Treasury Decision 8808 - Modifications and Additions to the Unified Partnership Audit Procedures
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Treasury Decision 8808 - Modifications and Additions to the Unified Partnership Audit Procedures


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Par. 3. Section 301.6103(j)(1)–1T is (xix) Principal industrial activity code, Approved December 29, 1998.added to read as follows: including the business description;Donald C. Lubick,(xx) Total number of documents and§301.6103(j)(1)–1T Disclosure of return Assistant Secretary of the total amount reported on the Forminformation to officers and employees of the Treasury.1096 transmitting Forms 1099-MISC;the Department of Commerce for certain(xxi) Form 941 indicator and business(Filed by the Office of the Federal Register on Janu-statistical purposes and related activitiesaddress on Schedule C; and ary 22, 1999, 8:45 a.m., and published in the issue of(temporary).(xxii) Consolidated return indicator. the Federal Register for January 25, 1999, 64 F.R.3669)(b)(4) and (5)[Reserved]. For further(a) through (b)(2)[Reserved]. For fur-guidance, see §301.6103(j)(1)–1(b)(4)ther guidance, see §301.6103(j)(1)–1(a)and (5).through (b)(2).(b)(6)(i) Officers or employees of the Section 6221.—Tax Treatment(b)(3) Officers or employees of the In-Internal Revenue Service will disclose the Determined at Partnership Levelternal Revenue Service will disclose thefollowing return information (but not in-following business related return informa-26 CFR 6221–1T: Tax treatment determined atcluding return information described intion reflected on the return of a taxpayerpartnership level (Temporary)section 6103(o)(2)) reflected on the returnto officers and employees of the ...



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Section 6221.—Tax Treatment Determined at Partnership Level
26 CFR 6221–1T: Tax treatment determined at partnership level (Temporary)
T.D. 8808 DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 301
Modifications and Additions to the Unified Partnership Audit Procedures
AGENCY: InternalRevenue Service, Treasury.
ACTION: Final and temporary regula-tions.
SUMMARY: Thisdocument contains final and temporary regulations relating to the unified partnership audit procedures added to the Internal Revenue Code by the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA).The unified part-nership audit procedures generally pro-vide administrative rules for the auditing of partnership items at the partnership level. Theseregulations modify the exist-ing unified partnership audit procedures to comply with the Taxpayer Relief Act of 1997 (1997 Act) and the Internal Revenue Service Restructuring and Reform Act of 1998 (1998 Act), and add new regulations to administer the new unified partnership audit provisions added by the 1997 Act. In general, the text of these temporary regulations also serves as the text of the proposed regulations set forth in the no-tice of proposed rulemaking on this sub-ject in REG–106564–98, on page 53.
DATES:Effective Date:These regula-tions are effective January 26, 1999.
FOR FURTHER INFORMATION CON-be brought by the partner in a refund ac-tion 6229(f)(2).Moreover, the temporary TACT: RobertG. Honigman, (202) 622-tion subsequent to the partnership levelregulations clarify that the partner re-3050 (not a toll-free number).determination. Inorder to minimize themains subject to the unified audit proce-burden on individual partners to defenddures regarding the nonsettled items. SUPPLEMENTARY INFORMATION: themselves by bringing their own refund Tax Matters Partner As ADebtor In suits, the temporary regulations incorpo-Backg round Bankruptcy rate a large number of defenses at the partnership level.The majority of a part-This document contains temporary Section 6229(b)(1)(B) provides that the ner’s defenses to the imposition of penal-amendments to the Procedure and Admin-statute of limitations under section 6229 ties are not specific to a particular partner, istration Regulations (26 CFR Part 301) is extended with respect to all partners in but can be determined by reference to the relating to the unified partnership audit the partnership by an agreement entered activities of the partnership.The applica-procedures found in sections 6221 through into between the tax matters partner bility of these defenses may be resolved at 6233 of the Internal Revenue Code (Code) (TMP) and the Service.Treas. Reg. the partnership level during the partner-and final regulations pertaining to the ap-§301.6231(a)(7)–1(l)(1)(iv) (1996) and ship proceeding.In addition, the tempo-plicable dates of §301.6231(a)(7)– Temp. Treas. Reg. §301.6231(c)–7T(a) rary regulations modify the computational 1T(p)(2) and §301.6231(a)(7)–1T(r)(1). (1987), however, provide that upon the adjustment rules to allow the Service to Sections 1231 through 1243 of the Tax-filing of a petition naming a partner as a assess penalties under those procedures. payer Relief Act of 1997, Public Law debtor in a bankruptcy proceeding, the 105–34, 111 Stat. 788, modified some of partner/debtor’s partnership items convert Partial Settlements the existing procedures and added certain to nonpartnership items, and if the part-new rules.Section 3507 of the Internal The period for assessing tax with re-ner/debtor was the TMP, that status termi-Revenue Service Restructuring and Re-spect to partnership items generally is thenates. Theserules were promulgated to form Act of 1998, Public Law 105–206,longer of the periods provided by sectionavoid the complications that the auto-112 Stat. 685, modified section 6231.6229 or section 6501.For partnershipmatic stay provision contained in 11 This document modifies existing regula-items that convert to nonpartnershipU.S.C. 362(a)(8) would have on a unified tions that, because of the 1997 Act or theitems, section 6229(f) provides that thepartnership audit.As a result, if a TMP 1998 Act, no longer reflect current law.period for assessing tax shall not expireexecuted a consent to extend the statute of before the date which is one year after thelimitations during a period when the TMP Explanation of Provisions date that the items became nonpartnershipwas a debtor in a bankruptcy proceeding, items. Section6231(b)(1)(C) providesthe consent would not be binding on the Penalties Determined At The Partnership that the partnership items of a partner forother partners.Under the regulations, the Level a partnership taxable year become non-person signing the agreement was ineligi-Before the 1997 Act, the Internal Rev-partnership items as of the date the part-ble to act as the TMP and extend the enue Service (Service) could imposener enters into a settlement agreementstatute as to all partners. penalties on a partner only through the ap-with the Service with respect to suchTo resolve the uncertainty under prior plication of the deficiency proceduresitems. Insome audits, however, the tax-law in the situation where a TMP executes after the completion of a partnership levelpayer and the Service will enter into a set-an agreement extending the statute of lim-proceeding. Forcingthe Service to opentlement agreement regarding some, butitations as to all partners while, unknown deficiency proceedings against the indi-not all, of the taxpayer’s partnershipto the Service, the TMP is a debtor in a vidual partners was inconsistent with theitems. The1997 Act added a special rulebankruptcy proceeding, the 1997 Act pro-efficiency goal of the unified partnershipfor these partial settlement agreements invides that the Service may rely on the ex-audit rules.The 1997 Act cured this prob-section 6229(f)(2), providing that the pe-ecuted statute extension agreement unless lem by providing that, for partnershipsriod for assessing any tax attributable toit is notified of the TMP’s bankruptcy under audit for taxable years ending afterthe settled items is determined as if theproceeding. Ifthe Service is not notified August 5, 1997, partnership level pro-partial settlement had not been executed.of the TMP’s bankruptcy proceeding, ceedings include the determination of ap-Thus, the limitations period applicable tostatute extensions granted by the TMP are plicable penalties at the partnership level.the last partnership item to be resolved forbinding on all partners in the partnership. Partners now may raise any partner levelthe partnership’s taxable year under auditThe temporary regulations provide a defenses to the imposition of penaltiesis controlling with respect to all disputedmechanism for the TMP, or other partners, only in a subsequent refund action.partnership items (including settled items)to provide notice to the Service that the Consistent with these statutoryfor such partnership taxable year.TMP is a debtor in a bankruptcy proceed-changes, the temporary regulations man-The temporary regulations state that theing and therefore is ineligible to serve as date that the partnership’s penalty de-one year period for assessing partnershipTMP and extend the statute under section fenses are to be resolved during the part-items that convert to nonpartnership items6229. Thismechanism is derived from nership proceeding.Nevertheless, anyapplicable to settlement agreements underexisting regulations that provide guidance individual defenses that a partner maysection 6231(b)(1)(C) does not apply toon how to notify the Service of informa-have to the imposition of a penalty maypartial settlement agreements under sec-tion concerning a partnership’s partners. March 8, 19991999–10 I.R.B.
