Guidance on Special Enforcement Matters Under the Centralized Partnership Audit Regime

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Guidance on Special Enforcement Matters Under the Centralized Partnership Audit

Regime

Notice 2019-06

SECTION 1. PURPOSE

This notice informs taxpayers that the Department of the Treasury (Treasury

Department) and the Internal Revenue Service (IRS) intend to propose regulations

addressing certain special enforcement matters under section 6241(11). This notice

also requests comments regarding other special enforcement matters that could be the

subject of future proposed regulations.

SECTION 2. BACKGROUND

Section 206(l) of the Technical Corrections Act of 2018, contained in Title II of

Division U of the Consolidated Appropriations Act of 2018, Public Law 115-141 (TTCA),

added section 6241(11) to the Internal Revenue Code (Code), regarding the treatment

of special enforcement matters. Under section 6241(11), in the case of partnership-

related items involving special enforcement matters, the Secretary may prescribe

regulations providing that the centralized partnership audit regime (or any portion

thereof) does not apply to such items and that such items are subject to special rules 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 partnership-partner or S corporation partner to furnish statements

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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

ments 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.

Section 6221(a) requires that any adjustment to a partnership-related item shall

be determined at the partnership level under the centralized partnership audit regime,

except to the extent otherwise provided in subchapter C of chapter 63 of the Code. A

partnership-related item is defined in section 6241(2) as any item or amount with

respect to the partnership which is relevant in determining the tax liability of any person

under chapter 1 of the Code, including any distributive share of such an item or amount.

Certain partnerships may elect out of the centralized partnership audit regime

under section 6221(b). A partnership is eligible to make an election out if it has 100 or

fewer partners for the taxable year, each partner in the partnership is an eligible partner,

the election is timely made in the manner prescribed by the Secretary, and the

partnership notifies its partners of the election in the manner prescribed by the

Secretary. The number of partners is determined by counting the number of statements

required to be furnished by the partnership under section 6031(b) and the number of

statements required to be furnished by any S corporation partners of the partnership.

Eligible partners are prescribed in section 6221(b)(1)(C) and Treas. Reg. §301.6221(b)-

1(b)(3)(i), and include C corporations.

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A qualified subchapter S subsidiary (QSub) is defined in section 1361(b)(3) as a

domestic corporation that has 100 percent of its stock held by an S corporation and for

which an election has been made to treat it as a QSub

ration partners of the partnership.

Eligible partners are prescribed in section 6221(b)(1)(C) and Treas. Reg. §301.6221(b)-

1(b)(3)(i), and include C corporations.

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A qualified subchapter S subsidiary (QSub) is defined in section 1361(b)(3) as a

domestic corporation that has 100 percent of its stock held by an S corporation and for

which an election has been made to treat it as a QSub. Except as provided by

regulation, a QSub is not treated as a corporation separate from its S corporation

shareholder and its assets, liabilities, and items of income, deduction and credit are

treated as the assets, liabilities, and items of its S corporation shareholder for the

taxable year. Section 1361(b)(3)(A). For purposes of the Code, a C corporation is

defined under section 1361(a)(2) as a corporation which is not an S corporation.

Because a QSub is not an S corporation, it is a C corporation (as defined in section

1361(a)(2)). Because a QSub is a C corporation, it is an eligible partner under section

6221(b).

SECTION 3. GUIDANCE TO BE ISSUED

The Treasury Department and the IRS intend to propose regulations under

section 6241(11)(B)(vi) regarding two matters that the Secretary has determined

present special enforcement considerations. The first matter concerns certain situations

in which an adjustment during an examination of a person other than the partnership

requires a change to a partnership-related item. Specifically, the regulations will allow

the IRS to effectively and efficiently focus on a single partner or a small group of

partners with respect to a limited set of partnership-related items without unduly

burdening the partnership and avoiding procedural concerns about the appropriate level

at which such items must be examined. Consequently, the regulations will provide that

the IRS may determine that the centralized partnership audit regime does not apply to

adjustments to partnership-related items when the following conditions are met:

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ited set of partnership-related items without unduly

burdening the partnership and avoiding procedural concerns about the appropriate level

at which such items must be examined. Consequently, the regulations will provide that

the IRS may determine that the centralized partnership audit regime does not apply to

adjustments to partnership-related items when the following conditions are met:

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(1) The examination being conducted is of a person other than the partnership;

(2) A partnership-related item must be adjusted, or a determination regarding a

partnership-related item must be made, as part of an adjustment to a non-partnership-

related item of the person whose return is being examined; and

(3) The treatment of the partnership-related item on the return of the partnership

under section 6031(b) or in the partnership’s books and records was based in whole or

in part on information provided by, or under the control of, the person whose return is

being examined.

