Final rules preclude partnerships with disregarded entity partners from electing out of BBA

The IRS on Dec. 29 issued final regulations (T.D. 9829) on electing out of the centralized partnership audit regime instituted by the Bipartisan Budget Act of 2015 (BBA), ruling that partnerships that have disregarded entities as partners would not be able to elect out of the BBA.

The BBA, which became effective for partnership tax years beginning after Dec. 31, 2017, replaced the partnership audit rules of the Tax Equity and Fiscal Responsibility Act of 1982 and generally assesses and collects tax at the partnership level. All partnerships are subject to the BBA, unless the partnership is able to elect out of the regime. To elect out, the partnership must have 100 or fewer partners, all of which must be “eligible” partners, which under the statute, constitute individuals, C corporations, estates of deceased partners, and S corporations. Each shareholder of the S corporation partner, however, counts toward the 100-partner limit.

The proposed regulations (REG-136118-15) provided that disregarded entities, partnerships, trusts, nominees or other similar persons that hold an interest on behalf of another person, and estate other than the estate of a deceased partner, were not eligible partners for purposes of the election out of the BBA. The government received numerous comments on this issue, including arguments that the Joint Committee on Taxation’s “General Explanations of Tax Legislation Enacted in 2015,” (also known as the Blue Book) supported an expansion of the list of eligible partners.

Ultimately, however, the final regulations follow the proposed regulations and indicate that the IRS and Treasury “have decided not to adopt these comments at this time.”

In effect, the government has left the issue open to future modifications through regulations. The final regulations state that “(a)fter gaining experience with the centralized partnership audit regime, the (government) will be in a position to reconsider any expansion of partnerships eligible to elect out of the regime.” Expanding the current definition of eligible partners would result in more partnerships electing out of the BBA, and thus resulting in more examinations by the IRS under current deficiency procedures, which was what the BBA was designed to prevent, according to the final regulations.

With regard to the mechanics of electing out of the BBA, the final regulations largely adopt the proposed regulations, in that the election must include each partner’s name, correct U.S. taxpayer identification number (TIN), and federal tax classification. If one of the eligible partners is an S corporation, then the election must also include the same information for the shareholders of the S corporation. The government declined to adopt a comment that the partnership be able to revoke the election out without the consent of the IRS, citing a detriment to tax administration.

With respect to eligible foreign partners, the final regulations also conclude that each foreign partner must have a correct U.S. TIN, and that substitutes, such as a completed Form W-8, would not be permissible for the partnership to elect out. Nonetheless, the government acknowledged that it will continue to study the issue and may provide for alternative methods of identifying foreign partners.

Contact Grace Kim
Principal, Partnership Tax Technical Leader, Washington National Tax Office
T +1 202 521 1590

Jose Carrasco
Senior Manager, National Tax Standards Group, Washington National Tax Office
T +1 202 521 1552

Glenn Dance
Managing Director, National Tax Standards Group, Washington National Tax Office
T +1 703 637 2634

Liz Askey
Managing Director, Tax Practice Policy & Quality
T +1 202 521 1513

Shamik Trivedi
Senior Manager, Washington National Tax Office
T +1 202 521 1511

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