Return of Partnership Income

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-209322-82]

RIN 1545-AU99

Return of Partnership Income

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Withdrawal of notice of proposed rulemaking; notice of proposed

rulemaking and notice of public hearing.

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SUMMARY: This document withdraws the notice of proposed rulemaking

relating to partnership returns. The proposed regulations were

published in the Federal Register on January 23, 1986. These

regulations revise the partnership filing requirement to reflect

changes to the law made by the Taxpayer Relief Act of 1997 (TRA). All

partnerships required to file partnership returns, including certain

foreign partnerships, are affected by these regulations. This document

also contains a notice of a public hearing on the proposed regulations.

DATES: Written comments must be received by April 27, 1998. Requests to

speak and outlines of oral comments to be discussed at the public

hearing scheduled for May 19, 1998, at 10 a.m. must be received by

April 28, 1998.

ADDRESSES: Send submissions to: CC:DOM:CORP:R (REG-209322-82), room

5226, Internal Revenue Service, POB 7604, Ben Franklin Station,

Washington, DC 20044. Submissions may be hand delivered between the

hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R (REG-209322-82), Courier's

Desk, Internal Revenue Service, 1111 Constitution Avenue NW.,

Washington, DC. Alternatively, taxpayers may submit comments

electronically via the Internet by selecting the ``Tax Regs'' option of

the IRS Home Page, or by submitting comments directly to the IRS

Internet site at: http://www.irs.ustreas.gov/prod/tax__regs/

comments.html. The public hearing will be held in the IRS Auditorium,

7400 Corridor, Internal Revenue Building, 1111 Constitution Avenue NW.,

Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Martin

Schaffer or Christopher Kelley, 202-622-3080; concerning foreign

partnerships, Ronald Gootzeit, 202-622-3860; concerning submissions and

the hearing, Michael Slaughter, 202-622-7190 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information contained in this notice of proposed

rulemaking has been submitted to the Office of Management and Budget

for review in accordance with the Paperwork Reduction Act of 1995 (44

U.S.C. 3507(d)). Comments on the collection of information should be

sent to the Office of Management and Budget, Attn: Desk Officer for the

Department of the Treasury, Office of Information and Regulatory

Affairs, Washington, DC, 20503, with copies to the Internal Revenue

Service, Attn: IRS Reports Clearance Officer, T:FP, Washington, DC

20224. Comments on the collection of information must be received by

March 27, 1998. Comments are specifically requested on:

Whether the proposed collection of information is necessary for the

proper performance of the functions of the Internal Revenue Service,

including whether the information will have practical utility;

The accuracy of the estimated burden associated with the proposed

collection of information (see below);

How the quality, utility, and clarity of the information to be

collected may be enhanced;

How the burden of complying with the proposed collection of

information may be minimized, including through the application of

automated collection techniques or other forms of information

technology; and

Estimates of the capital or start-up costs and costs of operation,

maintenance, and purchase of services to provide information.

The collection of information in this proposed regulation is in

Sec. 1.6031(a)-1. This information is required to enable the IRS to

verify that a taxpayer is reporting the correct amount of income or

gain or claiming the correct amount of losses, deductions, or credits

from that taxpayer's interest in the partnership. The collection of

information is mandatory. The likely respondents are businesses and

other for-profit institutions.

The burden is reflected in the burden of Form 1065.

An agency may not conduct or sponsor, and a person is not required

to respond to, a collection of information unless it displays a valid

control number assigned by the Office of Management and Budget.

Books or records relating to a collection of information must be

retained as long as their contents may become material in the

administration of any internal revenue law. Generally, tax returns and

tax return information are confidential, as required by 26 U.S.C. 6103.

Background

This document contains proposed amendments to the Income Tax

Regulations (26 CFR Part 1) under sections 6031 and 6063 of the

Internal Revenue Code of 1986 (Code). These amendments are designed, in

part, to reflect changes made to section 6031 by section 1141 of TRA,

Public Law 105-34, 111 Stat. 788 (1997). Section 6031 contains rules

regarding the filing of returns of partnership income (partnership

returns).

