Partnership Returns Required on Magnetic Media

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 301

[TD 8843]

RIN 1545-AW14

Partnership Returns Required on Magnetic Media

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations relating to the

requirements for filing partnership returns on magnetic media. These

regulations reflect changes to the law made by the Taxpayer Relief Act

of 1997. These regulations affect partnerships with more than 100

partners.

DATES: Effective Date: These regulations are effective January 1, 2000.

Applicability Date: These regulations apply to partnership returns

for taxable years ending on or after December 31, 2000. However, the

regulations will not apply to electing large partnership returns under

section 775 or partnership returns with foreign addresses for taxable

years ending before January 1, 2001.

FOR FURTHER INFORMATION CONTACT: Bridget E. Finkenaur, (202) 622-4940

(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

This document contains amendments to the Regulations on Procedure

and Administration (26 CFR part 301) relating to filing partnership

returns on magnetic media under section 6011(e)(2). In addition, this

document contains conforming amendments to the Regulations on Procedure

and Administration (26 CFR part 301) relating to information reporting

penalties under section 6721.

A notice of proposed rulemaking (REG-102023-98) was published in

the Federal Register (63 FR 56878) on October 23, 1998. The public

hearing scheduled for January 13, 1999, was canceled in the Federal

Register (64 FR 1148) on January 8, 1998. No public hearing was

requested or held. Two written comments were received. After

consideration of the comments, the proposed regulations are adopted as

modified by this Treasury decision. The comments are discussed below.

Explanation of Revisions and Summary of Comments

Both commentators requested that the IRS and the Treasury

Department postpone the effective date of the regulations. The

commentators were concerned that, given the various manners and formats

that nominees use to submit partner information to publicly traded

partnerships, these partnerships would be unable to create computer

programs that would reformat the partner information in time to file

their 1999 tax returns on magnetic media. In addition, partnerships

required to file their returns on magnetic media beginning in 2000 will

be focusing their computer resources on ensuring that their computer

systems are year 2000 compliant. The commentators suggested that the

effective date of the regulations be postponed to take into account

these programming considerations.

[[Page 61503]]

In considering these comments, the IRS and the Treasury Department

have decided to postpone the general effective date of the regulations

for one year. This will allow partnerships additional time to develop

systems that accommodate IRS processing requirements and integrate

third party information while not interfering with efforts to ensure

year 2000 compliance. Therefore, the final regulations are generally

effective for taxable years ending on or after December 31, 2000.

However, the effective date for electing large partnerships and

partnerships using foreign addresses on their Series 1065 forms remains

the same as the proposed regulations. Accordingly, electing large

partnerships and partnerships using foreign addresses will not be

required to file their returns on magnetic media for taxable years

ending before January 1, 2001.

Although the general effective date of the regulations has been

postponed, on March 15, 2000, the IRS will begin accepting partnership

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

magnetic media. The magnetic media filing of partnership returns for

taxable years ending before December 31, 2000, is voluntary;

partnerships will not be penalized for submitting a partnership return

on paper for taxable years ending before this date. However,

partnerships with the capability of submitting their partnership tax

returns on magnetic media are encouraged to do so.

Partnerships with 100 or fewer partners also may voluntarily submit

partnership returns on magnetic media beginning on March 15, 2000.

These regulations do not require partnerships with 100 or fewer

partners to file their returns on magnetic media; therefore, such

partnerships will not be penalized for their failure to do so. In

addition, partnerships with 100 or fewer partners participating in the

magnetic media filing program may discontinue their participation at

any time.

One commentator suggested that the IRS and the Treasury Department

publish regulations under section 6031(c) to require nominees holding

partnership interests to submit partner information to partnerships in

the same manner and format that the IRS requires partnerships to file

their returns under Sec. 301.6011-3 of the regulations. However, by

postponing the effective date, it is anticipated that partnerships and

nominees will have adequate time to establish satisfactory guidelines

for sharing information. Accordingly, this comment has not been adopted

by the final regulations.

Finally, one commentator asked whether fiscal year and short year

returns will be required to be filed on magnetic media by the general

effective date. Again, because the IRS and the Treasury Department have

postponed the general effective date for one year, it is anticipated

that partnerships will be able to meet the systems requirements set

forth in IRS revenue procedures and other published guidance by the

effective date. However, due to issues relating to creation of the

system for accepting returns on magnetic media, the IRS will not be

able to accept fiscal and short year returns prior to the general

effective date. Therefore, partnerships that use a fiscal year and

partnerships that must file a short year return may not voluntarily

file their returns on magnetic media before January 1, 2001.

As indicated in the preamble to the proposed regulations, although

the regulations define magnetic media broadly, the Service currently

plans, in prescribed procedures for participation in the mandatory

magnetic media filing program, to require partnerships with more than

100 partners to file their partnership returns electronically.

Special Analyses

It has been determined that this Treasury decision is not a

significant regulatory action as defined in Executive Order 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 regulations, and because

these regulations do 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 Internal Revenue Code, the

notice of proposed rulemaking that preceded these regulations was

submitted to the Chief Counsel for Advocacy of the Small Business

Administration for comment on its impact on small business.

Drafting Information: The principal author of these 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 regulations.

List of Subjects in 26 CFR Part 301

Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income

taxes, Penalties, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

Accordingly, 26 CFR part 301 is amended as follows:

PART 301--PROCEDURE AND ADMINISTRATION

Paragraph 1. The authority citation for part 301 is amended by

adding an entry in numerical order to read in part as follows:

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

Section 301.6011-3 also issued under 26 U.S.C. 6011; * * *

Par. 2. 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.

(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

[[Page 61504]]

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 2000:

Example 1. Partnership P had five general partners and 90

limited partners on January 1, 2000. On March 15, 2000, 10 more

limited partners acquired an interest in P. On September 29, 2000,

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, 2000, P had the same five general partners

and 90 limited partners it had on January 1, 2000. P had a total of

105 partners over the course of partnership taxable year 2000.

Therefore, P must file its 2000 partnership return on magnetic

media.

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

partners on January 1, 2000. On March 15, 2000, 10 partners sold

their individual partnership interests to corporation D, which was

not previously a partner in Q. On September 29, 2000, 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,

2000, 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 2000 partnership return

on magnetic media.

Example 3. Partnership G is a general partnership with 100

partners on January 1, 2000. There are no new partners added to G in

2000. 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 2000

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, 2000.

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. 3. 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. * * *

* * * * *

Approved: October 29, 1999.

Robert E. Wenzel,

Deputy Commissioner of Internal Revenue.

Jonathan Talisman,

Acting Assistant Secretary of the Treasury.

[FR Doc. 99-29087 Filed 11-10-99; 8:45 am]

BILLING CODE 4830-01-U