[Federal Register Volume 84, Number 39 (Wednesday, February 27, 2019)]
[Rules and Regulations]
[Pages 6468-6573]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-28140]



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Vol. 84

Wednesday,

No. 39

February 27, 2019

Part II





Department of the Treasury





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Internal Revenue Service





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26 CFR Part 301





Centralized Partnership Audit Regime; Final Rule

Federal Register / Vol. 84 , No. 39 / Wednesday, February 27, 2019 / 
Rules and Regulations

[[Page 6468]]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 301

[TD 9844]
RIN 1545-BO03; 1545-BO04


Centralized Partnership Audit Regime

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulation.

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SUMMARY: This document contains final regulations implementing the 
centralized partnership audit regime. These final regulations affect 
partnerships for taxable years beginning after December 31, 2017 and 
ending after August 12, 2018, as well as partnerships that make the 
election to apply the centralized partnership audit regime to 
partnership taxable years beginning on or after November 2, 2015, and 
before January 1, 2018.

DATES: 
    Effective date: These regulations are effective on February 27, 
2019.
    Applicability Date: For dates of applicability, see Sec. Sec.  
301.6221(a)-1(c); 301.6222-1(e); 301.6225-1(i); 301.6225-2(g); 
301.6225-3(e); 301.6226-1(g); 301.6226-2(h); 301.6226-3(i); 301.6227-
1(h); 301.6227-2(e); 301.6227-3(d); 301.6231-1(h); 301.6232-1(f); 
301.6233(a)-1(d); 301.6233(b)-1(e); 301.6234-1(f); 301.6235-1(f); 
301.6241-1(b); 301.6241-2(b); 301.6241-3(g); 301.6241-4(b); 301.6241-
5(d); 301.6241-6(c).

FOR FURTHER INFORMATION CONTACT: Concerning the regulations under 
sections 6221, 6226, 6235, and 6241, Jennifer M. Black of the Office of 
Associate Chief Counsel (Procedure and Administration), (202) 317-6834; 
concerning the regulations under sections 6225, 6231, and 6234, Joy E. 
Gerdy-Zogby of the Office of Associate Chief Counsel (Procedure and 
Administration), (202) 317-6834; concerning the regulations under 
sections 6222, 6227, 6232, and 6233, Steven L. Karon of the Office of 
Associate Chief Counsel (Procedure and Administration), (202) 217-6834; 
concerning the regulations under section 6225 relating to creditable 
foreign tax expenditures, Larry R. Pounders, Jr. of the Office of 
Associate Chief Counsel (International), (202) 317-5465; concerning the 
regulations relating to chapters 3 and 4 of the Internal Revenue Code 
(other than section 1446), Subin Seth of the Office of Associate Chief 
Counsel (International), (202) 317-5003; and concerning the regulations 
relating to section 1446, Ronald M. Gootzeit of the Office of Associate 
Chief Counsel (International), (202) 317-4953 (not toll-free numbers).

SUPPLEMENTARY INFORMATION: 

Background

    This document contains final regulations under sections 6221 
through 6241 of the Internal Revenue Code (Code) to amend the Procedure 
and Administration Regulations (26 CFR part 301) to implement the 
centralized partnership audit regime enacted by section 1101 of the 
Bipartisan Budget Act of 2015, Public Law 114-74 (BBA), as amended by 
the Protecting Americans from Tax Hikes Act of 2015, Public Law 114-
113, div Q (PATH Act), and sections 201 through 207 of the Tax 
Technical Corrections Act of 2018, contained in Title II of Division U 
of the Consolidated Appropriations Act of 2018, Public Law 115-141 
(TTCA).
    Section 1101(a) of the BBA removed former subchapter C of chapter 
63 of the Code effective for partnership taxable years beginning after 
December 31, 2017. Former subchapter C of chapter 63 of the Code 
contained the unified partnership audit and litigation rules enacted by 
the Tax Equity and Fiscal Responsibility Act of 1982, Public Law 97-248 
(TEFRA) that were commonly referred to as the TEFRA partnership 
procedures or simply TEFRA. Section 1101(b) of the BBA also removed 
subchapter D of chapter 63 of the Code and part IV of subchapter K of 
chapter 1 of the Code, rules applicable to electing large partnerships, 
effective for partnership taxable years beginning after December 31, 
2017. Section 1101(c) of the BBA replaced the TEFRA partnership 
procedures and the rules applicable to electing large partnerships with 
a centralized partnership audit regime that determines adjustments and, 
in general, determines, assesses, and collects tax at the partnership 
level. Section 1101(g) of the BBA set forth the effective dates for 
these statutory amendments, which are effective generally for returns 
filed for partnership taxable years beginning after December 31, 2017.
    On December 18, 2015, section 1101 of the BBA was amended by the 
PATH Act. The amendments under the PATH Act are effective as if 
included in section 1101 of the BBA, and therefore, subject to the 
effective dates in section 1101(g) of the BBA.
    On June 14, 2017, the Department of the Treasury (Treasury 
Department) and the IRS published in the Federal Register (82 FR 27334) 
a notice of proposed rulemaking (REG-136118-15) (June 2017 NPRM) 
proposing rules under section 6221 regarding the scope and election out 
of the centralized partnership audit regime, section 6222 regarding 
consistent treatment by partners, section 6223 regarding the 
partnership representative, section 6225 regarding partnership 
adjustments made by the IRS and determination of the amount of the 
partnership's liability (referred to as the imputed underpayment), 
section 6226 regarding the alternative to payment of the imputed 
underpayment by the partnership, section 6227 regarding administrative 
adjustment requests (AARs), and section 6241 regarding definitions and 
special rules. The Treasury Department and the IRS received written 
public comments in response to the regulations proposed in the June 
2017 NPRM, and a public hearing regarding the proposed regulations was 
held on September 18, 2017.
    On November 30, 2017, the Treasury Department and the IRS published 
in the Federal Register (82 FR 56765) a notice of proposed rulemaking 
(REG-119337-17) (November 2017 NPRM) proposing rules regarding 
international provisions under the centralized partnership audit 
regime, including rules relating to the withholding of tax on foreign 
persons, the withholding of tax to enforce reporting on certain foreign 
accounts, and the treatment of creditable foreign tax expenditures of a 
partnership. No written comments were submitted in response to this 
NPRM, and no hearing was requested or held.
    On December 19, 2017, the Treasury Department and the IRS published 
in the Federal Register (82 FR 60144) a notice of proposed rulemaking 
(REG-120232-17 and REG-120233-17) (December 2017 NPRM) proposing 
administrative and procedural rules under the centralized partnership 
audit regime, including rules addressing assessment and collection, 
penalties and interest, periods of limitations on making partnership 
adjustments, and judicial review of partnership adjustments. The 
regulations proposed in the December 2017 NPRM also provided rules 
addressing how pass-through partners take into account adjustments 
under the alternative to payment of the imputed underpayment described 
in section 6226 and under rules similar to section 6226 when a 
partnership files an AAR under section 6227. Written comments were 
received in response to the December 2017 NPRM. However, no hearing was 
requested or held.
    On January 2, 2018, the Treasury Department and the IRS published 
in

[[Page 6469]]

the Federal Register (82 FR 28398) final regulations under section 
6221(b) providing rules for electing out of the centralized partnership 
audit regime.
    On February 2, 2018, the Treasury Department and the IRS published 
in the Federal Register (83 FR 4868) a notice of proposed rulemaking 
(REG-118067-17) (February 2018 NPRM) proposing rules for adjusting tax 
attributes under the centralized partnership audit regime. Written 
comments were received in response to the February 2018 NPRM. However, 
no hearing was requested or held.
    On March 23, 2018, Congress enacted the TTCA, which made a number 
of technical corrections to the rules under the centralized partnership 
audit regime. The amendments under the TTCA are effective as if 
included in section 1101 of the BBA, and therefore, subject to the 
effective dates in section 1101(g) of the BBA.
    On August 9, 2018, the Treasury Department and the IRS published in 
the Federal Register (83 FR 39331) final regulations under section 6223 
providing rules relating to partnership representatives and final 
regulations under Sec.  301.9100-22 providing rules for electing into 
the centralized partnership audit regime for taxable years beginning on 
or after November 2, 2015, and before January 1, 2018. Corresponding 
temporary regulations under Sec.  301.9100-22T were also withdrawn.
    On August 17, 2018, the Treasury Department and the IRS published 
in the Federal Register (83 FR 41954) a notice of proposed rulemaking, 
notice of public hearing, and withdrawal and partial withdrawal of 
notices of proposed rulemaking (REG-136118-15) (August 2018 NPRM) that 
withdrew the regulations proposed in the June 2017 NPRM, the November 
2017 NPRM, the December 2017 NPRM, and the February 2018 NPRM, and 
proposed regulations reflecting the technical corrections enacted in 
the TTCA as well as other changes as discussed in the preamble to the 
August 2018 NPRM. Written public comments were received in response to 
the August 2018 NPRM, and a public hearing regarding the proposed 
regulations was held on October 9, 2018.
    In the preambles to the June 2017 NPRM and November 2017 NPRM, 
comments were requested regarding certain international and tax-exempt 
aspects of the centralized partnership audit regime. No comments were 
received in response to these requests, other than a comment regarding 
fiduciary issues under title I of the Employee Retirement Income 
Security Act of 1974 (ERISA), which is discussed later in section 3.B.i 
of the Summary of Comments and Explanation of Revisions. The Treasury 
Department and IRS will still consider comments on whether any issues 
related to international rules and tax-exempt partners warrant guidance 
either under the centralized partnership audit regime provisions or 
under the relevant provisions of the Code directly related to those 
areas.
    After careful consideration of all written public comments received 
in response to the June 2017 NPRM, the December 2017 NPRM, and the 
August 2018 NPRM, as well as statements made during the public hearings 
for the June 2017 NPRM and the August 2018 NPRM, the portions of the 
August 2018 NPRM described in this preamble are adopted as amended by 
this Treasury Decision. Comments received in response to the February 
2018 NPRM or that otherwise concern basis and tax attribute rules under 
Sec.  301.6225-4 or Sec.  301.6226-4 will be addressed in future 
guidance. For purposes of this preamble, the regulations proposed in 
the June 2017 NPRM, the November 2017 NPRM, and the December 2017 NPRM 
are collectively referred to as the ``former proposed regulations.'' 
The regulations proposed in the August 2018 NPRM are referred to as the 
``proposed regulations.''

Summary of Comments and Explanation of Revisions

    Thirty written comments were received in response to the June 2017 
NPRM. Five statements were provided at the public hearing held on 
September 18, 2017. Four written comments were received in response to 
the December 2017 NPRM. No public hearing was held. Eight written 
comments were received in response to the August 2018 NPRM, and one 
statement was provided at the public hearing held on October 9, 2018. 
All of these comments (both written and provided orally at the public 
hearings) have been considered, and revisions to the regulations were 
made in response to the comments. The written comments received are 
available for public inspection at www.regulations.gov or upon request.
    In addition to changes in response to the comments, editorial 
revisions were also made to correct typographical errors, grammatical 
mistakes, and erroneous cross-references. Revisions were also made to 
clarify language in the proposed regulations that was potentially 
unclear. Unless specifically described in this Summary of Comments and 
Explanation of Revisions, such revisions were not intended to change 
the meaning of the language that was revised. All applicability dates 
were revised to provide that the final regulations will not apply to 
taxable years that ended before the date the August 2018 NPRM was filed 
with the Federal Register. To the extent comments recommended as a 
general matter that the regulations take into account the TTCA 
amendments, those comments were adopted as described in this Summary of 
Comments and Explanation of Revisions.

1. Scope of the Centralized Partnership Audit Regime

    Three comments were received regarding the scope of the centralized 
partnership audit regime. All of the comments concerned former proposed 
Sec.  301.6221(a)-1, which was issued before the TTCA was enacted. No 
comments were received on proposed Sec.  301.6221(a)-1 as revised 
subsequent to the TTCA in the August 2018 NPRM.
    Prior to amendment by the TTCA, section 6221(a) provided that any 
adjustment to items of income, gain, loss, deduction, or credit of a 
partnership shall be determined at the partnership level. Former 
proposed Sec.  301.6221(a)-1(b)(1)(i) had defined the phrase ``items of 
income, gain, loss, deduction, or credit'' to mean all items and 
information required to be shown, or reflected, on a return of the 
partnership and any information contained in the partnership's books 
and records for the taxable year. One comment stated the definition 
under former proposed Sec.  301.6221(a)-1(b)(1)(i) included items on 
the partnership return or in the partnership's books and records 
regardless of whether (i) such items or information would affect the 
income that the partnership reports or (ii) the particular tax 
characteristics of the separate partners would affect the ultimate tax 
liability. The comment expressed concern that, by broadly defining the 
scope of the centralized partnership audit regime, the proposed 
regulations would expand the number of partnerships and partners that 
encounter differences between the correct tax they would have paid if 
they had properly reported, and the amount of the imputed underpayment. 
No changes to the regulations were made in response to this comment.
    The TTCA amended section 6221(a) by replacing the phrase ``items of 
income, gain, deduction, loss or credit of a partnership for a 
partnership taxable year (and any partner's distributive share 
thereof)'' with the term ``partnership-related item.'' The TTCA added a 
definition of ``partnership-related item'' to section

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6241(2). The August 2018 NPRM adopted the TTCA amendments to section 
6221(a) and 6241 by moving the majority of the regulation text under 
former proposed Sec.  301.6221(a)-1 to the definition of ``partnership-
related item'' under proposed Sec.  301.6241-6. Because of these 
changes, the comment is generally no longer applicable to this section 
of the regulations.
    In addition, the TTCA amendments address the comment's first 
concern that the scope of former proposed Sec.  301.6221(a)-1(b)(1)(i) 
was overly broad in that it was delineated without regard to whether 
items or information adjusted at the partnership level affect the 
income of the partnership. Section 6241(2)(B) broadly defines a 
partnership-related item as any item or amount with respect to the 
partnership which is relevant in determining the tax liability of any 
person under chapter 1 of the Code and any partner's distributive share 
thereof. Section 6241(2)(B). Nothing within that definition limits the 
term partnership-related item to income reported by the partnership. To 
the contrary, partnership-related items are any items with respect to 
the partnership that are relevant to determining any person's chapter 1 
tax, which could include partnership expenses, credits generated by 
partnership activity, assets and liabilities of the partnership, and 
any other items concerning the partnership that are relevant to 
someone's chapter 1 tax, irrespective of the impact such items have on 
the partnership's income.
    Furthermore, the core feature of the centralized partnership audit 
regime is to provide a centralized method of examining items of a 
partnership. Adjusting items on a partnership's return or in the 
partnership's books and records, regardless of their effect on 
partnership income, in a centralized partnership proceeding at the 
partnership level is not only consistent with this centralized 
approach, but it also results in efficiencies because one proceeding 
can be conducted that will bind all partners and the partnership. See 
section 6223(b). Nothing in the statute requires only items that affect 
the partnership's income, as reported on the partnership's return, to 
be adjusted at the partnership level.
    Regarding the comment's second concern that an imputed underpayment 
is determined without regard to partners' tax characteristics and that 
the imputed underpayment amount differs from the amount of tax the 
partners would have paid had the items been reported correctly, those 
concerns are addressed in section 3.A. of this Summary of Comments and 
Explanation of Revisions.
    Former proposed Sec.  301.6221(a)-1(b)(1)(i) provided as an example 
of an ``item of income, gain, loss, deduction, or credit'' any items 
related to transactions between a partnership and any person including 
disguised sales, guaranteed payments, section 704(c) allocations, and 
transactions to which section 707 applies. Former proposed Sec.  
301.6221(a)-1(b)(1)(i)(H). One comment suggested that this provision 
inappropriately included partner items such as a disguised fee under 
section 707(a)(2)(A) and the gain or loss a partner may realize from a 
disguised sale under section 707(a)(2)(B). The comment recommended 
revising the regulations to refer to ``items of a partnership related 
to . . . transactions to which section 707 applies.'' Similarly, 
another comment expressed concern about situations where a partner was 
not acting in the partner's capacity as a partner, but rather as a 
counterparty to a transaction with the partnership. The comment 
suggested that the regulations clarify that a final determination of a 
transaction between a partnership and a partner following an 
examination of the partnership is not binding on any third person, 
including a partner not acting in its capacity as a partner and who was 
not a party to the examination.
    These comments are addressed by the final regulations under Sec.  
301.6241-1(a)(6) regarding the definition of partnership-related item. 
Proposed Sec.  301.6241-6(b)(4) and (5) defined the phrase ``item or 
amount with respect to the partnership'' to include an item or amount 
that relates to a transaction with the partnership by a partner acting 
in its capacity as a partner or by an indirect partner acting in its 
capacity as an indirect partner as well as an item or amount relating 
to a transaction that is described in section 707(a)(2), 707(b), or 
707(c). Accordingly, under the proposed regulations if an item or 
amount related to a transaction that is described in section 707(a)(2), 
707(b), or 707(c) and was relevant in determining chapter 1 tax, that 
item was a partnership-related item and must be determined at the 
partnership level.
    As described more fully in section 1.B., the final regulations 
clarify that items or amounts relating to transactions of the 
partnership are items or amounts with respect to the partnership only 
if those items or amounts are shown, or required to be shown, on the 
partnership return or are required to be maintained in the 
partnership's books and records. The final regulations further clarify 
that items or amounts shown, or required to be shown, on a return of a 
person other than the partnership (or in that person's books and 
records) that result after application of the Code to a partnership-
related item and that take into account the facts and circumstances 
specific to that person are not partnership-related items and, 
therefore, are not determined at the partnership level under the 
centralized partnership audit regime.
    The changes in the final regulations to the definition of 
partnership-related item address the concerns raised by the comment. 
First, Sec.  301.6241-1(a)(6) provides that only items or amounts 
reflected, or required to be reflected on the partnership's return or 
in its books and records are with respect to the partnership. If such 
items are relevant to determining chapter 1 tax such items are 
partnership-related items. This rule applies equally to items or 
amounts relating to any transaction with, liability of, or basis in the 
partnership. Second, Sec.  301.6241-1(a)(6) further provides that items 
reflected, or required to be reflected on the return of a person other 
than the partnership or in that person's books and records that result 
after application of the Code to a partnership-related item are not 
with respect to a partnership and, thus, not partnership-related items. 
Accordingly, only items of the partnership, as suggested by the 
comment, are partnership-related items under Sec.  301.6241-1(a)(6).
    Proposed Sec.  301.6221(a)-1(a) provided that any consideration 
necessary to make a determination at the partnership level under the 
centralized partnership audit regime, including the period of 
limitations on making partnership adjustments under section 6235 or 
facts necessary to calculate an imputed underpayment under section 6225 
were determined at the partnership level. The final regulations under 
Sec.  301.6221(a)-1(b) retain this concept, but with revised language. 
The final regulations provide that any legal or factual determinations 
underlying any adjustment or determination made under the centralized 
partnership audit regime are also determined at the partnership level 
under the centralized partnership audit regime. For instance, such 
determinations include the period of limitations on making adjustments 
under the centralized partnership audit regime and any determinations 
necessary to calculate the imputed underpayment or any modification of 
the imputed underpayment under section 6225.
    After consideration, the Treasury Department and the IRS have 
concluded that the phrase ``legal and factual determinations underlying 
an

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adjustment or determination'' instead of the phrase ``any consideration 
necessary to make a determination at the partnership level'' more 
clearly and accurately reflects the rule that facts and legal 
conclusions that underlie adjustments to partnership-related items, 
tax, and penalties made at the partnership level are also determined at 
the partnership level. The revised language more clearly describes the 
rule and provides taxpayers with more definitive guidance regarding the 
items determined at the partnership level. Additionally, this language 
is consistent with language used in proposed Sec.  301.6241-6(b)(8), 
which was removed as described in section 2 of this Summary of Comments 
and Explanation of Revisions.
    Lastly, the final regulations remove the list of cross-references 
from the end of proposed Sec.  301.6221(a)-1(a). The TTCA amended 
section 6221(a) to provide that adjustments to partnership-related 
items are determined at the partnership level ``except to the extent 
otherwise provided in'' subchapter C of chapter 63. Because the 
statutory language is clear that there are exceptions within subchapter 
C of chapter 63 to the general rule under section 6221(a) and Sec.  
301.6221(a)-1, the list of cross-references from proposed Sec.  
301.6221(a)-1(a) was no longer necessary.
A. Penalty Defenses
    Five comments were received with respect to former proposed Sec.  
301.6221(a)-1(c), which provided that any defense to any penalty, 
addition to tax, or additional amount must be raised by the partnership 
in a partnership-level proceeding under the centralized partnership 
audit regime, regardless of whether the defense relates to facts and 
circumstances relating to a person other than the partnership. Once the 
adjustments determined in the partnership-level proceeding became 
final, no defense to any penalty determined could be raised or taken 
into account. Former proposed Sec.  301.6221(a)-1(c).
    Several comments stated that the rule under former proposed Sec.  
301.6221(a)-1(c) was inequitable to partners because, among other 
reasons, partners had no control over whether the partnership 
representative would raise a partner-specific defense, especially in 
the case of indirect partners who are less directly connected to the 
partnership representative. Some comments recommended the regulations 
clarify how partner-level defenses would be raised in the partnership-
level proceeding and how decisions regarding those penalty defenses 
would be communicated to partners. Other comments suggested that 
partners should be able to raise their own partner-level defenses. In 
response to these comments, former proposed Sec.  301.6221(a)-1(c) was 
removed from the proposed regulations in the December 2017 NPRM. See 
section 3 of the preamble to the December 2017 NPRM. The December 2017 
NRPM also proposed regulations under sections 6225 and 6226 (former 
proposed Sec. Sec.  301.6225-2(d)(2)(viii) and 301.6226-3(i)) which 
allowed partners to raise their own partner-level defenses at the time 
partners took into account the partnership adjustments determined at 
the partnership level (either through the modification process or as 
part of the election under section 6226). For further discussion of the 
rules regarding partner-level defenses under sections 6225 and 6226, 
see sections 3.D. and 4.C.ii.I. of this preamble. See also section 8.A. 
of this preamble regarding section 6233(a).
B. Partnership-Related Item
    Proposed Sec.  301.6241-6(a) defined the term ``partnership-related 
item'' as any item or amount with respect to the partnership which is 
relevant to determining the tax liability of any person under chapter 1 
and any partner's distributive share of any such item or amount. 
Proposed Sec.  301.6241-6(b) provided that an item or amount is with 
respect to the partnership without regard to whether the item or amount 
appeared on the partnership return if the item or amount was described 
in one of eight categories. Two categories described items or amounts 
that are shown or reflected, or required to be shown or reflected, on a 
return of the partnership under section 6031 or are in the 
partnership's books and records. The other categories described items 
or amounts relating to certain transactions with the partnership, items 
or amounts relating to liabilities of the partnership provided the item 
or amount was reported by a partner, and items or amounts relating to 
basis in the partnership. Imputed underpayments and any legal or 
factual determinations necessary to make an adjustment to items or 
amounts described in the other categories were also defined as items or 
amounts with respect to the partnership. Proposed Sec.  301.6241-
6(b)(1) through (8).
    After careful consideration, the Treasury Department and the IRS 
have revised the definition of ``item or amount with respect to the 
partnership.'' First, the final regulations remove the language 
``without regard to whether or not such item or amount appears on the 
partnership's return'' from proposed Sec.  301.6241-6(b). That phrase 
derived from the parenthetical in section 6241(2)(B)(i) that follows 
``item or amount with respect to the partnership.'' The Treasury 
Department and the IRS have determined that the parenthetical language 
describes items or amounts that appear on the partnership return, items 
or amounts that were required to appear on the return but actually did 
not, and items or amounts that factor into the determination of items 
or amounts that do appear on the partnership return. The Treasury 
Department and the IRS have concluded that this parenthetical does not 
extend the concept of ``with respect to the partnership'' to items or 
amounts that are reported by third parties and that are otherwise not 
defined as partnership-related items in these final regulations. See 
Sec.  301.6241-1(a)(6)(vi)(A) and (B).
    Second, the final regulations replace the list of eight categories 
of items or amounts that were with respect to the partnership with a 
single, streamlined paragraph, Sec.  301.6241-1(a)(6)(iii) that 
includes all the items and amounts from the prior list, except as 
described in this section of this preamble. Third, the definition of 
partnership-related item was moved from proposed Sec.  301.6241-6 and 
placed under the definition of ``partnership adjustment'' in Sec.  
301.6241-1(a)(6) to more closely track the statutory structure of 
section 6241(2).
    The final regulations under Sec.  301.6241-1(a)(6)(iii) maintain 
the rule from the proposed regulations that items or amounts shown or 
reflected, or required to be shown or reflected, on the return of the 
partnership are items or amounts with respect to the partnership. The 
final regulations also clarify that items or amounts in the 
partnership's book or records are items or amounts with respect to the 
partnership if those items or amounts are ``required to be maintained'' 
in the partnership's books and records. The phrase ``required to be 
maintained'' is added to account for items that may be maintained in 
the partnership's books and records on a voluntary basis. For example, 
a partnership may choose to maintain the outside basis of each of its 
partners in its books and records, even though the Code does not 
require this information be maintained by the partnership. The rule 
make clears that the voluntary recording of an item in the 
partnership's books is not determinative of the meaning of the phrase 
``item or amount with respect to the partnership.'' A partnership 
cannot convert an item or amount that is not with respect to the

[[Page 6472]]

partnership into an item or amount that is with respect to the 
partnership merely by including that item or amount in the 
partnership's books and records. This rule provides consistency among 
partnerships and more certainty regarding what items in the books and 
records of a partnership constitute items or amounts with respect to 
the partnership.
    The final regulations do not retain the separate categories of 
items relating to transactions with, liabilities of, and basis in the 
partnership. Instead, the final regulations adopt a streamlined 
approach and provide that those items are only with respect to the 
partnership if those items are reflected, or required to be reflected, 
on the partnership's return or required to be maintained in its books 
and records. The separate treatment under the proposed regulations for 
these types of items and amounts was duplicative. Items or amounts 
relating to transactions with, liabilities of, and basis in the 
partnership are items or amounts shown or reflected, or would be 
required to be shown or reflected, on the partnership return or 
required to be maintained in the partnership's books and records. 
Accordingly, describing separate categories for such items was 
unnecessary and potentially confusing.
    Under Sec.  301.6241-1(a)(6)(iii), an item or amount is with 
respect to the partnership only if the item or amount is shown or 
reflected, or required to be shown or reflected, on the partnership 
return or required to be maintained in the partnership's books and 
records. Consistent with that interpretation, the final regulations 
provide an item or amount relating to transactions with, liabilities 
of, and basis in the partnership is with respect to the partnership 
only if the item or amount is reported, or required to be reported, on 
the partnership return or is required to be maintained in the 
partnership's books and records.
    The term partnership-related item includes a partner's distributive 
share of items or amounts that are with respect to the partnership 
which are relevant in determining the chapter 1 tax of any person. 
Section 6241(2)(B)(ii). In taking into account the partner's 
distributive share of partnership-related items, a partner must apply 
the provisions of the Code to each partnership-related item to compute 
the partner's ultimate tax liability. The application of the Code to 
the partner's share of partnership-related items requires taking into 
account facts and circumstances that are unique to a particular 
partner. Generally speaking, those facts and circumstances are known 
only by the partner, are not known by the partnership, and are based on 
information only within the partner's control and outside of the 
partnership's control.
    In an examination of items on a partner's return, the IRS generally 
needs information pertaining to the partner's specific facts and 
circumstances to determine the correctness of the items. The partner 
whose items are at issue is normally the best source for that type of 
information. While a partnership may possess some information about a 
particular partner's facts and circumstances, obtaining information 
from the partnership is generally not as efficient as obtaining 
information from the partner. Obtaining such information from the 
partner also preserves the privacy interests of the partner. Therefore, 
from both a taxpayer and tax administration standpoint, an examination 
of items for which application of the Code depends on a partner's 
particular facts and circumstances is, in general, best performed at 
the partner level, rather than the partnership level.
    Under the TEFRA procedures, these types of items were considered 
affected items and adjustments to those items were computational 
adjustments. The centralized partnership audit regime is intended to 
have a scope sufficient to address those items that would have been 
considered partnership items, affected items, and computational 
adjustments under TEFRA, including the regulations. Joint Comm. on 
Taxation, JCX-6-18, Technical Explanation of the Revenue Provisions of 
the House Amendment to the Senate Amendment to H.R. 1625 (Rules 
Committee Print 115-66), 37 (2018) (JCX-6-18). One way to achieve a 
sufficiently broad scope is to attempt to define the term 
``partnership-related item'' to include those items that would have 
been partnership items, affected items, and computational adjustments 
under TEFRA. For the following reasons, however, this approach was not 
adopted.
    The centralized partnership audit regime is a fundamentally 
distinct system from TEFRA. While under both sets of rules adjustments 
are made at the partnership level and those adjustments are binding on 
partners, the framework for assessing and collecting tax resulting from 
those adjustments is significantly different. Under TEFRA, tax 
attributable to partnership items determined at the partnership level 
and tax attributable to affected items was assessed against the 
partners of the partnership through computational adjustments made by 
the IRS with respect to the partner. Computational adjustments were 
made either by mailing a notice of deficiency to the partner if factual 
determinations were necessary at the partner level or by directly 
assessing tax against the partner. The tax was assessed with respect to 
the year that was audited by the IRS, and assessments were required to 
be made within one year of the completion of the partnership-level 
proceeding.
    Under the centralized partnership audit regime, adjustments to 
partnership-related items are similarly determined at the partnership 
level. In stark contrast to the TEFRA procedures, however, the tax 
attributable to those adjustments is also assessed and collected at the 
partnership level in the form of an imputed underpayment determined 
pursuant to section 6225. An imputed underpayment is assessed as if it 
were a tax imposed for the adjustment year, generally the year in which 
the adjustments are finally determined, instead of the year that was 
subject to examination. Section 6225(d). The partnership, not the 
partners, is liable for the imputed underpayment. A partnership may 
elect the alternative to payment of the imputed underpayment under 
section 6226 and ``push out'' the adjustments determined at the 
partnership level, in which case the tax attributable to the 
adjustments is assessed and collected from the partnership's partners. 
Unlike the TEFRA procedures, however, under the push out process, 
assessment and collection is initiated by the partner, rather than by 
the IRS, by the partner taking into account the partnership adjustments 
and self-reporting any tax due on the partner's next filed return, 
alleviating both the administrative and timing issues that arose in 
TEFRA. See section 2.A of the preamble to the June 2017 NPRM.
    When calculating an imputed underpayment based on adjustments 
determined at the partnership level, taxpayer favorable adjustments are 
generally disregarded and the highest rate of tax is applied. This 
formula may produce an amount that is larger than the cumulative amount 
of tax the partners would have paid had the partners taken the 
adjustments into account separately, but it also relieves the IRS of 
the obligation to account for specific partner facts and circumstances 
when initially determining the imputed underpayment amount. During the 
modification phase, a partnership may, at its option, request that the 
imputed underpayment be modified to take into account partner tax 
attributes and facts and circumstances. See section 3.B. for further 
discussion.

[[Page 6473]]

    When taking into account adjustments under section 6226, a partner 
determines the increase or decrease in tax that would have occurred if 
the adjustments were taken into account for the partner's tax year 
correlating to the year that was audited. For intervening years, any 
year between the audited year and the current year, the partner must 
determine the effect on tax attributes of the adjustments and the 
resulting increase or decrease that would have occurred for those years 
as well. The partner then adjusts her tax for the current year by the 
aggregate tax that would have resulted had the adjustments been 
properly taken into account. Under TEFRA, it was the IRS's burden to 
determine tax at the partner level. The centralized partnership audit 
regime, under section 6226, shifts that burden from the IRS to the 
partner. As a result, it is neither necessary nor efficient for the IRS 
to determine at the partnership level the facts and circumstances 
specific to a partner in order for that partner to determine the proper 
amount of tax in the case of a push out.
    The rules for calculating an imputed underpayment under section 
6225 and the computation rules under section 6226 are sufficiently 
broad to ensure that the tax attributable to items that would have been 
partnership items, affected items, and computational adjustments under 
the TEFRA is collected under the centralized partnership audit regime. 
When the partnership pays an imputed underpayment, the application of 
limitations and restrictions is assumed and favorable adjustments are 
disregarded unless a partnership demonstrates that partner tax 
attributes should override those assumptions. In this way, the imputed 
underpayment determination, including any modifications, sufficiently 
accounts for those types of items that would have been affected items 
or computational adjustments under TEFRA. Similarly, in the case of an 
election under section 6226, the re-computation process necessarily 
involves the application of items that would have been affected items 
or computational adjustments.
    Because both the imputed underpayment rules and the section 6226 
rules sufficiently address items that would have been partnership 
items, affected items, and computational adjustments, it is both 
unnecessary and over-inclusive to define partnership-related item to 
encompass all of those items. Accordingly, the final regulations 
clarify that the term partnership-related item does not include items 
or amounts that would have been TEFRA affected items or computational 
adjustments. The final regulations do this by defining ``with respect 
to the partnership'' to exclude items or amounts shown, or required to 
be shown, on a return of a person other than the partnership (or in 
that person's books and records) that result after application of the 
Code to a partnership-related item and that take into account the facts 
and circumstances specific to that person. Because these items and 
amounts are not with respect to the partnership, they are not 
partnership-related items the IRS must adjust at the partnership level. 
Two examples were added to the final regulations under Sec.  301.6241-
1(a)(6)(vi) to illustrate this rule.
    The definition of ``with respect to the partnership,'' and by 
extension partnership-related item, under the final regulations 
preserves the centralized nature of the proceeding with respect to the 
partnership. During the partnership level proceeding under the 
centralized partnership audit regime, the IRS adjusts items that are 
germane to the partnership as an entity--that is, items reported by the 
partnership on its return or items in its books and records generally 
used for purposes of completing the return. The partnership has access 
to this information, and it is therefore, in general, most efficient to 
obtain this information from the partnership in the partnership level 
proceeding.
    This rule also protects the tax and privacy interest of partners. 
Under section 6223, partners are bound by actions taken by the 
partnership in the partnership proceeding and by any final decision in 
the partnership proceeding. Unlike under TEFRA, individual partners do 
not have a right to participate in the partnership level administrative 
or judicial proceeding. If items based on the application of the Code 
to a particular partner based on that partner's facts and circumstances 
were items required to be determined at the partnership level, the 
partner may be unable to dispute adjustments to those items. And even 
if the partner were able to dispute adjustments to those items, the 
partner would need to divulge private information in a proceeding in 
which the partnership was the party, not the partner itself.
    In addition, a rule that would require that such items and amounts 
be determined at the partnership level raises significant 
administrative concerns for the IRS. In general, the partnership would 
in most cases lack the facts necessary to determine items or amounts 
that depend on the facts and circumstances of the partners. By 
necessity, the IRS would be required to involve the partners in the 
examination to the extent the partner's items and amounts were at 
issue. Requiring the IRS to involve potentially the many partners in 
the entity level examination of the partnership would undermine the 
efficiencies of the centralized partnership audit regime's concept of 
the partnership representative and the binding nature of the 
partnership representative on the outcome of the entity level 
examination. Further, if the IRS did not examine all of the various 
items or amounts on the partners' returns during the partnership level 
proceeding, the IRS would, for each of the partners' items and amount 
that were also partnership-related items, be precluded from adjusting 
those items at the partner level outside of the centralized partnership 
audit regime. This would lead to an unnecessary expansion of 
partnership-level proceedings to encompass what could more simply and 
efficiently be resolved at the partner level for one or a small group 
of partners.
i. Comments Concerning Partnership-Related Item
    One comment recommended that all partners should be audited as a 
group, but only about their financial involvement within the scope of 
the partnership. According to the comment, outside interests and income 
should not be determined at the partnership level. Although it is not 
entirely clear what the comment includes in the phrases ``financial 
involvement within the scope of the partnership'' and ``outside 
interests and income'', the Treasury Department and the IRS understand 
this comment to be a request to limit the scope of the items that are 
``with respect to the partnership'' for purposes of this section. 
Another comment suggested that the scope of the term ``partnership-
related item'' should not be unreasonably broad, particularly with 
respect to partner-level items where the underlying issue is primarily 
of interest to the partner and not the partnership. The comment 
expressed concern that the partnership could have little interest in 
disputing a proposed adjustment that would have little impact to the 
partnership but could have a dramatic effect on a particular partner.
    These comments were adopted as reflected in the changes to the 
definition of ``with respect to the partnership'' described in this 
section of this preamble. Under the final regulations, outside 
interests and income and partner-level items are not ``with respect to 
the partnership'' to the extent those are not items or amounts 
reflected, or required to be reflected, on the

[[Page 6474]]

partnership return or required to be maintained in the partnership's 
books and records. In addition, the items or amounts that are ``with 
respect to the partnership'' as defined in Sec.  301.6241-1(a)(6)(iii) 
are generally items concerning the partners' financial involvement 
within the scope of the partnership. Accordingly, adjustments to items 
concerning the partners' financial involvement within the scope of the 
partnership would generally be determined at the partnership level, and 
adjustments to items involving outside interests and income or partner-
level items that result after application of the Code to a partnership-
related item and that take into account facts and circumstances 
specific to the partner, to the extent provided for in this section, 
are not determined at the partnership level under the centralized 
partnership audit regime.
    In addition to the revisions described earlier in this section of 
this preamble, the term imputed underpayment was moved from the 
definition of ``item or amount is with respect to the partnership'' to 
the definition of partnership-related item under Sec.  301.6241-
1(a)(6)(ii). This change clarifies that an imputed underpayment is 
always a partnership-related item. First, an imputed underpayment is a 
creation of the centralized partnership audit regime and can only arise 
under the centralized partnership audit regime. See sections 6225, 
6226, and 6227. Second, the statute expressly defines an imputed 
underpayment as an item or amount that is with respect to the 
partnership. Section 6241(2)(B)(i). Third, an imputed underpayment is 
relevant in determining the liability of any person under chapter 1, as 
defined in Sec.  301.6241-1(a)(6)(iv), because payment of the imputed 
underpayment by the partnership relieves the partners of any chapter 1 
liability attributable to the reviewed year partnership adjustments.

2. Partner's Return Must Be Consistent With Partnership Return

    Five comments were received concerning section 6222, regarding the 
requirement that a partner's return be consistent with the partnership 
return. The comments covered the following topics: Inconsistent 
treatment in the case of an amended return, an administrative 
adjustment request, or where no partnership return is filed; the form 
and method for identifying inconsistent treatment; proceedings to 
adjust identified, inconsistently reported items; and the election 
regarding consistent treatment with a schedule furnished to the partner 
by the partnership. In addition to responding to these comments, this 
section of the preamble describes changes to the language of Sec.  
301.6222-1(a)(2) regarding partners that are partnerships with an 
election in effect under section 6221(b).
A. Inconsistent Treatment on an Amended Return and Definition of 
Partner's Return for Purposes of Sec.  301.6222-1
    One comment recommended that the regulations clarify that a partner 
may file an amended return in order to take a position inconsistent 
with the filed partnership return as long as such amended return 
includes a statement identifying the inconsistent treatment. Under 
section 6222(a), a partner shall, on the partner's return, treat each 
partnership-related item in a manner that is consistent with the 
treatment of such item on the partnership return. Proposed Sec.  
301.6222-1(a) provided that the treatment of partnership-related items 
on a partner's return must be consistent with the treatment of such 
items on the partnership return in all respects, including the amount, 
timing, and characterization of such items. The term ``partner's 
return'' is not defined in either section 6222(a) or proposed Sec.  
301.6222-1(a).
    Section 6222(a) and Sec.  301.6222-1(a) are designed to ensure 
consistent treatment of partnership-related items on partners' returns 
and the partnership return filed with the IRS, except for cases where 
the partner notifies the IRS of the inconsistency. The requirement to 
be consistent with the partnership return extends to each return filed 
by the partner that reflects, or is required to reflect, partnership-
related items. This includes both original and amended returns. Any 
other application of this requirement would render the requirement of 
consistency meaningless. For example, a partner could file a return on 
April 15 taking a consistent position, only to turn around on April 16 
and file an amended return taking an inconsistent position.
    To clarify that the consistency requirement under section 6222(a) 
and proposed Sec.  301.6222-1(a) applies to each return of the partner, 
the final regulations provide that the term ``partner's return'' for 
purposes of Sec.  301.6222-1 includes any return, statement, schedule, 
or list, and any amendment or supplement thereto, filed by the partner 
with respect to any tax imposed by the Internal Revenue Code. 
Accordingly, pursuant to Sec.  301.6222-1(a), a partner on either an 
original or an amended return must treat partnership-related items 
consistently with how those items were treated on the partnership 
return filed with the IRS.
    The clarification of the term ``partner's return'' also addresses 
the comment's suggestion that the regulations permit inconsistent 
treatment on an amended return provided the IRS is notified of that 
inconsistent treatment. Under Sec.  301.6222-1(c)(1), the requirement 
that a partner treat a partnership-related item consistently with the 
partnership's treatment of that item, and the effect of inconsistent 
treatment, do not apply to partnership-related items identified as 
inconsistent (or that may be inconsistent) in a statement attached to 
the partner's return on which the partnership-related item is treated 
inconsistently. As clarified in these final regulations, the term 
partner's return for purposes of Sec.  301.6222-1 includes any 
amendment to the partner's original return. Accordingly, so long as a 
partner notifies the IRS of an inconsistent treatment, in the form and 
manner prescribed by the IRS, by attaching a statement to the partner's 
return--including an amended return--on which the partnership-related 
item is treated inconsistently, the consistency requirement under Sec.  
301.6222-1(a), and the effect of inconsistent treatment under Sec.  
301.6222-1(b), do not apply to that partnership-related item.
i. Limitations on Filing Amended Returns Reporting Inconsistent 
Positions
    When a partner on an amended return treats a partnership-related 
item inconsistently with how the item was treated on the partnership 
return, the partner is making a request for an administrative 
adjustment of that partnership-related item. Accordingly, the rule 
under proposed Sec.  301.6227-1(a) that provided a partner may not 
request an administrative adjustment of a partnership-related item was 
revised to account for situations in which on an amended return a 
partner treats a partnership-related item inconsistently with the 
partnership return pursuant to Sec.  301.6222-1(c)(1).
    Section 6227(c) provides that in no event may a partnership file an 
AAR after a notice of an administrative proceeding with respect to the 
taxable year is mailed under section 6231. Consistent with section 
6227(c), proposed Sec.  301.6227-1(b) provided that no AAR may be filed 
after a NAP has been mailed by the IRS, except as provided in Sec.  
301.6231-1(f) (regarding withdrawal of a NAP). To give effect to this 
rule in the context of inconsistent treatment, the final regulations 
under Sec.  301.6222-1(c)(5) provide that a partner

[[Page 6475]]

may not notify the IRS that the partner is treating an item 
inconsistently with the partnership return for a taxable year after a 
NAP with respect to such partnership taxable year has been mailed by 
the IRS under section 6231. This rule clarifies that once the IRS 
initiates an administrative proceeding with respect to a partnership 
taxable year, any adjustment to a partnership-related item for that 
year must be determined exclusively within that partnership-level 
proceeding in accordance with section 6221(a). Neither the partnership, 
through filing an AAR, nor a partner, by taking an inconsistent 
position, may adjust a partnership-related item outside of that 
proceeding. Any actions taken by the partnership and any final decision 
in the proceeding are binding on the partnership and all its partners. 
Section 6223(b).
B. Inconsistent Treatment in the Case of an Administrative Adjustment 
Request
    Proposed Sec.  301.6222-1(c)(2) provided that the notification 
procedures under Sec.  301.6222-1(c) do not apply to a partnership-
related item the treatment of which is binding on the partner because 
of actions taken by the partnership, or because of any final decision 
in a proceeding with respect to the partnership, under the centralized 
partnership audit regime. Accordingly, under proposed Sec.  301.6222-
1(c)(2), the provisions of Sec.  301.6222-1(c) did not apply with 
respect to the partner's treatment of a partnership-related item 
reflected on an AAR. This meant that a partner could not treat an item 
inconsistently with how such item was treated on an AAR. One comment 
recommended that the regulations under Sec.  301.6222-1(c)(2) be 
revised to permit a partner to notify the IRS of an inconsistent 
position taken with respect to an item reported on an AAR. This comment 
was adopted.
    Under section 6223(b), all partners are bound by actions taken by 
the partnership and by any final decision with respect to the 
partnership under the centralized partnership audit regime. In the case 
of an AAR, section 6223(b) binds each partner to the partnership's 
making of the request itself and the mechanism by which the adjustments 
requested are taken into account, including any election by the 
partnership to have the partners take into account the adjustments. 
Accordingly, if the partnership takes into account the adjustments by 
paying an imputed underpayment, the partners must follow the rules 
under section 6225. If there is no imputed underpayment or if the 
partnership elects to have the partners take into account the 
adjustments, the partners must follow the procedures under Sec.  
301.6227-3.
    When taking into account AAR adjustments under Sec.  301.6227-3, 
partners must adhere to the consistency requirements under section 
6222(a). See Sec.  301.6222-1(a)(4) (providing consistency requirement 
applies to the treatment of a partnership-related item on an AAR). 
Nothing in sections 6222, 6223(b), or 6227, however, precludes a 
partner from notifying the IRS the partner is taking an adjustment into 
account inconsistently with how the adjusted item was treated in an 
AAR. While section 6227 imposes certain requirements with respect to 
AARs, none of those requirements contradict section 6222(c)'s exception 
to the consistency requirement. Accordingly, the final regulations 
under Sec.  301.6222-1(c)(2) remove the language stating that the 
provisions of Sec.  301.6222-1(c)(1) do not apply with respect to a 
partner's treatment of a partnership-related item reflected on an AAR. 
In addition, the final regulations under Sec.  301.6227-1 remove the 
rule under proposed Sec.  301.6227-1(f) regarding the binding nature of 
an AAR. As a result of these changes, a partner may notify the IRS it 
is treating an AAR-adjusted item inconsistently in accordance with the 
provisions of Sec.  301.6222-1(c).
    The final regulations under Sec.  301.6222-1(c)(2) maintain the 
language stating that the provisions of Sec.  301.6222-1(c)(1) do not 
apply to a partner's treatment of an item reflected on a statement 
under section 6226 filed by the partnership with the IRS. A cross-
reference to Sec.  301.6226-1(e) was also added. In addition, the final 
regulations clarify that the provisions of Sec.  301.6222-1(c)(1) do 
not apply to any item the treatment of which is binding on the partner 
because of an action taken by the partnership or because of a final 
decision in a proceeding under the centralized partnership audit regime 
with respect to the partnership. Section 6223(b). Items reflected on a 
statement under section 6226 filed with the IRS are an example of such 
items.
C. Inconsistent Treatment When No Partnership Return is Filed
    Proposed Sec.  301.6222-1(a)(3) provided that a partner's treatment 
of a partnership-related item attributable to a partnership that does 
not file a return is per se inconsistent, unless the partner files a 
notice of inconsistent treatment in accordance with proposed Sec.  
301.6222-1(c). One comment recommended that the regulations include an 
example to illustrate the outcome of the application of the rule under 
proposed Sec.  301.6222-1(a)(3). The comment observed that without a 
return filed by the partnership, there would not be a return with which 
to make the partner's return consistent. To illustrate the application 
of Sec.  301.6222-1(a)(3), Example 7 was added under Sec.  301.6222-
1(a)(5).
    In light of the comment, the final regulations under Sec.  
301.6222-1(b)(1) include the clarification that where a partnership has 
failed to file a return, any treatment of a partnership-related item on 
a partner's return may be removed, and the IRS may determine any 
underpayment of tax resulting from such adjustment.
    Lastly, the final regulations eliminate the phrase ``unless the 
partner files a notice of inconsistent treatment in accordance with 
proposed Sec.  301.6222-1(c)'' from proposed Sec.  301.6222-1(a)(3). 
This change clarifies that a partner's treatment of an item 
attributable to a partnership that has not filed a return is per se 
inconsistent, even if the partner notifies the IRS of the inconsistent 
treatment. The notification under Sec.  301.6222-1(c) turns off the 
consistency requirement, but it does not change, as a factual matter, 
that the partner reported inconsistently.
D. Form and Method for Identifying Inconsistent Treatment of a 
Partnership-Related Item
    Under proposed Sec.  301.6222-1(c)(1), in addition to the 
requirement that a statement identifying an inconsistent treatment must 
be attached to the partner's return on which the item is treated 
inconsistently, the statement must be provided to the IRS according to 
the forms, instructions, and other guidance prescribed by the IRS. One 
comment asked about the form and method for providing the IRS with the 
statement described in proposed Sec.  301.6222-1(c)(1) and suggested 
specific format guidance in the regulations would assist the public in 
reporting an inconsistent treatment. This comment was not adopted.
    The final regulations maintain the rule that a partner must provide 
the statement described in Sec.  301.6222-1(c)(1) in accordance with 
forms, instructions, and other guidance prescribed by the IRS. 
Prescribing the form and method for notifying the IRS of inconsistent 
treatment through forms, instructions, and other sub-regulatory 
guidance allows the IRS the flexibility to update its procedures for 
identifying an inconsistency as appropriate and necessary without the 
IRS having to amend the regulations. This flexibility preserves 
government resources and

