Centralized Partnership Audit Regime

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 301

[REG-136118-15, REG-119337-17; REG-118067-17; REG-120232-17 and REG-120233-17]

RIN 1545-BO03; 1545-BO04

Centralized Partnership Audit Regime

AGENCY:

Internal Revenue Service (IRS), Treasury.

ACTION:

Notice of proposed rulemaking; notice of public hearing; withdrawal and partial withdrawal of notices of proposed rulemaking.

SUMMARY:

This document contains proposed regulations implementing the centralized partnership audit regime. This document withdraws and reproposes certain portions of proposed regulations implementing the centralized partnership audit regime that have not been finalized to reflect the changes made by the Technical Corrections Act of 2018, contained in Title II of the Consolidated Appropriations Act of 2018 (TTCA). The proposed regulations affect partnerships with respect to partnership taxable years beginning after December 31, 2017, as well as partnerships that make the election under the Bipartisan Budget Act of 2015 (BBA), to apply the centralized partnership audit regime to partnership taxable years beginning on or after November 2, 2015 and before January 1, 2018.

DATES:

Written or electronic comments must be received by October 1, 2018. Outlines of topics to be discussed at the public hearing scheduled for October 9, 2018, at 10 a.m. must be received by October 1, 2018.

ADDRESSES:

Send submissions to: CC:PA:LPD:PR (REG-136118-15), Room 5207, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-136118-15), Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue NW, Washington, DC 20224, or sent electronically via the Federal eRulemaking Portal at

www.regulations.gov

(IRS REG-136118-15).

FOR FURTHER INFORMATION CONTACT:

Concerning the proposed regulations under sections 6221, 6226, 6235, and 6241, Jennifer M. Black of the Office of Associate Chief Counsel (Procedure and Administration), (202) 317-6834; concerning the proposed regulations under sections 6225, 6231, and 6234, Joy E. Gerdy-Zogby of the Office of Associate Chief Counsel (Procedure and Administration), (202) 317-6834; concerning the proposed regulations under sections 6222, 6227, 6232, and 6233, Steven L. Karon of the Office of Associate Chief Counsel (Procedure and Administration), (202) 217-6834; concerning the proposed regulations under section 6225 relating to creditable foreign tax expenditures, Larry R. Pounders, Jr. of the Office of Associate Chief Counsel (International), (202) 317-5465; concerning the proposed regulations relating to chapters 3 and 4 of subtitle A of the Internal Revenue Code (other than section 1446), Subin Seth of the Office of Associate Chief Counsel (International), (202) 317-5003; concerning the proposed regulations relating to section 1446, Ronald M. Gootzeit of the Office of Associate Chief Counsel (International), (202) 317-4953; concerning the proposed regulations under sections 704 through 706 and §§ 301.6225-4 and 301.6226-4, Allison R. Carmody or Meghan M. Howard of the Office of Associate Chief Counsel (Passthroughs and Special Industries), (202) 317-5279; concerning the submission of comments, the hearing, or to be placed on the building access list to attend the hearing, Regina Johnson, (202) 317-6901 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

This document contains proposed regulations under sections 704 through 706 to amend the Income Tax Regulations (26 CFR part 1) under Subpart—Partners and Partnerships and proposed regulations under sections 6221 through 6241 to amend the Procedure and Administration Regulations (26 CFR part 301) under Subpart—Tax Treatment of Partnership Items to implement the centralized partnership audit regime enacted by section 1101 of the BBA, Public Law 114-74 (BBA), as amended by the Protecting Americans from Tax Hikes Act of 2015, Public Law 114-113 (PATH Act) and sections 201 through 207 of the TTCA, Public Law 115-141. This document also withdraws portions of proposed regulations under sections 704 through 706 and 6221 through 6241 that were published in the

Federal Register

on June 14, 2017 (REG-136118-15, 82 FR 27334), November 30, 2017(REG-119337-17, 82 FR 56765), December 19, 2017(REG-120232-17 and REG-120233-17, 82 FR 27071), and February 2, 2018 (REG-118067-17, 83 FR 4868).

Section 1101(a) of the BBA removed subchapter C of chapter 63 of the Internal Revenue Code (Code) effective for partnership taxable years beginning after December 31, 2017. Subchapter C of chapter 63 of the Code (subchapter C of chapter 63) contained the unified partnership audit and litigation rules that were commonly referred to as the TEFRA partnership procedures or simply TEFRA. Section 1101(b) of the BBA also removed subchapter D of chapter 63 of the Code and part IV of subchapter K of chapter 1 of the Code, rules applicable to electing large partnerships, effective for partnership taxable years beginning after December 31, 2017. Section 1101(c) of the BBA replaced the TEFRA partnership procedures and the rules applicable to electing large partnerships with a centralized partnership audit regime that, in general, determines, assesses, and collects tax at the partnership level.

On December 18, 2015, section 1101 of the BBA was amended by the PATH Act. The amendments under the PATH Act are effective as if included in section 1101 of the BBA, and therefore, subject to the effective dates in section 1101(g) of the BBA.

On June 14, 2017, the Treasury Department and the IRS published in the

Federal Register

(82 FR 27334) a notice of proposed rulemaking (REG-136118-15) (June 2017 NPRM) proposing rules under section 6221 regarding the scope and election out of the centralized partnership audit regime, section 6222 regarding consistent treatment by partners, section 6223 regarding the partnership representative, section 6225 regarding partnership adjustments made by the IRS and determination of the amount of the partnership's liability (referred to as the imputed underpayment), section 6226 regarding the election for partners to take partnership adjustments into account, section 6227 regarding administrative adjustment requests (AARs), and section 6241 regarding definitions and special rules. The Treasury Department and the IRS received written public comments in response to the regulations proposed in the June 2017 NPRM, and a public hearing regarding the proposed regulations was held on September 18, 2017.

On November 30, 2017, the Treasury Department and the IRS published in the

Federal Register

(82 FR 56765) a notice of proposed rulemaking (REG-119337-17) (November 2017 NPRM) proposing rules regarding international provisions under the centralized partnership audit regime, including rules relating to the withholding of tax

on foreign persons, the withholding of tax to enforce reporting on certain foreign accounts, and the treatment of creditable foreign tax expenditures of a partnership. No written comments were submitted in response to this NPRM, and no hearing was requested or held.

On December 19, 2017, the Treasury Department and the IRS published in the

Federal Register

(82 FR 27071) a notice of proposed rulemaking (REG-120232-17 and REG-120233-17) (December 2017 NPRM) proposing administrative and procedural rules under the centralized partnership audit regime, including rules addressing assessment and collection, penalties and interest, periods of limitations on making partnership adjustments, and judicial review of partnership adjustments. The regulations proposed in the December 2017 NPRM also provided rules addressing how pass-through partners take into account adjustments under the alternative to payment of the imputed underpayment described in section 6226 and under rules similar to section 6226 when a partnership files an AAR under section 6227. Written comments were received in response to the December 2017 NPRM. However, no hearing was requested or held.

On January 2, 2018, the Treasury Department and the IRS published in the

Federal Register

(82 FR 28398) final regulations under section 6221(b) providing rules for electing out of the centralized partnership audit regime.

On February 2, 2018, the Treasury Department and the IRS published in the

Federal Register

(83 FR 4868) a notice of proposed rulemaking (REG-118067-17) (February 2018 NPRM) proposing rules for adjusting tax attributes under the centralized partnership audit regime. Written comments were received in response to the February 2018 NPRM. However, no hearing was requested or held.

On March 23, 2018, Congress enacted the TTCA, which made a number of technical corrections to the rules under the centralized partnership audit regime. The amendments under the TTCA are effective as if included in section 1101 of the BBA, and therefore, subject to the effective dates in section 1101(g) of the BBA.

On August 9, 2018, the Treasury Department and the IRS published in the

Federal Register

(83 FR 39331) final regulations under section 6223 providing rules relating to partnership representatives and final regulations under § 301.9100-22 providing rules for electing into the centralized partnership audit regime for taxable years beginning on or after November 2, 2015 and before January 1, 2018. Corresponding temporary regulations under § 301.9100-22T were also withdrawn.

In light of the technical corrections made by the TTCA, to the extent regulations have not already been finalized, this document withdraws the regulations proposed in the June 2017 NPRM, the November 2017 NPRM, the December 2017 NPRM, and the February 2018 NPRM (collectively, the prior NPRMs) and proposes regulations reflecting the technical corrections made by the TTCA. The regulations proposed in this document also include clarifications, unrelated to the TTCA as discussed in the Explanation of Provisions section of this preamble. In addition, certain regulations have been reordered and renumbered, typographical errors have been corrected, nonsubstantive editorial changes have been made, and the applicability date provisions in the regulations have been revised to replace references to § 301.9100-22T with references to § 301.9100-22. Finally, the assumed highest rate of tax for corporations in the examples for all applicable periods is now 20 percent to more closely reflect the corporate tax rate in effect under section 11 (as amended by section 13001 of “[a]n Act to provide for the reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018,” Public Law 115-97 (the “Act”)).

Although this document withdraws the prior NPRMs, the Explanation of Provisions sections contained in the preambles of the withdrawn NPRMs remain relevant. Therefore, to the extent not inconsistent with the Explanation of Provisions section of this preamble or the preamble to the portions of the proposed regulations that have already been finalized, those Explanation of Provision sections are incorporated by reference in this document.

Federal Register

citations are provided to assist with locating the relevant section of the preamble in the prior NPRMs. The prior NPRMs are also included in the rulemaking docket for this notice of proposed rulemaking on

www.regulations.gov.

This document does not address written comments that were submitted in response to the regulations proposed in the prior NPRMs or respond to any statements made during the public hearing held on September 18, 2017. Except to the extent that the written comments relate to the final regulations under section 6221(b) and section 6223, such comments and any comments received in response to this notice of proposed rulemaking will be addressed when the regulations proposed in this document are finalized.

Explanation of Provisions

1. Scope of the Centralized Partnership Audit Regime and Partnership-Related Item

Section 6221(a) provides for the determination of certain adjustments at the partnership level under the centralized partnership audit regime. Prior to amendment by the TTCA, section 6221(a) provided that any adjustment to items of income, gain, loss, deduction, or credit of a partnership for a partnership taxable year (and any partner's distributive share thereof) shall be determined, any tax attributable thereto shall be assessed and collected, and the applicability of any penalty, addition to tax, or additional amount which relates to an adjustment to any such item or share shall be determined at the partnership level. Prior to amendment by the TTCA, section 6241(a)(2) provided that the term “partnership adjustment” meant any adjustment in the amount of any item of income, gain, loss, deduction, or credit of a partnership, or any partner's distributive share thereof.

Section 201(c)(2) of the TTCA amended section 6221(a) by replacing the phrase “items of income, gain, loss, deduction, or credit of a partnership for a partnership taxable year (and any partner's distributive share thereof)” with the phrase “a partnership-related item.” Section 6221(a) now provides that any adjustment to a partnership-related item and the applicability of any penalty, addition to tax, or additional amount which relates to an adjustment to any partnership-related item shall be determined at the partnership level. Additionally, section 6221(a) provides that any tax attributable to an adjustment to a partnership-related item shall be assessed and collected at the partnership level.

Section 201(a) of the TTCA amended section 6241(2) to provide that the term “partnership adjustment” means any adjustment to a partnership-related item, and the term “partnership-related item” means any item or amount with respect to the partnership (without regard to whether or not such item or amount appears on the partnership's return and including an imputed underpayment and any item or amount relating to any transaction with, basis in, or liability of, the partnership) which is relevant (determined without regard to subchapter C of chapter 63) in determining the tax liability of any person under chapter 1 of the Code

(chapter 1) and any partner's distributive share thereof.

By eliminating the reference to items of income, gain, loss, deduction, or credit of a partnership, and instead referring to partnership-related items, which is broadly defined, the amendments by the TTCA clarify that the scope of the centralized partnership audit regime is not narrower than the scope of the partnership audit procedures under TEFRA. Joint Comm. on Taxation, JCX-6-18,

Technical Explanation of the Revenue Provisions of the House Amendment to the Senate Amendment to H.R. 1625 (Rules Committee Print 115-66),

37 (2018) (JCX-6-18). Rather, the centralized partnership audit regime is intended to have a scope sufficient to address those items that would have been considered partnership items, affected items, and computational adjustments under TEFRA, including the regulations.

Id.

A. Proposed § 301.6221(a)-1

Proposed rules under § 301.6221(a)-1 were previously published in the

Federal Register

(82 FR 27372-73) in the June 2017 NPRM and the November NPRM (82 FR 56776) (former proposed § 301.6221(a)-1). Former proposed § 301.6221(a)-1(a) provided that the centralized partnership audit regime covers any adjustment to items of income, gain, loss, deduction, or credit of a partnership and any partner's distributive share of those adjusted items. Former proposed § 301.6221(a)-1(b)(1)(i) defined the phrase “items of income, gain, loss, deduction or credit” to mean all items and information required to be shown, or reflected, on a return of the partnership under section 6031, the regulations thereunder, and the forms and instructions prescribed by the IRS for the partnership's taxable year, and any information in the partnership's books and records for the taxable year. In addition, former proposed § 301.6221(a)-1(b)(1)(ii) provided that any factors that needed to be taken into account to determine or allocate the tax treatment of items adjusted under the centralized partnership audit regime were also to be determined at the partnership level. Former proposed § 301.6221(a)-1(b)(2) also addressed items included within the phrase “partner's distributive share.” Because the TTCA's amendment of the scope of the centralized partnership audit regime is accomplished by adding a new defined term—“partnership-related item”—the majority of the rules under former proposed § 301.6221(a)-1(b) that addressed the scope of what is adjusted at the partnership level are now incorporated into proposed § 301.6241-6 which defines the term “partnership-related item.”

Proposed § 301.6221(a)-1(a) now provides the general rule that, except as otherwise provided under the centralized partnership audit regime, any adjustments to partnership-related items and the applicability of any penalty, addition to tax, or additional amount that relates to an adjustment to any such items are determined at the partnership level. In addition, proposed § 301.6221(a)-1(a) provides that any chapter 1 tax attributable to an adjustment to a partnership-related item is assessed and collected at the partnership level. See section 13 of the preamble for a discussion of special enforcement matters pertaining to partnership-related items that may be adjusted outside of the centralized partnership audit regime.

Proposed § 301.6221(a)-1(a) further provides that any consideration necessary to make a determination at the partnership level under the centralized partnership audit regime is made at the partnership level. This would include the period of limitations on making adjustments under section 6235 as well as any facts necessary to calculate any imputed underpayment under section 6225, except as otherwise provided under the centralized partnership audit regime. These determinations previously constituted factors described under former proposed § 301.6221(a)-1(b)(1)(ii)(F) and (I).

B. Proposed § 301.6241-6

Proposed § 301.6241-6 defines the term “partnership-related item.” Proposed § 301.6241-6(a) provides the general rule that a partnership-related item is any item or amount with respect to the partnership which is relevant in determining the tax liability of any person under chapter 1 and any partner's distributive share of any such item or amount.

Proposed § 301.6241-6(b) provides that an item or amount is with respect to a partnership without regard to whether or not such item or amount appears on the partnership return. An item or amount is with respect to a partnership if: The item or amount is shown or reflected, or required to be shown, or reflected, on a return of the partnership; the item or amount is in the partnership's books and records; the item or amount is an imputed underpayment; the item or amount relates to any transaction with, basis in, or liability of the partnership; or the item or amount relates to a transaction under section 707(a)(2), 707(b), or 707(c).

Under proposed § 301.6241-6(b)(4) and (7), an item or amount that relates to any transaction with, or liability of, the partnership, is with respect to a partnership only if the item or amount relates to a transaction or liability between the partnership and a partner acting in its capacity as a partner or an indirect partner (as defined in proposed § 301.6241-1(a)(4)) acting in its capacity as an indirect partner. Accordingly, an item or amount that relates to any transaction with or liability of the partnership is not with respect to the partnership if the item or amount is reported (or reportable) solely by a person other than the partnership, a partner not acting in its capacity as a partner, or an indirect partner not acting in its capacity as an indirect partner (except for transactions under section 707). Proposed § 301.6241-6(b)(8) provides that any determination necessary to make an adjustment to an item or amount described in proposed § 301.6241-6(b)(1) through (b)(7) is also an item or amount with respect to the partnership.

