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DALLAS BAR ASSOCIATION – TAX SECTION

DECEMBER 4, 2017 ● DALLAS, TX

NEW PARTNERSHIP AUDIT RULES:WHAT THEY MEAN TO PARTNERSHIPS

AND TAX PROFESSIONALS

Presented by:

CHARLES D. PULMAN, J.D., LL.M., CPAMATTHEW L. ROBERTS, J.D., LL.M.

901 Main Street, Suite 3700Dallas, Texas 75202Main (214) 744-3700Fax (214) 747-3732

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E-Mail:cpulman@meadowscollier.com, mroberts@meadowscollier.com

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TABLE OF CONTENTS

Page

I. Overview............................................................................................................................. 1A. Background ..............................................................................................................1B. Effective Date ..........................................................................................................2C. Repeal of Old Sections and Addition of New Sections ...........................................4

II. Applicability (Section 6221)............................................................................................... 4A. General Rule Regarding Determinations and Applicability to All

Partnerships..............................................................................................................4B. Option to Elect Out for Certain Partnerships with 100 or Fewer Partners ..............6

III. Consistency Requirement (Section 6222)........................................................................... 8A. Consistency Generally Required..............................................................................8B. Failure to Be Consistent...........................................................................................8

IV. Partnership Representative (Section 6223)......................................................................... 9A. Designation ..............................................................................................................9B. Eligibility ...............................................................................................................10C. PR Designation, Resignation, and Revocation ......................................................10D. IRS Designation .....................................................................................................12E. Binding Effect of PR..............................................................................................13

V. Partnership Adjustments (Section 6225) .......................................................................... 13A. Imputed Underpayment .........................................................................................13B. Non-Imputed Underpayment Adjustments ............................................................20C. Alternative to Payment of Imputed Underpayment Amount by Partnership

(“Push Out Election”) (Section 6226)....................................................................21

VI. Administrative Adjustment Requests (Section 6227)....................................................... 26A. General ...................................................................................................................26B. Adjustment.............................................................................................................26C. Period of Limitations .............................................................................................27D. Where NOAPP Issued............................................................................................27E. Form.......................................................................................................................27F. Partner Modification ..............................................................................................27G. Push Out Election ..................................................................................................28H. No Imputed Underpayment Amount .....................................................................28

VII. Notice of Proceedings (Section 6231) .............................................................................. 29A. General Notice Requirements ................................................................................29B. Timing....................................................................................................................29C. Address for Notices................................................................................................29

VIII. Assessment and Collection (Section 6232)....................................................................... 30

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A. Method for Assessing and Collecting ....................................................................30B. Timing....................................................................................................................30C. Mathematical or Clerical Adjustments ..................................................................30D. Mathematical or Clerical Errors for Upper-Tier Partnerships ...............................30E. Partnership Waivers ...............................................................................................30F. Interest and Penalties (Section 6233).....................................................................31

IX. Judicial Review of Partnership Adjustment (Section 6234) ............................................. 31A. Lawsuit to Challenge FPA.....................................................................................31B. District Court and Court of Federal Claims...........................................................31C. Interest....................................................................................................................32D. Scope of Judicial Review.......................................................................................32E. Appeals ..................................................................................................................32F. Effect of Dismissal.................................................................................................32

X. Statute of Limitations (Section 6235) ............................................................................... 33A. Statute of Limitations - Three Time Periods..........................................................33B. Agreements to Extend............................................................................................33C. Exceptions..............................................................................................................33D. Suspension of Statute of Limitations .....................................................................34E. Bankruptcy Proceeding..........................................................................................34

XI. Other Special Provisions (Section 6241) .......................................................................... 34A. Partnership Payments Non-Deductible ..................................................................34B. Partnership Ceases to Exist....................................................................................35C. Entities Filing Partnership Return..........................................................................36D. Information Returns ...............................................................................................36E. Appealing IRS Determination under PAR.............................................................36A. Partnership Agreement...........................................................................................37B. Other Affected Agreements ...................................................................................39

TEFRA Partnership Criteria Flowchart ........................................................................................ 40

PAR Flowchart.............................................................................................................................. 41

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THE NEW IRS PARTNERSHIP AUDIT RULES: WHAT THEY MEAN TOPARTNERSHIPS AND TAX PROFESSIONALS

JOEL N. CROUCH, J.D.CHARLES D. PULMAN, J.D., LL.M., CPA

MATTHEW L. ROBERTS, J.D., LL.M.

I. OVERVIEW

A. Background

On September 18, 2014, the Government Accountability Office (“GAO”) issued a reportto Congress relating to the IRS’s effectiveness in auditing large partnerships, which were definedas those partnerships with $100 million or more in assets and 100 or more direct and indirectpartners. The report found substantial disparities in the IRS’s audit rates of large partnershipsand comparable large C corporations with $100 million or more in assets. Specifically, the GAOfound that although the number of large partnerships in operation from 2002 through 2011 hadnearly tripled, the IRS audit rate of those partnerships in 2012 was 0.8%. In contrast, the GAOfound that the IRS audit rate of large C corporations was 27.1% in 2012 notwithstanding asignificant 22% decrease in the number of large C corporations in operation from 2002 through2011.

In the report, the IRS identified several potential reasons for the disparity in audit rates.First, the IRS indicated that it was difficult to identify the appropriate partnership to audit whenthe partnership was part of a complex tiered-partnership structure. Second, the IRS indicatedthat the complexities in the TEFRA audit procedures made it more difficult to timely assess taxrelated to the partnership within the general 3-year statute of limitations period. Third, the IRSindicated that the TEFRA audit procedures resulted in burdensome time and costs to the IRSbecause after the IRS determined adjustments of tax items at the partnership level, the IRS wasrequired to recalculate the tax liability of each partner based on the partnership adjustment.

The GAO report recommended several legislative proposals to increase the IRS’s auditrates of large partnerships. The most significant legislative proposal in the report was to requirelarge partnerships to pay any tax due at the partnership level. The GAO noted that such a changewould “save the . . . [IRS’s] resources that are now devoted to the paper driven, labor intensiveprocess of passing adjustments through to large numbers of partners.”

On February 2, 2015, President Obama submitted his fiscal year 2016 budget proposal tothe United States Congress. In his budget proposal, President Obama recommended repealingthe existing TEFRA and electing large partnership audit procedures because those auditprocedures were “inefficient and more complex than those applicable to other large entities.” Intheir place, President Obama recommended enactment of a new partnership audit regime wherethe IRS would audit the partnership and make adjustments at the partnership level.

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Congress responded to the GAO report with several legislative proposals. Most notably,in June 2015, Rep. Renacci (R-OH) and Rep. Kind (D-WI) introduced H.R. 2821, thePartnership Audit Simplification Act. The Act sought to replace the existing TEFRA andelecting large partnership audit rules with rules that would require partnerships to be audited andtax collected at the partnership level.

On November 2, 2015, President Obama signed into law H.R. 1314, the BipartisanBudget Act of 2015 (“BBA”), which adopted many of the revised partnership audit rules in H.R.2821 as new Sections 6221 to 6241 of subchapter C of chapter 63 of the Internal Revenue Codeof 1986, as amended. BBA was further amended by the Protecting Americans from Tax HikesAct of 2015 (“PATH Act”). Congress estimates that the new partnership audit rules will bringin an additional $13.4 billion in tax revenue over the next 10 years.

The Joint Committee on Taxation issued “General Explanation of Tax LegislationEnacted in 2015” dated March 2016 (“Blue Book”), discussing the new partnership audit rules inTitle XI, pages 51 to 83.

On January 18, 2017, Proposed Regulations were issued (REG-136118-15). On June 14,2017, Proposed Regulations were reissued with minor changes.

B. Effective Date

1. Generally: The Revised Partnership Audit Rules (“PAR”) apply to returns filedfor partnership taxable years beginning after December 31, 2017. PAR applies toan entity taxed as a partnership for federal tax purposes, such as a limitedpartnership and a limited liability company. Section 6231.

2. Administrative Adjustments Requests (“AAR”): In the case of an AAR, the PARapply to requests with respect to returns filed for partnership taxable yearsbeginning after December 31, 2017. Prop. Reg. § 301.6227-1(i).

3. Earlier Application Election: A partnership may elect (at the time and in suchform as the Secretary may prescribe) for the PAR (other than Section 6221(b)which provides for the opt-out election for partnerships with 100 or fewerpartners) to apply to any return of the partnership filed for taxable years beginningafter the date of the enactment of the PAR (November 2, 2015) and beforeJanuary 1, 2018. Section 1101(g)(4) of the BBA.

a. An election may only be made for partnership tax returns filed for taxyears beginning after November 2, 2015.

b. A partnership may not elect into the new rules for purposes of electing out.(This prevents partnerships subject to TEFRA from avoiding both TEFRAand the new rules, thereby forcing the IRS to audit each partnerindividually.)

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c. Once the election is made for a tax year, it cannot be revoked without IRSconsent.

d. An election will not be valid if it frustrates the purpose of the new auditrules. (One example is where the partnership is not liquid enough to paythe entity level tax.)

e. To make the election, the partnership must submit a written statementwithin 30 days of the IRS first notifying the partnership that its return foran eligible tax year has been selected for audit. Alternatively thepartnership may make an election with the filing of an AAR in the mannerto-be-prescribed by the IRS (i.e., new form).

f. Among other things, the statement must include identifying informationabout the partnership, the person signing the statement and his or herauthority to do so, and the person designated as the partnershiprepresentative.

g. The statement must include several representations regarding thepartnership’s intent and liquidity, including that: (i) the partnership is notinsolvent nor does it anticipate becoming insolvent, (ii) the partnership isnot currently pursuing bankruptcy nor anticipating a bankruptcy filing, and(iii) the partnership has sufficient assets, and reasonably expects to havesufficient assets, to pay any tax liability ultimately determined.

h. Either the Tax Matters Partner or an individual authorized to sign apartnership return is authorized to make the election.

i. Perhaps most significant, the statement must include a representation,signed under penalties of perjury, that the individual signing the statementis duly authorized to make the election and that to the best of his or herbelief, the statement is true, correct and complete.

j. On August 5, 2016, the IRS issued Temporary Regulations set forth in§301.9100-22T to address the rules for a partnership to elect to apply PARto taxable years beginning after November 2, 2015, and before January 1,2018.

k. The Temporary Regulations expire on August 5, 2019.

l. The Blue Book at page 83 suggests a reason for making this election is “toobviate the need to furnish amended Schedules K-1 to correct apartnership-level error” or for partners “to file amended Federal and Stateincome tax returns.”