[[Page 6476]]

also expedites the guidance process for taxpayers to be aware of 
changes in IRS procedures. Accordingly, the final regulations do not 
provide a specific form or method for identifying inconsistent 
treatment.
    The same comment asked whether a statement identifying inconsistent 
treatment can only be filed contemporaneously with the partner's tax 
return. Proposed Sec.  301.6222-1(c) provided that a statement does not 
identify an inconsistency unless it is attached to the partner's return 
on which the partnership-related item is treated inconsistently. 
Because the plain language of proposed Sec.  301.6222-1(c) made clear 
that the statement identifying inconsistent treatment must be attached 
to a return, no change was made in response to this comment.
E. Proceeding To Adjust an Identified, Inconsistently Reported Item
    If a partner fails to satisfy the requirements of Sec.  301.6222-
1(a), the IRS may adjust the inconsistently reported partnership-
related item on the partner's return to make it consistent with the 
treatment of such item on the partnership return, unless the partner 
provides notice of the inconsistent treatment in accordance with Sec.  
301.6222-1(c). See Sec.  301.6222-1(b). Under proposed Sec.  301.6222-
1(c)(4)(i), if a partner notifies the IRS of an inconsistent treatment 
of a partnership-related item in accordance with proposed Sec.  
301.6222-1(c)(1) and the IRS disagrees with that inconsistent 
treatment, the IRS may adjust the identified, inconsistently reported 
item in a proceeding with respect to the partner. Nothing in proposed 
Sec.  301.6222-1(c)(4)(i) precluded the IRS, however, from also 
conducting a proceeding with respect to the partnership.
    One comment recommended that Sec.  301.6222-1(c)(4)(i) provide that 
if the IRS does conduct a proceeding with respect to the partnership to 
adjust an identified, inconsistently reported item, the IRS may include 
within that proceeding the partner who provided notice of inconsistent 
treatment. The comment was concerned that the regulations provided 
partners who identified inconsistent treatment an automatic right to 
contest the IRS's adjustment through deficiency proceedings, which 
would result in more partner-level proceedings and which would be 
contrary to the intent of the centralized system. According to the 
comment, the recommended rule would allow the IRS to avoid conducting 
separate partnership and partner proceedings by allowing the IRS to 
include notifying partners in the partnership-level proceeding, rather 
than engaging such partners through deficiency procedures.
    Proposed Sec.  301.6222-1(c)(4)(i) provided that the IRS may adjust 
an identified, inconsistently reported item in a proceeding with 
respect to the partner. The IRS is not required to make that 
adjustment. The IRS may instead choose to make the adjustment in a 
proceeding with respect to the partnership. To the extent the comment 
was suggesting the IRS must adjust an identified, inconsistently 
reported item in a proceeding with respect to the partner, the comment 
was not correct.
    If the IRS conducts a proceeding with respect to the partnership, 
that proceeding will include only the IRS, the partnership, and the 
partnership representative who is acting on behalf of the partnership. 
No partner, except a partner that is the partnership representative, or 
any other person may participate in the partnership proceeding without 
permission of the IRS. See Sec.  301.6223-2(d)(1). Accordingly, while a 
partner is not generally included in a proceeding with respect to the 
partnership under the centralized partnership audit regime, the IRS has 
the authority under Sec.  301.6223-2(d)(1) to allow any other person, 
including a partner who notified the IRS of inconsistent treatment, to 
participate in a partnership-level proceeding. Because that authority 
exists under Sec.  301.6223-2, a separate rule within Sec.  301.6222-1 
to allow notifying partners to be included in a partnership-level 
proceeding is unnecessary. Therefore, the revision to proposed Sec.  
301.6222-1(c)(4) as recommended by the comment was not adopted.
    All partners, including partners that have filed a notice of 
inconsistent treatment, are bound by the actions of the partnership and 
any final decision in a proceeding with respect to the partnership 
under the centralized partnership audit regime. See section 6223(b). To 
clarify the application of this rule in the case of a partnership-level 
proceeding to adjust an identified, inconsistently reported item, 
proposed Sec.  301.6222-1(c)(4) was revised to provide that where the 
IRS conducts a proceeding with respect to the partnership, and there is 
no proceeding with respect to the partner regarding an identified, 
inconsistently reported partnership-related item, the partner is bound 
to actions by the partnership and any final decision in the partnership 
proceeding.
    Another comment suggested that the regulations clarify what happens 
when the IRS conducts a proceeding with respect to the partnership 
under Sec.  301.6222-1(c)(4)(i) and at the conclusion of that 
proceeding, the IRS accepts the partnership return as filed. The 
comment suggested the regulations address what procedures apply for 
collection of an imputed underpayment in that scenario or for 
collection of tax from the partner that filed inconsistently. This 
comment was not adopted.
    First, because there is no partnership adjustment in the scenario 
described, there is also no imputed underpayment to collect from the 
partnership. Additionally, because there is no imputed underpayment, 
the partnership cannot make a push out election. See section 4.A.iii of 
this preamble. With respect to collection of tax from the partner, 
nothing in the regulations prevents the IRS, when it conducts a 
proceeding with respect to the partnership under Sec.  301.6222-
1(c)(4)(i), from also conducting a proceeding with respect to the 
partner to adjust an identified, inconsistently reported item. 
Accordingly, no changes were made in response to this comment.
F. Consistent Treatment With Schedule Furnished to the Partner by the 
Partnership
    Under proposed Sec.  301.6222-1(d)(1), a partner is treated as 
having notified the IRS of treating a partnership-related item 
inconsistently if the partner demonstrates that the treatment of such 
item on the partner's return is consistent with the treatment of that 
item on the statement, schedule, or other form prescribed by the IRS 
and furnished to the partner by the partnership, and the partner makes 
a valid election under proposed Sec.  301.6222-1(d)(2). This election 
must be filed no later than 60 days after the date of such notice. 
Proposed Sec.  301.6222-1(d)(2). One comment recommended that the 
regulations provide that this 60-day period may be extended with 
approval by the IRS. This comment was not adopted.
    The IRS may assess and collect any underpayment of tax resulting 
from an adjustment to conform an inconsistent position in the same 
manner as if the underpayment were on account of a mathematical or 
clerical error appearing on the partner's return, except that the 
procedures under section 6213(b)(2) for requesting abatement of an 
assessment do not apply. The 60-day period under Sec.  301.6222-1(d)(2) 
is designed to allow a partner to demonstrate consistency with the 
information furnished to the partner by the partnership and corresponds 
to the 60-day period the

[[Page 6477]]

partner would have had to request abatement if section 6213(b)(2) were 
applicable. Notably, section 6213(b)(2) does not provide for any 
extensions of time. Accordingly, the 60-day period under Sec.  
301.6222-1(d)(2) affords the partner an opportunity to contest the 
IRS's conforming adjustment the partner would not have otherwise had.
    Additionally, the 60-day period is a reasonable amount of time for 
the partner to demonstrate consistency with the information it has 
received from the partnership. At the time the partner is notified by 
the IRS of the inconsistent treatment, the partner should be in 
possession of any statements, schedules, or forms furnished to the 
partner by the partnership. If the partner were permitted to request 
abatement, the partner would likewise only have 60 days. Furthermore, 
if the partnership is made aware by the partner that an item was 
treated incorrectly on the partnership return or the schedules 
furnished by the partnership, the partnership has the ability to file 
an AAR with respect to the partnership-related item.
    Another comment suggested guidance is needed as to how the election 
under proposed Sec.  301.6222-1(d)(2) is made. Proposed Sec.  301.6222-
1(d)(2)(i) provided that the election must be filed in writing with the 
IRS office set forth in the notice that notified the partner of the 
inconsistency. Proposed Sec.  301.6222-1(d)(2)(ii) provided the 
election must be clearly identified as an election under section 
6222(c)(2)(B); signed by the partner making the election; accompanied 
by a copy of the incorrect statement and IRS notice that notified the 
partner of the inconsistency; and include any other information 
required in forms, instructions, or other guidance prescribed by the 
IRS.
    The comment did not suggest what further guidance should be 
provided in the regulations. Deferring further guidance to forms, 
instructions, and other sub-regulatory guidance allows the IRS the 
flexibility to update its procedures as appropriate and necessary 
without the IRS having to amend the regulations. As discussed earlier 
in this section of this preamble, this flexibility preserves government 
resources and also expedites the guidance process for taxpayers to be 
aware of changes in IRS procedures. Accordingly, proposed Sec.  
301.6222-1(d)(2) was not revised in response to this comment.
G. Effect of Inconsistent Treatment When Partner is a Partnership
    Proposed Sec.  301.6222-1(a)(2) provided that the rules of Sec.  
301.6222-1 apply to a partnership-partner regardless of whether the 
partnership-partner has made an election under section 6221(b) to elect 
out of the provisions of the centralized partnership audit regime. The 
final regulations clarify that the rules of Sec.  301.6222-1 apply to 
all partners including partnership-partners that have elected out of 
the centralized partnership audit regime and revise the language 
referring to such partners to better conform to similar references in 
other regulation sections.
    Proposed Sec.  301.6222-1(b)(3) provided a rule regarding the 
effect of inconsistent treatment where the partner is itself a 
partnership and also provided a cross-reference to the rules under 
section 6232(d)(1)(B) and Sec.  301.6232-1(d). To better conform the 
two sets of rules and to reduce any potential confusion between the 
provisions, the final regulations eliminate the rule under Sec.  
301.6222-1(b)(3) in favor of providing only a cross-reference to the 
rules under section 6232(d)(1)(B) and Sec.  301.6232-1(d).

3. Determination of an Imputed Underpayment, Modification of an Imputed 
Underpayment, and Adjustments That Do Not Result in an Imputed 
Underpayment

    Twenty comments were received concerning section 6225 and the rules 
regarding imputed underpayments. This section 3 addresses the comments 
concerning the determination of an imputed underpayment under proposed 
Sec.  301.6225-1; modification of an imputed underpayment under 
proposed Sec.  301.6225-2; and the rules regarding how adjustments that 
do not result in an imputed underpayment are taken into account in 
accordance with proposed Sec.  301.6225-3. As discussed in the 
Background, comments concerning the rules regarding basis and tax 
attributes under proposed Sec.  301.6225-4 will be addressed in future 
guidance.
A. Determination of an Imputed Underpayment
    Section 6225(b)(1)(B) provides that the determination of any 
imputed underpayment is made by ``applying the highest rate of tax in 
effect for the reviewed year under section 1 or 11.'' Consistent with 
section 6225(b)(1)(B), proposed Sec.  301.6225-1 provided that an 
imputed underpayment is determined by multiplying the total netted 
partnership adjustment by the highest rate of federal income tax in 
effect for the reviewed year under section 1 or 11 and increasing or 
decreasing that product by certain adjustments to credits and 
creditable expenditures.
    One comment stated that the statute's use of the highest marginal 
tax rate to calculate the imputed underpayment is unfair to taxpayers 
who may not be taxed at the highest marginal rate, particularly with 
respect to adjustments for qualified dividends or capital gains, where 
a partner is subject to the alternative minimum tax, or where a partner 
is a tax-exempt entity. To the extent the comment was suggesting that 
the regulations use a rate different than the rate prescribed in the 
statute to compute an imputed underpayment, the comment was not 
adopted. Section 6225(b)(1)(B)'s mandate to ``apply the highest rate of 
tax in effect for the reviewed year under section 1 or 11'' is 
unambiguous, and there is no exception from application of the highest 
rate for any particular partnership or for any specific type of 
partner, such as an exception that takes into account unique 
circumstances of specific partners. Because application of the highest 
rate is established by statute, the regulations also apply the highest 
rate of tax to determine an imputed underpayment under section 6225(b).
    A partnership and its partners may be able to reduce the rate used 
in computing an imputed underpayment by requesting modification under 
section 6225(c). For example, the partnership may request modification 
under Sec.  301.6225-2(d)(3) with respect to partnership adjustments 
that are allocable to a tax-exempt entity or modification under Sec.  
301.6225-2(d)(4) with respect to adjustments to capital gains or 
qualified dividends that are attributable to an individual. The 
partnership may also make a push out election under section 6226, 
allowing partners to take into account the adjustments and pay tax 
using their respective marginal tax rates, including taking into 
account the effect of the alternative minimum tax.
    Proposed Sec.  301.6225-1(a)(1) provided that each imputed 
underpayment determined under Sec.  301.6225-1 is based solely on 
partnership adjustments with respect to a single taxable year. One 
comment recommended that the regulations allow adjustments that move 
income or expense from one year to another to be netted for purposes of 
computing the imputed underpayment amount. This comment was not 
adopted.
    The comment described an example in which the IRS determines that 
the partnership should have reported income in year 1 that was 
originally reported in year 2. The increase in income for year 1 
results in an imputed underpayment. The decrease in income in year 2 is 
an adjustment that does not

[[Page 6478]]

result in an imputed underpayment pursuant to Sec.  301.6225-
1(f)(1)(i), and the partnership and its partners take into account the 
decrease in income in the adjustment year pursuant to Sec.  301.6225-3. 
One partner in the comment's example reports income from other sources 
in the adjustment year; the other partner does not report income from 
other sources.
    Section 6225(b) sets forth the rules for determining an imputed 
underpayment. The statutory structure of section 6225(b) is premised on 
the concept that an imputed underpayment is determined with respect to 
a reviewed year and that adjustments with respect to the reviewed year 
result in such imputed underpayment or are adjustments that do not 
result in an imputed underpayment. Section 6225(a). Section 
6225(b)(1)(A) expressly provides that ``any imputed underpayment with 
respect to any reviewed year shall be determined by the Secretary by 
appropriately netting all adjustments with respect to such reviewed 
year . . . .'' (emphasis added). The statute does not reference 
adjustments with respect to any year other than the reviewed year. 
Accordingly, a rule that allows for the netting of adjustments across 
tax years is not consistent with the statutory language of section 
6225(b)(1)(A).
    In addition, netting across multiple tax years would not constitute 
``appropriately netting'' within the meaning of section 6225(b)(1)(A). 
A fundamental federal income tax principle is that each taxable year 
stands alone. Commissioner v. Sunnen, 333 U.S. 591 (1948) (``Income 
taxes are levied on an annual basis. Each year is the origin of a new 
liability and of a separate cause of action.''). A rule that provides 
for netting across tax years ignores this fundamental principle. For 
netting to be appropriate, it must take into account general principles 
of federal income tax laws as well as the provisions of the Code. 
Allowing an adjustment from one taxable year to offset or net with an 
adjustment from another taxable year when determining an imputed 
underpayment contravenes both the general tax principle that each year 
stands alone and is not supported by the plain language of section 
6225. These principles are particularly significant in the context of 
partnerships given that partners' interests and the identity of 
partners can vary from year to year. Because adjustments relating to 
multiple years may affect items that are allocable to different 
partners or in different amounts, it would be particularly 
inappropriate to offset those types of adjustments against each other 
when determining the imputed underpayment.
    Furthermore, a timing adjustment, such as the one described in the 
comment's example, often has effects that must be reflected in each 
taxable year's return. Allowing such adjustments to net against each 
other could inappropriately negate those effects. For instance, an 
adjustment that shifts a depreciation deduction from one year to 
another year might have the effect of changing a taxpayer's status from 
being in a loss posture to being in a gain posture for the year from 
which the loss is being shifted. Although in some cases a gain in one 
year might effectively offset a loss in another year, such a result 
cannot be known without an analysis of each of the partners' specific 
circumstances. As discussed later in section 3.A.i. of this preamble, 
requiring the IRS to review each partner's specific circumstance in 
order to determine the imputed underpayment is the type of inquiry that 
the centralized partnership audit regime was designed to avoid.
    A rule that allows for automatic netting of adjustments across tax 
years also ignores the limitation in section 6225(b)(4) and would 
create significant administrative burdens for the IRS. Section 
6225(b)(4) provides that if any adjustment would result in a decrease 
in the amount of the imputed underpayment and could be subject to any 
additional limitation under the Code if taken into account by any 
person, such adjustment should not be taken into account in the netting 
process described in section 6225(b)(1)(A). This provision codifies the 
presumption that, except as otherwise provided, taxpayer favorable 
adjustments subject to any possible limitation under the Code if taken 
into account by any person are disregarded when determining an imputed 
underpayment. The statute does not require the IRS to determine whether 
taxpayer favorable adjustments are in fact subject to such limitations. 
A rule allowing for netting across tax years would, however, require 
the IRS to make such determinations. This would have the effect of 
inappropriately expanding the number of tax years and partnership 
adjustments potentially at issue in the partnership-level proceeding. 
Not only would that result undermine the limitation under section 
6225(b)(4), it would also unnecessarily complicate the partnership 
examination, creating potential burdens for both the IRS and the 
partnership.
    A rule allowing adjustments to offset across years would also 
create administrative burdens for both the IRS and for taxpayers 
because it would require determining the identity of the partners 
affected by the adjustment. While in some cases a lack of partner 
turnover may make that determination less burdensome, in other cases 
where there is a high turnover of partners or where special allocations 
are involved, the determination becomes more difficult. Establishing a 
rule that allows netting of adjustments across tax years as a general 
matter fails to take into account the differing make-up of partnerships 
and their partners. For instance, assume a case where there is a high 
turnover of partners, adjustments are determined across multiple 
reviewed years, and the rules allow netting of those adjustments to 
form a single imputed underpayment. If the partnership requested to 
modify that imputed underpayment, it would be unclear which partners 
would be required to participate in modification and if the partnership 
made a push out election with respect to the imputed underpayment, it 
would be unclear which partners would be furnished statements under 
Sec.  301.6226-2.
    Lastly, as a practical matter, the IRS may not examine each 
relevant partnership taxable year. If an adjustment results in moving a 
partnership-related item from one taxable year to another, the IRS may 
examine the other taxable year, but the IRS is not required to. 
Providing a rule requiring the IRS to take into account other taxable 
years when netting adjustments would effectively require the IRS to 
examine all of the partnership's open taxable years, which would result 
in a significant administrative burden to the IRS and the partnership 
subject to the administrative proceeding. If netting across tax years 
was allowed, but the IRS did not examine all relevant years, different 
partnerships would receive different, and potentially distorted, 
netting results. For instance, a partnership under examination for 
multiple taxable years could potentially benefit from netting across 
those taxable years, but a partnership under examination for only one 
taxable year would not receive the same benefit. The determination of 
an imputed underpayment amount for any one year should not be dependent 
on the number of partnership taxable years the IRS examines.
    Accordingly, a rule that allows adjustments to net across taxable 
years is inconsistent with the statutory language of section 
6225(b)(1)(A), contravenes general tax principles, creates 
administrative burdens for the IRS, and inappropriately affects the 
timing and netting of certain

[[Page 6479]]

partnership-related items. Therefore, the final regulations under Sec.  
301.6225-1(a)(1) maintain the requirement that an imputed underpayment 
be based solely on partnership adjustments with respect to a single 
taxable year.
i. Grouping, Subgrouping, and Netting of Partnership Adjustments
    Several comments provided recommendations regarding the grouping, 
subgrouping, and netting rules under proposed Sec.  301.6225-1(c), (d), 
and (e). In order to determine an imputed underpayment, each 
partnership adjustment determined by the IRS is first placed into one 
of four groupings pursuant to Sec.  301.6225-1(c) according to the type 
of partnership-related item being adjusted: The reallocation grouping, 
the credit grouping, the creditable expenditure grouping, or the 
residual grouping. Adjustments are then subgrouped, if appropriate, and 
netted to produce the total netted partnership adjustment. Proposed 
Sec.  301.6225-1(b)(2), (d) and (e).
    One comment stated that the grouping and netting procedures are 
broad, vague, and generally err on the side of maximizing tax revenue 
resulting from an audit without regard to generally applicable 
provisions of the Code. The design of section 6225(a) and (b) and the 
grouping and netting rules under Sec.  301.6225-1 is to create an 
imputed underpayment amount that is based on the highest rate of tax 
and that disregards any taxpayer favorable adjustments which would 
otherwise reduce the imputed underpayment. Given this formula, an 
imputed underpayment determined under Sec.  301.6225-1 will likely 
reflect an amount that is larger than the cumulative amount of tax the 
partners would have paid if the partners took the partnership 
adjustments into account separately.
    This formula is a feature of section 6225(a) and (b). The statute 
expressly disregards certain adjustments that may be subject to 
limitations and that would otherwise reduce the imputed underpayment 
and mandates the application of the highest applicable tax rate. 
Section 6225(b)(1)(B), (2) and (4). The proposed regulations followed 
these statutory mandates. By removing the obligation on the IRS to 
consider partners' facts and circumstances, such as whether adjustments 
that would otherwise reduce the imputed underpayment might be allowed 
at the partner level or whether adjustments might be taken into account 
by partners at a rate lower than the highest rate, section 6225(b) 
shifts the burden from the IRS during this phase of a partnership 
examination. Because the imputed underpayment determined at this phase 
in the examination is not required to reflect the facts and 
circumstances of the ultimate partners, modifications may be necessary 
to more closely reflect the proper tax treatment.
    After the preliminary determination of the imputed underpayment 
amount under Sec.  301.6225-1, the burden is shifted to the partnership 
to utilize the modification procedures under Sec.  301.6225-2 if the 
partnership so chooses. Modification is designed to allow the 
partnership and its partners to arrive at an imputed underpayment 
amount that is closer to the correct amount of tax while maintaining 
the assessment and collection efficiencies of a centralized audit 
process. See Joint Comm. on Taxation, JCS-1-16, General Explanations of 
Tax Legislation Enacted in 2015, 65-66 (2016) (JCS-1-16). As an 
alternative to modification and paying an imputed underpayment, the 
partnership can elect under section 6226 to push out the adjustments to 
its partners. Both modification and the push out election provide the 
opportunity to establish that the correct amount of tax is collected 
from the partnership and its partners. Accordingly, the final 
regulations under Sec.  301.6225-1 were not revised in response to the 
comment's concern about maximizing revenue.
    With respect to the comment's concerns that the grouping and 
netting procedures are broad and vague and disregard generally 
applicable tax laws, to the extent those concerns related to the scope 
of the centralized partnership audit regime and what determinations and 
adjustments are made at the partnership level, see section 1 of this 
preamble. To the extent the comment's concerns related to the fact that 
the regulations do not address every possible grouping and netting 
scenario, the regulations do so intentionally. The Treasury Department 
and the IRS have determined it is not reasonable to identify within the 
regulations all possible permutations of adjustments and partnership 
facts and circumstances that might affect how an imputed underpayment 
is calculated. Accordingly, the regulations provide general rules that 
apply to various scenarios that could arise in the examination process. 
The general nature of the grouping, subgrouping, and netting rules also 
allow for the regulations to adapt to future changes to the Code.
    Notwithstanding the rules' flexible nature, they are rooted in 
provisions of the Code and regulations that are generally applicable to 
partnerships and partners. The regulations require that adjustments be 
placed into groupings and subgroupings based on how the adjusted items 
are treated pursuant to the Code, the regulations, forms, instructions, 
and other guidance and do not generally permit the netting of 
adjustments that might otherwise be subject to limitations or 
restrictions under the tax laws. Accordingly, the grouping and netting 
rules are designed with regard to generally applicable provisions of 
the Code. For further discussion of the comment's concerns regarding 
the grouping and netting rules and the interaction with generally 
applicable tax laws, see section 3.A.ii. of this preamble.
    One comment suggested that the regulations should allow partners to 
supply information to the partnership and require that the partnership 
and the IRS apply this information in calculating the imputed 
underpayment. The comment also suggested there be a procedure for 
partners who are passive investors with respect to the partnership to 
have an opportunity to claim passive losses for net partnership 
adjustments on audits that increase income and cause the partnership to 
pay tax on their behalf.
    As discussed earlier in this section of this preamble, the tax 
attributes of the partnership's partners generally do not factor into 
the preliminary determination of the imputed underpayment. Rather, the 
imputed underpayment determined under Sec.  301.6225-1 is computed 
without regard to the partners' tax circumstances, for example whether 
a partner would be able to offset additional partnership income with 
additional deductions or whether a partner's tax attributes would 
reduce the amount of tax due as a result of the adjustments. See 
section 6225(b)(1)(B), (2) and (4). Modification as described under 
section 6225(c) and Sec.  301.6225-2 is the more appropriate stage of 
the examination for the IRS to take into account specific partner tax 
attributes. Requiring the IRS to review the tax attributes of each 
partner within the context of the first phase of the partnership 
examination would undermine the centralized nature of the examination 
process. The comment's' recommendation to allow partners to present 
information during the partnership audit and require the IRS to 
incorporate that information into the imputed underpayment calculation 
would require the IRS to review and evaluate partner tax attributes in 
a way that would significantly impede upon the exam and create numerous

[[Page 6480]]

administrative burdens for the government.
    Notwithstanding these challenges, proposed Sec.  301.6225-1(c)(1) 
and (d)(1) provided that the IRS may, in its discretion, place 
adjustments in groupings and subgroupings in a manner different from 
that described in the proposed regulations to appropriately reflect the 
facts and circumstances of each examination. This rule is intended to 
allow the partnership to provide information to the IRS to demonstrate 
that certain partner tax attributes should be taken into account when 
grouping and subgrouping to achieve a more appropriate netting of the 
adjustments.
    The regulations give the IRS the discretion to decide whether or 
not to use this information in the initial examination phase, that is, 
prior to modification. This discretion is necessary because the 
partnership and the IRS may not agree as to whether the groupings and 
subgroupings requested by the partnership are appropriate. Requiring 
the IRS and the partnership to resolve such disagreements within the 
context of the first phase of the partnership proceeding would take 
time and resources away from the audit and thereby recreate the same 
problems associated with introducing partner tax attributes into the 
partnership level exam. If the partnership and the IRS do not agree on 
the groupings and subgroupings recommended by the partnership during 
the exam, the partnership is not without recourse. The partnership may 
request during modification that the IRS include one or more 
partnership adjustments in a particular grouping or subgrouping or 
request that certain partnership adjustments be treated as if no 
limitations or restrictions apply with the result those adjustments may 
be subgrouped with other adjustments. See Sec.  301.6225-2(d)(6).
    Accordingly, modification is generally the appropriate point in the 
administrative phase at which partner tax attributes may be raised by 
the partnership and considered by the IRS. For example, the partnership 
and its partners can utilize the amended return procedure or the 
alternative procedure to filing amended returns, which require partners 
to take the adjustments into account in light of their individual tax 
attributes. Those procedures would potentially allow partners to offset 
passive income with any passive losses, consistent with the procedure 
recommended by the comment. In the alternative, the partnership may 
elect to push out the adjustments under section 6226, and the partners 
would be required to take into account the adjustments and any effects 
on the partners' tax attributes. At that stage, the partners could use 
passive losses to the extent permitted by the rules under Sec.  
301.6226-3 (regarding how partners take into account pushed out 
adjustments).
    Although the IRS is permitted to consider partner tax attributes 
during the first phase of the partnership exam, the statute and the 
regulations provide clear guidance on the modification process and 
specifically how a partnership may request that partners' tax 
attributes be taken into account to reduce the imputed underpayment. 
Limiting the requirement that the IRS consider such information to the 
modification stage is efficient for both the IRS and the partnership 
because it ensures that the first phase of the exam is focused on the 
substance of what adjustments must be made at the partnership level, 
rather than on specific partner attributes.
    For these reasons, the comment suggesting a rule that permits 
partners, as a matter of right, to present information regarding their 
tax attributes during the partnership audit is not adopted. However, a 
partnership may request that the IRS take into account facts and 
circumstances relating to its partners pursuant to the rules under 
Sec.  301.6225-1(d)(1) and (e)(1), which may allow for more appropriate 
grouping and subgroupings of adjustments. The comment's recommendation 
that the IRS be required to apply such information during the netting 
process was not adopted. The partnership may, however, request during 
modification to reduce the amount of the imputed underpayment based on 
the partners' specific tax attributes.
    Another comment stated the proposed regulations create a divergence 
between the imputed underpayment amount and the cumulative amount that 
the reviewed year partners would have to pay if the adjustments were 
allocated to them. The comment described two situations to illustrate 
this concern. In the first situation, one adjustment increases ordinary 
income, and another adjustment decreases capital gain. The comment 
concludes that because the proposed regulations do not allow the 
decrease in capital gain to be netted against the increase in ordinary 
income, the partners may have overpaid tax with respect to the capital 
gain. In the second situation, one adjustment increases capital gain, 
and another adjustment decreases ordinary income. The comment concludes 
that because the proposed regulations do not allow the decrease in 
ordinary income to be netted against the increase in capital gain, the 
partners may have overpaid tax with respect to the ordinary income. The 
comment suggested that the Treasury Department and the IRS should 
ensure that the government does not seek an increase in tax collections 
solely because the partnership bears the burden for the tax. This 
comment was not adopted because its conclusions are based on 
assumptions that may not apply in all situations and section 
6225(b)(1)(A) requires that adjustments are ``appropriately netted'' 
taking into consideration the further limitation of section 6225(b)(4) 
which does not permit the netting of adjustments that would reduce the 
imputed underpayment with other adjustments. The comment's suggestion 
presents the same issues described earlier in this section of the 
preamble regarding the introduction of partner tax information in the 
partnership level proceeding.
    The comment's conclusions that the partners may have overpaid tax 
with respect to the decreased capital gain or the decreased ordinary 
income may be true in some cases. Without a review of the partners' 
accounts or some affirmation from the partners that they did pay tax, 
the IRS cannot be certain this is true in all cases or any one 
particular case. For example, a partner may have been in an overall 
loss position for the taxable year, may not have originally reported 
the decreased item, or may not have filed a return. As discussed 
earlier in this section of this preamble, the initial phase of the 
examination is not designed for the IRS to consider the specific 
circumstances of any partners. A rule requiring the IRS to consider 
specific partner circumstances would require the IRS to review each 
partner's account and prior returns to ensure that the partner 
previously took an item into account and paid tax on that item. Such a 
rule would create significant burden on the IRS during the initial exam 
phase and undermine a core aspect of the centralized partnership audit 
regime's shifting of the burden from the IRS to the partnership and its 
partners. As discussed earlier in this section of this preamble, a 
partnership may request that tax attributes are accounted for by using 
the modification procedures or the partnership may make the election 
under section 6226.
    The comment also appears to conclude that if all partnership 
adjustments were netted, the imputed underpayment would result in some 
number closer to the amount the reviewed year partners would have to 
pay if the adjustments were allocated to

[[Page 6481]]

them. While this may be true in some cases, it would not occur in all 
situations. For instance, assume the partner in the first situation 
described by the comment had not reported and paid tax with respect to 
the capital gain that was then decreased on examination. If the 
regulations permitted the decreased capital gain to be fully netted 
against the increased ordinary income, the result may lead to little or 
no imputed underpayment, even though the partner had not paid tax on 
the capital gain that was reduced. In that case, no tax was paid by the 
partner on the capital gain (as originally allocated to the partner) 
and no tax was paid by the partnership with respect to the increased 
ordinary income, even though the partnership had additional ordinary 
income that should have been allocation to the partner. While the 
comment stated that the netting process under proposed Sec.  301.6225-1 
eliminated situations that would benefit the taxpayer, the comment did 
not acknowledge that the statutory structure of section 6225 mandates 
this result. The comment also does not acknowledge that the netting 
process as enacted in the statute and implemented in the regulations 
also protects the IRS, for instance in cases where the partner did not 
pay tax on an adjusted item. During the initial phase of determining 
the imputed underpayment, the rules should not require the IRS to take 
steps to ameliorate a potential discrepancy in payment amounts based on 
facts applicable in one situation if the rule would result in 
distortions for taxpayers with different facts.
    As discussed earlier in this section of this preamble, 
``appropriately netting'' within the meaning of section 6225(b)(1)(A) 
means, as a general matter, that when netting partnership adjustments 
for purposes of determining an imputed underpayment, all limitations 
under the Code should be considered, including limitations that would 
otherwise prevent the partnership from netting certain items. Section 
6225(b)(4)'s rule regarding taxpayer favorable adjustments subject to 
additional limitations under the Code if taken into account by any 
person supports this interpretation. Because certain items could be 
subject to limitations in the hands of certain partners, the statute 
requires that limitations be accounted for by assuming they exist for 
purposes of determining the imputed underpayment during the initial 
stage of the examination. The partnership may ameliorate any 
discrepancies caused by that assumption by demonstrating that no such 
limitations exist either under Sec.  301.6225-1(d)(1) or (e)(1) or in 
the modification phase. The partnership can also make the election 
under section 6226, and the partners will account for such limitations 
when taking into account the adjustments.
    The comment suggested specific approaches to ameliorate the 
concerns it raised. First, it suggested a rule that would allow an 
ordinary income grouping to be reduced by a capital loss grouping to 
the extent of $3,000 per direct or indirect individual partner. Second, 
it suggested a rule that would apply the applicable rate for net 
negative adjustments to the relevant subgrouping and allow this amount 
to reduce the imputed underpayment amount. Neither of these specific 
recommendations was adopted.
    The Code permits corporate taxpayers to deduct capital losses to 
the extent of capital gains. Section 1211(a). In the case of taxpayers 
other than corporations, the Code allows a deduction for any capital 
loss exceeding capital gain up to $3,000 ($1,500 in the case of a 
married individual filing separately). Section 1211(b). A rule allowing 
an offset of $3,000 against an increase in ordinary income in the 
situations described by the comment would require the IRS to first 
determine that the partners in the partnership are taxpayers other than 
corporations such that the rules under section 1211(b) apply. While 
this may be a relatively simple determination in some cases, requiring 
the IRS to engage in making the determination contravenes the principle 
that partners' tax attributes, including partner identity, are 
generally not accounted for in the initial imputed underpayment 
calculation.
    To the extent the rule recommended by the comment is based on the 
premise that each partner would be entitled to a $3,000 capital loss, 
that premise is faulty. One, such a rule would require the IRS to know 
whether there are no other capital gains (related or unrelated to the 
partnership) against which the non-corporate partners would first be 
required to offset the additional capital loss. Two, the rule would 
require the IRS to consider whether the partner was not an individual 
subject to the lower deduction amount of $1,500 allowed by section 
1211(b). This process would become more burdensome as the number of 
partners and tiers increased. Accordingly, this comment was not 
adopted. To extent that this comment recommended a rule that allowed 
more flexibility for the IRS to group adjustments according to the 
facts and circumstances of the partners, that rule is reflected in 
proposed Sec.  301.6225-1(d)(1) and (e)(1) as revised in the August 
2018 NPRM. A partnership that wishes to request that the IRS take into 
account its partner's tax circumstances, including that certain 
partners are otherwise entitled to a capital loss deduction under 
section 1211(b), may utilize the discretionary grouping and subgrouping 
rules under Sec.  301.6225-1(d)(1) and (e)(1) or make a modification 
request under Sec.  301.6225-2(d)(6).
    With respect to the recommendation that the regulations apply the 
applicable rate for net negative adjustments to the relevant negative 
subgrouping and allow this amount to reduce the imputed underpayment 
amount, this recommendation was also not adopted; however, the final 
regulations allow for the result requested by the comment depending on 
the facts and circumstances. The comment suggests that the rate used in 
determining an imputed underpayment should be applied to negative 
adjustments that would otherwise be adjustments that do not result in 
an imputed underpayment and allow those negative adjustments to net 
with other positive adjustments in an effort to calculate an amount 
that would more closely reflect what the partners would have paid if 
they had properly reported the adjusted items. Section 6225(b)(1) 
provides that the imputed underpayment is determined by appropriately 
netting all partnership adjustments and applying the highest rate of 
tax under section 1 or 11. Section 6225(b)(3) requires that the 
partnership adjustments are first separately determined and netted as 
appropriate within each category of items that are required to be taken 
into account separately under section 702(a) or other provision of the 
Code. When ``appropriately netting'' under section 6225(b)(1)(A), 
section 6225(b)(4) requires that negative adjustments that could be 
subject to any limitation or restriction if taken into account by any 
person be disregarded unless provided otherwise by regulation. The 
regulations incorporate this rule in Sec.  301.6225-1(d)(3). The 
regulations also provide the ability, however, to take facts and 
circumstances into account to allow negative or downward adjustments, 
where appropriate, to be subgrouped and thus netted with other 
adjustments. See Sec.  301.6225-1(d)(1). For these reasons, the final 
regulations maintain the process for subgrouping and netting as 
provided for in the proposed regulations.
ii. Subgrouping Principles
    Before being revised in the August 2018 NPRM, former proposed Sec.  
301.6225-1(d) had provided that after

[[Page 6482]]

grouping the adjustments, partnership adjustments are further 
subgrouped based on preferences, limitations, restrictions, and 
conventions, such as source, character, holding period, or restrictions 
under the Code applicable to such items. One comment stated that the 
proposed grouping and subgrouping rules under former proposed Sec.  
301.6225-1(d) unfairly removed many relevant distinctions between 
different types of items and adjustments and netted items that do not 
properly net against each other at the entity level, including 
intangible drilling costs, section 1231 gains and losses, and whether a 
particular partner is considered active or passive in his or her 
relationship to the partnership. Another comment recommended that the 
final regulations should also include a clear statement that the 
netting process will be applied in accordance with generally applicable 
tax law. Both comments are addressed by the amendments made by the TTCA 
to section 6225(b).
    Section 202(a) of the TTCA added section 6225(b)(3) to provide that 
partnership adjustments shall first be separately determined (and 
netted as appropriate) within each category of items that are required 
to be taken into account separately under section 702(a) or other 
provision of the Code. Section 6225(b)(4) provides if any adjustment 
would (but for section 6225(b)(4)) result in a decrease in the amount 
of the imputed underpayment, and could be subject to any additional 
limitation under the provisions of the Code (or not allowed, in whole 
or in part, against ordinary income) if such adjustment were taken into 
account by any person, such adjustment shall not be taken into account 
when appropriately netting partnership adjustments under section 
6225(b)(1)(A) except to the extent otherwise provided by the Secretary.
    Former proposed Sec.  301.6225-1(d) was revised in the August 2018 
NPRM to account for the additions of sections 6225(b)(3) and (4). 
Proposed Sec.  301.6225-1(d)(3)(i) provided that adjustments are 
subgrouped, when appropriate, according to how the adjustment would be 
required to be taken into account separately under section 702(a) or 
any other provision of the Code or regulations applicable to the 
adjusted partnership-related item. By separating adjustments into 
subgroupings according to how and whether the adjustments would be 
separately stated pursuant to section 702(a), the rules under Sec.  
301.6225-1(d)(3)(i) ensure that items that do not properly net against 
each other at the partnership level under section 702(a) do not net 
against each other for purposes of determining an imputed underpayment.
    For example, under Sec.  301.6225-1(c) a positive adjustment to 
intangible drilling costs and a negative adjustment to gain or loss 
from a sale of property described in section 1231 are both placed in 
the residual grouping. Pursuant to Sec.  301.6225-1(d)(3)(i), each 
adjustment is then placed in a separate subgrouping to reflect that one 
adjustment is a negative adjustment and that the items being adjusted 
are required to be separately stated pursuant to section 702(a). See 
section 702(a)(3), Sec.  1.702-1(a)(8)(i). Under Sec.  301.6225-
1(e)(1), adjustments from separate subgroupings cannot be offset 
against one another. Accordingly, just as a positive amount of 
intangible drilling costs would not be netted with a section 1231 loss 
under section 702(a), a positive adjustment to intangible drilling 
costs would not net against a negative adjustment to 1231 gain or loss 
for purposes of determining an imputed underpayment.
    Some items that are not separately stated pursuant to section 
702(a) may nevertheless be subject to other limitations under the Code 
or may not otherwise be allowed to net against ordinary income. To 
account for those types of limitations, proposed Sec.  301.6225-
1(d)(3)(i) further provided that if any adjustment could be subject to 
any preference, limitation, or restriction under the Code (or not 
allowed, in whole or in part, against ordinary income) if taken into 
account by any person, the adjustment is placed in its own separate 
subgrouping. For example, an increase in loss attributable to a trade 
or business activity of the partnership may not be deductible in the 
hands of a particular partner because that partner did not materially 
participate in the partnership activity. See section 469. Because the 
loss may be limited in the hands of a particular partner, the increase 
in loss is placed in its own separate subgrouping to prevent any 
inappropriate netting against an adjustment increasing income of the 
partnership.
    Accordingly, both the comment expressing concerns about the netting 
of items that do not properly net against each other at the entity 
level and the comment suggesting the regulations apply general 
principles of tax law were addressed by the changes to section 6225 in 
the TTCA and the subgrouping rules under Sec.  301.6225-1(d)(3)(i) as 
revised in the August 2018 NPRM. As a result, the final regulations 
were not revised in response to these comments.
    Generally, under Sec.  301.6225-1(d), reallocation adjustments must 
be placed into their own subgroupings, but there is an exception for 
when multiple reallocation adjustments apply to a single partner or 
group of partners. Proposed Sec.  301.6225-1(d)(3)(ii) provided that if 
a particular partner or group of partners has two or more reallocation 
adjustments allocable to such partner or group, such adjustments may be 
subgrouped in accordance with Sec.  301.6225-1(d)(3)(i) and netted in 
accordance with Sec.  301.6225-1(e). Proposed Sec.  301.6225-
1(d)(3)(iv) provided a similar rule with respect to recharacterization 
adjustments.
    In January 2017, a prior version of the June 2017 NPRM was made 
publicly available but was not published in the Federal Register. The 
unpublished version of the June 2017 NPRM contained an example under 
former proposed Sec.  301.6225-1(f) (former Example 3) which was not 
contained in the June 2017 NPRM that was published in the Federal 
Register. One comment recommended that former Example 3 be added back 
to the regulations. This comment was not adopted. The Treasury 
Department and the IRS considered reviving former Example 3, but 
because of the changes to section 6225 in the TTCA, former Example 3 
did not comport with the statute or the proposed regulations. Instead 
of reviving former Example 3, a new example was added, Example 12, to 
clarify subgrouping principles in the case of facts similar to, but 
slightly different from, the facts in former Example 3.
    One comment recommended that the regulations clarify whether and 
under what conditions positive and negative adjustments resulting from 
different reallocation or recharacterization adjustments are 
permissibly placed in the same subgrouping. The comment stated that the 
language of both proposed Sec.  301.6225-1(d)(3)(ii) and (iv) seemed to 
allow the inclusion in the same subgrouping of unrelated positive and 
negative adjustments provided that all of the adjustments apply to a 
particular partner or group of partners. The comment suggested that the 
final regulations include examples clarifying the proper grouping and 
netting of adjustments pursuant to Sec.  301.6225-1(d)(3). The addition 
of Example 12 under Sec.  301.6225-1(h) provides the example suggested 
by the comment. As discussed earlier in this section of this preamble, 
Example 12 clarifies operation of the rule under Sec.  301.6225-
1(d)(3)(ii) allowing for adjustments to be subgrouped together when the 
adjustments are allocable to a particular