The second matter concerns situations where a QSub is a partner in a

partnership. The regulations will provide that this situation presents special

enforcement considerations because partnership structures with QSubs as partners

could have far more than 100 ultimate partners, including many thousands, and still

potentially elect out of the centralized partnership audit regime. Allowing such a large

partnership to elect out of the centralized partnership audit regime would give rise to

significant enforcement concerns for the IRS and frustrate the efficiencies introduced by

the centralized partnership regime. As a result, the regulations will provide that section

6221(b) generally does not apply to a partnership with a QSub as a partner. The

regulations will also provide, however, that if a partnership meets certain requirements

as set forth in the regulations, the partnership may make an election under section

6221(b)

frustrate the efficiencies introduced by

the centralized partnership regime. As a result, the regulations will provide that section

6221(b) generally does not apply to a partnership with a QSub as a partner. The

regulations will also provide, however, that if a partnership meets certain requirements

as set forth in the regulations, the partnership may make an election under section

6221(b). Specifically, the regulations will apply a rule similar to the rules for S

corporations under section 6221(b)(2)(A). The regulations will also provide that for

purposes of determining whether a partnership has 100 or fewer partners for the taxable

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year for purposes of the election under section 6221(b), the partnership must include (1)

the statement the partnership is required to furnish to the QSub partner under section

6031(b) and (2) each statement the S corporation that holds 100 percent of the stock of

the QSub partner is required to furnish to its shareholders under section 6037(b).

The Treasury Department and the IRS intend to issue proposed and final

regulations prior to eighteen months after enactment of the TTCA such that the intended

regulations described in this section of the Notice may be applicable to all partnership

taxable years beginning after December 31, 2017. Section 7805(b)(2). If final

regulations are not issued prior to eighteen months after enactment of the TTCA, the

Treasury Department and the IRS intend the regulations to be applicable to partnership

taxable years beginning after December 31, 2017 and ending after the date this Notice

is issued to the public. Section 7805(b)(1)(C).

SECTION 4. REQUEST FOR COMMENTS

The Treasury Department and the IRS request comments on the intended

regulations described in section 3 of this notice and whether any other matters might

present special enforcement matters under section 6241(11). Comments must be

received by February 22, 2019.

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d ending after the date this Notice

is issued to the public. Section 7805(b)(1)(C).

SECTION 4. REQUEST FOR COMMENTS

The Treasury Department and the IRS request comments on the intended

regulations described in section 3 of this notice and whether any other matters might

present special enforcement matters under section 6241(11). Comments must be

received by February 22, 2019.

SECTION 5. ADDRESS TO SEND COMMENTS

Taxpayers may submit comments electronically via the Federal eRulemaking

Portal at www.regulations.gov (type IRS-2018-0044 in the search field on the

regulations.gov homepage to find this notice and submit comments). All

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recommendations for guidance submitted by the public in response to this notice will be

available for public inspection and copying in their entirety.

Alternatively, taxpayers may mail comments to:

Internal Revenue Service

Attn: CC:PA:LPD:PR (Notice 2019-06) Room 5203

P.O. Box 7604

Ben Franklin Station

Washington, D.C. 20044

or hand deliver comments Monday through Friday between the hours of 8 a.m. and 4

p.m. to:

Courier's Desk

Internal Revenue Service

Attn: CC:PA:LPD:PR (Notice 2019-06)

1111 Constitution Avenue, N.W.

Washington, D.C. 20224

SECTION 6. DRAFTING INFORMATION

The principal author of this notice is Jennifer M. Black of the Office of the

Associate Chief Counsel (Procedure and Administration). For further information

regarding this notice, contact Ms. Black at (202) 317-6834 (not a toll-free call).