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C. Repeal of Old Sections and Addition of New Sections

PAR repeal entirely subchapter C of Chapter 63 which includes the audit rules under theTax Equity and Fiscal Responsibility Act of 1982, Pub. L. No. 97-248 (referred to herein as“TEFRA”), and subchapter D of Chapter 63 which provides audit rules for electing largepartnerships. The repeal of these sections is effective for tax years beginning after December 31,2017.

1. Old Rules: Taxable years prior to December 31, 2017, will continue to begoverned by old Sections 6221-6234, 6240-6242, 6245-6248, 6251-6252, and6255.

2. New Rules: Taxable years after December 31, 2017, will be governed by newSections 6221, 6222, 6223, 6225, 6226, 6227, 6231, 6232, 6233, 6234, 6235, and6241.

3. Proposed Regulations: Proposed Regulations (REG-136118-15, 26 CFR Part301) under PAR were issued for Sections 6221, 6222, 6223, 6225, 6226, 6227,and 6241.

Proposed Regulations have not been issued for Sections 6231, 6232, 6233, 6234and 6235.

All “Section” references in this Outline are to the Internal Revenue Code of 1986,as amended and amended by PAR, unless otherwise indicated.

II. APPLICABILITY (SECTION 6221)

A. General Rule Regarding Determinations and Applicability to All Partnerships

1. New Law: Section 6221 provides a general rule that the following shall bedetermined at the partnership level:

a. any adjustment to items of income, gain, loss, deduction, or credit of apartnership for a partnership taxable year (and any partner’s distributiveshare thereof);

b. the assessment and collection of any tax attributable thereto; and

c. the applicability of any penalty, addition to tax, or additional amountwhich relates to an adjustment to any tax item or share thereof.

2. Existing Law: Under TEFRA, the tax treatment of any partnership item (and theapplicability of any penalty, addition to tax, or additional amount which relates toan adjustment of a partnership item) is determined at the partnership level.

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3. Items Covered by PAR: Prop. Reg. § 301.6221(a)-1(b)(1) defines “items”broadly to include the following of the partnership:

a. character, timing, source and amount of income, etc., items;

b. character, timing and source of partnership activities;

c. contributions and distributions;

d. bases and value of assets;

e. amount and character of liabilities;

f. category, timing, and amount of foreign tax expenditures;

g. elections;

h. transactions;

i. partnership terminations; and

j. capital accounts.

4. Items Not Covered by PAR: Prop. Reg. § 301.6221(a) – 1(b)(3) defines “tax” astax imposed by chapter 1. Therefore, PAR does not cover the following:

a. self-employment tax (chapter 2);

b. unearned income Medicare contribution (chapter 2A);

c. withholding on NRA or foreign corporation (chapter 3);

d. taxes to enforce foreign accounts (chapter 4); and

e. consolidated returns (chapter 6).

5. Defenses: Prop. Reg. § 301.6221(a) – 1(c) provides that only the partnership canraise defenses under PAR to a penalty, addition to tax or additional amount,including partner-level defenses. After the adjustments are determined inpartnership’s proceeding under PAR, no penalty defense can be raised or takeninto account with respect to any person.

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B. Option to Elect Out for Certain Partnerships with 100 or Fewer Partners

1. General Opt Out Election: Section 6221(b) states that PAR does not apply withrespect to any partnership for any taxable year if:

a. the partnership elects out for such taxable year;

b. for such taxable year, the partnership is required to furnish 100 or fewerstatements under Section 6031(b) with respect to its partners (i.e.,Schedule K-1s);

c. each of the partners of such partnership is an individual, a C corporation,any foreign entity that would be treated as a C corporation were itdomestic, an S corporation, or an estate of a deceased partner (Section6221(b)(1)(c));

d. the election is made with a timely filed return for such taxable year andincludes a disclosure of the name and taxpayer identification number ofeach partner at any time during the taxable year of such partnership; and

e. the partnership notifies such partners of such election within 30 days ofmaking the election (Prop. Reg. § 301.6221(b) – 1(c)(3)). The opt-outelection is binding unless the IRS determines the election is invalid. Prop.Reg. § 301.6221(b) – 1(e). Thus, an invalid election remains bindingunless the IRS determines the election is invalid. The ProposedRegulations do not provide for a time frame for the IRS to determine if theelection is invalid.

Under Prop. Reg. § 301.6221(b) – 1(b)(3), the following are not eligible entities:trusts, partnership, non-C corp. foreign entity, disregarded entity, nominee orestate of non-deceased individual.

Several professional organizations have suggested “eligible entities” be expandedto include single member LLC, trusts, IRA, qualified plans, and exemptorganizations. The Blue Book gives examples of a partnership with a partnerincluding a disregarded entity, a trust, a grantor trust or a partnership partnerelecting out of PAR, thus indicating that Congress contemplated these entitiesmay be eligible entities. Blue Book at 60.

2. Special Rules for S Corporation Partners: For any partner that is an Scorporation, the partnership must disclose the name and taxpayer identificationnumber of each S corporation shareholder for the taxable year of the Scorporation ending with or within the partnership taxable year for which theelection to opt out is made. The statements such S corporation is required tofurnish shall be treated as statements furnished by the partnership for purposes ofapplying the 100 partner rule. Prop. Reg. § 301.6221(b) – 1(c)(2).

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3. Spouse Partners. Under the Proposed Regulations, a Schedule K-1 issued to onespouse owning a community property interest in the partnership is considered asone Schedule K-1. If both spouses each own a community property interest andreceive separate Schedules K-1, then the number of Schedules K-1 for thispurpose is two. See Prop. Reg. § 301.6221(b)-1(b)(2)(iii), Ex. 1-2.

4. Tax-Exempt Partners. The Proposed Regulations do not specifically address thispoint. However, the preamble to the Proposed Regulations indicate that a tax-exempt organization should be treated as a C corporation for purposes of PAR,provided the tax-exempt organization is not classified as a trust for federal incometax purposes.

5. Tiered Partnerships: Under Prop. Reg. § 301.6221(b) – 1(d), if partnership (P1)is a partner in another partnership (P2) and P1 opts out, P1 is subject to the samerules under PAR with respect to its interest in P2 as any other partner in P2.

6. Foreign and Other Partners: The Secretary may provide for alternativeidentification of any foreign partners. The Secretary may by regulation or otherguidance prescribe rules similar to the rules above with respect to any partners notdescribed above. Section 6221(b)(2)(B), (C).

7. Existing Law: Under TEFRA, a partnership is defined to exclude smallpartnerships. A small partnership for these purposes refers to any partnershiphaving 10 or fewer partners each of whom is an individual (other than anonresident alien), a C corporation, or an estate of a deceased partner. A smallpartnership may for any taxable year elect not to be treated as a small partnershipand, therefore, be subject to the TEFRA provisions. Old Section 6231(a).

8. Consequences of Opting Out: IRS audit, deficiency, assessment and collectionproceedings conducted at each partner level under pre-TEFRA procedures andrules, including statute of limitations and venue.

Observation: The purpose for the enactment of TEFRA was to eliminate duplicativelitigation and inconsistent treatment among partners. Because partnerships with a largenumber of partners will be eligible to opt out, this would appear to have the oppositeeffect. Specifically, a partnership with up to 100 qualifying partners could elect out andvery likely would. This would mean that, if the IRS wanted to audit that partnership, itwould have to open an audit for all 100 partners. Moreover, each partner should be ableto litigate the adjustments against him/her separately, potentially in different courts,creating the potential for inconsistent results on identical issues. In addition, a successfulaudit at the partner level will largely depend on the partnership’s cooperation inproviding information and documentation. Failure to do so could be very detrimental to apartner. The partners may want to have their partnership agreement include languagerequiring the partnership to cooperate in a partner-level audit.

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III. CONSISTENCY REQUIREMENT (SECTION 6222)

A. Consistency Generally Required

Section 6222 sets forth the general requirement that a partner treat each item of income,gain, loss, deduction, or credit attributable to a partnership in a manner which is consistent withthe treatment of such income, gain, loss, deduction, or credit on the partnership return. Prop.Reg. § 301.6222-1(a)(1) adds that consistency includes amount, timing and character of the itemand is measured by the partnership return actually filed. In addition, these rules apply to apartnership (P1) who is a partner in another partnership (P2) without regard to whether P1 hasopted out of PAR. If a partnership return is not filed, a partner’s treatment of items is per seinconsistent. Prop. Reg. § 301.6222-1(a)(3).

B. Failure to Be Consistent

1. Underpayment of Tax: Prop. Reg. § 301.6222-1(b) gives the IRS the power toadjust the partner’s return to make the return consistent with the partnership’sreturn and to determine the underpayment of tax. The underpayment of tax isassessed and collected in the same manner as if such underpayment were onaccount of a mathematical or clerical error appearing on the partner’s return. Id.

2. No Abatement of Assessment: Section 6222(b) states that paragraph (2) ofSection 6213(b) (abatement of assessment request) does not apply to anassessment treated as a mathematical or clerical error under PAR (unless anexception applies).

Observation: As a practical matter, the above provisions permit the IRS to make anassessment resulting from an inconsistent position on a summary basis without affordingthe taxpayer any administrative or judicial relief, if none of the exceptions below apply.

3. Notice and Adjustment of Inconsistency:

a. Statement of Inconsistent Treatment: The consistency requirement andassessment provisions do not apply if the partner files with the Secretary astatement specifically identifying the inconsistent item on the partnershipreturn according to forms, instructions and other guidance prescribed bythe IRS. Prop. Reg. § 301.6222-1(c)(1). These rules apply even if thepartnership does not file a return; however, it is not clear what informationwould be included in the statement in this case. Section 6222(c).However, this exception does not apply to the treatment of an item bindingon the partner under Section 6223, i.e., actions taken by the partnershipunder PAR (i.e., AAR or Push-Out) or a final decision in a proceedingunder PAR. Prop. Reg. § 301.6222-1(a)(3).