Proposed § 301.6241-6(c) provides that the determination of whether an item or amount is relevant in determining the tax liability of any person under chapter 1 is made without regard to the provisions of the centralized partnership audit regime. Proposed § 301.6241-6(c) also clarifies that an item or amount of a partnership is relevant in determining the liability of any person under chapter 1 without regard to whether such item or amount, or adjustment to such item or amount, has an effect on the tax liability of any particular person under chapter 1. Section 6241(2)(B)(i) does not limit whether an item is relevant in determining tax liability under chapter 1 to whether the item is relevant to determining the tax liability of a partner of the partnership under chapter 1. Rather, the statutory language refers to liability under chapter 1 of “any person.” An item or amount is a partnership-related item if the item or amount is relevant in determining any person's liability under chapter 1 if the item might have any effect on any person's liability under chapter 1 regardless of whether it actually does have such an effect. Consequently, the IRS is not required to determine if an adjustment would have an actual effect on any person's chapter 1 liability under the Code.

Proposed § 301.6241-6(d) provides a list of examples of partnership-related items. These examples are largely the same as the items described in former proposed § 301.6221(a)-1(b)(1) with a few minor revisions. First, the

references to “foreign,” “tax,” and “§ 1.704-1(b)(4)(viii)(b)” in the example regarding creditable expenditures were removed to clarify that partnership-related item includes any creditable expenditures, not just a creditable foreign tax expenditure. Also, the “including . . .” phrase from each example was removed to be consistent with the broad scope of the centralized partnership audit regime and does not reflect a substantive change. No inference should be drawn from the removal of that language.

Proposed § 301.6241-6(e) provides examples that illustrate the rules under proposed § 301.6241-6.

2. Partner's Return Must Be Consistent With Partnership Return

Prior to enactment of the TTCA, section 6222 provided that a partner shall treat on the partner's return “each item of income, gain, loss, deduction, or credit attributable to a partnership” subject to subchapter C of chapter 63 in a manner that is consistent with the treatment of such item on the partnership return. Section 201(c) of the TTCA amended section 6222 to provide that a partner shall treat on the partner's return “any partnership-related item” in a manner which is consistent with the treatment of such item on the partnership return.

A. Proposed § 301.6222-1

Proposed rules under § 301.6222-1 were previously published in the

Federal Register

(82 FR 27375-78) in the June 2017 NPRM (former proposed § 301.6222-1). For an explanation of the rules under former proposed 301.6222-1, see 82 FR 27345-46.

Former proposed § 301.6222-1(a) provided that a partner's treatment of each item of income, gain, loss, deduction, or credit attributable to a partnership must be consistent with the treatment of those items on the partnership return, including treatment with respect to the amount, timing, and characterization of those items. The reference in former proposed § 301.6222-1(a) to “each item of income, gain, loss, deduction, or credit attributable to a partnership” has been replaced with a reference to “any partnership-related item” to reflect the statutory change to section 6222(a). In addition, references throughout former proposed § 301.6222-1 to the term “item” have been replaced with references to the term “partnership-related item,” as appropriate.

3. Imputed Underpayment, Modification of Imputed Underpayment, and Adjustments That Do Not Result in an Imputed Underpayment

Section 6225 provides rules governing the determination of the imputed underpayment, modification of the imputed underpayment, and the treatment of adjustments that do not result in an imputed underpayment. Section 202(c) of the TTCA amended section 6225(a) to reflect the new term “partnership-related item” and to provide that in the case of adjustments to partnership-related items that result in an imputed underpayment the partnership shall pay an amount equal to the imputed underpayment in the adjustment year as provided in section 6232. In the case of adjustments that do not result in an imputed underpayment, such adjustments shall be taken into account by the partnership in the adjustment year.

Section 202(a) of the TTCA amended section 6225(b)(1) to provide that the Secretary shall determine any imputed underpayment with respect to any reviewed year by appropriately netting all partnership adjustments to such reviewed year and applying the highest rate of tax in effect for that year under section 1 or 11. Section 202(a) of the TTCA also amended section 6225(b)(2) to provide that in the case of any adjustment that reallocates the distributive share of any item from one partner to another, such adjustment shall be taken into account by disregarding so much of such adjustment as results in a decrease in the amount of the imputed underpayment.

Section 202(a) of the TTCA also added paragraphs (b)(3) and (b)(4) to section 6225. Section 6225(b)(3) provides that partnership adjustments for any reviewed year shall first be separately determined (and netted as appropriate) within each category of items that are required to be taken into account separately under section 702(a) or other provision of the Code. Section 6225(b)(4) provides if any adjustment would (but for section 6225(b)(4)) result in a decrease in the amount of the imputed underpayment, and could be subject to any additional limitation under the provisions of the Code (or not allowed, in whole or in part, against ordinary income) if such adjustment were taken into account by any person, such adjustment shall not be taken into account when appropriately netting partnership adjustments under section 6225(b)(1)(A) except to the extent otherwise provided by the Secretary.

Section 202(b) of the TTCA amended several provisions relating to modifications of imputed underpayments. Sections 6225(c)(3), (c)(4)(A), and (c)(5)(A)(i), which previously referred to the “portion of the imputed underpayment,” were amended to refer to the “portion of the adjustment.” This amendment clarifies that modifications under sections 6225(c)(3), (c)(4), and (c)(5) result in disregarding the portion of the partnership adjustment affected by the modification, rather than the portion of the imputed underpayment. Section 202(c) of the TTCA also added section 6225(c)(9), which provides that the Secretary shall establish procedures under which the adjustments described in section 6225(a)(2)—adjustments that do not result in an imputed underpayment—may be modified in such manner as the Secretary determines appropriate.

Section 203 of the TTCA amended section 6225(c)(2) relating to the procedures for partners to take adjustments into account during modification. Section 6225(c)(2)(A) governs the filing of amended returns by partners. Section 6225(c)(2)(B) provides for an alternative procedure to the filing of amended returns. Section 6225(c)(2)(C) provides rules for adjustments that reallocate the distributive share of any item from one partner to another. Section 6225(c)(2)(D) provides that sections 6501 and 6511 shall not apply in certain situations related to amended returns and the alternative procedure to filing amended returns. Section 6225(c)(2)(E) provides that any adjustments to tax attributes that occur as a result of a modification under section 6225(c)(2) are binding on the partners and the partnership. Section 6225(c)(2)(F) provides rules for tiered structures, including defining the term “relevant partner” to mean any partner in the chain of ownership of any partnerships that are partners in the partnership requesting modification.

A. Proposed §§ 301.6225-1, 301.6225-2, and 301.6225-3

Proposed rules under §§ 301.6225-1, 301.6225-2, and 301.6225-3 were previously published in the

Federal Register

in the June 2017 NPRM (82 FR 27382-91), the November 2017 NPRM (82 FR 56776), and in the December 2017 NPRM (82 FR 60154) (collectively, former proposed §§ 301.6225-1, 301.6225-2, and 301.6225-3). For an explanation of the rules under former proposed §§ 301.6225-1, 301.6225-2, and 301.6225-3, see 82 FR 27350-58, 82 FR 56766-75, and 82 FR 60152-53.

Proposed § 301.6225-1 has been reorganized to clarify the process for determining an imputed underpayment. This reorganization, when compared to former proposed § 301.6225-1 (1) more clearly describes the steps necessary to determine an imputed underpayment and adjustments that do not result in an imputed underpayment; (2) consolidates rules regarding adjustments that do not result in an imputed underpayment; and (3) relocates rules regarding creditable expenditures to more clearly explain how to account for creditable expenditures in the determination of the imputed underpayment.

Proposed § 301.6225-1(b) addresses the calculation of the imputed underpayment. Due to the number of adjustments that could be made based on the definition of partnership-related item, the IRS will need to address circumstances in which multiple partnership-related items are adjusted to address a single issue or transaction in the administrative proceeding. Adjusting multiple partnership-related items that relate to the same issue or transaction could result in an imputed underpayment that double-counts some of the adjustments even though, if the partnership and partners had properly reported the item, one or more adjustments would have been subsumed by another item. To prevent double-counting the individual adjustments as inputs into the imputed underpayment, proposed § 301.6225-1(b)(4) provides that the IRS may treat adjustments that would otherwise be double-counted as zero for purposes of determining the imputed underpayment.

Proposed § 301.6225-1(c) describes the different groupings in which adjustments are placed for purposes of determining an imputed underpayment. These groupings are the reallocation grouping, the credit grouping, the creditable expenditure grouping, and the residual grouping. Proposed § 301.6225-1(c)(1) provides authority for the IRS to alter the manner in which adjustments are grouped to appropriately reflect the facts and circumstances.

Proposed § 301.6225-1(c)(2) defines the term “reallocation adjustment” and provides that in general reallocation adjustments are placed in the reallocation grouping. Under proposed § 301.6225-1(c)(3), however, reallocation adjustments to credits are placed in the credit grouping, and under § 301.6225-1(c)(4), reallocation adjustments to creditable expenditures are placed in the creditable expenditure grouping, similar to the rule under former proposed § 301.6225-1(d)(2)(iv). Proposed § 301.6225-1(c)(2)(ii) provides that each reallocation adjustment results in two separate adjustments—one positive adjustment and one negative adjustment. Proposed § 301.6225-1(c)(6) provides similar rules for recharacterization adjustments.

Proposed § 301.6225-1(c)(5)(ii) provides rules for how to account for adjustments to partnership-related items that are not allocated by the partnership to its partners under section 704(b). Proposed § 301.6225-1(d)(2)(iii)(B) provides that adjustments to such items, solely for purposes of determining an imputed underpayment, are treated as a positive adjustment to income to the extent appropriate. The Treasury Department and the IRS request comments regarding how to treat recharacterization and reallocation adjustments related to items that are not allocated under section 704(b).

To incorporate the additions of sections 6225(b)(3) and (b)(4), proposed § 301.6225-1(d)(1) provides that when the IRS determines a negative adjustment (as defined in proposed § 301.6225-1(d)(2)(ii)), all partnership adjustments are placed into subgroupings based on whether the adjusted items are required to be taken into account separately under section 702 and other provisions of the Code. Proposed § 301.6225-1(d)(1) provides authority for the IRS to alter the manner in which adjustments are subgrouped to appropriately reflect the facts and circumstances.

Proposed § 301.6225-1(d)(2) provides for the treatment of certain partnership adjustments and defines the terms negative adjustment and positive adjustment. A negative adjustment is defined as an adjustment that is a decrease in an item of income, treated as a decrease in an item of income, or that is an increase in an item of credit. A positive adjustment is an adjustment that is not a negative adjustment. Proposed § 301.6225-1(d)(3) requires that positive and negative adjustments resulting from reallocation adjustments and recharacterization adjustments be placed into separate subgroupings.

Proposed § 301.6225-1(e) provides rules for appropriately netting adjustments within each grouping or subgrouping and provides that adjustments are not netted between groupings or subgroupings. The statutory changes referencing section 702(a) and other provisions of the Code and the general inability to net negative adjustments result in restrictions on netting in these proposed rules that are broader than the restrictions described in former proposed § 301.6225-1. The examples in the proposed rules have been revised to reflect these broader restrictions on netting.

Proposed § 301.6225-1(f) provides rules related to determining whether adjustments are adjustments that do not result in an imputed underpayment. If the adjustments do not result in an imputed underpayment, such adjustments are taken into account in accordance with § 301.6225-3.

Proposed § 301.6225-1(g) provides the IRS may create multiple imputed underpayments for a particular tax year. Proposed § 301.6225-1(g)(2)(iii)(B) allows a particular adjustment that does not result in an imputed underpayment to be associated with a particular imputed underpayment. This rule ensures that adjustments that are appropriately associated with the imputed underpayment will be taken into account along with the other adjustments underlying the imputed underpayment if an election under section 6226 is made with respect to that imputed underpayment. For example, a reallocation or recharacterization adjustment generally results in more than one adjustment. In the case of a reallocation adjustment, there are adjustments that affect at least two partners. In a recharacterization adjustment, there is an adjustment to correct the characterization and an adjustment disallowing the incorrect characterization. As a result, if an adjustment that does not result in an imputed underpayment is due to a reallocation or recharacterization adjustment and one side of the adjustment is used to calculate a specific imputed underpayment, the other side of the adjustment, which is an adjustment that does not result in an imputed underpayment, is associated with that specific imputed underpayment.

The IRS may also determine that other adjustments that do not result in an imputed underpayment should be associated with a specific imputed underpayment. An adjustment that does not result in an imputed underpayment and that is not associated with a particular specific imputed underpayment is associated with the general imputed underpayment.

Proposed § 301.6225-2 provides guidance on procedures to modify the imputed underpayment. Former § 301.6225-2(b) provided that the effect of modification was determined by considering how the modification changed the relevant portion of the adjustment. This approach to modification is consistent with the amendments to section 6225(c). Accordingly, proposed § 301.6225-2(b)

reflects the rule that modification affects the portion of an adjustment.

Proposed § 301.6225-2(b)(3)(iv) provides rules on rate modification in the case of special allocations. Those rules generally mirror the statutory rule under section 6225(c)(4)(B)(ii). The rule in the statute is complex compared with other rate modifications in that they require a valuation analysis. The Treasury Department and the IRS request comments on ways to implement these rules efficiently.

Proposed § 301.6225-2(d)(2) provides rules regarding amended returns and the alternative procedure to filing amended returns. Proposed § 301.6225-2(d)(2) provides that a partnership may satisfy the requirements of amended return modification by submitting all the information required for amended return modification and the partners paying any amount that would be due if the partners had filed amended returns. The Treasury Department and the IRS request comments on how best to implement the alternative procedure to filing amended returns.

Former proposed § 301.6225-2(d)(2)(viii) provided that partners could raise a reasonable cause defense under section 6664(c) (or other partner-level defense as described in former proposed § 301.6226-3(i)(3)) with an amended return in modification. Proposed § 301.6225-(d)(2)(viii) now provides that such partner-level defenses should be raised through a claim for refund that is submitted outside of the modification process. This rule is similar to the current rule regarding partner-level defenses related to adjustments that are taken into account by partners under section 6226. See proposed § 301.6226-3(d)(3).

Section 6225(c)(6) grants the Secretary authority to “by regulations or guidance provide for additional procedures to modify imputed underpayment amounts on the basis of such other factors as the Secretary determines are necessary and appropriate to carry out the purposes of this section.” The Treasury Department and the IRS have elected to use this authority in two circumstances that were not included in former proposed § 301.6225-2. First, the Treasury Department and the IRS have concluded that the references to the adjustment year in section 6225(c)(5) make the implementation of section 6225(c)(5) unworkable. No partner would qualify as a specified partner until the adjustment year, but at any time during the administrative proceeding that is relevant to modification, the adjustment year does not yet exist. As a result, the only time this type of modification could be used would be in the case of an AAR because in that case, the adjustment year is the year in which the AAR is filed. In order for modification under section 6225(c)(5) to be administrable, proposed § 301.6225-2(d)(5)(iv) provides that a “qualified relevant partner” is a person that meets the definition of a specified partner but in a year that can be determined at the time modification is requested. The definition of a specified passive activity loss has also been changed to clarify that the years at issue do not have to be the adjustment year.

Second, the Treasury Department and the IRS are also exercising the authority under section 6225(c)(6) to add a modification for partnerships with partners entitled to benefits under an income tax treaty. Proposed § 301.6225-2(d)(9) allows modification if a relevant partner would have qualified for a reduction or exemption from tax with respect to a particular item under an income tax treaty with the United States. The Treasury Department and the IRS request comments on this type of modification.

Proposed § 301.6225-2(e) provides rules for modification of certain types of adjustments that do not result in an imputed underpayment (as defined in proposed § 301.6225-1(f)). Proposed § 301.6225-2(e) limits the ability to modify such adjustments to certain types of modification. The Treasury Department and the IRS request comments on whether the list of allowed modifications under proposed § 301.6225-2(e) is sufficient.

Lastly, proposed § 301.6225-2 adopts the term “relevant partner” to describe any direct or indirect partner in the partnership seeking modification. See section 6225(c)(2)(F) and proposed § 301.6225-2(a).

Proposed § 301.6225-3 provides rules regarding adjustments that do not result in in an imputed underpayment. The changes in the TTCA comport with former proposed § 301.6225-3, which required that the partnership take the adjustments that do not result in an imputed underpayment into account as separately stated or non-separately stated adjustments as appropriate.

