Partnership Returns Required on Magnetic Media

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 301

[REG-102023-98]

RIN 1545-AW14

Partnership Returns Required on Magnetic Media

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

-----------------------------------------------------------------------

SUMMARY: This document contains proposed regulations relating to the

requirements for filing partnership returns on magnetic media under

section 6011(e) of the Internal Revenue Code. The proposed regulations

reflect changes to the law made by the Taxpayer Relief Act of 1997. The

proposed regulations affect partnerships with more than 100 partners.

This document also provides a notice of a public hearing on these

proposed regulations.

DATES: Written comments must be received by January 21, 1999. Requests

to speak (with outlines of oral comments) at the public hearing

scheduled for January 13, 1999, must be received by December 23, 1998.

ADDRESSES: Send submissions to: CC:DOM:CORP:R (REG-102023-98), Room

5228, Internal Revenue Service, POB 7604, Ben Franklin Station,

Washington, DC 20044. Submissions may be hand delivered Monday through

Friday between the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R (REG-

102023-98), 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 on the IRS Home Page, or by submitting comments directly to the

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

comments.html. The public hearing will be held in Room 2615, Internal

Revenue Building, 1111 Constitution Avenue, NW., Washington, DC 20224.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,

Bridget E. Finkenaur, 202-622-4940;

[[Page 56879]]

concerning submissions of comments, the hearing, and/or to be placed on

the building access list to attend the hearing, Mike Slaughter, 202-

622-7190 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

This document contains proposed amendments to the Regulations on

Procedure and Administration (26 CFR part 301) relating to the filing

of partnership returns on magnetic media under section 6011(e)(2) of

the Internal Revenue Code. Section 6011(e)(2) was amended by section

1224 of the Taxpayer Relief Act of 1997, Public Law 105-34 (111 Stat.

788 (1997)) (the Act), effective for taxable years ending on or after

December 31, 1997. Section 6012(e) of the Internal Revenue Service

Restructuring and Reform Act of 1998, Public Law 105-206 (112 Stat. 685

(1998)), changes the effective date of section 1224 of the Act to

taxable years beginning after December 31, 1997.

Section 6011(e) authorizes the Secretary to prescribe regulations

providing the standards for determining which returns must be filed on

magnetic media or in other machine-readable form. Section 6011(e)(2)(A)

provides that the regulations may not require any person to file

returns on magnetic media unless the person is required to file at

least 250 returns during the calendar year. However, the last sentence

of section 6011(e)(2), which was added by section 1224 of the Act,

provides that the Secretary must prescribe regulations requiring

partnerships with more than 100 partners to file returns on magnetic

media. In addition, section 6011(e)(2)(B) requires that the regulations

take into account (among other relevant factors) the ability of the

taxpayer to comply at reasonable cost with the requirements of the

regulations.

Currently, the IRS permits certain partnerships to file their

partnership returns on magnetic media (including magnetic tape, floppy

disk, and electronic filing) with the Internal Revenue Service Center

in Andover, Massachusetts. Under this voluntary program, participants

have the option of: (1) submitting the entire partnership tax return

(including Form 1065, U.S. Partnership Return of Income, Schedules K-1,

Partner's Share of Income, Credits, Deductions, etc., and all other

related forms and schedules) on magnetic media, or (2) submitting only

the Schedules K-1 on magnetic media and filing the rest of the

partnership return on paper.

In Notice 97-77 (1997-52 I.R.B. 18 (December 29, 1997)), the IRS

notified taxpayers that the Act s amendment to section 6011(e)(2) is

not self-executing. Rather, the IRS must first issue regulations that

would require partnerships with more than 100 partners to file their

partnership returns on magnetic media. Accordingly, partnerships were

not required to file their 1997 partnership returns on magnetic media.

Explanation of Provisions

In General

The proposed regulations provide that partnerships with more than

100 partners must file their partnership returns on magnetic media. The

determination of whether a partnership has more than 100 partners is

made by counting the number of partners the partnership had over the

partnership's taxable year, regardless of whether a partner was a

partner for the entire year or whether the partnership had over 100

partners on any particular day in the year.

The proposed regulations provide that a partnership return is a

form in Series 1065 (including Form 1065, U.S. Partnership Return of

Income, and Form 1065-B, U.S. Return of Income for Electing Large

Partnerships), along with the corresponding Schedules K-1 and all other

related forms and schedules that are required to be attached to the

Series 1065 form.