Small Partnership ExceptionPartner level defenses are limited to those(Passthroughs & Special Industries), and William A. Heard, Office of the Assistantthat are personal to the partner or are de-The 1997 Act amended the small part-Chief Counsel (Field Service).However, pendantupon the partner’s separate re-nership exception to the unified partner-other personnel from the Service andturn, and cannot be determined at the ship audit procedures found in section Treasury Department participated in theirpartnership level.Examples of these de-6231. Formerly,in order to qualify for development. terminationsare: whether any applicable the small partnership exception, the part-threshold underpayment of tax has been nership had to have 10 or fewer partners* * * * * met with respect to the partner or whether at all times during the tax year, each of the partner has met the criteria of section Adoption o f Amendments to the whom was a natural person (other than a 6664(b)(penalties applicable only where Regulations nonresident alien) or an estate, and for return is filed), or section 6664(c)(1)(rea-which each partner’s share of each part-Accordingly, 26 CFR part 301 issonable cause exception) subject to part-nership item was the same as that part-amended as follows:nership level determinations as to the ap-ner’s share of every other partnership plicability of section 6664(c)(2). PART 301—PROCEDURE AND item. The1997 Act amended the small ADMINISTRATION partnership exception by allowing part-* * * * * nerships to qualify for the exception even Par. 3. Amend §301.6223(c)–1T by Paragraph 1.The authority citation for if they have a C corporation for a partner adding a sentence to the end of paragraph part 301 continues to read in part as fol-or specially allocate some partnership lows: (c)to read as follows: items. Thetemporary regulations modify Authority: 26U.S.C. 7805 * * * the existing regulations interpreting the§301.6223(c)–1T Additional information Par. 2.Amend §301.6221–1T by: small partnership exception to take ac-regarding partners furnished to the 1. Redesignating paragraph (c) as para-count of this change in the law.Service (temporary). graph (e). 2. Adding new paragraphs (c) and (d). Effective Date* * * * * The additions read as follows: (c) * * * Furthermore, reference to a These final and temporary regulations §301.6221–1T Tax treatment determinedprior general notification to the Service are applicable January 26, 1999.In ac-at partnership level (temporary).that a partner who would otherwise be the cordance with section 7805(e)(2), the tax matters partner is a debtor in a bank-temporary regulations contained herein * * * * * ruptcy proceeding or has had a receiver shall expire January 25, 2002. (c)Penalties determined at partner-appointed for him in a receivership pro-Special Analyses ship level (partnership taxable years end-ceeding is not sufficient unless a copy of ing after August 5, 1997).Any penalty,the notification document referred to is at-It has been determined that this Trea-addition to tax, or additional amount thattached to the statement. sury decision is not a significant regula-relates to an adjustment to a partnership tory action as defined in EO 12866. * * * * * item, shall be determined at the partner-Therefore, a regulatory assessment is not ship level.Partner level defenses to such Par. 4. Amend §301.6224(c)–3T by: required. Italso has been determined that items can only be asserted through refund 1. Revisingthe section heading. section 533(b) of the Administrative Pro-actions following assessment and pay-2. Revisingparagraphs (b), (c)(3)(ii), cedures Act (5 U.S.C. chapter 5) does not ment. Assessmentof any penalty, addi-and (d),Example (1). apply to these regulations.For the applic-tion to tax, or additional amount that re-The revisions read as follows: ability of the Regulatory Flexibility Act (5 lates to an adjustment to a partnership U.S.C. chapter 6) refer to the Special §301.6224(c)–3T Consistent settlement item shall be made based on partnership Analyses section of the preamble to the terms (temporary). level determinations.Partnership level cross reference notice of proposed rule-determinations include all the legal and making published in the Proposed Rules* * * * * factual determinations that underlie the section in this issue of theFederal Regis-determination of any penalty, addition to(b)Requi rements for consistent settle-ter.Pursuant