On January 23, 1986, the IRS published in the Federal Register (51

FR 3075) proposed regulations under section 6031 of the Internal

Revenue Code (existing proposed regulations). Section 1.6031-1 of the

existing proposed regulations provides rules that, if finalized, would

implement the partnership filing requirements of section 404 of the Tax

Equity and Fiscal Responsibility Act of 1982 (TEFRA), Public Law 97-

248, 96 Stat. 669 (1982). Because section 1141 of TRA supersedes the

partnership filing requirements of

[[Page 3678]]

section 404 of TEFRA, the IRS and Treasury consider it appropriate to

reissue proposed regulations reflecting recent changes to the law,

while giving taxpayers another opportunity to comment. Accordingly,

this document withdraws Sec. 1.6031-1 of the existing proposed

regulations published in the Federal Register on January 23, 1986 (51

FR 3075). A partnership that has followed the rules contained in

Sec. 1.6031-1 of the existing final regulations for all taxable years

prior to the taxable year for which these new regulations will become

effective will be treated as fully complying with the partnership

filing requirements with respect to such taxable years.

Section 6063 provides that a partnership return shall be signed by

any one of the partners. The proposed regulations clarify who must sign

a partnership return filed solely for the purpose of making certain

partnership-level elections.

Explanation of Provisions

Filing Requirement

Section 6031(a) requires every partnership to file a partnership

return. New section 6031(e), as added by section 1141 of TRA, exempts

certain foreign partnerships from the filing requirement of section

6031(a). Section 6031(e) provides that a foreign partnership is not

required to file a return for a tax year unless during that year it

derives gross income from sources within the United States or has gross

income that is effectively connected with the conduct of a trade or

business within the United States. Further exceptions to the filing

requirement for foreign partnerships may be provided by regulation.

The proposed regulations separately describe the filing

requirements for domestic and foreign partnerships. In accordance with

section 6031(a), the proposed regulations provide that, except in

certain limited circumstances, every domestic partnership must file a

partnership return.

Under section 6031 and the proposed regulations, a foreign

partnership generally must file a partnership return only if it has

either United States source income or income effectively connected (or

treated as effectively connected) with the conduct of a trade or

business within the United States. However, under the proposed

regulations, a foreign partnership that has no gross income that is

effectively connected with the conduct of a trade or business within

the United States, and that would be required to file a partnership

return only because it has gross income derived from sources within the

United States, will be exempt from the requirement to file a

partnership return if (i) no United States person has a direct or

indirect interest in the partnership; (ii) the gross income derived

from sources within the United States is either fixed or determinable

annual or periodical income described in Sec. 1.1441-2(b) or other

amounts subject to withholding described in Sec. 1.1441-2(c); (iii)

Forms 1042 and 1042-S are filed with respect to all such gross income

in accordance with Sec. 1.1461-1 (b) and (c); and (iv) the tax

liability of the partners with respect to such gross income has been

fully satisfied by the withholding of tax at the source, if applicable,

under chapter 3. The foreign partnership's obligation to file Forms

1042 and 1042-S is generally eliminated by the regulations under

section 1461 published in the Federal Register on October 14, 1997 (62

FR 53387) if those returns are filed by the withholding agent (or

agents) making the payments of United States source income to the

partnership and the partners' tax liability with respect to United

States source income has been fully satisfied by withholding. See

Sec. 1.1461-1 (b)(2) and (c)(4). The IRS and Treasury invite comments

addressing other ways to reduce duplicative information filing.

Any domestic or foreign partnership that elects to be excluded from

subchapter K of Chapter 1 of the Code under section 761(a) will not be

required to file a partnership return, except that where a partnership

makes an election under Sec. 1.761-2(b)(2)(i), the partnership must

timely file a partnership return that contains the information required

by Sec. 1.761-2(b)(2)(i) for the taxable year for which the election is

made.

Failure to Meet Filing Requirement

If a partnership that is not a small partnership under section

6231(a)(1)(B) is required to file a partnership return under section

6031 but fails to do so, the period of limitations on assessment of tax

attributable to items of that partnership remains open indefinitely

under section 6229(a). The failure of a partnership to file a return

required by section 6031 might also result in disallowance under

section 6231(f) of the deductions, losses, and credits flowing through

to the partners and could subject the partnership to penalties under

section 6698 and/or section 7203.

