Page 8 - Repeal of the TEFRA Entity Level Audit Rules Under the Bipartisan Budget Act of 2015

REPEAL OF THE TEFRA ENTITY LEVEL AUDIT RULES
partners, much less their tax status. The adjusted Schedule K-1 approach (election by the partnership) was further adopted to address these structures. Ac- cordingly a partnership which receives an adjusted Schedule K-1 from the audited partnership is required to provide its own partners additional adjusted Sched- ules K-1 for their allocable share of the adjusted agreed to by the audited partnership. Of course the upper- tier partnership could simply decide to pay the tax at the entity level on the tax attributable to the adjusted Schedule K-1.
This process would be replicated for each partnership tier in a multi-tier structure. Perhaps in some cases, the preferable thing to do might be for the entity to pay the tax and make some economic reconciliation with respect to the partners who received the associated benefits.
Notice of Proceedings and Adjustment
Code Sec. 6231(a) provides that the IRS will mail to the partnership and the designated representative of the partnership:
(1) Notice of any administrative proceeding initiated at
the partnership level with respect to an adjustment of any item of income, gain, loss, deduction or credit of a partnership for a partnership tax year, or any partner’s distributive share thereof;
(2) Notice of any proposed partnership adjustment result- ing from such proceeding; and
(3) Notice of any final partnership adjustment resulting from such proceeding.
Any notice of a final proposed partnership adjust- ment (FPAA) shall not be mailed earlier than 270 days after the date on which the notice of the proposed partnership adjustment is mailed to the last known address of the partnership’s designated representative or the partnership (even if the partnership has termi- nated its existence).38 The first sentence shall apply to any proceeding with respect to an AAR claim is filed by a partnership under Code Sec. 6227. Where an FPPA for any partnership tax year is issued, and the partnership files a petition under Code Sec. 6234 in response, absent fraud, malfeasance or misrepresenta- tion of a material fact, the IRS is prohibited from sending an additional notice to the partnership with respect to such year. The IRS may, with the consent of the partnership, rescind any notice of a partnership adjustment under Code Sec. 6231(c).
Assessment of Imputed Underpayment; Interest and Penalties for Reviewed Year, Adjustment Year
Code Sec. 6232(a) provides that an imputed underpay- ment is assessed and collected as if it were an assessment in income tax under Subtitle A. However, for an AAR under Code Sec. 6227(b)(1), the underpayment is paid when the AAR is filed. Code Sec. 6232(b) provides that except as otherwise provided by SELA, no assessment of a deficiency (and no levy or proceeding in any court for the collection of the adjustment amount) may be made or begun, etc., prior to (i) the close of the 90th day after the day on which an FPAA was mailed and (ii) where a petitioner is filed under Code Sec. 6234 as to such notice, until a final decision from the court is issued. Exceptions to Code Sec. 6232(b) are provided for adjustments aris- ing from clerical or mathematical errors or where the partnership signs a waiver of restrictions on assessment or collection under Code Sec. 6232(b).39
The interest on any partnership adjustment for the reviewed year will be the interest which would be de- termined under the generally applicable interest rules for the period beginning on the day after the return due date, i.e., the date for filing the partnership return such earlier year (determined without regard to extensions), for the reviewed year, and ending on the return due date for the adjustment year (or, if earlier, the date payment of the imputed underpayment is made). Proper adjustments in the amount determined under these rules will be made for adjustments required for partnership tax years after the reviewed year and before the adjustment year by reason of the partnership adjustment. Any penalties, additions to tax or additional amounts will be determined at the partnership level as if the partnership had been an indi- vidual subject to income tax for the reviewed year and the imputed underpayment were an actual underpayment (or understatement) for the year.
As to the payments of tax owed for the year in which the adjustment is made, where this is a failure to pay an imputed underpayment on the prescribed date, the part- nership will be liable for interest and any penalties, addi- tions to tax or additional amounts as determined under the following rules.40 Interest will accrue with respect to the failure to timely pay the imputed underpayment in the adjustment year in the same manner as a failure to pay tax in general, and penalties, additions to tax or ad- ditional amounts will be the penalties, additions to tax or
62 JOURNAL OF TAX PRACTICE & PROCEDURE
AUGUST–SEPTEMBER 2016