to section 7805(f) of the In-tax, or additional amount, other than part-ment term s—(1).In generalConsistent ternal Revenue Code, these final and tem-ner level defenses specified in paragraphsettlement terms are those based on the porary regulations will be submitted to (d) of this section.same determinations with respect to part-the Chief Counsel for Advocacy of the (d)Partner level defenses .Partner nershipitems. However,consistent set-Small Business Administration for com-level defenses to any penalty, addition totlement terms also may include partner-ment on their impact on small business. tax, or additional amount that relates to anship level determinations of any penalty, adjustment to a partnership item, may notaddition to tax, or additional amount that Drafting Information be asserted in the partnership level pro-relates to partnership items.Settlements The principal authors of these tempo-ceeding, but may be asserted through sep-with respect to partnership items shall be rary regulations are Robert G. Honigman,arate refund actions following assessmentself-contained; thus, a concession by one Office of the Assistant Chief Counseland payment.See section 6230(c)(4).party with respect to a partnership item 1999–10 I.R.B.March 8, 1999
Example (1) .The Service seeks to disallow a may not be based upon a concession by§301.6229(f)–1T Special rule for partial $100,000 loss reported by Partnership P.The Ser-another party with respect to any item thatsettlement ag reements (temporary). vice agrees to a settlement with X, a partner in P, in is not a partnership item other than any which the Service allows 60 percent of the loss, ac-(a)In general .If a partner enters into a penalty, addition to tax, or additional cepts the treatment of all other partnership items on settlement agreement with the Service amount that relates to an adjustment to athe partnership return, and imposes a penalty for with respect to the treatment of some of negligence related to the loss disallowance.Partner partnership item.Consistent agreements, Y, which owns a 10 percent interest in the partner-the partnership items in dispute for a part-whether comprehensive or partial, must nership taxable year, but other partnership ship, requests settlement terms which are consistent be identical to the original settlement (that with the settlement made between X and the Ser-items for such year remain in dispute, the is, the settlement upon which the offered vice. Theitems are partnership items (and a related period of limitations for assessing any tax settlement terms are based).A consistent penalty) for X immediately before X enters into the attributable to the settled items shall be agreement must mirror the original settle-settlement agreement and are partnership items (and determined as if such agreement had not a related penalty) for Y at the time of the request. ment and may not be limited to selected The Service must offer Y settlement terms allowingbeen entered into. items from the original settlement.Once a $6,000 loss, a negligence penalty on the $4,000 (b)Other itemsremaining in dispute. a partner has settled a partnership item, or disallowance, and otherwise reflecting the treatment Pursuant to section 6226(c), a partner is a penalty, addition to tax, or additional of partnership items on the partnership return. party to a partnership level judicial pro-amount that relates to an adjustment to a ceeding with respect to partnership items. * * * * * partnership item, that partner may not When a partner settles partnership items, subsequently request settlement terms Par. 5.Add §301.6229(b)–2T to read the settled partnership items convert to consistent with a settlement that contains as follows: nonpartnership items under section the previously settled item.The require-6231(b)(1)(C) and will not be subject to ment for consistent settlement terms ap-§301.6229(b)–2T Special rule with any future or pending partnership level plies only if—respect to debtors inTitle 11 cases proceeding pursuant to section 6226(d)-(i) The items were partnership items(temporary). (1). Theremaining unsettled partnership (and any related penalty, addition to tax, (a).In generalitems, however, will remain subject to de-Notwithstanding any or additional amount) for the partner en-other law or rule of law, if an agreement istermination under partnership level ad-tering into the original settlement imme-entered