Information To Be Furnished to Partners

Under section 6031(b), every partnership that is required by

section 6031(a) to file a partnership return must furnish information

to its partners as required by regulations. The rules governing

partnership statements to partners and nominees are in Sec. 1.6031(b)-

1T.

Partnership Elections

A foreign partnership otherwise exempt from the filing requirement

that wants to make a partnership-level election under section 703(b)

must file a partnership return for the year of the election. The

proposed regulations provide rules similar to those contained in

Sec. 1.7701-3(c)(2) of the entity classification regulations with

respect to who has the authority to file such returns. Generally, the

return must be signed by all partners or by an authorized partner.

Proposed Effective Dates

These regulations are proposed to be applicable to partnership tax

years ending on or after the 90th day after final regulations on this

subject are published in the Federal Register. However, the exceptions

for certain foreign partnerships contained in Sec. 1.6031(a)-1(b)(2)

will not be applicable to any partnership taxable years beginning

before January 1, 1999.

Special Analyses

It has been determined that this notice of proposed rulemaking is

not a significant regulatory action as defined in EO 12866. Therefore,

a regulatory assessment is not required. It also has been determined

that section 553(b) of the Administrative Procedure Act (5 U.S.C.

chapter 5) does not apply to these proposed regulations. It is hereby

certified that the collection of information contained in these

proposed regulations will not have a significant economic impact on a

substantial number of small entities. This certification is based on

the fact that the regulations would reduce (rather than increase) the

number of small entities that are required to file a partnership

return. Specifically, the proposed regulations would eliminate the

filing requirements for certain foreign partnerships that are fully

subject to withholding in order to prevent duplicative filing

requirements. In addition to eliminating the filing requirements in

these circumstances, for ease of reference the proposed regulations

update and restate the general requirements to file a partnership

return as set forth in existing regulations. Because the proposed

regulations would not impose any new reporting requirements that are

not imposed by the existing regulations,

[[Page 3679]]

and the only significant modification of the existing regulations is to

eliminate the filing requirement for certain foreign partnerships, the

regulations will not have a significant economic impact on a

substantial number of small entities. Accordingly, a Regulatory

Flexibility Analysis under the Regulatory Flexibility Act (5 U.S.C.

chapter 6) is not required. Pursuant to section 7805(f) of the Code,

these proposed regulations will be submitted to the Chief Counsel for

Advocacy of the Small Business Administration for comment on their

impact on small business.

Comments and Public Hearing

Before these proposed regulations are adopted as final regulations,

consideration will be given to any written comments (preferably a

signed original and eight (8) copies) that are submitted timely to the

IRS. All comments will be available for public inspection and copying.

A public hearing has been scheduled for Tuesday, May 19, 998, at 10

a.m., in the IRS Auditorium, 7400 Corridor, Internal Revenue Building,

1111 Constitution Avenue NW., Washington, DC. Because of access

restrictions, visitors will not be admitted beyond the building lobby

more than 15 minutes before the hearing starts.

The rules of 26 CFR 601.601(a)(3) apply to the hearing.

Persons that wish to present oral comments at the hearing must

submit written comments by April 27, 1998 and submit an outline of the

topics to be discussed and the time to be devoted to each topic (signed

original and eight (8) copies) by April 28, 1998.

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 regulations are Martin Schaffer and

Christopher Kelley, Office of Assistant Chief Counsel (Passthroughs and

Special Industries), and Ronald Gootzeit, Office of the Associate Chief

Counsel (International). However, other personnel from the IRS and

Treasury Department participated in their development.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements.

Withdrawal of Proposed Amendments to the Regulations

Accordingly, under the authority of 26 U.S.C. 7805, the notice of

proposed rulemaking that was published in the Federal Register on

January 23, 1986 (51 FR 3075) is withdrawn.

Proposed Amendments to the Regulations

Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

Paragraph 1. The authority citation for part 1 is amended by adding

an entry in numerical order to read as follows:

Authority: 26 U.S.C. 7805. * * *

Section 1.6031(a)-1 also issued under 26 U.S.C. 6031. * * *

Sec. 1.6031-1 [Removed]

Par. 1a. Section 1.6031-1 is removed.

