How basis and other "non-income" adjustments feed a BBA partnership's imputed underpayment

Plain-English summary

This is informal Chief Counsel advice, written as an email from a Senior Counsel to an examiner, about how the centralized partnership audit regime (BBA) computes an "imputed underpayment" (IU). The core point: any adjustment to a "money number" on the Form 1065 or in the partnership's books and records goes into the IU calculation, and it does not matter whether or how the underlying item would be taxed at the partner level. An adjustment to a non-income item, such as the partnership's inside basis in its assets shown on Schedule L, is always a positive adjustment that increases the IU. If two adjustments are duplicative (for example, reducing an expense and increasing an asset because something was expensed instead of capitalized), the IRS can treat one of them as zero solely for calculating the IU to avoid double counting. A partner's outside basis is not a partnership-related item, because it is not on the partnership return and need not be kept in the partnership's records, so any adjustment to outside basis is made outside the BBA rules. The advice also reminds the examiner to identify which specific adjustments each penalty applies to.

Ruling snapshot

• Question: How do adjustments to non-income items (like inside basis) enter a BBA partnership's imputed-underpayment calculation, and how are duplicative adjustments and outside basis handled?
• Outcome: Advice given (informal Chief Counsel advice)
• Key authorities: Treas. Reg. § 301.6225-1(b)(4), (d)(2); Treas. Reg. § 301.6241-1(a)(6)(iii); IRC §§ 6225, 6241

Full text (IRS public release)

ID: CCA_2021112409224143 [Third Party Communication:

UILC: 6225.01-00 Date of Communication: Month DD, YYYY]

Number: 202148006
Release Date: 12/3/2021
From: --------------------
Sent: Wednesday, November 24, 2021 9:22:41 AM
To: ---------------------
Cc: ---------------------------------------------------------------------------------------------------------------------------
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Bcc:
Subject: RE: Basis Adjustment

Good morning!

If we adjust any partnership-related item (PRI) that is a “money number” on the Form 1065 or in the partnership’s books and records, it goes into the calculation of the IU. An adjustment to an item that is not an item of income, gain, loss, deduction, or credit (i.e. “non-income item”) is always a positive adjustment. See 301.6225-1(d)(2) (definition of positive and negative adjustments). Under BBA, all adjustments are adjustments and whether an adjustment is included in the IU calculation does not at all depend on whether/how/if the item would be taxed at the partner level. It only matters if we make a change to a “money number” (adjustments to “non-money numbers” like gallons for the fuel credit are always adjustments that do not result in an IU). If any adjustment is duplicative or included within another adjustment (ex. a reduction in an expense and an increase in assets if an item was expensed instead of capitalized), the IRS can treat one of those adjustments as zero, solely for purposes of calculating the IU, if it makes sense to do so in that case. See 301.6225-1(b)(4).

If you are adjusting the partnership’s inside basis in its assets (i.e. the amounts on the Sch L of the Form 1065 and/or in its books and records), that is a non-income item adjustment and it would be a positive adjustment going into the calculation of the IU. A partner’s outside basis in the partnership is not a PRI as it is not on the partnership return nor it is required to be maintained in the partnership’s books and records. See 301.6241-1(a)(6)(iii). So if you want to adjust the partner’s outside basis, that would be done outside of BBA (if you are going to do this, call me).

You will need to say which specific adjustments are subject to which penalty unless a penalty is applicable to all the adjustments.

Please let me know if you have any additional questions.

Happy Thanksgiving!

Thanks,
Jenni

Jenni Black
Senior Counsel
CC:PA:07
Phone: ---------------------