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b. Incorrect Partnership Statement: A partner is treated as satisfying thestatement of inconsistency if the partner demonstrates that the treatment ofthe item on the partner’s return is consistent with the treatment of the itemon the statement, schedule or other IRS form furnished to the partner bythe partnership and the partner elects to have Section 6222 apply. Prop.Reg. § 301.6222-1(d). The time, substance and manner of the election areset forth in this Prop. Reg. The election must be made within 60 daysafter the IRS notifies the partner of the inconsistency. If the inconsistencyis not clear, the election must explain how the partner’s treatment isconsistent.

c. Adjustments: If a partner properly and timely notifies the IRS of aninconsistency and the IRS disagrees, the IRS can commence a proceedingto adjust or contest the item in question. Prop. Reg. § 301.6222-1(c)(4)(ii). In that proceeding, the IRS can “also adjust any item on thepartner’s return, including items that are not attributable to thepartnership.” Id. Example 2 of this Proposed Regulation clarifies that theproceeding is under subchapter B of Chapter 63 (i.e., the normalassessment and deficiency proceedings).

d. Partnership Not Bound: Any final decision with respect to an inconsistentposition identified under these exceptions to which the partnership is not aparty is not binding on the partnership.

IV. PARTNERSHIP REPRESENTATIVE (SECTION 6223)

A. Designation

1. General: Section 6223 requires that each partnership designate a partner (or otherperson) with substantial presence in the United States and capacity to act as thepartnership representative (“PR”) who shall have the sole authority to act onbehalf of the partnership for purposes of PAR. One PR can be designated pertaxable year. Prop. Reg. § 301.6223-1.

Observation: Note that any person may be designated to serve as PR. The person doesnot have to be a partner. This is a departure from existing law. See Old Section6231(a)(7). In addition, it is not clear if a partnership making the “opt out” electionshould or may designate a PR.

2. Entity PR: An entity can be a PR provided an individual is appointedwho has substantial presence in the U.S. and has capacity to act. Prop. Reg. §301.6223-1(b)(3).

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B. Eligibility

1. Substantial Presence in the U.S.: A PR must have a substantial presence in theU.S. Under the Proposed Regulations, a PR has substantial presence in the U.S. ifall of the following requirements are met:

a. Available to Meet with IRS: The person is available to meet in personwith the IRS in the U.S. at a reasonable time and place, as is necessary andappropriate, as determined by the IRS;

b. U.S. Street Address: The person has a street address that is in the U.S. anda telephone number with a U.S. area code where the person can be reachedduring normal business hours;

c. U.S. TIN: The person has a U.S. TIN.

Prop. Reg. § 301.6223-1(b)(2).

2. Capacity to Act: A PR does not have capacity to act in the event of: (i) death; (ii)certain court orders determining the person lacks capacity or enjoining the personfrom acting on behalf of partnership or entity PR; (iii) incarceration; (iv)liquidation or dissolution of entity PR; or (iv) any similar situation the IRSdetermines the person lacks capacity to act. Prop. Reg. § 301.6223-1(b)(4).

C. PR Designation, Resignation, and Revocation

1. Designation of PR: The partnership designates the PR annually on its partnershipreturn. Prop. Reg. § 301.6223-1(c).

2. Resignation of PR: A PR may resign by notifying the partnership and the IRS inwriting of the resignation. Prop. Reg. § 301.6223-1(d).

a. Successor PR. The notification to the IRS may include a successor PRdesignation, which is effective 30 days from the date on which the IRSreceives the written notification. If the resigning PR fails to designate asuccessor PR, the IRS will determine that no designation is in effect, andthe partnership will have an opportunity to designate a successor PR. Ifthe partnership fails to designate a successor PR after the IRS notice, theIRS will designate a PR for the partnership. Prop. Reg. § 301.6223-1(d)(1).

b. Time for Resignation: A PR may only resign: (i) simultaneously with thefiling of an AAR; (ii) after receipt of a notice of administrative partnershipproceeding (“NOAPP”); or (iii) at such other time as prescribed by theIRS in other guidance. A partnership may not file an AAR solely for thepurpose of permitting a PR to resign. Prop. Reg. § 301.6223-1(d)(2).

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3. Revocation of PR: A partnership may revoke the designation of a PR bynotifying the PR and IRS in writing, which is effective 30 days from the date onwhich the IRS receives the written notification. Prop. Reg. § 301.6223-1(e)(1).

a. Time for Revocation: A partnership may revoke a PR designation by: (i)filing an AAR; (ii) after receipt of an NOAPP; or (iii) at such other time asprescribed by the IRS in other guidance. A partnership may not file anAAR solely for the purpose of revoking a PR designation. Prop. Reg. §301.6223-1(e)(2).

b. Revocation Requirements:

i. General Partner Signature: A revocation must be signed by aperson who was a general partner at the close of the taxable yearfor which the PR designation is in effect. A partner in thepartnership during the taxable year who was not a general partnermay sign the revocation only if, at the time the revocation issigned, each general partner of the partnership eligible to sign therevocation is no longer a partner or no longer has capacity to act.For purposes of these requirements, a member-manager of an LLCis treated as a general partner and a member of an LLC who is nota member-manager is treated as a partner other than a generalpartner. Prop. Reg. § 301.6223-1(e)(3).

ii. Form: The notification of revocation must include:

1. A certification under penalties of perjury that the personsigning the form meets the General Partner Signaturerequirement and has provided a copy of the revocation tothe partnership and to the PR whose designation is beingrevoked;

2. A statement that the person signing the form is revoking thedesignation of the PR; and

3. A subsequent designation of the PR in accordance with IRSinstructions.

Prop. Reg. § 301-6223-1(e)(3)(ii).

c. Multiple Revocations: If the IRS receives multiple revocations within a90-day period, the IRS may determine that a designation is not in effect.Prop. Reg. § 301.6223-1(e)(4).

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D. IRS Designation

1. IRS Determination that Designation is not in Effect: If the IRS determines that aPR designation is not in effect for a partnership taxable year, the IRS will notifythe partnership and the most recent PR. The determination that a PR designationis not in effect is effective on the date the IRS mails the notification. Generally,the partnership has 30 days from the date of the IRS notification to designate asuccessor PR. Prop. Reg. § 301.6223-1(f).

a. The IRS may determine that a designation is not in effect in the followingcircumstances:

i. multiple revocations within a 90-day period;

ii. the partnership failed to make a valid designation;

iii. the PR lacks a substantial presence in the U.S. or lacks capacity toact;

iv. the partnership failed to appoint a designated individual of anentity PR;

v. no successor designation was made when the PR resigned; or

vi. the partnership fails to designate the successor PR in accordancewith instructions or forms of IRS.

Prop. Reg. § 301.6223-1(f)(2), (3).

2. Multiple Revocations: In the event the IRS determines that the PR designation isnot in effect due to multiple revocations, the partnership will not be provided anopportunity to designate a successor PR. Prop. Reg. § 301.6223-1(f)(4).

3. Designation by IRS: The IRS may designate a PR if the IRS determines that a PRdesignation or successor designation is not in effect. The IRS designates a PR bynotifying the partnership of the name, address, and telephone number of the newPR. The designation of a PR by the IRS is effective on the date on which the IRSmails the notice of the designation to the partnership. In addition, the IRS willmail a copy of the notice to the new PR. Prop. Reg. § 301.6223-1(f)(5)(i).

4. IRS Factors in Designation: The IRS may designate any person to be the PR. Inaddition to other relevant factors, the IRS will consider whether there is a suitablepartner of the partnership, either from the Reviewed Year or at the time thepartnership designation is made. The IRS will additionally consider the followingfactors: (i) the views of the majority interest partners; (ii) the general knowledgeof the person in tax matters and administrative operation of the partnership; (iii)

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the person’s access to the books and records of the partnership; and (iv) whetherthe person is a U.S. person. Prop. Reg. § 301.6223-1(f)(5)(ii).

E. Binding Effect of PR

1. Binding Effect of Actions of Partnership and PR: The actions of the partnershipand PR and any final judicial decision bind the partnership, all partners of thepartnership, and any other person whose tax liability is determined in whole or inpart by taking into account adjustments as determined under the PAR. Prop. Reg.§ 301.6223-2(a).

2. Sole Authority to Act: The PR has sole authority to act on behalf of thepartnership. No other partner or any other person may participate in a partnershipexamination or other proceeding involving the partnership without IRSpermission. Prop. Reg. § 301.6223-2(c)(1).

3. Existing Law: Gives any partner the right to participate in any administrativeproceeding relating to the determination of partnership items at the partnershiplevel. In addition, under old Section 6224, a tax matters partner has authority toenter into a settlement agreement with the Internal Revenue Service.

V. PARTNERSHIP ADJUSTMENTS (SECTION 6225)

A. Imputed Underpayment

If the IRS makes an adjustment (“Partnership Adjustment”) for the Reviewed Year(defined below) in the amount of any item of income, gain, loss, deduction, or credit of apartnership, or any partner’s distributive share of such item, the following applies:

1. Payment By Partnership: Imputed Underpayment Amount (defined below) ispaid by the Partnership in the Adjustment Year as if it were a tax. Prop. Reg. §301-6235-1(a)(1).

a. “The “Reviewed Year” is the tax year to which the tax item adjustedrelates – i.e., the year audited by the IRS. Section 6225(d)(1).

b. The “Adjustment Year” under Section 6225(d)(2) is defined as:

i. if a proceeding under Section 6234 (i.e., judicial review of apartnership adjustment), the tax year the court decision is final;

ii. if an Administrative Adjustment Request (“AAR”) under Section6227, the tax year in which the AAR is made; or

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iii. in other cases, the tax year in which Notice of Final PartnershipAdjustment (“FPA”) is mailed under Section 6231.

c. The term “Partnership Adjustment” is defined in Section 6241.

2. Other Adjustments: An adjustment by the IRS that is not an ImputedUnderpayment Amount must be taken into account by the partnership in theAdjustment Year (Section 6235(a)(2)):

a. Non-credit items: If a non-credit item, the adjustment is a reduction innon-separately stated income or an increase in non-separately stated loss(whichever is appropriate) under Section 702(a)(8); or

b. Credit items: If a credit item, the adjustment is a separately stated item.

