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Wiley Rein Tax Lawyer Michael Grace Discusses Additional Partnership Audit Regulations
Michael J. Grace, consulting counsel in Wiley Rein’s Tax and Corporate practices, was quoted in the February 8 issues of the Wolters Kluwer Federal Tax Weekly and Standard Federal Tax Reports regarding additional guidelines for partnership audits proposed by the Treasury/IRS under the Centralized Partnership Audit Regime. The article explained that the final regulations will prescribe how and when partnerships and their partners will adjust tax attributes to take into account partnerships’ payment adjustments under the new Regime.
“These proposed regulations layer additional complexity onto two sets of already complicated regulations: partnership allocations under Code Sec. 704(b) and previously issued regulations interpreting the Centralized Partnership Audit Regime,” said Mr. Grace. Under Code Sec. 704(b), tax professionals will have to differentiate between allocations of items which can have substantial economic effect and allocations that cannot have substantial economic effect, Mr. Grace told Wolters Kluwer.
Enacted by the Bipartisan Budget Act of 2015 (BBA), the new Centralized Partnership Audit Regime governs most IRS audits of partnership returns filed for 2018 and thereafter. Proposed regulations were initially issued in June 2017, with follow-up guidance in November and December 2017.
The proposed regulations reflect two aspects of the Centralized Partnership Audit Regime that depart from longstanding partnership tax conventions. First, the partnership itself, rather than the partners, generally must pay the IRS any “deficiency” that results from the IRS’ auditing the partnership. Second, a partnership generally will make any such payment in a later year than the tax year the IRS examined; traditionally, a partnership both pays a cost or expense and allocates it among the partners the same tax year. To address these unique aspects of the new Regime, the proposed regulations amend longstanding other regulations in unprecedented ways.
Mr. Grace observed that “Specified Tax Attributes” must be adjusted under these regulations for some but not all purposes under the Centralized Partnership Audit Regime, and therefore tax professionals will continuously have to determine when and how the regulations should be applied.
Further commenting on the specific aspects of the proposed regulations, Mr. Grace noted:
- Code Sec. 6226(b)(3) requires that “any tax attribute” be appropriately adjusted when a partnership has elected to “push out” an imputed underpayment to its partners.
- The “substantial economic effect” of an allocation, as determined under Code Sec. 704(b), can be substantial “only if” an item is allocated in a specific way, which departs from how this requirement has traditionally been handled.
- The question of how “successors” will be compensated under Code Sec. 704(b) will need to be explored in instances when a “reviewed year partner,” to whom a payment generally would be allocated, is no longer around.