[[Page 6483]]

partner or group of partners. Although Example 12 illustrates these 
concepts in the context of reallocation adjustments, the example's 
analysis is equally applicable to recharacterization adjustments. The 
result demonstrated by Example 12 under Sec.  301.6225-1(h) of the rule 
under Sec.  301.6225-1(d)(3)(ii) for reallocation adjustment 
subgroupings would not be the result if the negative adjustments in 
that example were subject to limitations described in section 
6225(b)(4) and Sec.  301.6225-1(d)(3)(i).
iii. Negative Adjustments
    Under Sec.  301.6225-1(e), adjustments from each subgrouping (or 
grouping if there is no subgrouping within that grouping) are netted to 
produce either a net positive adjustment or a net negative adjustment 
with respect to each grouping or subgrouping. When determining an 
imputed underpayment, generally only net positive adjustments are taken 
into account, and net negative adjustments are generally treated as 
adjustments that do not result in an imputed underpayment. Adjustments 
to credits and creditable expenditures are treated separately. See 
section 3.A.vi. of this preamble.
    One comment suggested that the requirement that only net positive 
adjustments are taken into account in determining an imputed 
underpayment will frequently result in double taxation of the same 
income items. The comment cited to Example 4 under proposed Sec.  
301.6225-1(h) (Example 3 in former proposed Sec.  301.6225-1(f)) to 
demonstrate this point. In Example 4, the IRS determines that $125 of 
long-term capital gain should have been reported as $125 of ordinary 
income, resulting in a $125 increase in ordinary income and a 
corresponding $125 decrease in long-term capital gain (a $125 increase 
in long-term capital loss). The increase in ordinary income results in 
an imputed underpayment, and the increase in long-term capital loss is 
an adjustment that does not result in an imputed underpayment.
    To the extent the comment was suggesting that the example does not 
specify what happens with respect to the $125 increase in long-term 
capital loss, the example was revised in the August 2018 NPRM to 
clarify that this loss is taken into account in accordance with Sec.  
301.6225-3. Under Sec.  301.6225-3(b), the partnership takes into 
account the adjustment increasing long-term capital loss in the 
adjustment year. Alternatively, the partnership may request 
modification under section 6225(c) or make a push out election under 
section 6226 to ensure that the negative adjustment is taken into 
account by the partnership's reviewed year partners, rather than in the 
adjustment year by its adjustment year partners.
    To the extent the comment was expressing more general concerns 
about double taxation, proposed Sec.  301.6225-1(b)(4) was added in the 
August 2018 NPRM to provide that if the effect of a partnership 
adjustment under chapter 1 of the Code is reflected in another 
adjustment taken into account in the imputed underpayment 
determination, the IRS may treat an adjustment as zero for the purposes 
of calculating the imputed underpayment. This rule is designed to 
ensure that when calculating an imputed underpayment, an adjustment is 
not counted twice if the tax effect of that adjustment is reflected by 
another adjustment made by the IRS. A partnership may request that the 
IRS utilize this rule to treat an adjustment as zero if there is the 
partnership is concerned about double taxation. Accordingly, to the 
extent the comment was raising concerns about double taxation, no 
changes were made to the regulations in response to the comment.
    The final regulations under Sec.  301.6225-1(b)(4) do, however, 
clarify that the IRS has the discretion to treat adjustments as zero 
for purposes of determining the imputed underpayment if the effect of 
the adjustment under the Code is reflected in another adjustment. The 
language requiring that the adjustment must have previously been taken 
into account under Sec.  301.6225-1 was removed. This change provides 
the IRS the discretion to treat a partnership adjustment as zero in 
more situations. For instance, the effect of an adjustment may be 
reflected in an adjustment to an item treated inconsistently under 
section 6222(c). The final regulations under Sec.  301.6225-1(b)(4) 
also remove the language limiting the rule's application to chapter 1. 
Under the final regulations, the rule applies to the effect of an 
adjustment under the Code in general. This change also gives more 
flexibility to the IRS to treat partnership adjustments as zero for 
purposes of determining the imputed underpayment amount.
iv. Other Suggestions Regarding Grouping and Netting Adjustments
    One comment suggested that its concerns with the grouping and 
netting rules might be alleviated by allowing the partnership to treat 
the partnership adjustment as if it arose during the adjustment year 
rather than the reviewed year, which would synchronize the imposition 
of the tax in the adjustment year with the adjustment year partners 
bearing the liability for the imputed underpayment. This comment was 
not adopted because it is contrary to the plain language of the 
statute.
    Section 6225(a)(1) refers to adjustments to partnership-related 
items ``with respect to any reviewed year.'' Section 6225(b)(1) 
provides that any imputed underpayment ``with respect to any reviewed 
year'' shall be determined by appropriately netting all partnership 
adjustments ``with respect to such reviewed year.'' In addition, 
section 6225(d)(2) defines adjustment year to mean, in the case of an 
examination, the year in which an FPA is mailed under section 6231 or 
in the case of adjustment pursuant to a decision in a proceeding under 
section 6234, the year in which the decision is final. Accordingly, at 
the time of the modification phase of the examination, the adjustment 
year will not yet be determined.
    If the comment's suggestion were adopted and adjustments were 
treated as having arisen in the adjustment year, it is unclear whether 
the reviewed year partners' or the adjustment year partners' tax 
attributes would be relevant in the modification determination. The 
modification period will in every case come before the issuance of the 
FPA. As a result, the adjustment year will not yet have been 
determined, and therefore the adjustment year partners will not yet be 
known. In addition, section 6225(c)(2) provides the ability for 
partners to file amended returns in modification. The statute's use of 
the phrase ``amended return'' implies that a prior return must have 
been filed. A prior return could not have been filed for the adjustment 
year at this point in the examination because the adjustment year would 
not yet be determined. The partners from the reviewed year, therefore, 
must be the partners that utilize the modification procedures under 
section 6225(c)(2) through the filing of amended returns for the 
reviewed year. The reviewed year partners' amended returns could not 
take into account adjustment year adjustments and apply them against 
reviewed year returns. Accordingly, the plain language of the statute 
indicates that adjustments for purposes of determining an imputed 
underpayment are the adjustments with respect to a reviewed year, not 
the adjustment year.
    Furthermore, section 6225(a)(1) provides the partnership shall pay 
an amount equal to such imputed underpayment in the adjustment year as 
provided in section 6232. In the case of adjustments that do not result 
in an imputed underpayment, section

[[Page 6484]]

6225(a)(2) provides that such adjustments shall be taken into account 
in the adjustment year. Section 6225(a)(2)'s explicit statement that 
adjustments not resulting in an imputed underpayment are taken into 
account in the adjustment year, and the absence of similar language in 
section 6225(a)(1) makes clear that only those partnership adjustments 
that do not result in an imputed underpayment are taken into account in 
the adjustment year.
    Accordingly, a reasonable reading of the statutory language of 
section 6225(a) supports an interpretation that adjustments with 
respect to the reviewed year should be treated as such for purposes of 
determining an imputed underpayment and not treated as adjustments 
arising in the adjustment year. However, Sec.  301.6225-3 does provide 
that adjustments that do not result in an imputed underpayment are 
taken into account in the adjustment year, that is, when the imputed 
underpayment is also required to be paid. To that extent, any 
adjustments that do not result in an imputed underpayment may mitigate 
the burden of the imputed underpayment on adjustment year partners.
    Another comment stated that the time shifting of the tax on 
partnership examination adjustments from the reviewed year to the 
adjustment year is inappropriate and that tax on partnership 
examination adjustments should arise in the reviewed year and not in 
the adjustment year. The comment further states that the burden of the 
payment in all cases should fall directly on the reviewed year partners 
and that the rules should require the reviewed year partners to amend 
their reviewed year tax returns to include their shares of the 
partnership examination adjustments. The comment was not adopted 
because all of the changes recommended by the comment would require 
amendments to the statute.
    Section 6225 provides that if the adjustments result in an imputed 
underpayment, the partnership shall pay an amount equal to such imputed 
underpayment in the adjustment year as provided in section 6232. 
Accordingly, the year partnerships must pay is, by statute, the 
adjustment year, and if the partnership pays the imputed underpayment 
without modification or does not make an election under section 6226, 
the statute is designed so that the adjustment year partners bear the 
burden of that payment. See section 6241(4) and Sec.  301.6241-4 
(denying any deduction to the partnership for any payment made by the 
partnership, including the imputed underpayment). Additionally, there 
is no authority within subchapter C of chapter 63 to allow the Treasury 
Department or the IRS to require that reviewed year partners file 
amended returns, though partners have the option to do so in 
modification. The partnership may also make the election under section 
6226 which would result in adjustments relating to the imputed 
underpayment for which the election was made being taken into account 
by the reviewed year partners.
    Another comment suggested treating an audited partnership as an 
``entity'' rather than an ``aggregate'' solely for the purposes of 
calculating the imputed underpayment based on majority ownership of the 
partnership (measured by the partners' interest in profits). 
Specifically, the comment suggested that if more than 50% of the 
interest in a partnership's profit is held by one or more individuals, 
S corporations, or closely-held corporations, the provisions of the 
Code that apply to individuals should apply for purposes of determining 
the amount of any imputed underpayment. This comment was not adopted.
    As discussed earlier in this section of this preamble, section 6225 
is prescriptive as to how an imputed underpayment is determined. The 
determination process expressly does not determine the imputed 
underpayment as if the partnership were an individual or an entity. 
Instead, the process for determining the imputed underpayment, 
including ``appropriately netting all partnership adjustments'' under 
section 6225(b)(1)(A) in accordance with Sec.  301.6225-1 generally 
does not take into account partner tax attributes, including whether a 
partner is an individual or a person subject to the Code provisions 
that apply to individuals. The IRS has the discretion to take into 
account an attribute of a particular partner when grouping or 
subgrouping the adjustments, but the IRS is not required to do so. 
Sec.  301.6225-1(d)(1), (e)(1). For instance, the IRS may consider 
whether a certain ownership percentage of the partnership was held by 
individuals, S corporations, or closely-held corporations and group 
adjustments based on information submitted by the partnership. However, 
a rule requiring the IRS to treat all partnership adjustments as if 
they were being taken into account by an individual as the comment 
suggests is inconsistent with the statutory requirement to net items 
appropriately. A rule that required the IRS to do so would also 
potentially disadvantage certain partnerships depending on the nature 
of adjustments and the types of the partners.
    Moreover, it is not clear that the comment's suggestion of 
accounting for the individual tax attributes of specific partners and 
applying the Code's rules regarding those partners would yield an 
appropriate netting of the adjustments for purposes of determining the 
imputed underpayment at the partnership level. For example, the Code's 
rules may apply differently to one individual partner versus another 
individual partner. Treating all individual partners in the same manner 
would negate operation of those rules. Accordingly, there is no reason 
to conclude that treating adjustments according to how some but not all 
partners' tax attributes would affect an adjustment is any more 
reasonable than not taking into account any partners' tax attributes. 
The statute provides a baseline assumption that partners' tax 
attributes are not taken into account. The imputed underpayment that 
best reflects the facts and circumstances of the partners should be 
determined through application of the permissive grouping and 
subgrouping rules under Sec.  301.6225-1(d)(1), (e)(1) or through 
modification. Accordingly, the final regulations do not adopt the 
comment's suggestion to base the imputed underpayment determination on 
the identity of the majority of the partnership.
    Section 6225(b) only provides specific rules with respect to one 
type of adjustment, that is, the rule that adjustments to distributive 
shares of partners not be netted under section 6225(b)(2). While it is 
true a determination regarding an adjustment described in section 
6225(b)(2) is usually made with some knowledge of the partners' 
distributive shares, such a determination does not account for the 
particular tax attributes of any specific partner. The IRS is not 
required to know any other information about the specific partners at 
the initial examination phase to reallocate adjustments between 
partners. Therefore, in order to effectuate the rule under section 
6225(b)(2), there is no need to know whether a partner is an 
individual, a corporation, a pass-thru partner, or some other entity. 
Section 6225(b)'s lack of reference to any particular tax attributes of 
specific partners indicates that the determination of an imputed 
underpayment is not dependent on knowing any partner's specific tax 
attributes.
    The same comment suggested another alternative in which the 
grouping and netting rules would account for current year partner 
attributes for purposes of determining an imputed underpayment.

[[Page 6485]]

The comment cited the amendment to section 6225(a) by TTCA that 
provides if the partnership adjustments do not result in an imputed 
underpayment, such adjustments shall be taken into account by the 
partnership in the adjustment year. This comment was not adopted.
    Section 6225 does not reference either partner tax attributes or 
current year partners as a consideration in determining the imputed 
underpayment. As discussed earlier in this section of this preamble, 
the Treasury Department and the IRS have determined a reasonable 
interpretation of section 6225(b) supports a process in which the 
determination of the imputed underpayment does not depend on specific 
partners' tax attributes. Moreover, the comment's reference to 
``current year'' is ambiguous; it could refer to any number of 
different time periods: the adjustment year, the actual calendar year 
in which the imputed underpayment is being determined, the year the 
imputed underpayment is proposed in a notice of proposed partnership 
adjustment, the time during the modification period prior to issuance 
of the FPA, or, if the partnership contests the partnership adjustments 
in court, the year the court decision is final. It is not administrable 
for the IRS to determine an imputed underpayment based on the potential 
tax attributes from time periods that are not fixed relative to the 
reviewed year and that may result in different partners being the 
relevant partners. The final regulations reflect the amendments to 
section 6225 by the TTCA, and therefore the final regulations were not 
revised in response to this comment.
v. Recharacterization Adjustments
    One comment recommended that the grouping and subgrouping rules be 
reconsidered due to the concern that under the proposed regulations, 
the inability to net certain overpayments and underpayments could lead 
to taxpayers not receiving an appropriate adjustment for taxes 
previously paid. The comment cited to Example 4 under proposed Sec.  
301.6225-1(h) to highlight this concern. In Example 4, the IRS 
determines that $125 of long-term capital gain should have been 
reported as $125 of ordinary income, resulting in a $125 increase in 
ordinary income and a corresponding $125 decrease in long-term capital 
gain (effectively, a $125 increase in long-term capital loss). The 
increase in ordinary income results in an imputed underpayment, and the 
increase in long-term capital loss is an adjustment that does not 
result in an imputed underpayment.
    The comment noted that the example does not specify what happens 
with respect to the $125 increase in long-term capital loss. As 
discussed earlier in section 3.A.iii. of this preamble, the example has 
been revised to clarify that $125 increase in long-term capital loss is 
taken into account in the adjustment year in accordance with Sec.  
301.6225-3. The comment also noted that it is unknown whether the 
partnership will be able to use the increased capital loss in the 
future. To avoid this potential adverse consequence, the comment 
recommended that the regulations permit a partnership to net 
adjustments across different categories of gain or loss to reflect 
taxes that were previously paid. This comment was not adopted for 
several reasons.
    As an initial matter, implicit in the comment's suggestion is that 
either the IRS or the partnership have knowledge of taxes previously 
paid by the partners. As discussed earlier in section 3.A.i. of the 
preamble, facts and circumstances unique to specific partners are 
generally not taken into account in determining whether the adjustments 
result in an imputed underpayment. The regulations give the IRS wide 
latitude to consider such facts and circumstances, but the rules do not 
narrowly define the circumstances when that occurs. See Sec.  301.6225-
1(d)(1) and (e)(1). The regulations are designed to maintain 
flexibility for both the IRS and the partnership to allow for the 
particular examination to accommodate the unique circumstances of each 
examination. Based on these reasons alone, the comment's suggestion was 
not adopted.
    The comment's suggestion was also not adopted because it is 
inconsistent with the overall approach applied to how 
recharacterization adjustments are taken into account in determining an 
imputed underpayment. Proposed Sec.  301.6225-1(c)(6)(iii) provided 
that a recharacterization adjustment results in at least two separate 
adjustments: One adjustment reversing the improper characterization of 
the partnership-related item, and the other adjustment effectuating the 
proper characterization of the partnership-related item. Generally, one 
of those adjustments is a positive adjustment and the other is a 
negative adjustment, but each adjustment is normally the same numerical 
amount ($125 in the case of Example 4 under proposed Sec.  301.6225-
1(h)). Under proposed Sec.  301.6225-1(d)(3)(iv), the positive 
adjustment and the negative adjustment are each placed into its own 
separate subgrouping. Because an adjustment in one subgrouping may not 
be netted against an adjustment from another subgrouping, the positive 
adjustment is not offset by the negative adjustment, and the result is 
a net positive adjustment that forms the base for an imputed 
underpayment amount. Proposed Sec.  301.6225-1(e)(2) and (3)(i).
    These rules are adopted largely without change in the final 
regulations in order to ensure that recharacterization adjustments are 
not inappropriately netted when determining an imputed underpayment, as 
required by section 6225(b)(1)(A). Allowing for the netting of the 
negative adjustment against the positive adjustment in the case of a 
recharacterization adjustment, as suggested by the comment, could cause 
the positive adjustment to be negated in its entirety, which would 
defeat the purpose of making the adjustment in the first place. It 
would also result in the recharacterization adjustment not properly 
being reflected in the imputed underpayment calculation. For instance, 
allowing the capital loss to fully offset the ordinary income in 
Example 3 under Sec.  301.6225-1(h) would not adequately reflect the 
fact that there was an underreporting of ordinary income by the 
partnership for that taxable year. Furthermore, if there were no 
imputed underpayment because recharacterization adjustments were 
allowed to net, there would be no statutory basis for imposing an 
interest charge on the partnership as suggested by the comment.
    Accordingly, the comment's suggestion to net adjustments across 
different categories of gain or loss to reflect taxes that were 
previously paid was not adopted, though the effect of such adjustments 
may be mitigated, in whole or in part, under certain circumstances 
through the modification procedures or by making a push out election 
under section 6226. The final regulations under Sec.  301.6225-1(e)(2) 
do clarify, however, that positive adjustments and negative adjustments 
within the same subgrouping may only net within that same subgrouping. 
No netting is permitted across subgroupings.
vi. Credits and Creditable Expenditures
    In determining whether partnership adjustments result in an imputed 
underpayment, adjustments to credits are placed in the credit grouping 
described under Sec.  301.6225-1(c)(3). One comment suggested that for 
administrative efficiency, it would make sense to group and order 
credits in accordance with Form 3800 and recommended that the 
regulations provide for grouping and ordering

[[Page 6486]]

credits in such a manner. This comment was not adopted.
    As discussed earlier in section 3.A.ii. of this preamble, the 
subgrouping rules under Sec.  301.6225-1(d)(3)(i), including the 
application of those rules to the credit grouping, take into account 
any limitations or restrictions under the Code. Therefore, to the 
degree the Code would require certain credits to be subgrouped within 
the credit grouping to reflect any limitations or restrictions, the 
rules under Sec.  301.6225-1(d)(3)(i) allow for that result. In 
addition, when determining subgroupings the IRS may take into account 
the facts and circumstances of a partnership and its partners. It may 
be the case that the subgroupings with respect to a particular set of 
adjustments ultimately reflects the manner in which credits are grouped 
and ordered on Form 3800, but that may not always be the case. The 
regulations provide the necessary flexibility to achieve the result 
suggested by the comment without binding the IRS and partnerships to a 
particular manner in which credits must be subgrouped.
    Additionally, because the Form 3800 and the underlying statutory 
rules it reflects may change over time, it is unwise to link the 
regulatory rules for subgrouping with the form's methodology for 
grouping credits. Relying on the general subgrouping rules under Sec.  
301.6225-1(d)(3)(i) gives the IRS and partnerships the flexibility to 
adapt to changes in the Code and any form changes without needing to 
amend the regulations.
    Adjustments to creditable expenditures are placed in the creditable 
expenditure grouping described under Sec.  301.6225-1(c)(4). Proposed 
Sec.  301.6225-1(c)(4)(B), (d)(3)(iii), and (e)(3)(iii) provided 
specific rules relating to foreign creditable tax expenditures. Aside 
from the general rule regarding what constitutes a creditable 
expenditure, no additional rules relating to creditable expenditures 
were proposed.
    The Treasury Department and the IRS requested comments on the 
appropriate treatment of creditable expenditures. One comment suggested 
any items that may be treated as a credit when taken into account by a 
partner and not otherwise limited (for instance, by their non-
creditable status against the alternative minimum tax) be credited 
against the imputed underpayment amount. For other items which may be 
subject to limitations at the individual level, the comment suggested 
that the regulations provide rules similar to those rules proposed 
under proposed Sec.  301.6225-3, regarding adjustments that do not 
result in an imputed underpayment, because any adjustment to a credit 
would not result in an imputed underpayment.
    With the exception of the rules under Sec.  301.6225-1 regarding 
foreign tax creditable expenditures, the Treasury Department and the 
IRS have determined not to issue regulations regarding the treatment of 
creditable expenditures at this time. However, the final regulations do 
clarify that the general subgrouping principles under Sec.  301.6225-
1(d)(3)(i) apply when subgrouping adjustments to creditable 
expenditures. The comments received with respect to creditable 
expenditures remain under consideration, and future guidance will be 
issued when appropriate. The final regulations also clarify that a net 
positive adjustment to creditable foreign tax expenditures is excluded 
from the calculation of the total netted partnership adjustment under 
Sec.  301.6225-1(b)(2).
    Comments were also requested regarding how credit recapture 
situations should work under the centralized partnership audit regime. 
One comment offered suggestions with respect to two credit recapture 
situations. The first situation involved a credit recapture that 
results from a partnership adjustment. The comment recommended in that 
situation that the regulations should incorporate any credit recapture 
into the calculation of any imputed underpayment to the extent that the 
originating credits were generated from partnership activities, but 
that this incorporation should be limited to partnerships with partners 
that actually would have benefited from the original credits. This 
recommendation was partially adopted.
    A recapture of a credit generated by partnership activities 
constitutes a partnership adjustment as defined under Sec.  301.6241-
1(a)(6), and the credit recapture would constitute a positive 
adjustment under Sec.  301.6225-1(d)(2)(iii)(A) and be placed in the 
credit grouping under Sec.  301.6225-1(c)(3). The full amount of the 
credit recapture would be taken into account in the determination of 
the imputed underpayment, unless the partnership requests, subject to 
IRS approval, that the credit recapture should be taken into account 
differently during the partnership-level proceeding or pursuant to a 
modification request. See Sec.  301.6225-1(d)(1), (e)(1), Sec.  
301.6225-2. This rule is necessary because, as discussed earlier in 
this section of this preamble, in general, the initial determination of 
an imputed underpayment does not account for the attributes of the 
partnership's partners, including whether and to what extent any 
partners actually benefited from the original credits. Accordingly, the 
final regulations include a credit recapture amount in the amount of 
the imputed underpayment, and this amount is not limited to the amount 
partners actually benefited from the recaptured credits unless the 
partnership can affirmatively demonstrate to the satisfaction of the 
IRS during exam either before issuance of the NOPPA or on modification 
the appropriate partner-level tax treatment.
    The second situation described by the comment involves a 
partnership adjustment that results in a credit that is incorporated 
into the imputed underpayment calculation, presumably as a reduction to 
the imputed underpayment and that may later be subject to recapture. 
The comment recommended that the regulations require the partnership to 
notify partners that they received the benefit of such credits and that 
the partners may be obligated to recapture those credits at a later 
date. The comment suggested this notice could be provided as notes to 
the adjustment year Schedule K-1. This comment was not adopted. The 
final regulations do not require that the partnership notify the 
partners of any risk of future credit recapture, though the partnership 
is not prohibited from doing so if the partnership determines that such 
notification would be beneficial to the partners and the partnership. 
Except where required for the operation of the provisions of the 
centralized partnership audit regime, the Treasury Department and the 
IRS do not generally regulate communications between the partnership 
and the partners, and therefore the final regulations do not impose a 
requirement for notification by the partnership concerning possible 
credit recaptures.
    Because a net negative adjustment to a credit, that is, an increase 
in an item of credit, would generally be subject to limitations under 
the Code, the final regulations under Sec.  301.6225-1(e)(3)(ii) 
clarify that a net negative adjustment to a credit is treated as an 
adjustment that does not result in an imputed underpayment as described 
in Sec.  301.6225-1(f)(1), unless the IRS determines otherwise. This 
rule ensures that the total netted partnership adjustment is not 
inappropriately reduced by an increase in credit that would subject to 
limitations in the hands of the partners of the partnership.
B. Modification of an Imputed Underpayment
    Proposed Sec.  301.6225-2 provided the rules and procedures 
regarding modification of an imputed

[[Page 6487]]

underpayment by the partnership. The Treasury Department and the IRS 
received multiple comments regarding proposed Sec.  301.6225-2 focusing 
on the following areas: (1) Modification in general; (2) timing of 
modification requests and determinations; (3) amended return 
modification; (4) the alternative procedure to filing amended returns; 
(5) rate modification; (6) modification pertaining to certain passive 
losses of publicly traded partnerships; (7) modification pertaining to 
qualified investment entities; (8) closing agreement modification; and 
(9) recommendations to add additional types of modifications.
i. Comments Pertaining to Modification in General
    The modification provisions under Sec.  301.6225-2 are designed to 
determine an imputed underpayment amount that reflects, as closely as 
possible, the tax the partners would have paid had they correctly 
reported the adjusted items, while at the same time maintaining the 
efficiencies of a streamlined examination and collection process. See 
JCS-1-16 at 65-66. One comment suggested, that the modification 
provisions do not operate as intended because those provisions do not 
expressly permit a modification to reflect how the partners actually 
took an item into account, to account for reductions that would be 
permitted to offset an increase under generally applicable law, or to 
otherwise expressly challenge the IRS's method of calculating a 
proposed adjustment amount. Except as described later in this section, 
no changes to the regulations were made in response to this comment.
    The Treasury Department and the IRS do not agree with the comment's 
characterization of how the modification provisions operate because the 
modifications available under Sec.  301.6225-2 permit a partnership to 
achieve the results sought by the comment. For instance, both the 
amended return procedure and the alternative procedure to filing 
amended returns provide an opportunity for the partnership to request 
modification to reflect how an item was actually taken into account by 
its partners and to account for offsetting reductions permitted under 
generally applicable law. When a partner files an amended return 
including his share of the partnership adjustments, the amended return 
reflects a tax amount based on how the partner originally reported the 
partnership-related item prior to adjustment compared to how the 
partnership adjustment affects the partner's original return. This tax 
amount is the correct amount of tax for that partner after taking into 
account the partnership adjustment and includes any allowable 
reductions that may offset any additional income determined at the 
partnership level.
    Regarding the comment's concern that a partnership does not have an 
opportunity to challenge the IRS's method of calculating a proposed 
adjustment amount, proposed Sec.  301.6225-2(d)(6) provided a procedure 
for modifying the composition of an imputed underpayment. Under Sec.  
301.6225-2(d)(6), a partnership may request that the IRS include one or 
more partnership adjustments in a particular grouping or subgrouping. 
If certain negative partnership adjustments should be treated as if no 
limitations or restrictions in fact apply to the partners to whom the 
adjustments are allocated and the partnership can establish this 
result, if approved, on modification, such negative adjustments may be 
properly grouped or subgrouped with other adjustments and therefore 
allowed to net against those adjustments in accordance with Sec.  
301.6225-1(e) to reduce the amount of the imputed underpayment.
    To the extent the comment was suggesting that the modification 
procedures do not provide the partnership an opportunity to challenge 
the substance of partnership adjustments, the comment is correct but no 
change is made in response to the comment. The statutory modification 
procedures are designed to allow the partnership to modify the amount 
of the imputed underpayment, not adjust the substance of the 
partnership adjustments that underlie the imputed underpayment. The 
substance of partnership adjustments are determined by the IRS on 
examination, and may be further revised in the IRS Appeals Office (IRS 
Appeals) or by a court in a proceeding for readjustment brought under 
section 6234. Although the comment did not explicitly state it as such, 
to the extent the comment was recommending a rule under Sec.  301.6225-
2 that allows a modification to reflect a circumstance where a partner 
actually took an item into account in a manner consistent with how that 
item was adjusted by the IRS during the partnership proceeding, this 
suggestion was adopted. As discussed later in section 3.B.ix. of this 
preamble, the final regulations under Sec.  301.6225-2(d)(2)(ii) allow 
a partnership to request modification based on how adjusted items were 
taken into account by a partner prior to the item being adjusted by the 
IRS.
    The same comment also suggested that the modification procedures 
permit a partnership to demonstrate how an adjustment would impact its 
partners and reduce an imputed underpayment without a need for the 
partners to file an amended return. The other proposed modification 
procedures provided multiple opportunities for partnerships to 
demonstrate the impact of adjustments on specific partners. The 
alternative procedure to filing amended returns is one way in which 
this type of modification may be achieved. Under Sec.  301.6225-
2(d)(2)(x), a partnership may submit on behalf of a partner, in 
accordance with forms, instructions, and other guidance prescribed by 
the IRS, all information and payment of any tax, penalties, additions 
to tax, additional amounts, and interest that would be required to be 
provided if the partner were filing an amended return. If the 
partnership avails itself of this procedure with respect to a partner, 
the partner does not need to also file an amended return in order for 
modification to be approved. The amended return procedures and the 
alternative procedure to filing amended returns are discussed further 
in sections 3.B.iii. and 3.B.iv. of this preamble.
    Other modification procedures also provide the partnership with an 
opportunity to demonstrate the effect of adjustments on specific 
partners. For instance, tax-exempt modification provides an opportunity 
for the partnership to demonstrate that partnership adjustments are 
allocable to a partner that would not owe tax by reason of its status 
as a tax-exempt entity. Rate modification allows partnerships to 
demonstrate that partners would be subject to a lower rate than the 
highest rate of tax applied to calculate the imputed underpayment. 
Because the partnership has many avenues within modification to 
demonstrate the effect a partnership adjustment would have on specific 
partners, no new modification procedures were adopted in response to 
this comment.
    Former proposed Sec.  301.6225-2 permitted a partnership to request 
modification with respect to an indirect partner (as defined in Sec.  
301.6241-1(a)(4)). See, for example, former proposed Sec.  301.6225-
2(d)(2). One comment suggested that permitting partnerships to modify 
their imputed underpayment to account for direct and indirect partners 
is consistent with the objective of determining an imputed underpayment 
amount that is as close as possible to the tax due if the partnership 
and partners had correctly reported and paid. The comment further 
suggested

[[Page 6488]]

that permitting modifications for direct and indirect partners would 
also reduce the disincentives for partnerships to pay the imputed 
underpayment and recommended the final regulations adopt rules 
permitting modification with respect to indirect partners, consistent 
with the proposed regulations.
    The final regulations are consistent with the comment's request and 
adopt the proposed rules allowing modification with respect to indirect 
partners, provided the indirect partner is a relevant partner as 
defined in Sec.  301.6225-2(a). The August 2018 NPRM introduced, the 
term ``relevant partner'' to describe any person for whom modification 
is requested by the partnership that is a reviewed year partner, 
including a pass-through partner, or an indirect partner. The term 
relevant partner does not include, however, any person that is a 
wholly-owned entity disregarded as separate from its owner for Federal 
income tax purposes. No comments were received regarding the definition 
of relevant partner. The final regulations maintain the definition of 
relevant partner from proposed Sec.  301.6225-2(a).
    Accordingly, under the final regulations a partnership may request 
modification with respect to reviewed year partners (direct partners), 
including pass-through partners, and indirect partners. A partnership 
may not request modification, however, with respect to a direct or 
indirect partner that is a wholly-owned entity disregarded as separate 
from its owner for Federal income tax purposes.
    One comment noted some concerns regarding the interaction between 
the centralized partnership audit regime and ERISA. The comment 
expressed concerns about situations in which the partnership 
representative must decide whether to request a modification that 
benefits non-ERISA partners over ERISA partners and how that affects 
the discharge of any fiduciary duties under ERISA. To address these 
concerns, the comment made three recommendations. First, the comment 
recommended that the regulations provide that the partnership 
representative may solicit a vote of the partners in the partnership in 
determining whether to request a modification. This recommendation was 
not adopted.
    The decision whether to solicit a vote of the partners in the 
partnership as part of determining whether to request modification or a 
particular type of modification is fully within the authority of the 
partnership representative. Nothing in the final regulations prevents 
or requires the solicitation of a vote by the partnership 
representative. Additionally, if the partnership and its partners 
impose such a condition on the partnership representative through an 
agreement with the partnership representative, any failure to adhere to 
that agreement does not affect actions taken by the partnership 
representative. See Sec.  301.6223-2(d).
    Second, the comment recommended that the IRS agree to automatically 
grant a request for an extension of the 270-day period for requesting 
modification if a vote of the partners whether to request modification 
has been solicited. This comment was not adopted for the reasons 
discussed in section 3.B.ii. of this preamble.
    Lastly, the comment recommended that the Treasury Department and 
the IRS share a suggestion with the Department of Labor that the 
Department of Labor clarify that a partnership representative will not 
be treated as a fiduciary with respect to any ERISA plan partner if the 
partnership representative requests or fails to request a modification 
based on the results of a vote of the partners. The rules regarding who 
is treated as a fiduciary with respect to any ERISA plan are beyond the 
scope of these regulations. However, as requested, the comment has been 
forwarded to the Department of Labor.
    Another comment recommended that the IRS revise proposed Sec.  
301.6225-2(c)(2)(ii) to limit the required information submitted with 
any modification request to that specific information relevant to the 
type of modification requested. The comment noted that requiring 
extensive and detailed documentation for each modification request will 
limit the ability of some partnerships to take advantage of the 
modification procedure. The comment also urged the IRS to establish 
realistic minimal documentation requirements for any modification 
request and create additional specific relevant requirements for the 
various types of modification requests permitted under the proposed 
regulations. The comment further noted that the ability of the IRS to 
request supplemental information prior to approval (as provided in 
proposed Sec.  301.6225-2(c)(4)) will ensure that the IRS obtains 
documentation they deem necessary for a particular set of facts and 
circumstances. This comment was adopted.
    The final regulations under Sec.  301.6225-2(c)(2)(ii) clarify that 
the partnership representative must furnish to the IRS information as 
required by forms, instructions, or other guidance prescribed by the 
IRS or as is otherwise requested by the IRS. The final regulations 
provide examples of such information, including the information that 
was described previously in proposed Sec.  301.6225-2(c)(ii). The 
information listed in the proposed regulations pertained to items that 
are necessary to process the majority of modification requests. It is 
possible, however, that certain items may not be necessary in every 
case, and if such items are not necessary, or if different items are 
more appropriate, the IRS will describe the information required in 
forms, instructions, or other guidance. In this way, the regulations 
provide the flexibility for the IRS to request what is needed for 
efficient and effective processing of modification requests, while 
maintaining the flexibility to adapt information requests in the 
future.
    The final regulations under Sec.  301.6225-2(c)(2)(i) also clarify 
that, pursuant to section 6241(10), the partnership may be required to 
submit or file items required to be provided to the IRS under Sec.  
301.6225-2 in an electronic format. The form and manner for submission 
of anything required to be submitted under Sec.  301.6225-2 will be 
described in forms, instructions, and other guidance prescribed by the 
IRS. Lastly, the final regulations under Sec.  301.6225-2(c)(2)(i) 
clarify that the IRS will deny modification not only for the failure to 
substantiate a modification request but also for the failure to pay 
anything required under Sec.  301.6225-2.
ii. Timing of Modification
    Proposed Sec.  301.6225-2(c)(3) provided rules regarding the time 
for submitting modification information to the IRS. One comment made 
three recommendations regarding these rules. First, the comment 
suggested that the final regulations provide a specified time frame in 
which the IRS must respond to a request for modification. This 
suggestion was not adopted because the regulations under section 6235 
provide a time frame within which the IRS will respond to a 
partnership's modification request.
    Pursuant to Sec.  301.6235-1(a)(2) and (b), in the case of any 
modification of an imputed underpayment, no partnership adjustment may 
be made later than the date that is 270 days after the date on which 
everything required to be submitted under Sec.  301.6225-2 for 
modification is so submitted. The date on which everything required to 
be submitted is so submitted is the date the modification period ends 
or expires. Sec.  301.6235-1(b)(2). Accordingly, in the case of a 
modification request, the IRS

[[Page 6489]]

must generally mail an FPA to make a partnership adjustment within 270 
days of the date the modification period ends.
    To the extent the comment was requesting a deadline by which the 
IRS must respond to a request for modification prior to the time limit 
for making adjustments under section 6235, the comment was not adopted. 
It is not administrable for the IRS to impose a deadline that would 
apply in every case that is earlier than the statutory deadline imposed 
by section 6235. The facts and circumstances of each administrative 
proceeding, the partnership adjustments made during that proceeding, 
and the modifications that are requested may differ greatly. Similarly, 
the complexity of the modification process may range from simple and 
straight forward to highly complex. Finally, for those modification 
requests that are more complex or that require additional 
documentation, the partnership may extend the time period for 
submitting modifications under Sec.  301.6225-2(c)(3) to allow for 
additional time and any additional documentation. For the reasons 
discussed in section 3.B.iii. of this preamble, the IRS plans to adopt 
procedures under which the IRS will respond to a request for 
modification in the FPA, including the planned time frame for 
responses. It is important to tax administration that these procedures 
are developed in separate guidance to allow for additional flexibility 
as the IRS gains more experience with the centralized partnership audit 
regime and the modification process. The 270-day period for mailing an 
FPA therefore acts as the outside time frame within which the IRS must 
respond to a request for modification. Because this time frame exists 
elsewhere in the regulations, the final regulations under Sec.  
301.6225-2 do not provide a separate time frame for providing a 
response to a modification request.
    The comment also recommended that the final regulations provide 
that if there is a pending request for modification at the expiration 
of the 270-day period, the IRS will automatically agree to an extension 
of that period until at least 30 days after they provide their 
response. It is not clear from the face of the comment which 270-day 
period the comment was referring to--the 270-day period under Sec.  
301.6225-2(c)(3)(i) in which everything required for modification must 
be submitted or the 270-day period under Sec.  301.6235-1(b) in which 
the IRS must mail an FPA to make a partnership adjustment. Both periods 
may be extended at the request of the partnership or the IRS. See 
Sec. Sec.  301.6225-2(c)(3)(ii); 301.6235-1(d).
    Regardless of which 270-day period the comment was referring to, 
the comment was not adopted. The final regulations do not provide that 
the IRS will automatically agree to an extension of either period under 
any circumstance. Whether an extension of the time to submit 
modification information, or an extension of the time to consider such 
information, is warranted is based on the facts and circumstances. In 
some cases an extension may be appropriate, for example, where there is 
a pending request and additional information would help clarify the 
issues. In other cases an extension may not be appropriate, for 
example, where it is clear that more information is likely to be of 
little to no value. Accordingly, while the regulations allow for an 
extension of both the period to submit modification information and the 
period in which the IRS has to consider such information, neither 
extension is automatic but rather must be based on the facts and 
circumstances of the particular case.
    Lastly, the comment suggested the regulations provide a time frame 
for a partnership to respond to an IRS request for additional 
information during the IRS's review of a modification request. The 
comment recommended the time frame for responding be a minimum of 60 
days and suggested that this issue is particularly significant if the 
request occurs near the expiration of the 270-day period. This comment 
was not adopted, but the IRS plans to adopt procedures that will allow 
a partnership time to provide additional information, when necessary, 
with respect to a particular request for modification. Because not all 
modification requests will require additional information from the 
partnership, this time frame is not provided for in the regulations. In 
addition, the response time may depend on the facts and circumstances. 
For example, as the comment notes, if a request for additional 
information occurs near the end of the 270-day period to submit 
information, there might not enough time to allow for a 60-day response 
period. While it is true the partnership and the IRS may agree to 
extend the 270-day period, this will not always be the case. 
Accordingly, a rule establishing a 60-day time frame for responding to 
requests for additional information in every case is not appropriate 
and would, in the example noted in the comment, serve as an automatic 
extension of the 270-day period to submit information that might not be 
requested by the partnership or consented to by the IRS. Nevertheless, 
if more information is required from the partnership, the IRS 
appreciates the need for partnerships to know when that information is 
due. The IRS plans to establish appropriate procedures through forms, 
instructions, or other guidance. As a result, the regulations were not 
revised in response to this comment.
iii. Amended Returns
    Proposed Sec.  301.6225-2(d)(2) provided rules regarding 
modification with respect to amended returns filed by partners. 
Proposed Sec.  301.6225-2(d)(2)(i) provided that a partnership may 
request modification of an imputed underpayment based on an amended 
return filed by a relevant partner provided all of the partnership 
adjustments properly allocable to such relevant partner are taken into 
account. One comment recommended that the regulations clarify whether 
modification will be allowed if a partner files an amended return 
taking into account adjustments that make up one imputed underpayment, 
while not taking into account adjustments that make up a separate 
imputed underpayment which also affects that partner. This comment was 
not adopted because its recommendation contradicts the statute.
    The requirement in proposed Sec.  301.6225-2(d)(2)(i) that partners 
take into account all partnership adjustments derives from section 
6225(c)(2)(A)(ii). Section 6225(c)(2)(A)(ii) states that when partners 
file amended returns in modification, that return must ``take into 
account all adjustments'' under section 6225(a) that are ``properly 
allocable to such partners (and the effect of such adjustments on any 
tax attributes).'' Section 6225(a) refers to ``any adjustment by the 
Secretary to any partnership-related items with respect to any reviewed 
year of a partnership . . .'' Section 6225(c)(2)(A)(ii)'s reference to 
``all adjustments'' under section 6225(a) does not distinguish between 
partnership adjustments that result in an imputed underpayment and 
partnership adjustments that do not result in an imputed underpayment. 
By not distinguishing between the types of partnership adjustments, the 
language of section 6225(c)(2)(A)(ii) indicates that all partnership 
adjustments must be taken into account by partners filing modification 
amended returns, as opposed to only those adjustments that are 
associated with the imputed underpayment for which modification is 
requested. Consistent with section 6225(c)(2)(A)(ii), the final 
regulations under Sec.  301.6225-2(d)(2)(i) require that even in the 
case of multiple imputed

[[Page 6490]]

underpayments, partners filing modification amended returns must take 
into account all partnership adjustments, not just the adjustments 
associated the imputed underpayment for which modification is 
requested.
    The comment also asked whether there are any specific requirements 
or limitations that apply in the case of an amended return modification 
request made with respect to one imputed underpayment, but not with 
respect to a separate imputed underpayment. Nothing in the regulations 
imposes specific requirements or limitations on the partnership or its 
partners when utilizing amended return modification with respect to 
only one imputed underpayment. The partnership and its partners must 
comply with all the requirements under Sec.  301.6225-2(d)(2) with 
respect to any request for amended return modification, including a 
request made for only one imputed underpayment in the case of multiple 
imputed underpayments.
    Proposed Sec.  301.6225-2(d)(2)(ii)(A) provided that an amended 
return modification request will not be approved unless the partner 
filing the amended return has paid all tax, penalties, additions to 
tax, additional amounts, and interest due as a result of taking into 
account the adjustments at the time such return is filed with the IRS. 
One comment suggested that the full payment requirement under Sec.  
301.6225-2(d)(2)(ii)(A) should be satisfied if the partner is in 
compliance with available IRS administrative processes to make full 
payment, for example, an installment payment agreement. Another comment 
recommended that the regulations permit partners to submit requests for 
installment agreements or offers in compromise within the 270-day 
modification period. These comments were not adopted.
    Section 6225(c)(2)(A)(iii) provides that if one or more partners 
file amended returns during modification, such returns take into 
account the adjustments properly allocable to such partners, and 
``payment of any tax due is included with such returns,'' the imputed 
underpayment is determined without regard to the adjustments so taken 
into account. Payment of any tax due is a statutory requirement under 
section 6225(c)(2)(A)(iii). Consistent with section 6225(c)(2)(A)(iii), 
proposed Sec.  301.6225-2(d)(2)(ii)(A) required full payment of any 
tax, penalties, and interest due at the time the amended return is 
filed with the IRS. If payment is not included with the amended return, 
the IRS will not approve modification with respect to the amended 
return.
    This rule is necessary to ensure that the IRS collects the entire 
amount of tax that results from the partner's share of partnership 
adjustments before approving the partnership's request that the imputed 
underpayment be calculated without regard to those adjustments. 
Allowing a partner to enter into an installment agreement undermines 
the ability of the IRS to collect tax on those adjustments both from 
the partnership, because the adjustments would no longer be reflected 
in the imputed underpayment, and from the partner that may ultimately 
default on the installment agreement. If a partner ultimately does not 
pay, the IRS may not be able to collect against that partner and likely 
would be outside the time period within which it must make partnership 
adjustments, preventing the IRS from collecting any additional imputed 
underpayment from the partnership. Similar concerns are presented by 
allowing a partner to enter into an offer in compromise. Moreover, a 
rule permitting partners to request installment agreements and offers 
in compromise as alternatives to full payment would increase the 
administrative burden on the IRS by requiring the IRS to evaluate 
whether such requests were appropriate, slowing down the modification 
process in general, and complicating the amended return process 
specifically. Accordingly, the final regulations retain the rule that 
full payment of any tax, penalties, and interest due as a result of 
taking into account the partner's allocable share of adjustments is 
required in order for modification to be approved with respect to a 
partner's amended return. In addition, the final regulations under 
Sec.  301.6225-2(c)(2)(i) clarify that a failure by any person to make 
any payments required with respect to a modification request within the 
time restrictions described in Sec.  301.6225-2(c) will result in a 
denial of a modification request.
    Proposed Sec.  301.6225-2(c)(3) provided that all information 
required under Sec.  301.6225-2 with respect to a request for 
modification must be submitted on or before 270 days after the date the 
NOPPA is mailed, unless that period is extended with the permission of 
the IRS. Several comments recommended partners only be required to file 
amended returns or make payments on those returns after the issuance of 
the FPA to allow the court to review the partnership adjustments before 
modification is requested. One comment recommended that, to provide an 
adequate amount of time, partners should be allowed at least 270 days 
from the time of the receipt of an FPA to file amended returns. The 
comment further recommended that the 270-day period be tolled at any 
time during which a court proceeding pursuant to section 6234 is 
ongoing. Another comment recommended that the final regulations commit 
the IRS to freely grant extensions of the 270-day period and other 
relevant periods and allow taxpayers to seek modification of the 
underpayment by filing an amended return, or use the alternative 
procedure to filing amended returns, within 60 days after there has 
been a final determination in the partnership case. These comments were 
not adopted.
    First, allowing modification requests, including amended returns, 
after the FPA is mailed or after there is a court decision with respect 
to the partnership adjustments is contrary to the statutory scheme 
under section 6225(c). The statutory scheme under section 6225, section 
6231, and section 6235 envision a process where the IRS first mails a 
NOPPA to the partnership that includes the proposed partnership 
adjustments and proposed imputed underpayment, followed by a 
modification period, which is followed by the FPA. The mailing of the 
NOPPA starts the 270 day period within which anything required to be 
filed or submitted in the modification process must be filed or 
submitted to the IRS. After the close of this 270-day period, which may 
be extended with the consent of the IRS, if modification is requested, 
the IRS has an additional 270 days to modify the imputed underpayment 
as necessary to reflect approved modifications and mail the FPA, which 
will describe the final partnership adjustments and imputed 
underpayment. After the FPA is issued, there is no basis for the IRS to 
consider further modifications. The examination is complete and the 
partnership may then pay the imputed underpayment or elect the push 
out. The partnership may also challenge the partnership adjustments in 
court.
    Section 6225(c)(2), which provides the procedures for filing 
amended returns and the alternative procedure to filing amended returns 
was enacted at the same time as section 6225(c)(7). The amended return 
modification and the alternative procedure to filing amended returns 
are just two of many statutory modifications. Had Congress intended for 
there to be an exception to the 270-day period under section 6225(c)(7) 
for amended return modification, as suggested by the comments, Congress 
could have included such an exception