Observation: The requirement that the tax is paid by the partnership is a dramatic changein policy. Historically, any tax attributable to partnership adjustments has been accountedfor, and paid at, the partner level. PAR creates an entity level tax. In addition, thepartners in the Adjustment Year will be the partners that bear the economic consequencesof additional tax owed, not the partners in the Reviewed Year, unless the Push-OutElection is made (see below).

3. Application of Preferences, etc.: Prop. Reg. § 301.6225-1(a)(2) provides that allamounts determined under Section 6225, i.e., Imputed Underpayment, netting,and adjustments, are determined, unless IRS determines otherwise in itsdiscretion, by applying all preferences, restrictions, limitation and conventions todisallow or limit any adjustment that increases a loss, deduction or credit ordecreases income or gain as if the item was reported originally in most beneficialmanner to the partners.

4. NOPPA: The Imputed Underpayment is set forth in the NOPPA without regardto permitted modifications.

5. Other Adjustments: If a Partnership Adjustment does not result in an ImputedUnderpayment, that Adjustment is taken into account in the Adjustment Year.

6. Computation of Imputed Underpayment Amount: The Imputed UnderpaymentAmount is determined under Prop. Reg. § 301.6225-1(c) as follows:

a. Generally: Multiplying Partnership Adjustments of by the highest rate oftax in effect for the Reviewed Year under Sections 1 or 11. Section6225(b)(1).

b. Credits: Increase or decrease the amount in (a) by net increase or netdecrease in credits under the Partnership Adjustment.

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c. Total Netted Partnership Adjustments: The sum of all “net positiveadjustments” in Residual Group and in Reallocation Group. Prop. Reg. §301.6225-1(c)(3).

d. Distributive Share Reallocation Adjustments: Disregarded under Prop.Reg. § 301.6225-1(d)(2)(ii) and net non-positive adjustments under Prop.Reg. § 301.6225-1(d)(3) do not result in Imputed Underpayment.

e. Netting of Adjustments: Not permitted between years. Prop. Reg. §301.6225-1(c)(4).

f. Grouping: Prop. Reg. § 301.6225-1(d) requires Partnership Adjustmentsbe grouped as follows:

i. Reallocation Group: Adjustments that reallocate distributive shareof an item between and among partners or allocation of item to apartner.

ii. Credit Group: Adjustments to items claimed or could be claimedas a credit.

iii. Creditable Expenditure Group: (Reserved)

iv. Residual Group: Other adjustments not described above andfurther subject to subgrouping per limitations or restrictionsimposed on adjustment items, such as character or holding period.

g. Netting of Adjustments: Netting only within each Group or Subgroup asnet positive or net non-positive adjustment; no netting between Groups orSubgroups or between tax years. Prop. Reg. § 301.6225-1.

h. Total Netting Adjustments: Sum of all net positive adjustments inResidual Grouping and in Reallocation Grouping. Only net positiveadjustments in Group taken into account. Id.

i. Imputed Underpayment Amount: (i) Total Netted PartnershipAdjustments times highest rate under Section 1 or Section 11 plus orminus (ii) net decrease or increase in Credit Group.

j. Subgroups Adjustments within each Group are further subgrouped basedon preferences, limitations, restrictions, and conventions, such as source,character, holding period or restrictions applicable to each item. Prop.Reg. § 301.6625-1(d)(1).

k. Reallocation Grouping: A reallocation of the distributive share of an itemfrom one partner to another or an allocation of an item to a particular

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partner that results in net decreases in items of income or gain or netincreases in items of deduction, loss or credit are disregarded in computingImputed Underpayment Amount. Each allocation or reallocation of anitem is a separate subgroup for purposes of netting. If a partner has morethan one adjustment within a reallocation group, the adjustments may becombined or further subdivided into subgroups. Any net non-positiveadjustments are disregarded and do not result in an ImputedUnderpayment. Net positive adjustments are included in the calculation ofTotal Netted Partnership Adjustment.

l. Netting Within Each Group or Subgroup: Partnership Adjustments withina Group or Subgroup are netted together within each Group or Subgroupand are not cross-netted. Only net positive adjustments are taken intoaccount in calculating Total Netted Partnership Adjustment. Net Non-Positive Adjustments within a Group or Subgroup are disregarded and donot result in an Imputed Underpayment.

m. Treatment of Adjustments: An increase in gain or decrease in loss istreated as an increase in income. A decrease in gain or an increase in lossis treated as a decrease in income.

n. Multiple Imputed Underpayments: The IRS has the discretion todetermine the Partnership Adjustments resulting in more than one ImputedUnderpayment and which Partnership Adjustments are to be taken intoaccount in a particular Imputed Underpayment based upon the nature ofthe Adjustment.

o. Types of Imputed Underpayments: Prop. Reg. § 301.6225-1(e)(2)describes two types of Imputed Underpayments – a General ImputedUnderpayment and a Specific Imputed Underpayment (both as defined)and each of those types of Imputed Underpayments are separatelycalculated. A Specific Imputed Underpayment is one in which theAdjustments to an item were allocated to one partner or group of partnershaving the same or similar characteristics. Any Adjustment that isn’t thusdefined is treated as a General Imputed Underpayment. The IRS hasdiscretion to determine which Partnership Adjustments should be takeninto account for a Specific Imputed Underpayment or a General ImputedUnderpayment.

p. Imputed Underpayment Not Deductible. Section 6241(4) states a payment(ie, Imputed Underpayment) made by a partnership under subtitle A is notdeductible.

Observation: The Imputed Underpayment Amount does not appear to take the AMT orNet Investment Income Tax under Section 1411 into account. In addition, affected itemsat the partner level appear to be ignored.

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7. Modification of Imputed Underpayment Amount: Under Section 6225 and/or theProposed Regulations, the following modifications to an Imputed UnderpaymentAmount are available if requested by a partnership (i.e., the PR) that has receiveda NOPPA:

a. Amended Returns: The Imputed Underpayment Amount may bemodified, with IRS approval, if one or more Reviewed Year partners fileamended return taking into account all Partnership Adjustments allocableto the partner and any other tax attribute affected by the Adjustment andthe tax is paid with the Amended Return. If the Adjustment is areallocation of distributive share item, all partners affected by theAdjustment must file amended returns.

i. IRS Approval: IRS approval conditioned on IRS receiving withinthe 270-day period affidavits from the partners signed underpenalties of perjury that each amended return required to be filedhas been filed (including the date on which the returns were filed)and that full payment of the tax, penalties, additions to tax,additional amounts, and interest have been paid (including the dateon which the payments were made). The partners must fileamended returns for each year affected by the modification. Prop.Reg. § 301.6225-2(d)(2)(iii) - (iv).

ii. Statute of Limitations: Amended return modification not allowedif the statute of limitations for assessment of the tax for the year forwhich the amended return is filed has expired. However, the IRSmay approve the amended return modification if a refund of tax,provided all partnership adjustments allocated to the partners filingthe amended returns are taken into account on the amendedreturns, the only items reported on the amended returns are itemsattributable to such partnership adjustments, and the partners fileall required amended returns in which adjustments are required.Prop. Reg. § 301.6225-2(d)(2)(v)(A) - (B).

iii. Pass-Through Partners. A pass-through partner (or indirect partnerthat is a pass-through partner) that has a valid Opt-Out Election ineffect for a partnership taxable year may elect, solely for purposesof the modification procedures, to take into account its share of thepartnership adjustments and determine and pay an amountcalculated under the safe harbor provisions. Prop. Reg. §301.6225-2(d)(2)(vii).

iv. Additional Amended Returns Restricted. If an amended return isfiled, the partner may not file a subsequent amended return withoutthe permission of the IRS. Prop. Reg. § 301.6225-2(d)(vii)(B).

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v. Modification Denied. If the IRS denies a modification request, theProposed Regulations do not address how or whether the partnerwho filed the amended return can obtain a refund of the tax paidand do not address whether and how the denial can be appealed inthe IRS.

vi. Refund. If the modification is an amended return, the amendedreturn includes the Imputed Underpayment items and the net non-positive adjustment items. If the result of including all adjustmentsis a refund for the Review Year, the normal 3 year statute oflimitations for refund claims under Section 6511 is waived. Prop.Reg. 301.6225-2(b)(3)(v).

b. Tax Exempt Partners: A modification may be requested for a partnershipwith a tax exempt partner who would not owe tax. Prop. Reg. § 301.6225-2(d)(3).

c. Lower Tax Rate: A modification may be requested for a lower tax rateapplicable to partners which are C corporations or, in the case of a capitalgain or qualified dividend, individuals. For purposes of the capital gain orqualified dividends modification, an S corporation is treated as anindividual. The lower rate cannot be less than the highest rate for the typeof income or taxpayer (i.e., modified rate is not actual rate applicable toReviewed Partner). Prop. Reg. § 301.6225-2(d)(4). If a partner hasvarying percentage interests in partnership items of income, gain, loss,deduction or credit, the partner’s percentage share of the ImputedUnderpayment Amount to which the lower rate applies is determined byreference to the amount of the partner’s distributive share of net gain orloss arising out of a hypothetical sale of all partnership assets at their fairmarket value as of the close of the Reviewed Year. Blue Book at 67;Prop. Reg. § 301.6225-2(b)(3)(iii).

d. Passive Losses of Publicly Traded Partnerships:

i. Adjustment to Imputed Underpayment Amount: The ImputedUnderpayment Amount is determined without regard to the portionattributable to a net decrease in a specified passive activity losswhich is allocable to a specified partner. Prop. Reg. § 301.6225-2(d)(5)(i); Section 6225(c)(5). The net decrease is taken intoaccount as an adjustment in the Adjustment Year with respect tothe specified partners to who such decrease relates. Section6225(c)(5).

ii. Specified Passive Activity Loss: This term means, with respect toany specified partner, the lesser of (i) the passive activity loss of

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such partner under Section 469(k) with respect to such partner’staxable year in which or with which the Reviewed Year of suchpartnership ends or (ii) such passive activity loss so determinedwith respect to such partner’s taxable year in which or with whichthe Adjustment Year of such partnership ends. Section6225(c)(5)(B); Prop. Reg. § 301.6225(d)(5)(ii).

