Page 10 - Partnership Audit Rules - Drafting Partnership Agreements: The New Partnership Representative And The Outgoing Tax Matters Partner

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are to be determined at the partner- ship level, and interest, will be as- sessed against the partnership.23 The assessment against the partner- ship is for the final amount, as mod- ified and/or adjusted, of the “im- puted underpayment” amount.
Under the centralized partnership audit regime, the IRS is no longer required to determine each partner’s share of the adjustments made to partnership items followed by a sep- arate computational adjustment for each partner to assess the correct tax due as a result of the partnership audit. Instead, under the default rules of Section 6225, the partner- ship is liable for an imputed un- derpayment based on the adjust- ments made at the partnership level.24 The imputed underpayment calculation may, for some partner- ships, overstate the amount of tax due had the partnership and partners reported the partnership adjustments properly. To correct potential over- statements, the BBA contains modi- fication procedures and provides ad- ditional discretionary authority for the IRS to modify imputed under- payments to avoid excessive taxa- tion and achieve a result that at- tempts to approach the aggregate amount of tax that would have been due had the partnership and the partners correctly reported and paid
23 Section 6225(a)(1).
24 The proposed regulations take an expansive
view of the scope of the centralized partner- ship audit regime to extend to all items and information related to or derived from the partnership. Accordingly, under Prop. Reg. 301.6221(a)-1, all items required to be shown or reflected on the partnership’s return and information in the partnership’ s books and records related to a determination of such items, as well as factors that affect the deter- mination of items of income, gain, loss, de- duction, or credit, are subject to determina- tion and adjustment at the partnership level
76D*points, Next 120D, Vjust JCE2:1
the tax on the originally filed re- turns.
The Imputed Underpayment Amount
Under Section 6225(b), the “im- puted underpayment” is calculated with respect to any “reviewed year,” i.e., the year under audit, and is re- quired to be determined “(A) by netting all adjustments of items of income, gain, loss, or deduction and multiplying such net amount by the highest rate of tax in effect for the reviewed year [the year under audit] under Section 1 or Section 11, (B) by treating any net increase or de- crease in loss under subparagraph (A) as a decrease or increase, re- spectively, in income, and (C) by taking into account any adjustments to items of credit as an increase or decrease, as the case may be, in the amount determined under subpara- graph (A) [the imputed underpay- ment].”
Under a set of modifications in Section 6225(c), an imputed un- derpayment amount can be reduced: (1) based on a reduction in the ap- plicable tax rate at the partner level of items of income; (2) based on the allocation of net taxable income to a tax-exempt partner provided such income would not constitute unre- lated trade or business income or debt-financed income; (3) or where one or more partners for the re- viewed year file amended returns taking into account their increase in
under the centralized partnership audit re-
gime.
25 See Prop. Reg. 301.6225-1(d)(1).
26 Prop. Reg. 301.6225-1(d)(2)(ii) describes
the reallocation grouping. Any adjustment that reallocates an item from one or more partners to one or more other partners is treated as two adjustments. The first adjust- ment is a decrease in the amount of the items allocated by the partnership on its return to one or more partners. The second adjustment is an increase in the amount of the items al- located by the IRS to the other partner(s). Each adjustment is grouped in its own reallo-
federal income tax from the adjust- ments for the reviewed year and make payment of the tax with the amended returns. Reduction in the imputed underpayment amount may also result with respect to a foreign partner’s reduced income tax rate for certain species of U.S.-source income or as provided under a perti- nent income tax convention.
Under Prop. Reg. 301.6225-1(d), adjustments are grouped together, which provides a framework for the netting of adjustments appropriately. Within each grouping, adjusted items may be further divided into subgroupings, depending on their character or to account for prefer- ences, sources, categories, limita- tions, or other restrictions under Ti- tle 26 (for example, adjustments to short-term capital gain will gener- ally be in a different subgrouping from adjustments to long-term capi- tal gain).25 The groupings and sub- groupings provide the IRS with the ability to net adjustments according to applicable limitations and restric- tions, but Treasury and the IRS have asked for comments on any specific items that may require spe- cial rules or special subgroupings.
Prop. Reg. 301.6225-1(d)(2)(i) provides that partnership adjust- ments are divided into three types of groups in the following order: First, adjustments that reallocate items among the partners (realloca- tion grouping) are grouped to- gether.26 Second, adjustments to the
cation subgrouping to prevent the two adjust- ments from netting to zero. After application of the netting rules under Prop. Reg. 301.6225-1(d)(3), any net non-positive adjust- ment is disregarded in the calculation of the imputed underpayment under Prop. Reg. 301.6225-1(d)(3)(ii)(A). An adjustment that results in a net non-positive adjustment is an adjustment that does not result in an imputed underpayment because the reallocation of an item among partners is one of the circum- stances described in Prop. Reg. 301.6225-1(c)(2).
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Corporate Taxation