Page 1 - Tax Controversy Corner: Consider the Constructive Partnership Rules Before reorganizing to Elect Out of the BBA

P. 1

Tax Controversy Corner

Consider the Constructive Partnership

Rules Before Reorganizing to Elect Out

of the BBA

By Megan L. Brackney *

1
he Bipartisan Budget Act of 2015 (the “BBA”) made substantial changes
to the audit procedures for passthrough entities. The BBA repealed the
T prior rules for partnership audits and replaced them with a centralized
regime that, in general, assesses and collects tax at the partnership level. Tax
professionals have expressed concern that assessment and collection of tax at
the partnership level is inconsistent with the long-standing rules of taxation of
passthrough entities, and may have unpredictable and incongruous consequenc-
2
es. Not surprisingly, one of the first questions that partners and practitioners
Treasury
asked was “how do we get out this?” Treasury and the IRS, however, want most
wa h
partnersh ps to be cov red bby the A, an hu the election out ru les have bee
partnerships to be covered by the BBA, and thus the election out rules have been
a cont ov si aspect of BBA
a controversial aspect of the BBA.
Can We Get Out of This?
Under the BBA, for partnership years beginning after December 31, 2017 (un-
less the entity elected in early), all passthrough entities are subject to the BBA
3
4
except for those with 100 or fewer members who affirmatively opt out. If a
partnership elects out, any proposed adjustments will be determined, and any
tax adjustments will be assessed and collected, at the partner level pursuant to
the ordinary deficiency procedures.
Under Code Sec. 6221, only “eligible partnerships” with “eligible partners” may
elect out. An “eligible partnership” is a partnership with 100 or fewer partners,
meaning that the partnership is required to furnish 100 or fewer statements under
5
Code Sec. 6031(b) (Forms K-1). An “eligible partner” is defined as an individual,
a C corporation, a foreign entity that would be treated as a C corporation if it were
6
a domestic entity, an S corporation, and an estate of a deceased partner. Partners
that are not eligible partners are partnerships, trusts, foreign entities other than
those described above, disregarded entities, nominees or other similar persons
that hold an interest on behalf of another person, and estates of individuals other
Megan L. Brackney is a Partner at Kostel- than a deceased partner. 7
anetz & Fink, LLP in New York, New York. Treasury received numerous requests to expand the definition of eligible part-
ners, but it rebuffed those requests because it intends to narrowly construe Code

1 2 3 4