Chief Counsel comments on a BBA partnership-audit training case study

Plain-English summary

This is an internal email and set of margin comments in which Chief Counsel attorneys review a training case study about partnership audits under the Bipartisan Budget Act of 2015 (the BBA "centralized partnership audit regime"). Their central point: under the BBA, adjustments are made at the partnership level, and when the partnership pays the resulting "imputed underpayment," the IRS generally cannot separately assess or collect the related tax from the individual partners. The comments flag that a partner's outside basis in the partnership is not a "partnership-related item" and cannot be adjusted in a BBA exam, and that certain items (like section 751 gain) are only partnership-related items for tax years 2019 forward once required on the Form 1065. They also note which partners make a partnership ineligible to elect out of the BBA regime and remind reviewers that section 6103 limits sharing return information among the entities involved. Because this is advice on how to present the rules, it grants or denies nothing; it corrects and clarifies the draft materials.

Ruling snapshot

• Question: Are the draft BBA partnership-audit training materials accurate, especially on assessing partner-level tax after the partnership pays an imputed underpayment?
• Outcome: advice given
• Key authorities: IRC §§ 6221(a), 6241; Treas. Reg. § 301.6241-1; IRC §§ 704(c), 751; § 6103

Full text (IRS public release)

                                                                 1




 ID:         CCA_2024081410324348                                    [Third Party Communication:

 UILC:       754.00-00, 741.00-00, 6221.00-00,                       Date of Communication: Month DD, YYYY]

             6241.00-00
Number: 202452012
Release Date: 12/27/2024
From: ------------
Sent: Monday, May 1, 2023 2:21:19 PM
To: ---------------------
Cc: ---------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
Bcc:
Subject: RE: 2023 Case Study - Ready for Counsel Review


Hi ---------,

Attached please find our comments to the slides and the factual summary document. Our
main concern is that the example appears to be assessing tax on the partners as a result of
the adjustments made in the BBA exam after the partnership pays the IU. Generally when
the partnership pays the IU, if a partner level tax results because of the PRI adjustments,
the Service cannot assess/collect against the partner for that tax.

We think it may be helpful to schedule a call discuss our comments, and I am happy to set
up a call at a time / day convenient for you. Thank you!

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 ---------------------------------------------------------------------------------------------------------------------------
 Slide 8

 HMM0 Caution - 6103 prohibits disclosure of return information amongst some of these entities
      unless the taxpayer consents or some other exception to 6103 applies
            Howard Meghan M, 2023-05-01T15:09:19.034
                                                      2

Slide 16

HMM0 O/B is not a PRI, but if tax is attributable as a result of an adjustment to a PRI, it cannot
     be assessed/collected at the partner level if the partnership pays the IU. See IRC 6221(a)
           Howard Meghan M, 2023-04-30T21:19:17.301
                                                          3

Slide 46

HMM0 Why is there an exam of the partner's 1040 as well? Under BBA, partnership adjustments
     would be made at the partnership level
           Howard Meghan M, 2023-04-30T21:29:01.271

Slide 52

HMM0 Again, if tax is attributable as a result of an adjustment to a PRI, it cannot be
     assessed/collected at the partner level if the partnership pays the IU. There are no longer
     computational adjustments as there were under TEFRA. See IRC 6221(a). There should
     not be separate partner audits for these items.

           A "partnership related item" is: (A) Any item or amount with respect to the partnership
           (as defined in paragraph (a)(6)(iii) of this section) which is relevant in determining the tax
           liability of any person under chapter 1 of the Code (chapter 1) (as defined in paragraph
           (a)(6)(iv) of this section);
           (B) Any partner's distributive share of any such item or amount; and
           (C) Any imputed underpayment determined under subchapter C of chapter 63 of the
           Code (subchapter C of chapter 63).

           An item or amount is with respect to the partnership if the item or amount is shown or
           reflected, or required to be shown or reflected, on a return of the partnership under
           section 6031 or the forms and instructions prescribed by the Internal Revenue Service
           (IRS) for the partnership's taxable year or is required to be maintained in the partnership's
           books or records. Treas. Reg. 301.6241-1(a)(6)(ii)
           Howard Meghan M, 2023-04-30T21:37:56.463
                                                      4

Slide 68

HMM0 If tax is attributable as a result of an adjustment to a PRI, it cannot be assessed/collected
     at the partner level if the partnership pays the IU.
           Howard Meghan M, 2023-04-30T21:45:07.974
                                                      5

Slide 73

HMM0 These corrections cannot go out on partner level SNODs per section 6221
           Howard Meghan M, 2023-04-30T21:46:04.763
                                                      6

Slide 95

HMM0 Remember - to the extent any tax is attributable to adjustments to PRIS, that cannot be
     assessed/collected at the partner (Wolf) level if the partnership pays the IU
           Howard Meghan M, 2023-04-30T21:50:20.153
                                                     7

Slide 100

HMM0 To the extent any tax is attributable to adjustments made to PRIs, it cannot be
     assessed/collected at the partner level if the partnership pays the IU
         Howard Meghan M, 2023-04-30T21:53:40.679

Slide 102

HMM0 Is 704© a PRI? Is it required to be reported on the partnership's return or kept in the
     partnership's books/records?
         Howard Meghan M, 2023-05-01T15:20:18.036

Slide 103

HMM0 To the extent any tax is attributable to adjustments made to PRIs, it cannot be
     assessed/collected at the partner level if the partnership pays the IU
         Howard Meghan M, 2023-04-30T21:52:29.684
8




    Commented [AJEl): Consider mentioning examples of
    ineligible partners: partnerships, trusts, disregarded entities,
    and ineligible foreign entities. Reg. Section 301.6221(b)-
    l(b)(3)(ii).

    Commented [HMM2R1): May also want to mirror
    instructions in the form 1065 Instructions:

    A partnership is an eligible partnership for the tax year if it
    has 100 or fewer eligible partners in that year. Eligible
    partners are individuals, C corporations, S corporations,
    foreign entities that would be C corporations if they were
    domestic entities, and estates of deceased partners. The
    determination as to whether the partnership has 100 or
    fewer partners is made by adding the number of
    Schedules K-1required to be issued by the partnership for
    the tax year to the number of Schedules K-1 required to be
    issued by any partner that is an S corporation to its
    shareholders for the tax year of the S corporation ending
    with or within the partnership tax year. A partnership isn't
    eligible to elect out of the centralized partnership audit
    regime if it is required to issue a Schedule K-1 to any of
    the following partners.
        • A partnership.
       • A trust.
       • A foreign entity that would not be treated as a
       C corporation if it were a domestic entity.
       • A DE described in Regulations section 301.7701-
       2(c)(2)(i).
       • An estate of an individual other than a deceased
       partner.
       • Any person that holds an interest in the partnership on
       behalf of another person.


    Commented [AJE3]: Partnership Representative (PR) can
    also be designated on Form 8979, Partnership
    Representative Revocation, Designation, and Resignation. If
    no PR is designated, the IRS can appoint a PR.

    Commented [HMM4R3): Hi Julie- I removed the portion
    about Form 7036, Election under Section 1101(g)(4) of the
    Bipartisan Budget Act of 2015 because this was only used if
    the partnership did an early election in prior to 2018. I
    don't think it is relevant for this example
9




    Commented [HMMSJ: It should be noted that a
    partner's outside basis in a partnership is not a partnership
    related item and cannot be adjusted as part of the BBA
    exam.
10




     Commented [HMM6): 751 gain is only a PRI for tax years
     2019 and forward when it was required to be listed on the
     Form 1065.