Magnetic media means any magnetic media permitted under applicable

regulations, revenue procedures, or publications. The IRS will

prescribe procedures for participation in the mandatory magnetic media

filing program for partnerships with more than 100 partners. Included

in those procedures will be methods for registering for the program and

signing the partnership return. The procedures will be contained in

applicable revenue procedures or publications.

The term magnetic media generally includes magnetic tape, tape

cartridge, and diskette, as well as other media (such as electronic

filing). Consistent with the definition of magnetic media in other

regulations, the proposed regulations define magnetic media broadly.

However, under these regulations, the Service plans to require

partnerships with more than 100 partners to file their partnership

returns electronically. These requirements for electronic filing will

be detailed in applicable revenue procedures or publications.

The IRS and Treasury Department believe that requiring affected

partnerships to file electronically will enhance the quality of IRS s

customer service and will reduce the costs associated with maintaining

the ability to accept forms in a variety of magnetic media.

Furthermore, the IRS and Treasury Department believe that electronic

filing has less burden on taxpayers than filing using other forms of

magnetic media.

Electronic filing reduces the normal processing time associated

with paper returns in that there is minimal hands-on processing and,

therefore, there are no paperwork delays. Faster processing means

faster settling of accounts and better customer service. Electronic

filing also reduces errors and increases security by reducing duplicate

or erroneous returns. In addition, taxpayers receive prompt

acknowledgment that their returns have been received and accepted by

the Internal Revenue Service. Finally, electronic filing reduces the

operating costs for taxpayers whose data already resides on a computer

system. Overall, electronic filing of partnership returns should

increase customer satisfaction and confidence in the filing process,

and be more cost effective for partnerships.

Although the IRS Service Center in Andover, Massachusetts currently

accepts returns in the voluntary program on various forms of magnetic

media, the systems at this facility are not year 2000 compliant and

will not be in operation after 1999. Accordingly, in designing its new

magnetic media systems to accept electronically filed returns only, the

IRS anticipates that it will no longer be able to accept returns filed

in the form currently used by some partnerships in the voluntary

program.

Hardship Waiver

The proposed regulations provide procedures for granting waivers of

the magnetic media filing requirements for one or more years in cases

of hardship. A determination of hardship will be based upon all of the

facts and circumstances. Some factors that will be considered in

granting waivers include the reasonableness of the incremental cost to

the partnership of complying with the magnetic media filing

requirements as well as temporary equipment breakdowns and destruction

of magnetic media filing equipment.

Penalties

The proposed regulations provide that if a partnership has more

than 100 partners and is required to file a partnership return, but

fails to file its Series 1065 form, accompanying Schedules K-1, and all

other related forms and schedules in the manner required, the

partnership is deemed to have failed to file correct information

[[Page 56880]]

returns for purposes of the information reporting penalty under section

6721. Penalties for failure to file correct information returns would

apply for each Schedule K-1 that is not filed using permissible

magnetic media.

Proposed Effective Dates

The IRS is currently focusing a significant portion of its

resources on the Year 2000 date change. In addition, the IRS is

developing new programs to accommodate the new Form 1065-B and

partnership returns filed with a foreign address on the Series 1065

form. Further, partnerships will have to update their processes and

technology to implement the electronic filing requirements.

Taking these factors into consideration, the proposed regulations

would delay the effective date for filing partnership returns on

magnetic media, and phase in the magnetic media filing of certain

partnership returns. Thus, the proposed regulations would be generally

effective for partnership returns for partnership taxable years ending

on or after December 31, 1999. However, electing large partnerships

under section 775 and partnerships using foreign addresses on their

Series 1065 forms would not be required to file their partnership

returns using magnetic media for taxable years ending before January 1,

2001.

Special Analyses

It is hereby certified that the regulations in this document will

not have a significant economic impact on a substantial number of small

entities. This certification is based on a determination that these

regulations will impose no additional reporting or recordkeeping

requirement and will prescribe only the method for filing partnership

returns that are already required to be filed under section 6031.

Accordingly, a Regulatory Flexibility Analysis under the Regulatory

Flexibility Act (5 U.S.C. chapter 6) is not required.

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.

