Page 162 - 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
Procedures for modification of the tax should include 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 [the year under audit]. A lower rate may apply for certain types of taxpayers or types of income.85
The GENERAL EXPLANATION OF TAX LEGISLATION ENACTED IN 2015 (JCS-1-16, March 2016) illustrates this principle with a partnership that contains as a partner a C corporation. This is the argument:
 For a C corporation, the highest marginal rate of Federal income tax is the highest rate of tax specified in Section 11(b).
 For that C corporation partner, the highest marginal rate of Federal income tax is 35 percent in 2016, for example, for ordinary income and capital gain for the reviewed year.
 That 35 percent rate is lower than the highest marginal rate of Federal income tax for individuals (39.6 percent in 2016, for example).
 The GENERAL EXPLANATION OF TAX LEGISLATION ENACTED IN 2015 (JCS- 1-16, March 2016) suggests that the partnership can use the lower corporate tax rate in some way in computing the imputed underpayment. The General Explanation contains language that supports the inference that we look to the lower corporate tax rate in the reviewed year [the year of the audit].
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 as of the close of the reviewed year. For example, adjustments are made to a partnership’s rental income from property A and its depreciation deductions with respect to property B. A corporate partner has a 20 percent distributive share of rental income from property A, a 15 percent distributive share of depreciation deductions from property B, and a 20 percent distributive share of any gain in the reviewed year. However, if the partnership had sold its assets at fair market value as of the close of the reviewed year, the gain would have been $100, and based on its capital account, the corporate partner’s distributive share would have been $20. Thus, the portion of the imputed underpayment to which the lower rate applies with respect to the corporate partner is 20 percent.
85 I.R.C. § 6225(c)(4).
© Terence Floyd Cuff and Jerald David August, 2016
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