Par. 2. Section 1.6031(a)-1 is added to read as follows:

Sec. 1.6031(a)-1 Return of partnership income.

(a) Domestic partnerships--(1) Return required. Except as provided

in paragraphs (a)(3) and (c) of this section, every domestic

organization that is a partnership must file a return of partnership

income under section 6031 (partnership return) for each taxable year on

the form prescribed for the partnership return. The partnership return

must be filed for the taxable year of the partnership regardless of the

taxable years of the partners. For taxable years of a partnership and

of a partner, see section 706 and Sec. 1.706-1. For the rules governing

partnership statements to partners and nominees, see Sec. 1.6031(b)-1T.

(2) Content of return. The partnership return must contain the

information required by the prescribed form and the accompanying

instructions.

(3) Special rule. A partnership that has no income, deductions, or

credits for federal income tax purposes for a taxable year is not

required to file a partnership return for that year.

(4) Failure to file. For the consequences of a failure to comply

with the requirements of section 6031(a) and this paragraph (a), see

sections 6229(a), 6231(f), 6698, and 7203.

(b) Foreign partnerships--(1) Return required. A foreign

partnership must file a partnership return for a partnership taxable

year only if it has gross income derived from sources within the United

States or it has gross income that is (or is treated as) effectively

connected with the conduct of a trade or business within the United

States for the taxable year. Certain exceptions to this requirement are

provided in paragraphs (b)(2) and (c) of this section. A foreign

partnership that is required to file a partnership return must file the

partnership return in accordance with the rules provided for domestic

partnerships in paragraph (a) of this section.

(2) Exception to partnership return requirement for certain foreign

partnerships investing in the United States. A foreign partnership that

has no gross income that is effectively connected with the conduct of a

trade or business within the United States, and that would be required

to file a partnership return only because it has gross income derived

from sources within the United States, is not required to file a

partnership return under section 6031 if--

(i) No United States person has a direct or indirect interest in

the partnership;

(ii) The gross income derived from sources within the United States

is either fixed or determinable annual or periodical income described

in Sec. 1.1441-2(b) or other amounts subject to withholding described

in Sec. 1.1441-2(c);

(iii) Forms 1042 and 1042-S are filed with respect to all such

gross income in accordance with Sec. 1.1461-1 (b) and (c). In order to

satisfy this requirement, Forms 1042 and 1042-S must be filed by the

partnership unless the partnership is not required to file such returns

under Sec. 1.1461-1 (b)(2) and (c)(4), in which case, Forms 1042 and

1042-S must be filed by another withholding agent (or agents); and

(iv) The tax liability of the partners with respect to such gross

income has been fully satisfied by the withholding of tax at the

source, if applicable, under chapter 3 of the Internal Revenue Code.

(3) Partnership information or returns required of partners who are

United States persons--(i) In general. If a United States person is a

partner in a partnership that is not required to file a partnership

return, the district director or director of the service center may

require that person to render the statements or provide the information

necessary to verify the accuracy of the reporting by that person of any

items of partnership income, gain, loss, deduction, or credit.

(ii) Certain partnership elections. For a partnership that is not

otherwise required to file a partnership return, if an election that

can only be made by the partnership under section 703 (affecting the

computation of taxable income derived from a partnership) is to be made

by or for the partnership, a return

[[Page 3680]]

on the form prescribed for the partnership return must be filed for the

partnership. The return must be signed by--

(A) Each partner that is a partner in the partnership at the time

the election is made; or

(B) Any partner of the partnership who is authorized (under local

law or the partnership's organizational documents) to make the election

and who represents to having such authorization under penalties of

perjury.

(iii) Controlled foreign partnerships. Certain United States

persons who are partners in a foreign partnership controlled (within

the meaning of section 6038(e)(1)) by United States persons may be

required to provide information with respect to the partnership under

section 6038.

(4) Exclusion for certain organizations. The return requirement of

section 6031 and this section does not apply to the International

Telecommunications Satellite Organization, the International Maritime

Satellite Organization, or any organization that is a successor of

either.