B. Proposed § 301.6225-4

Proposed rules under § 301.6225-4 were previously published in the

Federal Register

(83 FR 4868-82) in the February 2018 NPRM (former proposed § 301.6225-4). For an explanation of the rules under former proposed § 301.6225-4, see 82 FR 4877.

Proposed § 301.6225-4 sets forth rules under which a partnership and its partners must adjust specified tax attributes to take into account partnership adjustments and the partnership's payment of an imputed underpayment. Changes have been made throughout former proposed § 301.6225-4 to conform to the changes to the definition of “tax attribute” under proposed § 301.6241-1(a)(10). See section 11.A of this preamble regarding the change to the definition of “tax attribute.” In addition, the definition of “specified tax attributes” in proposed § 301.6225-4(a)(2) now includes earnings and profits under section 312 in response to comments received concerning the effect of partnership adjustments on a corporate partner's earnings and profits.

4. Election for the Alternative to Payment of the Imputed Underpayment

Section 6226 provides an alternative to the general rule under section 6225(a)(1) that the partnership must pay an imputed underpayment. Under section 6226, the partnership may elect to have its reviewed year partners take into account adjustments made by the IRS and pay any tax due as a result of those adjustments. If this election is made, the reviewed year partners must pay any chapter 1 tax resulting from taking into account the adjustments, and the partnership is not required to pay the imputed underpayment.

Section 206(d) of TTCA amended section 6226(a) to clarify that if a partnership makes a valid election under section 6226 with respect to an imputed underpayment, no assessment of such imputed underpayment, levy, or proceeding in any court for the collection of such imputed underpayment shall be made against such partnership.

Section 206(e) of the TTCA amended section 6226(b)(1) to provide that when a partner takes into account the adjustments, the partner's chapter 1 tax is adjusted by the aggregate of the “correction amounts” determined under section 6226(b)(2). After amendment by the TTCA, the correction amounts under section 6226(b)(2) are defined as the amounts by which the partner's chapter 1 tax would increase “or decrease” for the partner's first affected year if the partner's share of the adjustments were taken into account for that year. The correction amounts are also the amount by which the partner's chapter 1 tax would increase “or decrease” by reason of the adjustment to tax attributes for any intervening years. See section 6226(b)(2).

Section 204(a) of the TTCA added to the Code section 6226(b)(4), which provides that a partnership or S corporation that receives a statement under section 6226(a)(2) must file a

partnership adjustment tracking report with the IRS and furnish statements under rules similar to the rules of section 6226(a)(2). If the partnership or S corporation fails to furnish such statements, the partnership or S corporation must compute and pay an imputed underpayment under rules similar to the rules of section 6225. A partnership that is a partner must file the partnership adjustment tracking report, and furnish statements or pay an imputed underpayment, notwithstanding any election out of the centralized partnership audit regime under section 6221(b) by the partnership for the tax year that includes the end of the reviewed year of the audited partnership. The term “audited partnership” means the partnership in the chain of ownership that originally made the election under section 6226. See section 6226(b)(4)(D).

A. Proposed §§ 301.6226-1, 301.6226-2, and 301.6226-3

Proposed rules under §§ 301.6226-1, 301.6226-2, and 301.6226-3 were previously published in the

Federal Register

in the June 2017 NPRM (82 FR 27391-97), the November 2017 NPRM (82 FR 56778-79), and the December 2017 NPRM (82 FR 60155-61) (collectively, former proposed §§ 301.6226-1, 301.6226-2, and 301.6226-3). For an explanation of the rules under former proposed §§ 301.6226-1, 301.6226-2, and 301.6226-3, see 82 FR 27358-66, 82 FR 56769-71, and 82 FR 60148-51.

Former proposed § 301.6226-1(b)(2) provided that if a partnership makes a valid election in accordance with proposed § 301.6226-1, the partnership is not liable for the imputed underpayment to which the election relates. To reflect the statutory change to section 6226(a), language has been added to proposed § 301.6226-1(b)(2) to clarify that if a partnership makes a valid election under section 6226 with respect to an imputed underpayment, the IRS may not assess such imputed underpayment, levy, or bring a proceeding in any court for the collection of that imputed underpayment against such partnership. A similar change has also been made to proposed § 301.6226-1(c)(2) (regarding invalid elections) to clarify that if a final determination is made that a purported election under section 6226 is invalid, the IRS may assess the imputed underpayment with respect to which the election was made against the partnership without regard to the limitations under section 6232(b).

Former proposed § 301.6226-3 provided that a reviewed year partner that is furnished a statement under section 6226(a)(2) is required to pay any additional chapter 1 tax (additional reporting year tax) that results from taking into account the partnership adjustments on that statement. As mentioned above in this section of the preamble, section 206(e) of the TTCA amended section 6226(b) to provide that decreases, as well as increases, in chapter 1 tax that result from taking into account partnership adjustments are used in computing a partner's additional reporting year tax. Section 206(e) of the TTCA also replaced the term “adjustment amount” with “correction amount.” Accordingly, proposed § 301.6226-3 now refers to “correction amount” instead of “adjustment amount,” as appropriate, and now provides that a reviewed year partner's chapter 1 tax for the reporting year may be increased or decreased by the additional reporting year tax. The additional reporting year tax is the sum of the correction amounts for the first affected year and any correction amounts for the intervening years. Under proposed § 301.6226-3(b)(2) and (3), the correction amounts are the amounts by which the partner's chapter 1 tax for the taxable year would be increased or decreased if the partner's taxable income for that year were recomputed by taking into account, in the case of the first affected year, the partner's share of the partnership adjustments reflected on the statement furnished to the partner or, in the case of any intervening year, any change to tax attributes of the partner resulting from the changes in the first affected year. A correction amount for the first affected year or any intervening year may be less than zero and may be used to offset any correction amounts from any other year in computing the additional reporting year tax. The examples under proposed § 301.6226-3(h) illustrate situations in which a correction amount may be less than zero.

Furthermore, the additional reporting year tax may be less than zero and may offset other taxes owed by the partner on the partner's reporting year return. Accordingly, any references to the additional reporting year tax as a “liability” have been removed from former proposed § 301.6226-3 to account for situations in which the additional reporting year tax is less than zero.

Section 6226(c)(2) provides that interest in the case of a section 6226 election is determined at the partner level, from the due date of the return for the taxable year to which the increase in chapter 1 tax is attributable, and at the underpayment rate under section 6621(a)(2) (substituting 5 percent for 3 percent). As discussed above in this section of the preamble, the TTCA amended section 6226(b) to provide that both increases and decreases in chapter 1 tax are used in computing a partner's additional reporting year tax. However, the TTCA did not similarly amend the reference to “increases” in section 6226(c)(2) with the result that interest only applies to the increases in the chapter 1 tax that would have resulted from taking into account the partnership adjustments under section 6226. No provision under the centralized partnership audit regime provides for interest in the case of a

decrease

in chapter 1 tax that would have resulted in the first affected year or any intervening year if the adjustments were taken into account in those years. Accordingly, proposed § 301.6226-3(c)(1) provides that interest on the correction amounts determined under proposed § 301.6226-3(b) is only calculated for taxable years for which there is a correction amount greater than zero, that is, taxable years for which there would have been an increase in chapter 1 tax if the adjustments were taken into account.

Proposed § 301.6226-3(c)(1) further provides that for purposes of calculating interest on the correction amounts, any correction amount that is less than zero does not offset any correction amount that is greater than zero. Although those amounts may offset when determining the additional reporting year tax (as described in proposed § 301.6226-3(b)), allowing the same offset for purposes of calculating interest is inconsistent with section 6226(c)(2), which provides that interest is determined with respect to any increase determined under section 6226(b)(2).

Proposed § 301.6226-3(d)(3) has also been clarified to provide that if a partner wants to raise a partner-level defense to any penalty, addition to tax, or additional amount, a partner must first pay the penalty, addition to tax, or additional amount and file a claim for refund for the reporting year in order to raise the defense.

As discussed above in this section of the preamble, section 204(a) of the TTCA amended section 6226(b) to provide that partnerships and S corporations that are direct or indirect partners in an audited partnership and that receive statements under 6226(a)(2) must file partnership adjustment tracking reports with the IRS and furnish statements to their owners under rules similar to section 6226. If no statements are furnished, the partnership or S corporation must

compute and pay an imputed underpayment.

Former proposed § 301.6226-3(e)(1) provided that a pass-through partner (as defined in proposed § 301.6241-1(a)(5)) that was furnished a statement described in proposed § 301.6226-2 (including a statement as described in former proposed § 301.6226-3(e)(3)) must take into account the adjustments reflected on that statement by either furnishing statements to its partners or by paying an amount calculated like an imputed underpayment. Any statements furnished under those provisions were treated as statements described in proposed § 301.6226-2, and any pass-through partner receiving a statement under former proposed § 301.6226-3(e)(3) was required to also take the adjustments reflected on the statement into account by furnishing statements to its own partners or paying an amount calculated like an imputed underpayment. See former proposed § 301.6226-3(e)(3)(i) and (iv).

Although the rules under former proposed § 301.6226-3(e) were largely consistent with the rules under section 6226(b)(4), some changes were needed to conform the two sets of rules. First, proposed § 301.6226-3(a)(1) now provides that the rules under proposed § 301.6226-3(a)(1) apply to a reviewed year partner except to the extent otherwise provided in proposed § 301.6226-3. Second, proposed § 301.6226-3(e) now includes a requirement that the pass-through partner must file a partnership adjustment tracking report. Third, proposed § 301.6226-3(e) provides a default rule that a pass-through partner must furnish statements to its own partners in accordance with proposed § 301.6226-3(e)(3). If a pass-through partner fails to furnish statements in accordance with proposed § 301.6226-3(e)(3), the pass-through partner must compute and pay an imputed underpayment. Additionally, language referring to a pass-through partner “taking into account” the adjustments under former proposed § 301.6226-3(e) was removed to more closely align with the statutory language in section 6226(b)(4). Fourth, proposed § 301.6226-3(e) defines and refers to the term “audited partnership,” which proposed § 301.6226-3(e)(1) defines as the partnership that made the election under § 301.6226-1. See section 6226(b)(4)(D). Lastly, proposed § 301.6226-3(e)(4) provides that the amount a pass-through partner must compute and pay, if it does not furnish statements to its partners, is an “imputed underpayment.” See section 6226(b)(4)(A)(ii)(II).

Because under proposed § 301.6226-3(e), pass-through partners compute and pay an “imputed underpayment,” rather than calculating correction amounts under proposed § 301.6226-3(b), references in former proposed § 301.6226-3(b) to amended returns filed by indirect partners as part of modification have been deleted. Pass-through partners computing an imputed underpayment under proposed § 301.6226-3(e) may account for modifications submitted by their indirect partners, but non-pass-through partners calculating correction amounts under proposed § 301.6226-3(b) cannot. Accordingly, the references in former proposed § 301.6226-3(b) to amended returns filed by indirect partners were removed.

To reflect the change to the definition of “tax attribute” under proposed § 301.6241-1(a)(10) (see section 11.A. of this preamble), proposed §§ 301.6226-2 and 301.6226-3 now only refer to the tax attributes of the partner. For example, proposed §§ 301.6226-2(e) and 301.6226-3(e)(3)(iii) no longer require that the audited partnership report any changes to

partnership

tax attributes on the statements furnished to its partners under section 6226(a)(2). Therefore, when a partner computes the partner's correction amount for any intervening year, the partner calculates the amount by which the partner's chapter 1 tax for any intervening year would increase or decrease if any tax attribute of that partner (for example, a net operating loss carryover or capital loss carryover) has been adjusted after taking into account the partner's share of the adjustments in the first affected year.

Finally, references to “items” or “items of income, gain, loss, deduction, or credit” throughout former §§ 301.6226-1, 6226-2, and 6226-3 have been replaced with references to “partnership-related items.”

B. Revisions to the Regulations Under Section 6226 Unrelated to the TTCA Amendments

In addition to the changes needed to conform to the amendments by the TTCA, some additional changes have been made to former proposed §§ 301.6226-1, 6226-2, and 6226-3. First, proposed § 301.6226-1(b)(2) now provides that only those adjustments that do not result in an imputed underpayment which are associated with an imputed underpayment for which an election under section 6226 is made are included in the reviewed year partner's share of the partnership adjustments reported to the partner. Any adjustments that do not result in an imputed underpayment which are not associated with an imputed underpayment for which an election under section 6226 is made are taken into account under section 6225. This change was necessary to clarify which partnership adjustments are pushed out in the case of multiple imputed underpayments where the push out election is not made with respect to all imputed underpayments. See proposed § 301.6225-1(g) for rules regarding the treatment of adjustments that do not result in an imputed underpayment in the context of specific imputed underpayments.

Second, under proposed § 301.6226-1(c)(1), an election under section 6226 is only valid if all the provisions under proposed § 301.6226-1 (regarding making the election) and § 301.6226-2 (regarding the furnishing of statements) are satisfied, and an election made under section 6226 is valid until the IRS determines that the election is invalid. The rule that an election is valid until the IRS determines it is invalid was moved from former proposed § 301.6226-1(c)(2) to proposed § 301.6226-1(c)(1) to clarify that an election that does not fully satisfy the requirements of proposed §§ 301.6226-1 and 301.6226-2 is valid unless the IRS determines that the purported election is invalid. For example, if a partnership makes an election in accordance with proposed § 301.6226-1 but fails to furnish statements to its partners, that election is valid until the IRS determines otherwise.

In addition, the word “final” was removed from before the word “determination” in proposed § 301.6226-1(c)(2) when referring to a determination made by the IRS that a purported election under section 6226 is invalid. The removal of the word “final” clarifies that the IRS may determine that an election is invalid and assess and collect the imputed underpayment to which the purported election related without first being required to make a proposed or initial determination of invalidity. Although nothing in the regulations precludes the IRS from first notifying the partnership of a potential problem with an election before determining the election is invalid, proposed § 301.6226-1(c)(2) provides that the IRS may determine that an election is invalid even if the partnership has corrected the statements required to be filed and furnished in accordance with proposed § 301.6226-2(d)(3) and also provides that the IRS is not obligated to require the correction of any errors prior to determining an election is invalid.

Third, several changes were made to clarify that the partnership must provide correct information in order to make a valid election under section 6226 and in order for statements to be properly furnished either under proposed § 301.6226-2 or proposed § 301.6226-3(e)(3). Proposed § 301.6226-1(c)(4)(ii) requires the partnership to provide correct information in its election, and proposed § 301.6226-2(e) and proposed § 301.6226-3(e)(3)(iii) require that the statements filed and furnished with the IRS include correct information. Additionally, proposed § 301.6226-2(d)(3) provides that if the IRS cannot determine whether the statements filed and furnished by the partnership are correct because of a failure by the partnership to comply with any requirements (such as filing a partnership adjustment tracking report), the IRS may, but is not obligated to, require the partnership to provide additional information to substantiate the statements. Proposed § 301.6226-2(d)(2) extends the rules governing corrections of errors in statements to statements furnished by pass-through partners under proposed § 301.6226-3(e)(3) and to provide that, if consent of the IRS is required for a correction, that corrected statements may not be furnished until the IRS provides consent.

Fourth, duplicative language regarding the definition of the extended due date for the adjustment year of the audited partnership was removed from former proposed § 301.6226-3(e)(3)(ii) and (e)(4)(ii).

Fifth, in proposed § 301.6226-3(g), the word “grantor” has been added between the words “wholly-owned” and “trusts” to clarify that “wholly-owned trusts” means “wholly-owned grantor trusts.”

Sixth, the phrase “an entity described in § 301.7701-2(c)(2)(i)” in former proposed § 301.6226-3(j) was changed to “a wholly-owned entity disregarded as separate from its owner for Federal tax purposes in the reviewed year” to conform to the definition of disregarded entity under proposed § 301.6241-1(a)(4).

