The IRS has released temporary regulations (TD 9780) implementing the revised partnership examination procedures adopted as part of the Bipartisan Budget Reconciliation Act of 2016 (BBA). While the rules are not mandatory until years beginning on or after January 1, 2018, partnerships may elect to come under the rules for tax years beginning after November 2, 2015 and before January 1, 2018. [Section 1101(g)(4) of the BBA]
The proposed regulations are meant to provide information on making the election to come under the rules early.
The proposed regulations do answer one question that some had wondered about. Under the new rules, some partnerships that currently are required to have any examinations conducted under the older TEFRA examination rules will be able to elect out of the new BBA rules, and instead be examined under the “pre-TEFRA” rules. Such partnerships are ones that issue fewer than 100 K-1s (up from the 10 partner limit for escaping TEFRA status) and the partners must all be individuals, corporations (including certain types of foreign entities), or estates (with S corporations now joining the list of “acceptable” partners. [IRC §6221(b)(2)(C)]
Some had wondered if an entity that did not qualify as exempt from TEFRA exam status could elect to apply the new rules and the “opt-out” of the consolidated examination provisions found in BBA. Temporary Reg. §301.9100-22T(a) provides that an election opens up all of the BBA provisions except the “opt-out” rule found at IRC §6221(b). Thus, such partnerships will only be able to choose between TEFRA and the new BBA provisions for years beginning before January 1, 2018. After that point an eligible partnership would be able to “opt-out”.
The temporary regulations require that an election to have the BBA rules apply early must be made in accordance with the temporary regulations and an election can only be revoked with the consent of the IRS. [Temporary Reg. §301.9100-22T(a)]
The regulation provides that an election is not valid if it “frustrates the purposes of Section 1101 of the BBA.” The regulation also provides that an extension of time to file the election will be available under the late election relief provisions found at Reg. §301.9100-3. [Temporary Reg. §301.9100-22T(a)]
The regulations do provide some provisions to eliminate the possibility of having both BBA and non-BBA provisions apply to the same year. The preamble notes:
Section 301.9100-22T(d)(2)provides exceptions to the definition of an eligible taxable year to avoid proceedings under both the TEFRA partnership procedures and the new partnership audit regime for the same partnership taxable year. To avoid these multiple proceedings, an election under these temporary regulations does not apply if the partnership has taken the affirmative step to apply the TEFRA partnership procedures with respect to the partnership return for that taxable year. This occurs when the tax matters partner has filed a request for an administrative adjustment for the partnership taxable year under section 6227(c) of the TEFRA partnership procedures with respect to a partnership taxable year. Similarly, an election under these temporary regulations also does not apply if a partnership that is not subject to the TEFRA partnership procedures has filed an amended return of partnership income for the partnership taxable year.
The election under the regulation must be made within 30 days of the date of notification to the partnership, in writing, that the return of the partnership for an eligible tax year has been selected for examination. [Reg. §301.9100-22T(b)(1)] The fact that the IRS is allowing the election to be deferred until a return is actually selected for exam gives the IRS additional time to issue regulations that would govern such an exam.
Reg. §301.9100-22T(b)(2)(i) provides in general that “[t]he partnership makes an election under this section by providing a written statement with the words ‘Election under Section 1101(g)(4)’ written at the top that satisfies the requirements of paragraph (b)(2) of this section to the individual identified in the notice of selection for examination as the IRS contact regarding the examination.”
The regulation continues to describe the election at Reg. §301.9100-22T(b)(ii) by noting:
A statement making an election under this section must be in writing and be dated and signed by the tax matters partner, as defined under section 6231(a)(7) (prior to amendment by the BBA), and the applicable regulations, or an individual who has the authority to sign the partnership return for the taxable year under examination under section 6063, the regulations thereunder, and applicable forms and instructions. The fact that an individual dates and signs the statement making the election described in this paragraph (b) shall be prima facie evidence that the individual is authorized to make the election on behalf of the partnership.
Specific items to be disclosed in the election include the following:
(A) The partnership’s name, taxpayer identification number, and the partnership taxable year for which the election is being made;
(B) The name, taxpayer identification number, address, and daytime telephone number of the individual who signs the statement;
(C) Language indicating that the partnership is electing application of section 1101(c) of the BBA for the partnership return for the eligible taxable year identified in the notice of selection for examination;
(D) The information required to properly designate the partnership representative as defined by section 6223 as amended by the BBA, which must include the name, taxpayer identification number, address, and daytime telephone number of the partnership representative and any additional information required by applicable regulations, forms and instructions, and other guidance issued by the IRS;
(E) The following representations--
(1) The partnership is not insolvent and does not reasonably anticipate becoming insolvent before resolution of any adjustment with respect to the partnership taxable year for which the election is being made;
(2) The partnership has not filed, and does not reasonably anticipate filing, voluntarily a petition for relief under title 11 of the United States Code;
(3) The partnership is not subject to, and does not reasonably anticipate becoming subject to, an involuntary petition for relief under title 11 of the United States Code; and
(4) The partnership has sufficient assets, and reasonably anticipates having sufficient assets, to pay a potential imputed underpayment with respect to the partnership taxable year that may be determined as part of the BBA exam; and
(F) A representation, signed under penalties of perjury, that the individual signing the statement is duly authorized to make the election and that, to the best of the individual’s knowledge and belief, all of the information contained in the statement is true, correct, and complete. [Temporary Reg. §301.9100-22T(b)(2)(ii)]
One a partnership files this election, the IRS will issue a Notice of Administrative Proceeding as required under IRC §6231(a)(1) “promptly” at some time 30 days after the receipt of the election. [Temporary Reg. §301.9100-22T(b)(2)(iii)]
While the BBA provisions also provide a revised method of filing requests for administrative adjustments, the temporary regulations provide that the IRS will not accept an election to use that mechanism for an eligible year beginning prior to January 1, 2018 until January 1, 2018. [Temporary Reg. §301.9100-22T(c)(2)]
After that date a partnership can elect to use the “new” system to file an administrative adjustment request for years beginning after November 2, 2018 and before January 1, 2018. The form and manner of making that election will be announced by the IRS, presumably sometime around January 1, 2018. [Temporary Reg. §301.9100-22T(c)(1), (3)]
However, if the partnership has previously filed either an administrative adjustment request under the TEFRA rules or an amended partnership return (for a partnership not subject to TEFRA) for the year in question, the partnership may not elect to use the BBA provisions for any Administrative Adjustment Request for that year. [Temporary Reg. §301.9100-22T(c)(2).
At the same time the temporary regulations were issued, the IRS issued identical proposed regulations. [REG-105005-16]