(c) Partnerships excluded from the application of subchapter K--(1)

Wholly excluded--(i) Year of election. An eligible partnership as

described in Sec. 1.761-2(a) that elects to be excluded from all the

provisions of subchapter K of chapter 1 of the Internal Revenue Code in

the manner specified by Sec. 1.761-2(b)(2)(i) must timely file the form

prescribed for the partnership return for the taxable year for which

the election is made. In lieu of the information otherwise required,

the return must contain or be accompanied by the information required

by Sec. 1.761-2(b)(2)(i).

(ii) Subsequent years. Except as otherwise provided in paragraph

(c)(1)(i) of this section, an eligible partnership that elects to be

wholly excluded from the application of subchapter K is not required to

file a partnership return.

(2) Deemed excluded. An eligible partnership that is deemed to have

elected exclusion from the application of subchapter K beginning with

its first taxable year, as specified in Sec. 1.761-2(b)(2)(ii), is not

required to file a partnership return.

(d) Definitions--(1) Partnership. For the meaning of the term

partnership, see Sec. 1.761-1(a).

(2) United States person. In applying this section, United States

person means a person described in section 7701(a)(30); the government

of the United States, a State, or the District of Columbia (including

an agency or instrumentality thereof); or a corporation created or

organized in Guam, the Commonwealth of the Northern Mariana Islands,

the U.S. Virgin Islands, and American Samoa, if the requirements of

sections 881(b)(1) (A), (B), and (C) are met for such corporation. The

term does not include an alien individual who is a resident of Puerto

Rico, Guam, the Commonwealth of the Northern Mariana Islands, the U.S.

Virgin Islands, or American Samoa, as determined under

Sec. 301.7701(b)-1(d) of this chapter.

(e) Procedural requirements--(1) Place for filing--(i) Domestic

partnerships. The return of a domestic partnership that is required to

file under paragraph (a) of this section must be filed with the service

center for the internal revenue district in which the partnership has

its principal office or principal place of business in the United

States.

(ii) Foreign partnerships with United States business or income.

The return of a foreign partnership that is required to file under

paragraph (b)(1) of this section must be filed--

(A) With the service center for the internal revenue district in

which the partnership has its principal office or principal place of

business in the United States; or

(B) With the Internal Revenue Service Center, Philadelphia, PA

19255-0011 if the partnership has no office or place of business in the

United States.

(iii) Foreign partnerships without United States business or

income. The return of a foreign partnership filed under paragraph

(b)(3)(ii) of this section (regarding partnerships for which an

election under section 703 is made) must be filed with the Internal

Revenue Service Center, Philadelphia, PA 19255-0011. A statement must

be attached to the partnership return indicating that the return is

being filed pursuant to paragraph (b)(3)(ii) of this section solely to

make one or more elections under section 703.

(2) Time for filing. The return of a partnership must be filed on

or before the fifteenth day of the fourth month following the close of

the taxable year of the partnership.

(3) Magnetic media filing. For magnetic media filing requirements

with respect to partnerships, see section 6011(e)(2) and the

regulations thereunder.

(f) Effective date. This section applies to taxable years of a

partnership ending on or after the 90th day after the date final

regulations on this subject are published in the Federal Register.

However, in no event will paragraph (b)(2) of this section apply to

taxable years of a partnership that begin before January 1, 1999.

Par. 3. Section 1.6063-1 is amended by adding paragraph (c) to read

as follows:

Sec. 1.6063-1 Signing of returns, statements, and other documents made

by partnerships.

* * * * *

(c) Certain partnership elections--(1) In general. For rules

regarding the authority of a partner to sign a partnership return filed

solely for the purpose of making certain partnership-level elections,

see Sec. 1.6031(a)-1(b)(3)(ii).

(2) Effective date. The provisions of paragraph (c) of this section

apply to taxable years of a partnership ending on or after the 90th day

after the date final regulations on this subject are published in the

Federal Register.

Michael P. Dolan,

Deputy Commissioner of Internal Revenue.

[FR Doc. 98-1529 Filed 1-23-98; 8:45 am]

BILLING CODE 4830-01-U