Seventh, proposed § 301.6226-3(c)(2) now provides that interest on any penalties, additions to tax, or additional amounts is calculated from each applicable taxable year until the penalty, addition to tax, or additional amount is paid. Former proposed § 301.6226-3(c)(2) provided that interest was calculated from the first affected year. Under proposed § 301.6226-3(d)(2), partners calculate any penalties, additions to tax, or additional amounts that relate to the partnership adjustments at the partner level. Because the adjustments could create tax effects in more than just the first affected year (for example, as a result of changes to tax attributes in an intervening year), a penalty, addition to tax, or additional amount might likewise result in more than just the first affected year. Accordingly, proposed § 301.6226-3(c)(2) provides that interest on penalties, additions to tax, and additional amounts runs from the applicable taxable year (that is, the particular tax year to which the penalty, addition to tax, or additional amount relates).

Finally, certain errors were corrected in the examples under proposed § 301.6226-3(h). Examples 2 through 4 and 6 through 9 under former proposed § 301.6226-3(h) incorrectly listed the last day to file a petition under section 6234 as the date the adjustments became final, and examples 6 through 9 incorrectly referred to former proposed § 301.6226-1(b) as support for this rule. Under proposed § 301.6226-2(b), partnership adjustments become finally determined on the later of the expiration of the time to file a petition under section 6234 or, if a petition is filed under section 6234, the date when the court's decision becomes final. The examples under proposed § 301.6226-3(h) now reflect that the adjustments become final on the day after the last day to file a petition under section 6234 to be consistent with the rule under § 301.6226-2(b), and incorrect references to § 301.6226-1(b) in Examples 6 through 9 under former proposed § 301.6226-3(h) have been replaced with correct references to § 301.6226-2(b).

Proposed § 301.6226-4

Proposed rules under §§ 301.6226-4 were previously published in the

Federal Register

in the February 2018 NPRM (83 FR 4868) (former proposed § 301.6226-4). For an explanation of the rules under former proposed § 301.6226-4, see 83 FR 4874.

Proposed § 301.6226-4 sets forth rules for adjusting reviewed year partners' tax attributes to take into account partnership adjustments when a partnership makes an election under section 6226. To reflect the addition of section 6226(b)(4), proposed § 301.6226-3(e)(4) now provides that a reviewed year partner that is a pass-through partner must pay an imputed underpayment if the pass-through partner does not furnish statements. In addition, changes have been made throughout former proposed § 301.6226-4 to conform to the change to the definition of “tax attribute” under proposed § 301.6241-1(a)(10). See section 11.A of this preamble. These changes reflect that the adjustments to tax attributes taken into account by a partner should be consistent, regardless of whether the partner files an amended return during modification, participates in the alternative procedure to filing an amended return, or receives a statement under section 6226. Accordingly, the proposed regulations under section 6226 have been revised to refer only to the tax attributes of the partner in the intervening years. Additionally, clarifying changes were made in proposed § 301.6226-4(b) to conform to the terminology used in proposed § 301.6226-3. Lastly, an incorrect cross-reference in former proposed § 301.6226-4(c)(4)(iii) has been replaced with the correct cross-reference.

5. Administrative Adjustment Requests

Section 6227 provides a mechanism for a partnership to file an AAR to correct errors on a partnership return for a prior year. Prior to amendment by the TTCA, section 6227(a) provided that a partnership may file a request for administrative adjustment in the amount of one or more items of income, gain, loss, deduction, or credit of the partnership or any partnership taxable year. Section 201(c) of the TTCA amended section 6227(a) by striking “items of income, gain, loss, deduction, or credit of the partnership” and inserting “partnership-related items.”

Prior to amendment by the TTCA, section 6227(b) provided that any adjustment requested in an AAR is taken into account for the partnership taxable year in which the AAR is made. Section 206(p) of the TTCA amended section 6227(b) by striking “is made” both places it appears and inserting “is filed.”

Prior to amendment by the TTCA, section 6227(b)(1) provided that if an adjustment results in an imputed underpayment, the adjustment may be determined and taken into account by the partnership under rules similar to the rules under section 6225 relating to payment of the imputed underpayment by the partnership, except that the provisions under section 6225 pertaining to modification of the imputed underpayment based on amended returns by partners, the time for submitting information to the Secretary for purposes of modification, and approval by the Secretary of any modification do not apply.

Section 206(p) of the TTCA amended section 6227(b)(1) by striking the reference to “paragraphs (2), (6), and (7)” of section 6225(c) (relating to

modification) and inserting “paragraphs (2), (7), and (9)” of section 6225(c). As a result, section 6227(b)(1) provides that adjustments requested in an AAR are taken into account by the partnership under rules similar to section 6225 (except for sections 6225(c)(2), (7), and (9)). As amended by TTCA, section 6225(c)(2) provides rules allowing for amended returns and an alternative procedure to filing amended returns for purposes of modification, section 6225(c)(7) provides that information required to be submitted for purposes of modification be submitted within 270 days from the date on which the notice of a proposed partnership adjustment is mailed under section 6231, and section 6225(c)(9) provides for modification with respect to adjustments that do not result in an imputed underpayment.

Lastly, section 206(f) of the TTCA added section 6227(d) to provide that the Secretary shall issue regulations or other guidance which provide for the proper coordination of section 6227 and section 905(c).

A. Proposed §§ 301.6227-1, 301.6227-2, and 301.6227-3

Proposed rules under §§ 301.6227-1, 301.6227-2, and 301.6227-3 were previously published in the

Federal Register

(82 FR 27397-99) in the June 2017 NPRM, November 2017 NPRM (82 FR 56779), and December 2017 NPRM (82 FR 60161) (collectively, former proposed §§ 301.6227-1, 301.6227-2, and 301.6227-3). For an explanation of the rules under former proposed §§ 301.6227-1, 301.6227-2, and 301.6227-3, see 82 FR 27366-69, 82 FR 56769, and 82 FR 60151.

Former proposed § 301.6227-1(a) provided that a partner may not file an AAR except if the partner is doing so on behalf of the partnership in the partner's capacity as the partnership representative or if the partner is a partnership-partner filing an AAR under former proposed § 301.6227-3(c). Proposed § 301.6227-3(c), however, does not provide for the filing of an AAR by a partnership-partner. Rather, under proposed § 301.6227-3(c), a partnership-partner takes into account adjustments requested in an AAR by the partnership in which it is a partner by following the rules under proposed § 301.6226-3(e) (except to the extent otherwise provided). Proposed § 301.6227-1(a) therefore is changed to remove the reference to partnership-partners, and now only refers to partners filing AARs in their capacity as a partnership representative.

Proposed § 301.6227-2(a)(1) provides the rules for determining whether an imputed underpayment results from adjustments requested in an AAR by referring to the rules under proposed § 301.6225-1. Under proposed § 301.6227-2(a)(2), in the case of an AAR, a partnership may reduce an imputed underpayment as a result of certain modifications permitted under proposed § 301.6225-2. Under former proposed § 301.6227-2(a)(2), these modifications included modifications that relate to tax-exempt partners (proposed § 301.6225-2(d)(3)), rate modification (proposed § 301.6225-2(d)(4)), modification related to certain passive losses of publicly traded partnerships (proposed § 301.6225-2(d)(5)), modification applicable to qualified investment entities described in section 860 (proposed § 301.6225-2(d)(7)), and other modifications to the extent permitted under future IRS guidance (proposed § 301.6225-2(d)(10)). Proposed § 301.6227-2(a)(2) adopts this same list of modifications and adds modifications related to the composition of the groupings that factor into the calculation of the imputed underpayment (proposed § 301.6225-2(d)(6)(ii)) and modifications related to tax treaties (proposed § 301.6225-2(d)(9)).

Proposed § 301.6227-2(a)(2) provides that other types of modification, such as modification under proposed § 301.6225-2(d)(2) with respect to amended returns, including the alternative procedure to filing amended returns, and modification under proposed § 301.6225-2(d)(8) with respect to closing agreements, are not available in the case of an AAR. Modifications with respect to adjustments that do not result in an imputed underpayment also are also not available in the case of an AAR.

Former proposed § 301.6227-2(a)(2)(i) provided that a partnership did not need to seek IRS approval prior to modifying an imputed underpayment that results from adjustments requested in an AAR. Section 6227(b)(1) does not explicitly carve out section 6225(c)(8),which states that any modification to the imputed underpayment made under section 6225(c) shall be made only upon approval of such modification by the Secretary. Section 6227(b)(1) does provide, however, that partnerships take into account adjustments requested in an AAR under rules similar to the rules under section 6225. In proposing rules similar to the rules under section 6225 for the purposes of requesting an AAR and taking into account adjustments, the Treasury Department and the IRS have determined it is more efficient and beneficial for both the IRS and for partnerships to be able to apply modifications when filing an AAR without first securing approval of permitted modifications. Accordingly, although any modifications in connection with an AAR are subject to IRS approval, the rules under proposed § 301.6227-2(a)(2)(i) provide that the partnership is not required to obtain the approval from the IRS before applying modifications when calculating the amount of the imputed underpayment the partnership needs to pay when filing the AAR. Proposed § 301.6227-2(a)(2)(ii) also provides, however, that modifications to an imputed underpayment resulting from adjustments requested in an AAR may not be applied by the partnership if the AAR that is filed does not include notification to the IRS of the modification, a description of the effect of the modification on the imputed underpayment, an explanation of the basis for such modification, and all necessary documentation to support the partnership's entitlement to such modification.

Under proposed § 301.6227-3, a reviewed year partner that receives a statement described in proposed § 301.6227-1(d) must treat that statement as if it were provided under section 6226(a)(2). Former proposed § 301.6227-3(b)(1) also provided that the restriction in former proposed § 301.6226-3(b)(1)—that the correction amount for the first affected year and any intervening year cannot be less than zero—does not apply in the case of taking into account adjustments requested by the partnership in an AAR. Proposed § 301.6227-3(b)(1) no longer needs to address that restriction because the restriction in former proposed § 301.6226-3(b)(1) no longer exists. Therefore, the exception in former proposed § 301.6227-3(b)(1) has been eliminated. Additionally, the provision in former proposed § 301.6227-3(b)(2), stating that when the additional reporting tax results in being less than zero the partner may reduce his chapter 1 tax for the reporting year, is moved to proposed § 301.6227-3(b)(1).

Former proposed § 301.6227-1 included a reserved paragraph regarding notice of change to amounts of creditable foreign tax expenditures. Proposed § 301.6227-1 also reserves this same paragraph and does not contain rules to coordinate sections 6227 and 905(c). The Treasury Department and the IRS seek comments regarding the coordination of sections 6227 and 905(c) for consideration in future guidance.

Lastly, the reference to “items of income, gain, loss, deduction, or credit of the partnership” in former proposed § 301.6227-1(a) has been replaced with

a reference to “partnership-related items.”

B. Revisions to the Regulations Under Section 6227 Unrelated to the TTCA Amendments

Proposed § 301.6227-1(a) now coordinates the rules regarding the filing of an AAR and the revocation of a designation of the partnership representative under § 301.6223-1. Former proposed § 301.6227-1(a) provided that the partnership may not file an AAR solely for the purpose of allowing the partnership to change the designation of a partnership representative. Proposed § 301.6227-1(a) now adds that when the partnership changes the designation of the partnership representative or the appointment of a designated individual in conjunction with the filing of an AAR, the change in designation or appointment is treated as occurring prior to the filing of the AAR.

Former proposed § 301.6227-1(b) provided that an AAR may not be filed after a notice of administrative proceeding (NAP) has been mailed. To account for situations in which the IRS mails a NAP, but then withdraws it, proposed § 301.6227-1(b) now provides that an AAR may not be filed after a NAP has been mailed, except when the NAP has been withdrawn under proposed § 301.6231-1(f).

Additions were also made in proposed § 301.6227-3(c) to clarify the rules for pass-through partners, unrelated to the changes made by the TTCA. First, proposed § 301.6227-3(c)(1) provides that when a pass-through partner takes into account adjustments requested in an AAR in accordance with proposed § 301.6226-3(e), the pass-through partner must provide the information described in proposed § 301.6227-3(c)(3) as opposed to the information in described in proposed § 301.6226-3(e)(3)(iii) when furnishing statements to its partners. Second, under proposed § 301.6227-3(c)(1), a pass-through partner that computes and pays an imputed underpayment in accordance with proposed § 301.6226-3(e)(4) may not take into account any modifications. Third, proposed § 301.6227-3(c)(4) provides that when a pass-through partner furnishes a statement to an affected partner under proposed § 301.6227-3(c), the affected partner must treat that statement as if it were a statement described in proposed § 301.6227-3(a) that was furnished to such affected partner.

6. Notices of Proceedings and Adjustments

Section 6231(a) provides that the Secretary shall mail to the partnership and to the partnership representative a notice of any administrative proceeding initiated at the partnership level, notice of any proposed partnership adjustment resulting from that proceeding (NOPPA), and notice of any final partnership adjustment (FPA). Prior to amendment by the TTCA, section 6231(a) also provided that any FPA shall be mailed no earlier than 270 days after the date on which the NOPPA is mailed. Such notices shall be sufficient if mailed to the last known address of the partnership and the partnership representative, even if the partnership has terminated its existence. See section 6231(a) flush language (prior to amendment by the TTCA).

Prior to amendment by the TTCA, the statute did not limit the period for the IRS to propose adjustments under the centralized partnership audit regime. Section 206(h) of the TTCA amended section 6231 to address this issue. As amended, section 6231(b)(1) provides that any NOPPA shall not be mailed later than the date determined under section 6235(a)(1), which is generally the date that is 3 years after the later of: (1) The date on which the partnership return for the taxable year was filed, (2) the return due date for the taxable year, or (3) the date on which the partnership filed an AAR with respect to the taxable year.

Section 206(h) of the TTCA makes a conforming amendment to section 6231(a) to reflect the addition of the period of limitations to made partnership adjustments. Prior to amendment, section 6231(a) provided that “Such notices shall be sufficient if mailed to the last known address of the partnership representative or the partnership (even if the partnership has terminated its existence).” The amendment replaced the words “Such notices” with “Any notice of final partnership adjustment.”

Section 201(c) of the TTCA also makes a conforming amendment to section 6231(a) by striking the phrase “all items of income, gain, loss, deduction, or credit of the partnership” and inserting “all partnership-related items.”

A. Proposed § 301.6231-1

Proposed rules under § 301.6231-1 were previously published in the

Federal Register

(82 FR 60161-62) in the December 2017 NPRM (former proposed § 301.6231-1). For an explanation of the rules under former proposed § 301.6231-1, see 82 FR 60151-52.

Although not required by statute, former proposed § 301.6231-1(b)(1) provided a period of limitations for making partnership adjustment. That section provided that a NOPPA may not be mailed after the expiration of the period described in section 6235(a)(1), including any extensions of that period and after applying any of the special rules in section 6235(c) (providing additional time for situations where no return is filed, fraud, and other specified reasons).

Former proposed § 301.6231-1(c) provided that NAPs, NOPPAs, and FPAs are sufficient if mailed to the last known address of the partnership and the partnership representative. As discussed above in this section of the preamble, section 6231(a) now provides that any FPA is sufficient if mailed to the last known address of the partnership and the partnership representative. The Treasury Department and the IRS have determined that while the last known address requirement under section 6231(a) only applies to a notice of final partnership adjustment, the IRS will also mail the NAP and the NOPPA to the last known address of the partnership and the partnership representative.

Accordingly, because the rules under former proposed § 301.6231-1(b)(1) and (c) are consistent with the statutory changes to section 6231(a), those rules are unchanged. The only change to former proposed § 301.6231-1 was to replace references to “item of income, gain, loss, deduction, or credit” and to a “partner's distributive share” in former proposed § 301.6231-1(a)(1) with a reference to “partnership-related item”.

7. Assessment, Collection, and Payment of Imputed Underpayments

Section 6232(a) provides rules for the assessment, collection, and payment of imputed underpayments. Section 206(g) of the TTCA amended section 6232(a) to clarify that the assessment of any imputed underpayment is not subject to the deficiency procedures under subchapter B of chapter 63 of the Code and to clarify that in the case of an AAR, the underpayment may be assessed when the AAR is filed. See JCX-6-18, at 48.

Section 6232(b) provides limitations on the assessment of an imputed underpayment. Section 206(g) of the TTCA amended section 6232(b) to correct a reference to “assessment of a deficiency” to now refer to “assessment of an imputed underpayment.” Section 206(p) of the TTCA also amends section

6232(b) to strike the reference to “this chapter” and replace it with “this subtitle (other than subchapter B of this chapter).”

