Page 7 - Repeal of the TEFRA Entity Level Audit Rules Under the Bipartisan Budget Act of 2015

and any additions therefore. The election effectively pre- cludes the partnership or the partners from challenging the partnership’s agreement to be subject to the assessment.
It is not difficult to predict that designated partner- ship representatives of partnerships subject to the SELA rules will have a preference, perhaps in many if not most instances, for invoking the 45-day rule and issuing the conforming adjusted K-1 required to shift the burden of the payment of the imputed underpayment to the part- ners. This will avoid having the partnership to use cash committed for business purposes to be used to front or pay partner level taxes. It would be reasonable to assume that many operating agreements will require such pay- ment of additional assessments made by the IRS at the partner level under Code Sec. 6226(b). Consider whether a partnership with foreign partners subject to applicable withholding and FACTA reporting requirements might instead opt for payment of the tax at the partnership level.
What is troublesome about the new rules is that the part- ners paying the taxes for the adjustment year may, in many instances, not be the same partners, or may have a different percentage interest between the reviewed year and the adjust- ment year, that enjoyed the benefit from the prior underre- porting of partnership income. Will the operating agreement for the LLC or partnership require a form of claw-back from the former partners of such tax benefits were the partnership to accept and make payment of the imputed underpayment? Will reserves be retained for such purpose? The same issue will be very much in the radar screen of purchasers and perhaps even donees of partnership interests.
Audited partnerships will often not be able to use the statutory rule contained in new Code Sec. 6225(c) (2) for reducing or avoiding a partnership-level tax by demonstrating that their historical partners have filed amended returns reporting and paying any taxes due as a result of the partnership adjustment. In most cases, a partnership will have no power to compel its historical partners to file amended returns, and those partners would have little economic incentive to do so. This was why an outside professional group, the Tax Policy Advisory Committee of the Real Estate Roundtable, developed and recommended the adjusted Schedule K-1 procedure. So what is left is Code Sec. 6226(a) to avoid assessment against the partnership.
Statute of Limitations for Partnership Adjustments
In general, the IRS will be limited to a period of three years from the date the partnership return is filed, or the return due date, if the return is not filed to adjust an item
on a partnership return or an AAR is made under Code Sec. 6227. The limitation period runs to six years where there is a substantial omission from gross income and there is no statute of limitations with respect to a fraudulent partnership return or where the partnership fails to file a return for the applicable tax year. The limitation period may be extended if a notice of proposed adjustment is- suance as such commences the 270-day period in which the partnership may obtain a modification of the imputed underpayment. During this 270-day period, a final notice of partnership adjustment is not permitted to be issued.
Where the proposed adjustment resulting in an imputed underpayment is timely issued within three years, the notice of partnership adjustment may be issued no later than either the date which is 270 days after the partnership has completed its response in seeking a modification or no later than 270 days after the date of a notice of pro- posed adjustment where no response or only a partial or incomplete response has been made by the partnership.
Statute of limitations issues at the partner level for the reviewed (audited) year are not applicable since the assessment in tax under Code Sec. 6226(b) is imposed for the current year.33 Any penalties, additions to tax or additional amounts will be determined at the partnership level and the partners of the partnership for the reviewed year will also be liable for such penalties, additions to tax or additional amounts.34
Were a partner not to pay the “add-on” tax under Code Sec. 6226(b)(1), then there will be penalties for failure to pay as well as accuracy-related penalty concerns for inconsistent reporting.35 Interest will be determined at the partner level and will commence from the due date of the return for the tax year to which the increase is attributable (taking into account any increases resulting from a change in tax attributes for tax years for which the tax attributes were re-determined).36 The interest rate is five percentage points (instead of three) over the federal short-term rate.37 Finally, the statute of limitations for the partner (for the reviewed year) is not directly involved as the adjusted Schedule K-1 is treated as a current surcharge in the amount of the partner’s current year’s income tax liability.
Application to Multiple-Tiered Partnerships
Complexity as well as problems of tax administration will again be evident under the new regime, as under current law, with respect to multi-tiered partnerships. For many multitier partnerships, the audited partner- ship will be unable to identify its ultimate indirect
AUGUST–SEPTEMBER 2016 © 2016 CCH INCORPORATED AND ITS AFFILLIATES. ALL RIGHTS RESERVED. 61