Non-income partnership adjustments are positive for imputed underpayment

Plain-English summary

Chief Counsel explained that an imputed underpayment is calculated from net positive partnership adjustments. Adjustments to non-income items, including distributions, self-employment earnings, and section 199A items, are always positive, although the IRS may treat an adjustment as zero if another adjustment sufficiently reflects it. A partner's outside basis is not a partnership-related item because it is neither on the partnership return nor required in the partnership's books, so it cannot be adjusted in the BBA proceeding. Partner-level facts are not considered when calculating the imputed underpayment. Negative adjustments create subgroupings, and items generally may net in the calculation if they can net on the partnership return.

Ruling snapshot

• Question: How are section 199A and other non-income adjustments treated when calculating a BBA imputed underpayment?
• Outcome: Advice given, non-income adjustments are positive and partner outside basis is outside the partnership proceeding
• Key authorities: IRC § 6225; Treas. Reg. § 301.6225-1(b)(4)

Full text (IRS public release)

ID: CCA_2023041011332143 [Third Party Communication:

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

Number: 202433009
Release Date: 8/16/2024
From: --------------------
Sent: Monday, April 10, 2023 11:33:21 AM
To: --------------------------------------------------------- Cc: -------------------------------------------------------------- Bcc: Subject: RE: Request for Advice re: FPA Review under BBA; Section 199A issue

Hi --------,

The imputed underpayment (IU) is calculated on net positive adjustments. A positive adjustment is an adjustment that is not a negative adjustment. A negative adjustment is a reduction in income, increase in expense, or increase in a credit. Therefore, any adjustment to a non-income item (e.g., balance sheet item) is always a positive adjustment. An adjustment to distributions, net earnings from self-employment, or to a 199A item is an adjustment to a non-income item and is therefore always positive. Under 301.6225-1(b)(4) the IRS can choose to treat one or more adjustments as zero solely for purposes of calculating the IU is the adjustment is sufficiently reflected within another adjustment(s).

A partner’s outside basis is not a partnership-related item (PRI) as it is not on the partnership return nor required to be maintained in the partnership’s books and records. So we cannot adjust a partner’s outside basis under BBA. Partner-level facts and circumstances are not taken into account in the calculation of the IU.

Note that subgroupings are only done if there are negative adjustments. As for netting, in general, if it can net on the partnership return it can net in the calculation of the IU.

As for the CCDM, we used to review all the FPAs but we no longer are.

Please let me know if you have any further questions.

Thanks,
Jenni

Jenni Black (she/her)
Senior Counsel
CC:PA:07
Phone: (202) 317-5216