iii. Specified Partner: This term means any person: (i) who is apartner of the publicly traded partnership; (ii) is an individual,estate, trust, closely held C corporation or personal servicecorporation; and (iii) has a specified passive activity with respectto such publicly traded partnership, with respect to each taxableyear of such person which is during the period beginning with thetaxable year of such person in which or with which the ReviewedYear of such publicly traded partnership ends and ending with thetaxable year of such person in which or with which the AdjustmentYear of such publicly traded partnership ends. Section6225(c)(5)(C); Prop. Reg. § 301.6225(d)(5)(iii).

iv. Partner Notification: The IRS must approve of the modificationand the partnership must report to each specified partner theamount of that partner’s reduction of suspended passive losscarryovers at the end of the Adjustment Year to take into accountthe amount of any passive losses applied in connection with themodification request. The reduction in suspended passive losscarryovers is a determination of the partnership and is binding onthe specified partners. Prop. Reg. § 301.6225-2(d)(5)(iv).

e. Qualified Investment Entities. A partnership may request modification ofthe Imputed Underpayment Amount based on the partnership adjustmentsallocated to a Reviewed Year partner (or indirect partner) where themodification is based on deficiency dividends distributed as described inSection 860(f), by a partner that is a qualified investment entity underSection 860(b), which includes both a regulated investment company(RIC) and a real estate investment trust (REIT). Prop. Reg. § 301.6225-2(c)(7).

f. Number and Composition of Imputed Underpayment: The Partnershipmay request that Partnership Adjustments be included in one or moreparticular Groups or Subgroups and that the IRS determine one or morespecific Imputed Underpayments based on those modified groupings.

g. Closing Agreements. A partnership may request modification based on aclosing agreement entered into by the IRS and any partner (or indirectpartner). Prop. Reg. § 301.62256-2(c)(8).

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h. Other Modifications. A partnership may request additional modificationsnot described above. The IRS will determine whether the requestedmodification is accurate and appropriate under the circumstances. Prop.Reg. § 301.6226-2(c)(9).

8. Deadline for Submitting Documentation for Requested Modification: Alldocumentation, including amended returns, must be submitted to the IRS not laterthan the close of the 270-day period beginning on the date on which the notice ofproposed partnership adjustment (“NOPPA”) is mailed unless the partnershiprequests an extension of time and the IRS grants such an extension. Prop. Reg. §301.6225-2(c)(3)(i).

a. Expiration of 270-day Period by Consent. The IRS and the PR may agree,in writing, to waive the 270-day period after the mailing of the NOPPAand before the issuance of the FPA. Prop. Reg. § 301.6225-2(c)(3)(iii).

9. Required Documentation: The partnership must provide a detailed description ofthe structure, allocations, ownership, ownership changes, partners, and, ifrelevant, any indirect partners for each taxable year relevant to the request formodification and any other information the IRS determines is necessary. Inaddition, the partnership must provide documentation which may include taxreturns and the partnership agreement. Prop. Reg. § 301.6225-2(c)(2)(ii).

10. IRS Approval: The IRS will notify the PR in writing of the approval or denial, inwhole or in part, of the requested modification but notification of approval will beprovided only after receipt of all relevant information and necessary payments.Prop. Reg. § 301.6225-2(c)(4).

11. Modification Does Not Result in Separate IRS Examination. The modificationprocess is part of the partnership administrative proceeding and does notconstitute a separate examination, inspection, or other administrative proceedingwith respect to any other person. Prop. Reg. § 301.6225-2(c)(1).

B. Non-Imputed Underpayment Adjustments

1. General. Partnership Adjustments that did not result in an ImputedUnderpayment are taken into account by the partnership in the Adjustment Year.Prop. Reg. § 301.6225-3(a).

2. Reallocation Adjustments. If the Partnership Adjustment is a reallocation of adistributive share, the applicable Adjustment is allocated to the Adjustment Yearpartners who are also Reviewed Year partners to whom the amount was re-allocated. If a Reviewed Year partner is not also an Adjustment Year partner, theamount otherwise allocable to the Reviewed Year partners is allocated to theAdjustment Year partners who are the successor or successors to the ReviewedYear partner. If a successor cannot be identified or does not exist, the Adjustment

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is allocated among Adjustment partners according to their respective distributiveshares. Prop. Reg. § 301.6225(b)(4).

3. Adjustments Effected by Modification Process. If the modification processapplies and a Reviewed Year partner takes into account an Adjustment that doesnot otherwise result in an Imputed Underpayment, and the modification isapproved by the IRS, the partnership does not take the Adjustment into account inthe Adjustment Year. Prop. Reg. § 301.6225-3(b)(5).

4. Effect of Push Out Election. If a valid Push Out Election has been maderegarding an Imputed Underpayment, the Partnership Adjustment that does notresult in an Imputed Underpayment (i.e., the Adjustment is a distributive shareallocation, is disregarded or the Adjustment is a non-positive adjustment) is takeninto account by the Reviewed Year partner under Section 6226. Prop. Reg. §301.6225-3(b)(6).

5. Net Non-Positive Adjustment. A net non-positive adjustment (ie, decrease inincome or gain or increase in deduction or loss) is treated as a reduction in non-separately stated income or gain or separately stated income or gain under Section702 or an increase in non-separately stated deduction or loss or separately stateddeduction or loss under Section 702, as applicable. An adjustment in a credit is aseparately stated item. Prop. Reg. § 301.6225-3(b).

C. Alternative to Payment of Imputed Underpayment Amount by Partnership (“PushOut Election”) (Section 6226)

Section 6226 provides for an election (“Push Out Election”) whereby the ReviewedYear partners, and not the partnership, pay the Imputed Underpayment Amount.

1. Criteria. A partnership does not pay the Imputed Underpayment Amount if thepartnership meets the following two criteria: (i) not later than 45 days after thedate of the FPA, the partnership elects Section 6226 and (ii) at such time and insuch manner as the Secretary provides, the partnership furnishes to eachReviewed Year partner and to the Secretary a statement of the partner’s share ofany adjustment to income, gain, loss, deduction, or credit (as determined in thenotice of final partnership adjustment). In such case, Section 6225 does not applyand each Reviewed Year partner takes such adjustment into account as providedbelow.

2. Multiple Imputed Underpayments: A partnership may make a Push Out Electionwith respect to one or more Imputed Underpayments identified in the FPA. Prop.Reg. § 301.6226-1(a).

3. Election: To be valid, a Push Out Election must include the followinginformation:

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a. the name, address, and correct TIN of the partnership;

b. the taxable year to which the election relates;

c. a copy of the FPA to which the election relates;

d. if the FPA includes more than one Imputed Underpayment, identificationof the Imputed Underpayment(s) to which the election applies;

e. each Reviewed Year partner’s name, address, and correct TIN; and

f. any other information prescribed by the IRS in forms, instructions, andother guidance.

Prop. Reg. § 301.6226-1(c)(4)(ii).

In addition, the election is only valid if the partnership provides the ReviewedYear partners with statements of the final adjustments and files a similarstatement with IRS. Once made, the election may not be revoked without IRSconsent. Prop. Reg. § 301.6226-1(c)(1). The Blue Book at page 69 states that aspart of any settlement with the IRS, the IRS may permit revocation of the Push-Out Election and the partnership pays the tax at the partnership level.

4. Invalid Election: If IRS determines the Push Out election is invalid, IRS willnotify the PR within 30 days. If IRS makes a final determination that the electionis invalid, Section 6225 applies. Prop. Reg. § 301.6226-1(c)(2).

5. No Extensions: Partnership may not request an extension of time of the 45-dayrequirement. Prop. Reg. § 301.6226-1(c)(3).

6. Amount Due By Partners: Each partner’s tax is increased by sum of the following(Section 6226(b)):

a. Partner Year that Includes End of Partnership Reviewed Year: Theamount by which the tax for the Reviewed Year would increase if theReviewed Year partner’s share of the adjustments were taken into accountfor such taxable year, plus

b. Subsequent Years: The amount by which the tax would increase for anyyear after the Reviewed Year by reason of the adjustments to any taxattribute which would have been affected in the subsequent year.

Prop. Reg. 301.6226-3.

The Push-Out election applies to Imputed Underpayment adjustments and netnon-positive adjustments, both of which are reported by the Reviewed Year

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partner. The amount due by the partner cannot be less than zero and does notreduce any other correction amount or tax due. Prop. Reg. § 301.6226-3(b)(1).Thus, if net non-positive adjustments are greater than the Imputed Underpaymentadjustments, the Reviewed Year partner cannot claim a refund under thisprocedure. The refund apparently can be obtained only through the amendedreturn modification to the Imputed Underpayment. Prop. Reg. § 301.6226-3(b)(2).

7. Penalties: Notwithstanding a Push Out Election, any penalties or additions to taxmust be determined at the partnership level and Reviewed Year partners shall beliable for any such penalty, addition to tax, or additional amount.

8. Interest: Interest is determined at the partner level, from the due date of the returnfor the taxable year to which the increase is attributable and at the underpaymentrate under Section 6621(a)(2) determined by substituting 5 percentage points for 3percentage points. If the Push Out Election is not made, the underpayment rate isincreased by 3 percentage points only. Note: The underpayment rate in Section6621(a)(2) is generally the federal short term rate plus 3 percentage points.

9. Partner Statements: Partnerships must provide each Reviewed Year partner astatement, which must also be filed with the IRS no later than 60 days after thedate all of the Partnership Adjustments to which the statement relates are finallydetermined. Prop. Reg. § 301.6226-2(a), (b)(1). Partnership Adjustments arefinally determined upon the later of: (i) the expiration of the time to file a petitionunder Section 6234, or (ii) if a petition is filed, the date when the court’s decisionbecomes final. Id.