Section 205 of the TTCA added a new subsection (f) to section 6232 to provide a mechanism for collection of tax due in the case of a failure of a partnership or S corporation to pay an imputed underpayment or specified similar amount. Under section 6232(f)(1), if any amount of any imputed underpayment to which section 6225 applies or any specified similar amount as defined in section 6232(f)(2) has not been paid by the date which is 10 days after the date on which the Secretary provides notice and demand for such payment, the Secretary may assess upon each partner of the partnership a tax equal to such partner's proportionate share of such amount.

Under section 6232(f)(2), the term “specified similar amount” means the amount determined under section 6226(b)(4)(ii)(II) and any amount assessed upon a partner under section 6232(f)(1)(B) that is a partnership or an S corporation. Section 206(g)(2)(B) of the TTCA amended section 6232(b) to provide that the limitations on assessment with respect to an imputed underpayment do not apply in the case of a specified similar amount defined in section 6232(f)(2).

The Treasury Department and the IRS are not proposing rules under section 6232(f) at this time. The Treasury Department and the IRS request comments with respect to section 6232(f), including the determination of a partner's proportionate share of the unpaid amount, for consideration with respect to future guidance.

A. Proposed § 301.6232-1

Proposed rules under § 301.6232-1 were previously published in the

Federal Register

(82 FR 60162-63) in the December 2017 NPRM (former proposed § 301.6232-1). For an explanation of the rules under former proposed §§ 301.6232-1, see 82 FR 60152.

Former proposed § 301.6232-1(a) provided that because the centralized partnership audit regime under subchapter C of chapter 63 applies to an assessment of an imputed underpayment, the deficiency procedures under subchapter B of chapter 63 do not apply. Former proposed § 301.6232-1(b) provided that the IRS may assess an underpayment reflected on an AAR on the date the AAR is filed. Former proposed § 301.6232-1(c) provided limitations on assessment of the imputed underpayment, except as otherwise provided in § 301.6232-1. Because the rules under former proposed § 301.6232-1(a) and (b) are consistent with the statutory changes to section 6232(a), those rules are unchanged.

Proposed § 301.6232-1(c) is generally the same as former proposed § 301.6232-1(c). However, changes were made to take into account section 206(g)(2)(B) of TTCA, providing that the limitations on assessment do not apply to specified similar amounts, and section 206(p) of TTCA, providing that the limitations on assessments under proposed § 301.6232-1(c) apply except as otherwise provided in subtitle F of the Code (other than deficiency procedures under subchapter B of chapter 63).

With respect to former proposed § 301.6232-1(d), the reference to “items of income, gain, loss, deduction, or credit” in former proposed § 301.6232-1(d)(1)(i) was replaced with a reference to “partnership-related items.”

8. Interest and Penalties Related to Imputed Underpayments

Section 6233 provides rules related to interest and penalties with respect to imputed underpayments. Section 206(i) of the TTCA amended section 6233 by adding a new subsection (c), which provides a cross-reference to section 6603 for rules allowing deposits to suspend the running of interest on potential underpayments.

A. Proposed §§ 301.6233(a)-1 and 301.6233(b)-1

Proposed rules under §§ 301.6233(a)-1 and 301.6233(b)-1 were previously published in the

Federal Register

(82 FR 60163-65) in the December 2017 NPRM (former proposed §§ 301.6233(a)-1 and 301.6233(b)-1). For an explanation of the rules under former proposed §§ 301.6233(a)-1 and 301.6233(b)-1, see 82 FR 60152-53.

Proposed § 301.6233(a)-1 provides rules for determining interest and penalties from the reviewed year, and proposed § 301.6233(b)-1 provides rules for determining interest and penalties from the adjustment year. Neither former proposed § 301.6233(a)-1 nor former proposed § 301.6233(b)-1 provided rules regarding deposits to suspend the running of interest on underpayments. The Treasury Department and the IRS are not proposing rules regarding the interaction of the deposit rules under section 6603 and the interest rules under section 6233. However, the Treasury Department and the IRS request comments for consideration in future guidance regarding the interaction between section 6603 and the interest rules under section 6233.

Former proposed § 301.6233(a)-1(c)(2)(ii)(C) provided a definition of “negative adjustment” and defined that term through reference to “items of income, gain, loss, deduction, or credit.” Proposed § 301.6225-1 now uses the term “negative adjustment” and the phrase “items of income, gain, loss, deduction, or credit” has been removed from subchapter C of chapter 63. To reflect these changes, proposed § 301.6233(a)-1(c)(2)(ii)(C) now provides that a “decreasing adjustment” is “an adjustment to a partnership-related item that resulted in a decrease to the imputed underpayment.” Example 3 under proposed § 301.6233(a)-1(c)(3) also reflects changes to former proposed §§ 301.6225-1 and 301.6225-2.

Former proposed § 301.6233(a)-1(c)(2)(ii), regarding how to calculate the portion of the imputed underpayment to which a penalty applies, referred to “non-credit partnership adjustments” and “credit adjustments.” Under proposed § 301.6225-1(e)(3)(iii) certain adjustments to creditable expenditures are treated as an adjustment to a credit and may impact the calculation of the imputed underpayment. To properly account for such adjustments when determining the portion of an imputed underpayment subject to a penalty, the term “non-credit partnership adjustment” was changed to “a partnership adjustment that is not an adjustment to a credit or treated as an adjustment to a credit,” and the term “credit adjustment” changed to “an adjustment to a credit or treated as an adjustment to a credit.”

Former proposed § 301.6233(a)-1(c)(2)(iii)(B), regarding the application of the substantial understatement penalty under section 6662(d)(1)(A)(i) to imputed underpayments, provided that taxable income meant the net ordinary business income or loss of the partnership. The reference to “ordinary business” failed to account for other sources of income of the partnership that are appropriate to consider for purposes of the substantial understatement penalty. Therefore, proposed § 301.6233(a)-1(c)(2)(iii)(B) now provides that for purposes of determining the amount of tax required to be shown on the return it is the net income or loss of the partnership that is treated as taxable income. See Page 5 of Form 1065, Return of Partnership Income.

Former proposed § 301.6233(a)-1(c)(2)(v), pertaining to reasonable cause and good faith defenses, provided that

partner-level defenses may not be raised in a proceeding of the partnership except as provided under the modification procedures pertaining to amended returns and partner closing agreements. For clarity, this provision has been moved to proposed § 301.6233(a)-1(c)(1). Furthermore, the provision allowing partner-level defenses to penalties to be raised under the modification procedures has been removed. A partner may raise a partner-level defense by filing a claim for refund under procedures existing outside of the centralized partnership audit regime or through an agreement with the IRS regarding an adjustment to a partnership-related item.

9. Judicial Review of Partnership Adjustments

Section 6234(a) provides that within 90 days after the date on which an FPA is mailed under section 6231 with respect to any partnership taxable year, the partnership may file a petition for readjustment for such taxable year with the Tax Court, the district court in which the partnership's principal place of business is located, or the Court of Federal Claims. Prior to amendment by the TTCA, section 6234(b)(1) provided that a petition for readjustment under section 6234 may be filed in a district court of the United States or the Court of Federal Claims only if the partnership filing the petition deposits with the Secretary, on or before the date the petition is filed, the amount of the imputed underpayment. Section 206(j) of the TTCA amended section 6234(b)(1) to clarify that the amount of the jurisdictional deposit that the partnership must make in order to file a readjustment petition in a district court or the Court of Federal Claims is the amount of (as of the date of the filing of the petition) the imputed underpayment, penalties, additions to tax, and additional amounts with respect to the imputed underpayment. See JCX-6-18, at 49.

A. Proposed § 301.6234-1

Proposed rules under § 301.6234-1 were previously published in the

Federal Register

(82 FR 60165-66) in the December 2017 NPRM (former proposed § 301.6234-1). For a further explanation of the rules under former proposed § 301.6234-1, see 82 FR 60153.

Former proposed § 301.6234-1(b) provided that a partnership may file a petition for a readjustment of any partnership adjustment in a district court or the Court of Federal Claims “only if the partnership filing the petition deposits with the [IRS], on or before the date the petition is filed, the amount of any imputed underpayment resulting from the partnership adjustment.”

To reflect the amendment to section 6234(b)(1) made by section 206(j) of the TTCA regarding the amount of the deposit, proposed § 301.6234-1(b) now provides that amount required to be deposited is the amount (as of the date of the filing of the petition) of any imputed underpayment and any penalties, additions to tax, and additional amounts with respect to such imputed underpayment.

To account for the possibility that multiple imputed underpayments may be reflected in an FPA, proposed § 301.6234-1(b) also now provides that the partnership must only deposit the amount of any imputed underpayment to which the petition for readjustment relates and the amount of any penalties, additions to tax, and additional amounts with respect to such imputed underpayment.

10. Period of Limitations on Making Adjustments

Section 6235 provides the period of limitations on making adjustments under the centralized partnership audit regime. Under section 6235(a), the general rule is that no adjustment for any partnership taxable year may be made after the later of three specified dates. Section 206(k) of the TTCA amended section 6235(a) by inserting “or section 905(c)” after “Except as otherwise provided in this section.” The amendment makes clear that the period of limitations on making adjustments under the centralized partnership audit regime does not limit the period for notification of the Secretary and redetermination of tax under section 905(c) with respect to foreign tax redeterminations.

In addition, section 206(k) of the TTCA amended section 6235 by striking paragraph (d), which provided for a suspension of the period on making adjustments when the Secretary mails an FPA. That provision was similar to a provision that existed under TEFRA, but the provision has no effect on making adjustments under the centralized partnership audit regime. See JCX-6-18, at 49-50.

A. Proposed § 301.6235-1

Proposed rules under § 301.6235-1 were previously published in the

Federal Register

(82 FR 60166-67) in the December 2017 NPRM (former proposed § 301.6235-1). For an explanation of the rules under former proposed § 301.6235-1, see 82 FR 60153-54.

Proposed § 301.6235-1(a) now reflects the amendments to section 6235 to provide an exception for section 905(c) and to remove the reference to section 6235(d).

11. Definitions and Special Rules

A. Proposed § 301.6241-1

Proposed rules under § 301.6241-1 were previously published in the

Federal Register

(82 FR 27399-400) in the June 2017 NPRM (former proposed § 301.6241-1). For an explanation of the rules under former proposed § 301.6241-1, see 82 FR 27369.

Former proposed § 301.6241-1(a)(1) defined the term “adjustment year” to mean the partnership taxable year in which a decision of a court becomes final (if a petition is filed under section 6234), an AAR is made, or, in any other case, when an FPA is mailed (or if the partnership waives its right to an FPA, the year the waiver is executed by the IRS). Section 206(p) of the TTCA amended section 6227 to provide that an AAR is “filed,” as opposed to “made.” To reflect this amendment, proposed § 301.6241-1(a)(1) now provides that an AAR is “filed” and not “made.”

Former proposed § 301.6241-1(a)(3) defined the term “imputed underpayment” as the amount determined under § 301.6225-1. Because an imputed underpayment may also be computed and paid pursuant to proposed § 301.6226-3(e)(4) (relating to pass-through partners) as well as under proposed § 301.6227-2 and § 301.6227-3(c) (relating to AARs), proposed § 301.6241-1(a)(3) now refers to imputed underpayments determined under those provisions. Proposed § 301.6241-1(a)(3) was also clarified to provide that an imputed underpayment calculated under section 6225 is calculated under section 6225 and the regulations thereunder.

Proposed § 301.6241-1(a)(4) now provides that the term “indirect partner” includes a person that holds an interest in the partnership through a wholly owned entity that is disregarded as separate from its owner for Federal income tax purposes, such as a disregarded entity or grantor trust. This change from the language in the former proposed regulations clarifies that a partnership may seek modification under proposed § 301.6225-2 based on indirect partners holding an interest through a disregarded entity or grantor trust.

Proposed § 301.6241-1(a)(6) now provides that the term “partnership adjustment” means any adjustment to a partnership-related item (as defined in

proposed § 301.6241-6), and such term includes a portion of a partnership adjustment.

Former proposed § 301.6241-1(a)(10) defined a tax attribute as anything that can affect, with respect to a partnership or partner, the amount or timing of an item of income, gain, loss, deduction, or credit or that can affect the amount of tax due in any taxable year. As discussed in section 4.A. of this preamble, section 203(a) of the TTCA amended section 6225 to provide an alternative procedure to filing amended returns during modification under which a partner agrees to take into account adjustments to the tax attributes “of such partner”. Section 6225(c)(2)(B)(ii). To reflect the amendment to section 6225(c)(2)(B) regarding tax attributes of a partner, the phrase “with respect to a partnership or a partner” was removed from the definition of tax attribute under former proposed § 301.6241-1(a)(10). The reference to “items of income, gain, loss, deduction, or credit” in former proposed § 301.6241-1(a)(10) was also replaced with a reference to “partnership-related item.”

B. Proposed § 301.6241-2

Proposed rules under § 301.6241-2 were previously published in the

Federal Register

(82 FR 27400) in the June 2017 NPRM (former proposed § 301.6241-2). Former proposed § 301.6241-2 provided for coordination between Title 11 of the United States Code, which deals with bankruptcy, and the centralized partnership audit regime. Because the amendments by the TTCA did not affect section 6241(6), the rules under former proposed § 301.6241-2 are unchanged. For an explanation of the rules under former proposed § 301.6241-2, see 82 FR 27369-70.

C. Proposed § 301.6241-3

Proposed rules under § 301.6241-3 were previously published in the

Federal Register

(82 FR 27400-02) in the June 2017 NPRM (former proposed § 301.6241-3). For an explanation of the rules under former proposed § 301.6241-3, see 82 FR 27370-71.

Former proposed § 301.6241-3(a)(3) provided that the rules requiring former partners to take into account adjustments of a partnership which the IRS determined had ceased to exist did not apply to the former partners of a partnership that had elected out of the centralized partnership audit regime under section 6221(b). Because under section 6226(b)(4) a partnership-partner that has elected out of the centralized partnership audit regime may be liable for an imputed underpayment in the case of a push out election, proposed § 301.6241-3(a)(3) now provides that the rules under proposed § 301.6241-3 apply to a partnership-partner and its former partners, regardless of whether the partnership-partner has elected out of the centralized partnership audit regime. Accordingly, under proposed § 301.6241-3(a)(3), the former partners of any partnership that may be liable for an imputed underpayment, including a partnership-partner that has elected out of the centralized partnership audit regime, will be required to take into account a partnership adjustment if the IRS determines that such partnership ceased to exist before the partnership adjustment had taken effect. Example 2 under proposed § 301.6241-3(f) illustrates this rule.

Former proposed § 301.6241-3(b)(2)(i) provided that the IRS will not determine that a partnership has ceased to exist solely because: (i) A partnership has technically terminated under section 708(b)(1)(B); (ii) the partnership has made a valid election under section 6226 and the regulations thereunder with respect to any imputed underpayment; or (iii) the partnership has not paid any amount the partnership is liable for under subchapter C of chapter 63. To reflect the amendment to section 708 by the Act to eliminate technical terminations, the reference to section 708(b)(1)(B) was removed from former proposed § 301.6241-3(b)(2)(i). In addition, a rule was added to former proposed § 301.6241-3(b)(2)(i) to provide that a partnership also does not cease to exist solely because it furnished statements in accordance with proposed § 301.6226-3(e)(3). This change clarifies that partnership-partners that properly furnish statements in accordance with proposed § 301.6226-3(e)(3) (and therefore are not liable for an imputed underpayment) are treated the same as an audited partnership who made a valid election under section 6226.

Additional clarifications were made to proposed § 301.6241-3. First, the phrase “any amounts” in former proposed § 301.6241-3(a)(2) was replaced with the phrase “any unpaid amounts.” This clarification was made to eliminate the implication that the partnership was not liable for the original amount due and to clarify that if the IRS determines that a partnership has ceased to exist, the partnership is no longer liable for any remaining unpaid amounts due under subchapter C of chapter 63, meaning that if the partnership had made a prior payment, the IRS can retain that payment. Second, former proposed § 301.6241-3(b)(2)(iii) provided that the IRS may not determine that a partnership has ceased to exist after the expiration of the period of limitations on collection. Proposed § 301.6241-3(b)(2)(iii) now provides that the period relevant to this determination is the period of limitations on collection with respect to the imputed underpayment that was assessed against the partnership that ceased to exist. Finally, prior references to section 708(b)(1)(A) in former proposed § 301.6241-3(b)(2), (d)(2), and (f) were changed to refer to section 708(b)(1) to reflect the amendment to section 708 made by the Act.

