Page 504 - TaxAdviser_2022

TAX CLINIC

change in income or loss that is not real- to its partners, who will take the capital ■ Any other modification approved by
located among the partners. loss on their current-year tax return. the IRS.
Next, the partnership subgroups the In most cases, multiple modifications
positive and negative adjustments in Types of modifications may apply. Some of these will be readily
each grouping. Specifically, the partner- XYZ’s imputed underpayment calcula- apparent and necessary. For example, if Y
ship reviews the items in each grouping tion provides a glimpse into the impor- of XYZ partnership is a tax-exempt enti-
to determine if any positive and negative tance of requesting a modification of the ty, it would not make sense or be fair for
adjustment can net together. Subgroup- imputed underpayment. XYZ’s partners XYZ to pay an imputed underpayment
ing is appropriate if the adjustments paid tax on the capital gain in 2019. for adjustments that would otherwise be
would be aggregated for purposes of Sec. Assuming X is an individual, his capital nontaxable to Y. Assuming no adjust-
702(a). Any adjustment that may be sub- in XYZ decreases by his share of the im- ment is unrelated business income to
ject to a preference, limitation, or restric- puted underpayment, and he is subject Y, XYZ’s modification would result in a
tion is placed in separate subgroupings. to the capital loss limitations. X is in a $31 imputed underpayment. The modi-
Thus, subgrouping is not allowed if any net negative position when considering fication automatically reduces the $100
provision in the Internal Revenue Code the time value of money because he pays positive adjustment to $66, for an initial
would treat an adjustment as a prefer- today on the increase to ordinary income payment of $24.40 when multiplied by
ence, limitation, or restriction. This spe- adjustment, while benefiting from the 37%. Then, XYZ increases the payment
cific step in the calculation is responsible decrease to capital gain adjustment by $6.60, for approximately $31.
for imposing the “worst-case scenario” over time. Other readily apparent modifica-
imputed underpayment. XYZ can request to modify the tions include modifying the rate of tax
imputed underpayment and affect how (if all partners are corporations, for
Example: XYZ partnership is under the adjustments affect its partners. Regs. example) or applying a treaty provi-
examination for the 2019 tax year. Sec. 301.6225-2(d) provides the list of sion (for foreign partners). However,
The IRS determines that XYZ potential modifications applicable at the many partnerships will benefit from the
should have reported a $100 capital end of a CPAR exam: pull-in return procedures or alternative
gain as ordinary income and that ■ Modifications to take into account amended return procedures. Under the
XYZ could not substantiate $10 of amended pull-in returns by relevant amended return procedures, the partners
expense that it used to calculate the partners; prepare and file amended returns for the
research-and-development credit. ■ Modifications to take into account examined tax year with the IRS’s adjust-
XYZ has a $100 positive adjustment partner-level adjustments under an ments. The partners can account for
to ordinary income, a $10 positive “alternative procedure” that mimics positive and negative adjustments and
adjustment as a result of the decrease the results of amended partner avoid the punishing assumptions of the
in the research-and-development pull-in returns; imputed underpayment. XYZ’s partners,
credit, and a $100 negative adjust- ■ Modifications to take into account a for example, can report the increase in
ment due to the decrease in capital partner’s tax-exempt status; ordinary income while also paying less
gain. XYZ will group each $100 ■ Modifications based on a rate of tax than the marginal tax rate because they
adjustment in the residual grouping lower than the highest applicable already paid tax on the capital gain.
and the $10 negative adjustment in rate; The alternative procedures are similar
the credit grouping. XYZ cannot sub- ■ Modifications with respect to certain to the amended return procedures. The
group any of the adjustments because passive activity losses of publicly partners bear the burden of the IRS’s
each is separately stated under Sec. traded partnerships; adjustments without needing to file
702(a). ■ Modifications with respect to quali- amended returns. While the procedures
fied investment entities (regulated are simpler in some respects, the part-
The imputed underpayment is $47. investment companies and real estate ners do not receive a refund if there is a
XYZ first multiplies the $100 positive investment trusts); net negative adjustment.
adjustment to ordinary income by 37%, ■ Modifications attributable to closing The amended return procedures and
or the highest marginal tax rate for tax agreements (Regs. Sec. 301.6225- push-out statements both require part-
year 2019. Then XYZ adds the $10 posi- 2(d)(8)); ners to account for any positive or nega-
tive credit adjustment to arrive at the ■ Modifications to apply treaty provi- tive adjustment resulting from an IRS
final imputed underpayment. XYZ will sions (Regs. Sec. 301.6225-2(d)(9)); examination, with one key difference.
push out the $100 negative adjustment and Typically, partners must defer negative

18 October 2022 The Tax Adviser