The statement is mailed to the current or last address of the Reviewed Yearpartner that is known to the partnership. Prop. Reg. § 301.6226-2(b)(2). If astatement is returned as undeliverable, the partnership must undertake reasonablediligence to identify a correct address for the Reviewed Year partner. Id. Inaddition, the statement must include the following information:

a. the name and correct TIN of the Reviewed Year partner to whom thestatement is being furnished;

b. the current or last address of the Reviewed Year partner that is known tothe partnership;

c. the Reviewed Year partner’s share of items as originally reported for theReviewed Year on statements furnished to the partner under Section6031(b) (i.e., Schedules K-1), and, if applicable, Section 6227;

d. the Reviewed Year partner’s share of Partnership Adjustments;

e. certain modifications as required by the Proposed Regulations;

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f. the Reviewed Year partner’s share of any amounts attributable toadjustments to the partnership’s tax attributes resulting from thePartnership Adjustments in the Reviewed Uear;

g. the Reviewed Year partner’s share of any penalties, additions to tax, oradditional amounts;

h. the Reviewed Year partner’s safe harbor amount and, if applicable,interest safe harbor amount (see below);

i. the date the statement is furnished to the Reviewed Year partner;

j. the partnership taxable year to which the Partnership Adjustments relate;and

k. any other information required by forms, instructions, and other guidanceprescribed by the IRS.

Prop. Reg. § 301.6226-2(e).

The Proposed Regulations provide rules for correcting partner statements afterthey are issued to the Reviewed Year partners. In addition, the ProposedRegulations address IRS actions when the IRS discovers an error after the partnerstatements are issued. See Prop. Reg. § 301.6226-1(d).

10. Amount and Payment of Tax. The amount of the tax imposed on the ReviewedYear partners is either the “aggregate of the adjustment amounts” or, if an electionis made by the partners, the “safe harbor amount.” The Reviewed Year partnermust pay the partner’s share of any penalties, additions to tax, and additionalamounts reflected on the partner statements. Prop. Reg. § 6226-3.

a. Aggregate of the Adjustment Amounts: The “aggregate of the adjustmentamounts” equals the sum of (i) correction amounts for the first affectedyear and (ii) correction amounts for intervening years.

i. Correction Amount for First Affected Year = A – (B + C – D)

A = Amount of chapter 1 tax that would have been imposed haditems as adjusted been properly reported on return for firstaffected year.

B = Amount of chapter 1 tax on the return for the first affectedyear.

C = Amounts not so shown previously assessed (or collected).

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D = Amount of rebates.

ii. Correction Amount for Intervening Years = A – (B + C – D)

A = Amount of chapter 1 tax that would have been imposed forintervening year.

B = Amount shown as chapter 1 tax on return for interveningyear (taking into account amended returns).

C = Amounts not so shown previously assessed (or collected).

D = Amount of rebates.

b. Safe Harbor: If a Push Out Election is made, the partnership mustcalculate a safe harbor amount, which cannot be less than zero, for eachReviewed Year partner and an interest safe harbor amount for eachReviewed Year partner who is an individual. Prop. Reg. § 301.6226-2(g)(1).

i. Safe Harbor Amount: Calculated in the same manner as theImputed Underpayment Amount except each Reviewed Yearpartner’s share of the Partnership Adjustments as reported on thepartner statements (including any amounts attributable toadjustments to partnership tax attributes) are substituted as thePartnership Adjustments taken into account for purposes ofdetermining the Imputed Underpayment Amount. Prop. Reg. §301.6226-2(g)(2)(i).

ii. Interest Safe Harbor Amount: Calculated at 5% plus the Federalshort-term rate from the due date (without extension) of theindividual Reviewed Year partner’s return for the first affectedyear until the due date (without extension) of the individualReviewed Year partner’s return for the year in which the statementis issued. Prop. Reg. § 301.6226-2(g)(2)(iii)

c. Tax Due. The tax as computed is added to the tax due by the partner forthe year that includes the year the statement is furnished to the partner.Prop. Reg. § 301.6226-3(a).

Observation: If a Section 6226 Push Out Election or Section 6225(c)(2) partner amendedreturn election is made, the 3.8 percent net investment tax on any affected items will betaken into account by the Reviewed Year partner. By contrast, if such elections are notmade, the partnership will pay the Imputed Underpayment Amount without the 3.8percent tax.

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11. Indemnification Agreements. The Blue Book at page 70 discusses the situationwhere the Push Out statement is made to a partner who itself is a partnership. The discussionpresents a scenario where the partnership partner and its present and former partners haveentered into an indemnification agreement relating to the tax liability of the Reviewed Yearpartner being borne by the partners in the year of the Push Out statement. The Blue Bookconcludes that since the tax paid by the partnership under PAR is non-deductible, theindemnification payment is also non-deductible.

12. Pass-Through Partners: The Proposed Regulations do not address, but reserve,the issue of tiered partnerships subject to a Push Out election. An issue raised to the IRS is toallow the Push-Out election to be applied through tiered partnerships. The Explanation ofProvisions (“Explanation”) to the Proposed Regulations acknowledges this issue of tieredpartnership push outs and expresses concerns over complexities, challenges and inefficiencies.Nevertheless, the Explanation indicates the IRS is studying this issue that will be the subject ofother proposed regulations.

13. Foreign Entity Partners: RESERVED in the Proposed Regulations

14. Partners’ Outside Bases and Capital Accounts: The Proposed Regulations do notaddress, but reserve, the manner in which partner’s partnership interest adjusted basis and capitalaccount are to be adjusted by the PPAR procedures. However, Prop. Reg. § 301.6241-4 statesthe payments reduce the adjusted basis of the partnership interest under Section 705(a)(2)(B).

VI. ADMINISTRATIVE ADJUSTMENT REQUESTS (Section 6227)

The AAR Provisions generally describe the procedures for amending partnership returnsand filing related refund claims.

A. General

A partnership may file a request for an administrative adjustment (“AAR”) with respectto one or more items of income, gain, loss, deduction, or credit of the partnership taxable year orany partner’s distributive share for any partnership. Prop. Reg. § 301.6227-1(a).

B. Adjustment

An administrative adjustment must be taken into account for the partnership taxable yearin which the AAR is made under rules similar to the rules of Section 6226 (adjustments by theSecretary). Section 6227(b).

C. The partnership must determine if the adjustments under the AAR result in an ImputedUnderpayment under Prop. Reg. § 301.6227-2(a), in which case the partnership must paythe Imputed Underpayment on the date the AAR is filed (Prop. Reg. § 301.6227-2(b))unless a Push Out Election is made in which case the Review Year partners take the

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adjustment into account in the year the partnership furnished the Reviewed Year partnerswith the required statement. Prop. Reg. § 301-6227.3. If the adjustments do not result inan Imputed Underpayment (ie, non-positive adjustment), the Reviewed Year partnerstake the adjustments into account in the year the partnership issues the requiredstatement. Prop. Reg. § 301.6227-3.

D. Period of Limitations

A partnership may not file an AAR more than 3 years after the later of (1) the date onwhich the partnership return for such year is filed or (2) the last day for filing the partnershipreturn for such year (determined without regard to extensions). Section 6227(c).

E. Where NOAPP Issued

A partnership may not file an AAR for a year to which a NOAPP has been mailed previouslyto the partnership under Section 6231. Section 6227(c).

F. Form

The AAR must be filed in accordance with IRS forms, instructions, and other guidance,be signed by the PR under penalties of perjury and include the following information:

(i) the adjustments requested;

(ii) if a Reviewed Year partner is required to take into account the adjustments, astatement of the name and correct TIN of the Reviewed Year partner to whom thestatement is being furnished; the current or last address of the partner that isknown to the partnership; the Reviewed Year partner’s share of items asoriginally reported on statements furnished to the partner under Section 6031(b),and, if applicable, the Reviewed Year partner’s share of the adjustments; the datethe statement is furnished to the partner; the partnership taxable year to which theadjustments relate;

(iii) other information prescribed by the IRS in forms, instructions, or other guidance.

Prop. Reg. § 301.6227-1(c)(2) and (e).

G. Partner Modification

A partnership may request modification of the amount of the Imputed UnderpaymentAmount for tax-exempt partners, tax rates, specified passive activity losses, qualified investmententities, or as provided in forms, instructions, or other guidance prescribed by the IRS withrespect to AARs. To request a modification, the partnership must:

(i) notify the IRS of any modification;

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(ii) describe the effect of the modification on the Imputed Underpayment Amount;

(iii) provide an explanation of the basis for the modification;

(iv) provide documentation to support the partnership’s eligibility for themodification.

Prop. Reg. § 301.6227-2(a)(2).

If a Push Out Election is made, no modification is permitted. Prop. Reg. § 301.6227-2(c). In addition, IRS prior approval is not required for a modification to an AAR. Prop. Reg. §301.6227-2(a)(2).

H. Push Out Election

The partnership may elect under the AAR to have each Reviewed Year partner take intoaccount the adjustments requested in the AAR. If a valid Push Out election is made, thepartnership does not pay the Imputed Underpayment Amount. Rather, each Reviewed Yearpartner must take into account his/her share of the adjustments and any modifications requestedare disregarded and all adjustments requested in the AAR must be taken into account by eachReviewed Year partner. Prop. Reg. § 301.6227-2(c).

I. No Imputed Underpayment Amount

If the adjustments requested in an AAR do not result in an Imputed UnderpaymentAmount, the partnership must furnish statements to each Reviewed Year partner and file suchstatements with the IRS. Each Reviewed Year partner must take into account its share of theadjustments requested in the AAR as though a Push Out Election had been made. Prop. Reg. §301.6227-1(d).

J. Penalties

The IRS may impose a penalty, addition to tax and additional amount on the ImputedUnderpayment or on the failure to pay timely the Imputed Underpayment. Prop. Reg. §301.6227-2(b)(2).

K. Refunds

Prop. Reg. § 301.6227-3(b) provides that the adjustments taken into account by theReviewed Year partner under AAR do not entitle the partner to a refund of tax under Chapter 1of Subtitle A to which the partner is not entitled. The example is given of a partnership partnerto which this statement applies. However, this Proposed Regulation does give an example of anindividual partner being able to claim a refund of tax.

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L. Disregarded Provisions

Prop. Reg. § 301.6227-3(b) provides that if the Reviewed Year partner is taking intoaccount the adjustments (either because no Imputed Underpayment of Push Out Election), thefollowing provisions are disregarded: (1) safe harbor amount, (2) interest on safe harbor amount,(3) increased interest rate and (4) correction amount cannot be less than zero.

M. Use of AAR In Lieu of Amended K-1

The Blue Book at page 82 states that a Schedule K-1 cannot be amended after the duedate (including extensions) of the partnership return but the AAR process can be used to amendthe prior years.