[[Page 6491]]

when enacting both statutory provisions.
    Second, extending the 270-day period beyond the date of the 
issuance of the FPA could result in several tax administration issues 
for the IRS. Section 6225(c)(8) provides that any modification of the 
imputed underpayment amount ``shall be made only upon approval of such 
modification by the Secretary.'' A request for amended return 
modification must therefore be approved by the IRS. If the partnership 
fails to comply with the requirements under the rules under Sec.  
301.6225-2, the IRS may decline to approve the request for 
modification. In order to adopt the comment's suggestion that amended 
returns and associated payments not be provided until after the FPA is 
issued, the IRS would need to wait to approve the modification request 
with respect to that amended return until after the partnership and its 
partners submitted what was required to be provided under the 
modification rules. This would prevent the IRS from including its 
approval or disapproval of the modification request in the FPA, 
delaying a determination with respect to the modification until some 
later date. The FPA--the notice of final partnership adjustment--is 
designed to be the final notice to the partnership from IRS, not an 
interim notice subject to further modifications or changes.
    A partnership adjustment is defined under section 6241(2) as an 
adjustment to a partnership-related item, and a partnership-related 
item is defined as including an imputed underpayment. An adjustment to 
an imputed underpayment is, therefore, a partnership adjustment as 
defined in section 6241(2). The approval of a modification affects the 
amount of an adjustment that is taken into account in the imputed 
underpayment under the rules described in Sec.  301.6225-2(b). 
Therefore, the IRS must approve or disapprove of a modification before 
the expiration of the time period for making adjustments under section 
6235 or the IRS will have lost its opportunity to do so. Relatedly, and 
in addition to the concern about the statute of limitations, if the IRS 
waits until after the issuance of the FPA to make further adjustments 
to the imputed underpayment, modification could extend for an 
indefinite period of time, which would lead to uncertainty and 
administrative challenges for the partnership, the partners, and the 
IRS. This is particularly true with respect any adjustments after the 
mailing of the FPA because the mailing of the FPA imbues the 
partnership with certain rights, such as the right to petition a court 
for a readjustment of the partnership adjustments in the FPA and to 
elect the push out under section 6226 with respect to the imputed 
underpayment. The comment does not explain how a rule that would allow 
the IRS to further alter the imputed underpayment after the partnership 
has elected push out or petitioned a court for a readjustment would 
work. Such a rule would raise numerous tax administration concerns and 
potentially cause confusion for the partnership and its partners as to 
what the IRS finally determined and when.
    In addition, the IRS is limited as to when it may make a 
partnership adjustment. According to section 6235(a)(2), ``no 
adjustment under this subchapter for any partnership taxable year may 
be made after . . . in the case of any modification of an imputed 
underpayment under section 6225(c), the date that is 270 days 
[including extensions] . . . after the date on which everything 
required to be submitted to the Secretary pursuant to such section is 
so submitted.'' In order to adopt the comment allowing an extension of 
the 270-day modification submission period beyond the issuance of the 
FPA, the IRS would be required to issue two FPAs. The first FPA would 
address the partnership adjustments and the imputed underpayment prior 
to consideration of modifications. The second FPA would be issued at 
some later date before the expiration of the period for making 
adjustments under section 6235. Nothing in section 6235(a)(2) prevents 
the IRS from mailing a second FPA; however, under section 6231(c), if 
the partnership petitions the original FPA under section 6234, the 
Secretary may not mail another notice with respect to the same taxable 
year in the absence of fraud, malfeasance, or misrepresentation of a 
material fact. In other words, in the situation contemplated by the 
comment, in which a partnership petitioned the FPA, in general, the IRS 
could not issue a second FPA to approve or deny modification issues 
because the IRS would be prevented from doing so under section 6231(c).
    Adopting the comment's suggestion would prevent the IRS from 
exercising the discretion to approve modification for which Congress 
provided it authority in section 6225(c)(8). The IRS needs this 
discretion to ensure that requests for modification are appropriate for 
the partnership and that the administrative proceeding process is 
uniform between partnerships. Partners also have other options, such as 
subsequent amended returns, to address some concerns regarding making 
payments during the modification process. Accordingly, the regulations 
have not adopted this comments suggestion.
    Proposed Sec.  301.6225-2(d)(2)(vii)(B) provided that if a relevant 
partner files an amended return for purposes of modification, such 
partner may not file a subsequent amended return without the permission 
of the IRS. One comment recommended that the regulations clarify that 
the restriction in proposed Sec.  301.6225-2(d)(2)(vii)(B) relates to 
only those items related to a partnership adjustment. Similarly, 
another comment recommended that the IRS ease the restriction on the 
ability of a taxpayer using the amended return modification procedure 
to file subsequent amended returns when the subsequent amended return 
does not affect the items included in the partnership's audit 
adjustments. The comment stated that requiring a taxpayer to request 
permission from the IRS before filing an amended return is an 
administrative burden in terms of time and resources for both the 
taxpayer and the IRS.
    Another comment recommended that the regulations not prohibit a 
partner who has amended her return as part of the modification process 
from amending her return again without the permission of the Service. 
This comment suggested revising the forms for filing amended returns to 
(1) include a check-box asking whether the taxpayer filed a prior 
amended return for that same tax year that was the basis for a 
modification under section 6225(c) and (2) require any taxpayer who 
answers in the affirmative to attach to the subsequent amended return 
an explanatory statement and certain related documents, such as the 
prior amended return. Another comment recommended the regulations 
clarify that if a partner filed an amended return and paid tax on its 
share of adjustments, and modification was approved with respect to the 
amended return, the partner may later claim a refund of the tax paid if 
the partnership successfully appeals or contests the adjustment.
    The final regulations clarify that the restriction under Sec.  
301.6225-2(d)(2)(vii)(B) only applies to subsequent amended returns 
that change the treatment of partnership adjustments previously taken 
into account on a prior amended return that was filed during 
modification or are filed with respect to an imputed underpayment that 
was taken into account on a prior modification amended return. The 
final regulations also removed the requirement that limited further 
amended returns filed with respect to an imputed underpayment. The 
final regulations

[[Page 6492]]

provide exceptions to this rule if the modification amended return or 
all modifications become inapplicable to the reviewed year. For 
instance, a court could determine after the issuance of the FPA that 
the IRS's determination was erroneous in whole or in part, and there 
was no longer an imputed underpayment or the imputed underpayment 
should be reduced. In that case, the amended returns submitted during 
modification would have been with respect to an imputed underpayment 
that either no longer existed or was altered. The modifications in that 
case would either be wholly or partially inapplicable. Alternatively, 
during the modification process, after a partner files an amended 
return for purposes of modification, the IRS could deny modification 
under Sec.  301.6225-2(c)(2)(i). In those cases, the partner may file a 
subsequent amended return to reverse the treatment of partnership 
adjustments taken into account as part of the request for modification 
that is no longer applicable, subject to the period of limitations 
under section 6511. In response to the comment, the final regulations 
also remove the requirement that the partners request permission before 
filing subsequent amended returns. The final regulations also clarify 
that the restrictions on amended returns also apply to other claims for 
refund.
    One comment recommended clarification about whether and how the 
partner can file a request for refund if the IRS denies a modification 
based on a partner's filing of an amended return and payment of tax (or 
the use of the alternative procedure to filing amended returns) or if 
the partnership files a petition in court of the FPA which results in 
an adjustment in the partnership's favor. The same comment requested 
clarification on how a taxpayer who has filed an amended return or 
executed a closing agreement under section 6225 would receive the 
benefit of the reduced tax liability of the revised adjustment amount. 
Pursuant to section 7121, a closing agreement approved by the IRS is 
final and conclusive. Accordingly, as a general rule, a partner may not 
request a refund of amounts agreed to in, and paid with, a closing 
agreement, though the determination of whether a partner could file 
further amended returns or claims for refund with respect to a year in 
which a closing agreement was executed would depend on the facts and 
circumstances and the agreed upon terms of the closing agreement. As 
discussed earlier in this Summary of Comments and Explanation of 
Revisions, the final regulations under Sec.  301.6225-2(d)(2)(vii) now 
clarify that partners may file additional amended returns with respect 
to partnership adjustments or imputed underpayments, including in the 
case of denied modification or court readjustment. To file a subsequent 
amended return, the partners must do so in accordance with forms, 
instructions, and other guidance prescribed by the IRS. A partner that 
modifies using the alternative procedure to filing amended returns as 
described in section 6225(c)(2)(B) that seeks a refund for an amount 
paid as part of those procedures must follow the rules of Sec.  
301.6225-2(d)(2)(vii)(B) and (C). There is no separate process for 
partners that modify using the alternative procedure to amended 
returns.
    Former proposed Sec.  301.6225-2(d)(2)(vii) provided that a pass-
through partner may elect, solely for the purposes of modification, to 
take into account its share of the partnership adjustments and make a 
payment on behalf of its partners. If modification was approved with 
respect to the pass-through partner, the partnership was not permitted 
to request modification based on amended returns filed by upper-tier 
direct and indirect partners of the pass-through partner. Former 
proposed Sec.  301.6225-2(d)(2)(vii). One comment suggested that the 
regulations should permit a modification of a pass-through partner's 
payment amount based on amended returns filed by its upper-tier owners.
    This suggestion was adopted in the August 2018 NPRM revisions to 
Sec.  301.6225-2(d)(2). Proposed Sec.  301.6225-2(d)(2)(vi)(B), as 
revised in the August 2018 NPRM, provided that in accordance with 
forms, instructions, and other guidance, a pass-through partner making 
a payment under Sec.  301.6225-2(d)(2)(vi)(A) may take into account 
modifications with respect to its direct and indirect partners to the 
extent that such modifications are requested by the partnership and 
approved by the IRS. Therefore, to the extent an upper-tier partner of 
the pass-through partner has filed an amended return, the partnership 
has requested modification with respect to that amended return, and the 
modification is provided, the pass-through partner may take into 
account that amended return in accordance with forms, instructions, or 
other guidance when making a payment in modification. The final 
regulations under Sec.  301.6225-2(d)(2)(vi)(B) retain this rule.
    Another comment recommended that the regulations provide more 
guidance regarding the form required for an amended return filed by a 
pass-through partner and the information that form will need to 
contain. This comment was not adopted. The form required for any 
amended return, including an amended return filed by a pass-through 
partner, and the information required on that form will be set forth in 
forms, instructions, and other guidance prescribed by the IRS. Setting 
forth this information in forms, instructions, and other guidance gives 
the IRS the flexibility to adapt the form and its contents without 
having to amend the regulations. This flexibility preserves government 
resources and expedites the time in which taxpayers will know of 
changes to the statement requirements. At the same time, the IRS 
recognizes the need of taxpayers to know of the information required in 
order to comply with the regulations. The IRS plans to develop and 
release drafts of forms and instructions for public inspection as they 
are completed.
    Another comment recommended that the regulations address the 
situation in which a partner files an amended return but incorrectly 
calculates the interest amount due and subsequently receives an 
additional assessment from the IRS. The comment expressed concern that 
the incorrect calculation of interest and resulting shortfall in 
payment may result in an inadvertent denial of the modification 
request. Another comment recommended a rule that a de minimis shortfall 
of interest or penalties resulting from a good faith effort by a 
taxpayer to calculate the correct amount shall not result in a denial 
of a modification request.
    The comment recommending a good faith de minimis rule to address 
situations in which a partner has a shortfall of interest or penalties 
was not adopted. First, allowing a good faith de minimis rule for 
interest or penalties is inconsistent with the centralized partnership 
audit regime's approach of allowing modification of the imputed 
underpayment if partners fully account for adjustments by taking them 
into account, paying any resulting amounts due as if the partnership 
and partners had reported correctly the first time. Because amended 
return modification is occurring years after any tax would have been 
due as a result of the partnership adjustment, partners with an 
underpayment must pay interest to compensate the government for the 
time value of money on the underpayments. Similarly, partners that owe 
a penalty must pay that penalty to fully take into account the 
adjustments and allow the partnership the benefit of modification for 
those adjustments. A de minimis rule that affirmatively blessed some

[[Page 6493]]

dollar amount or percentage shortfall for either interest or penalties 
would encourage taxpayers to calculate their interest and penalties to 
fall within the allowed de minimis range to avoid disallowance but pay 
less than is required. It is inconsistent with the collection of 
amounts determined due on examination to systematically allow a 
collection of less than all that is due.
    Second, administering a rule that allowed partners to underpay what 
is owed under Sec.  301.6225-2(d)(2)(ii)(A) as long as they made a good 
faith effort and had only a de minimis short fall would result in 
untenable administrative complexities for the IRS. The IRS must review 
all modification requests within 270 days after the modification 
request has been submitted. The IRS will need to quickly ensure that 
all relevant partners have provided all information and payments 
necessary to approve modification. A rule that includes a good faith 
element would require the IRS to engage in a partner-specific inquiry 
with respect to any shortfall that might be within the de minimis range 
to determine whether partner made a good faith effort to comply. A rule 
that looks to the intent of the partner in determining the amount of 
interest and penalties is factually intense and would require an 
inquiry into the state of mind of the partner or that partner's tax 
advisor. In a fraction of the time it would take to make such an 
inquiry, the IRS could instead request and receive full payment from 
the partner. Therefore, it is not administrable to inject this 
additional, burdensome good faith de minimis shortfall rule in the 
final regulations, when the current requirement of full pay is both 
more administrable and less burdensome on the IRS and partners.
    If the partnership representative becomes aware of the shortfall 
before expiration of the 270-day period, the partnership representative 
may request an extension of the 270-day period in order to allow for 
full payment to be made before the modification period ends. In this 
way, the partnership representative can take steps to ensure that all 
requirements under Sec.  301.6225-2(d)(2) were satisfied.
    Proposed Sec.  301.6225-2(d)(2)(ii)(C) provided that in the case of 
a reallocation adjustment, all partners affected by such adjustment 
must file amended returns in order for the IRS to approve modification 
with respect to those amended returns. One comment suggested that the 
partners affected by the reallocation adjustment should be required to 
file amended returns only if there is evidence of a net underpayment of 
tax by the partners as a whole. The comment suggested as an alternative 
that the partners be allowed to attach an explanation or information 
statement to their adjustment year return rather than filing an amended 
return for the reviewed year. These suggestions were not adopted.
    Section 6225(c)(2)(C) provides that in the case of a reallocation 
adjustment, amended return modification applies only if all the 
requirements of either amended return modification or the alternative 
procedure to filing amended returns ``are satisfied with respect to all 
partners affected by such adjustment.'' The statute does not provide 
any exception to this rule, including an exception for situations in 
which there is evidence of a net underpayment of tax. Accordingly, the 
final regulations retain the rule that all partners affected by a 
reallocation adjustment must file amended returns or utilize the 
alternative to filing amended returns in order for modification to be 
approved. This rule ensures that all relevant partners affected by the 
reallocation adjustment take into account their appropriate shares of 
that adjustment and thereby ensures such partners receive the 
appropriate tax benefits for the taxable year subject to the 
adjustment.
    Furthermore, payment and collection of an underpayment is not the 
only issue required to be resolved by the filing of modification 
amended returns. In some cases, the purpose of the amended returns is 
to take into account the tax attributes that may have effects on other 
modification years. Certainly, in some cases, the tax effect of 
adjustments taken into account in one year may be offset by tax effect 
of adjustments in another year or by another partner, but as described 
in section 3.A. of this preamble, the unmodified imputed underpayment 
is designed by statute to take into account only the reviewed year and 
it does not take into account the specific tax attributes of any 
partner or the effects of the partnership adjustments in modification 
years or intervening years. An unmodified imputed underpayment will 
often result in an amount that is higher than what the partners 
collectively would have paid had they taken the adjustments into 
account properly in the reviewed year. The unmodified imputed 
underpayment protects the IRS's interests in collecting at least the 
amount of tax that should have been paid by the partners without having 
to separately examine and track all the partners. In other words, the 
unmodified imputed underpayment represents a simple way to allow the 
partnership to pay, and the IRS to collect, as amount related to the 
partnership adjustments without having to delve into the specific tax 
attributes of each partner.
    Modification, however, provides an opportunity for the partners and 
the partnership to demonstrate that specific tax attributes of partners 
should have an effect on the imputed underpayment. With respect to 
reallocation adjustments, if partners seek to receive the benefit of 
modification, each partners subject to a reallocation adjustment must 
follow the statutory requirement to file amended returns for all 
adjustments in a reallocation adjustment. It may be the case that one 
partner pays on modification and another partner is entitled to a 
refund. However, such a result is unknown until the partners 
demonstrate that fact through modification. More importantly, section 
6225(c)(2)(C) expressly requires that all partners have taken into 
account all partnership adjustments and related tax attributes for the 
modification years and future years. This statutory mandate makes clear 
that the purpose of this modification is not to ensure that there is a 
net tax payment with respect to the partnership adjustments, but 
instead to ensure that the proper partners have taken the adjustments 
into account correctly, including in all modification years. The 
requirement that all partners affected by a reallocation file amended 
returns is a necessary condition for modification to be approved.
    Similarly, the comment's suggestion that partners attach a 
statement to their adjustment year returns attesting to the fact that 
they had a net underpayment as a result of the adjustments is not 
workable. In an administrative proceeding, the adjustment year is the 
year in which the FPA is mailed under section 6231 or, if the 
partnership challenges the adjustments in court, the year such decision 
becomes final. Section 6225(d)(2). If a partner was one of the partners 
subject to a reallocation adjustment and failed to file an amended 
return, none of the other amended returns from other partners subject 
to the reallocation adjustments could be approved as a modification. As 
a result, the imputed underpayment would be determined in the FPA 
without reduction with respect to those adjustments. Attaching a 
statement on the next filed return of the partner that failed to file 
an amended return would have no effect on the imputed underpayment 
already finally determined.
    Recognizing the costs and burdens this rule may create for 
partnerships, partners, and the IRS in cases where it

[[Page 6494]]

is clear one partner will not owe tax on its share of a reallocation 
adjustment, the Treasury Department and the IRS included a rule within 
proposed Sec.  301.6225-2(d)(2)(ii)(C) to mitigate the potential impact 
of the requirement that all partners file amended returns. Proposed 
Sec.  301.6225-2(d)(2)(ii)(C) provided that modification may be 
approved in the case of a reallocation adjustment even if a relevant 
partner affected by the adjustment does not file an amended return or 
utilize the alternative procedure provided the partner takes into 
account its share of the adjustment through other modifications 
approved by the IRS or if a pass-through partner takes into account the 
relevant adjustments. For instance, in the case of an adjustment that 
reallocates a loss from one partner to another, the IRS may determine 
that the requirements of Sec.  301.6225-2(d)(2)(ii)(C) have been 
satisfied if one affected relevant partner files an amended return 
taking into account the adjustment and the other affected relevant 
partner signs a closing agreement with the IRS taking into account the 
adjustments. Proposed Sec.  301.6225-2(d)(2)(ii)(C).
    One comment recommended that the regulations clarify whether a tax-
exempt partner eligible for tax-exempt modification under Sec.  
301.6225-2(d)(3) and allocated a share of a reallocation adjustment 
must file an amended return to satisfy the requirements under Sec.  
301.6225-2(d)(2) in order for the IRS to approve a modification request 
with respect to such partner. The comment recommended adding to the 
regulations either an explicit statement or an example indicating that 
such a filing is not necessary provided the IRS is satisfied that the 
relevant partner qualifies as a tax-exempt entity. This comment was 
partially adopted by adding a sentence to Sec.  301.6225-2(d)(2)(ii)(C) 
indicating the IRS may determine the amended return requirement in the 
context of reallocation adjustment is satisfied to the extent an 
affected relevant partner meets the requirements of Sec.  301.6225-
2(d)(3) regarding tax-exempt partners. The satisfaction of the 
requirements of Sec.  301.6225-2(d)(2) (amended return modification and 
the alternative procedure) is only satisfied to the extent of the tax-
exempt portion as defined in Sec.  301.6225-2(d)(3)(iii). Therefore, if 
certain partnership adjustments allocable to tax-exempt partners are 
subject to tax, and the partner wishes to take advantage of amended 
return modification, the tax-exempt partner may have to file an amended 
return to pay tax on the portion of adjustments allocable to that 
partner which are subject to tax. The final regulations do not add an 
example to this effect because the plain language of Sec.  301.6225-
2(d)(2)(ii)(C) addresses the point raised by the comment.
    One comment recommended that the regulations provide an additional 
modification method in the case of reallocation adjustments that would 
allow a partner to whom a net negative adjustment is allocated to file 
an amended return (or use the alternative procedure to filing amended 
returns) to claim a refund of tax arising from such adjustment, on the 
condition that the partner to whom the net positive adjustment is 
allocated, or the partnership, has paid the tax attributable to the net 
positive adjustment. Similarly, another comment recommended that the 
regulations permit a modification of an imputed underpayment where only 
the partner experiencing additional income (or less deduction, loss, or 
credit) as a result of a reallocation adjustment files an amended 
return. These comments were not adopted.
    As discussed earlier in this section of this preamble, section 
6225(c)(2)(C) provides that in the case of a reallocation adjustment, 
amended return modification applies only if all the requirements of 
either amended return modification or the alternative procedure to 
filing amended returns ``are satisfied with respect to all partners 
affected by such adjustment.'' This rule demonstrates that reallocation 
adjustments made by the IRS under the centralized partnership audit 
regime are included in the calculation of the imputed underpayment 
unless all partners affected by such adjustments take them into 
account. Section 6225(c)(2)(C) does not contain an exception to the 
rule that all partners take the adjustments into account. Consistent 
with section 6225(c)(2)(C)'s requirement that all affected partners 
take the reallocation adjustments into account, the IRS has exercised 
its discretionary authority under section 6225(c)(6) to permit 
modification in the case of a reallocation adjustment where a relevant 
partner affected by such adjustment has met the requirements of another 
modification method and that modification has been approved by the IRS. 
This regulatory exception fits squarely within the statutory framework 
of ensuring that all partners affected by a partnership adjustment take 
into account their share of that adjustment and recognize the tax 
effects of such adjustments. Adopting the approach suggested by the 
comments, one where either only the loss partner or only the income 
partner take the adjustments into account, would undercut the statutory 
framework and directly contradict the plain language of the statute. A 
rule that does not account for all aspects of a reallocation adjustment 
would run contrary to the collection mechanism of the centralized 
partnership audit regime with respect to reallocation adjustments. The 
statutory framework requires either that the partnership pay an imputed 
underpayment representing the additional tax effects of the 
reallocation adjustment in the adjustment year and take the negative 
adjustment aspects into account in that same year or all affected 
partners from the reviewed year must fully account for their share of 
the reallocation adjustment.
    One comment recommended that the regulations clarify whether a 
taxpayer filing an amended return or requesting a closing agreement 
under section 6225 for purposes of modification is required to take 
into account and pay any additional taxes due under chapters 2 and 2A 
of the Code. This comment was adopted. The final regulations clarify 
that a partner filing an amended return or using the alternative 
procedure to filing amended returns only is required to pay tax due 
under chapter 1 of the Code with respect to the amended return and the 
alternative procedure to filing amended returns. The exception to the 
limitation of tax to chapter 1 tax is for a pass-through partner filing 
an amended return under Sec.  301.6225-2(d)(2)(vi) because the pass-
through partner, but for Sec.  301.6225-2(d)(2)(vi), might otherwise 
not owe tax under chapter 1. Nothing in the final regulations limits 
the IRS's authority under section 6241(9). The type of tax paid in a 
closing agreement, however, will depend on the terms of the closing 
agreement. The final regulations clarify the type of tax paid in these 
situations in Sec. Sec.  301.6225-2(d)(2)(ii)(A) and (d)(8).
    Another comment asked about the effect on the IRS's approval of 
modification in the case that a partnership or partner fails to pay 
taxes under chapters 2 and 2A in modification. Because the final 
regulations clarify that a partner is only required to pay chapter 1 
tax in amended return modification or in the alternative procedure to 
filing amended returns, the failure to pay taxes under chapters 2 and 
2A is irrelevant to the approval or denial of modification. The 
questions asked by the comment are therefore moot, and no changes were 
made in response to the comment.
    Section 6225(c)(2)(D) provides that section 6501 and 6511 shall not 
apply

[[Page 6495]]

with respect to returns filed in modification. A comment was concerned 
that amended returns filed after the expiration of the time period in 
section 6511 would be automatically rejected by IRS Service Centers, 
causing confusion and uncertainty about whether the amended return has, 
in fact been filed, and if so, whether it was timely. The comment 
recommended that the IRS develop a procedure for the filing of amended 
returns with the IRS personnel handling the partnership's examination 
so that this person can make sure that the return is filed and properly 
processed or alternatively that the regulations directed taxpayers to 
include a banner on the top of the amended return stating, in red ink, 
``Filed Pursuant to Section 6225(c),'' to alert the Service Center that 
this amended return should not be automatically rejected if it is 
otherwise untimely under section 6511. Another comment recommended that 
the final regulations also require that the reviewed-year partner 
include in the affidavit filed with the amended return modification 
request the partner's TIN and contact information to enable the IRS to 
locate easily the amended return and payment in its databases. The IRS 
intends to develop a process through which the partners would file 
their amended returns, but the regulations do not specify the details 
of that process. The IRS will develop forms and instructions directing 
the partnership and the partners as to how and where to file their 
amended returns submitted in modification, and the IRS intends to 
request the relevant partner's TIN as part of that process.
    Prior to the enactment of the TTCA, section 6225(c)(2) stated that 
section 6511 did not apply with respect to amended return modification, 
but it was silent on whether section 6501 limitations on assessment 
applied. If a partner's period under section 6501 was closed at the 
time of modification, the partner might not be able to participate in 
amended return modification. One comment recommended that the IRS 
resolve this issue by allowing partners to extend the relevant section 
6501 periods. This comment was received in response to the June 2017 
NPRM, prior to the enactment of the TTCA. The TTCA explicitly provided 
that section 6501 does not apply with respect to returns filed in 
modification, so the need for such extensions no longer exists.
iv. The Alternative Procedure To Filing Amended Returns
    The TTCA created an additional statutory modification under section 
6225(c)(2)(B), titled the alternative procedure to filing amended 
returns (the alternative procedure), which has been referred to as the 
``pull in'' or ``push in.'' Several comments recommended that the 
Treasury Department and the IRS adopt these procedures in response to 
the June 2017 NPRM, prior to the enactment of the TTCA. The August 2018 
NPRM proposed rules related to the alternative procedure, adopting 
those comments in response to the enactment of the TTCA, which included 
the alternative procedure.
    One comment suggested that the final regulations should include a 
modification procedure whereby an imputed underpayment is reduced when 
the partnership provides sufficient evidence that the adjustments 
underlying the imputed underpayment would have resulted in a smaller 
imputed underpayment if they had been taken into account according to 
how the partners and the partnership actually treated the partnership-
related item. The comment described this concept as similar to the 
``pull-in'' procedure included in the TTCA. The comment has not been 
adopted in its entirety because no one modification provision 
specifically allows the partnership to demonstrate that the imputed 
underpayment would be reduced if the partnership and partners had taken 
the adjustment into account. The purpose of the modification process is 
not only to reduce the amount of the imputed underpayment, but for 
those partners that take the adjustments into account as part of the 
modification requested, they are required to pay any additional tax, 
interest and penalties due and agree to adjust their tax attributes in 
exchange for the IRS approving the modification. As such, the 
regulations contain rules related to the alternative procedure as 
defined in section 6225(c)(2)(B) and Sec.  301.6225-2(d)(2)(x) and 
under that procedure the partnership may satisfy the requirements of 
amended return modification by submitting on behalf of relevant 
partners, in accordance with forms, instructions, and other guidance 
prescribed by the IRS, all information and payment of any tax, 
penalties, additions to tax, additional amounts, and interest that 
would be required to be provided if the relevant partner were filing a 
modification amended return. The partnership must also demonstrate that 
relevant partners have agreed to take into account tax attributes 
consistent with taking into account the partnership adjustments 
allocable to that partner. The regulations provide another modification 
under Sec.  301.6225-2(d)(10), where the IRS will consider any other 
request for modification and determine whether it is appropriate in the 
circumstances.
    Another comment recommended that the modifying partner using the 
``push in'' procedure deal directly with the IRS exam team during the 
partnership audit because many partners will not want to provide the 
details of their financial affairs to the partnership representative or 
the partnership. The regulations do not provide specific details as to 
what information will need to be provided to the IRS under the 
alternative procedure, but the IRS intends to develop such processes. 
The partnership, not the partners, however, requests amended return 
modification, and the partnership may satisfy those requirements 
through the alternative procedure. Because the partnership is 
responsible for making the modification request, the comment was not 
adopted at this time. The processes the IRS develops may ultimately 
provide that the partners submit some information directly to the IRS, 
but the partners will likely be required to provide some information to 
the partnership representative to request modification. Nothing in the 
regulations prevents the partnership from working with third parties or 
selecting a partnership representative that will not share the details 
of the partners' financial affairs directly with the partnership. The 
partnership, the partnership representative, and the partners will 
ultimately be required to meet filing requirements established in 
forms, instructions, and other guidance.
    The same comment also recommended that partners who establish that 
they are owed a refund receive such refund through the alternative 
procedure rather than by filing an amended return or relying on Sec.  
301.6225-3, which allows an adjustment that does not result in an 
imputed underpayment to be taken into account in the adjustment year. 
The comment recommended that refunds in the alternative procedure 
context only be allowed after all relevant partners have paid their tax 
and after the partnership has paid any remaining imputed underpayment. 
This comment was not adopted. Requests for the alternative procedure 
under Sec.  301.6225-2(d)(2)(x) are not claims for refunds for the 
reasons described later in this section of this preamble. To the extent 
the comment was suggesting that refunds could be claimed after the 
issuance of the FPA, which is the point after which the partnership 
would have been able to pay the imputed underpayment, the partners may 
only do so pursuant to Sec.  301.6225-2(d)(2)(vii).

[[Page 6496]]

    One comment recommended that if partnerships and their partners 
will be permitted some simplified method of modification (without the 
need to file amended returns), the regulations should fully explain 
that concept. This comment was made prior to the passage of the TTCA 
and the issuance of the August 2018 NPRM. The preamble to the August 
2018 NPRM explains the alternative procedure as enacted by the TTCA. 
This section of the preamble to these regulations provides additional 
explanation of the alternative procedure. In addition to the 
regulations, the alternative procedure will be further described in 
forms, instructions and other guidance as the IRS processes surrounding 
the alternative procedure are developed further.
    Another comment requested clarification on the interaction of the 
alternative procedure with other provisions described in the proposed 
regulations. For instance, the comment stated the language under 
proposed Sec.  301.6225-2(d)(2)(x) was unclear whether a taxpayer 
reporting a negative reallocation or recharacterization adjustment is 
eligible to use the alternative procedure. No changes were made to the 
regulations in response to this comment.
    There is nothing in the regulations that precludes the partnership 
from requesting modification with respect to a relevant partner under 
the alternative procedure where the relevant partner would otherwise be 
entitled to a refund had the partner instead filed amended returns. 
However, the regulations state that a request for modification under 
the alternative procedure is not a claim for refund with respect to any 
person. As a result, a relevant partner may not make a claim for refund 
via the alternative procedure. This rule is based on the statutory 
requirement under section 6225(c)(2)(B)(i) that requires a partner to 
pay any amount due under section 6225(c)(2)(A)(iii) if the partnership 
requests the alternative procedure. If a partner, after taking into 
account all partnership adjustments allocable to the partner, would not 
owe any amount as required in amended return modification under section 
6225(c)(2)(A)(iii), the partner is not required to make a payment as 
part of the alternative procedure. The fact that a partner may utilize 
the alternative procedure without making a payment does not, however, 
allow the partner access to a refund through the alternative procedure.
    The alternative procedure as described in section 6225(c)(2)(B) 
does not provide that the partners may obtain refunds. The alternative 
procedure provides a streamlined process for partners and the 
partnership generally to those partners paying additional amounts of 
tax, in lieu of filing amended returns. This streamlined nature of the 
alternative procedure process also benefits the IRS. By limiting the 
alternative procedure to just those relevant partners that are making 
payments required under section 6225(c)(2)(B)(i) (or that owe no 
additional tax), the IRS should be able to more quickly and efficiently 
process requests under the alternative procedure. Partners that have 
been allocated negative adjustments, including reallocation or 
recharacterization adjustments, may take those adjustments into account 
using the alternative procedure but by doing so will forego any claim 
for refund of any amounts related to taking those adjustments into 
account. In other words, if, for instance, the partner had offsetting 
income against which the negative adjustment might be netted, the 
partner could utilize the alternative procedure to make whatever 
payment resulted from the remaining offsetting income. If the partner 
would be entitled to a refund as a result of its allocated adjustments, 
the partner must use the amended return procedures to obtain that 
refund. Using the amended return procedures allows the IRS to track the 
refund appropriately and ensure it is processed efficiently.
    The same comment also stated that it was unclear if the alternative 
procedure would trigger the restrictions on further amended returns 
described in Sec.  301.6225-2(d)(2)(vii)(B). The final regulations 
under Sec.  301.6225-2(d)(2)(vii)(B) clarify that the restrictions on 
subsequent amended returns or claims for refund apply equally to the 
amended return process and the alternative procedure. A subsequent 
amended return or claim for refund is most likely to occur outside the 
centralized partnership audit regime process. Because the alternative 
procedure does not exist outside the centralized partnership audit 
regime, there is no method by which a partnership could use the 
alternative procedure to obtain a refund of amounts paid during 
modification. The partner may file a subsequent amended return, 
however, if the circumstances described in Sec.  301.6225-
2(d)(2)(vii)(C) are met.
v. Rate Modification
    Under Sec.  301.6225-2(d)(4), a partnership may request 
modification based on a lower rate of tax for the reviewed year with 
respect to adjustments that are allocable to a relevant partner that is 
a C corporation and adjustments with respect to capital gains or 
qualified dividends that are allocable to a relevant partner who is an 
individual. One comment suggested that the rate modification procedures 
accommodate situations in which the sole adjustment is a 
recharacterization of capital gain as ordinary income. In that 
situation, the adjustment increasing ordinary income is a net positive 
adjustment that results in an imputed underpayment, and the adjustment 
decreasing capital gain is a net negative adjustment that does not 
result in an imputed underpayment. See Sec.  301.6225-1.
    The comment recommended revising the rate modification procedures 
to provide that an individual partner may file an amended return, or 
use the alternative procedure, to establish that the partner previously 
paid tax on the recharacterized gain at the lower rate with the result 
that the portion of the net positive adjustment allocable to such 
partner would be subject to tax only at the difference between the 
highest tax rate and such lower rate. In addition, the comment 
recommended that the rate modification procedures allow a corporate 
partner to demonstrate that it paid tax on capital gain with the result 
that the portion of the net positive adjustment allocable to the 
corporate partner would be subject to tax at a zero percent rate, as 
corporate tax rates on capital gains equal rates on ordinary income.
    Rate modification is designed to address situations in which there 
is an adjustment to a particular type of income that is allocable to an 
individual or an adjustment that is allocated to a corporate taxpayer. 
A partnership may demonstrate that a lower rate of tax applies with 
respect to that income type or based on the type of taxpayer. Section 
6225(c)(4)(A) (flush language) limits the rates that may apply by 
providing that ``[i]n no event shall the lower rate determined . . . be 
less than the highest rate in effect with respect to the income and 
taxpayer . . . .'' Proposed Sec.  301.6225-2(d)(4) provided a rule 
consistent with this statutory mandate. For instance, with respect to 
an adjustment attributable to a C corporation, the highest rate in 
effect for the reviewed year with respect to all C corporations would 
apply to that adjustment, regardless of the rate that would apply to 
the C corporation based on the amount of that C corporation's taxable 
income. The comment suggested a rule where the rate applied to the 
recharacterized income allocable to the C corporation would be 0 
percent because there is no reduced capital

[[Page 6497]]

gains rate for C corporations. Zero is lower than the highest rate 
applicable to a C corporation and as a result is not permitted by 
statute. Similarly, for the individual in the comment's suggestion, for 
taxable year 2018 the highest rate is 37 percent and the highest rate 
for capital gains is 20 percent. The difference between these two rates 
is 17 percent, which is lower than the highest rate for capital gains 
for an individual and as a result not permitted by statute. 
Accordingly, the comment was not adopted.
    In contrast, the amended return (or the alternative procedure to 
filing amended returns) allows a partner to take into account the 
partner's share of adjusted items and apply the specific tax rate that 
applies to the partner's amount of taxable income. When taking into 
account her share of the adjustments, which includes both the 
adjustment increasing ordinary income and the adjustment decreasing 
capital gain, the partner is able to offset additional partnership 
income with any permissible deductions. For example, a partner may 
utilize the increase in capital loss to offset the capital gain that 
was originally reported and subsequently recharacterized, thereby 
reducing the partner's tax on capital gains to potentially zero and 
paying tax on her share of ordinary income at the partner's specific 
effective tax rate.
    To the extent the comment was suggesting that the Treasury 
Department and IRS exercise its discretionary authority under section 
6225(c)(6), the Treasury Department and IRS decline to do so because 
adopting such a rule would present administrability concerns for the 
IRS. For example, the corporate partner described by the comment may or 
may not have paid tax on capital gain on the corporate partner's 
original return; there may have been offsetting capital losses. The 
most efficient way from a tax administration perspective for the 
partnership and the corporate partner to demonstrate that the corporate 
partner previously paid tax on the capital gain is the amended return 
process (or the alternative procedure). By filing an amended return, 
the corporate partner can take into account the adjusted amount of both 
ordinary income and capital loss, and assuming those adjustments could 
offset on the corporate return, the corporate partner would owe no 
additional tax and the adjustments taken into account by the corporate 
partner would be disregarded from the total netted partnership 
adjustment. See Sec.  301.6225-2(b)(2). An amended return, or an 
alternative procedure submission, allows the IRS to understand better 
what the corporation took into account on its original return.
    Proposed Sec.  301.6225-2(b)(3) provided rules for calculating an 
imputed underpayment in the case of a rate modification. The first step 
in determining an imputed underpayment in the case of a rate 
modification is to determine each relevant partner's distributive share 
of the partnership adjustments based on how each adjustment subject to 
rate modification would be properly allocated under section 702 to such 
relevant partner in the reviewed year. Proposed Sec.  301.6225-
2(b)(3)(iii)(A). In the case of an adjusted item that was specially 
allocated to a partner or group of partners, however, each relevant 
partner's distributive share is determined based on the amount of net 
gain or loss to the partner that would have resulted if the partnership 
had sold all of its assets at their fair market value as of the close 
of the reviewed year. Proposed Sec.  301.6225-2(b)(3)(iv).
    One comment suggested that the requirement to determine the 
partner's distributive share based on a hypothetical sale of all 
partnership assets at fair market value as of the close of the reviewed 
year is administratively burdensome and difficult for partnerships to 
apply many years after the calculation date. The comment also suggested 
that the lack of a definition for fair market value in the statute and 
in the regulations will generate significant disputes between the IRS 
and partnerships. In order to simplify the administration of this rule, 
the comment recommended that the regulations should define fair market 
value solely for purposes of this rule as a more easily determined 
amount, such as using section 704(b) basis. This comment was not 
adopted, although the final regulations do provide an alternative 
method for determining a partner's distributive share in the case of 
special allocations as described later in this section of this 
preamble.
    Section 6225(c)(4)(B)(ii) provides if an imputed underpayment is 
attributable to the adjustment of more than one item, and any partner's 
distributive share of such items is not the same with respect to all 
such items, then the portion of the imputed underpayment to which the 
lower rate applies with respect to such partner shall be determined by 
reference to the amount which would have been the partner's 
distributive share of net gain or loss if the partnership had sold all 
of its assets at their fair market value as of the close of the 
reviewed year of the partnership. As discussed later in this section of 
this Summary of Comments and Explanation of Revisions, the IRS 
recognizes that there may be concerns about the burden a fair market 
value analysis might create on both the partnership and the IRS. The 
Treasury Department and the IRS considered using the authority under 
section 6225(c)(6) to expand modification to use section 704(b) basis, 
but the recommendation to use section 704(b) basis is also flawed. Not 
all partnerships have section 704(b) basis numbers to which the 
partnership and the IRS could refer for modification purposes. 
Accordingly, the section 704(b) basis alternative would only be 
available to certain partnerships, and the IRS would prefer to provide 
an alternative option to the fair market value analysis that would be 
available to all partnerships. In addition, there is concern that some 
partners may not have accurate records for section 704(b) basis. As 
discussed later in this section of the preamble, the Treasury 
Department and the IRS did exercise the authority under section 
6225(c)(6) to provide an option for special allocation rate 
modification that would apply to all partnerships.
    The comment suggested, as an alternative to defining fair market 
value, that the regulations permit the partnership to request that 
adjustments subject to the special allocation rule under Sec.  
301.6225-2(b)(3)(iv) be placed in a specific imputed underpayment 
separate from other adjustments. The comment suggested this process 
would allow for the adjustments to be allocated solely to the affected 
relevant partners in the appropriate manner, and also recommended that 
the request to designate a specific imputed underpayment in this 
context be considered separately from other modification requests.
    The process suggested by the comment was arguably permissible under 
former proposed Sec.  301.6225-2(d)(6). Under former proposed Sec.  
301.6225-2(d)(6), a partnership was permitted to request during 
modification that one or more partnership adjustments taken into 
account to calculate one general or specific imputed underpayment be 
taken into account to calculate a different specific imputed 
underpayment. Former proposed Sec.  301.6225-1(e)(2)(iii) had defined a 
specific imputed underpayment as an imputed underpayment with respect 
to adjustments to an item or items that were allocated to one partner 
or a group of partners that had the same or similar characteristics or 
that participated in the same or similar transaction. In the case of a 
special allocation to a group of partners, however, the partners may 
not

[[Page 6498]]

necessarily share the same characteristics or have participated in the 
same transaction. Accordingly under former proposed Sec.  301.6225-
1(e)(2)(iii), certain specially allocated items may have been eligible 
for placement in a specific imputed underpayment while others may not.
    This discrepancy was addressed by the revisions to proposed Sec.  
301.6225-1(g)(2)(iii) in the August 2018 NPRM. Proposed Sec.  301.6225-
1(g)(2)(iii) provided that the IRS may designate a specific imputed 
underpayment with respect to adjustments to items that were allocated 
to a partner or group of partners that had the same or similar 
characteristics, that participated in the same or similar transaction, 
``or on such other basis as the IRS determines properly reflects the 
facts and circumstances.'' A partnership may request designation of a 
specific imputed underpayment during the examination or during 
modification. See Sec.  301.6225-2(d)(6). Accordingly, because the 
process suggested by the comment is contemplated by the proposed 
regulations, no change was made in the final regulations to response to 
this comment.
    With respect to the comment's request for an alternative to fair 
market value, the Treasury Department and the IRS recognize that a 
determination of fair market value may present challenges for taxpayers 
and the IRS. For instance, obtaining a fair market value analysis may 
require the hiring of experts by the taxpayer, thereby increasing the 
costs of modification. Depending on the type of assets or the amount at 
issue, the IRS may need to employ its own experts to ensure that the 
taxpayer's analysis is correct. Recognizing these costs and 
administrative burdens, the Treasury Department and the IRS have 
exercised the authority under section 6225(c)(6) to ``provide for 
additional procedures to modify imputed underpayment amounts on the 
basis of such other factors as the Secretary determines are necessary 
or appropriate'' to carry out the purposes of section 6225(c). Pursuant 
to that authority, the final regulations under Sec.  301.6225-
2(b)(3)(iv) allow a partnership requesting rate modifications in the 
case of special allocations to determine the distributive share for all 
adjustments to which the lower rate applies with respect to all 
partners based on the test under either section 6225(c)(4)(B)(i) or 
section 6225(c)(4)(B)(ii).
    The rule under the final regulations allows partnerships and 
partners to request modification based on what they determine is the 
most appropriate method to measure partners' distributive shares. This 
rule provides an alternative to the fair market value analysis for 
partnerships and partners which comments suggested, and the Treasury 
Department and the IRS agree, may be too difficult or costly. The rule, 
however, does not remove the ability of a partnership to request 
modification based on section 6225(c)(4)(B)(ii). The final regulations 
also clarify that the distributive share referenced in section 
6225(c)(4)(B)(i) is the distributive share as determined in the NOPPA, 
and if no determination regarding that distributive share was made in 
the NOPPA, the rules of subchapter K of chapter 1 of the Code 
(subchapter K).
    The same comment also recommended that the regulations clarify that 
if the IRS requires a partnership to make the deemed sale calculation 
envisioned in proposed Sec.  301.6225-2(b)(3)(iv), the regulations 
provide that such action is not considered a revaluation for purposes 
of section 704. This comment was adopted. A sentence has been added to 
the final regulations under Sec.  301.6225-2(b)(3)(iv) to make clear 
that any calculation by the partnership that is necessary for purposes 
of complying with the rule under Sec.  301.6225-2(b)(3)(iv) is not a 
revaluation for purposes of section 704.
vi. Certain Passive Losses of Publicly Traded Partnerships
    Proposed Sec.  301.6225-2(d)(5) provided rules for modification 
regarding certain passive activity losses of publicly traded 
partnerships. Pursuant to proposed Sec.  301.6225-2(d)(5), in the case 
of a publicly traded partnership that is a relevant partner, an imputed 
underpayment is determined without regard to the portion of any 
adjustment the partnership demonstrates would be reduced by a specified 
passive activity loss which is allocable to a ``specified partner.'' 
Proposed Sec.  301.6225-2(d)(5)(iii) defined specified partner as a 
person that is a partner of a publicly traded partnership; that is an 
individual, estate, trust, closely held C corporation, or personal 
service corporation; and that has a specific passive activity loss with 
respect to the publicly traded partnership. One comment recommended 
that the definition of specified partner include partnerships to 
accommodate persons that hold an indirect interest in a lower-tier 
partnership that is under examination through one or more upper-tier 
partnerships. The final regulations do not adopt this definition of 
specified partner, but the final regulations do accommodate persons 
that hold an indirect interest in the partnership under examination.
    In the August 2018 NPRM, the Treasury Department and the IRS used 
the authority under section 6225(c)(6) to create a second type of 
partner, a qualified relevant partner, that was eligible for 
modification under Sec.  301.6225-2(d)(5). A qualified relevant partner 
is a relevant partner that meets the requirements of a specified 
partner for each year starting with the first affected year through the 
last year for which a return was filed by the partnership. To address 
the recommendation made by the comment to accommodate indirect 
partners, the final regulations provide that an indirect partner may 
also be a qualified relevant partner, and therefore be eligible for 
modification under Sec.  301.6225-2(d)(5), if the indirect partner is 
an individual, estate, trust, closely held C corporation, or personal 
service corporation and has a specified passive activity loss with 
respect to the publicly traded partnership.
    Former proposed Sec.  301.6225-2(d)(5) had provided that 
modification for certain passive losses of publicly traded partnerships 
applied equally with respect to a publicly traded partnership subject 
to a proceeding under the centralized partnership audit regime and 
where a portion of the imputed underpayment was attributable to a 
publicly traded partnership that is a partnership-partner. Proposed 
Sec.  301.6225-2(d)(5) was revised in the August 2018 NPRM to provide 
that Sec.  301.6225-2(d)(5) applies in the case of a publicly traded 
partnership that is a relevant partner. The final regulations provide 
that modification under Sec.  301.6225-2(d)(5) applies only to the 
publicly traded partnership requesting modification under Sec.  
301.6225-2 (that is, the partnership under examination). This change 
makes the modification procedures under Sec.  301.6225-2(d)(5) more 
administrable for the IRS because only the partnership under 
examination may request modification under Sec.  301.6225-2(d)(5). In 
this way, the change also makes modification Sec.  301.6225-2(d)(5) 
consistent with other types of modification. Because the final 
regulations accommodate certain indirect partners of the publicly 
traded partnership requesting modification, this change should not 
substantially affect the number of publicly traded partnerships and 
partners eligible for modification under Sec.  301.6225-2(d)(5).
    Another comment observed that section 6225(c)(5) required certain 
actions and calculations based on information that would not be known 
until the adjustment year. Pursuant to