Pursuant to section 7805(f) of the Internal Revenue Code, this

notice of proposed rulemaking will be submitted to the Chief Counsel

for Advocacy of the Small Business Administration for comment on its

impact on small business.

Comments and Public Hearing

Before these proposed regulations are adopted as final regulations,

consideration will be given to any comments that are submitted timely

to the IRS. All comments will be available for public inspection and

copying.

A public hearing has been scheduled for Wednesday, January 13,

1999, at 10 a.m. in Room 2615 of the Internal Revenue Building, 1111

Constitution Avenue, NW., Washington, DC. Due to building security

procedures, visitors must enter at the 10th Street entrance, located

between Constitution and Pennsylvania Avenues, NW. 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 15 minutes before the hearing

starts. For 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 that wish to present oral comments at the hearing must

submit comments and an outline of the topics to be discussed and the

time to be devoted to each topic by December 23, 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 author of these proposed regulations is Bridget E.

Finkenaur, Office of the Assistant Chief Counsel (Income Tax and

Accounting). However, other personnel from the IRS and Treasury

Department participated in the development of these proposed

regulations.

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.

Proposed Amendments to the Regulations

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

follows:

PART 1--INCOME TAXES

Paragraph 1. The authority citation for part 1 continues to read as

follows:

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

Par. 2. Section 1.6031(a)-1 as proposed to be added at 63 FR 3679

is amended by adding paragraph (e)(1)(iv) to read as follows:

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

* * * * *

(e) * * *

(1) * * *

(iv) Returns filed on magnetic media. Notwithstanding the

provisions of paragraphs (e)(1)(i) and (ii) of this section, the return

of a partnership that is required to be filed on magnetic media under

Sec. 301.6011-3 of this chapter must be filed at the Service Center

indicated in relevant Internal Revenue Service revenue procedures,

publications, forms, or instructions.

* * * * *

PART 301--PROCEDURE AND ADMINISTRATION

Par. 4. The authority citation for part 301 is amended by adding an

entry in numerical order to read as follows:

Authority: 26 U.S.C. 7805 * * * Section 301.6011-3 also issued

under 26 U.S.C. 6011; * * *

Par. 5. Section 301.6011-3 is added to read as follows:

Sec. 301.6011-3 Required use of magnetic media for partnership

returns.

(a) Partnership returns required on magnetic media. If a

partnership with more than 100 partners is required to file a

partnership return pursuant to Sec. 1.6031(a)-1 of this chapter, the

information required by the applicable forms and schedules must be

filed on magnetic media, except as otherwise provided in paragraph (b)

of this section. Returns filed on magnetic media must be made in

accordance with applicable revenue procedures or publications. In

prescribing revenue procedures or publications, the Commissioner may

determine that partnerships will be required to use any one form of

magnetic media filing. For example, the Commissioner may determine that

partnerships with more than 100 partners must file their partnership

returns electronically. In filing its return, a partnership must

register to participate in the magnetic media filing program in the

manner prescribed by the Internal Revenue Service in applicable revenue

procedures or publications.

[[Page 56881]]

(b) Waiver. The Commissioner may waive the requirements of this

section if hardship is shown in a request for waiver filed in

accordance with this paragraph (b). A determination of hardship will be

based upon all of the facts and circumstances. One factor in

determining hardship will be the reasonableness of the incremental cost

to the partnership of complying with the magnetic media filing

requirements. Other factors, such as equipment breakdowns or

destruction of magnetic media filing equipment, also may be considered.

A request for waiver must be made in accordance with applicable revenue

procedures or publications. The waiver will specify the type of

partnership return and the period to which it applies. The waiver will

also be subject to such terms and conditions regarding the method of

filing as may be prescribed by the Commissioner.

(c) Failure to file. If a partnership fails to file a partnership

return on magnetic media in the manner required and when required to do

so by this section, the partnership will be deemed to have failed to

file the return in the manner prescribed for purposes of the

information return penalty under section 6721. See Sec. 301.6724-

1(c)(3) for rules regarding the waiver of penalties for undue economic

hardship relating to filing returns on magnetic media.

(d) Meaning of terms. The following definitions apply for purposes

of this section:

(1) Magnetic media. The term magnetic media means any magnetic

media permitted under applicable regulations, revenue procedures, or

publications. These generally include magnetic tape, tape cartridge,

and diskette, as well as other media (such as electronic filing)

specifically permitted under the applicable regulations, procedures, or

publications.