into under section 6229(b)(1)(B),ministrative and judicial procedures. diately before the original settlement; and and the agreement is signed by a personConsequently, any remaining unsettled (ii) The items are partnership items items will be deemed to remain in dis-who would be the tax matters partner but (and any related penalty, addition to tax, pute. Thus,the period for assessing set-for the fact that, at the time that the agree-or additional amount) for the partner re-tled items will be governed by the period ment is executed, the person is a debtor in questing the consistent settlement at the for assessing the remaining unsettled a bankruptcy proceeding under Title 11 of time the partner files the request. items. the United States Code, such agreement (2)Effect of consistent agreement. Par. 7.Amend §301.6231(a)(1)–1T by: shall be binding on all partners in the Consistent settlement terms are reflected 1. Revising the first two sentences of partnership unless the Service has been in a consistent agreement.A consistent paragraph (a)(1). notified of the bankruptcy proceeding in agreement is not a settlement agreement 2. Removing paragraph (a)(3). accordance with paragraph (b) of this which gives rise to further consistent set-3. Redesignating paragraph (a)(4) as section. tlement rights because it is required to be paragraph (a)(3). (b)Procedu resfor notifying the Ser-given without volitional agreement of the The revision reads as follows: vice of a partne r’s bankruptcy proceed-Secretary. Therefore,a consistent agree-ing.(1) The Service shall be notified of ment required to be offered to a request-§301.6231(a)(1)–1T Exception for small the bankruptcy proceeding of the tax mat-ing taxpayer is not a settlement agreement partnerships (temporary). ters partner in accordance with the proce-under section 6224(c)(2) of the Internal dures set forth in §301.6223(c)–1T. Revenue Code, or paragraph (c)(3) of this(a) ** * section which starts a new period for re-(2) Inaddition to the information spec-(1) “r.10 or fewe” The“10 or fewer” questing consistent settlement terms.For ifiedin §301.6223(c)–1T, notification thatlimitation described in section 6231(a)-all other purposes of the Internal Revenuea person is (or was) a debtor in a bank-(1)(B)(i) is applied to the number of nat-Code, however, (e.g., binding effect underruptcy proceeding shall include the dateural persons (other than nonresident section 6224(c)(1), and conversion tothe bankruptcy proceeding was filed, thealiens), C corporations, and estates of de-nonpartnership items under sectionname and address of the court in whichceased partners that were partners at any 6231(b)(1)(C)) a consistent agreement isthe bankruptcy proceeding exists (or tookone time during the partnership taxable treated as a settlement, the caption of the bankruptcy pro-year. Thus,for example, a partnership (c) ** *ceeding (including the docket number orthat at no time during the taxable year had (3) ** *other identification number used by themore than 10 partners may be treated as a (ii) The60th day after the day oncourt), and the status of the proceeding assmall partnership even if, because of which the settlement agreement was en-of the date of notification.transfers of interests in the partnership, 11 tered into.Par. 6.Add §301.6229(f)–1T to read asor more natural persons, C corporations, (d) ** *follows: orestates of deceased partners owned in-
March 8, 1999
terests in the partnership for some portionwhere the Service otherwise accepts alllargest-profits-interest rule of §301.6231(a)-of the taxable year. * * *nonpartnership items (including, for ex-(7)–1(m)(2), the Commissioner will se-ample, nonpartnership item componentslect a partner (including a general or lim-* * * * * of carryover amounts) as reported.ited partner) as the tax matters partner in (2) Changes in a partner’s tax liabilityaccordance with the criteria set forth in Par. 8.Amend §301.6231(a)(6)–1T by: with respect to affected items that require§301.6231(a)(7)–1(q). TheCommis-1. Revising paragraph (a). partner level determinations (such as asioner will notify, within 30 days of the 2. Removing paragraph (c). partner’s at-risk amount to the extent itselection, the partner selected, the part-The revision reads as follows: depends upon the source from which thenership, and all partners required to re-§301.6231(a)(6)–1T Computationalpartner obtained the funds that the