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IRS: Pass-throughs can apply proposed GILTI regs

RFP
Business meetingThe IRS released Notice 2019-46 on Aug. 22, announcing its intent to issue regulations that will permit a domestic partnership or S corporation to apply the rules in proposed Treas. Reg. Sec. 1.951A-5 (related to global intangible low-taxed income or GILTI) for taxable years ending before June 22, 2019.

The guidance provides substantial administrative relief for the 2018 tax year to partnerships and S corporations that would otherwise have been obligated to file superseding or amended Forms 1065 or 1120S, as well as corrected Schedules K-1, to comply with the final GILTI regulations (TD 9866). Those final regulations narrowed the application of the GILTI tax, providing that non-U.S. shareholder partners in domestic partnerships that owned a controlled foreign corporation (CFC) were not required to include GILTI income. Similar rules for Subpart F income were proposed and may also impact certain partnerships. Despite the limited effect of the GILTI tax, many partnerships expressed concern with respect to filing and compliance burdens.

The notice addresses those concerns by allowing a partnership or S corporation to apply the proposed GILTI regulation under Treas. Reg. Sec. 1.951A-5, despite the promulgation of final GILTI regulations. In order to do so, the partnership or S corporation must provide notification to each partner or shareholder demonstrating: (1) that the Schedule K-1 provided to the partner or shareholder is consistent with the proposed GILTI regulation; (2) whether the partnership or S corporation’s Forms 1065 or 1120S is consistent with the proposed or final GILTI regulation; and (3) that the notification is being provided in accordance with Notice 2019-46.

Notification by the partnership or S corporation to its partners or shareholders must be by the extended due date (Sept. 16, 2019, for calendar year pass-throughs), and may be provided through any reasonable method, including via mail, e-mail, or posting on a website that would ordinarily be used to disseminate information to partners. If the partnership or S corporation has already filed its tax return by the unextended due date, the notification is due on the date on which the return would have been due if an extension had been filed.

In addition, the domestic partnership or S corporation must attach the notification and Form 8992, “U.S. Shareholder Calculation of Global Intangible Low-Taxed Income (GILTI)” reflecting computations under proposed Treas. Reg. Sec. 1.951A-5 to its tax return if the tax return has not been filed as of Aug. 22, 2019, the date of the notice.

The notice also requires that partnerships or S corporations that furnished a Schedule K-1 to its partners/shareholders based on the proposed GILTI regulations, must separately state on Schedules K-1 for subsequent taxable years the partner’s or shareholder’s distributive or pro rata share of a CFC’s distributions to the partnership or S corporation of earnings and profits that relate to the GILTI inclusion amount that was reflected on the 2018 Schedule K-1. Such information must be provided for the subsequent taxable year to address the situation of a partner/shareholder filing inconsistently with the 2018 Schedule K-1, and not including in gross income the distributive or pro rata GILTI inclusion amount.

If a partnership or S corporation complies with the requirements of the notice, the IRS will not apply certain failure-to-file penalties under Sections 6698(a), 6699(a), or 6722(a) that would otherwise apply for inconsistent filings of the Forms 1065, 1120S, or Schedules K-1.

Notice 2019-46 comes just weeks after the IRS in July issued Rev. Proc. 2019-32, which provided for superseding return treatment for partnerships that filed Forms 1065 and Schedules K-1 without extensions. Such partnerships would have faced unanticipated consequences for its partners under the centralized partnership audit rules of the Bipartisan Budget Act of 2015 (BBA) if required to amend their returns. Under the BBA, an amended return by a partnership would be accomplished through filing an administrative adjustment request (AAR). Generally, partners of the BBA partnership would be then obligated to take into account the adjustments reflected in the AAR in the year in which the AAR is filed, and not the year to which the adjustments relate.

A partnership that is eligible for and elects the relief of Rev. Proc. 2019-32 may apply the rules described in the notice. Because Rev. Proc. 2019-32 requires consistent treatment of the superseding Form 1065 and Schedules K-1, partnerships that elect that relief must file Schedules K-1 consistent with the final GILTI regulations if the Form 1065 is filed consistent with those final regulations.

For more information contact:

David Auclair
National Managing Principal
Washington National Tax Office
Grant Thornton LLP
+1 202 521 1515

David Sites
National Managing Partner – International Tax
Washington National Tax Office
Grant Thornton LLP
+1 202 861 4104

Shamik Trivedi
Senior Manager, IRS Practice & Procedure
Washington National Tax Office
Grant Thornton LLP
+1 202 521 1511

Grace Kim
Principal, Partnership Tax
Washington National Tax Office
Grant Thornton LLP
T +1 202 521 1590

Cory Perry
Senior Manager, International Tax
Washington National Tax Office
Grant Thornton LLP
+1 202 521 1509

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