(2) Partnership. The term partnership means a partnership as

defined in Sec. 1.761-1(a) of this chapter.

(3) Partner. The term partner means a member of a partnership as

defined in section 7701(a)(2).

(4) Partnership return. The term partnership return means a form in

Series 1065 (including Form 1065, U.S. Partnership Return of Income,

and Form 1065-B, U.S. Return of Income for Electing Large

Partnerships), along with the corresponding Schedules K-1 and all other

related forms and schedules that are required to be attached to the

Series 1065 form.

(5) Partnerships with more than 100 partners. A partnership has

more than 100 partners if, over the course of the partnership's taxable

year, the partnership had more than 100 partners, regardless of whether

a partner was a partner for the entire year or whether the partnership

had over 100 partners on any particular day in the year. For purposes

of this paragraph (d)(5), however, only those persons having a direct

interest in the partnership must be considered partners for purposes of

determining the number of partners during the partnership s taxable

year.

(e) Examples. The following examples illustrate the provisions of

paragraph (d)(5) of this section. In the examples, the partnerships

utilize the calendar year, and the taxable year in question is 1999:

Example 1. Partnership P had five general partners and 90

limited partners on January 1, 1999. On March 15, 1999, 10 more

limited partners acquired an interest in P. On September 30, 1999,

the 10 newest partners sold their individual partnership interests

to C, a corporation which was one of the original 90 limited

partners. On December 31, 1999, P had the same five general partners

and 90 limited partners it had on January 1, 1999. P had a total of

105 partners over the course of partnership taxable year 1999.

Therefore, P must file its 1999 partnership return on magnetic

media.

Example 2. Partnership Q is a general partnership that had 95

partners on January 1, 1999. On March 15, 1999, 10 partners sold

their individual partnership interests to corporation D, which was

not previously a partner in Q. On September 30, 1999, corporation D

sold one-half of its partnership interest in equal shares to five

individuals, who were not previously partners in Q. On December 31,

1999, Q had a total of 91 partners, and on no date in the year did Q

have more than 100 partners. Over the course of the year, however, Q

had 101 partners. Therefore, Q must file its 1999 partnership return

on magnetic media.

Example 3. Partnership G is a general partnership with 100

partners on January 1, 1999. There are no new partners added to G in

1999. One of G's partners, A, is a partnership with 53 partners. A

is one partner, regardless of the number of partners A has.

Therefore, G has 100 partners and is not required to file its 1999

partnership return on magnetic media.

(f) Effective date. In general, this section applies to partnership

returns for taxable years ending on or after December 31, 1999.

However, electing large partnerships under section 775 and partnerships

using foreign addresses on their Series 1065 forms are not required to

file using magnetic media for taxable years ending before January 1,

2001.

Par. 6. Section 301.6031-1 is revised to read as follows:

Sec. 301.6031-1 Return of partnership income.

For provisions relating to the requirement of returns of

partnership income, see Sec. 1.6031(a)-1 of this chapter. For

provisions relating to magnetic media filing of partnership returns,

see Sec. 301.6011-3.

Par. 7. Section 301.6721-1 is amended by removing the third,

fourth, and fifth sentences of paragraph (a)(2)(ii) and adding four

sentences in their place to read as follows:

Sec. 301.6721-1 Failure to file correct information returns.

(a) * * *

(2) * * *

(ii) * * * However, no penalty is imposed under paragraph (a)(1) of

this section solely by reason of any failure to comply with the

requirements of section 6011(e)(2), except to the extent that such a

failure occurs with respect to more than 250 information returns (the

250-threshold requirement) or in the case of a partnership with more

than 100 partners, more than 100 information returns (the 100-threshold

requirement) (collectively, the threshold requirements). Each Schedule

K-1 considered in applying the 100-threshold requirement will be

treated as a separate information return. These threshold requirements

apply separately to each type of information return required to be

filed. Further, these threshold requirements apply separately to

original and corrected returns. * * *

* * * * *

Michael P. Dolan,

Deputy Commissioner of Internal Revenue.

[FR Doc. 98-28264 Filed 10-22-98; 8:45 am]

BILLING CODE 4830-01-U