Page 5 - Repeal of the TEFRA Entity Level Audit Rules Under the Bipartisan Budget Act of 2015

partners for the reviewed years in issue to file amended returns and pay any tax (including additions to tax) due with such return.23 The tax is to be computed at the highest tax rates applicable based but can be taken into account lower rates of tax applicable to corporations, tax exempt partners or with respect to capital gain or qualified dividend income of an individual.24
A third exception relates not to the audit process, but only as to the assessment and collection process. This second exception to the partnership level “imputed under- payment” is contained in new Code Sec. 6226. It provides that with 45 days of receiving a notice of partnership adjustment, a tax partnership may elect to issue to each partner for the reviewed year a statement of the partner’s share of any adjustment to income, gain, loss, deduc- tion or credit as determined in the notice of partnership adjustment (and subsequently settled by the partnership representative) and submit to the IRS a statement of the partner’s share of such adjustment(s).
Thereafter, each affected partner (for the reviewed year(s)) is responsible for payment with respect to the adjustment amounts so reported and not the partnership. Once elected by the partnership, the election to shift (“push-out”) the obligation to pay tax on the imputed underpayment, as modified, from the partnerships to the partners for the reviewed year in accordance with Code Sec. 6226(b) is irrevocable unless the IRS consents to the proposed revocation. Where, however, the partnership challenges the IRS’s proposed adjustments in court in a nonrefund proceeding, any resulting deficiency in tax may be assessed against the partnership.
With respect to each partner whose tax year includes the end of the reviewed year or years, the statement (amended K-1) such partner for additional tax attributable to the imputed underpayment will be assessed and such partner must immediately pay the amount by which the partner’s income tax would increase by reason of the adjustment. The adjustments take into account any tax attributes of the affected partner for any tax years after the tax year that includes the end of the reviewed year and before the ad- justed year that includes the date the statement was issued.25
Meet the “New” Partnership Representative; Same as the “Old” Tax Matters Partner?
Under new Code Sec. 6223 the term “tax matters partner” used in the ELA rules is replaced by the “partnership’s representative,” who is a partner or other person having a “substantial presence” in the United States and who is
granted, by statute, the sole authority to act on behalf of the partnership. Where a designation is not in effect by the entity taxable as a partnership, the IRS may select any person as the partnership representative. Under Code Sec. 6223(b), a partnership and all partners are bound by any actions taken by the partnership (through the partnership’s representative) and by any final decision in a proceeding brought under the SELA rules. Will a new designation by the partnership have to be made, or is the existing TMP to automatically become the “partnership representative”? Obviously, the guidance will provide the answer to this question.
Commencement of Partnership Audit, Administrative and Judicial Resolution
A partnership audit is commenced under the SELA rules in the same manner as under the ELA rules through the issuance of a notice of the beginning of an administrative proceeding at the partnership level (NBAP) by issuing a notice of administrative proceeding to the partnership or its designated representative.26 Any adjustment to items of income, gain, loss, deduction or credit of a partnership for a partnership tax year, and any partner’s distributive share thereof, generally is determined at the partnership level.27 The IRS is required to notify the partnership and the partnership representative of any proposed partner- ship adjustment before the IRS may issue a notice of final partnership adjustment (FPAA). Any notice of a proposed adjustment issued to the partnership must identify all adjustments and inform the partnership of the amount of any imputed underpayment. If the adjustments result in an underpayment of tax, the tax is generally imputed to the partnership and may be assessed and collected at the partnership level in the year that the partnership adjust- ment becomes final (the adjustment year).28
The amount of the imputed underpayment of tax with respect to a partnership adjustment for any reviewed year is determined by netting all adjustments of items of income, gain, loss or deduction and multiplying the net amount by the highest rate of federal income tax applicable either to individuals or to corporations that is in effect for the reviewed year. Adjustments for tax credits, e.g., foreign tax credits under Code Sec. 901 paid by the partnership on foreign source income, are required, to be taken into account as an increase or decrease of the product of this multiplication. Presumably as to foreign tax credits, the limitations under Code Sec. 904 as well as under other applicable rules are to be applied at the partnership level.
AUGUST–SEPTEMBER 2016 © 2016 CCH INCORPORATED AND ITS AFFILLIATES. ALL RIGHTS RESERVED. 59