Page 160 - 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
pay tax on their distributive shares).83 This modification is designed to reduce the income on which the imputed underpayment is calculated on account of the tax-exempt entity’s distributive share.
Modification procedures for the imputed underpayment apparently will include reduction in the amount of the net increase in income that the partnership demonstrates is allocable to a tax-exempt partner that would not owe tax for the reviewed year [the year under audit]. This modification presumably should be modified if the income is unrelated business taxable income.
A tax-exempt entity means –
 the United States, any State or political subdivision thereof, any possession of the United States, or any agency or instrumentality of any of these,
 an organization (other than a cooperative) that is exempt from Federal income tax,
 any foreign person or entity, and
 any Indian tribal government exercising governmental functions.
83 I.R.C. § 6225(c)(1), (3) (“(c) Modification of imputed underpayments. – (1) In general. – The Secretary shall establish procedures under which the imputed underpayment amount may be modified consistent with the requirements of this subsection. . . . (3) Tax-exempt partners. – Such procedures shall provide for determining the imputed underpayment without regard to the portion thereof that the partnership demonstrates is allocable to a partner that would not owe tax by reason of its status as a tax-exempt entity (as defined in section 168(h)(2)).”). The GENERAL EXPLANATION OF TAX LEGISLATION ENACTED IN 2015 (JCS-1-16, March
2016) provides:
Modification procedures: tax-exempt partners
Procedures for modification provide for determining the amount of the imputed underpayment without regard to the portion of it that the partnership demonstrates is allocable to a partner that would not owe tax by reason of its status as a tax-exempt entity for the reviewed year.209 [209 Sec. 6225(c)(3).] For this purpose, a tax-exempt entity means (1) the United States, any State or political subdivision thereof, any possession of the United States, or any agency or instrumentality of any of these, (2) an organization (other than a cooperative) that is exempt from Federal income tax, (3) any foreign person or entity, and (4) any Indian tribal government determined by the Secretary in consultation with the Secretary of the Interior to exercise governmental functions. Under this procedure for modification, the partnership demonstrates the amounts of adjustments that are allocable to the tax-exempt partner and the resulting portion of the imputed underpayment allocable to that partner.210 [210 Secs. 6225(c)(3) and 168(h)(2)(A).]
© Terence Floyd Cuff and Jerald David August, 2016
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