D. Proposed § 301.6241-4

Proposed rules under § 301.6241-4 were previously published in the

Federal Register

(82 FR 27402) in the June 2017 NPRM (former proposed § 301.6241-4). For an explanation of the rules under former proposed § 301.6241-4, see 82 FR 27371.

Former proposed § 301.6241-4 provided that payments made by a partnership under the centralized partnership audit regime, including payment of any imputed underpayment and any amount under proposed § 301.6226-3, were not deductible to the partnership. Because the payment amount for a partnership-partner in the case of a push out election is referred to as an imputed underpayment, reference to any amount under § 301.6226-3 in former proposed § 301.6241-4 became superfluous and thus was removed.

E. Proposed § 301.6241-5

Proposed rules under § 301.6241-5 were previously published in the

Federal Register

(82 FR 27402) in the June 2017 NPRM (former proposed § 301.6241-5). For an explanation of the rules under former proposed § 301.6241-5, see 82 FR 27371.

Former proposed § 301.6241-5 provided rules for extending the centralized partnership audit regime to entities filing partnership returns. References in former proposed § 301.6241-5(a) to “items of income, gain, loss, deduction, or credit” and “partner's distributive share” were replaced with a reference to “partnership-related item.” Proposed § 301.6241-5(c) now also reflects the fact that certain business arrangements, which may not be classified as entities, can file partnership returns to make an election under section 761(a). Under proposed § 301.6241-5(c), the centralized partnership audit regime does not apply in that case notwithstanding the filing of a partnership return.

12. Coordination With Other Chapters of the Code

Section 201(b) of the TTCA added section 6241(9) to the Code regarding the coordination of the centralized partnership audit regime with chapters of the Code other than chapter 1. Section 6241(9)(A) provides that the centralized partnership audit regime shall not apply with respect to any tax imposed (including any amount required to be deducted or withheld) under chapter 2, 2A, 3, or 4 of subtitle A of the Code, except that any partnership adjustment determined under the centralized partnership audit regime for purposes of chapter 1 shall be taken into account for purposes of determining any such tax to the extent that such adjustment is relevant to such determination. Section 6241(9)(B) provides that in the case of any tax imposed (including any amount required to be deducted or withheld) under chapters 3 and 4 of the Code, which is determined with respect to a partnership adjustment, such tax shall be so determined with respect to the reviewed year and shall be so imposed (or so required to be deducted or withheld) with respect to the adjustment year.

Section 201(b) also added section 6501(c)(12) to the Code regarding the statute of limitation on assessment of taxes under chapter 2 or 2A which are attributable to any partnership adjustment. Section 6501(c)(12) provides in the case of any partnership adjustment determined under the centralized partnership audit regime, the period for assessment of any tax imposed under chapter 2 or 2A of the Code which is attributable to such adjustment shall not expire before the date that is one year after one of two events. In the case of an adjustment pursuant to the decision of a court in a proceeding brought under section 6234, the period for assessment shall not expire before the date that is one year after the decision becomes final. In any other case, the period for assessment shall not expire before the date that is one year after 90 days after the date on which the FPA is mailed under section 6231.

A. Proposed § 301.6241-7

Former proposed § 301.6221(a)-1(d) provided that nothing in subchapter C of chapter 63 precluded the IRS from making any adjustment to an item of a partnership (as described in the prior version of § 301.6221(a)-1(b)) outside of the centralized partnership audit regime for purposes of determining tax imposed by provisions of the Code other than chapter 1. Accordingly, under former proposed § 301.6221(a)-1(d), the IRS was not precluded from examining a partnership's compliance with its obligations under chapters 3 and 4 (or any other chapter of the Code other than chapter 1) in a proceeding outside of the centralized partnership audit regime. Former proposed § 301.6221(a)-1(f) provided examples to illustrate this concept.

The rules contained in former proposed § 301.6221(a)-1(d), and the examples in former proposed § 301.6221(a)-1(f), are consistent with section 6241(9)(A). However, given that these concepts are now codified in section 6241, the rules and examples under former proposed § 301.6221(a)-1(d) and (f) are now under proposed § 301.6241-7(a)(1) and (2). References to “items of income, gain, loss, deduction, or credit” were replaced with references to “partnership-related item” as defined under proposed § 301.6241-6. Other editorial changes were made to reflect revisions to former proposed § 301.6221(a)-1.

Proposed § 301.6241-7(a)(1) provides that the centralized partnership audit regime does not apply with respect to any tax imposed (including any amount required to be deducted or withheld) under any chapter of the Code other than chapter 1, including chapter 2, 2A, 3, or 4 of the Code. Accordingly, for purposes of determining taxes under chapters of the Code other than chapter 1, the IRS may make adjustments to partnership-related items in proceedings not subject to the centralized partnership audit regime. However, to the extent an adjustment to a partnership-related item or a determination made under the centralized partnership audit regime is relevant in determining tax outside of chapter 1, such adjustment or determination must be taken into account in determining that non-chapter 1 tax. Proposed § 301.6241-7(a)(2) provides examples to illustrate these concepts.

Proposed § 301.6241-7(b) provides rules for coordinating the centralized partnership audit regime with chapters 3 and 4 of the Code. Proposed § 301.6241-7(b)(1) restates the rule in section 6241(9)(B) regarding the timing of withholding for tax imposed under chapters 3 and 4 that is determined with respect to a partnership adjustment. Proposed § 301.6241-7(b)(2) defines the terms chapter 3, chapter 4, and amount subject to withholding.

Former proposed §§ 301.6225-1(a)(4) and 301.6226-2(h) provided rules to coordinate the collection of tax in the case of partnership adjustments to amounts subject to withholding under chapters 3 and 4, including rules for when the partnership pays an imputed underpayment resulting from such an adjustment and rules for when the partnership makes the election under section 6226 with respect to such an imputed underpayment. These rules now fall within proposed § 301.6241-7(b)(3) and (b)(4). Proposed § 301.6241-7(b)(4) now provides that a partnership required to pay tax under chapter 3 or chapter 4 when it makes an election under section 6226 is required to pay the tax before the due date of the partnership return for the adjustment year (without regard to extension).

13. Other Amendments by the TTCA to the Centralized Partnership Audit Regime

Section 206(l) of the TTCA amended section 6241 by adding a new provision, section 6241(11), providing for the treatment of special enforcement matters. Under section 6241(11), in the case of partnership-related items which involve special enforcement matters, the Secretary may prescribe regulations pursuant to which the centralized partnership audit regime (or any portion thereof) does not apply to such items, and that such items are subject to special rules (including rules related to assessment and collection) as the Secretary determines to be necessary for the effective and efficient enforcement of the Code. For purposes of section 6241(11), the term “special enforcement matters” means: (1) Failure to comply with the requirements of section 6226(b)(4)(A)(ii) (regarding the requirement for a pass-through partner to furnish statements or compute and pay an imputed underpayment); (2) assessments under section 6851 (relating to termination assessments of income tax) or section 6861 (relating to jeopardy assessments of income, estate, gift, and certain excise taxes); (3) criminal investigations; (4) indirect methods of proof of income; (5) foreign partners or partnerships; and (6) other matters that the Secretary determines by regulation present special enforcement considerations. Rules under this provision may be provided in future guidance. The Treasury Department and the IRS are considering proposing rules under section 6241(11)(B)(vi) (dealing with other matters that present special enforcement considerations) which allow certain partnership-related items reported solely by persons other than the partnership to be adjusted outside the centralized partnership audit regime. The Treasury Department and the IRS request comments on this provision, including whether there are

any additional special enforcement considerations that should be addressed through regulations.

Section 206(m) of the TTCA amended section 6241 by adding a new provision, section 6241(12), to clarify that a U.S. shareholder of a controlled foreign corporation (CFC) which is a partner of a partnership shall be treated as a partner of such partnership for purposes of the centralized partnership audit regime. The U.S. shareholder's distributive share of the partnership is the U.S. shareholder's pro rata share of the CFC's Subpart F income determined under rules similar to section 951(a)(2). Similarly, a taxpayer that makes a Qualified Electing Fund (QEF) election with respect to a passive foreign investment company (PFIC) that is a partner in a partnership shall be treated as a partner of such partnership. In this case, a taxpayer's distributive share of the partnership is the taxpayer's pro rata share of the PFIC's ordinary earnings and net capital gain determined under rules similar to section 1293(b). Consequently, in both circumstances, the U.S. shareholder of a CFC and the taxpayer of a PFIC will be treated as the adjustment year partner or reviewed year partner under the centralized partnership audit regime, where applicable. Regulatory authority was also given to issue regulations or other guidance as necessary or appropriate to carry out the purpose of the provision, including regulations which apply the rule in similar circumstances or with respect to similarly situated persons. Consequently, in both circumstances, the U.S. shareholder of a CFC and the taxpayer of a PFIC will be treated as the adjustment year partner or reviewed year partner under proposed §§ 301.6241-1(a)(2) and 301.6241-1(a)(9) where applicable.

Special Analyses

This regulation is not subject to review under section 6(b) of Executive Order 12866 pursuant to the Memorandum of Agreement (April 11, 2018) between the Department of the Treasury and the Office of Management and Budget regarding review of tax regulations.

Because the proposed regulations would not impose a collection of information on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply.

Pursuant to section 7805(f) of the Code, this notice of proposed rulemaking has been submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

Statement of Availability of IRS Documents

IRS Revenue Procedures, Revenue Rulings, Notices, and other guidance cited in this preamble are published in the Internal Revenue Bulletin (or Cumulative Bulletin) and are available from the Superintendent of Documents, U.S. Government Publishing Office, Washington, DC 20402, or by visiting the IRS website at

www.irs.gov.

Comments and Public Hearing

Before these proposed regulations are adopted as final regulations, consideration will be given to any electronic and written comments that are submitted timely to the IRS as prescribed in this preamble under the

ADDRESSES

heading. The Treasury Department and the IRS request comments on all aspects of the proposed rules. All comments will be available at

www.regulations.gov

or upon request.

A public hearing has been scheduled for October 9, 2018, beginning at 10 a.m. in the Auditorium of the Internal Revenue Building, 1111 Constitution Avenue NW, Washington, DC. Due to building security procedures, visitors must enter at the Constitution Avenue entrance. In addition, all visitors must present photo identification to enter the building. Because of access restrictions, visitors will not be admitted beyond the immediate entrance area more than 30 minutes before the hearing starts. For more information about having your name placed on the building access list to attend the hearing, see the

FOR FURTHER INFORMATION CONTACT

section of this preamble.

The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who wish to present oral comments at the hearing must submit an outline of the topics to be discussed and the time to be devoted to each topic by October 1, 2018. Submit a signed paper or electronic copy of the outline as prescribed in this preamble under the

ADDRESSES

heading. A period of 10 minutes will be allotted to each person for making comments. An agenda showing the scheduling of the speakers will be prepared after the deadline for receiving outlines has passed. Copies of the agenda will be available free of charge at the hearing.

Drafting Information

The principal authors of these proposed regulations are Jennifer M. Black, Joy E. Gerdy-Zogby, Steven L. Karon, and Brittany Harrison of the Associate Chief Counsel (Procedure and Administration). However, other personnel from the Treasury Department and the IRS participated in their development.

List of Subjects

26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 301

Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income taxes, Penalties, Reporting and recordkeeping requirements.

Withdrawal of Notices of Proposed Rulemaking and Partial Withdrawal of Notice of Proposed Rulemaking

Accordingly, under the authority of 26 U.S.C. 7805, the notices of proposed rulemaking (REG-119337-17, REG-120232-17, REG-120233-17, and REG-118067-17) that were published in the

Federal Register

on November 30, 2017 (82 FR 56765), December 19, 2017 (82 FR 27071), and February 2, 2018 (83 FR 4868) are withdrawn. Also under the authority of 26 U.S.C. 7805, 301.6221(a)-1, 301.6222-1, 301.6225-1, 301.6225-2, 301.6225-3, 301.6225-4, 301.6226-1, 301.6226-2, 301.6226-3, 301.6226-4, 301.6227-1, 301.6227-2, 301.6227-3 of the notice of proposed rulemaking (REG-136118-15) published in the

Federal Register

on June 14, 2017 (82 FR 27334) is withdrawn.

Proposed Amendments to the Regulations

Accordingly, 26 CFR parts 1 and 301 are proposed to be amended as follows:

PART 1—INCOME TAX

Paragraph 1.

The authority citation for part 1 continues to read in part as follows:

Authority:

26 U.S.C. 7805 * * *

Par. 2.

Section 1.704-1 is amended by:

1. Adding paragraph (b)(1)(viii).

2. Adding a sentence to the end of paragraph (b)(2)(iii)(

a

).

3. Adding paragraphs (b)(2)(iii)(

f

), (b)(2)(iv)(

i

)(

4

), and (b)(4)(xi) through (xv).

The additions read as follows:

§ 1.704-1

Partner's distributive share.

(b) * * *

(1) * * *

(viii)

Items relating to a final determination under the centralized partnership audit regime

—(

a

)

In general.

Certain items of income, gain, loss, deduction or credit may result from a final determination under subchapter C of chapter 63 of the Internal Revenue Code (subchapter C of chapter 63) (relating to the centralized partnership audit regime). Special rules

under section 704(b) and § 1.704-1(b) apply to these items that take into account that the item relates to the reviewed year (as defined in § 301.6241-1(a)(8) of this chapter) but occurs in the adjustment year (as defined in § 301.6241-1(a)(1) of this chapter). See paragraphs (b)(2)(iii)(

a

) and (

f

), (b)(2)(iv)(

i

)(

4

), and (b)(4)(xi) through (xv) of this section.

(

b

)

Successors

—(

1

)

In general.

In the case of a transfer or liquidation of a partnership interest subsequent to a reviewed year, a successor has the meaning provided in paragraph (b)(1)(viii)(

b

) of this section. In the case of a subsequent transfer by a successor of a partnership interest, the principles of paragraph (b)(1)(viii)(

b

) of this section will also apply to the new successor.

(

2

)

Identifiable transferee partner.

Except as otherwise provided in paragraph (b)(1)(viii)(

b

)(

3

) of this section, in the case of a transfer of all or part of a partnership interest during or subsequent to the reviewed year, a successor is the partner to which the reviewed year transferor partner's capital account carried over (or would carry over if the partnership maintained capital accounts) under paragraph (b)(2)(iv)(

l

) of this section (an identifiable transferee partner).

(

3

)

Unidentifiable transferee partner.

If, after exercising reasonable diligence, the partnership cannot determine an identifiable transferee partner under paragraph (b)(1)(viii)(

b

)(

2

) of this section, each partner in the adjustment year that is not an identifiable transferee partner and was not a partner in the reviewed year, (an unidentifiable transferee partner) is a successor to the extent of the proportion of its interest in the partnership to the total interests of unidentifiable transferee partners in the partnership (considering all facts and circumstances).

(

4

)

Liquidation of partnership interest.

In the case of a liquidation of a partner's entire interest in the partnership during or subsequent to the reviewed year, the successors to the liquidated partner are certain adjustment year partners (as defined in § 301.6241-1(a)(2) of this chapter) as provided in this paragraph (b)(1)(viii)(

b

)(

4

). The determination of the extent to which the adjustment year partners are treated as successors under this section must be made in a manner that reflects the extent to which the adjustment year partners' interests in the partnership increased as a result of the liquidating distribution (considering all facts and circumstances).

(2) * * *

(iii) * * *

(

a

) * * * Notwithstanding any other sentence of this paragraph (b)(2)(iii)(

a

), an allocation of any of the following will be substantial only if the allocation is described in paragraph (b)(2)(iii)(

f

) of this section: an expenditure for any payment required to be made by a partnership under subchapter C of chapter 63 (relating to the centralized partnership audit regime), adjustments reflected on a statement furnished to a pass-through partner (as defined in § 301.6241-1(a)(5) of this chapter) under § 301.6226-3(e)(4) of this chapter, or interest, penalties, additions to tax, or additional amounts described in section 6233.

(

f

)

Certain expenditures under the centralized partnership audit regime

—(

1

)

In general.

