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adjustments to the current-year tax re- next decade, partnerships will be forced Under Sec. 721, the general rule is
turn. However, the Treasury regulations to navigate the inconsistency, vagueness, “[n]o gain or loss shall be recognized to
reverse this assumption for the amended and nuance of the CPAR. Many battles a partnership or to any of its partners in
return, alternative amended return, with the IRS will go to court, where the case of a contribution of property to
changes in the composition of the im- partners will soon discover the limited the partnership in exchange for an inter-
puted underpayment, and the catch-all scope of judicial review. Center stage will est in the partnership.” However, there
modifications. This difference may be be the imputed underpayment and its is the potential of a disguised sale under
beneficial for partnerships if, for ex- modifications, which will be the single Regs. Sec. 1.707-5 when encumbered
ample, there is a decrease in capital gain largest area of procedural dispute within property is contributed. Under this
that an individual partner may not take the CPAR. regulation, if a partnership assumes or
in full due to capital loss limitations. From Derek Reuter, J.D., Pittsburgh takes property subject to a liability other
than a qualified liability, the partnership
How to request a modification Real estate partnership is treated as transferring consideration to
The process to request modification restructuring and potential the partner. As such, when transferring
of the imputed underpayment seems disguised sales encumbered property in a partnership
deceptively simple. A partnership must Instead of having a single real estate restructuring transaction, care must be
electronically file Form 8980, Partnership property housed under a stand-alone taken to determine whether the liability
Request for Modification of Imputed Un- partnership entity, there is a trend transferred is considered qualified.
derpayments Under IRC Section 6225(c), toward diversification in a real estate As defined in Regs. Sec. 1.707-5(a)(6),
and supporting documents, utilizing IRS portfolio with multiple properties. This a qualified liability is:
Publication 5346, Instructions for Form can be accomplished by contributing ■ A liability incurred by the partner
8980. The supporting documentation property to a real estate fund or to an more than two years prior to the
provides the main source of complex- umbrella partnership real estate invest- earlier of the date the partner agrees
ity. The Treasury regulations provide ment trust (UPREIT) that traditionally in writing to transfer the property
only that the IRS must be satisfied that holds multiple real estate properties, in or the date the partner transfers the
the modification is appropriate under exchange for a partnership interest in property to the partnership, and
the circumstances. that entity. With these restructuring that has encumbered the transferred
If a partnership elected to modify transactions, careful consideration is property the entire time;
the imputed underpayment by filing needed to prevent the transaction from ■ A liability that was not incurred
amended returns, then each partner being deemed a disguised sale. in anticipation of the transfer of
would file amended tax returns, pay the
additional tax, and submit confirmation
of each to the IRS. Congress was vague
when stating whether the IRS must
approve the modification request after
the partners have filed their amended
returns. Sec. 6225 provides that partner-
ships may modify the imputed under-
payment “only upon approval” by the
IRS, without saying whether the IRS
necessarily must accept a modification if
the partnership meets all requirements.
PHOTO BY PETER ADAMS/GETTY IMAGES may limit judicial review of the IRS’s
Additionally, the broad language that
Congress used in requiring IRS approval

determination to deny an imputed un-
derpayment modification.
The CPAR’s relentless punishment
of partners is only beginning as the first
wave of IRS examinations after the
COVID-19 pandemic end. Over the

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