[[Page 6499]]

section 6225(d), the adjustment year in the case of an administrative 
proceeding is the year in which a case is fully adjudicated under 
section 6234, or if no petition is filed under section 6234, when the 
FPA is mailed. A modification request must be submitted within 270 days 
of the issuance of the NOPPA, which must be mailed before the FPA. See 
section 6231(b)(2)(A). As a result of these rules, section 6225(c)(5) 
does not operate properly in the case of an administrative proceeding. 
When the partnership submits modification under section 6225(c)(5), the 
partnership cannot know what the adjustment year is, much less what tax 
effects there might be in that year. The only circumstance in which 
section 6225(c)(5) operates properly with respect to the adjustment 
year is if an AAR has been issued. This is because under section 
6225(d) the adjustment year in the case of an AAR is the year in which 
the AAR is filed.
    To address these incongruences, the comment recommended that the 
regulations allow a publicly traded partnership to reduce an imputed 
underpayment based on a net decrease in the passive activity loss 
allocable to a specified partner in the reviewed year to the extent the 
partnership takes such loss into account in the taxable year 
immediately preceding the year in which the NOPPA is issued. This 
comment was not adopted, but the concerns it raises were addressed in 
the August 2018 NPRM. In the August 2018 NPRM, the Treasury Department 
and the IRS used the authority under section 6225(c)(6) to provide that 
the partnership may request modification under Sec.  301.6225-2(d)(5) 
with respect to the adjustment year or the most recent year for which 
the publicly traded partnership has filed a return under section 6031.
    The Treasury Department and the IRS acknowledge that the most 
recent year for which a return was filed may not always be the year 
immediately before the issuance of the NOPPA, as in the rule suggested 
by the comment. However, using the taxable year for the most recently 
filed return allows the publicly traded partnership to refer to 
whatever return is the most recently filed, even if that return was 
filed shortly after the issuance of the NOPPA. This flexibility allows 
the partnership to take into account the information known as of the 
most recent tax year. If the rule were to require the publicly traded 
partnership to take into account information from a return filed before 
the issuance of the NOPPA, as suggested by the comment, the return 
filed before the issuance of the NOPPA might not be the most recent 
return. For example, the return filed prior to the issuance of the 
NOPPA could have preceded the NOPPA by several months. After the NOPPA 
was issued and at the time the partnership is considering submitting a 
modification request, the partnership could have filed the next year's 
return reflecting the next year's passive activity losses, which might 
differ from the losses reported on the return filed prior to the 
issuance of the NOPPA. The Treasury Department and the IRS have an 
interest in ensuring that the most current tax amounts are used in 
determining whether a modification request under Sec.  301.6225-2(d)(5) 
should be approved. Given this interest, the rule in the final 
regulations uses the most recently filed return, rather than the 
comment's suggestion to use the return filed before the issuance of the 
NOPPA.
    In addition, the rule suggested by the comment would require the 
partnership to know what adjustments would be included in the NOPPA and 
make adjustments on its return to take such adjustments into account, 
prior to the issuance of the NOPPA. If the adjustments in the NOPPA 
somehow differed from the adjustments the partnership took into account 
on its return, the modification might be denied because the partnership 
failed to take those adjustments into account. The comment's 
suggestion, therefore, has its own timing issues. The final regulations 
provide more flexibility for the partnership to reflect the information 
known as of the last return filed without requiring the partnership to 
predict what may or may not be in the NOPPA and on which day the NOPPA 
will be issued. Accordingly, although the final regulations did not 
adopt the comment per se, the final regulations adopted an alternative 
solution to the problem identified by the comment.
    The same comment recommended that the final regulations allow a 
publicly traded partnership to request modification of the imputed 
underpayment after the end of the adjustment year. Specifically, the 
comment recommended that the final regulations require the modification 
request to be submitted within 74 days of the end of the adjustment 
year, which roughly aligns with the original due date of the 
partnership tax return. The procedure recommended by the comment is not 
administrable for the IRS for the same reasons discussed earlier in 
section 3.B.iii. regarding accepting amended return payments after the 
issuance of the FPA. Because the FPA is the mechanism through which 
modification is approved or denied, the modification determination must 
be made prior to the issuance of the FPA.
    The comment stated that any post-FPA modification request would 
cause the FPA and a denial of the modification request to be subject to 
judicial review separately. This statement is inaccurate. If the 
partnership seeks judicial review under section 6234 with respect to an 
FPA, in the absence of a showing of fraud, malfeasance, or 
misrepresentation of a material fact, the IRS is precluded from mailing 
another FPA to such partnership with respect to such taxable year. 
Section 6231(c). Accordingly, if the IRS issued an FPA within the time 
frames discussed earlier in section 3.B.iii. regarding amended return 
payments, and the partnership seeks judicial review of that FPA, the 
IRS would be prevented from issuing a later FPA dealing with the 
modification request. If the partnership submitted its modification 
request after the partnership had already received judicial review with 
respect to the adjustments in the FPA, the IRS generally could not mail 
an additional FPA approving or denying the modification request, and 
the partnership would have no determination concerning its modification 
request which it could challenge in court under section 6234. 
Accordingly, this comment was not adopted.
    The same comment requested that the IRS include the denial of any 
modification request in the FPA to ensure that any Tax Court proceeding 
will also address the dispute regarding the requested modification. 
This comment was not adopted. Whether and how disputes regarding 
modification requests are subject to judicial review by a court is not 
within the purview of the Treasury Department's or the IRS's regulatory 
authority. However, to assist with any potential judicial review of 
modification, the IRS plans to use the FPA as the method for approving 
or denying modification. The final regulations do not specify, however, 
what is required to be included in the FPA for purposes of approving or 
denying modification. The absence of a regulatory rule in this regard 
provides the IRS flexibility to allow for the differing circumstances 
of each administrative proceeding and varying types of modification 
requests.
    The final regulations in Sec.  301.6225-2(d)(5) describe the 
requirements for modification by publicly traded partnerships under 
section 6225(c)(5). This section does not require the

[[Page 6500]]

partnership requesting modification to provide any particular 
information about partners to the IRS, but the partnership must meet 
the general requirement to provide all information necessary to approve 
the modification as described in Sec.  301.6225-2(c)(2). Specifically, 
Sec.  301.6225-2(c)(2)(i) provides that the IRS may set forth in forms, 
instructions, and other guidance the information necessary to request 
modification. One comment requested that the partnership be able to 
provide summary information with respect to modification under Sec.  
301.6225-2(d)(5). The comment specifically suggested that the 
regulations provide that a partnership can substantiate the 
availability of specified passive activity losses by providing summary 
schedules reflecting the specific allocations to each specified partner 
of the partnership from the year such partner purchased units through 
the year the partnership receives the FPA.
    This comment was received in response to the June 2017 NPRM, prior 
to the addition of the definition of qualified relevant partner. The 
definition of qualified relevant partner allows partners to be eligible 
for modification under Sec.  301.6225-2(d)(5) provided they are 
partners through the year for which the most recent partnership was 
filed. For purposes of the comment, however, the Treasury Department 
and the IRS view this comment as suggesting that the partnership would 
provide such information for whatever years are relevant for the 
modification.
    The final regulations do not specify what specific information is 
required for modification under Sec.  301.6225-2(d)(5). Therefore, the 
regulations do not address whether summary schedules would be 
appropriate. The IRS intends to issue forms and instructions for 
modification procedures which will provide additional information on 
what will be required for modification procedures under Sec.  301.6225-
2(d)(5).
    Section 301.6225-2(d)(5)(v) requires that the partnership report, 
in accordance with forms, instructions, and other guidance prescribed 
by the IRS, to each specified partner or qualified relevant partner the 
amount of the reduction in suspended passive loss carryovers. One 
comment suggested that the easiest way to do so is to incorporate such 
reporting into the Schedules K-1 distributed to such partner at the end 
of the adjustment year. This comment was received in response to the 
June 2017 NPRM. Therefore, it could not have taken into account the 
rule from the August 2018 NPRM that allowed for use of the year of the 
most recently filed return. The final regulations do not specify the 
manner in which information must be reported under Sec.  301.6225-
2(d)(5)(v). Rather, the regulations defer the manner of reporting to 
forms and instructions. This provides flexibility to the IRS to gain 
experience with the forms it intends to develop for purposes of 
assisting partnerships in complying with the reporting requirements of 
Sec.  301.6225-2(d)(5)(v) and to change those forms in response to 
taxpayer feedback, if necessary, without needing to amend the 
regulations.
    In light of the change to allow certain indirect partners to 
utilize modification under Sec.  301.6225-2(d)(5), the final 
regulations under Sec.  301.6225-2(d)(5)(v) provide that the IRS may 
require reporting to an indirect partner that is a qualified relevant 
partner through forms, instructions, or other guidance. This rule 
allows the IRS flexibility to evaluate and adapt reporting requirements 
concerning indirect partners as the IRS and partnerships gain more 
experience with the centralized partnership audit regime.
vii. Modification Relating to Qualified Investment Entities
    Proposed Sec.  301.6225-2(d)(7) provided that a partnership may 
request a modification of an imputed underpayment based on deficiency 
dividends distributed as described in section 860(f) by a relevant 
partner that is a qualified investment entity (QIE) under section 
860(b). Under Sec.  301.6225-2(c)(3)(i), the partnership must provide 
all information required to request modification (including 
modification for deficiency dividends paid by a QIE partner) on or 
before 270 days after the issuance of the NOPPA. A partnership may 
request an extension of this 270-day period, subject to the consent of 
the IRS. Section 301.6225-2(c)(3)(ii).
    Several comments suggested that it is not ideal for a QIE partner 
to pay a deficiency dividend with respect to an amount or an adjustment 
that may not be final. The comments were specifically concerned that 
issues may be unresolved during the 270-day period after the issuance 
of the NOPPA because of possible review by IRS Appeals. The comments 
recommended that the IRS grant extensions of the 270-day period under 
Sec.  301.6225-2(c)(3)(i) as a matter of course until all relevant 
issues concerning the adjustments have become final.
    The IRS plans to adopt procedures under which the partnership will 
have an opportunity to resolve with IRS Appeals any issues with respect 
to the adjustments made during the examination prior to the mailing of 
the NOPPA. Therefore, all issues with respect to the adjustments will 
generally be resolved at the administrative level prior to the mailing 
of the NOPPA and the start of the 270-day modification period. Because 
a request for modification under Sec.  301.6225-2(d)(7) will not be 
submitted until after the NOPPA has been mailed, the partnership and 
its QIE partners should know with certainty what adjustments are agreed 
and which are unagreed at the time of the modification request. This 
timing will allow the partnership and its QIE partners to evaluate the 
best method for modification and to determine whether modification 
under Sec.  301.6225-2(d)(7) is appropriate. Accordingly, a rule 
requiring the granting of extensions of the 270-day period as a matter 
of course is not necessary.
    Moreover, whether an extension of the modification period is 
appropriate is a determination best made on the facts and circumstances 
of a particular case. A rule requiring automatic granting of extensions 
would deprive the IRS of the ability to evaluation an extension request 
based on the facts and circumstances. Therefore, the final regulations 
do not require granting extensions of the 270-day period as a matter of 
course. Lastly, the regulations provide the IRS with the authority to 
grant an extension of the 270-day period when warranted, which also 
protects the partnership in cases that it may be initially unclear 
whether modification under Sec.  301.6225-2(d)(7) is appropriate.
    Another comment suggested that the regulations require payment of a 
deficiency dividend no later than 60 days after the date the 
partnership adjustments are finally determined, rather than after the 
NOPPA is mailed during the 270-day modification period. Another comment 
recommended that the regulations provide that the allowance of a 
deficiency dividend be agreed to in advance of a NOPPA, but in the 
event of a challenge to the underlying substantive adjustment in IRS 
Appeals or in court, the allowance does not become effective until 
final resolution of the underlying challenge. The final regulations do 
not adopt these suggestions.
    First, as discussed earlier in this section of this preamble, the 
IRS Appeals process that the IRS intends to implement will already have 
determined which substantive adjustments are agreed to prior to the 
issuance of the NOPPA. As a result, the most likely avenue for a 
substantive challenge after modification will be in court and not with 
IRS Appeals.

[[Page 6501]]

    Second, pursuant to section 6225(c)(7) and Sec.  301.6225-
2(c)(3)(i), everything required to submitted with respect to a 
modification request must be provided to the IRS within 270 days after 
the mailing of the NOPPA. The 270-day period is designed to ensure a 
timely resolution of the audit while also providing the partnership 
enough of an opportunity to modify an imputed underpayment reflected in 
a NOPPA. A rule allowing modifications after that 270-day period 
expires would undermine those goals.
    Third, allowing modifications after the adjustments are finally 
determined precludes the IRS from approving modifications in the FPA. 
As discussed in section 3.B.ii of this preamble, the IRS plans to adopt 
procedures under which it will approve or deny each modification 
request in the FPA. Accordingly, the regulations do not permit 
modifications to be submitted beyond the 270-day period described in 
Sec.  301.6225-2(c)(3)(i).
    One comment recommended that the regulations clarify that a 
partnership's receipt of a NOPPA is not a ``determination'' that begins 
the 90- or 120-day period for a QIE partner's issuance and claiming of 
a deficiency dividend deduction under section 860. Section 860(e)(1)-
(4) provides that a ``determination'' means (1) a court decision; (2) a 
closing agreement; (3) an agreement signed by the Secretary and by the 
QIE relating to the QIE liability for tax; or (4) a statement by the 
QIE attached to its amendment or supplement to a tax return. A NOPPA 
does not fall into any of these four categories. Accordingly, a NOPPA 
is not a ``determination'' for purposes of section 860(e). Moreover, 
Sec.  301.6225-2(d)(7)(ii) requires that the partnership provide 
documentation of the QIE partner's ``determination'' described in 
section 860(e) as part of the partnership's request for modification. 
This rule makes clear that the determination in this context is the 
determination with respect to the QIE partner, which does not, by 
definition, include the NOPPA mailed to the partnership. Accordingly, 
because section 860(e), when read together with proposed Sec.  
301.6225-2(c)(7)(ii), addresses the comment's recommendation, the 
comment was not adopted.
viii. Closing Agreement Modification
    Proposed Sec.  301.6225-2(d)(8) provided that a partnership may 
request modification based on a closing agreement between the IRS and 
the partnership or between the IRS and a relevant partner, or both. One 
comment expressed concern that some partners might not want to 
negotiate the details of their tax return through the partnership 
representative and recommended that the regulations outline procedures 
for partners to work directly with the IRS to enter into closing 
agreements as part of the partnership audit. Although the IRS may, 
pursuant to Sec.  301.6223-2(d)(1), allow a person that is not the 
partnership representative to participate in the examination of the 
partnership, the IRS is not required to do so. The centralized 
partnership audit regime is designed to provide for a single, unified 
proceeding in which the IRS works solely with the partnership 
representative who has the sole authority to bind the partnership and 
all its partners. Developing a regulatory procedure that would allow a 
single partner to work directly with the IRS, without working in 
conjunction with the partnership representative, during the partnership 
examination would contravene the regime's central design. The 
partnership representative may request that the IRS work directly with 
a partner on a closing agreement or other issues, but it is solely 
within the IRS's discretion to allow that. See Sec.  301.6223-2(d)(1). 
Accordingly, this comment was not adopted.
ix. Requests for Additional Modifications
    Section 6225(c)(6) provides that the ``Secretary may by regulations 
or guidance provide for additional procedures to modify imputed 
underpayment amounts on the basis of such other factors as the 
Secretary determines are necessary or appropriate'' for the purposes of 
section 6225(c). Proposed Sec.  301.6225-2(d)(10) provided that a 
partnership may request a modification not otherwise described in Sec.  
301.6225-2(d), and the IRS will determine whether such modification is 
accurate and appropriate. Additional types of modifications and the 
documentation necessary to substantiate such modifications may be set 
forth in forms, instructions, or other guidance prescribed by the IRS.
    Several comments recommended that the Treasury Department and the 
IRS exercise the authority under section 6225(c)(6) to expand the 
available types of modifications under proposed Sec.  301.6225-2(d). 
One comment recommended additional modifications related to foreign 
partners, including a tax exemption based on section 892 and a 
reduction in taxes based on eligibility for reduced rates of 
withholding under a tax treaty. The comment further recommended that 
these types of modifications and modification for a tax exemption based 
on foreign status be verified using an expanded version of the existing 
Forms W-8 and W-9.
    Former proposed Sec.  301.6225-2(d)(3) provided rules regarding 
modifications with respect to adjustments allocable to partners that 
would not owe tax as a result of their status as a tax-exempt entity. 
Proposed Sec.  301.6225-2(d)(3)(ii) defined tax-exempt entity to mean a 
person or entity defined in section 168(h)(2)(A), (C), or (D). A 
foreign person or entity as defined in section 168(h)(2)(C) includes a 
foreign government or foreign organization. Accordingly, to the extent 
an adjustment is allocable to a foreign government or foreign 
organization, the partnership may request modification with respect to 
such adjustment provided the requirements of Sec.  301.6225-2(c) and 
(d)(3) are met.
    Proposed Sec.  301.6225-2(d)(9), added in the August 2018 NPRM, 
provided rules for tax treaty modifications. Under proposed Sec.  
301.6225-2(d)(9), a partnership may request modification with respect 
to a relevant partner's distributive share of an adjustment to a 
partnership-related item if the relevant partner was a foreign person 
who would have qualified, under an income tax treaty with the United 
States, for a reduction or exemption from tax with respect to such 
partnership-related item in the reviewed year, would have derived the 
item (within the meaning of Sec.  1.894-1(d)) had it been taken into 
account properly in the partnership's reviewed year return, and is not 
otherwise prevented under the income tax treaty with the United States 
from claiming such reduction or exemption with respect to the reviewed 
year at the time of the modification request.
    No comments were received on the tax treaty modification rules 
proposed in the August 2018 NPRM. Proposed Sec.  301.6225-2(d)(9) is 
retained and simplified in the final regulations, with no change in 
substance. Accordingly, a treaty modification is only available to the 
extent the relevant partner would have qualified for the treaty benefit 
at issue, whether a rate reduction or exemption from tax, had the item 
been taken into account by the partner in the reviewed year. In 
general, that means a foreign partner may submit a treaty modification 
only if the partner was, for the reviewed year, a treaty resident; 
would have derived the item of income through the partnership, or tiers 
of partnerships, if applicable, under the tax laws of its country of 
residence; would have been the beneficial owner of the item of income 
(not a nominee or conduit); would have satisfied the

[[Page 6502]]

limitation on benefits article under the treaty, if any; and met any 
other specific requirement for claiming the benefit under the treaty, 
such as a stock ownership threshold in the case of a claim for a 
reduced rate of tax on U.S. source dividends.
    The final regulations do not address, however, which form will be 
used for tax treaty modification, or for any type of modification. 
Prescribing the specific form used for a specific type of modification 
in the regulations is generally not ideal for either taxpayers or the 
IRS. The IRS may determine in the future a different form is more 
appropriate or the form number or name may require revision. Having the 
flexibility to prescribe the form without needing to change the 
regulations saves government resources and allows for expedited 
guidance to taxpayers.
    Another comment expressed concern that the determination of the 
imputed underpayment with respect to adjustments to CFTEs could result 
in an overpayment of taxes by partners under the centralized 
partnership audit regime to the extent that one or more partners would 
be eligible to take an additional foreign tax credit (FTC) as a result 
of any adjustments made following the conclusion of an audit. The 
comment recommended that taxpayers should be permitted to claim FTCs 
for which they are eligible, provided that the taxpayer can provide 
sufficient evidence to the IRS when claiming the credit. This comment 
was not adopted.
    The modification procedures provide adequate opportunity for a 
partner to take advantage of any new FTCs. For example, the partners 
may use amended return modification or the alternative procedure to 
take into account all adjustments that might affect specific partners, 
including any new FTCs. Accordingly, no changes were made to the 
regulations in response to this comment.
    Two comments requested that the Treasury Department and the IRS use 
the authority under section 6225(c)(6) to expand modification and to 
authorize an ``Early Decision'' procedure for pushing out audit 
adjustments in tiered structures in order to address the administrative 
concerns of the IRS related to a tiered push out. This comment, which 
was submitted prior to the amendments by the TTCA to section 6226(b) 
and the August 2018 NPRM, was not adopted. Under the rule proposed in 
the August 2018 NPRM, adjustments may be pushed out beyond the first 
tier of partners. See proposed Sec.  301.6226-3(e) and section 4.C.iii. 
of this preamble for further discussion of the tiered push out rules.
    One comment suggested that, to the extent an adjustment amount and 
the imputed underpayment with respect to that adjustment amount have 
already been reported and tax paid, modifications should be permitted 
with respect to the tax amount paid and not be limited only to taxes 
paid in connection with an amended return. The comment offered two 
examples which might result in an imputed underpayment being determined 
on tax that had already been paid. The first example would occur if 
partners file tax returns with inconsistent positions under section 
6222 that reflect the income being adjusted in the examination. The 
second example presented by the comment is the situation in which two 
or more people may be deemed by the IRS to have formed a partnership 
when they have individually reported the income being ascribed to the 
deemed partnership. This comment was adopted. The final regulations 
under Sec.  301.6225-2(d)(2)(ii) allow a partnership to satisfy the 
requirements of amended return modification by demonstrating that a 
partner previously took into account such partnership adjustments and 
their effect on tax attributes for all relevant years and made any 
necessary payments.
    Similarly, one comment recommended that modification provide for an 
alternative to closing agreements that would allow the partnership to 
demonstrate that a partner's share of an adjustment was partially or 
fully reversed and so the imputed underpayment should therefore be 
reduced to give credit for taxes paid in a later year. For instance, 
the partnership could demonstrate that a former partner would have paid 
tax on capital gain on its partnership interest and that amount of gain 
would have, economically included the amount of an adjustment. The 
partnership would then, pursuant to this recommendation, be permitted 
to demonstrate that the imputed underpayment should be reduced by a 
refund in an intervening year.
    The same comment also recommended that the final regulations adopt 
an additional modification type that would allow the partnership to 
demonstrate the impact of adjustments on one or more of its partners, 
specifically with respect to interest expense and foreign taxes paid. 
The comment recommended that the partnership be able to demonstrate 
that the partner's reporting of these items was not as beneficial as 
assumed in the calculation of the imputed underpayment.
    These comments were received in response to the June 2017 NPRM. The 
August 2018 NPRM provided rules relating to the alternative procedure 
and also allowed for amended return modification without regard to 
sections 6501 and 6511. These additions in the August 2018 NPRM allow 
for the types of modifications the comment was recommending. For 
example, under amended return modification as revised in the August 
2018 NRPM, a partner files amended returns for the first affected year 
and other years to the extent tax attributes in those years are 
affected by taking the adjustments into account. Whether the partner 
pays additional amounts, demonstrates that on net there is no tax due, 
or is entitled to a net refund, provided the partner has otherwise 
complied with the modification requirements, the imputed underpayment 
will be adjusted to remove that partner's share of the adjustments if 
the IRS approves the modification. Accordingly, the final regulations 
do not adopt these comments because the final regulations provide other 
methods for accomplishing the rules recommended by the comments.
    One comment recommended that the final regulations expand 
modification procedures to allow modification based on closing 
agreements by and amongst the partnership and the relevant partners 
entered into in the course of a proceeding with the Competent Authority 
office, in particular to facilitate the implementation of any mutual 
agreement by the IRS in a manner that is consistent with the purpose of 
tax treaties to avoid double taxation. This modification might include 
mutual agreement procedures but may also include requests for 
assistance in the context of partner-level foreign tax credits and 
protective claims. The comment also recommended that the final 
regulations permit multiple closing agreements and provide procedures 
for cooperation between the Competent Authority and partnership 
examination teams. This comment was received in response to the June 
2017 NPRM. The August 2018 NPRM provided for treaty modifications that 
were not in the former proposed regulations, and the final regulations 
maintain the added treaty modification procedure. The final regulations 
do not adopt any new modifications that were not previously proposed in 
the August 2018 NPRM, but maintain the modifications based on closing 
agreements and treaties. Nothing in the regulations limits the closing 
agreements in a way that would prevent

[[Page 6503]]

a closing agreement, or multiple closing agreements, entered into 
during the Competent Authority process from being considered in the 
modification process.
C. Defenses to Penalties
    Proposed Sec.  301.6225-2(d)(2)(viii) provided that a relevant 
partner may raise a partner-level defense (as described in Sec.  
301.6226-3(d)(3)) by first paying the penalty, addition to tax, or 
additional amount with the amended return filed under Sec.  301.6225-
2(d)(2) and then filing a claim for refund in accordance with forms, 
instructions and other guidance. One comment recommended allowing the 
audited partnership to submit partner-level defenses for both direct 
and indirect partners as part of the modification process. According to 
the comment, a review by the IRS prior to requiring payment of the 
proposed penalties would permit an early determination regarding the 
validity of any partner-level defense and reduce economic and 
administrative burdens on taxpayers. The comment suggested that because 
penalties can represent a large dollar amount, the requirement that 
taxpayers must provide advance payment of penalties, even in cases 
where they have a valid penalty defense, can create a significant 
economic burden on partners. This comment was not adopted.
    Due to the limited time the IRS has to review modification 
requests, the Treasury Department and IRS have determined that 
reviewing penalty defenses for specific partners in addition to 
reviewing the amounts taken into account on amended returns or in the 
alternative procedure submissions is unadministrable in the time frame 
allowed. The core aspect of the modification procedures is to exclude 
partnership adjustments from the imputed underpayment calculation. 
Whether a specific partner is then entitled to a refund of penalties 
paid after taking the adjustments into account is best determined 
outside the modification procedures and not subject to the time 
constraints of section 6225(c)(7) and Sec.  301.6225-2(c). The final 
regulations, therefore, maintain the requirement that a partner must 
first pay any penalty due with the amended return filed during 
modification and then afterward file a claim for refund of the penalty 
in order to raise a partner-level defense. However, to address the 
concerns raised by the comment, the final regulations under Sec.  
301.6225-2(d)(2)(viii) give the IRS flexibility to develop through 
future guidance alternative procedures for raising partner-level 
defenses as the IRS gains more familiarity with the centralized 
partnership audit regime.
D. Adjustments That Do Not Result in an Imputed Underpayment
    Proposed Sec.  301.6225-3 addressed the treatment of adjustments 
that do not result in an imputed underpayment. Proposed Sec.  301.6225-
3 provided that a net negative adjustment resulting from a reallocation 
adjustment, which does not result in an imputed underpayment pursuant 
to Sec.  301.6225-1(f), is taken into account by the partnership in the 
adjustment year as a separately stated item or a non-separately stated 
item, as required by section 702 and is allocated to adjustment year 
partners who are also reviewed year partners with respect to whom the 
amount was reallocated.
    One comment expressed concerns with the application of proposed 
Sec.  301.6225-3(b)(4) to publicly traded partnerships. According to 
this comment, the public trading of units of publicly traded 
partnerships depends on their fungibility, which requires that all 
items affecting the partners' section 704(b) capital accounts be 
allocated pro rata. The comment suggested that an allocation under 
proposed Sec.  301.6225-3(b)(4) could force an adjustment year 
allocation to less than all of the public unit holders, potentially 
causing the units to be non-fungible. This comment was not adopted at 
this time, but the final regulations provide that the IRS may provide 
exceptions to the rule under Sec.  301.6225-3(b)(4) pursuant to forms, 
instructions, and other guidance prescribed by the IRS. As the IRS 
gains more experience with the centralized partnership audit regime, 
the IRS may determine to create an exception through forms, 
instructions, or other guidance if doing so would benefit taxpayers 
while fulfilling the requirements of the statute and remaining 
administrable for the IRS. Having the flexibility to create such an 
exception through forms, instructions, and other guidance preserves 
government resources and expedites the process for the IRS to address 
taxpayer needs and for taxpayers to be aware of changes in IRS 
procedures.
    One comment recommended that the regulations provide examples 
demonstrating the proper application of proposed Sec.  301.6225-
3(b)(4). The final regulations add two such examples under Sec.  
301.6225-3(d). One example demonstrates the application of the rule 
under Sec.  301.6225-3(b)(4) in the context of a recharacterization 
adjustment the other example demonstrates application of the rule in 
the context of a reallocation adjustment.
    One comment recommended that the rules be clarified regarding 
whether netting would be allowed with respect to adjustments that do 
not result in an imputed underpayment in multi-year audits. The comment 
asks about a particular example: If an audit of 2018 results in an 
imputed underpayment in 2018 and an overpayment in 2019 in regard to 
adjustment items, the proposed regulations would not permit those 
amounts to be netted. As discussed in section 3.A. of this preamble, 
partnership adjustments with respect to different reviewed years are 
not netted. If a multi-reviewed-year audit that resulted in an imputed 
underpayment with respect to one reviewed year and adjustments that do 
not result in an imputed underpayment with respect to a different 
reviewed year both had the same adjustment year, then the expense 
associated with the imputed underpayment paid in the adjustment year is 
taken into account by the partnership in the adjustment year and the 
adjustments that do not result in an imputed underpayment would also be 
taken into account on the adjustment year tax return. Expenses related 
to payment of an imputed underpayment are nondeductible under section 
6241(4). As a result, such items would be taken into account according 
to subchapter K principles in the adjustment year and the extent to 
which any items net on the partnership or partners' returns would 
depend on the particular adjustments and the facts and circumstances of 
the partnership and partners. Instead, the partnership may also take 
advantage of modification procedures and the election under section 
6226 to allow partnership adjustments to be taken into account directly 
by the partners that may, depending on the facts and circumstances, 
allow for different netting results at the partner level.
    Lastly, Sec.  301.6225-3(b)(7) was added to provide that partners 
that previously took into account an adjustment that does not result in 
an imputed underpayment before a notice of administrative proceeding 
was mailed by the IRS or before an administrative adjustment request 
was filed by the partnership do not take into account a second time the 
same adjustment that does not result in an imputed underpayment. This 
rule addresses situations where a partner took a position inconsistent 
with the partnership return as filed and as a result of that 
inconsistent position previously took into account items that were 
later determined by the IRS (or by the partnership in an AAR) to be

[[Page 6504]]

adjustments that do not result in an imputed underpayment, such as 
additional losses or deductions. The rule is designed to ensure that 
such partners do not take the same items into account again in the 
adjustment year.

4. Election for Alternative to Payment of the Imputed Underpayment

    Twenty-two comments were received concerning section 6226, the 
election for an alternative to payment of the imputed underpayment. 
This section of this Summary of Comments and Explanation of Revisions 
addresses comments concerning the mechanics and effect of making an 
election under proposed Sec.  301.6226-1; the statements furnished to 
partners and filed with the IRS pursuant to proposed Sec.  301.6226-2; 
and the rules regarding how adjustments are taken into account by 
partners in accordance with proposed Sec.  301.6226-3. Comments 
concerning basis and tax attribute rules under proposed Sec.  301.6226-
4 will be addressed in future guidance.
A. Mechanics and Effect of Making an Election Under Section 6226
    The comments received regarding the mechanics and effect of making 
an election under section 6226 cover six general topics: (1) The time 
for making the election; (2) revocations of the election; (3) making 
the election when there are multiple imputed underpayments or there is 
no imputed underpayment; (4) notification by the IRS that an election 
is invalid; (5) making the election and filing a petition for 
readjustment under section 6234; and (6) whether the election should be 
mandatory.
i. Time for Making the Election Under Section 6226
    Under section 6226(a) and proposed Sec.  301.6226-1(c)(3), a 
partnership may make an election under section 6226 (push out election) 
within 45 days of the date on which the FPA is mailed by the IRS. This 
45-day period cannot be extended, and once made, the election may only 
be revoked with the consent of the IRS. See proposed Sec.  301.6226-
1(c)(1), (3).
    Several comments recommended changes to the 45-day period under 
proposed Sec.  301.6226-1(c)(3). Some comments suggested that the 
partnership should not be required to make the push out election until 
after there is a final determination of the partnership adjustments, 
either as a result of a defaulted FPA or, if a petition is filed, a 
final court decision. Other comments recommended that the regulations 
permit, either automatically or upon request, an extension of the 45-
day period. These comments were not adopted.
    The 45-day period for making an election under section 6226 is 
established by statute. Pursuant to section 6226(a)(1), section 6225 
shall not apply to an imputed underpayment if the partnership ``not 
later than 45 days after the date of the notice of final partnership 
adjustment'' elects the application of section 6226 with respect to 
such imputed underpayment and furnishes statements to its partners for 
the reviewed year under section 6226(a)(2). The partners must then take 
into account the adjustments that resulted in that imputed 
underpayment. Consistent with section 6226(a)(1), proposed Sec.  
301.6226-1(c)(3) provided that an election under Sec.  301.6226-1 must 
be filed within 45 days of the date the FPA is mailed by the IRS and 
that the time for filing such an election may not be extended.
    Nothing in section 6226 provides for an exception to the 45-day 
period described in section 6226(a)(1), nor does section 6226 provide 
that the 45-day period may be extended by the IRS. Accordingly, 
comments suggesting that the regulations provide that a push out 
election may be made later than 45 days after the date of the FPA, 
whether as a general rule or as a result of an extension, were not 
adopted.
ii. Revocations of Elections Under Section 6226
    One comment suggested that, as an alternative to delaying or 
extending the 45-day period for making the push out election, the 
regulations should provide that the IRS will liberally grant 
revocations of a push out election in certain circumstances, such as in 
the case of a settlement of an imputed underpayment. Another comment 
suggested that the regulations should provide that the IRS will approve 
any request to revoke an election upon completion of the administrative 
or judicial proceeding. These comments were not adopted.
    Section 6226(a) provides that an election under section 6226, once 
made, ``shall be revocable only with the consent of the Secretary.'' 
Consistent with section 6226(a), Sec.  301.6226-1(c)(1) provides that 
an election under Sec.  301.6226-1 may only be revoked with the consent 
of the IRS. The requirement that a revocation only be made with the 
consent of the IRS is mandated by the statute and is critical to the 
administration of the collection aspect of the push out regime. A push 
out election relieves the partnership that made the election under 
section 6226 (audited partnership) from the requirement to pay the 
imputed underpayment to which the election relates and shifts the 
collection of any chapter 1 tax resulting from the partnership 
adjustment to the partners of the partnership. In light of the 
collection nature of the push out regime, whether a revocation of a 
push out election should be granted largely depends on the facts and 
circumstances. For example, a revocation may benefit the IRS, the 
partnership, and its partners in the case of an agreement by the 
partnership to pay at the partnership level in lieu of pushing out the 
adjustments to its partners. On the other hand, a revocation may 
prejudice the IRS and the partners if, for example, the revocation is 
granted after statements have already been furnished to the partners. 
In that case, some partners may have already paid any resulting tax. If 
the revocation is significantly delayed, some partners may be time-
barred from filing refund claims. In turn, any refund claim filed by a 
partner would require additional processing by the IRS, which could 
become administratively burdensome particularly in the case of tiered 
structures. Also, the period to assess the imputed underpayment against 
the partnership may have expired at the time of the revocation request. 
Additionally, the audited partnership may no longer be collectible and, 
if the IRS granted a revocation, the IRS would be required to engage in 
unnecessary and costly additional collection procedures. Requiring 
consent of the IRS before a revocation takes effect ensures flexibility 
to appropriately address each circumstance and protects partners that 
may have already received pushed out statements. Accordingly, comments 
recommending liberal or automatic approvals of requests to revoke push 
out elections were not adopted.
iii. Making the Election When There Are Multiple Imputed Underpayments 
or When There Is No Imputed Underpayment
    Under proposed Sec.  301.6226-1(a), if an FPA includes more than 
one imputed underpayment (as described in proposed Sec.  301.6225-
1(g)), a partnership may make an election under Sec.  301.6226-1 with 
respect to one or more of the imputed underpayments identified in the 
FPA. One comment suggested that the regulations clarify whether there 
are any requirements for, or limitations on, a partnership's ability to 
make a push out election for different imputed underpayments. Neither 
the proposed regulations nor the final

[[Page 6505]]

regulations under Sec.  301.6226-1(a) contain any restrictions or 
limitations on a partnership's ability to make an election under 
section 6226 for a particular imputed underpayment identified in an 
FPA. For each imputed underpayment for which the partnership plans to 
make a push out election, the partnership must satisfy the provisions 
of Sec. Sec.  301.6226-1 and 301.6226-2, including the requirement 
under Sec.  301.6226-1(c)(3)(ii)(D) that the election identify the 
imputed underpayment to which the election relates. Because the 
regulatory text does not suggest there are any restrictions on making a 
push out election with respect to different imputed underpayments, the 
comment seeking further clarification on this point was not adopted.
    One comment suggested that a partnership should be allowed to make 
an election under section 6226 for a taxable year for which there is no 
imputed underpayment, but for which there is a tax effect favorable to 
the partnership. The comment described an example in which the IRS 
determines in an examination of year 1 that the partnership should have 
reported income originally reported in year 3 ratably over years 1, 2, 
and 3. In the example, the IRS determines an imputed underpayment with 
respect to year 1, and the partnership makes a push out election with 
respect to that imputed underpayment. The comment suggested that a push 
out election should be permitted for year 3 as well to correct the 
perceived anomalous result that could occur if the reviewed year 
partners did not get the benefit of the decrease in income with respect 
to year 3.
    Pursuant to section 6226(a)(1), the partnership may make a push out 
election ``with respect to an imputed underpayment.'' Section 301.6226-
1(a) echoes the statutory language by providing that a partnership may 
elect under Sec.  301.6226-1 an alternative to the payment by the 
partnership of ``an imputed underpayment.'' Accordingly, to make a push 
out election under section 6226(a)(1) and Sec.  301.6226-1, there must 
be at least one imputed underpayment for the taxable year. To the 
extent the comment was suggesting an election should be permitted for a 
year in which there is no imputed underpayment, the comment was not 
adopted.
    As the comment observed, the partnership has other options to make 
adjustments for year 3. The partnership in the example could file an 
AAR for year 3, provided the period described in section 6227(c) 
permitted the filing of an AAR for year 3. See 6227(c) and Sec.  
301.6227-1(b). The modification procedures may also provide a mechanism 
for the partnership and its partners to benefit from the change to year 
3. For example, the partners may file amended returns (or utilize the 
alternative procedure to filing amending returns) to take into account 
the adjustments to years 1, 2, and 3. See Sec.  301.6225-2(d)(2). See 
also section 6225(c)(9) (allowing modification of adjustments that do 
not result in an imputed underpayment). Additionally, nothing in the 
final regulations prevents the partnership from seeking a closing 
agreement with the IRS with respect to year 3 subject to rules 
generally applicable to closing agreements.
iv. Notification That an Election Under Section 6226 Is Invalid
    Under proposed Sec.  301.6226-1(c)(1), an election under Sec.  
301.6226-1 is valid until the IRS determines that the election is 
invalid. If an election is determined by the IRS to be invalid, the IRS 
will notify the partnership and the partnership representative within 
30 days of such determination and provide the reasons for the 
determination. See Sec.  301.6226-1(d). Former proposed Sec.  301.6226-
1(c)(2) had provided that if the IRS makes a final determination that 
an election under Sec.  301.6226-1 is invalid, section 6225 applies 
with respect to the imputed underpayment as if the election were never 
made and the partnership must pay the imputed underpayment. The word 
``final'' was removed from former proposed Sec.  301.6226-1(c)(2) in 
the August 2018 NPRM to clarify that the IRS may determine that an 
election is invalid, and assess and collect the imputed underpayment to 
which the purported election related, without first being required to 
make a proposed or initial determination of invalidity. This 
clarification was adopted in the final regulations under Sec.  
301.6226-1(d) (formerly proposed Sec.  301.6226-1(c)(2)). Under Sec.  
301.6226-1(d), the IRS may determine an election is invalid without 
first notifying the partnership or providing the partnership an 
opportunity to correct any failures to satisfy all of the provisions of 
Sec.  301.6226-1 and Sec.  301.6226-2, including an opportunity to 
correct errors in pursuant to Sec.  301.6226-2(d).
    One comment suggested that the regulations require the IRS to 
notify the partnership of its intent to determine that a push out 
election is invalid and provide the partnership with an opportunity to 
respond prior to making a final determination that the election is 
invalid. This comment was not adopted.
    An election under section 6226 may be invalid for a number of 
reasons and not every case will present a need to first communicate 
with the partnership. For example, the partnership may make an 
election, but never furnish statements to its partners. Providing the 
partnership with a preliminary determination that the election is 
invalid in that case and an additional opportunity to furnish 
statements would undermine the 60-day period for furnishing statements 
(see proposed Sec.  301.6226-2(b)), which is designed to support the 
IRS's timely collection of any additional reporting year tax and 
provide timely information to reviewed year partners regarding any 
additional reporting year tax. In such a case, the IRS should have the 
ability to determine the election is invalid and to immediately assess 
an imputed underpayment without first notifying the partnership. 
Accordingly, the comment's suggestion was not adopted. However, while 
nothing in the regulations requires the IRS to first contact a 
partnership prior to making a determination that an election under 
section 6226 is invalid, the IRS intends to develop procedures under 
which the IRS will first contact partnerships prior to determining a 
push out election is invalid in certain cases. Those procedures, if 
adopted, will be set forth in future sub-regulatory guidance.
    The same comment also suggested that the partnership should be able 
to seek review of a decision by the IRS that a push out election is 
invalid in the United States Tax Court. The United States Tax Court is 
a court of limited jurisdiction. See section 7442. The Treasury 
Department and the IRS do not have authority to confer jurisdiction on 
the United States Tax Court. Therefore, this comment was not adopted.
v. Effect of Filing a Petition for Readjustment Under Section 6226
    Under proposed Sec.  301.6226-1(e) (Sec.  301.6226-1(f) in the 
final regulations), a partnership that has made an election under Sec.  
301.6226-1 is not precluded from filing a petition under section 
6234(a). Section 6234(a) provides that a partnership may file a 
petition in the Tax Court, a United States district court, or the Court 
of Federal Claims, within 90 days of the date on which an FPA is mailed 
under section 6231. A petition under section 6234 may be filed in a 
district court or the Court of Federal Claims only if the partnership 
filing the petition makes a jurisdictional deposit in accordance with 
section 6234(b). Proposed Sec.  301.6234-1(b) provide that the 
jurisdictional deposit is the amount of (as of the date of the filing 
of the

