Page 161 - 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
k. Modification Procedures: Modification of Applicable Highest Tax Rates
The basic tax rate used to calculate the imputed underpayment is the highest federal corporate or individual rate for the reviewed year [the year under audit] (not for the adjustment year). Regulations presumably will clarify which rate we should use.84
84 I.R.C. § 6225(c)(4) (“(4) Modification of applicable highest tax rates. – (A) In general. – Such procedures shall provide for taking into account a rate of tax lower than the rate of tax described in subsection (b)(1)(A) with respect to any portion of the imputed underpayment that the partnership demonstrates is allocable to a partner which – (i) is a C corporation, or (ii) in the case of a capital gain or qualified dividend, is an individual. In no event shall the lower rate determined under the preceding sentence be less than the highest rate in effect with respect to the income and taxpayer described in clause (i) or clause (ii), as the case may be. For purposes of clause (ii), an S corporation shall be treated as an individual. (B) Portion of imputed underpayment to which lower rate applies. – (i) In general. – Except as provided in clause (ii), the portion of the imputed underpayment to which the lower rate applies with respect to a partner under subparagraph (A) shall be determined by reference to the partners’ distributive share of items to which the imputed underpayment relates. (ii) Rule in case of varied treatment of items among partners. – If the imputed underpayment is attributable to the adjustment of more than 1 item, and any partner’s distributive share of such items is not the same with respect to all such items, then the portion of the imputed underpayment to which the lower rate applies with respect to a partner under subparagraph (A) shall be determined by reference to the amount which would have been the partner’s distributive share of net gain or loss if the partnership had sold all of its assets at their fair market value as of the close of the reviewed
year of the partnership.”).
The GENERAL EXPLANATION OF TAX LEGISLATION ENACTED IN 2015 (JCS-1-16, March 2016)
provides:
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 gain 212 [211 Sec. 6225(c)(4).] 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
© Terence Floyd Cuff and Jerald David August, 2016
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