Partner credits applied after additional reporting year tax calculation

Plain-English summary

Chief Counsel explained how a partner calculates tax after receiving a section 6226 push-out statement. The additional reporting year tax is an adjustment to the partner's chapter 1 tax for the reporting year, even though it is computed by comparing tax consequences in earlier reviewed years. It is calculated as part of tax before applying credit carryovers. A negative additional reporting year tax may reduce other chapter 1 tax to zero but cannot create a negative tax liability, refund, or overpayment. The advice notes that a legislative fix had been requested.

Ruling snapshot

• Question: Should credit carryovers be applied before calculating the additional reporting year tax, and can a negative amount be refunded?
• Outcome: Advice given, calculate tax first and do not allow the adjustment below zero
• Key authorities: IRC § 6226(b); Treas. Reg. § 301.6226-3

Full text (IRS public release)

 ID:         CCA_2023092913383543                                [Third Party Communication:

 UILC:       6226B.00-00, 6226B.01-00                            Date of Communication: Month DD, YYYY]

Number: 202346026
Release Date: 11/17/2023
From: --------------------
Sent: Friday, September 29, 2023 1:38:35 PM
To: -------------------------------------------------------------------
Cc: ----------------------------------------------------------------------------------------------------------
Bcc:
Subject: RE: question on Example in F3800 instructions


Hi ------,

In your calculation, it looks like you are applying the remaining credit carryover before
the additional reporting year tax. This is not correct. The additional reporting year tax is
an increase/decrease in a partner’s chapter 1 tax for the reporting year (in this example,
2023). It is part of tax, it is not a credit against tax. The additional reporting year tax is a
tax imposed under chapter 1 for the 2023 taxable year. Although this 2023 tax is
computed by reference to what the decrease/increase in the partner’s tax would have
been in 2020, 2021, and 2022, it is not a tax for 2020, 2021, or 2022. You apply the
credits after tax is calculated. In addition, the additional reporting year tax is not
refundable. Chapter 1 tax cannot be negative. As the additional reporting year tax is
part of chapter 1 tax for (in this case) 2023, a negative additional reporting year tax can
reduce other chapter 1 taxes to zero but not below. Congress did not make it
refundable/create an overpayment. We have asked for a legislative fix.

---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
------------------------------------

Section 6226(b)(1):

         (1)TAX IMPOSED IN YEAR OF STATEMENT
         Except as provided in paragraph (4), each partner’s tax imposed by chapter 1
         for the taxable year which includes the date the statement was furnished
         under subsection (a) shall be adjusted by the aggregate of the correction
         amounts determined under paragraph (2) for the taxable years referred to
         therein.
                                            2

Paragraph (4) is about partners that are partnerships and S corps. The correction
amount is the amount by which the partner’s chapter 1 tax would have
increased/decreased if the partner had reported the adjustment correctly to begin with.

Treas. Reg. 301.6226-3(a):

               (a) Effect of taking adjustments into account on tax imposed by chapter
       1. Except as otherwise provided in this section, the tax imposed by chapter 1 of
       the Internal Revenue Code (chapter 1 tax) for each reviewed year partner (as
       defined in §301.6241-1(a)(9)) for the taxable year that includes the date a
       statement was furnished in accordance with §301.6226-2 (the reporting year) is
       increased by the additional reporting year tax, or if the additional reporting year
       tax is less than zero, decreased by such amount. The additional reporting year
       tax is the aggregate of the correction amounts (determined in accordance with
       paragraph (b) of this section). In addition to being liable for the additional
       reporting year tax, a reviewed year partner must also calculate and pay for the
       reporting year any penalties, additions to tax, and additional amounts (as
       determined under paragraph (d) of this section). Finally, a reviewed year partner
       must also calculate and pay for the reporting year any interest (as determined
       under paragraph (c) of this section).

Please let me know if you have any questions.

Thanks,
Jenni

Jenni Black (she/her)
Senior Counsel
CC:PA:06
Phone: (202) 317-5216