[[Page 6506]]

petition) any imputed underpayment (as shown on the FPA) and any 
penalties, additions to tax, and additional amounts with respect to 
such imputed underpayment.
    One comment stated that the proposed regulations provide no 
explanation as to how or whether the deposit amount under section 
6234(b) may or should be adjusted to reflect a push out election under 
section 6226. The comment recommended the regulations should provide a 
mechanism that would enable a partnership to file a petition in a 
district court or Court of Federal Claims and still make an election 
under section 6226, without creating the risk of having tax on the 
partnership adjustments paid twice. The comment suggested that one 
possible approach might be to reduce the deposit amount by the amount 
that would be reported by partners that receive push out statements. 
The comment suggested that another possible approach might be to ensure 
that there is a clear mechanism for the partnership to obtain a refund 
of the jurisdictional deposit before any amounts are paid under the 
push out by partners.
    Nothing in the proposed regulations limits a partnership's ability 
to file a petition in a district court or the Court of Federal Claims 
if the partnership has made an election under section 6226 (provided 
the partnership has made the jurisdictional deposit required by section 
6234(b)). Proposed Sec.  301.6226-1(e) expressly provided that a 
partnership making the election under Sec.  301.6226-1 is not precluded 
from filing a petition under section 6234(a) (which includes petitions 
in the Tax Court as well as petitions in district courts and the Court 
of Federal Claims). Accordingly, to the extent the comment was seeking 
clarification that a partnership can both make an election under 
section 6226 and file a petition under section 6234, the comment was 
not adopted because the plain language of Sec.  301.6226-1(f) (proposed 
at Sec.  301.6226-1(e) and renumbered to Sec.  301.6226-1(f)) makes 
clear that a partnership can take both actions. Accordingly, no changes 
were made to proposed Sec.  301.6226-1 in response to the comment. To 
the extent the comment was seeking to make clear that a partnership 
that makes a valid election under section 6226 with respect to an 
imputed underpayment is no longer liable for that imputed underpayment, 
the plain language of section 6226(a) and Sec.  301.6226-1(b)(2) makes 
clear that is the case. The comment's suggestion regarding the amount 
of the jurisdictional deposit under section 6234(b) and proposed Sec.  
301.6234-1(b) is addressed in section 9 of this Summary of Comments and 
Explanation of Revisions.
vi. Elective Nature of Section 6226
    One comment suggested that the regulations should make the election 
under section 6226 mandatory, unless provided for otherwise in the 
partnership agreement, in two circumstances in order to mitigate a 
partnership representative's potential conflict of interest and to 
provide protection to partners that are partners in the adjustment year 
but not partners in the reviewed year. The first circumstance is when 
the partnership representative is both a partner in the reviewed year 
and the adjustment year, and the partnership representative's interest 
during the adjustment year is less than it was in the reviewed year. 
The second circumstance is when the aggregate partnership interest of 
any adjustment year partner or group of partners holding a 20 percent 
or greater interest in the partnership is 20 percent or greater than 
the interest held by the same partner or group of partners in the 
reviewed year. Because the approach recommended by the comment is 
prohibited by statute, the comment's recommendation was not adopted.
    Sections 6225 and 6226 provide that the default rule, absent an 
affirmative election by the partnership, is that the partnership shall 
pay any imputed underpayment resulting from the partnership 
adjustments. The regulations cannot switch the default rule from one 
that imposes partnership liability under section 6225 to one that 
requires a push out election under section 6226. Additionally, a 
partnership ``elects the application of'' section 6226 with respect to 
an imputed underpayment. Section 6226(a)(1). That election is statutory 
and, like under any other election under the Code, is a choice by the 
partnership. It would not be consistent with the elective nature of 
section 6226 to require the partnership to make a push out election 
under any circumstance.
vii. Election Must Include Address for Each Reviewed Year Partner
    Proposed Sec.  301.6226-1(c) required that an election under Sec.  
301.6226-1 must include each reviewed year partner's name, address, and 
TIN. Under Sec.  301.6226-2(e), each statement furnished by the 
partnership to a reviewed year partner must include ``the current or 
last address of the reviewed year partner that is known to the 
partnership.'' A partnership should use the same standard for 
determining the address included for each reviewed year partner in the 
election under Sec.  301.6226-1 as the address included in each 
statement under Sec.  301.6226-2. Accordingly, the final regulations 
under Sec.  301.6226-1(c) clarify that an election under Sec.  
301.6226-1 must include the ``the current or last address of each 
reviewed year partner that is known to the partnership.''
B. Statements Furnished to Partners and Filed With the IRS
    The comments received regarding furnishing statements to partners 
and filing the statements with the IRS cover five general areas: (1) 
The partners to whom the statements are furnished; (2) the timing of 
when the statements are furnished; (3) reasonable diligence in 
identifying correct addresses; (4) the effect of failing to properly 
furnish statements; and (5) the content of the statements.
i. Partners to Whom the Statements Are Furnished
    Section 6226(a)(2) requires a partnership to furnish statements to 
``each partner of the partnership for the reviewed year.'' Consistent 
with the statute, proposed Sec.  301.6226-2(a) provided that a 
partnership that makes an election under Sec.  301.6226-1 must furnish 
to each reviewed year partner a statement reflecting the partner's 
share of partnership adjustments associated with the imputed 
underpayment for which the election under Sec.  301.6226-1 was made. A 
``reviewed year partner'' is any person who held an interest in the 
partnership at any time during the reviewed year. See proposed Sec.  
301.6241-1(a)(9). One comment suggested that the partnership should 
only be required to furnish (or have the option to furnish) statements 
to partners that would owe additional tax as a result of the 
partnership adjustments. This comment was not adopted.
    The statute does not impose any qualifications or limitations on 
which partners from the reviewed year must be furnished push out 
statements. The statute mandates that the partnership furnish a 
statement ``to each partner of the partnership for the reviewed year.'' 
Section 6226(a)(2). This statutory requirement is unambiguous and as a 
result is not being altered in the final regulations.
    In addition, the collection mechanism of section 6226 is similar to 
tax reporting with respect to Schedules K-1, in that the partnership 
furnishes statements to the partners, and the partners are solely 
responsible for determining and self-reporting any tax due. 
Additionally, in most cases, the

[[Page 6507]]

partnership will not know whether a reviewed year partner will owe 
additional tax for a particular year as a result of a push out 
election. Therefore, the partnership could not properly furnish 
statements without obtaining additional information about each 
partner's tax situation and determining to a high degree of certainty 
whether the information provided was accurate. Such an exercise would 
be burdensome for the partnership, potentially invasive to partners, 
and pose significant tax administration concerns. Furthermore, such a 
rule would require the IRS to know which partners would ultimately owe 
tax as a result of the election to evaluate whether the partnership 
properly furnished statements. While a partnership may know it is 
likely that a particular partner will owe additional tax under certain 
circumstances, crafting a general rule with those partnerships and 
circumstances in mind would be unfair to partnerships that lack such 
knowledge or have a means of obtaining it. In contrast, a rule 
requiring the partnership to furnish a statement to each reviewed year 
partner, regardless of whether that partner might owe tax as a result 
of the pushed out adjustments, is more administrable for the IRS, less 
burdensome to partnerships, and required by the statute.
    The same comment also recommended that the regulations clarify how 
adjustments are communicated to reviewed year partners who dispose of 
their interest in the partnership, including persons who were partners 
in the reviewed year but not the adjustment year and persons who were 
only partners in the intervening years (the years after the reviewed 
year but before the adjustment year). Persons who were only partners in 
the intervening years are by definition not reviewed year partners, and 
therefore the partnership is not required to furnish statements to such 
partners under Sec.  301.6226-2. As a result, partners that were only 
partners during intervening years are not required to take into account 
partnership adjustments under Sec.  301.6226-3. Therefore, to the 
extent the comment was suggesting statements should be furnished to 
partners from intervening years only, this suggestion was not adopted.
    Persons who were reviewed year partners, but who are not partners 
during the adjustment year or some or all of the intervening years, 
retain their status as reviewed year partners regardless of when they 
disposed of their interest. The partnership is required to furnish 
statements to its reviewed year partners in accordance with Sec.  
301.6226-2. Because the proposed regulations clearly required that 
statements be furnished to all reviewed year partners, no changes were 
made in response to this comment.
ii. Timing of When the Statements Are Furnished
    Two comments were received regarding the timing of the statements 
furnished by a partnership to its reviewed year partners. The first 
comment suggested that the regulations should provide that a 
partnership will not be required to furnish statements under proposed 
Sec.  301.6226-2 until after the partnership has exhausted its rights 
to challenge the audit adjustments through an administrative or 
judicial proceeding.
    Under proposed Sec.  301.6226-2(b)(1), a partnership that makes an 
election under Sec.  301.6226-1 must furnish statements to its reviewed 
year partners (and file those statements with the IRS) no later than 60 
days after the date all of the partnership adjustments to which the 
statement relates are finally determined. Partnership adjustments 
become finally determined upon the later of the expiration of the time 
to file a petition under section 6234 or, if a petition under section 
6234 is filed, the date when the court's decision becomes final. 
Proposed Sec.  301.6226-2(b)(1)(i), (ii). Once the time to file a 
petition has expired, or if a petition is filed, the court's decision 
has become final, the partnership has exhausted its ability to 
challenge the partnership adjustments through administrative and 
judicial avenues. Accordingly, because the plain language of proposed 
Sec.  301.6226-2(b)(1) reflected the rule suggested by this comment, no 
changes were made in response to this comment.
    The second comment suggested that the due date for the statements 
under proposed Sec.  301.6226-2 should align with the due date for the 
partnership's Schedule K-1s and that extensions of the statement due 
date should be permitted to accommodate the complexity of the 
calculations necessary for the accurate distribution of the adjustments 
among the partners. The comment stated that not having the statement 
due date coincide with the Schedule K-1 due date would create confusion 
among the partners and likely result in less timely compliance. This 
comment was not adopted.
    Under section 6226(a) and (b), each reviewed year partner that is 
furnished a statement takes into account the partnership adjustments 
reflected on that statement by adjusting the partner's chapter 1 tax 
for the taxable year which includes the date the statement was 
furnished by the partnership (the reporting year). Therefore, the date 
the statement is furnished by the audited partnership determines which 
taxable year a partner (either direct or indirect) will pay tax as a 
result of taking into account the partnership adjustments (the 
additional reporting year tax). For example, if a reviewed year partner 
is furnished a push out statement on March 15, 2022 with respect to 
reviewed year 2020, the partner must report and pay its additional 
reporting year tax on the partner's return for the 2022 taxable year, 
which, for individuals, would be considered timely filed on April 17, 
2023 (April 15, 2023 is a Saturday). In contrast, when a partner 
receives a Schedule K-1, the partner is required to report the items on 
that Schedule K-1 on the tax return for the taxable year that has just 
ended. For example, if a partner receives a Schedule K-1 on March 15, 
2022 for the 2021 taxable year, the partner must report the items on 
that Schedule K-1 on the partner's return for the 2021 taxable year, 
which, for individuals, would be due on April 15, 2022.
    These examples illustrate the impediments to aligning the push out 
statement due date with the Schedule K-1 due date or with providing 
extensions of the statement due date. First, reviewed year partners who 
simultaneously receive both a push out statement and a Schedule K-1 may 
be required to report the items on those statements in different 
taxable years. While the receipt of tax documents at the same time of 
year might have some superficial appeal, there is a risk of causing 
confusion about when and how to take into account the information on 
those documents. For instance, receiving the push out statement at the 
same time as the Schedule K-1 could result in a belief by the partner 
that the partner is supposed to report the amounts on the push out 
statement in the same year as the items on the Schedule K-1, which 
would likely be incorrect. In addition, the reviewed year partners, to 
whom the push out statements must be furnished, may not be the same as 
the partners for whom Schedule K-1s are required. Therefore, requiring 
the statements to be furnished at or around the same time may also 
create confusion for the partnership.
    Second, aligning the push out statement due date with the Schedule 
K-1 due date or allowing extensions would significantly delay the 
reporting and payment of the additional reporting year tax by reviewed 
year partners, which is contrary to the interests of sound tax 
administration. A delay in the

[[Page 6508]]

reporting and payment of the additional reporting year tax would also 
increase the amount of interest partners would be liable for under 
section 6226(c). For example, if a reviewed year partner is furnished a 
push out statement on March 15, 2022 with respect to reviewed year 2020 
under proposed Sec.  301.6226-2 that statement reflects adjustments 
that were finally determined on or after January 15, 2022 (within the 
past 60 days). However, if instead the regulations provided that a 
statement may be furnished by the Schedule K-1 due date for the year in 
which the adjustments become finally determined (2022), the push out 
statement would not need to be furnished until March 15, 2023 (assuming 
no extensions). Under such a rule, the reviewed year partner would not 
be required to pay the additional reporting year tax until April 15, 
2024, a full year after the partner would pay under the proposed 
regulations. See Sec.  301.6226-3(b).
    Accordingly, it is in the interests of sound tax administration to 
require the push out statements to be furnished expeditiously for all 
adjustments that are finally determined more than 60 days from the end 
of the calendar year because the additional reporting year tax is 
required to be paid with the return for the year in which the statement 
is furnished. This reporting and payment system also benefits partners 
by ensuring that reviewed year partners are furnished the push out 
statement close in time to the final determination of the partnership 
adjustments, allowing the reviewed year partners to determine any 
additional reporting year tax, effects on tax attributes, and make 
payments to stop interest from continuing to run.
    For these reasons, the comment recommending alignment of the push 
out statement due date with the Schedule K-1 due date was not adopted. 
The recommendation that the push out statement due date be subject to 
extension also was not adopted for the reasons described in this 
section of this preamble.
    In the case of a tiered structure, however, the comments' 
recommendation to align the push out statement due date with the 
Schedule K-1 due date is reflected in Sec.  301.6226-3(e). Under Sec.  
301.6226-3(e)(3)(ii), pass-through partners must furnish statements to 
their affected partners no later than the extended due date for the 
return for the adjustment year of the audited partnership. This due 
date aligns the push out statements furnished by pass-through partners 
with the extended Schedule K-1 due date for the audited partnership, 
accommodating, in part, the comment's recommendation.
iii. Reasonable Diligence in Identifying Correct Address of Reviewed 
Year Partner
    Under proposed Sec.  301.6226-2(b)(2), a partnership must furnish 
statements to each reviewed year partner in accordance with the forms, 
instructions, and other guidance prescribed by the IRS. If the 
partnership mails the statement, the partnership must mail the 
statement to the current or last address of the reviewed year partner 
that is known to the partnership. If a statement is returned as 
undeliverable, the partnership must undertake reasonable diligence to 
identify a correct address for the reviewed year partner to which the 
statement relates. Proposed Sec.  301.6226-2(b)(2).
    One comment suggested the final regulations clarify that a master 
limited partnership (a publicly traded partnership as defined in 
section 7704) satisfies the reasonable diligence requirement under 
proposed Sec.  301.6226-2(b) if the partnership utilizes the same 
procedures it uses for undeliverable Schedule K-1s. According to the 
comment, a master limited partnership (MLP) normally sends the Schedule 
K-1 to the address provided to the MLP by the partner's broker; MLPs 
provide call centers and web-based support that allow partners to 
directly provide updated contact information to the partnership; and 
MLPs typically do not attempt to update partners' addresses by using 
public name and address databases, but will update an address if mail 
is returned with a forwarding address.
    The regulations under the centralized partnership regime are rules 
of general applicability for all partnerships. The procedure suggested 
by the comment would be cost-prohibitive for many partnerships. The 
Treasury Department and the IRS decline to provide a safe harbor in the 
final regulations solely for partnerships with the means to operate a 
call center. Additionally, it is not administrable to create special 
rules for different categories of partnerships as this would result in 
a multitude of special rules that in some cases may be contradictory 
and under inclusive. It may also create additional burdens for 
partnerships that cannot comply with a general rule designed with only 
a specific type of partnership in mind.
    As the IRS gains experience with the centralized partnership audit 
regime and the push out election in particular, the Treasury Department 
and the IRS may consider whether further guidance regarding reasonable 
diligence would be beneficial for partnerships. For purposes of the 
final regulations, however, the comment's suggestion was not adopted, 
and the final regulations maintain the rule that the partnership 
undertake reasonable diligence when a statement is returned 
undeliverable.
    In addition, the final regulations under Sec.  301.6226-2(b)(2) 
clarify that if after undertaking reasonable diligence the partnership 
identifies a correct address for the reviewed year partner, the 
partnership must mail the statement to the reviewed year partner at 
that correct address.
iv. Effect of Failing To Properly Furnish Statements
    Several comments suggested that the regulations clarify the effect 
of a partnership's failure to properly furnish statements under Sec.  
301.6226-2 has on the validity of an election under section 6226. One 
comment recommended clarification of whether a failure to undertake 
reasonable diligence under proposed Sec.  301.6226-2(b)(2) with respect 
to a single partner would make the entire election under section 6226 
invalid or only the portion allocable to that specific partner. 
Similarly, another comment recommended that the regulations clarify 
that a failure to furnish the statement to one partner would mean the 
push out election was still effective with respect to the other 
reviewed year partners, but that the partnership would be liable for 
the tax attributable to the partner who was not properly furnished a 
statement.
    Pursuant to section 6226(a)(1), an election under section 6226 is 
made ``with respect to an imputed underpayment.'' Section 6226(a)(2) 
requires a partnership to furnish statements to ``each partner'' of the 
partnership for the reviewed year. Accordingly, the IRS may invalidate 
an election under section 6226(a) for any failure to meet the 
requirements of Sec.  301.6226-1, regarding how an election must be 
made, or Sec.  301.6226-2, regarding the manner in which statements 
must be furnished. Because an election under section 6226(a) is ``with 
respect to an imputed underpayment'' and not with respect to each 
specific partnership adjustment that resulted in that imputed 
underpayment, an election under section 6226 is either valid or invalid 
with respect to the entire imputed underpayment for which the election 
was purportedly made.
    Nothing in the regulations, however, requires the IRS to determine 
that a purported election under section 6226 is invalid in situations 
where the partnership fails to fully comply with

[[Page 6509]]

Sec.  301.6226-1 or Sec.  301.6226-2. To the contrary, pursuant to 
Sec.  301.6226-1(c)(1), a push out election is valid unless and until 
the IRS determines that the election is invalid. Accordingly, if a 
partnership makes an election under Sec.  301.6226-1 and furnishes 
statements to 99 out of 100 reviewed year partners, the partnership's 
push out election is valid unless and until the IRS determines the 
election is invalid.
    Several comments suggested that the regulations provide a safe 
harbor that would satisfy the requirement to furnish statements to all 
reviewed year partners. Two comments suggested that the regulations 
adopt a de minimis rule providing that a failure to deliver a certain 
number of push out statements, or statements representing a de minimis 
amount of the pushed out adjustments, would not invalidate a 
partnership's election under section 6226. One comment recommended that 
the regulations provide that a partnership's push out election will not 
be invalidated if the partnership has substantially complied with the 
regulatory requirements. Another comment suggested that the regulations 
provide that a partnership will be deemed to have made a valid election 
under section 6226 if the partnership makes a good faith effort to 
furnish push out statements to all of its partners. Another comment 
recommended that the regulations clarify that the obligation to furnish 
a statement to each reviewed year partner is deemed satisfied if the 
partnership in good faith furnishes a statement to each partner to whom 
it was required to send a Schedule K-1 for the reviewed year. These 
comments were not adopted.
    As an initial matter, proposed Sec.  301.6226-2 did not require 
that the statements be delivered in order for the partnership's 
election under section 6226 to be valid. Rather, proposed Sec.  
301.6226-2(b)(2) required the partnership to furnish statements to 
partners in accordance with forms, instructions, and other guidance; 
mail the statements to the current or last address of the partner that 
is known to the partnership, and undertake reasonable diligence to 
identify a correct address for any returned statement. Compliance with 
the regulations does not require actual delivery, which is illustrated 
by proposed Sec.  301.6226-2(b)(3), Example 1.
    With respect to the suggestion that the regulations adopt a de 
minimis, substantial compliance, or good faith rule for failure to 
properly furnish statements to partners, these suggestions were not 
adopted. The push out regime is a collection mechanism in lieu of 
collecting the imputed underpayment from the audited partnership. The 
benefit to the audited partnership by making a push out election is 
that the partnership is no longer liable for the imputed underpayment 
to which the election relates. One of the requirements to obtain this 
benefit is that the partnership must furnish correct statements to all 
of the partnership's reviewed year partners. Until the statements have 
been furnished and the partners determine their additional reporting 
year tax, the tax implications for each partner as a result of taking 
into account the pushed out adjustments is uncertain. The additional 
reporting year tax for each partner may differ greatly, ranging from an 
increase in tax, a decrease in tax, or no liability at all.
    None of the rules suggested by the comments--de minimis safe 
harbor, substantial compliance, good faith standard--takes into account 
the asymmetric tax consequences of the pushed out adjustments in the 
hands of the partners. For instance, a large percentage of adjustments 
may be allocated to one or a few partners and a failure to furnish 
statements to this de minimis number of partners would impede the 
proper collection of a large percentage of additional reporting year 
tax. Similarly, relatively small numerical adjustments may have 
significant tax effects on partners. A de minimis rule, whether based 
on the number of statements or amount of adjustments, would frustrate 
the collection aspect of section 6226. Additionally, a de minimis rule 
would present tax administration challenges because a partnership can 
pick and choose which statements to furnish to which partners, so long 
as the number of statements furnished or the amount of the pushed out 
adjustments fell within the de minimis amount. Good faith and 
substantial compliance rules present the same concerns.
    Other provisions in the regulations mitigate against the concerns 
expressed by the comments. As previously discussed in this section of 
this preamble, under Sec.  301.6226-2(b)(2) a partnership must send a 
push out statement to the current or last address of the partner that 
is known to the partnership. Doing so is generally sufficient for 
purposes of satisfying the address requirements of Sec.  301.6226-2. 
Additionally, the general versus specific imputed underpayment rules 
also mitigate concerns about being unable to properly furnish a 
statement to a particular partner or group of partners. The partnership 
may request that the IRS designate a specific imputed underpayment with 
respect to the adjustments allocable to a partner or group of partners 
if the partnership has concerns about furnishing a statement to that 
partner or group of partners. See proposed Sec.  301.6225-2(d)(6). For 
example, if the partnership lacks current address information for a 
specific partner, the partnership may request a specific imputed 
underpayment for that partner's share of the adjustments, pay the 
specific imputed underpayment, and make a push out election for the 
general imputed underpayment.
    Two comments expressed concerns about situations when the partner 
no longer exists or is deceased or when the partnership does not have 
current contact information for a former partner. One of these comments 
suggested that once a partnership has furnished statements to its 
partners and to the IRS, the partnership has fulfilled its obligations 
under section 6226. The other comment specifically stated that neither 
the partnership nor the remaining partners should have any liability 
for the imputed underpayment or associated interest and penalties with 
respect to adjustments allocable to partners that are no longer in 
existence or who are deceased.
    Nothing in the statute or the proposed regulations provides that 
the partnership or any remaining partners are liable for any amounts 
that are allocable to reviewed year partners who are no longer in 
existence or are deceased. Under section 6226(a) and proposed Sec.  
301.6226-1, there are only two requirements for a partnership to make 
an election under section 6226. One, the partnership must make an 
election under section 6226(a)(1) and Sec.  301.6226-1 within 45 days 
of the date the FPA is mailed by the IRS. Two, the partnership must 
furnish statements to each partner from the reviewed year in the time 
and manner prescribed by Sec.  301.6226-2. The plain language of 
proposed Sec.  301.6226-1(c)(1) made clear that if a valid election is 
made under Sec.  301.6226-1, the partnership is not liable for the 
imputed underpayment to which the election applies. Additionally, under 
proposed Sec.  301.6226-2(f), only a partner's allocable share of the 
partnership adjustments are included on the statement furnished to that 
reviewed year partner. Pursuant to Sec.  301.6226-3, only the 
adjustments reflected on the statement furnished to the reviewed year 
partner must be taken into account by that partner. To the extent the 
comment expressed concern about the partnership lacking a current 
address for a partner that no longer exists, is deceased or is 
otherwise a former partner, the proposed regulations

[[Page 6510]]

provide that the partnership may furnish statements to the last address 
known to the partnership. Only if the statements are returned as 
undeliverable is the partnership required to undertake reasonable 
diligence to ascertain a current address. Accordingly, no revisions to 
the final regulations were made in response to this comment.
v. Corrections of Errors in Statements
    As discussed in section 4.B.iv. of this preamble, several comments 
expressed concerns about the requirement to furnish statements to all 
of the partnership's reviewed year partners. Although those comments 
were not adopted, the ability to correct errors in statements mitigates 
the potential effects of this rule. Proposed Sec.  301.6226-2(e) 
provided that the partnership must provide correct information in the 
statements it furnishes to its partners and files with the IRS. 
Proposed Sec.  301.6226-2(d)(2)(i) provided that if a partnership 
discovers an error in a statement within 60 days of the statement due 
date, the partnership must correct that error, and may do so without 
IRS consent. If a partnership discovers an error more than 60 days 
after the statement due date, the partnership may only correct the 
error after receiving IRS consent. Proposed Sec.  301.6226-2(d)(2)(ii). 
Additionally, when the IRS discovers an error in a statement, the IRS 
may require the partnership to correct that error or to provide 
additional information. Proposed Sec.  301.6226-2(d)(3).
    The correction rules under proposed Sec.  301.6226-2(d) were 
designed to require a partnership that identifies an error in a 
statement to correct that error expeditiously. Similarly, nothing in 
the regulations prevents a partner that receives a statement containing 
an error from alerting the partnership of the error within the 60-day 
period so that the audited partnership can correct the error. Even if 
the partnership corrects errors within the 60-day period, however, 
proposed Sec.  301.6226-1(c)(2) provided the IRS could invalidate the 
election.
    In light of the comments in section 4.B.iv of this preamble 
regarding the effect on the push out election of failures to furnish 
correct statements, the Treasury Department and the IRS have revised 
the rule under proposed Sec.  301.6226-1(c)(2). The 60-day correction 
period should serve as a period of time after the statements are 
furnished to verify that the information on the statements was correct 
and to rectify any errors without adverse consequences regarding the 
push out election to the partnership or its partners. The ability to 
correct statements gives the partnership an opportunity to ensure 
statements were furnished properly and, to the extent a correction can 
cure the identified defects, to take steps to ensure that an election 
under section 6226 will not be invalidated. The ability to correct 
errors also ensures that partners have the correct information when the 
partners take into account the adjustments reflected on the statements.
    Accordingly, the final regulations under Sec.  301.6226-1(d) 
clarify that the IRS may not invalidate an election based on errors 
that are timely corrected by the partnership in accordance with Sec.  
301.6226-2(d). However, any errors in any statements furnished by the 
partnership are subject to penalty under section 6722 and the 
regulations thereunder. See Sec.  301.6226-2(a). In the case of errors 
discovered by the IRS, the IRS is under no obligation to require the 
partnership to provide additional information or to correct any errors 
discovered or brought to the IRS's attention at any time. The IRS may, 
instead, invalidate the election.
    One comment recommended changes to the correction process under 
Sec.  301.6226-2(d) and the timing of the correction period. 
Specifically, the comment suggested with respect to errors discovered 
by a partnership, the partnership should have an automatic obligation 
and right to issue corrected statements for errors discovered no later 
than 60 days after the extended due date of the audited partnership's 
adjustment year return. The comment also suggested that for errors 
discovered by the partnership after this date, the partnership must 
notify the IRS, and unless the IRS objects within 90 days of such 
notification, the partnership must issue the corrected statements. The 
comment suggested that if the IRS issues a denial within the 90-day 
period, such denial shall include an explanation for the denial, and 
the partnership shall have the ability to challenge the decision with 
IRS Appeals. These suggestions were not adopted.
    It is not in the interest of sound tax administration to place a 
limit on the time the IRS has to consider whether to allow corrected 
statements after 60 days from the due date of the statements. For 
example, a partnership may request to make a correction at a time when 
the period of limitations on assessing additional tax for the affected 
partners was closed, but the period of limitations for requesting a 
refund as to other affected partners was still open. If the IRS was 
unable to process the request to issue corrected statements within 90 
days, the corrected statements would be furnished to the partners and 
those partners would take into account the adjustments. If the IRS 
determines that the correction of the errors was insufficient, the IRS 
could determine the partnership's election under section 6226 was 
invalid, but the period of limitations on assessing the imputed 
underpayment may have expired by that time. By requiring IRS permission 
before any corrected statements are furnished, the IRS can evaluate 
each request based on the facts and circumstances and ensure that any 
proposed corrections are consistent with the determinations made during 
the partnership proceeding and would not frustrate the collection of 
any amounts owed as a result of the partnership proceeding. Requiring 
IRS permission also incentivizes partnerships to submit correct 
statements by the due date, which ensures that partners are provided 
timely and accurate information with which to take into account the 
adjustments. Because partners may have already taken into account the 
adjustments, any corrections received by the partners after they have 
taken into account the adjustments could detrimentally affect those 
partners.
    The same comment also suggested that with respect to errors 
discovered by the IRS, the IRS may not unreasonably refuse to permit a 
partnership to issue corrected statements if correction of the error 
results in a reduced tax liability by the affected partners or to 
correct the allocation of an adjustment between partners. This comment 
was not adopted. To extent this comment was suggesting that the 
regulations require the IRS to require the partnership to correct 
errors the IRS discovers in these circumstances, the comment was not 
adopted. The IRS needs discretion to evaluate whether requiring the 
correction of errors is in the interest of sound tax administration. 
For example, the errors may be de minimis or the correction of the 
errors may result in barred assessments or require partners to file 
amended returns if they have already taken into account the 
adjustments. To the extent the comment was suggesting that the IRS 
should not unreasonably withhold consent in situations where the 
partnership has discovered errors, the comment was also not adopted. As 
stated earlier in this section of this preamble, the IRS needs the 
flexibility to evaluate requested changes based on the facts and 
circumstance of each request.
vi. Contents of the Statements
    Under proposed Sec.  301.6226-2(e), each statement described in 
proposed

[[Page 6511]]

Sec.  301.6226-2 must include an enumerated list of items, including 
the partner's name and taxpayer identification number (TIN) and any 
other information required by forms, instructions, and other guidance 
prescribed by the IRS. Several comments suggested that the IRS assign a 
unique control number or other numerical code to a notice of final 
partnership adjustment and require that all push out statements with 
respect to an imputed underpayment reflected on that FPA include that 
control number. The IRS intends to adopt this suggestion by assigning a 
unique control number to each examination under the centralized 
partnership audit regime and by using that number for each form, 
letter, or other document used in the examination as well as any forms 
or statements utilized for a push out election. The final regulations, 
however, do not include the audit control number as an enumerated item 
under Sec.  301.6226-2(e). Requiring the control number through the 
forms and instructions provides the IRS with the flexibility to gain 
experience with the use of a unique control number and to make changes, 
as necessary, without needing to amend the regulations. This 
flexibility preserves government resources and also expedites the 
process for taxpayers to be aware of changes in IRS procedures.
C. Adjustments Taken Into Account by Partners
    The comments regarding how adjustments are taken into account by 
partners covered five general areas: (1) The calculation of the 
additional reporting year tax; (2) penalties, additions to tax, and 
additional amounts; (3) pass-through partners; (4) qualified investment 
entities and master limited partnerships (MLPs); and (5) the examples 
under proposed Sec.  301.6226-3(h).
i. Calculation of the Additional Reporting Year Tax
    Former proposed Sec.  301.6226-3(a) provided that the chapter 1 tax 
for each reviewed year partner for the reporting year was increased by 
the additional reporting year tax, which was generally defined as the 
aggregate of the correction amounts determined under former proposed 
Sec.  301.6226-3(b). Under former proposed Sec.  301.6226-3(b), the 
aggregate of the correction amounts was determined by adding the amount 
by which a reviewed year partner's chapter 1 tax would have increased 
for the first affected year with the amount by which the partner's 
chapter 1 tax for any intervening year would have increased if the 
adjustments were taken into account in the first affected year. Because 
the rule did not account for any decrease in a reviewed year partner's 
tax for a taxable year, former proposed Sec.  301.6226-3(b)(1) provided 
that a correction amount for any taxable year could not be less than 
zero and that any amount less than zero could not reduce any other 
correction amount.
    Section 206(e) of the TTCA amended section 6226(b) to provide that, 
when a reviewed year partner takes into account the adjustments under 
section 6226(b), the partner's chapter 1 tax for the reporting year is 
adjusted by the amounts the partner's chapter 1 tax for the first 
affected year or any intervening year would increase or decrease if the 
partner's share of the adjustments were taken into account in the first 
affected year. The TTCA amendments to section 6226(b) were adopted in 
the August 2018 NPRM. Proposed Sec.  301.6226-3(b), as revised in the 
August 2018 NPRM, provided that each reviewed year partner's chapter 1 
tax for the reporting year is increased or decreased by the additional 
reporting year tax, as appropriate. Under proposed Sec.  301.6226-
3(b)(2) and (3), the correction amounts are the amounts by which the 
partner's chapter 1 tax would increase or decrease if the partner's 
taxable income for that year were recomputed by taking into account the 
partner's share of the partnership adjustments. Under proposed Sec.  
301.6226-3(b)(1), as revised, a correction amount for the first 
affected year or any intervening year may be less than zero, and any 
correction amount less than zero may reduce any other correction 
amount.
    The final regulations under Sec.  301.6226-3(b)(1) were further 
revised to provide that nothing in Sec.  301.6226-3 entitles any 
partner to a refund of tax imposed by chapter 1 to which such partner 
is not entitled. This language clarifies that the rules under section 
6226 and 6227 are consistent insofar as those rules concern the ability 
of a partner to claim a refund of an overpayment when taking into 
account partnership adjustments. See Sec.  301.6227-3(b)(1). Whether an 
overpayment exists is determined by the Code and existing law outside 
the scope of these regulations. See section 5.D. of this preamble for 
further discussion.
    Proposed Sec.  301.6226-3(b)(2) and (3) provided that when 
computing a correction amount for the first affected year or any 
intervening year, partners should account for the amount of tax shown 
on an amended return for such year, ``including an amended return 
filed, or alternative to an amended return submitted, under section 
6225(c)(2) by a reviewed year partner.'' The final regulations under 
Sec.  301.6226-3(b)(2) and (3) remove the language referring to the 
alternative procedure for filing amended returns under section 
6225(c)(2). Amounts assessed based on submissions under the alternative 
procedure more appropriately fall within the amounts described in Sec.  
301.6226-3(b)(2)(ii)(B) and (b)(3)(ii)(B). Accordingly, treating such 
amounts as akin to amounts shown on amended returns could have led to 
inaccurate correction amounts. As such, the final regulations under 
Sec.  301.6226-3(b)(2)(ii)(B) and (b)(3)(ii)(B) have been revised to 
clarify that the amounts under those provisions include not only the 
amounts described in Sec.  1.6664-2(d), but also any amounts not 
included on the return of a partner which are assessed against and 
collected from the partners. Such amounts include amounts paid as part 
of modification under Sec.  301.6225-2, including under the alternative 
procedure or in accordance with a closing agreement. Such amounts do 
not include, however, any amounts paid with an amended return filed as 
part of modification because those amounts are included with the 
amounts shown on a return or amended return under Sec.  301.6226-
3(b)(2)(ii)(A) and (b)(3)(ii)(A).
    Several comments received prior to the TTCA amendments recommended 
that the calculation of the additional reporting year tax under former 
proposed Sec.  301.6226-3(b) be revised to account for potential 
decreases to a reviewed year partner's chapter 1 tax had the 
adjustments been taken into account. Certain comments stressed that it 
was critical for taxpayers to receive symmetrical treatment under 
section 6226 with respect to adjustments for overpayments or other 
adjustments that would serve to reduce the additional reporting year 
tax. One comment suggested that a decrease in tax in one year as a 
result of the adjustments should be able to reduce the additional tax 
payable with respect to any other taxable year. One comment 
specifically recommended that former proposed Sec.  301.6226-3(b) be 
revised to provide that the correction amount for a partner is the 
amount by which the reviewed year partner's chapter 1 tax would 
increase or decrease for the first affected year and all intervening 
years.
    The plain language of section 6226(b), as amended by the TTCA, and 
proposed Sec.  301.6226-3(a) and (b), as revised in the August 2018 
NPRM, make clear that any decreases in tax that result from taking into 
account the adjustments can produce a correction amount, and in

[[Page 6512]]

turn an additional reporting year tax, that is less than zero. 
Accordingly, because the recommendations made by the comments were 
reflected in the proposed regulations, no changes were necessary in 
response to those comments.
    Another comment recommended that the regulations clarify how 
information would be communicated to reviewed year partners to 
calculate a correction amount under section 6226(b)(2)(B) for an 
intervening year and suggested that partners calculate only the net 
increase in tax in each intervening year. The comment described an 
example of an adjustment that results from timing differences and 
recommended that the push out statement include the beneficial effect 
of deductions, if any, in subsequent years.
    Consistent with section 6226(b)(2)(B), proposed Sec.  301.6226-
3(b)(3) provided that a correction amount for an intervening year is 
the amount the partner's chapter 1 tax for such year would increase or 
decrease after taking into account any adjustments to tax attributes 
that resulted from taking into account the partnership adjustments in 
the first affected year. Accordingly, in order to determine an 
intervening year correction amount, the partner needs to know the 
partnership adjustments for the reviewed year, which is information 
provided on the push out statement furnished to the partner. See Sec.  
301.6226-2(e). No changes were made to the regulation to respond to the 
comment's request for clarification on this point. Regarding the 
comment's suggestion that the correction amount for any intervening 
year be calculated by reference to the partner's net increase in tax, 
the rule under Sec.  301.6226-3(b)(3) accommodates this suggestion 
because it accounts for both increases and decreases that would have 
occurred in an intervening year. Therefore, no changes were made to the 
regulations in response to this suggestion.
    The comment also recommended that the regulations provide that each 
partner calculates the correction amounts as though drafting an amended 
return and that such calculation should be based on generally 
applicable rules under the Code. The plain language of proposed Sec.  
301.6226-3(b)(2) and (3) provided precise rules for calculating the 
correction amounts. Those rules are consistent with how underpayments 
and overpayments are generally calculated elsewhere in the Code and 
regulations and thus provide for the method the comment recommended. 
See, for example, Sec.  1.6664-2. Forms and instructions will provide 
additional guidance for partners in computing correction amounts and 
the additional reporting year tax. Providing this additional guidance 
through forms and instructions allows for both the IRS and taxpayers to 
gain experience with those documents and to recommend and to make 
changes, as necessary and appropriate, without needing to amend the 
regulations. This informal guidance process preserves government 
resources and expedites the process by which the IRS can respond to 
taxpayer needs and by which taxpayers are made aware of changes in IRS 
procedures. Accordingly, no changes were made to the regulations in 
response to this comment.
    Two comments observed that an audit under the centralized 
partnership audit regime may be concluded after the statute of 
limitations for amending partner returns has expired. The comments 
recommended that the statute of limitations should be automatically 
extended to allow partners time to file an amended return and claim a 
refund.
    To the extent these comments were concerned about the inability to 
benefit from any decreases in tax that would have resulted from taking 
into account the adjustments under section 6226(b), those concerns are 
addressed by proposed Sec.  301.6226-3(b) as revised in the August 2018 
NPRM. As discussed earlier in this section of this preamble, the plain 
language of Sec.  301.6226-3(b) allows partners to account for 
increases and decreases that would have resulted in the first affected 
year or any intervening year were the adjustments taken into account in 
those years.
    To the extent the comment was addressing seeking refunds via 
amended returns outside the push out process, Sec.  301.6225-2(d)(2) 
allows for modification of the imputed underpayment via partner amended 
returns for taxable years for which the period of limitations would 
otherwise be expired. See section 6225(c)(2)(D). To the extent the 
comment was seeking a mandatory extension of all partner (direct and 
indirect) statutes of limitation to file amended returns and claim a 
refund, it is not in the interests of sound tax administration to 
provide for automatic extensions where other mechanisms provide 
adequate remedies for taxpayers. Under both the push out process and 
the amended return modification procedures, partners may benefit from 
decreases in tax that result from partnership adjustments. Creating an 
additional automatic extension process to achieve the same results 
potentially leads to more administrative burden for the IRS without any 
tangible benefit for partners. Accordingly, the comments' 
recommendation for automatic extensions in order to file refund claims 
was not adopted.
    Two comments suggested that the final regulations clarify whether a 
partner must calculate and pay any additional taxes due under chapters 
2 and 2A of the Code when taking into account adjustments under section 
6226(b). One comment specifically asked about the application of 
chapters 2 and 2A in the context of an election by the taxpayer to pay 
the safe harbor amount. Another comment asked about the consequences of 
failing to pay chapter 2 or 2A tax if the regulations imposed such a 
requirement.
    First, regarding the comment specific to the safe harbor amount, 
the safe harbor amount was removed from the regulations in the December 
2017 NPRM, no comments were received regarding its removal, and the 
final regulations do not include a safe harbor amount. Accordingly, 
inasmuch as this comment was concerned about the safe harbor amount, 
this comment was not adopted.
    Regarding the other comments, section 6226(b)(1) provides that each 
partner's ``tax imposed by chapter 1'' shall be adjusted by the 
aggregate of the correction amounts determined under section 
6226(b)(2). Both section 6226(b)(2)(A) and (B) describe the correction 
amounts as amounts by which the partner's ``tax imposed under chapter 
1'' would increase if the partner's share of the adjustments were taken 
into account. Consistent with section 6226(b), proposed Sec.  301.6226-
3(b) provided that each partner's chapter 1 tax for the reporting year 
is increased or decreased by the amounts by which the partner's chapter 
1 tax would increase or decrease were the adjustments taken into 
account. The plain language of the statute and the proposed regulations 
makes clear that a reviewed year partner only increases its chapter 1 
reporting year tax by the aggregate of the correction amounts, which 
are calculated by reference to the amounts by which the partner's 
chapter 1 tax would increase or decrease for the first affected year or 
any intervening year. Therefore, no changes were made to Sec.  
301.6226-3(b) in response to this comment. Furthermore, because the 
regulations do not require payment of chapter 2 or 2A taxes when a 
partner takes into account adjustments under section 6226(b), the 
consequences of failing to pay those taxes is beyond the scope of the 
regulations.
ii. Penalties, Additions to Tax, and Additional Amounts
    Former proposed Sec.  301.6226-3(a) provided that a reviewed year 
partner

[[Page 6513]]

must pay the partner's share of any penalties, additions to tax, or 
additional amounts determined at the partnership level reflected on the 
statement furnished to the partner under Sec.  301.6226-2. See former 
proposed Sec.  301.6226-2(e)(7) and (f)(3). Example 1 in former 
proposed Sec.  301.6226-3(g) illustrated the application of this rule. 
In the example, the IRS determines an imputed underpayment and a 
related accuracy-related penalty in the amount of $32. The partnership 
elects the application of section 6226 with respect to the imputed 
underpayment and furnishes a statement to partner A, a 25 percent 
partner, reflecting A's share of the adjustments and A's share of the 
$32 penalty amount ($8). The example concludes that A must pay its $8 
share of the penalty with its reporting year return.
    One comment expressed concern with Example 1 under former proposed 
Sec.  301.6226-3(g), particularly the result that a partner pays a 
penalty amount based on the amount of the partnership's imputed 
underpayment, rather than the amount of the partner's increased tax 
liability. The comment recommended the regulations clarify that 
penalties are not measured by reference to the imputed underpayment 
amount determined at the partnership level.
    This comment was addressed by proposed Sec.  301.6226-3(d), as 
revised in the December 2017 NPRM. As revised, proposed Sec.  301.6226-
3(d)(2) provided that a reviewed year partner calculates the amount of 
any penalty, addition to tax, or additional amount at the partner level 
by treating a correction amount determined under Sec.  301.6226-3(b) as 
if it were an underpayment or understatement for the first affected 
year or intervening year, as applicable. If, after taking into account 
the partnership adjustments, the reviewed year partner did not have an 
underpayment, or had an underpayment that fell below the applicable 
threshold for the imposition of a penalty, no penalty would be due from 
the reviewed year partner. Proposed Sec.  301.6226-3(d)(2). 
Accordingly, the proposed regulations make clear that a partner's 
penalty is not based on the imputed underpayment amount determined at 
the partnership level, as recommended by the comment. Example 1 under 
Sec.  301.6226-3(h) was also revised to account for this rule change.
I. Penalty Defenses
    Former proposed Sec.  301.6221(a)-1(c) had provided that any 
defense to any penalty, addition to tax, or additional amount must be 
raised by the partnership in the partnership-level proceeding, 
regardless of whether the defense was based on facts and circumstances 
relating to a person other than the partnership. As discussed in 
section 1.A of this preamble, former proposed Sec.  301.6221(a)-1(c) 
was removed from the regulations in the December 2017 NPRM. As part of 
the revisions in the December 2017 NPRM, the regulations under section 
6226 (former proposed Sec.  301.6226-3(i)) were also revised to provide 
that the calculation of the partner's penalty amount in the case of a 
push out election is based on the characteristics of, and facts and 
circumstances applicable to, the reviewed year partner. In addition, a 
reviewed year partner claiming that a penalty, addition to tax, or 
additional amount is not due because of a partner-level defense may 
raise that defense, but must first pay the penalty and file a claim for 
refund for the reporting year. See proposed Sec.  301.6226-3(d)(3), as 
revised in the August 2018 NPRM.
    One comment recommended that the regulations clarify that a 
partnership that makes a push-out election will be able to avail itself 
of partner-level defenses at the partnership level. For the reasons 
discussed in section 8.A. of this preamble, this comment was not 
adopted. Under Sec.  301.6233(a)-1(c)(1), a partner-level defense may 
not be raised in a proceeding of the partnership, including a 
partnership that makes an election under section 6226, except as 
otherwise provided in guidance prescribed by the IRS.
    Two other comments recommended that the regulations should provide 
a mechanism for partners to raise partner-level defenses prior to 
assessment, rather than requiring the partner to first pay the penalty 
and then file a claim for refund to raise the partner-level defense. 
One comment specifically suggested that a partner could raise a 
partner-level defense in the push out context by submitting a statement 
supporting that defense with the partner's reporting year return. This 
comment further suggested that the requirement to pre-pay penalties is 
contrary to the procedures in place for similar scenarios involving 
amended returns and audit adjustments. These comments were not adopted.
    First, to the extent the comment addresses procedures for amended 
returns and audit adjustments other than partnership adjustments, those 
procedures are beyond the scope of these regulations. The centralized 
partnership audit regime is a new set of procedures that does not have 
an existing parallel in other areas of procedural tax law, and, as 
such, other scenarios involving amended returns and audit adjustments 
are not sufficiently similar to provide a relevant baseline against 
which to determine how the centralized partnership audit procedures 
should be developed.
    Second, under the centralized partnership audit regime, the 
applicability of penalties, additions to tax, and additional amounts 
that relate to partnership adjustments is determined at the partnership 
level. Section 6221(a). A push out statement furnished to a partner 
under Sec.  301.6226-2 will include any penalties, additions to tax, or 
additional amounts determined at the partnership level that are 
applicable to the adjustments pushed out to that partner. The 
applicability of such penalties, additions to tax, and additional 
amounts as set forth in the push out statement furnished to the partner 
are binding on the partner pursuant to section 6223. See Sec.  
301.6226-1(e). Therefore, when taking into account the pushed out 
adjustments, the applicability of any penalties related to those 
adjustments has already been determined. The imposition and amount of 
the penalty is determined only upon the partner calculating the 
additional reporting year tax (or imputed underpayment in the case of 
pass-through partners) and applying any relevant threshold amounts.
    Because the IRS has already determined that a penalty applies, it 
is contrary to the interests of sound tax administration to allow 
partners to argue they are not liable for the penalty based on partner-
specific reasons without first requiring payment of the penalty. 
Allowing a partner to raise a partner-level defense without prepaying 
the penalty would require the IRS to check each reviewed year partner's 
return to see if a penalty defense was properly raised and open up an 
examination of the partner to determine the validity of the defense. 
Such a process would frustrate the collection of the penalties, the 
applicability of which was already determined at the partnership level 
in an examination. Requiring pre-payment of penalties before defenses 
are raised ensures that partners raise only colorable penalty defense 
claims. For those that do not have such claims, it will ensure 
immediate collection of the appropriate amount of penalties.
    One comment observed that, as a practical matter, it is unclear how 
a limited partner would dispute penalties determined at the partnership 
level, particularly because the partner may have no or limited 
information of actions at the partnership level or