partner ceive notice under section 6223(a), effec-adjustments (temporary).contributed to the partnership) are compu-tive as of the date specified in the notice. tational adjustments subject to deficiency For regulations applicable before July 22, (a)In general .A change in the tax lia-procedures. Nevertheless,any penalty, 1998, see §301.6231(a)(7)–1(p)(2). bility of a partner to properly reflect the addition to tax, or additional amount that (p)(3) through (q) [Reserved]. For fur-treatment of a partnership item under sub-relates to an adjustment to a partnership ther guidance, see §301.6231(a)(7)– chapter C of chapter 63 of the Internal item may be directly assessed following a 1(p)(3) through (q). Revenue Code is made through a compu-partnership proceeding, based on determi-(r)Notification of partnership—(1)In tational adjustment.A computational ad-nations in that proceeding, regardless of general .If the Commissioner selects a justment includes a change in tax liability whether partner level determinations are tax matters partner under the provisions that reflects a change in an affected item required. of §301.6231(a)(7)–1(p)(1) or (3)(i), the where that change is necessary to prop-Commissioner will notify, within 30 days erly reflect the treatment of a partnership* * * * * of the selection, the partner selected, the item, or any penalty, addition to tax, or Par. 9. Amend §301.6231(a)(7)–1 bypartnership, and all partners required to additional amount that relates to an ad-adding a sentence at the end of paragraphsreceive notice under section 6223(a), ef-justment to a partnership item.However, (p)(2) and (r)(1) to read as follows: fective as of the date specified in the no-if a change in a partner’s tax liability can-tice. Forregulations applicable before not be made without making one or more §301.6231(a)(7)–1 Designation or July 22, 1998, see §301.6231(a)(7)– partner level determinations, that portion selection of tax matters partner. 1(r)(1). of the change in tax liability attributable (r)(2) [Reserved].For further guid-* * * * * to the partner level determinations shall ance, see §301.6231(a)(7)–1(r)(2). be made under the provisions of subchap-(p) * * * ter B of chapter 63 of the Internal Rev-(2) * * * For regulations applicable onRobert E. Wenzel, enue Code (relating to deficiency proce-or after January 26, 1999 (reflecting statu-Deputy Commissioner of dures), except for any penalty, addition to tory changes made effective July 22,Internal Revenue Service. tax, or additional amount which relates to 1998) and before January 25, 2002, see an adjustment to a partnership item. §301.6231(a)(7)–1T(p)(2). ApprovedDecember 30, 1998. (1) Changes in a partner’s tax liability with respect to affected items that do not* * * * * Donald C. Lubick, require partner level determinations (such Assistant Sec retary of (r) * * *(1) * * * For regulations ap-as the threshold amount of medical de-the Treasury. plicable on or afterJanuary 26, 1999 (re-ductions under section 213 that changes flecting statutory changes made effective (Filed by the Office of the Federal Register on Janu-as the result of determinations made at the July 22, 1998) and before January 25, ary 25, 1999, 8:45 a.m., and published in the issue of partnership level) are computational ad-2002, see §301.6231(a)(7)–1T(r)(1).the Federal Register for January 26, 1999, 64 F.R. justments that are directly assessed. 3837) When making computational adjust-* * * * * ments, the Service may assume that Par. 10. Add §301.6231(a)(7)–1T to amounts the partner reported on the part-read as follows: ner ’sindividual return include all amounts reported to the partner by the §301.6231(a)(7)–1T Designation or partnership, absent contrary notice to the selection of tax matters partner Service (for example, a “Notice of Incon-(temporary). sistent Treatment”).Such an assumption by the Service does not constitute a part-(a) through (p)(1) [Reserved].For fur-ner level determination.Moreover, sub-ther guidance, see §301.6231(a)(7)–1(a) stituting redetermined partnership itemsthrough (p)(1). for the partner’s previously reported part-(p)(2)When each general partner is nership items (including partnership itemsrest in therofits intedeemed to have no p included in carryover amounts) does notpartnership .If it is impracticable under constitute a partner level determination§301.6231(a)(7)–1(o)(2) to apply the 1999–10 I.R.B.March 8, 1999