The Treasury Department and IRS released multiple pieces of guidance in the form of proposed and final regulations in late-December as the centralized partnership audit regime passed under the Bipartisan Budget Act of 2015 (BBA) became effective on Jan. 1.
The BBA replaced the partnership audit rules of the Tax Equity and Fiscal Responsibility Act of 1982 and is effective for partnership tax years beginning after Dec. 31, 2017. The BBA presents a profound shift not only for the partnerships themselves, but also for many C corporations, tax-exempt entities, S corporations and trusts that are partners in partnerships. The rules are designed to shift the burden for actually assessing tax after a partnership-level adjustment from the IRS to the partnership and partners. Partnerships will need to consider changes to their partnership and operating agreements to respond to the BBA, especially considering the proposed regulations, which tend to place greater import on the relationship between the partners and the partnership representative than between the IRS and the partnership.
Guidance issued in December include proposed regulations that allow pass-through partners to push out adjustments up multiple tiers of partnerships (REG-120232-17 and REG-120233-17
); proposed regulations on foreign partner withholding (REG-119337-17
); and final regulations on partnerships’ ability to elect out of the BBA altogether (T.D. 9829
Push-out elections and tiered partnerships
REG-120232-17 and REG-120233-17 allow partnership-level adjustments to be pushed out through multiple tiers of pass-through partners to the ultimate non-pass-through owners. If finalized, the proposed regulations would be a taxpayer-friendly resolution to an issue that was reserved in prior proposed regulations released in June 2017.
Generally, a partnership subject to the BBA must pay an imputed underpayment with respect to an adjustment of partnership items or a partner’s distributive share of any of these items. However, the partnership may instead elect to have its partners for the tax year under audit take the adjustments into account and pay the resulting tax (the so-called push-out election). Under the proposed regulations, each pass-through partner may either push the adjustments out to its partners or pay the imputed underpayment itself. The option to either push out the adjustment or pay the imputed underpayment is made at each level of pass-through partners. To alleviate administrative burden to the government, the IRS will collect the tax directly from any pass-through partner who does not timely push out the adjustment to its partners or otherwise take into account the adjustment and pay the imputed underpayment itself.
A pass-through partner that wishes to push out the adjustment that it receives from a partnership must furnish each of its partners or owners for the reviewed year a statement that includes that partner’s distributive share or owner’s allocable share of the adjustment along with certain other items. These statements must be furnished no later than the extended due date of the partnership’s tax return for the tax year in which the adjustment is made. Pass-through partners will need to take care to comply with the requirements to appropriately push out the adjustment. Nevertheless, these proposed regulations should help alleviate concerns over the ability to have non-pass-through partners instead of partnerships pay the tax related to a partnership adjustment.
International tax provisions
On Nov. 29, the IRS and Treasury issued proposed regulations (REG-119337-17) on the BBA that addressed withholding taxes under Chapters 3 and 4, and foreign tax credits and creditable foreign tax expenditures (CFTEs) that affect a partner’s foreign tax credit.
The regulations make it clear that withholding taxes imposed under Chapter 3 and Chapter 4 are outside the scope of the BBA’s centralized audit regime. The proposed regulations contain coordination rules for audits of withholding tax and audits under the BBA. If a withholding tax audit is conducted prior to when the BBA is in effect, and the tax is collected, the issues addressed by the withholding audit are disregarded for purposes of the BBA. If an examination of withholding tax has not occurred prior to a centralized audit, then any withholding tax is collected from the partnership and no assessment is made on the partner. However, interest and penalties associated with under-withholding may still be assessed as part of a withholding audit.
Under the proposed regulations, if a Section 6226 push-out election is made to push out adjustments to the partners, the partnership remains responsible for the Chapter 3 and Chapter 4 withholding on such adjustments. For purposes of Section 1446 withholding, no reduction is allowed for any partner-level items. The partnership would be required to send statements to each of the partners described in the withholding adjustments such that they can file amended tax returns if applicable. The partnership can also request a modification of these procedures from the IRS.
For foreign tax credits, the existing foreign tax credit system is maintained and foreign tax items are calculated at the partner level. The proposed regulations address the treatment of adjustments to CFTEs made as part of the BBA. If CFTE is decreased under the centralized audit regime, the decrease is treated as an underpayment of tax by the partner to which the centralized audit regime applies. Conversely, increases in CFTEs are not considered immediately refundable to the partners to which the CFTE’s are allocated. Modifications would be allowed if requested and approved by the IRS. Statements must be sent to the partners such that they can amend their returns.
Principal, Partnership Tax Technical Leader, Washington National Tax Office
+1 202 521 1590
Senior Manager, National Tax Standards Group, Washington National Tax Office
+1 202 521 1552
Managing Director, National Tax Standards Group, Washington National Tax Office
+1 703 637 2634
Managing Director, Tax Practice Policy & Quality
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