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Proposed regs limit elections out of BBA

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Tax Hot Topics newsletter The IRS released proposed regulations (REG-123652-18) that expand the list of partner types that would prevent a partnership from electing out of the Bipartisan Budget Act (BBA) centralized partnership audit regime and provide rules governing certain partnership issues (so-called special enforcement matters) which will be examined outside of a partnership-level BBA exam.

The IRS previously released final regulations (TD 9844) implementing the BBA audit regime in early 2019. Around the same time, it released Notice 2019-06 announcing its intent to issue additional regulations addressing the ability of a partnership with a qualified Subchapter S subsidiary (QSub) as a partner to elect out of the BBA and special enforcement matters. These proposed regulations follow up on Notice 2019-06 and provide additional guidance on the implementation of the BBA audit process.

The proposed regulations would add to the categories of partners that make a partnership ineligible to elect out of the BBA. A partnership is only eligible to elect out of the BBA if it has 100 or fewer partners for the taxable year, each partner in the partnership is an eligible partner and the election is timely made. The proposed regulations would make partnerships with a qualified REIT subsidiary, QSub or grantor trust as a partner ineligible to elect out of the BBA. Although Notice 2019-06 had indicated that QSubs would be eligible partners, the IRS indicated that preventing partnerships with QSub partners from electing out of the BBA was necessary in order to avoid the IRS from having to examine more than 100 taxpayers.

The proposed regulations would also provide procedural rules for certain situations where the BBA’s general approach of partnership-level examinations is not effective or efficient. These special circumstances are called special enforcement matters and include termination and jeopardy assessments, criminal investigations and situations where the partner may have more information than the partnership (i.e., partnership-related item components of non-partnership-related items). In these situations, the proposed regulations authorize the IRS to make adjustments outside of a partnership-level examination in order to audit partnerships and partners in the most efficient and effective manner.

The proposed regulations would also change and clarify certain provisions including guidance for when partnerships cease to exist, adjustments to non-income items (including incorrect allocations of partnership liabilities), and treatment of partnership Chapter 1 taxes dues to a previously determined imputed underpayment. The proposed regulations contain applicability dates that vary by the provision.

Contacts:
Grace Kim
Principal, Partnerships
Washington National Tax Office
T +1 202 521 1590

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

Whit Cocanower
Senior Associate
Washington National Tax Office
T +1 202 521 1541

Sarah Barlow
Senior Associate
Washington National Tax Office
T +1 202 521 1505

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