N. Use of AAR by Partnership/Partner Subject to Push Out.

The Blue Book at 71 states that a partnership (PI) that is a partner in another partnership(P2) may file an AAR with respect to its distributive share of an adjustment in P1. Perhaps thissuggestion means that P1 can file an AAR regarding a Push-Out from P2, and thus “Push Out”the Push Out adjustments to the partners of P1 in the P1 Reviewed Year corresponding to theReviewed Year of P2 (assuming the statute is still open for the Reviewed Year of P1).

VII. NOTICE OF PROCEEDINGS (SECTION 6231)

A. General Notice Requirements

The PAR requires the IRS to mail to the partnership and the PR the following: (1)NOAPP initiated at the partnership level with respect to an adjustment of any item of income,gain, loss, deduction, or credit of a partnership for a partnership taxable year, or any partners’distributive share thereof, (2) NOPPA resulting from such proceeding and (3) FPA resultingfrom such proceeding. Section 6231(a).

B. Timing

A FPA may not be mailed earlier than 270 days after the date on which the NOPPA ismailed. This timing requirement applies to any proceeding with respect to an AAR filed by thepartnership under Section 6227. Section 6231(a).

C. Address for Notices

Notices are sufficient if mailed to the last known address of the PR or the partnership(even if the partnership has terminated its existence).

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VIII. ASSESSMENT AND COLLECTION (Section 6232)

A. Method for Assessing and Collecting

The Imputed Underpayment Amount is assessed and collected in the same manner as if itwere a tax imposed for the Adjustment Year by subtitle A of the Code, except in the case of anAAR, the underpayment must be paid when the request is filed. Section 6232(a).

B. Timing

Generally, no assessment of a deficiency may be made (and no levy or proceeding in anycourt for the collection of any amount resulting from such adjustment may be made, begun orprosecuted) before (1) the close of the 90th day after the day on which a FPA was mailed and (2)if a petition is filed in court with respect to the FPA, the decision of the court has become final.Section 6232(b).

C. Mathematical or Clerical Adjustments

If a partnership is notified of a mathematical or clerical error resulting in an adjustment toan item on the partnership return, rules similar to the rules of paragraphs (1) and (2) of Section6213(b) apply to such adjustment. Section 6232(d).

Note: Section 6213 (a) and (b) set forth procedures for making mathematical or clericaladjustments to a return. Generally, such assessments are not subject to the deficiencyprocedures unless a taxpayer requests abatement within 60 days of notice. In suchinstances, any reassessment is subject to the deficiency procedures of the Code.

D. Mathematical or Clerical Errors for Upper-Tier Partnerships

If a partnership (P2) is a partner in another partnership (P1), any adjustment on accountof P2’s failure to comply with Section 6222(a) (requiring partners to be consistent with apartnership return) is treated as a mathematical or clerical error. In such instance, subparagraph(2) of Section 6213, which provides a mechanism for abating the assessment and forcing theissuance of a notice of deficiency, shall not apply. Section 6232(d)(1)(B).

E. Partnership Waivers

A partnership may at any time (regardless of whether any notice of partnershipadjustment has been issued), by a signed written notice filed with the Secretary, waive therestrictions imposed on the issuance of an assessment on any Partnership Adjustment. Section6232(d)(2).

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F. Interest and Penalties (Section 6233)

1. Computation Up to Year of Adjustment:

a. Penalties: Except to the extent discussed above with respect to Push OutElections, the partnership is liable for any penalty, addition to tax oradditional amount, which is determined at the partnership level as if suchpartnership had been an individual subject to tax under chapter 1 of theCode for the Reviewed Year and the Imputed Underpayment Amountwere an actual underpayment (or understatement) for such year. Section6233(a)(1), (3).

b. Interest: Except to the extent provided under Section 6226(c), interest ona Partnership Adjustment is determined under chapter 67 of the Code forthe period beginning on the day after the return due date for the ReviewedYear and ending on the return due date for the Adjustment Year (or ifearlier, the date payment of the Imputed Underpayment is made).Adjustments are required for partnership taxable years after the ReviewedYear and before the Adjustment Year. Section 6233(a)(2).

2. Failure to Pay Imputed Underpayment Amount When Due: If an ImputedUnderpayment Amount is not paid when due, the partnership is liable for intereston the Imputed Underpayment Amount as an underpayment of tax imposed in theAdjustment Year. Penalties or additions to tax are determined by applying thefailure to pay penalties in Section 6651(a)(2). Section 6233(b).

G. Collection Due Process

The Blue Book at page 81 states that the merits of FPA cannot be raised at a CDP hearingbut the taxpayer is entitled to a CDP hearing for other aspects of the IRS collection process.

IX. JUDICIAL REVIEW OF PARTNERSHIP ADJUSTMENT (Section 6234)

A. Lawsuit to Challenge FPA

Within 90 days after the date on which a notice of a FPA is mailed, the partnership mayfile a petition for a readjustment with either (1) the United States Tax Court, (2) the district courtof the United States for the district in which the partnership’s principal place of business islocated or (3) the United States Court of Federal Claims. Under Section 6241(5), a principalplace of business located outside the United States is treated as located in the District ofColumbia. Section 6234(a).

B. District Court and Court of Federal Claims

A petition for readjustment may be filed in a district court of the United States or theCourt of Federal Claims only if the partnership filing the petition deposits with the Secretary, on

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or before the date the petition is filed, the Imputed Underpayment Amount (as of the date of thefiling of the petition) if the Partnership Adjustment was made as provided by the FPA. The courtmay by order provide that the jurisdictional requirements are satisfied where there has been agood faith attempt to satisfy such requirements and any shortfall of the amount is timelycorrected. Section 6234(b).

Observation: This prepayment requirement for filing a lawsuit in either federal districtcourt or the Court of Federal Claims does not appear to carve out an exception for orspecifically address the situation where a partnership wishes to make a Push Out Electionunder Section 6226 to have its partners pay the tax attributable to PartnershipAdjustments rather than having the partnership pay the Imputed Underpayment Amount.Apparently, the Imputed Underpayment Amount is to be paid in all cases where a lawsuitis filed in either district court or the Court of Federal Claims. For all practical purposes,this could mean that the district court and the Court of Federal Claims may not beavailable to any partnership that wishes to make a Push Out Election under Section 6226.Otherwise, the partnership may be required to pay the Imputed Underpayment Amount inaddition to having the partners account for tax due under Section 6226 for PartnershipAdjustments where a lawsuit in filed in either of these courts. In addition, what happensto a partner who files an amended return under Section 6225(c)? These issues are notaddressed in the Proposed Regulations.

C. Interest

Under Section 6234(b)(2), any amount deposited under Section 6234 is not to be treatedas a payment of tax for purposes of the Code, other than for purposes of Chapter 67 (Interest).Presumably, the deposit will earn interest if it is ultimately refunded to the partnership.

D. Scope of Judicial Review

A court with which a petition is filed has jurisdiction to determine all items of income,gain, loss, deduction, or credit of the partnership for the partnership taxable year to which theFPA. Section 6234(c).

E. Appeals

Any determination by the U.S. Tax Court, district court or Court of Federal Claims hasthe force and effect of a decision or final judgment from that court, as the case may be, and isreviewable as such. The date of any such determination is treated as the date of the court’s orderentering the decision. Section 6234(d).

F. Effect of Dismissal

If an action filed in any of the courts described above is dismissed, other than by reasonof rescission under Section 6231(c), the dismissal is considered as a decision that the FPA iscorrect and an appropriate order will be entered in the records of the court. Section 6234(c).

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X. STATUTE OF LIMITATIONS (SECTION 6235)

A. Statute of Limitations - Three Time Periods

Section 6235 states that, except as otherwise provided, no adjustment may be made afterthe later of:

1. The date which is 3 years after the latest of (A) the date on which the partnershipreturn for such taxable year (ie, Reviewed Year) was filed, (B) the return due datefor the taxable year or (C) the date on which the partnership filed an AAR withrespect to such year, or

2. In the case of any modification of an Imputed Underpayment Amount, the datethat is 270 days (plus the number of days of any extension consented to by theIRS under Section 6225(c)(7)) after the date on which everything required to besubmitted to the IRS pursuant to such Section is submitted, or

3. In the case of a NOPPA, the date that is 330 days (plus the number of days of anyextension consented to by the Secretary under Section 6225(c)(7)) after the dateof such Notice.

Note: The three-year period appears to be merely a minimum period rather than amaximum period. The provision dealing with Imputed Underpayment Amount seems toswallow-up the general three-year statute of limitations. There is no specific time-frameor deadline for issuing a NOPPA. In theory, the IRS could issue a NOPPA at any timeand would always have 270 days from that date to issue an FPA under Section 6231(a).The IRS has been requested to clarify this issue and provide that the NOPPA must beissued within the three year limitation period. The Blue Book at page 75 contains anexample of a NOPPA being issued within the three year period.

B. Agreements to Extend

The statute of limitations may be extended by an agreement entered into by the IRS andthe partnership before the expiration of such period.

C. Exceptions

1. Fraudulent Return: No statute of limitations applies in the case of a false orfraudulent partnership return with intent to evade tax. Section 6235(c)(1).

2. Substantial Omission: The 3-year statute of limitations is extended to 6 years ifany partnership omits from gross income 25% or more of income described inSection 6501(e)(1)(A). Section 6235(c)(2).

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3. No Return: If no return is filed for a taxable year, statute of limitations does notrun and the adjustment may be made at any time. A “substitute return” executedby the IRS under Section 6020(b) on behalf of the partnership is not treated as areturn of the partnership. Section 6235(c)(3).

D. Suspension of Statute of Limitations

1. FPA. If a FPA is mailed, the running of the statute of limitations, as modified byother provisions in Section 6235, is suspended for the period during which an action may be filedin court (and if a petition is filed, until the decision of the court becomes final), and for 1 yearthereafter. Section 6235(d).

E. Bankruptcy Proceeding

1. General. If a Partnership is a debtor in a Title 11 case, the statute of limitations istolled for making a Partnership Adjustment, or assessment or collection of any ImputedUnderpayment until 60 days after the suspension ends for adjustments or assessments and 6months after the suspension ends for collection. Prop. Reg. § 301.6241-2(a)(1).