The economic effect of an allocation of an expenditure for any payment required to be made by a partnership under subchapter C of chapter 63 (as described in § 301.6241-4(a) of this chapter) is substantial only if the expenditure is allocated in the manner described in this paragraph (b)(2)(iii)(

f

). For partnerships with allocations that do not satisfy paragraph (b)(2)(ii) of this section, see paragraph (b)(4)(xi) of this section.

(

2

)

Expenditures for imputed underpayments or similar amounts.

Except as otherwise provided, an expenditure for an imputed underpayment, as defined in § 301.6241-1(a)(3) of this chapter, is allocated to the reviewed year partner (or its successor, as defined in paragraph (b)(1)(viii)(

b

) of this section) in proportion to the allocation of the notional item (as described in § 301.6225-4(b) of this chapter) to which the expenditure relates, taking into account modifications under § 301.6225-2 of this chapter attributable to that partner.

(

3

)

Interest, penalties, additions to tax, or additional amounts described in section 6233.

An expenditure for interest, penalties, additions to tax, or additional amounts as determined under section 6233 (or penalties and interest described in § 301.6226-3(e)(4)(iv) of this chapter) is allocated to the reviewed year partner (or its successor, as defined in paragraph (b)(1)(viii)(

b

) of this section) in proportion to the allocation of the portion of the imputed underpayment with respect to which the penalty applies or related notional item to which it relates (whichever is appropriate), taking into account modifications under § 301.6225-2 of this chapter attributable to that partner.

(

4

)

Imputed underpayments unrelated to notional items.

In the case of an imputed underpayment that results from a partnership adjustment for which no notional items are created under § 301.6225-4(b)(2) of this chapter, the expenditure must be allocated to the reviewed year partner (or its successor, as defined in paragraph (b)(1)(viii)(

b

) of this section) that would have borne the economic benefit or burden of the partnership adjustment if the partnership and its partners had originally reported in a manner consistent with the partnership adjustment that resulted in the imputed underpayment with respect to the reviewed year.

(iv) * * *

(

i

) * * *

(

4

)

Certain expenditures under the centralized partnership audit regime.

Notwithstanding paragraph (b)(2)(iv)(

i

)(

1

) of this section, the economic effect of an allocation of an expenditure for any payment required to be made by a partnership under subchapter C of chapter 63 (as described in § 301.6241-4(a) of this chapter) is substantial only if the expenditure is allocated in the manner described in paragraph (b)(2)(iii)(

f

) of this section. For partnerships with allocations that do not satisfy paragraph (b)(2)(ii) of this section, see paragraph (b)(4)(xii) of this section.

(4) * * *

(xi)

Notional items under the centralized partnership audit regime.

An allocation of a notional item (as described in § 301.6225-4(b)(3) of this chapter) does not have substantial economic effect within the meaning of paragraph (b)(2) of this section. However, the allocation of a notional item of income or gain described in § 301.6225-4(b)(3)(ii) and (iv) of this chapter, or expense or loss described in § 301.6225-4(b)(3)(iii) and (v) of this chapter, will be deemed to be in accordance with the partners' interests in the partnership if the notional item is allocated in the manner in which the corresponding actual item would have been allocated in the reviewed year under the rules of this section, treating successors (as defined in paragraph (b)(1)(viii)(

b

) of this section) as reviewed year partners. Additionally, the allocation of a notional item of expense or loss described in § 301.6225-4(b)(3)(iv) of this chapter, or a notional item of income or gain described in § 301.6225-4(b)(3)(v) of this chapter, will be deemed to be in accordance with the partners' interests in the partnership if the notional item is allocated to the reviewed year partners (or their successors as defined in paragraph (b)(1)(viii)(

b

) of this section) in the

manner in which the excess item was allocated in the reviewed year.

(xii)

Certain section 705(a)(2)(B) expenditures under the centralized partnership audit regime.

An allocation of an expenditure for any payment required to be made by a partnership under subchapter C of chapter 63 (relating to the centralized partnership audit regime and as described in § 301.6241-4(a) of this chapter) will be deemed to be in accordance with the partners' interests in the partnership, as provided in paragraph (b)(3) of this section, only if the expenditure is allocated in the manner described in paragraph (b)(2)(iii)(

f

) of this section and if the partners' distribution rights are reduced by the partners' shares of the imputed underpayment.

(xiii)

Partnership adjustments that do not result in an imputed underpayment under the centralized partnership audit regime.

An allocation of an item arising from a partnership adjustment that does not result in an imputed underpayment (as defined in § 301.6225-1(f) of this chapter) does not have substantial economic effect within the meaning of paragraph (b)(2) of this section. However, the allocation of such an item will be deemed to be in accordance with the partners' interests in the partnership if allocated in the manner in which the item would have been allocated in the reviewed year under the rules of this section, treating successors as defined in paragraph (b)(1)(viii)(

b

) of this section as reviewed year partners.

(xiv)

Partnership adjustments subject to an election under section 6226.

An allocation of an item arising from a partnership adjustment that results in an imputed underpayment for which an election is made under § 301.6226-1 of this chapter does not have substantial economic effect within the meaning of paragraph (b)(2) of this section. However, the allocation of such an item will be deemed to be in accordance with the partners' interests in the partnership if allocated in the adjustment year (as defined in § 301.6241-1(a)(1) of this chapter) in the manner in which the item would have been allocated under the rules of this section (or otherwise taken into account under subtitle A of the Code) in the reviewed year (as defined in § 301.6241-1(a)(8) of this chapter), followed by any intervening years (as defined in § 301.6226-3(b)(3) of this chapter), concluding with the reporting year (as defined in § 301.6226-3(a) of this chapter).

(xv)

Substantial economic effect under sections 168(h) and 514(c)(9)(E)(i)(ll).

An allocation described in paragraphs (b)(4)(xi) through (xiv) of this section will be deemed to have substantial economic effect for purposes of sections 168(h) and 514(c)(9)(E)(i)(ll) if the allocation is deemed to be in accordance with the partners' interests in the partnership under the applicable rules set forth in paragraphs (b)(4)(xi) through (xiv) of this section.

Par. 3.

Section 1.705-1 is amended by adding paragraph (a)(10) to read as follows:

§ 1.705-1

Determination of basis of partner's interest.

(a) * * *

(10) For rules relating to determining the adjusted basis of a partner's interest in a partnership following a final determination under subchapter C of chapter 63 of the Internal Revenue Code (relating to the centralized partnership audit regime), see §§ 301.6225-4 and 301.6226-4 of this chapter.

Par. 4.

Section 1.706-4 is amended by redesignating paragraphs (e)(2)(viii) through (xi) as paragraphs (e)(2)(ix) through (xii), respectively, and adding a new paragraph (e)(2)(viii) to read as follows:

§ 1.706-4

Determination of distributive share when a partner's interest varies.

(e) * * *

(2) * * *

(viii) Any item arising from a final determination under subchapter C of chapter 63 of the Internal Revenue Code (relating to the centralized partnership audit regime) with respect to a partnership adjustment resulting in an imputed underpayment for which no election is made under § 301.6226-1 of this chapter or for which a pass-through partner (as defined in § 301.6241-1(a)(5)) pays an imputed underpayment under § 301.6226-3(e)(4).

PART 301—PROCEDURE AND ADMINISTRATION

Par. 5.

The authority citation for part 301 continues to read in part as follows:

Authority:

26 U.S.C. 7805 * * *

Par. 6.

Section 301.6221(a)-1 is added to read as follows:

§ 301.6221(a)-1

Determination at partnership level.

(a)

In general.

Except as otherwise provided under subchapter C of chapter 63 of the Internal Revenue Code (subchapter C of chapter 63) and the regulations thereunder, any adjustment to a partnership-related item (as defined in § 301.6241-6) is determined, any tax imposed by chapter 1 of subtitle A of the Internal Revenue Code (Code) attributable thereto is assessed and collected, and the applicability of any penalty, addition to tax, or additional amount that relates to an adjustment to any partnership-related item is determined at the partnership level under subchapter C of chapter 63. Any consideration necessary to make a determination at the partnership level under subchapter C of chapter 63, including the period of limitations on making partnership adjustments under section 6235 or facts necessary to calculate an imputed underpayment under section 6225, is also made at the partnership level except as otherwise provided under subchapter C of chapter 63 and the regulations thereunder. For rules relating to assessment and collection in a proceeding involving inconsistent treatment of a partnership-related item, see § 301.6222-1; in the case of modification under section 6225(c), see § 301.6225-2; in the case of an election under section 6226, see § 301.6226-3. For rules relating to tax imposed (including any amount required to be deducted or withheld) by chapter 2, 2A, 3 or 4 of subtitle A of the Code, see section 6241(9) and § 301.6241-7. For rules relating to special enforcement matters, see § 301.6241-8.

(b)

Applicability date

—(1)

In general.

Except as provided in paragraph (b)(2) of this section, this section applies to partnership taxable years beginning after December 31, 2017.

(2)

Election under § 301.9100-22 in effect.

This section applies to any partnership taxable year beginning after November 2, 2015 and before January 1, 2018 for which a valid election under § 301.9100-22 is in effect.

Par. 7.

Section 301.6222-1 is added to read as follows:

§ 301.6222-1

Partner's return must be consistent with partnership return.

(a)

Consistent treatment of partnership-related items

—(1)

In general.

The treatment of partnership-related items (as defined in § 301.6241-6) on a partner's return must be consistent with the treatment of such items on the partnership return in all respects, including the amount, timing, and characterization of such items. A partner has not satisfied the requirement of this paragraph (a) if the treatment of the partnership-related item on the partner's return is consistent with how such item was treated on a schedule or other information furnished to the partner by the partnership but inconsistent with the treatment of the item on the partnership return actually

filed. For rules relating to the election to be treated as having reported the inconsistency where the partner treats a partnership-related item consistently with an incorrect schedule or other information furnished by the partnership, see paragraph (d) of this section.

(2)

Partner that is a partnership.

The rules of this section apply to a partnership-partner (as defined in § 301.6241-1(a)(7)) regardless of whether the partnership-partner has made an election under section 6221(b) to elect out of the provisions of subchapter C of chapter 63 of the Internal Revenue Code (subchapter C of chapter 63). Accordingly, unless the requirements of paragraph (c) of this section are satisfied, a partnership-partner must treat partnership-related items of a partnership in which it is a partner consistent with the treatment of such items on the partnership return filed by the partnership in which it is a partner.

(3)

Partnership does not file a return.

A partner's treatment of a partnership-related item attributable to a partnership that does not file a return is per se inconsistent, unless the partner files a notice of inconsistent treatment under paragraph (c) of this section.

(4)

Treatment of items on a partnership return.

For purposes of this section, the treatment of a partnership-related item on a partnership return includes—

(i) The treatment of such item on the partnership's return of partnership income filed with the IRS under section 6031, and any amendment or supplement thereto, including an administrative adjustment request (AAR) filed pursuant to section 6227 and the regulations thereunder; and

(ii) The treatment of such item on any statement, schedule or list, and any amendment or supplement thereto, filed by the partnership with the Internal Revenue Service (IRS), including any statements filed pursuant to section 6226 and the regulations thereunder.

(5)

Examples.

The following examples illustrate the rules of this paragraph (a). For purposes of these examples, each partnership is subject to the provisions of subchapter C of chapter 63, and each partnership and its partners are calendar year taxpayers, unless otherwise stated.

Example 1.

B is a partner in Partnership during 2018 and 2019. Both B and Partnership are calendar year taxpayers. In December 2018, Partnership receives an advance payment for services to be performed in 2019 and reports this amount as income on its partnership return for 2018. B includes its distributive share of income from the advance payment on B's income tax return for 2019 and not on B's income tax return for 2018. B did not file a notice of inconsistent treatment with respect to the advanced payment. B's treatment of the income attributable to Partnership is inconsistent with the treatment of that item by Partnership on its partnership return.

Example 2.

C is a partner in Partnership during 2018. Partnership incurred start-up costs before it was actively engaged in its business. Partnership capitalized these costs on its 2018 partnership return. C deducted his distributive share of the start-up costs on C's 2018 income tax return. C's treatment of the start-up costs is inconsistent with the treatment of that item by Partnership on its partnership return.

Example 3.

D is a partner in Partnership during 2018. Partnership reports a loss of $100,000 on its partnership return for 2018. On the 2018 Schedule K-1 attached to the partnership return, Partnership reports $5,000 as D's distributive share of that loss. On the 2018 Schedule K-1 furnished to D, however, Partnership reports $15,000 as D's distributive share of the loss. D reports the $15,000 loss on D's 2018 income tax return. D has not satisfied the requirements of paragraph (a) of this section because D reported D's distributive share of the loss in a manner that is inconsistent with how D's distributive share of the loss was reported on the 2018 partnership return actually filed. See, however, paragraph (d) of this section for the election to be treated as having reported the inconsistency where the partner treats an item consistently with an incorrect schedule.

Example 4.

D was a partner in Partnership during 2018. Partnership reports a loss of $100,000 on its partnership return for 2018. In 2020, Partnership files an AAR under section 6227 reporting that the amount of the loss on its 2018 partnership return is $90,000, rather than $100,000 as originally reported. Pursuant to section 6227 and the regulations thereunder, Partnership elects to have its partners take the adjustment into account, and furnishes D a statement showing D's share of the reduced loss for 2018. D fails to take his share of the reduced loss for 2018 into account in accordance with section 6227 and the regulations thereunder. D has not satisfied the requirements of paragraph (a) of this section because D has not taken into account his share of the loss in a manner consistent with how Partnership treated such items on the partnership return actually filed.

Example 5.

E was a partner in Partnership during 2018. In 2021, Partnership receives a notice of final partnership adjustment in an administrative proceeding under subchapter C of chapter 63 with respect to Partnership's 2018 taxable year. Partnership properly elects the application of section 6226 and furnishes to E a statement of E's share of adjustments with respect to Partnership's 2018 taxable year. E fails to take his share of the adjustments into account in accordance with section 6226 and the regulations thereunder. E has not satisfied the requirements of paragraph (a) of this section because E has not taken into account his share of adjustments with respect to Partnership's 2018 taxable year in a manner consistent with how Partnership treated such items on the partnership return actually filed.

Example 6.

In 2018, E is a partner in Partnership. E is a partnership-partner with a 2018 taxable year that ends on the same day as Partnership's 2018 taxable year. E has filed a valid election under section 6221(b) in effect with respect to E's 2018 partnership taxable year. Notwithstanding E's election under section 6221(b) for its 2018 taxable year, E is subject to section 6222 for taxable year 2018. E must treat, on its 2018 partnership return, any items attributable to E's interest in Partnership in a manner that is consistent with the treatment of those items on the 2018 partnership return actually filed by Partnership.

(b)

Effect of inconsistent treatment

—(1)

Determination of underpayment of tax resulting from inconsistent treatment.

If a partner fails to satisfy the requirements of paragraph (a) of this section, unless the partner provides notice in accordance with paragraph (c) of this section, the IRS may adjust the inconsistently reported partnership-related item on the partner's return to make it consistent with the treatment of such item on the partnership return and determine the underpayment of tax that results from that adjustment. For purposes of this section, the underpayment of tax is the amount by which the correct tax, as determined by making the partner's return consistent with the partnership return, exceeds the tax shown on the partner's return.

(2)

Assessment and collection of tax.

The IRS may assess and collect any underpayment of tax resulting from an adjustment described in paragraph (b)(1) of this section in the same manner as if the underpayment of tax was on account of a mathematical or clerical error appearing on the partner's return, except that the procedures under section 6213(b)(2) for requesting abatement of an assessment do not apply.

(3)

Effect when partner is a partnership.

If the partner is itself a partnership (a partnership-partner), any adjustment on account of such partnership-partner's failure to satisfy the requirements of paragraph (a) of this section will be treated as an adjustment on account of a mathematical or clerical error under section 6213(b), except that the procedures under section 6213(b)(2) for requesting abatement of an assessment do not apply. See section 6232(d)(1)(B) and § 301.6232-1(d).

(4)

Examples.

The following examples illustrate the rules of this paragraph (b).

Example 1.