[[Page 6514]]

control over such actions even if known. The comment recommended 
clarifying what constitutes reasonable cause or good faith under 
circumstances that will be common among partnerships with limited 
partners.
    Proposed Sec.  301.6226-3(d)(3) defined partner-level defenses as 
those defenses that are personal to the reviewed year partner and based 
on the facts and circumstances applicable to that partner (for example, 
a reasonable cause and good faith defense under section 6664(c) based 
on facts specific to a particular partner). Limited partners will have 
an opportunity to raise defenses specific to their facts and 
circumstances. The partners (limited partner or otherwise) should have 
all of the information needed to adequately raise a partner-level 
defense because that defense is based on the facts and circumstances 
applicable to the specific partner raising the defense. The partner 
does not need new information regarding partnership-level actions or 
control over partnership-level information that the partner did not 
have access to at the time it took a position on its return reflecting 
the items from the partnership subject to penalty. The centralized 
partnership audit regime does not alter the existing law under the 
Code, regulations, or applicable case law relating to reasonable cause 
and good faith determinations. Furthermore, as discussed in section 8.A 
of the preamble, any defense that is based on the conduct or actions of 
the partnership is a partnership-level defense that must be raised by 
the partnership during the partnership proceeding. See proposed Sec.  
301.6233(a)-1(c)(2)(v).
II. Partnership Payment of Penalties on Behalf of Partners
    One comment recommended that the partnership have the option of 
paying penalties at the partnership level while pushing out the 
partnership adjustments to its partners. The comment noted that pushing 
out penalties may require long and complex explanations regarding why 
the penalties apply, which could be burdensome to the partnership, 
partners, and the IRS, and may cause friction among the partners.
    Section 6226(c)(1) provides that any penalties, additions to tax, 
or additional amounts shall be determined as provided under section 
6221, and the partners of the partnership for the reviewed year shall 
be liable for any such penalty, addition to tax, or additional amount. 
If the partnership were to pay any penalties, additions to tax, or 
additional amounts in lieu of pushing out those amounts to its 
partners, the payment would be a payment towards the liability of the 
partners, not the partnership. The ability of a person to make a 
payment towards another's tax liability currently exists outside of the 
centralized partnership audit regime, and the regime does not alter or 
affect this ability. The partnership and its partners may enter into a 
business arrangement whereby the partnership makes a payment towards 
the partner's penalty liabilities, or whereby the partnership remits an 
amount to each partner to compensate for any potential penalties, 
additions to tax, or additional amounts. Nothing in the regulations 
under Sec.  301.6226-3 would disturb those types of arrangements.
    At the same time, the regulations do not provide a specific method 
for making such payments. Creating and monitoring a separate system to 
allow for partnerships to pay penalties on behalf of its partners would 
be burdensome for the IRS, partnerships, and partners. As discussed 
earlier in this section of the preamble, under proposed Sec.  301.6226-
3(d)(2) a partner's penalty amount is calculated based on the facts and 
circumstances unique to each partner. For the partnership to fully pay 
the amount of penalties owed by its partners, the partnership would 
need to obtain detailed information about each partner's personal tax 
situation, which is burdensome for the partnership and potentially 
invasive to the partners. This information would also have to be 
transmitted to the IRS to verify the correct penalty amount was paid 
and reflected in each partner's account. For these reasons, this 
comment was not adopted.
    Another comment similarly suggested that the IRS create a process 
by which the partnership could pay both interest and penalties on 
behalf of its foreign partners so that those foreign partners would not 
need to obtain a TIN to file a U.S. tax return to report and pay 
interest and penalties. The comment suggested that the IRS could 
require, as part of that process, the partnership to obtain 
documentation from the foreign partner authorizing the partnership to 
make the payment on the foreign partner's behalf. The comment also 
recommended that the regulations make clear such a payment would not 
preclude the partnership from making a push out election with respect 
to the adjustments. This comment was not adopted.
    As discussed earlier in this section of this preamble, there are 
administrative difficulties involved with adopting a specific method 
for a partnership to determine and pay over to the IRS its partners' 
amounts of penalties and interest. Further, because penalties and 
interest are determined at the partner level, a partnership will 
generally not be able to pay the exact amount of penalties and interest 
due with respect to each foreign partner. Therefore, there would be no 
basis for waiving the filing requirement for a foreign partner under 
these circumstances, even in cases in which the partnership is able to 
satisfy the tax due at source. For these reasons, the comment's 
suggestion was not adopted and no changes were made to the regulations 
in response to the comment.
III. Interest on Penalties, Additions to Tax, and Additional Amounts
    Section 6226(c)(2) provides that in the case of a push out 
election, interest shall be determined at the partner level from the 
due date of the return for the taxable year to which the increase in 
chapter 1 tax is attributable. Proposed Sec.  301.6226-3(c)(1) provided 
that interest on each correction amount greater than zero is calculated 
from the due date (without extension) of the reviewed year partner's 
return for the applicable taxable year until the amount is paid. For 
purposes of calculating interest on any penalties, additions to tax, or 
additional amounts, proposed Sec.  301.6226-3(c)(2) similarly provided 
that such interest is calculated from the due date (without extension) 
of the reviewed year partner's return for the applicable taxable year 
until the amount is paid.
    One comment observed that section 6226(c)(2) is silent as to 
whether the due date of the return for the purpose of calculating 
interest is determined with or without regard to any extension of time 
for filing, and noted that the statute does not differentiate between 
interest on tax and interest on penalties and additions to tax. The 
comment recommended the regulations adopt a bifurcated approach under 
which interest would run on the correction amounts from the due date of 
the return without regard to extensions while interest on penalties 
would run from the due date of the return including any extensions. The 
comment observed a similar bifurcated approach exists for calculating 
interest on tax and certain penalties outside the partnership context.
    After consideration, the Treasury Department and the IRS have 
adopted this comment to be consistent with the method of calculating 
interest on penalties outside of the centralized partnership audit 
regime pursuant to section 6601(e)(2)(B). Accordingly, Sec.  301.6226-
3(c)(2) now provides that

[[Page 6515]]

interest on any penalties, additions to tax, or additional amounts is 
calculated from the due date (including any extension) of the reviewed 
year partner's return for the applicable tax year until the amount is 
paid.
IV. Interest on the Additional Reporting Year Tax
    Section 6226(c)(2) provides that interest in the case of a section 
6226 election is determined at the partner level, from the due date of 
the return for the taxable year to which the increase in chapter 1 tax 
is attributable, and at the underpayment rate under section 6621(a)(2) 
(substituting 5 percent for 3 percent). As explained in section 4.A of 
the preamble to the August 2018 NPRM, while the TTCA amended section 
6226(b) to provide that both increases and decreases in chapter 1 tax 
are used in computing a partner's additional reporting year tax, the 
TTCA did not similarly amend the reference to ``increases'' in section 
6226(c)(2). The result of the changes to section 6226 is that interest 
only applies to the increases in the chapter 1 tax that would have 
resulted from taking into account the partnership adjustments under 
section 6226. No provision under the centralized partnership audit 
regime provides for interest on a decrease in chapter 1 tax that would 
have resulted in the first affected year or any intervening year if the 
adjustments were taken into account in those years. Accordingly, 
proposed Sec.  301.6226-3(c)(1) provided that interest on the 
correction amounts determined under proposed Sec.  301.6226-3(b) is 
only calculated for taxable years for which there is a correction 
amount greater than zero, that is, taxable years for which there would 
have been an increase in chapter 1 tax if the adjustments were taken 
into account.
    One comment suggested that the final regulations clarify that the 
IRS will pay interest on any refunds issued on prior overpayments 
resulting from a taxpayer's statements filed under section 6226 with 
their reporting year return. The comment expressed the belief that the 
rule under section 6226(c)(2) is only intended to increase the normal 
statutory rate of interest imposed, not to exclude interest on 
overpayments.
    The additional reporting year tax is calculated under section 
6226(b)(2) by reference to the amount that a partner's chapter 1 tax 
``would'' increase or decrease if the partner's share of adjustments 
``were taken into account'' in the first affected year or in the case 
of an intervening year, the amount by which such tax would increase or 
decrease by reason of the adjustment to tax attributes. An adjustment 
to a tax attribute is any tax attribute which ``would have been 
affected'' if the adjustments ``were taken into account'' in the first 
affected year. Under the language of section 6226(b)(2) and (3), 
adjustments are not actually taken into account like they would be if 
an amended return was filed under Sec.  301.6225-2(d)(2). Similarly, 
the increases or decreases do not actually occur as they would in the 
amended return context and tax attributes are not actually adjusted as 
part of this calculation. Accordingly, in the case of an increase in 
tax that would result in the first affected year or any intervening 
year if the adjustments were taken into account, no overpayment results 
for any year because there is an increase in tax, not a decrease. In 
the case of a decrease in tax that would result in the first affected 
year or any intervening year if the adjustments were taken into 
account, there is no overpayment because the determination of a 
decrease in tax is merely by reference to the relevant year to be taken 
into account as part of the total additional reporting year tax. 
Therefore, no overpayment interest is due and owing to the partner.
iii. Pass-Through Partners
    The June 2017 NPRM reserved on the issue of how a pass-through 
partner takes into account its share of adjustments reflected on a 
statement furnished to the pass-through partner under Sec.  301.6226-2. 
In response to the June 2017 NPRM, multiple comments recommended that 
pass-through partners take into account adjustments by pushing out 
those adjustments to the next tier of partners and suggested approaches 
to achieve this result.
    After careful consideration of those comments, the December 2017 
NPRM adopted an approach that required a pass-through partner to take 
into account adjustments reflected on a push out statement by either 
furnishing statements to its own partners or by paying an amount 
calculated like an imputed underpayment with respect to the 
adjustments, plus any applicable penalties and interest. See former 
proposed Sec.  301.6226-3(e)(1). The regulations created an iterative 
process under which any pass-through partner receiving a statement from 
another pass-through partner must also take into account the 
adjustments on the statement by furnishing statements to its own 
partners or paying an amount calculated like an imputed underpayment. 
Any ultimate, non-pass-through partner was required to take into 
account its share of the adjustments as if such partner was a reviewed 
year non-pass-through partner. If a pass-through partner failed to take 
into account the adjustments in accordance with former proposed Sec.  
301.6226-3(e)(1), the pass-through partner was required to pay an 
amount calculated like an imputed underpayment plus any applicable 
penalties and interest.
    Section 204(a) of the TTCA added to the Code section 6226(b)(4), 
which provides that a partnership or S corporation that receives a 
statement under section 6226(a)(2) must file a partnership adjustment 
tracking report with the IRS and furnish statements under rules similar 
to the rules of section 6226(a)(2). If the partnership or S corporation 
fails to furnish such statements, the partnership or S corporation must 
compute and pay an imputed underpayment under rules similar to the 
rules of section 6225. The rules under former proposed Sec.  301.6226-
3(e) were revised in the August 2018 NPRM to reflect the amendment to 
section 6226(b)(4). See section 4.A. of the preamble to the August 2018 
NPRM.
    Three comments were received regarding proposed Sec.  301.6226-
3(e). The comments focused on three topics: (1) The statements 
furnished under proposed Sec.  301.6226-3(e)(3); (2) the computation of 
an imputed underpayment under proposed Sec.  301.6226-3(e)(4); and (3) 
the payment of the additional reporting year tax by affected partners 
in accordance with proposed Sec.  301.6226-3(e)(4)(iv).
I. Statements Furnished Under Sec.  301.6226-3(e)(3)
    Proposed Sec.  301.6226-3(e)(1) provided that each pass-through 
partner that is furnished a statement described in Sec.  301.6226-2 
with respect to adjustments of an audited partnership must file and 
furnish statements to its affected partners. Affected partners are 
persons that held an interest in the pass-through partner at any time 
during the taxable year of the pass-through partner to which the 
adjustments in the statement relate. Consistent with section 
6226(b)(4)(B), proposed Sec.  301.6226-3(e)(3)(ii) provided that a 
pass-through partner must furnish such statements no later than the 
extended due date for the return for the adjustment year of the audited 
partnership. One comment recommended that the regulations provide a 
process by which a pass-through partner could apply to the IRS for a 
discretionary short-term extension of the time period set out in 
proposed Sec.  301.6226-3(e)(3)(ii). This extension would address 
exceptional or unusual circumstances in which a pass-through

[[Page 6516]]

partner is unable to furnish the statements to all its affected 
partners within the specified time frame. This comment was not adopted.
    Section 6226(b)(4)(B) expressly provides that statements under 
section 6226(b)(4)(A) ``shall be furnished by not later than the due 
date for the return for the adjustment year of the audited 
partnership.'' The statute does not provide for an extension beyond the 
extended due date of the adjustment year return. Under proposed Sec.  
301.6226-3(e)(3)(ii), the adjustment year return due date is the 
extended due date under section 6081 regardless of whether the audited 
partnership is required to file a return for the adjustment year or 
timely files a request for an extension under section 6081 and the 
regulations thereunder. As a threshold matter, the language of section 
6226(b)(4)(B), providing that statements ``shall be furnished not later 
than'' the due date suggests that discretionary extensions are not 
permissible. Furthermore, the due date for furnishing statements to 
affected partners must be fixed for all pass-through partners for the 
IRS to ensure statements are furnished timely and payments are timely 
made. In addition, the ultimate affected partners are obligated to file 
and pay additional reporting year tax by the extended due date of the 
audited partnership. Extending the due date for furnishing statements 
to affected partners for any pass-through partner would cause delays 
for upper tier affected partners and potentially subject ultimate 
affected partners to penalties for filing or paying additional 
reporting year tax more than 30 days after the extended due date. 
Therefore, the regulations do not provide for discretionary extensions 
of the time period that was set forth in proposed Sec.  301.6226-
3(e)(3)(ii).
    Another comment observed that the proposed regulations did not 
specify who at the IRS must receive the statements furnished by a pass-
through partner and recommended that the final regulations clearly 
state to whom at the IRS pass-through partner statements should be 
directed. This comment was not adopted, but the regulations were 
revised to provide that a pass-through partner must file and furnish 
statements to its affected partners in accordance with forms, 
instructions, or other guidance prescribed by the IRS. Providing the 
method for filing and furnishing statements in forms, instructions, and 
other guidance provides the IRS with the flexibility to change the 
filing and furnishing procedures as appropriate and necessary without 
needing to amend the regulations. This flexibility is particularly 
important as the IRS gains experience with the centralized partnership 
audit regime. Flexibility also preserves government resources and will 
expedite the process for the IRS to respond to taxpayer needs and for 
taxpayers to be aware of changes in IRS procedures.
    Under Sec.  301.6226-3(e)(3)(iii), each statement furnished by a 
pass-through partner must include correct information concerning 
certain enumerated items. These items include the name and TIN of the 
affected partner to whom the statement is being furnished as well as 
any other information required by forms, instructions, and other 
guidance prescribed by the IRS. One comment suggested that the 
regulations should clarify whether a statement provided under proposed 
Sec.  301.6226-3(e) would be effective without the TIN of the affected 
partner if the affected partner is a foreign person not otherwise 
required to obtain a TIN. The comment observed that foreign persons 
generally are not required to obtain a U.S. TIN, particularly if they 
will not claim the benefits of a U.S. tax treaty.
    Proposed Sec.  301.6226-3(e)(3)(iii) required each statement 
furnished by a pass-through partner to include the correct TIN of the 
affected partner. This information is critical to the administration of 
the push out regime because it allows the IRS to identify the person to 
whom the statement is furnished, and it provides the IRS with the 
ability to match the adjustments on that statement with the return 
filed by the affected partner. In response to this comment, however, 
the final regulations require that a push out statement furnished under 
Sec.  301.6226-3(e) include the partner's TIN ``or alternative form of 
identification as prescribed by forms, instructions, or other 
guidance.'' See also Sec.  301.6226-2(e) (imposing the same requirement 
for push out statements furnished to reviewed year partners). In 
addition, the election under Sec.  301.6226-1 by the audited 
partnership must include the TIN ``or alternative form of 
identification as prescribed by forms, instructions, or other 
guidance'' for each reviewed year partner of the partnership. See Sec.  
301.6226-1(c)(3)(ii). The addition of the quoted language in each 
section contemplates that there may be situations in which an 
alternative form of identification for certain partners is warranted.
    Accordingly, as the IRS gains experience with the centralized 
partnership audit regime, the IRS may allow for the use of an 
alternative form of identification through forms, instructions, or 
other guidance if the IRS determines such identification is appropriate 
for foreign persons. This flexibility gives the IRS and partnerships 
time to evaluate whether an alternative form of identification is 
administrable and beneficial without needing to amend the regulations 
to allow for alternative identification, which preserves government 
resources and expedites the process by which the IRS responds to 
taxpayer needs and taxpayers become aware of changes in IRS procedures.
    The same comment also recommended that to the extent practicable, 
the IRS identify as soon as possible any additional information that 
may be required in additional forms, instructions, or other guidance 
for statements under Sec.  301.6226-3(e)(3). The comment suggested 
regulations or drafts of forms or instructions could identify such 
additional information, which would allow partnerships to timely, 
completely, and accurately collect necessary data from partners to 
comply with requirements and avoid the risk that the IRS would deny a 
push out election due to incomplete or inaccurate or untimely data.
    As discussed earlier in this section of the preamble, maintaining 
the ability to require additional information on forms, instructions, 
or other guidance gives the IRS the flexibility to adapt statements 
without having to amend the regulations. At the same time, the IRS 
recognizes the need of taxpayers to know of the information required to 
not jeopardize compliance with the regulations. The IRS plans to 
develop and release drafts of forms and instructions for public 
inspection as soon as possible.
    In addition to the changes described earlier in this Summary of 
Comments and Explanation of Revisions, two other clarifying changes 
were made to Sec.  301.6226-3. First, Sec.  301.6226-3(e)(3)(iii)(M) 
was clarified to provide that the information required to be included 
in statements furnished to affected partners regarding the 
applicability of penalties, additions to tax, or additional amounts are 
the determinations made at the audited partnership level pertaining to 
the applicability of penalties, additions to tax, or additional 
amounts. This change reinforces the notion that the applicability of 
penalties is determined at the audited partnership level and that 
penalties attach to adjustments as they are pushed out through the 
tiers. An affected partner that pays an imputed underpayment or 
additional reporting year tax independently determines the amount of 
any penalty applicable to

[[Page 6517]]

adjustments that are taken into account by the affected partner.
    In addition, Sec.  301.6226-3(e)(4)(iv)(B) was clarified to provide 
that when determining interest on an imputed underpayment paid by a 
pass-through partner, the imputed underpayment is treated as if it were 
a correction amount for the first affected year. This change conforms 
the language in Sec.  301.6226-3(e)(4)(iv)(B) with the language in 
Sec.  301.6226-3(c) regarding interest on correction amounts.
II. Modifications Available to Pass-Through Partner Paying an Imputed 
Underpayment
    If a pass-through partner does not furnish statements, the pass-
through partner must compute and pay an imputed underpayment in 
accordance with proposed Sec.  301.6226-3(e)(4). Section 
6226(b)(4)(A)(ii)(II); proposed Sec.  301.6226-3(e)(2). Pursuant to 
proposed Sec.  301.6226-3(e)(4)(iii), this imputed underpayment is 
computed in the same manner as an imputed underpayment under section 
6225 and Sec.  301.6225-1. In calculating an imputed underpayment under 
proposed Sec.  301.6226-3(e)(4)(iii), a modification is taken into 
account if it was approved by the IRS under Sec.  301.6225-2 with 
respect to the pass-through partner (or any relevant partner holding 
its interest in the audited partnership through the pass-through 
partner) and it is reflected on the statement furnished to the pass-
through partner. Any modification that was not approved by the IRS 
under Sec.  301.6225-2 may not be taken into account. Proposed Sec.  
301.6226-3(e)(4)(iii).
    One comment suggested that it was unclear under proposed Sec.  
301.6226-3(e)(4) whether a pass-through partner that elects to pay an 
imputed underpayment is only permitted to make modifications that are 
included on the information statement furnished to the pass-through 
partner or whether the pass-through partner also may make modifications 
based on the pass-through partner's own partners (to the extent such 
modification is not already reflected on the information statement). 
The comment recommended that the pass-through partner be permitted to 
make modifications based on its own partners to the extent the pass-
through partner would be permitted to make modifications under section 
6225 if it were the partnership directly under audit. This comment was 
not adopted.
    Section 6226(b)(4)(A)(ii)(II) provides that a partnership may 
compute and pay an imputed underpayment under rules similar to the 
rules of section 6225 (other than section 6225(c)(2), (7), and (9)). 
Section 6226(b)(4)(A)(ii)(II) does not explicitly carve out section 
6225(c)(8), which provides that any modification of the imputed 
underpayment amount under section 6225(c) shall be made only upon 
approval of such modification by the Secretary. Consistent with section 
6225(c)(8), proposed Sec.  301.6226-3(e)(4)(iii) only allows 
modifications approved by the IRS under proposed Sec.  301.6225-2 to be 
taken into account in calculating an imputed underpayment with respect 
to a pass-through partner. Modifications approved by the IRS under 
Sec.  301.6225-2 are only those modifications requested by the audited 
partnership and approved during the administrative proceeding with 
respect to the audited partnership. See Sec.  301.6225-2(b). A pass-
through partner may not use modifications that were not requested or 
approved in the administrative proceeding with respect to the audited 
partnership in calculating its imputed underpayment under proposed 
Sec.  301.6226-3(e)(4).
    Allowing a pass-through partner to apply modifications that were 
not previously requested or approved in calculating its imputed 
underpayment is contrary to the centralized nature of an administrative 
proceeding under the centralized partnership audit regime. Partnership 
adjustments are determined at the partnership level. Section 6221(a). 
The imputed underpayment is a partnership-related item and therefore 
modifications to the imputed underpayment are determined at the 
partnership level. The modification provisions under Sec.  301.6225-2 
are the appropriate method for determining whether and to what extent a 
modification should be allowed. Allowing pass-through partners to 
raise, for the first time, modifications during the push out is 
inconsistent with making such determinations at the partnership level. 
Allowing such modifications would create significant administrative 
burdens for the IRS. For one, the IRS would have to expend increased 
time and resources to review any modifications applied during push out 
that were not previously evaluated and approved during the modification 
process at the audited partnership level. This concern would be 
exacerbated in situations where there are multiple tiers of entities 
applying multiple types of additional modifications. For instance, a 
pass-through partner might raise again a modification that was rejected 
by the IRS at the audited partnership level during the modification 
process, causing further administrative delay and burden. Furthermore, 
if a modification applied by a pass-through partner was incorrectly 
applied, the IRS would have to expend time and resources to correct the 
incorrectly claimed modification, resulting in additional delays in the 
collection of amounts due as a result of the examination and the push 
out election.
III. Payment of Additional Reporting Year Tax by Affected Partners
    Proposed Sec.  301.6226-3(e)(3)(iv) provided that affected partners 
that are not pass-through partners must take into account their share 
of adjustments reflected on a statement furnished under proposed Sec.  
301.6226-3(e)(3) in accordance with proposed Sec.  301.6226-3(e). When 
taking into account the adjustments, an affected partner that is not a 
pass-through partner bases its reporting year on the date the audited 
partnership furnished its statements to its reviewed year partners. As 
a result, the reporting year of an affected partner that is not a pass-
through partner will be the same taxable year as the reporting year of 
a reviewed year partner that is also not a pass-through partner.
    As discussed in section 1 of the Explanation of Provisions in the 
preamble to the December 2017 NPRM, there may be circumstances in which 
a statement is not furnished to an affected partner that is not a pass-
through partner in time for the partner to report and pay the 
additional reporting year tax by the unextended due date of the 
partner's return for the reporting year. To account for this situation, 
proposed Sec.  301.6226-3(e)(3)(iv) provided that the IRS will not 
impose any additions to tax under section 6651 related to any 
additional reporting year tax if an affected partner that is not a 
pass-through partner reports and pays any additional reporting year tax 
within 30 days of the extended due date for the return for the 
adjustment year of the audited partnership.
    One comment recommended that the 30-day period under proposed Sec.  
301.6226-3(e)(3)(iv) should be extended to at least 60 days and that 
there be a mechanism for requesting and obtaining an extension of this 
deadline when needed. This comment was not adopted.
    While it may be difficult to accurately compute and pay the 
additional reporting year tax in situations where the affected partner 
receives the statement close in time to the extended due date of the 
reporting year return, the affected partner has options available to 
mitigate any additions to tax under section 6651. First, the 
regulations under Sec.  301.6226-3(e)(3)(iv) provide a 30-day period in 
which the IRS will not

[[Page 6518]]

impose a section 6651 penalty. Second, the affected partner may make an 
estimated tax payment prior to the due date for the reporting year and 
use that payment as a credit against any potential liability for the 
additional reporting year tax to avoid failure to pay penalties.
    Third, the affected partner may also request that any additions to 
tax under section 6651 be abated due to reasonable cause. Nothing in 
the regulations under the centralized partnership audit regime alters 
the mechanisms by which a taxpayer may raise a reasonable cause defense 
in response to a proposed penalty. Existing regulations under Sec.  
301.6651-1(c)(1) and the Internal Revenue Manual provide procedures for 
raising a reasonable cause defense to avoid an addition to tax under 
section 6651. If an addition to tax under section 6651 is asserted 
because a taxpayer did not pay the entire additional reporting year tax 
within 30 days of the extended due date of the audited partnership's 
adjustment year return, the taxpayer may follow those existing 
procedures to raise any reasonable cause and good faith defense that 
may be applicable to the taxpayer's delay in payment.
iv. Qualified Investment Entities and MLPs
    Proposed Sec.  301.6226-3(b)(4) provided rules for qualified 
investment entities (QIEs), such as real estate investment trusts and 
regulated investment companies, to utilize the deficiency dividend 
procedures under section 860 when taking into account the adjustments 
under section 6226(b). One comment recommended that the Treasury 
Department and the IRS adopt the rules as proposed in Sec.  301.6226-
3(b)(4) without change in the final regulations. This comment was 
adopted.
    Another comment recommended that in the case of an MLP, the safe 
harbor calculation for a partner should take into account the partner's 
share of specified passive activity losses within the meaning of 
section 6225(c)(5)(B). As discussed earlier in this section of the 
preamble, the safe harbor amount was removed from the regulations in 
the December 2017 NPRM, no comments were received regarding its 
removal, and the final regulations do not include a safe harbor amount. 
Accordingly, this comment was not adopted.
v. Examples Under Proposed Sec.  301.6226-3(h)
    Proposed Sec.  301.6226-3(h) provided examples that illustrated the 
rules of proposed Sec.  301.6226-3. One comment recommended that 
additional examples be added to Sec.  301.6226-3(h) to show the proper 
treatment of two situations. The first situation involved the IRS 
approving a modification based on a partner filing an amended return, 
the partnership challenging the IRS's adjustment in Tax Court, and the 
amount of the adjustment being subsequently reduced. The second 
situation involved the IRS determining at the partnership level a 20 
percent accuracy-related penalty with respect to the partnership 
adjustments and the IRS approving a modification based on a partner's 
status as a tax-exempt entity. The comment suggested that the example 
illustrate how the amount of the penalty is calculated in this 
situation after allowance for the modification with respect to the tax-
exempt entity and how the penalty is allocated among all partners, 
including the tax-exempt entity.
    These hypotheticals were described within the portion of the 
comment addressing section 6226. Therefore, notwithstanding that the 
comment did not explicitly state that the partnership in the 
hypothetical made a push out election, for purposes of addressing these 
comments it is assumed that the partnership did make the push out 
election. After careful consideration, the Treasury Department and the 
IRS have declined to add these examples because, as described in this 
section of the preamble, both situations describe fact patterns that 
are addressed by a straight forward application of the proposed 
regulations, as revised in the December 2017 and August 2018 NPRMs, and 
thus the examples would not help clarify any aspect of the rules.
    The first situation is addressed by proposed Sec.  301.6226-3(b)(2) 
and (3), which provided that in calculating a correction amount, 
decreases in tax should be taken into account and that amounts shown on 
amended return filed during modification should be accounted for in the 
calculation. As described earlier in section C.i. of this preamble, 
proposed Sec.  301.6226-3(b)(2) and (3) was revised in the August 2018 
NPRM to reflect the amendments to section 6226(b) by the TTCA. As 
amended, section 6226(b) provides that when a reviewed year partner 
takes into account pushed out adjustments, the partner's chapter 1 tax 
for the reporting year is adjusted by the amounts the partner's chapter 
1 tax for the first affected year or any intervening year would 
increase or decrease if the partner's share of the adjustments were 
taken into account in the first affected year. As a result, under 
proposed Sec.  301.6226-3(b)(2) and (3) as revised in the August 2018 
NPRM, a correction amount and the additional reporting year tax can be 
less than zero.
    When the partner in the first hypothetical calculates the 
correction amount for the year that was amended, the partner recomputes 
its tax for the year by starting with the amount of tax shown on the 
amended return, which had been based on the full amount of the 
adjustment (prior to its reduction by the court decision). The partner 
then determines the amount the partner's chapter 1 tax would have 
increased or decreased were the reduced adjustment taken into account 
for that year. If the partner's tax for the amended year decreases as a 
result of the reduced adjustment, that decrease in tax produces a 
negative correction amount, which in turn produces a negative 
additional reporting year tax. The negative additional reporting year 
tax would then reduce the partner's tax for the reporting year.
    The second situation is addressed by proposed Sec.  301.6226-3(d) 
as previously revised in the December 2017 NPRM. As discussed earlier 
in this section of the preamble, proposed Sec.  301.6226-3(d)(2) 
provided that each reviewed year partner calculates its penalty amount 
by treating the correction amounts determined under Sec.  301.6226-3(b) 
as if they were underpayments or understatements for the first affected 
year or any intervening year. This rule is different from the rule 
initially set forth in former proposed Sec.  301.6226-2(f)(3). Under 
the former rule, to which the comment's recommendation related, each 
partner was allocated their share of the penalty that was calculated at 
the partnership level. Under the rule in proposed Sec.  301.6226-3(d), 
however, a partner's penalty calculation is based on the 
characteristics of, and facts and circumstances applicable to, the 
reviewed year partner. Accordingly, while the applicability of the 
accuracy-related penalty in the second hypothetical described by the 
comment was determined at the partnership level, if as a result of 
taking into account the adjustments under Sec.  301.6226-3(b), the tax-
exempt entity would not have an underpayment or understatement for 
which a penalty was applicable, the penalty amount calculated by the 
tax-exempt entity pursuant to Sec.  301.6226-3(d)(2) would be zero. 
Whether modification was requested or approved with the tax-exempt 
entity would not affect this determination.
    The same comment also recommended adding an example to show the 
proper application of partner and partnership-level tax attributes to 
the calculation of a correction amount

[[Page 6519]]

for an intervening year. This recommendation was also not adopted.
    Former proposed Sec.  301.6241-1(a)(10) had defined the term tax 
attribute to include both the tax attributes of the partnership and the 
tax attributes of its partners. This definition was changed in the 
August 2018 NPRM to remove references to the partnership or the 
partner. This change allows ``tax attribute'' to apply to the 
partnership or to a partner depending on the particular context within 
which it is used. See section 11.A. of the preamble to the August 2018 
NPRM. As a result, the definition of tax attribute in proposed Sec.  
301.6241-1(a)(10), as revised, did not refer to either the partnership 
or its partners.
    Former proposed Sec.  301.6226-3(b)(3) had provided that an 
intervening year correction amount was derived by recomputing a 
partner's taxable income by taking into account any adjustments to tax 
attributes. After the change to the definition to tax attribute, 
proposed Sec.  301.6226-3(b)(3) was revised to make clear that in the 
context of calculating an intervening year correction amount, it is the 
``tax attributes of the partner'' that are relevant, not the tax 
attributes of the partnership. As a result, under proposed Sec.  
301.6226-3(b)(3) as revised in the August 2018 NPRM, partnership-level 
tax attributes no longer factor into the calculation of an intervening 
year correction amount. See proposed Sec.  301.6226-3(h), Example 7; 
section 4.A. of the preamble to the August 2018 NPRM. Given these 
revisions, an example showing the application of partnership-level tax 
attributes would no longer be accurate for computing an intervening 
correction amount under Sec.  301.6226-3(b)(3).
    The Treasury Department and the IRS have also declined to add an 
example illustrating the application of a partner's tax attributes to 
the calculation of its correction amount for an intervening year. 
Creating an example involving the tax attributes of a specific partner 
would necessitate a description of that particular partner's tax 
profile and would require a number of assumptions that would strip the 
example of its utility.
    Example 5 of proposed Sec.  301.6226-3(h) described a situation in 
which the IRS determines a $200 partnership adjustment with respect to 
taxable year 2020 and a resulting $40 imputed underpayment. During the 
modification process, Partner F files amended returns for 2020, 2021, 
and 2022 taking into account F's share of the $200 partnership 
adjustment, and the IRS approves that modification. See Sec.  301.6225-
2(d)(2). The partnership elects to make a push out election with 
respect to the $40 imputed underpayment and furnishes a statement to F 
reflecting F's share of the $200 partnership adjustment and reflecting 
the approval of F's amended return modification.
    Former proposed Sec.  301.6226-3(g) had provided that F computes 
its correction amounts for the first affected year and the intervening 
years and that F ``computes any additional chapter 1 tax for those 
years using the returns for 2020, 2021, and 2022 taxable years as 
amended during the modification process.'' One comment found the quoted 
language ambiguous and recommended the language be revised to provide 
that ``F's computation will take into account the additional chapter 1 
tax that F reported and paid pursuant to the modification process on 
amended returns for the 2020, 2021, and 2022 taxable years.'' This 
comment has been adopted.
    Although F takes into account the chapter 1 tax F reported and paid 
with its amended returns, F still must compute the correction amounts 
for each year under Sec.  301.6226-3(b). F cannot assume F's additional 
reporting year tax is zero because of the fact F filed an amended 
return and took into account the adjustments during the modification 
process. For example, F may have inadvertently taken the adjustments 
into account incorrectly when filing its amended returns or filed a 
subsequent amended return, and as a result F may compute an additional 
reporting year tax that is greater than (or possibly less than) zero 
when F performs the calculation under Sec.  301.6226-3(b) for the 
reporting year.
    The comment also recommended changing the language ``[t]he time to 
file a petition expires on'' in Examples 2-4 and 6-9 under proposed 
Sec.  301.6226-3(h) to ``[t]he last day to file a petition is.'' Under 
Sec.  301.6226-2(b)(1)(i), if a petition is not filed under section 
6234, the adjustments become finally determined upon the expiration of 
the time to file a petition under section 6234. Although this is 
determined in relation to the last day to file a petition under section 
6234, the language in the examples mirrors the regulatory language 
under Sec.  301.6226-2(b)(1)(i). Changing the language in the examples 
to differ from the language in the rule could create confusion and 
ambiguity. Accordingly, this comment was not adopted.
    Lastly, several comments noted typographical errors and incorrect 
cross-references in the examples under former proposed Sec.  301.6226-
3. These errors were fixed in proposed Sec.  301.6226-3(h). See section 
4.B. of the preamble to the August 2018 NPRM.

5. Administrative Adjustment Requests

    Four comments were received concerning administrative adjustment 
requests under section 6227. The comments addressed the following 
topics: (1) The requirement that the partnership representative must 
sign an AAR; (2) the ability to report multiple imputed underpayments 
in a single AAR; (3) the modifications available in the case of an AAR; 
(4) how partners take into account adjustments requested in an AAR; (5) 
the availability of the safe harbor amount; (6) the application of 
section 905(c); and (7) how partnerships that have elected out of the 
centralized partnership audit regime file amended returns. In addition 
to addressing the comments, this section of the preamble explains a 
change to the rules regarding whether an AAR is valid if it fails to 
include required statements and interest with respect to imputed 
underpayments reported on an AAR.
A. Requirement That the Partnership Representative Signs an AAR
    Proposed Sec.  301.6227-1(c) provided the form and manner for 
making an AAR under the centralized partnership audit regime, including 
the rule that an AAR must be signed under penalties of perjury by the 
partnership representative. One comment recommended that the 
regulations remove the requirement that the partnership representative 
sign an AAR and instead allow any person authorized to sign the 
original partnership return to sign the AAR. This comment was not 
adopted.
    Under section 6223(b), the partnership and all partners of such 
partnership are bound by actions taken under the centralized 
partnership audit regime by the partnership. See Sec.  301.6223-2(a). 
The filing of an AAR under section 6227 is an action under the 
centralized partnership audit regime. Under section 6223(a), the 
partnership representative has the sole authority to act on behalf of 
the partnership under the centralized partnership audit regime. 
Consequently, only the partnership representative has the authority to 
file an AAR under section 6227, and the final regulations maintain the 
requirement that the partnership representative sign an AAR.
    The comment expressed concern that, in some circumstances, 
obtaining the signature of the partnership representative could be 
difficult or impossible. For example, if the partnership representative 
is deceased or where a partnership representative

[[Page 6520]]

whose designation is being revoked refuses to sign the AAR. The 
regulations under section 6223 and 6227 accommodate the concern 
illustrated in these examples. Under Sec.  301.6223-1(e)(2)(ii), a 
partnership may revoke a designation of a partnership representative by 
filing a valid AAR in accordance with section 6227. The revocation must 
include a designation of a successor partnership representative. Sec.  
301.6223-1(e)(1). Both the revocation and the designation are effective 
on the date the partnership files the AAR. Sec.  301.6223-1(e)(3).
    Proposed Sec.  301.6227-1(a) provided that when the partnership 
changes the designation of the partnership representative in 
conjunction with the filing of an AAR in accordance with Sec.  
301.6223-1(e), the change in designation is treated as occurring prior 
to the filing of the AAR. Under this rule, the prior partnership 
representative is revoked and a new partnership representative is 
designated prior to the time the AAR is filed, with the result that the 
newly designated partnership representative is the partnership 
representative of record at the time the AAR is filed. This rule was 
designed to address the circumstances described by the comment when it 
may be difficult to obtain the signature of the prior partnership 
representative and to make clear that it is the newly designated 
partnership representative that signs an AAR. Because Sec.  301.6227-
1(a), in connection with the regulations under section 6223, adequately 
address the concerns raised by the comment, the comment was not 
adopted.
B. Multiple Imputed Underpayments
    Proposed Sec.  301.6227-1(a) provided that when filing an AAR, the 
partnership must determine whether the adjustments requested in the AAR 
result in an imputed underpayment. Under proposed Sec.  301.6227-
2(a)(1), the determination of whether adjustments requested in an AAR 
result in an imputed underpayment and the determination of the amount 
of the imputed underpayment is made in accordance with the rules under 
Sec.  301.6225-1. Generally, a partnership must pay any imputed 
underpayment determined under Sec.  301.6227-2(a) resulting from the 
adjustments requested in an AAR on the date the partnership files the 
AAR. Proposed Sec.  301.6227-2(b). In lieu of paying the imputed 
underpayment under Sec.  301.6227-2(b), the partnership may elect to 
have each reviewed year partner take into account the adjustments 
requested in the AAR in accordance with Sec.  301.6227-3. Proposed 
Sec.  301.6227-2(c).
    One comment observed that it was unclear whether the references to 
``an imputed underpayment'' in proposed Sec.  301.6227-2(a)(1) and to 
``the imputed underpayment'' in proposed Sec.  301.6227-2(c) imply that 
there can be only one imputed underpayment in an AAR, or whether more 
than one imputed underpayment can be calculated in an AAR. The comment 
recommended the regulations should clarify that a single AAR can result 
in multiple imputed underpayments, some of which can be paid while 
others are pushed out, and that adjustments that do not result in an 
imputed underpayment can be pushed out.
    Neither section 6227 nor the regulations thereunder prohibit a 
partnership from filing multiple AARs for the same taxable year to 
request multiple adjustments to partnership-related items. To allow the 
IRS to respond to issues that arise in implementing the new partnership 
audit regime, proposed Sec.  301.6227-1(c) required that an AAR must be 
filed with the IRS in accordance with the forms, instructions, and 
other guidance prescribed by the IRS. The current version of the form 
prescribed by the IRS for filing an AAR is not designed to accommodate 
the reporting of multiple imputed underpayments. A partnership may file 
multiple AARs to allocate adjustments into separate imputed 
underpayments. For example, the partnership may file one AAR reporting 
an imputed underpayment that the partnership pays, while filing another 
AAR reporting an imputed underpayment for which the partnership elects 
to push out the adjustments associated with that imputed underpayment. 
Accordingly, a partnership, by filing multiple AARs, can achieve the 
result requested by the comment--that is, the ability to pay an imputed 
underpayment with respect to certain adjustments and push out other 
adjustments associated with a different imputed underpayment.
    In response to the comment, the regulations have been revised to 
refer to ``an'' or ``any'' imputed underpayment, as appropriate, to 
accommodate future cases in which an AAR may result in more than one 
imputed underpayment. In addition, Sec. Sec.  301.6227-2(c) and 
301.6227-3(a) have been revised to clarify that in the case of an 
election to have the reviewed year partners take into account the 
adjustments in an AAR, such partners take into account only those 
adjustments that are associated with the imputed underpayment to which 
the election relates. Notwithstanding these revisions, the regulations 
continue to refer to the form for filing an AAR and its instructions 
for purposes of instructing how a partnership requests adjustments in 
an AAR that result in an imputed underpayment.
C. Modifications Available in the Case of an AAR
    Proposed Sec.  301.6227-2(a)(2) provided that a partnership may 
apply modifications to the amount of the imputed underpayment 
determined under proposed Sec.  301.6227-2(a)(1) using only certain, 
enumerated modifications as described in proposed Sec.  301.6225-2 or 
as provided in forms, instructions, or other guidance prescribed by the 
IRS with respect to AARs. A partnership may not modify an imputed 
underpayment resulting from adjustments requested in an AAR except as 
described in proposed Sec.  301.6227-2(a)(2).
    Proposed Sec.  301.6225-2(d)(10) provided a catch-all provision for 
other modifications under which a partnership may request a 
modification not described in proposed Sec.  301.6225-2(d), and the IRS 
will determine whether such modification is accurate and appropriate. 
Similarly, proposed Sec.  301.6225-2(d)(10) provided that additional 
types of modifications, and the documentation necessary to substantiate 
such modifications, may be set forth in forms, instructions, or other 
guidance.
    One comment suggested that the regulations should be more flexible 
regarding the types of modifications that are allowed in the case of an 
AAR. Specifically, the comment recommended that proposed Sec.  
301.6227-2(a)(2) be revised to allow for the catch-all provision under 
proposed Sec.  301.6225-2(d)(10) on the condition that the IRS approves 
of the relevant modification upon review of the AAR. This comment was 
not adopted.
    Both proposed Sec.  301.6225-2(d)(10), in the context of an audit, 
and proposed Sec.  301.6227-2(a)(2), in the context of an AAR, provide 
that the IRS may set forth additional modifications in forms, 
instructions, or other guidance. To the extent the comment was 
recommending that adoption of the Sec.  301.6225-2(d)(10) catch-all 
provision in Sec.  301.6227-2(a)(2) would allow the IRS to set forth 
other modifications not specifically described in proposed Sec.  
301.6227-2(a)(2), that ability is already provided for by the plain 
language of Sec.  301.6227-2(a)(2).
    To the extent the comment was recommending a rule in which a 
partnership could request a

