Page 6 - Repeal of the TEFRA Entity Level Audit Rules Under the Bipartisan Budget Act of 2015

The common theme of the SELA rules shifts the burden of making payment of additional income tax as a result of dit from those persons who wer artners for the year under audit and received the tax benefit from the tax item or items in issue, to the partnership.
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REPEAL OF THE TEFRA ENTITY LEVEL AUDIT RULES
In other words, under the “netting” approach, limitations on credits, deductions or other allowances are made at the partnership or entity level.
Modifications of Imputed Underpayment by Administrative Process
Where the partnership disagrees with the computation of the imputed underpayment during an administrative proceeding, it may seek modification of the computation in accordance with Code Sec. 6225(c)(1). Legislative regulations will be issued to establish procedures to modify the imputed underpayment amount. Modification proce- dures will be required to permit a redetermination of the imputed underpayment amount in certain instances; (1) to account for amounts paid with amended returns filed by reviewed year partners; (2) to properly disregard the portion allocable to a tax-exempt partner in computing the imputed underpayment; and (3) to take into account a rate of tax lower than the highest tax rate for individu-
partnerships including funds of funds may desire settling all tax adjustment issues at the fund level, which would affect the revised Schedules K-1 to the current investors and which some commentators have referred to as “like a Section 481 adjustment.”29
Code Sec. 6225(c)(7) requires that anything that is required to be submitted in connection with the modifica- tion must be submitted no later than 270 days after the notice of the proposed partnership adjustment is mailed under Code Sec. 6231, unless the IRS consents to extend this period. Modification of the imputed underpayment amount requires the approval of the IRS.30
Where the partnership no longer exists before a part- nership adjustment is assessed, the adjustment is required to be taken into account by the former partners of the partnership under guidance to be issued by the IRS.
An Alternative: Move the Payment Obligation to the Partners! The “Push- Out” Rule Under Code Sec. 6226(a)
As briefly noted above, under new Code Sec. 6226(a), where the partnership is subject to an imputed underpayment for one or more years, the partnership may elect out of making the tax payment where no later than 45 days after the date of the FPAA is issued to the partnership, and at such time and manner provided by guidance issued by the IRS, it furnishes to each partner of the partnership and to the IRS a statement of the partner’s share of any adjustment to income, gain, loss, deduction or credit (as determined in the FPAA) for the reviewed year(s). If the election is made, each subject partner is required to take such adjustment into account under Code Sec. 6226(b). Code Sec. 6226(b)(1) is an income tax enabling provision.31 It shifts the economic burden of the partnership’s obligation to be subject to assessment and payment of the imputed underpayment to each partner. Accordingly, each partner’s tax imposed by Chapter 1 for the tax year of the ad- justment, which includes the date the statement was furnished by the partnership in accordance with Code Sec. 6226(a), is to be increased by the aggregate of the adjustment amounts.32
The notice to each partner will include a statement of the partner’s share of any adjustment to income, gain, loss, deduction or credit set forth in the FPAA as to each reviewed year. In other words, the “adjustment amounts” will then be allocated among the partners for the reviewed year who will then separately determine the amount of additional income tax that each will be required to pay based on their receipt of the adjusted K-1. Each partner is only liable for his or its share of the tax. There is no joint and several liability for payment of the adjustment amount
als or corporations for the reviewed year. As to this last type of modification, it would apply, for example, where the imputed underpayment is ultimately taxable to an individual partner or partners at long term capital gains rates and not as ordinary income.
In addition, regulations or other form of guidance is- sued by the IRS may provide for additional procedures to modify imputed underpayment amounts on the basis of other necessary or appropriate factors. In the case of a publicly traded partnership, such other appropriate factors could include taking into account the Code Sec. 469(k) requiring that deductions that exceed income (passive activity losses) be carried forward and applied against income from the publicly traded partnership, not against other income of the partners. Large investment
60 JOURNAL OF TAX PRACTICE & PROCEDURE
AUGUST–SEPTEMBER 2016