Page 144 - The TEFRA Partnership Audit Rules Repeal:

ALI CLE Live Video Webcast / “The TEFRA Partnership Audit Rules Repeal: Partnership and Partner Impacts” June 7, 2016, Jerald David August and Terence Floyd Cuff
Modification procedures: modification of applicable highest tax rates
Procedures for modification provide for taking into account a rate of tax lower than the highest rate of Federal income tax applicable either to individuals or to corporations that is in effect for the reviewed year, for certain types of taxpayers or types of income.211 [211 Sec. 6225(c)(4).]
The partnership may demonstrate that a portion of an imputed underpayment is allocable to a partner that is a C corporation, and for that C corporation partner, the highest marginal rate of Federal income tax (35 percent in 2016, for example) for ordinary income and capital gain212 [212 The Secretary has regulatory authority under the provision, including authority to acknowledge or identify the types of income, gain, deduction, and loss to which the lower rate applies. See also section 411 of the Protecting Americans from Tax Hikes Act of 2015 (Division Q of Pub. L. No. 114-113). A lower rate of tax may be taken into account in the case of either capital gain or ordinary income of a partner that is a C corporation.] for the reviewed year is lower than the highest marginal rate of Federal income tax for individuals (39.6 percent in 2016, for example). For a C corporation, the highest marginal rate of Federal income tax is the highest rate of tax specified in section 11(b).
Similarly, the partnership may demonstrate that a portion of an imputed underpayment relates to an item of long-term capital gain or qualified dividend income that is allocable to a partner who is an individual, and that the highest rate of tax with respect to that item of long-term capital gain or qualified dividend income for the reviewed year (20 percent for 2016, for example) is lower than the highest rate of Federal income tax applicable to individuals for the reviewed year (39.6 percent in 2016, for example). The highest rate for the type of income and type of taxpayer applies under the modification. An S corporation is treated as an individual for this purpose.
In general, the portion of the imputed underpayment to which the lower rate applies with respect to a partner is determined by reference to the partner’s distributive share of items of income, gain, loss, deduction, and credit to which the imputed underpayment relates. However, if the partner’s distributive share differs among items, then the portion of the imputed underpayment to which the lower rate applies is determined by reference to the amount of the partner’s distributive share of net gain or loss if the partnership had sold all of its assets at their fair market value
© Terence Floyd Cuff and Jerald David August, 2016
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