The IRS issued proposed regulations addressing how partnerships and their partners adjust tax attributes to take into account partnership adjustments under the new centralized partnership audit regime (REG-118067-17). The proposed rules supplement proposed regulations issued June 14, 2017 (REG-136118-15), and provide related amendments to Regs. Secs. 1.704-1, 1.705-1, and 1.706-4.
The centralized audit regime was enacted by the Bipartisan Budget Act of 2015, P.L. 114-74, and amended by the Protecting Americans From Tax Hikes Act of 2015, P.L. 114-113, to replace the former partnership audit procedures implemented by the Tax Equity and Fiscal Responsibility Act of 1982, P.L. 97-248. Under the new procedures, tax is generally determined, assessed, and collected at the partnership level.
The new proposed rules address how and when partnerships and their partners adjust tax attributes to take into account partnership adjustments under both Secs. 6225 and 6226. The IRS says it took into consideration comments it received in response to the 2017 proposed regulations when drafting the new proposed regulations.
In the preamble to the proposed regulations, the IRS states that the proposed rules are consistent with the policy described in the Joint Committee on Taxation's "General Explanation of Tax Legislation Enacted in 2015" (JCS-1-16), which explained that "[u]nder the centralized partnership audit regime, the flowthrough nature of the partnership under subchapter K of the Code is unchanged, but the partnership is treated as a point of collection of underpayments that would otherwise be the responsibility of partners."
The preamble to the 2017 proposed regulations announced that Treasury and the IRS intended to issue additional rules providing for adjustments to the basis of partnership property and book value of any partnership property if the partnership adjustment is a change to an item of gain, loss, amortization, or depreciation. When finalized, the new proposed regulations will provide this guidance.
The proposed regulations cover:
- How to adjust specific tax attributes;
- Allocation of notional items;
- Successor rules for purposes of adjusting specified tax attributes;
- Adjustments to specified tax attributes in certain circumstances;
- Special rules for outside basis;
- Accounting and allocation of partnership Sec. 705(a)(2)(B) expenditures;
- Partnership adjustments that do not result in an imputed underpayment;
- How partnership adjustments are taken into account if the partnership elects under Sec. 6226(a) not to have the imputed underpayment rules apply;
- General mechanics of Sec. 704(b);
- The timing of adjustments of partnership-level tax attributes; and
- The effect of a payment by a passthrough partner.