D, an individual, is a partner in Partnership. D and Partnership are both calendar year taxpayers and Partnership does not have an election under section 6221(b) in effect for its 2018 taxable year. On its partnership return for taxable year 2018,

Partnership reports $100,000 in ordinary income. On the Schedule K-1 attached to the partnership return, as well as on the Schedule K-1 furnished to D, Partnership reports $15,000 as D's distributive share of the $100,000 in ordinary income. D reports only $5,000 of the $15,000 of ordinary income on his 2018 income tax return. The IRS may determine the amount of tax that results from adjusting the ordinary income attributable to D's interest in Partnership reported on D's 2018 income tax return from $5,000 to $15,000 and assess that resulting underpayment in tax as if it was on account of a mathematical or clerical error appearing on D's return. D may not request an abatement of that assessment under section 6213(b).

Example 2.

F was a partner in Partnership during 2018. In 2021, Partnership receives a notice of final partnership adjustment in an administrative proceeding under subchapter C of chapter 63 with respect to Partnership's 2018 taxable year. Partnership properly elects the application of section 6226 and files with the IRS a statement of F's share of adjustments with respect to Partnership's 2018 taxable year. F fails to report one adjustment, F's share of a decrease in the amount of losses for 2018, on F's return as required by section 6226 and the regulations thereunder. The IRS may determine the amount of tax that results from adjusting the decrease in the amount of losses on F's return to be consistent with the amount included on the section 6226 statement filed with the IRS and may assess the resulting underpayment in tax as if it was on account of a mathematical or clerical error appearing on F's return. F may not request an abatement of that assessment under section 6213(b).

(c)

Notification to the IRS when items attributable to a partnership are treated inconsistently

—(1)

In general.

Paragraphs (a) and (b) of this section (regarding the consistent treatment of partnership-related items and the effect of inconsistent treatment) do not apply to partnership-related items identified as inconsistent (or that may be inconsistent) in a statement that the partner provides to the IRS according to the forms, instructions, and other guidance prescribed by the IRS. Instead, the procedures in paragraph (c)(3) of this section apply. A statement does not identify an inconsistency for purposes of this paragraph (c) unless it is attached to the partner's return on which the partnership-related item is treated inconsistently.

(2)

Coordination with section 6223.

Paragraph (c)(1) of this section is not applicable to a partnership-related item the treatment of which is binding on the partner because of actions taken by the partnership under subchapter C of chapter 63 or because of a final decision in a proceeding with respect to the partnership under subchapter C of chapter 63. Accordingly, the provisions of paragraph (c)(1) of this section do not apply with respect to the partner's treatment of a partnership-related item reflected on an AAR under section 6227 or a statement under section 6226 filed by the partnership with the IRS to which the partner is bound under section 6223. Therefore, if the partner's treatment of a partnership-related item reflected on an AAR or statement described in section 6226 is not consistent with the treatment of the partnership to which the partner is bound under section 6223, the provisions of section 6222(c) and paragraph (c)(1) of this section do not apply with respect to such item, and any resulting underpayment may be assessed and collected in accordance with paragraph (b)(2) of this section.

(3)

Partner protected only to extent of notification.

A partner who reports the inconsistent treatment of a partnership-related item is not subject to paragraphs (a) and (b) of this section only with respect to those items identified in the statement described in paragraph (c)(1) of this section. Thus, if a partner notifying the IRS with respect to one partnership-related item does not report the inconsistent treatment of another partnership-related item, the IRS may determine the amount of tax that results from adjusting the unidentified, inconsistently reported item on the partner's return to make it consistent with the treatment of such item on the partnership return, and assess the resulting underpayment of tax in accordance with paragraph (b)(2) of this section.

(4)

Adjustment after notification

—(i)

In general.

If a partner notifies the IRS of the inconsistent treatment of a partnership-related item in accordance with paragraph (c)(1) of this section, and the IRS disagrees with the inconsistent treatment, the IRS may adjust the identified, inconsistently reported item in a proceeding with respect to the partner. Nothing in this paragraph (c)(4)(i) precludes the IRS from also conducting a proceeding with respect to the partnership.

(ii)

Adjustments in partner proceeding.

In a proceeding with respect to a partner described in paragraph (c)(4)(i) of this section, the IRS may adjust any identified, inconsistently reported partnership-related item to make the item consistent with the treatment of that item on the partnership return or determine that the correct treatment of such item differs from the treatment on the partnership return and instead adjust the item to reflect the correct treatment, notwithstanding the treatment of that item on the partnership return. The IRS may also adjust any item on the partner's return, including items that are not partnership-related items. Any final decision with respect to an inconsistent position in a proceeding to which the partnership is not a party is not binding on the partnership.

(5)

Examples.

The following examples illustrate the rules of this paragraph (c). For purposes of these examples, each partnership is subject to the provisions of subchapter C of chapter 63, and each partnership and partner is a calendar year taxpayer, unless otherwise stated.

Example 1.

B is a partner in Partnership during 2018. B treats a deduction and a capital gain attributable to Partnership on B's 2018 income tax return in a manner that is inconsistent with the treatment of those items by Partnership on its 2018 partnership return. B reports the inconsistent treatment of the deduction in accordance with paragraph (c)(1) of this section, but not the inconsistent treatment of the gain. Because B did not notify the IRS of the inconsistent treatment of the gain in accordance with paragraph (c)(1) of this section, the IRS may determine the amount of tax that results from adjusting the gain reported on B's 2018 income tax return in order to make the treatment of that gain consistent with how the gain was treated on Partnership's partnership return. Pursuant to paragraph (c)(3) of this section, the IRS may assess and collect the underpayment of tax resulting from the adjustment to the gain as if it was on account of a mathematical or clerical error appearing on B's return.

Example 2.

On its 2018 partnership return, Partnership treats partner E's distributive share of ordinary loss attributable to Partnership as $8,000. E, however, claims an ordinary loss of $9,000 as attributable to Partnership on its 2018 income tax return and notifies the IRS of the inconsistent treatment in accordance with paragraph (c)(1) of this section. As a result of the notice of inconsistent treatment, the IRS conducts a separate proceeding under subchapter B of chapter 63 of the Internal Revenue Code with respect to E's 2018 income tax return, a proceeding to which Partnership is not a party. During the proceeding, the IRS determines that the proper amount of E's distributive share of the ordinary loss from Partnership is $3,000. During the same proceeding, the IRS also determines that E overstated a charitable contribution deduction in the amount of $2,500 on its 2018 income tax return. The determination of the adjustment of E's share of ordinary loss is not binding on Partnership. The charitable contribution deduction is not attributable to Partnership or to another partnership subject to the provisions of subchapter C of chapter 63. The IRS may determine the amount of tax that results from adjusting the $9,000 ordinary loss deduction to $3,000 and from adjusting the charitable contribution deduction. Pursuant to paragraph (c)(4)(ii) of this section, the IRS is not limited to only adjusting the ordinary loss of $9,000, as originally reported on E's partner return, to $8,000, as originally reported by Partnership on its partnership return, nor is the IRS prohibited from adjusting the charitable

contribution deduction in the proceeding with respect to E.

(d)

Partner receiving incorrect information

—(1)

In general.

A partner is treated as having complied with section 6222(c)(1)(B) and paragraph (c)(1) of this section with respect to a partnership-related item if the partner—

(i) Demonstrates that the treatment of such item on the partner's return is consistent with the treatment of that item on the statement, schedule, or other form prescribed by the IRS and furnished to the partner by the partnership, and

(ii) The partner makes an election in accordance with paragraph (d)(2) of this section.

(2)

Time and manner of making election

—(i)

In general.

An election under paragraph (d) of this section must be filed in writing with the IRS office set forth in the notice that notified the partner of the inconsistency no later than 60 days after the date of such notice.

(ii)

Contents of election.

The election described in paragraph (d)(2)(i) of this section must be—

(A) Clearly identified as an election under section 6222(c)(2)(B);

(B) Signed by the partner making the election;

(C) Accompanied by a copy of the statement, schedule, or other form furnished to the partner by the partnership and a copy of the IRS notice that notified the partner of the inconsistency; and

(D) Include any other information required in forms, instructions, or other guidance prescribed by the IRS.

(iii)

Treatment of partnership-related item is unclear.

Generally, the requirement described in paragraph (d)(2)(ii)(C) of this section will be satisfied by attaching a copy of the statement, schedule, or other form furnished to the partner by the partnership to the election (in addition to a copy of the IRS notice that notified the partner of the inconsistency). However, if it is not clear from the statement, schedule, or other form furnished by the partnership that the partner's treatment of the partnership-related item on the partner's return is consistent, the election must also include an explanation of how the treatment of such item on the statement, schedule, or other form furnished by the partnership is consistent with the treatment of the item on the partner's return, including with respect to the characterization, timing, and amount of such item.

(3)

Example.

The following example illustrates the rules of this paragraph (d). For purposes of this example, the partnership is subject to subchapter C of chapter 63 and the partnership and its partners are calendar year taxpayers.

Example.

E is a partner in Partnership for 2018. On its 2018 partnership return, Partnership reports that E's distributive share of ordinary income attributable to Partnership is $1,000. Partnership furnishes to E a Schedule K-1 for 2018 showing $500 as E's distributive share of ordinary income. E reports $500 of ordinary income attributable to Partnership on its 2018 income tax return consistent with the Schedule K-1 furnished to E. The IRS notifies E that E's treatment of the ordinary income attributable to Partnership on its 2018 income tax return is inconsistent with how Partnership treated the ordinary income allocated to E on its 2018 partnership return. Within 60 days of receiving the notice from the IRS of the inconsistency, E files an election with the IRS in accordance with paragraph (d)(2) of this section. Because E made a valid election under section 6222(c)(2)(B) and paragraph (d)(1) of this section, E is treated as having notified the IRS of the inconsistency with respect to the ordinary income attributable to Partnership under paragraph (c)(1) of this section.

(e)

Applicability date

—(1)

In general.

Except as provided in paragraph (e)(2) of this section, this section applies to partnership taxable years beginning after December 31, 2017.

(2)

Election under § 301.9100-22 in effect.

This section applies to any partnership taxable year beginning after November 2, 2015 and before January 1, 2018 for which a valid election under § 301.9100-22 is in effect.

Par 8.

Section 301.6225-1 is added to read as follows:

§ 301.6225-1

Partnership Adjustment by the Internal Revenue Service.

(a)

Imputed underpayment based on partnership adjustments

—(1)

In general.

In the case of any partnership adjustments (as defined in § 301.6241-1(a)(6)) by the Internal Revenue Service (IRS), if the adjustments result in an imputed underpayment (as determined in accordance with paragraph (b) of this section), the partnership must pay an amount equal to such imputed underpayment in accordance with paragraph (a)(2) of this section. If the adjustments do not result in an imputed underpayment (as described in paragraph (f) of this section), such adjustments must be taken into account by the partnership in the adjustment year (as defined in § 301.6241-1(a)(1)) in accordance with § 301.6225-3. Partnership adjustments may result in more than one imputed underpayment pursuant to paragraph (g) of this section. Each imputed underpayment determined under this section is based solely on partnership adjustments with respect to a single taxable year.

(2)

Partnership pays the imputed underpayment.

An imputed underpayment (determined in accordance with paragraph (b) of this section and included in a notice of final partnership adjustment (FPA) under section 6231(a)(3)) must be paid by the partnership in the same manner as if the imputed underpayment were a tax imposed for the adjustment year in accordance with § 301.6232-1. The FPA will include the amount of any imputed underpayment, as modified under § 301.6225-2 if applicable, unless the partnership waives its right to such FPA under section 6232(d)(2). See § 301.6232-1(d)(2). For the alternative to payment of the imputed underpayment by the partnership, see § 301.6226-1. If a partnership pays an imputed underpayment, the partnership's expenditure for the imputed underpayment is taken into account by the partnership in accordance with § 301.6241-4. For interest and penalties with respect to an imputed underpayment, see section 6233.

(3)

Imputed underpayment set forth in notice of proposed partnership adjustment.

An imputed underpayment set forth in a notice of proposed partnership adjustment (NOPPA) under section 6231(a)(2) is determined in accordance with paragraph (b) of this section without regard to any modification under § 301.6225-2. Modifications under § 301.6225-2, if allowed by the IRS, may change the amount of an imputed underpayment set forth in the NOPPA and determined in accordance with paragraph (b) of this section. Only the partnership adjustments set forth in a NOPPA are taken into account for purposes of determining an imputed underpayment under this section and any modification under § 301.6225-2.

(b)

Determination of an imputed underpayment

—(1)

In general.

In the case of any partnership adjustment by the IRS, an imputed underpayment is determined by—

(i) Grouping the partnership adjustments in accordance with paragraph (c) of this section and, if appropriate, subgrouping such adjustments in accordance with paragraph (d) of this section;

(ii) Netting the adjustments in accordance with paragraph (e) of this section;

(iii) Calculating the total netted partnership adjustment in accordance with paragraph (b)(2) of this section;

(iv) Multiplying the total netted partnership adjustment by the highest rate of Federal income tax in effect for

the reviewed year under section 1 or 11; and

(v) Increasing or decreasing the product that results under paragraph (b)(1)(iv) of this section by—

(A) Any amounts treated under paragraph (e)(3)(ii) of this section as net positive adjustments (as defined in paragraph (e)(4)(i) of this section); and

(B) Any net negative adjustments (as defined in paragraph (e)(4)(ii) of this section), except net negative adjustments resulting from reallocation adjustments to credits as described in paragraph (d)(3)(ii) of this section and creditable tax expenditures described in paragraph (e)(3)(iii) of this section.

(2)

Calculation of the total netted partnership adjustment.

For purposes of determining an imputed underpayment under paragraph (b)(1) of this section, the

total netted partnership adjustment

is the sum of all net positive adjustments in the reallocation grouping described in paragraph (c)(2) of this section and the residual grouping described in paragraph (c)(5) of this section.

(3)

Adjustments to items for which tax has been collected under chapters 3 and 4.

A partnership adjustment is disregarded for purposes of calculating the total netted partnership adjustment under paragraph (b)(2) of this section to the extent that the IRS has collected the tax required to be withheld under chapter 3 or chapter 4 (as defined in § 301.6241-7(b)(2)(ii) and (iii)) that is attributable to the partnership adjustment. See § 301.6241-7(b)(3) for rules that apply when a partnership pays an imputed underpayment that includes a partnership adjustment to an amount subject to withholding (as defined in § 301.6241-7(b)(2)(i)) under chapter 3 or chapter 4 for which such tax has not yet been collected.

(4)

Treatment of adjustment as zero for purposes of calculating the imputed underpayment.

If the effect of a partnership adjustment under chapter 1 of subtitle A of the Internal Revenue Code (Code) to any person is reflected in another adjustment taken into account under this section, the IRS may treat an adjustment as zero solely for purposes of calculating the imputed underpayment.

(c)

Grouping of partnership adjustments

—(1)

In general.

To determine an imputed underpayment under paragraph (b) of this section, partnership adjustments are placed into one of four groupings. These groupings are the reallocation grouping described in paragraph (c)(2) of this section, the credit grouping described in paragraph (c)(3) of this section, the creditable expenditure grouping described in paragraph (c)(4) of this section, and the residual grouping described in paragraph (c)(5) of this section. Adjustments in groupings may be placed in subgroupings, as appropriate, in accordance with paragraph (d) of this section. The IRS may, in its discretion, group adjustments in a manner other than the manner described in this paragraph (c) when such grouping would appropriately reflect the facts and circumstances. For requests to modify the groupings, see § 301.6225-2(d)(6).

(2)

Reallocation grouping

—(i)

In general.

Any adjustment that allocates or reallocates a partnership-related item to and from a particular partner or partners is a

reallocation adjustment.

Except in the case of an adjustment to a credit (as described in paragraph (c)(3) of this section) or to a creditable expenditure (as described in paragraph (c)(4) of this section), reallocation adjustments are placed in the reallocation grouping. Adjustments that reallocate a credit to and from a particular partner or partners are placed in the credit grouping (see paragraph (c)(3) of this section), and adjustments that reallocate a creditable expenditure to and from a particular partner or partners are placed in the creditable expenditure grouping (see paragraph (c)(4) of this section).

(ii)

Each reallocation adjustment results in at least two separate adjustments.

Each reallocation adjustment generally results in at least two separate adjustments. One adjustment reverses the effect of the improper allocation of a partnership-related item, and the other adjustment effectuates the proper allocation of the partnership-related item. Generally, a reallocation adjustment results in one positive adjustment (as defined in paragraph (d)(2)(iii) of this section) and one negative adjustment (as defined in paragr

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