2. Judicial Review. The statute of limitations is tolled regarding judicial review ofPartnership Adjustments until 60 days after the termination of the period of time during whichthe partnership is prohibited from filing a petition under Section 6234. Prop. Reg. § 301.6241-2(a)(3).

3. Actions Not Prohibited. A Title 11 case does not suspend the following:

a. Administrative Proceeding;

b. Notice of a proceeding, including a NOAPP, NOPPA, FPA;

c. Demand for tax returns;

d. Assessment of any tax; and

e. Issuance of notice and demand for payment of assessment.

Prop. Reg. § 301.6241-2(a)(4).

XI. OTHER SPECIAL PROVISIONS (Section 6241)

A. Partnership Payments Non-Deductible

No deduction is allowed for any payment required to be made by a partnership under thePAR. Section 6241(4). Prop. Reg. § 301.6241-4 states such payments are treated as anexpenditure under Section 705(a)(2)(B) (expenditures not deductible and properly chargeable tocapital account). Section 705(a)(2)(B) expenditures reduce the adjusted basis in the partnership

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interest of the partner. The Proposed Regulations do not address how to treat the underlyingadjustments to income that resulted in the Imputed Underpayment and whether these adjustmentsshould be taken into account under Section 705(a)(1)(B).

The Blue Book at page 79 states that the payment of tax made by the partnership reducesthe adjusted basis in the assets of the partnership.

B. Partnership Ceases to Exist

1. General. If IRS determines that a partnership “ceases to exist” before anyPartnership Adjustment “takes effect”, the Partnership Adjustment is taken into account by the“former partners” and the partnership ceases to be liable for the Partnership Adjustment. Thisprovision does not apply if the partnership has made a valid Opt Out Election for the ReviewedYear. Prop. Reg. § 301.6241-3(a)(1), (2) and (3).

2. Partnership “Ceases to Exist”- Prop. Reg. § 301.6241-3(b).

a. Determination. A determination of “ceases to exist” is made in the solediscretion of the IRS, but the IRS is not required to do so. If IRS makesthat determination, the IRS is to notify the partnership and “formerpartners” in writing within 30 days of the determination.

b. Definition. “Ceases to exist” means the partnership terminates underSection 708(b)(1)(A) or does not have the ability to pay, in full, anyamount due by the partnership. The IRS has the discretion to determinewhether the Partnership has the ability to pay (i.e., not collectible) basedon information the IRS has at the time. “Ceases to exist” does not arisesolely because of a technical termination under Section 708(b)(1)(B), avalid Push-Out Election under Section 6226 or the Partnership has notpaid any amount required to be paid.

c. Year Ceases to Exist. If termination under Section 708(b)(1)(A), theapplicable year is the last day of the partnership’s final taxable year. Ifpartnership does not have ability to pay, the applicable year is the date theIRS makes that determination.

d. Limitation. A determination of “ceases to exist” cannot be made after theexpiration of the period of limitations on collection relating to theapplicable adjustment period.

3. Definition of “Takes Effect”. A Partnership Adjustment “takes effect” when allamounts due under PAR resulting from the Partnership Adjustment are fully paidby the partnership. Prop. Reg. § 301.6241-3(c)(1).

4. Former Partners. Generally, “former partners” means the Adjustment YearPartners and the partners of a partnership-partner that has “ceased to exist.” If

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there are no Adjustment Year partners, “former partners” means the partners ofthe partnership during the last taxable year for which a partnership return of thepartnership was filed under Section 6031. Prop. Reg. § 301.6241-3(d).

5. Accounting for Adjustment. The Partnership Adjustment is treated as though thepartnership made a Push Out Election to the “former partners” and the Partnershipis required to notify both the former partners and the IRS in writing of theadjustments, which notification is to be made within 30 days after the IRS notifiedthe partnership that the partnership has ceased to exist. Prop. Reg. § 301.6241-3(e). If the required statements are not timely delivered to the former partner andthe IRS, the IRS will notify the former partners of the Partnership Adjustmentsbased on information recently available to the IRS. Prop. Reg. § 301.6241-3(e)(3).

C. Entities Filing Partnership Returns

If a partnership return is filed by an entity for a taxable year but it is determined that theentity is not a partnership (or that there is no entity) for such year. PAR are applied to suchentity for such year and its tax items and to persons holding an interest in such entity unless theOpt Out Election is made or the election under § 761(a) is made. Section 6241(8); Prop. Reg. §301.6241-5

D. Information Returns

PAR also amend Section 6031(b) which requires partnerships to provide its partners withcertain information as required under IRS Regulations (i.e., Schedule K-1s). PAR delete the lastsentence requiring such information to be provided by electing large partnerships by March 15th

and instead add a provision stating that except as provided in the procedures under Section6225(c) (dealing with modifications to the Imputed Underpayment Amounts), with respect toSection 6226(c) (providing alternative procedures to the Imputed Underpayment Amountpayment requirement by a partnership), or as otherwise provided by the Secretary, informationrequired to be furnished by the partnership under Section 6031(b) may not be amended after thedue date of the partnership return.

Note: This provision effectively precludes a partnership from changing informationprovided in a K-1 after the due date of the partnership return. It is not clear how thisprohibition against amendments correlates with a partnership’s ability to fileAdministrative Adjustment Requests (i.e., amended partnership returns) with the IRS.

E. Appealing IRS Determinations under PAR

The Proposed Regulations do not address the right of the partnership to appeal IRSdeterminations under PAR, such as IRS decisions relating to Opt Out, partnership representativedesignation, Push Out election, modification requests, partner-level defenses, partnership ceasingto exist, or adjusted items in the NOPPA.

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XIII. DRAFTING CONSIDERATIONS

A. Partnership Agreement

1. Partnership agreements will need to address PAR and include provisions thatclarify the rights, powers and obligations of the Partnership Representative (PR),the Reviewed Year partners and the Adjustment Year partners. In some cases,conflicts will arise between these three (3) groups of persons.

2. The following is a list of some of the issues that will need to be considered indrafting amendments to existing partnership agreements in new partnershipagreements:

a. Partnership Representative.

i. Who will be designated and what vote of the partners is required toappoint and to remove this person.

ii. What is the power and authority of the PR in acting in that capacityand in representing the Partnership to the IRS, considering PARdesignates the PR as a “czar” in tax matters.

iii. For those actions that are elective under PAR, such as Opting Out,AAR, Push-Out, Judicial Review, and Modifications, what is thepower and authority of the PR to elect to take these actions? Doesthe PR need partner approval and if so which partners (ie,Adjustment Year partners or Reviewed Year partners or both) arerequired to approve an action and how is vote of the partners to bedetermined? Each of these elective actions requires an affirmativeact and if not taken within a prescribed time period, the ability totake the elective act is forfeited.

iv. Is the PR required to consult with the partners, and if so, does thatinclude both the Adjustment Year partners and the Reviewed Yearpartners and how much information and detail is the PR required toshare.

v. Is the PR indemnified by the Partnership or the partners andreleased from all liability arising out of any act or omission of thePR subject to certain agreed carve outs, ie, gross negligence,willful misconduct, fraud.

vi. If the partnership agreement does not include provisionsaddressing PAR, the PR and the Partnership’s professionaladvisors are placed in a difficult position for purposes ofimplementing and complying with PAR.

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b. Partners.

i. What are the rights and obligations of the partners regarding PAR.

ii. Is a partner required to comply with the requirements of anelection made by the PR when the partner had no participation inthe making of the election, such as a Push-Out election thatimposes the tax on the Reviewed Year partner or filing AmendedReturns.

iii. Do the partners have an obligation to indemnify the PR and, if so,which partner group (ie, Reviewed Year partners or AdjustmentYear partners), and how is the indemnification obligation sharedamong the indemnifying partners.

iv. If Push-Out is election is not made, do the Reviewed Year partnershave an obligation to the Partnership or the Adjustment Yearpartners to indemnify them for any taxes, penalties and interestarising out of the Partnership Adjustments and, if so, how is thetax, penalty and interest allocated among the Reviewed Yearpartners. Does the indemnity extend to Texas franchise tax.

v. Do the partners have a right to participate in any IRS proceedingwith the PR or have the right to attend meetings or receive noticeof the proceeding or meeting.

vi. Do the partners have the right to receive periodic updates from thePartnership Representative and, if so, is that both the ReviewedYear partners and the Adjustment Year partners.

vii. Can the Reviewed Year partners compel the PR to seek judicialreview of a Partnership Adjustment? Same question regarding anycalculation of the Imputed Underpayment or any modifications.

viii. Do the partners have the right to participate in selection of counselin connection with the tax audit and proceedings, if so, whichpartner group and how are costs shared.

ix. If a partner fails to take an action, such as filing an amended returnor providing necessary information to the PR, what is the remedythat the Partnership or other partners can seek against that partner.

x. Do the partners have the right of access to the books and records ofthe Partnership in the event of an IRS proceeding under an Opt Outelection.

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c. Transfer Restrictions. Do the partners have the right to transfer an interestin the Partnership if a transfer would prevent the Partnership from makingan Opt-Out election.

d. Survival. Do the obligations and liabilities of a partner relating to theprovisions of the partnership agreement addressing PAR survive thepartner’s ceasing to be a partner.

B. Other Affected Agreements

1. Partnership Interest Buy-Sell Agreements need to include provisions covered byPAR, including indemnification by the seller in favor of the buyer in the event ofa Partnership Adjustment for a presale year and whether the buyer can vote infavor a Push-Out election or any other elective act that could adversely affect theselling partner.

2. In the divorce area, Agreements Incident to Divorce and Divorce Decrees need toaddress PAR issues if a partnership interest is involved in the division of propertyfor the year of divorce and how the economic consequence of an audit under PARwill be shared by the parties.

3. Loan agreements also need to be reviewed for covenants and representations thatcould be affected by PAR and whether the lender will require an Opt-Out electionor a Push-Out election.

4. Tenancy in Common Agreements (TICA) may also need to be reviewed todetermine the consequences of the IRS determining that the arrangement isactually a partnership and whether the TICA needs to contain provisionsaddressing PAR in such event.

5. Wills and estate planning may need to be reviewed, especially the power ofexecutor or trustee to participate in elections under PAR or for estate or trust toindemnify heirs and beneficiaries from taxes arising under PAR.

486207.6

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