[[Page 6521]]

modification in an AAR on the condition that modification is only 
allowed upon approval by the IRS, the comment was not adopted. The 
final regulations adopt the rule that a partnership may not modify an 
imputed underpayment resulting from adjustments requested in an AAR 
except for the modifications described in proposed Sec.  301.6227-
2(a)(2). Under proposed Sec.  301.6227-2(a)(2)(i), the partnership is 
not required to seek approval from the IRS prior to applying 
modifications to the amount of any AAR imputed underpayment. This rule 
permits a partnership to determine an imputed underpayment that results 
from the adjustments requested in an AAR and apply modifications when 
calculating the amount of the imputed underpayment the partnership 
needs to pay when filing the AAR. The Treasury Department and the IRS 
have determined that this procedure is more administrable for the IRS 
and allows partnerships to more effectively file AARs and take any 
adjustments into account. The partnership does not have to wait for an 
IRS determination regarding specific modifications before determining 
the amount of the imputed underpayment as modified, which would 
significantly hamper the AAR process.
    Because the partnership applies modifications prior to the IRS 
reviewing and approving such modifications, the specifically enumerated 
modifications in the regulations are limited to the types of 
modifications for which the IRS already has procedures and systems in 
place. This permits the IRS, when it reviews an AAR, to utilize those 
procedures and systems to determine the accuracy and appropriateness of 
the modification that was applied in the AAR. The limitation on the 
types of modifications, in addition to the detailed information 
required under Sec.  301.6227-2(a)(2)(ii), is designed to provide 
partnerships the ability to reasonably modify an imputed underpayment 
resulting from adjustments requested in an AAR while not creating undue 
delay for the partnership and its partners to take the adjustments into 
account. Also, by providing certainty regarding the permissible types 
of modifications, a partnership will be able to efficiently use its 
time and resources in determining whether it will pay an imputed 
underpayment or elect to have its partners take into account the 
adjustments. Finally, as the IRS gains more experience with 
modifications in connection with an AAR under the centralized 
partnership audit regime, Sec.  301.6227-2(a)(2) provides the ability 
for the IRS to expand the set of allowed modifications through the use 
of forms, instructions, or other guidance.
D. Partners Taking Into Account Adjustments Requested in an AAR
    Former proposed Sec.  301.6227-3 included a reserved paragraph 
regarding how a reviewed year partner that is a pass-through partner 
takes into account its share of adjustments requested in an AAR. In 
response to the June 2017 NRPM, one comment recommended that the 
regulations should allow a pass-through partner to push out its share 
of adjustments to the next tier of partners. The December 2017 NPRM 
contained proposed rules under Sec.  301.6227-3 allowing for pass-
through partners to take into account adjustments requested in an AAR 
by either making a payment or pushing out the adjustments to the next 
tier of partners, similar to the rules under proposed Sec.  301.6226-
3(e). The rules under proposed Sec.  301.6227-3 were further revised in 
the August 2018 NPRM to reflect the amendments by section 204 of the 
TTCA and the corresponding changes to proposed Sec.  301.6226-3(e). See 
section 5 of the preamble to the August 2018 NPRM. As a result, the 
comment was adopted in the August 2018 NPRM and is also included in the 
final regulations.
    Example 2 under proposed Sec.  301.6227-3(b)(2), regarding how 
partners other than pass-through partners take into account AAR 
adjustments, was revised to remove the language indicating that the 
partner may make a claim for refund with respect to the overpayment of 
$25. Instead, the final regulations provide that the partner may make a 
claim for refund with respect to ``any overpayment.'' Section 301.6227-
3(b)(1) provides that nothing in the rules under Sec.  301.6227-3 
entitles any partner to a refund of chapter 1 tax to which such partner 
is not entitled. Whether an overpayment exists is determined under 
provisions of the Code and relevant case law outside the scope of these 
regulations. Generally, an overpayment and the amount of a refund of an 
overpayment cannot exceed the amount of tax paid. See section 
6511(b)(2), Jones v. Liberty Glass, 332 U.S. 524, 531 (1947). No refund 
or credit can be made unless it has first been determined that the 
taxpayer has made an overpayment of tax for the period at issue. Lewis 
v. Reynolds, 284 U.S. 281, 283 (1932).
    Example 2 was also revised to clarify that the partner's chapter 1 
tax for 2022 is -$25, that is, negative $25. This change conforms 
Example 2 to the rules under Sec.  301.6226-3(b) which allow for the 
additional reporting year tax to reduce a partner's chapter 1 tax for 
the reporting year.
    Finally, minor revisions were made to clarify that any adjustment 
that does not result in an imputed underpayment is taken into account 
by reviewed year partners.
E. Availability of Safe Harbor for Partners Taking Into Account 
Adjustments
    The June 2017 NPRM requested comments on whether the election to 
pay a safe harbor amount under former proposed Sec.  301.6226-3 should 
be available in the case of a partner that must take into account 
adjustments requested in an AAR under proposed Sec.  301.6227-3. One 
comment recommended that the regulations require a partnership filing 
an AAR to calculate a safe harbor amount for each partner required to 
take into account the adjustments requested in the AAR and include such 
safe harbor amount in the statement furnished to the partner.
    For the reasons discussed in section 4 of the preamble to the 
December 2017 NPRM, the safe harbor amount was removed from the 
regulations. No comments were received regarding its removal, and the 
final regulations do not include a safe harbor amount. Accordingly, 
this comment was not adopted.
F. Application of Section 905(c)
    One comment recommended rules for how a partnership subject to the 
centralized partnership audit regime can fulfill the requirements of 
section 905(c), including the rules relating to the assessment and 
collection of interest on certain refunds of creditable foreign taxes. 
The final regulations under section 6227 do not provide rules regarding 
the application of section 905(c), but do include a reserved paragraph 
regarding notice of change to amounts of creditable foreign tax 
expenditures. See Sec.  301.6227-1(g). The recommendations put forth by 
the comment remain under consideration.
G. Partnerships That Have Elected Out of the Centralized Partnership 
Audit Regime
    One comment suggested that the regulations address how a 
partnership that has a valid election under section 6221(b) in effect 
for a particular taxable year should report changes to its original 
partnership return from that year. Section 6227 is the mechanism for 
partnerships that are subject to the centralized partnership audit 
regime to file an AAR to correct errors on a partnership for a prior 
year. A

[[Page 6522]]

partnership that has made a valid election under section 6221(b) in 
accordance with Sec.  301.6221(b)-1 is not subject to such regime. 
Accordingly, a partnership that has elected out of the centralized 
partnership audit regime is not subject to section 6227 and therefore 
does not file an AAR to correct errors on its original return. The 
manner in which a partnership that has elected out should report 
changes to its original return is outside the scope of these 
regulations.
H. Whether an AAR Is Valid Without Statements
    Proposed Sec.  301.6227-1(c)(2) provided that a valid AAR must 
include the adjustments requested, the statements described in Sec.  
301.6227-1(e) if a reviewed year partner is required to take into 
account the adjustments requested, and other information prescribed by 
the IRS in forms, instructions, or other guidance. The final 
regulations clarify that in the case of a failure to provide the 
information required under Sec.  301.6227-1(c)(2), the IRS may, but is 
not required to, invalidate an AAR or readjust items that were adjusted 
in the AAR.
    Conversely, the word ``valid'' was added to Sec.  301.6227-2(b)(1) 
to clarify that only a valid election under Sec.  301.6227-2(c) turns 
off the partnership's obligation to pay an imputed underpayment 
resulting from adjustments requested in an AAR.
I. Adjustments That Do Not Result in an Imputed Underpayment
    Under Sec.  301.6225-1(f)(1), two situations occur where there may 
be adjustments that do not result in an imputed underpayment. Under 
Sec.  301.6225-1(f)(1)(i), a partnership adjustment does not result in 
an imputed underpayment if the result of netting with respect to any 
grouping or subgrouping that includes the particular partnership 
adjustment is a net negative adjustment. Under Sec.  301.6225-
1(f)(1)(ii), a partnership adjustment does not result in an imputed 
underpayment if the calculation under Sec.  301.6225-1(b)(1) resulted 
in an amount that is zero or less than zero. Proposed Sec.  301.6227-
3(c)(2) provided rules regarding how a pass-through partner takes into 
account adjustments that do not result in an imputed underpayment. The 
proposed rule was unclear as to whether the rule applied to both types 
of situations. The final regulations under Sec.  301.6227-3(c)(2) 
clarify that a pass-through partner must take into account AAR 
adjustments that, with respect to that pass-through partner, do not 
result in an imputed underpayment by furnishing statements to its 
affected partners. This rule applies to both adjustments that do not 
result in an imputed underpayment pursuant to Sec.  301.6225-1(f)(1)(i) 
and adjustments that do not result in an imputed underpayment pursuant 
to Sec.  301.6225-1(f)(1)(ii). This rule also applies in situations 
where the pass-through partner pays an imputed underpayment. The final 
regulations under Sec.  301.6227-1(e)(2) additionally clarify that when 
a partnership pays an imputed underpayment and there are adjustments 
that did not result in that imputed underpayment pursuant to Sec.  
301.6225-1(f)(1)(i), only the adjustments that did not result in an 
imputed underpayment are to be included in the statements to its 
affected partners.
J. Interest With Respect to an Imputed Underpayment Resulting From AAR 
Adjustments
    Proposed Sec.  301.6227-2(b)(2) provided that interest on an 
imputed underpayment resulting from adjustments requested in an AAR is 
determined under chapter 67 of the Code for the period beginning on the 
date after the due date of the partnership return for the reviewed year 
(determined without regard to extension) and ending on the earlier of 
the date payment of the imputed underpayment is made, or the due date 
of the partnership return for the adjustment year. In the case of any 
failure to pay an imputed underpayment by the due date of the 
partnership return for the adjustment year, interest is determined in 
accordance with section 6233(b)(2). Proposed Sec.  301.6227-2(b)(2).
    To conform the rules under proposed Sec.  301.6227-2(b)(2) with the 
rules under proposed Sec. Sec.  301.6232-1(b), 301.6233(a)-1(b), and 
301.6233(b)-1(c), the final regulations provide that interest on an 
imputed underpayment resulting from adjustments requested in an AAR 
ends on the date the AAR is filed. In the case of any failure to pay an 
imputed underpayment on the date the AAR is filed, interest is 
determined in accordance with section 6233(b)(2) and Sec.  301.6233(b)-
1(c).

6. Notices of Proceedings and Adjustments

    Former proposed Sec.  301.6231-1(b)(1) provided that a notice of 
proposed partnership adjustment (NOPPA) is timely if it is mailed 
before the expiration of the period for making adjustments under 
section 6235(a)(1), including any extensions of that period under 
section 6235(b) and after applying any of the special rules in section 
6235(c). After former proposed Sec.  301.6231-1(b)(1) was issued, 
section 206(h) of the TTCA amended section 6231(b) to provide that a 
NOPPA shall not be mailed later than the date determined under section 
6235(a)(1). Prior to this amendment, the statute did not limit the 
period for the IRS to propose adjustments under the centralized 
partnership audit regime. Because former proposed Sec.  301.6231-1 
comported with the TTCA amendments to section 6231, former proposed 
Sec.  301.6231-1 was not revised when the regulations were re-proposed 
in the August 2018 NPRM.
    One comment received prior to the issuance of former proposed Sec.  
301.6231-1 and before the TTCA amendments to section 6231(b) 
recommended that the regulations clarify that a NOPPA must be issued 
within the three-year period specified in section 6235(a)(1). Because 
the statute and the plain language of proposed Sec.  301.6231-1 reflect 
the rule suggested by this comment, the final regulations adopt the 
language of the proposed regulations without change.
    Section 6227(c) provides that a partnership has three years from 
the later of the filing of the partnership return or the due date of 
the partnership return (excluding extensions) to file an AAR for a 
taxable year. However, a partnership may not file an AAR for a 
partnership taxable year after the IRS has mailed a NAP under section 
6231 with respect to that taxable year. Section 6227(c); Sec.  
301.6227-1(b). Proposed Sec.  301.6231-1(f) provided that the IRS may, 
without consent of the partnership, withdraw any NAP or NOPPA, and any 
NAP or NOPPA that has been withdrawn by the IRS has no effect for 
purposes of subchapter C of chapter 63. If the IRS withdraws a NAP with 
respect to a partnership taxable year under proposed Sec.  301.6231-
1(f), the prohibition under section 6227(c) on filing an AAR after the 
mailing of a NAP no longer applies with respect to such taxable year.
    One comment stated that the rule under proposed Sec.  301.6231-1(f) 
lifting the prohibition on filing an AAR after a NAP is meaningless if 
the three-year period of limitations under section 6227(c) to file an 
AAR has already expired. The comment suggested that the language in 
proposed Sec.  301.6231-1(f) be revised to provide that a NAP that has 
been withdrawn by the IRS has no effect for purposes of subchapter C or 
chapter 63 ``except for suspension of the period of limitations under 
section 6227 as provided in Sec.  301.6227-1(b).'' The comment 
suggested a corresponding change to proposed Sec.  301.6227-1(b) to 
provide that the

[[Page 6523]]

period of limitations for filing an AAR is suspended while a NAP is 
outstanding. These suggestions have not been adopted.
    First, section 6227 does not authorize the Treasury Department or 
the IRS to suspend the period of limitations within which a partnership 
may file an AAR. By way of contrast, other statutory provisions within 
subchapter C of chapter 63, such as section 6235(b) and section 
6225(c)(7), do provide authority for the IRS to extend certain time 
periods. The absence of similar authority in section 6227 indicates the 
IRS does not have the authority to suspend the period of limitations 
under section 6227(c).
    Moreover, because of the required timing of an examination under 
the centralized partnership audit regime, it is likely that in many 
cases when a NAP is withdrawn, there will still be time left on the 
period of limitations to file a timely AAR. In order for a NOPPA to be 
timely mailed, it generally must be issued within three years of the 
date on which the partnership return for such taxable year was filed or 
the return due date for the taxable year. Section 6235(a)(1). To allow 
for sufficient time to examine the partnership taxable year and to mail 
a timely NOPPA, the IRS will normally mail the NAP early on in that 
three-year period.
    The period for filing a timely AAR under section 6227(c) runs 
concurrently with the three-year period for mailing a NOPPA. If after 
the issuance of the NAP a partnership finds that it agrees with the 
adjustments the IRS has raised with the partnership during the 
examination, the partnership may also find that it is more efficient 
for both the partnership and the IRS to file an AAR, rather than have 
those adjustments be made in the context of the partnership-level exam. 
In such a case, the partnership may inform the IRS of its desire to 
file an AAR, and the IRS can determine whether it is appropriate, in 
the view of the IRS, to withdraw the NAP in light of all of the facts 
and circumstances. It is incumbent upon the partnership to inform the 
IRS of its desire to file an AAR at the earliest possible point in the 
exam to ensure the NAP can be withdrawn with sufficient time in the 
section 6227(c) period to file an AAR.
    Proposed Sec.  301.6231-1(f) provided that a NAP that has been 
withdrawn by the IRS has no effect for purposes of subchapter C of 
chapter 63. Under Sec.  301.6223-1(d)(2) and (e)(2), however, if the 
IRS withdraws a NAP pursuant to Sec.  301.6231-1(f), any valid 
resignation or revocation of a partnership representative designation 
or designated individual appointment prior to the withdrawal of the NAP 
remains in effect. To conform these two sets of rules, the final 
regulations under Sec.  301.6231-1(f) clarify that a withdrawn NAP has 
no effect for purposes of subchapter C of chapter 63 except as 
described in Sec.  301.6223-1(d)(2) and (e)(2).
    In addition, proposed Sec.  301.6231-1(f) was revised to clarify 
that if the IRS withdraws a NAP or NOPPA, the NAP or NOPPA is treated 
as if it were never issued, in addition to the NAP or NOPPA not having 
any effect for purposes of subchapter C of chapter 63. This change 
conforms the language of the final regulations under Sec.  301.6231-
1(f) more closely with the language of section 6227(c).
    Lastly, the final regulations under Sec.  301.6231-1(f) clarify 
that the withdrawal of a NAP or NOPPA obviates the limitation under 
Sec.  301.6222-1(c)(5) providing that a partner may not treat an item 
inconsistently after a NAP has been mailed with respect to a 
partnership taxable year. This change clarifies that if the IRS 
withdraws a NAP, a partner may treat an item inconsistently from how 
the item was treated on the partnership return after the withdrawal of 
the NAP.

7. Assessment, Collection, and Payment of Imputed Underpayments

    Proposed Sec.  301.6232-1(d)(1)(i) provided that a notice to a 
partnership that, on account of a mathematical or clerical error 
appearing on the partnership return or as a result of a failure by a 
partnership-partner to comply with section 6222(a), the IRS has 
adjusted or will adjust partnership-related items to correct the error 
or to make the items consistent under section 6222(a) and has assessed 
or will assess any imputed underpayment resulting from the adjustment 
is not considered an FPA under section 6231(a)(3). A petition for 
readjustment under section 6234 may not be filed with respect to such 
notice, and the limitations under proposed Sec.  301.6232-1(c) 
(providing that generally no assessment can be made before the mailing 
of an FPA or, if applicable, a final court decision) do not apply to an 
assessment under Sec.  301.6232-1(d)(1)(i). A partnership generally may 
request abatement of such assessments, but abatement is not available 
where an adjustment that is the subject of a notice described in 
proposed Sec.  301.6232-1(d)(1)(i) is due to the failure of a 
partnership-partner to comply with section 6222(a). Proposed Sec.  
301.6232-1(d)(1)(ii).
    One comment recommended that the regulations include a statement 
that the assessment procedures under Sec.  301.6232-1(d)(1)(i) will be 
narrowly construed and applied. The comment suggested as an example 
that the regulations make clear that an assessment against a partner of 
a partnership-partner will not be treated as a mathematical or clerical 
error where the partner has reported the items at issue consistently 
with the partnership-partner, even though the partnership-partner may 
not have been consistent with the partnership in which it is a partner. 
These suggestions were not adopted.
    Nothing in the statute indicates that section 6232(d) should be 
construed or applied to a particular degree. More specifically, a rule 
providing that section 6232(d) will be applied and construed narrowly 
would be vague and not give helpful guidance to taxpayers or the IRS. 
For these reasons, the comment's suggestion regarding construing and 
applying section 6232(d) narrowly was not adopted, and the regulations 
do not include a statement to that effect.
    Regarding the comment's example of a rule that might reflect a 
narrow construction of the regulations, this suggestion was also not 
adopted. Proposed Sec.  301.6232-1(d)(1)(iii) provided that in the case 
of a partnership-partner that has an election under section 6221(b) in 
effect, any tax resulting from an adjustment due to the partnership-
partner's failure to comply with section 6222(a) may be assessed with 
respect to the reviewed year partners of the partnership-partner (or 
indirect partners of the partnership-partner). Such tax may be assessed 
in the same manner as if the tax were on account of a mathematical or 
clerical error appearing on the reviewed year partner's or indirect 
partner's return, except that the procedures under section 6213(b)(2) 
for requesting an abatement of such assessment do not apply. Proposed 
Sec.  301.6232-1(d)(1)(iii). For all other partnership-partners, the 
IRS may assess an imputed underpayment against such partnership-partner 
on account of a failure to meet the consistency requirements under 
section 6222(a). See Sec.  301.6232-1(d)(1)(i). The rule suggested by 
the comment thus would apply in the case of partnership-partners that 
have an election under section 6221(b) in effect and that fail to meet 
the requirements of section 6222(a).
    Section 6232(d) provides that any adjustment on account of a 
failure of a partnership that is a partner in another partnership to 
meet the requirements of section 6222(a) shall be treated as an 
adjustment based on mathematical or

[[Page 6524]]

clerical error, and rules similar to those under section 6213(b)(1) 
shall apply. In the case of partnership-partners that have an election 
in effect under section 6221(b), sections 6213 and 6232 allow the IRS 
to assess tax against the partners of such partnership-partner, without 
providing for a method to seek abatement of that assessment. Section 
6232(d)(1)(B) provides that any adjustment on account of a failure by a 
partnership-partner to meet the consistency requirements under section 
6222(a) is treated as an adjustment due to a mathematical or clerical 
error. Accordingly, an assessment that follows any adjustment to the 
partnership-partner's return pursuant to section 6232(d) is not subject 
to the prohibition under section 6213(a), which would otherwise require 
a notice of deficiency to be mailed to the taxpayer. Additionally, 
section 6232(d)(1)(B) explicitly provides that the provisions under 
section 6213(b)(2), permitting abatement of such assessment, do not 
apply. Therefore, the IRS may assess tax against the partners of a 
partnership-partner where the partnership-partner reported 
inconsistently and has an election in effect under section 6221(b) 
without first having to issue a notice of deficiency to the partner, 
and abatement of the assessment under section 6213(b)(2) is not 
available. Accordingly, no changes were made in response to this 
comment.
    The same comment also suggested that the regulations explain how a 
taxpayer may properly challenge a mathematical or clerical error 
assessment made by the IRS under proposed Sec.  301.6232-(d)(1)(ii)(B) 
where the normal abatement procedures are unavailable. This comment was 
not adopted.
    In the case where an imputed underpayment has been assessed 
pursuant to Sec.  301.6232-(d)(1)(ii)(B) against a partnership-partner 
that has not complied with section 6222(a), the partnership-partner may 
be able to file an AAR subsequent to that assessment in accordance with 
the provisions of sections 6222 and 6227. While the AAR may readjust 
the partnership-related items at issue which resulted in the imputed 
underpayment, in effect providing an opportunity to the partnership to 
contest the adjustments, such readjustments would be required to be 
taken into account by the partnership's partners pursuant to the rules 
under section 6227 because the readjustments would necessarily be 
adjustments that would not result in an imputed underpayment. See 
Sec. Sec.  301.6227-1(a), 301.6227-3(a). Those readjustments may reduce 
the partner's tax in the reporting year, but nothing would give the 
partnership-partner the ability to claim a refund of any imputed 
underpayment paid. Accordingly, it is the burden of a partnership-
partner to ensure it has complied with the provisions of section 
6222(a), either by treating items consistently with the manner in which 
they are treated on the partnership return or by notifying the IRS of 
any inconsistency, in order to preclude an assessment of an imputed 
underpayment under section 6232(d)(1)(B).
    Under Sec.  301.6232-(d)(1)(ii)(B), a partnership-partner that has 
failed to comply with section 6222(a) may, prior to assessment, correct 
an inconsistency by filing an AAR under section 6227 or filing an 
amended partnership return and furnishing amended statements, as 
appropriate. To clarify that an AAR in such a situation is only 
permitted to the extent allowed under section 6227, including the 
timing restrictions under section 6227(c), the final regulations under 
Sec.  301.6232-(d)(1)(ii)(B) provide that the partnership may file an 
AAR ``in accordance with'' section 6227.
    In the situation where an imputed underpayment has been assessed 
pursuant to Sec.  301.6232-(d)(1)(ii)(B) against a partnership-partner 
but such partnership-partner had in fact complied with the provisions 
of section 6222(a), the partnership may be able to seek a refund of the 
any imputed underpayment paid on the ground that the adjustment should 
not have been treated as being on account of mathematical or clerical 
error. Any ability to seek a refund in this situation, however, is 
outside the scope of these regulations. For these reasons, no changes 
were made to the regulations under Sec.  301.6232-1(d) in response to 
this comment.

8. Interest and Penalties Related to Imputed Underpayments

    Proposed Sec.  301.6233(a)-1(a) provided that except to the extent 
provided in section 6226(c) and the regulations thereunder, in the case 
of a partnership adjustment for a reviewed year, a partnership is 
liable for interest and for any penalty, addition to tax, or additional 
amount as provided in proposed Sec.  301.6233(a)-1(c). Proposed Sec.  
301.6233(a)-1(c)(1) provided that in accordance with section 6221(a), 
the applicability of any penalties, additions to tax, and additional 
amounts that relate to a partnership adjustment is determined at the 
partnership level as if the partnership had been an individual subject 
to tax imposed by chapter 1 of the Code for the reviewed year, and the 
imputed underpayment were an actual underpayment of tax or 
understatement for such year. Proposed Sec.  301.6233(a)-1(c)(2) 
provided rules that apply in the case of penalties imposed under 
sections 6662, 6662A, and 6663 with respect to partnership adjustments.
A. Defenses to Penalties
    Proposed Sec.  301.6233(a)-1(c)(1) provided that a partner-level 
defense (as described in Sec.  301.6226-3(d)(3)) may not be raised in a 
proceeding of the partnership. As discussed in section 4.C.ii.I of this 
preamble, one comment recommended that the regulations clarify that a 
partnership that makes a push-out election will be able to avail itself 
of partner-level defenses at the partnership level. Another comment 
recommended that the regulations should provide a mechanism for 
partners to raise partner-level defenses prior to assessment, rather 
than requiring the partner to first pay the penalty and then file a 
claim for refund to raise the partner-level defense. The comment stated 
the post-payment process would be unduly burdensome on partners and 
that a pre-payment process would not impair the audit process for the 
IRS. These comments were not adopted.
    Section 6233 provides that penalties are determined as if the 
partnership had been an individual subject to chapter 1 tax for the 
reviewed year. In determining whether a penalty applies during the 
partnership proceeding, therefore, it is only the conduct of the 
partnership that is relevant. Allowing the partnership or partners to 
raise partner-level defenses and requiring the IRS to evaluate a 
partner's facts and circumstances during the partnership proceeding 
contravenes that purpose of the centralized partnership audit regime. 
Such a rule would also significantly impair the IRS's audit process. As 
discussed in section 3 of this preamble regarding the determination of 
imputed underpayments, an examination under the centralized partnership 
audit regime is a centralized proceeding wherein partner tax attributes 
are generally unaccounted for. Requiring the IRS to evaluate the 
specific facts and circumstances of each partner undermines the 
centralized nature of the proceeding and could significantly delay the 
examination.
    Moreover, section 6233 treats an imputed underpayment as if it were 
an actual underpayment or understatement for the reviewed year. A 
partner-level defense by itself cannot reduce the amount of an imputed 
underpayment. Even if the partner-level defense were sufficient to 
provide penalty relief, that

[[Page 6525]]

relief does not affect the amount of the imputed underpayment. A 
partner-level defense can only be relevant in situations where the 
imputed underpayment is reduced because a partner takes into account 
the adjustments that resulted in the imputed underpayment, for example 
as part of modification, or where there is no partnership-level 
liability for the imputed underpayment because of an election by the 
partnership under section 6226 to have its partners take into account 
the adjustments. Only upon taking into account the adjustments will a 
partner know the amount of the penalty the partner is liable for and 
therefore whether a defense to the penalty is needed. Accordingly, 
comments suggesting that the partnership be permitted to raise partner-
level defenses to reduce a penalty imposed against the partnership were 
not adopted. For discussion of partner-level defenses in the context of 
modification and the push out election, see sections 3.C and 4.C.ii.I 
of this preamble.
B. Determining the Portion of the Imputed Underpayment to Which the 
Penalty Applies
    Proposed Sec.  301.6233(a)-1(c)(2)(ii) provided rules for 
determining the portion of the imputed underpayment to which a penalty 
applies where there exists (1) at least one adjustment with respect to 
which no penalty has been imposed and at least one adjustment with 
respect to which a penalty has been imposed or (2) at least two 
adjustments with respect to which penalties have been imposed and the 
penalties have different rates. In general, to determine the portion of 
the imputed underpayment to which the penalty applies, all partnership 
adjustments that resulted in the imputed underpayment were grouped 
together according to whether they were adjustments with respect to 
which a penalty has been imposed and according to rate of penalty. The 
adjustments were then multiplied by the rate that applied in 
calculating the imputed underpayment and added together to produce the 
portion of the imputed underpayment to which the penalty applies.
    One comment observed that under proposed Sec.  301.6233(a)-
1(c)(2)(ii)(D) and (E) negative or decreasing adjustments were applied 
first to adjustments to which no penalties have been imposed and then 
to adjustments subject to the lowest penalty and suggested that this 
rule applies such adjustments in a manner that maximizes penalties. The 
comment recommended that the proposed regulations be revised to group 
adjustments by character for purposes of calculating the portion of the 
imputed underpayment subject to the penalty. This comment was partially 
adopted.
    Section 6233(a)(3) provides that any penalty, addition to tax, or 
additional amount shall be determined at the partnership level as if 
such partnership had been an individual subject to tax under chapter 1 
for the reviewed year and the imputed underpayment were an actual 
underpayment (or understatement) for such year. Section 6662, which 
imposes accuracy-related penalties on underpayments, applies to the 
portion of an underpayment attributable to certain circumstances such 
as negligence or disregard of rules or regulations or a substantial 
understatement of income tax. To determine the portion of an imputed 
underpayment to which a penalty applied, proposed Sec.  301.6233(a)-
1(c) applied rules similar to the ordering rules under Sec.  1.6664-3 
by disregarding the grouping and subgrouping rules under Sec.  
301.6225-1 and by applying decreasing adjustments to offset any 
positive adjustments to which no penalty was imposed, followed by 
adjustments to which 20 a percent penalty was imposed, and so forth. 
While the rules under proposed Sec.  301.6233(a)-1(c) were consistent 
with the rules Sec.  1.6664-3, this consistency did not allow for 
important distinctions between the calculation of an underpayment and 
the calculation of the imputed underpayment. For example, in computing 
an imputed underpayment, negative adjustments are generally not taken 
into consideration in determining the imputed underpayment unless the 
negative adjustment is in a grouping or subgrouping under Sec.  
301.6225-1 that results in a net positive adjustments because only net 
positive adjustments are totaled to determine the total netted 
partnership adjustment, which forms the base for an imputed 
underpayment prior to application of any adjustments to credits.
    Section 301.6233(a)-1(c) has been revised to account for these 
distinctions and to apply the ordering rules under Sec.  1.6664-3 
within each grouping or subgrouping determined in accordance with Sec.  
301.6225-1. Because the revised rule uses the groupings and 
subgroupings determined under section 6225, in general the character of 
the adjustments within each grouping will be the same, as suggested by 
the comment. See Sec.  301.6225-1(d). The revised rule maintains the 
treatment of an imputed underpayment as if it were an actual 
underpayment or understatement, but also respects the framework for 
calculating the imputed underpayment established under section 6225 and 
the regulations thereunder. The revised rule is also more streamlined, 
removes references to specific penalty rates to allow for any future 
statutory changes, and eliminates unnecessary steps and terminology. 
For example, the revised rule eliminates the term decreasing adjustment 
and instead uses the term ``negative adjustment'' as defined in Sec.  
301.6225-1(d)(2).
    Section 301.6233(a)-1(c)(2) provides the rules for calculating 
penalties under section 6662, 6662A or 6663. Section 301.6233(a)-
1(c)(2)(iii) provides the rules for applying negative adjustments. As a 
threshold matter, the rule provides that adjustments that do not result 
in an imputed underpayment and adjustments that are disregarded in 
determining the imputed underpayment are not taken into account when 
determining the amount of penalties. The rule generally provides that 
if any grouping or subgrouping as determined under Sec.  301.6225-1 or 
Sec.  301.6225-2 contains a negative adjustment and at least one 
positive adjustment subject to penalty, the negative adjustment is 
first used to offset any positive adjustment to which no penalties have 
been imposed within that grouping or subgrouping. If any amount of 
negative adjustments remains after offsetting positive adjustments to 
which no penalties have been imposed, the remaining amount of negative 
adjustment is applied within the grouping or subgrouping against 
positive adjustments to which a penalty has been imposed at the lowest 
rate. If after this step, any amount of negative adjustment remains, 
the process is repeated iteratively with respect to higher rates in 
ascending order of rate. Additionally, the regulations provide special 
rules for the application of negative credits. All adjustments to 
credits and adjustments treated as adjustments to credits are treated 
as grouped in the credit grouping without regard to whether the 
adjustments were subgrouped for purposes of Sec.  301.6225-1 (or Sec.  
301.6225-2 in the case of modification). If negative credit adjustments 
remain after the application of negative adjustments in accordance with 
Sec.  301.6233(a)-1(c)(2)(iii)(A), negative credit amounts are first 
applied to reduce the portion of the imputed understatement not subject 
to penalty then to reduce the portion of the imputed understatement 
subject to penalty iteratively in ascending order of rate.
    Section 301.6233(a)-1(c)(2)(ii) provides the mechanical steps for 
calculating any penalty after any

[[Page 6526]]

negative adjustments have been applied in accordance with 301.6233(a)-
1(c)(2)(iii). The steps are applied separately for each particular 
penalty imposed with respect to the adjustments.
    First, all adjustments that are not adjustments to credits or 
treated as adjustments to credits that are subject to a particular 
penalty and to which the highest rate of tax in effect for the reviewed 
year under section 1 or 11 was applied are totaled. Second, the total 
from step one is multiplied by the highest rate of tax in effect for 
the reviewed year under section 1 or 11. Third, the first and second 
steps are repeated for any other tax rates used to calculate the 
imputed underpayment, for example, rates applied as part of the 
modification process. Fourth, all of the results from completing the 
first three steps are totaled. Fifth, all adjustments in the credit 
grouping are netted. The total from step four is increased by any 
remaining positive adjustments to credits or decreased by negative 
adjustments to credits in accordance with the rules in Sec.  
301.6233(a)-1(c)(2)(iii). This result is the portion of the imputed 
underpayment subject to penalty. Sixth, the total from step five is 
multiplied by the penalty rate for the penalty to provide the total 
penalty amount.
C. Interest on Penalties, Additions to Tax, and Additional Amounts
    As discussed earlier in section 4.C.ii.III. of this preamble, one 
comment recommended that the regulations adopt a bifurcated approach 
under which interest would run on tax from the due date of the return 
without regard to extensions while interest on penalties would run from 
the due date of the return including any extensions. The comment 
recommended that proposed Sec.  301.6233(a)-1(b) be revised to provide 
that the interest imposed on penalties and additions to tax (other than 
assessable penalties) on an imputed underpayment begins on the day 
after the due date of the partnership return (including any 
extensions). This comment was partially adopted.
    Proposed Sec.  301.6233(a)-1(b) provided rules regarding interest 
on an imputed underpayment, but did not provide rules regarding 
interest on penalties, additions to tax, or additional amounts with 
respect to the imputed underpayment. In light of the comment, the final 
regulations under Sec.  301.6233(a)-1(b) clarify that interest with 
respect to penalties, additions to tax, or additional amounts with 
respect to an imputed underpayment determined under the rules of Sec.  
301.6233(a)-1(c) is the interest that would be imposed under chapter 67 
of the Code treating the partnership return for the reviewed year as 
the return of tax to with respect to which such penalty is imposed. To 
the extent the comment was suggesting a rule that is not consistent 
with chapter 67 of the Code, the comment was not adopted.

9. Judicial Review of Partnership Adjustments

    Section 6234(a) provides that a partnership may file a petition in 
the Tax Court, a United States district court, or the Court of Federal 
Claims, within 90 days of the date on which an FPA is mailed under 
section 6231. A petition under section 6234 may be filed in a district 
court or the Court of Federal Claims only if the partnership filing the 
petition makes a jurisdictional deposit in accordance with section 
6234(b). The jurisdictional deposit is the amount of (as of the date of 
the filing of the petition) any imputed underpayment (as shown on the 
FPA) and any penalties, additions to tax, and additional amounts with 
respect to such imputed underpayment. See proposed Sec.  301.6234-1(b).
    Under proposed Sec.  301.6226-1(e), a partnership that has made an 
election under Sec.  301.6226-1 is not precluded from filing a petition 
under section 6234(a). One comment stated that the proposed regulations 
provided no explanation as to how or whether the deposit amount under 
section 6234(b) may or should be adjusted to reflect a push out 
election under section 6226. The comment recommended the regulations 
should provide a mechanism that would enable a partnership to file a 
petition in a district court or Court of Federal Claims and still make 
an election under section 6226, without creating the risk of having tax 
on the partnership adjustments paid twice. The comment suggested that 
one possible approach might be to reduce the deposit amount by the 
amount that would be reported by partners that receive statements based 
on an election under section 6226. The comment suggested that another 
approach might be to provide a clear mechanism for having the 
partnership obtain a refund of the imputed tax deposit before any 
amounts are paid by the push out partners under section 6226.
    The comment's suggestion regarding whether a partnership can make 
an election under section 6226 and also file a petition under section 
6234 is addressed in section 4.A.v of this preamble. With respect to 
the comment's suggestion that the partnership deposit be reduced by the 
amount of the imputed underpayment that would be reported by partners 
that receive 6226 statements, this suggestion was not adopted. The 
plain language of section 6234(b)(1) makes clear that a petition for 
readjustment may be filed in district court or the Court of Federal 
Claims only if the partnership makes a jurisdictional deposit. The 
statute does not provide authority to alter this jurisdictional 
requirement by regulation for any partnerships, including partnerships 
that make the election under section 6226. The election under section 
6226 is made with respect to an imputed underpayment, and therefore the 
deposit required under section 6234(b)(1) must equal the entire imputed 
underpayment to which the election relates (in addition to penalties 
and interest). An election under section 6226 is not with respect to a 
portion of an imputed underpayment; likewise, a deposit under section 
6234(b)(1) cannot be for a portion of the imputed underpayment.
    Moreover, a rule allowing for a reduction in the deposit amount for 
those partners that are furnished statements under section 6226 would 
not work as a practical matter. First, to the extent the comment was 
suggesting a rule that allows a reduction of the deposit equal to each 
partner's share of the adjustments, this rule would reduce the deposit 
amount to zero, provided all partners properly were furnished 
statements. This would effectively eliminate the deposit requirement 
for partnerships making an election under section 6226. There is 
nothing in the statute that allows any partnership, including a 
partnership making the election under section 6226, to be exempt from 
the jurisdictional requirements of section 6234(b).
    Second, to the extent the comment was suggesting a rule that would 
reduce the deposit by the tax paid by partners furnished statements, 
this rule would also not work given the timing of when statements must 
be furnished. Pursuant to Sec.  301.6226-2(b)(1), all statements must 
be furnished no later than 60 days after the date all of the 
partnership adjustments to which the statement relates are finally 
determined. Partnership adjustments are finally determined upon the 
later of the expiration of the time to file a petition under section 
6234, or if a petition under section 6234 is filed, the date when the 
court's decision becomes final. The deposit under section 6234(b)(1) 
must be made when a petition is filed. The deposit cannot be reduced at 
the time by the amount the tax partners will pay because statements are 
not furnished until later in the

[[Page 6527]]

process and even then the tax is not known until the partner files its 
return for the reporting year, which depending on timing of the FPA 
could be more than a year after the deadline for petitioning a court 
under section 6234(a). For these reasons, the comment's suggestion 
regarding a reduction in the amount of the deposit were not adopted, 
and the regulations were not changed in response to those suggestions.
    With respect to the comment's recommendation that there be a clear 
mechanism for having the partnership obtain a refund of the tax 
deposit, the comment's concern that the deposit made in conjunction 
with a section 6226 election would result in double taxation is 
misplaced; however, the regulations were revised to clarify operation 
of the deposit rules. Under Sec.  301.6234-1(c), the amount deposited 
under section 6234(b)(1) is not treated as a payment of tax (except 
with respect to chapter 67 of the Code). If the partnership makes a 
valid election under section 6226, no amount may be assessed against 
the partnership, and instead the partners must take the adjustments 
into account. To conform these two sets of rules, the final regulations 
under Sec.  301.6234-1(e) clarify that a partnership is entitled to a 
return of any deposit that is in an amount in excess of the amount 
assessed against the partnership. To obtain a return of this excess 
deposit, the partnership must notify the IRS in writing in accordance 
with forms, instructions, and other guidance prescribed by the IRS.

10. Definitions and Special Rules

    Five comments were received regarding the definition of pass-
through partner under proposed Sec.  301.6241-1, the rules regarding 
cease to exist determinations in accordance with proposed Sec.  
301.6241-3, and the rules regarding the nondeductibility of payments 
made under the centralized partnership audit regime as provided in 
proposed Sec.  301.6241-4.
A. Definitions
    Proposed Sec.  301.6241-1 defined certain terms for purposes of the 
centralized partnership audit regime. Proposed Sec.  301.6241(a)(5) 
defined a ``pass-through partner'' as ``a pass-through entity that 
holds an interest in a partnership'' and a ``pass-through entity'' to 
include a partnership described in Sec.  301.7701-2(c)(1), among other 
types of entities. A partnership as described in Sec.  301.7701-2(c)(1) 
means a business entity that is not a corporation under Sec.  301.7701-
2(b) and that has at least two members.
    Section 6241(1) defines the term partnership to mean any 
partnership required to file a return under section 6031(a), which 
applies to every partnership as defined in section 761(a). Certain 
unincorporated organizations may elect under section 761(a) to not be 
subject to subchapter K. Proposed Sec.  301.6241-5(a) provided that an 
entity that files a partnership return for any taxable year is subject 
to the centralized partnership audit regime with respect to such 
taxable year even if it is determined that the person filing the 
partnership return was not a partnership for such taxable year. 
Proposed Sec.  301.6241-5(c)(2) provided an exception from this rule 
for entities for which a partnership return was filed for the sole 
purpose of making the election described in section 761(a).
    One comment suggested there was an inconsistency between the 
definition of ``pass-through partner'' under proposed Sec.  301.6241-
1(a)(5), which defines partnership by reference to Sec.  301.7701-
2(c)(1), and the exception under proposed Sec.  301.6241-5(c)(2) for 
entities that have elected out of subchapter K. The comment observed 
that the definition of partnership under Sec.  301.7701-2(c)(1) 
arguably includes business organizations that have elected out of 
subchapter K under section 761(a). As a result, the term ``pass-through 
partner'' would include entities that may not be partnerships within 
the meaning of section 6031(a) because those entities are required to 
file partnership returns. To remedy this inconsistency, the comment 
recommended that the definition of ``pass-through partner'' in proposed 
Sec.  301.6241-1(a)(5) be revised to eliminate the reference to Sec.  
301.7701-2(c)(1) and instead refer to the definition of ``partnership'' 
under section 6241(1), that is, ``a partnership required to file a 
return under section 6031(a).''
    The Treasury Department and the IRS agree with the comment that 
there was an inconsistency in the definition of ``pass-through 
partner.'' The approach recommended in the comment was adopted and 
remedied this inconsistency. The revision clarifies that business 
organizations that have elected out of subchapter K are not ``pass-
through partners.'' This change is consistent with the definition of 
``partnership'' under section 6241(1). Accordingly, the definition of 
``pass-through partner'' under Sec.  301.6241-1(a)(5) refers to a 
partnership that is required to file a return under section 6031(a), 
consistent with the definition of partnership under section 6241(1).
    One comment was received regarding the application of the 
centralized partnership audit regime to pass-through partners as a 
result of the proposed regulations. Proposed Sec.  301.6226-3 provided 
that a pass-through partner that is furnished a statement described in 
Sec.  301.6226-2 must comply with proposed Sec.  301.6226-3(e). The 
term ``pass-through partner'' includes partnerships that made an 
election under section 6221(b) for the taxable year. One comment 
suggested that there may be uncertainty with respect to how a 
partnership that has elected out of the centralized partnership audit 
regime complies with the requirements of the regime. For example, the 
elected out partnership may not have designated a partnership 
representative prior to receiving a statement described in Sec.  
301.6226-2. The comment recommended that the Treasury Department and 
the IRS should issue further guidance on elected out partnerships, 
including providing guidance that confirms an elected out partnership 
receiving a statement described in Sec.  301.6226-2 and complying with 
Sec.  301.6226-3(e) will not be deemed subject to the centralized 
partnership audit regime for other purposes.
    A partnership that has made an election under section 6221(b) is 
not subject to the requirements of the centralized partnership audit 
regime as a partnership. For example, the partnership is not required 
to select a partnership representative. A partnership that has made an 
election under section 6221(b) may still be subject to the requirements 
of the centralized partnership audit regime in its capacity as a 
partner in a partnership that is subject to the centralized partnership 
audit regime. For example, sections 6222, 6223, 6226(b)(4)(C), 6241(7), 
and the regulations thereunder apply to all partners in a partnership 
subject to the centralized partnership audit regime, including any 
pass-through partner. Pass-through partners that must comply with these 
provisions include partnerships subject to the centralized partnership 
audit regime as partnerships as well as those that made an election 
under 6221(b) and other entities such as S corporations and trusts.
    For example, under Sec.  301.6226-3(e) a pass-through partner that 
receives a push out statement from an audited partnership must furnish 
statements to its owners or, if it fails to furnish statements to its 
owners, pay an imputed underpayment. This rule applies regardless of 
whether or not the pass-through partner is subject to the

[[Page 6528]]

centralized partnership audit regime in its capacity as a partnership. 
Nothing in proposed Sec.  301.6226-3(e) indicated that a pass-through 
partner not otherwise subject to the centralized partnership audit 
regime becomes subject to other provisions of the regime simply because 
it must comply with Sec.  301.6226-3(e) in its capacity as a partner. 
Therefore, the Treasury Department and the IRS have declined to provide 
further guidance regarding the application of the centralized 
partnership audit regime to partnerships that have made an election out 
of the centralized partnership audit regime under section 6221(b).
B. Treatment Where a Partnership Ceases To Exist
    Several comments were received regarding the treatment of 
partnership adjustments where a partnership ceases to exist under 
section 6241(7). The comments pertained to two general areas: (1) The 
determination that a partnership has ceased to exist; and (2) the 
definition of ``former partners'' under proposed Sec.  301.6241-3(d).
i. Determination That Partnership Has Ceased To Exist
    Proposed Sec.  301.6241-3 provided that, if the IRS determined a 
partnership ceased to exist (as described in proposed Sec.  301.6241-
3(b)(2)) before the partnership adjustments take effect (as described 
in proposed Sec.  301.6241-3(c)), the partnership adjustments are taken 
into account by the former partners (as described in proposed Sec.  
301.6241-3(d)) in accordance with proposed Sec.  301.6241-3(e). 
Proposed Sec.  301.6241-3(b)(1) provided that a determination that a 
partnership had ceased to exist was within the sole discretion of the 
IRS, and the IRS was not required to determine that a partnership has 
ceased to exist, even if the partnership meets the definition of cease 
to exist in proposed Sec.  301.6241-3(b)(2).
    One comment stated that the language in proposed Sec.  301.6241-
3(b)(1) and (2) was ambiguous and allowed for excessive latitude and a 
potential for abuse of discretion in making such a cease-to-exist 
determination. The comment suggested that the IRS, upon formal request, 
should be compelled to consider the facts and circumstances of a cease-
to-exist determination.
    If the IRS receives a letter requesting that the IRS determine that 
a specific partnership has ceased to exist and providing detailed facts 
to support such a determination, the IRS will consider the 
circumstances in the letter and whether it is in the interest of sound 
tax administration to determine that the partnership has ceased to 
exist. The IRS, however, will retain its discretion as to whether to 
determine that a partnership has ceased to exist, even if the facts 
would indicate that the partnership meets the criteria in Sec.  
301.6241-3(b)(1)(i) and (ii). The cease-to-exist rules are inherently 
related to collection issues with respect to amounts not paid as a 
result of an administrative proceeding under the centralized 
partnership audit regime. Where a taxpayer or partnership properly owes 
amounts to the U.S. government, the IRS should be provided broad 
latitude, within the statutory limits, to ensure that such amounts are 
ultimately collected. To that end, it is administratively necessary for 
the IRS to retain its discretion to make a determination about whether 
a partnership ceases to exist. Cease to exist is not the only 
collection tool available to the IRS. The Treasury Department and the 
IRS therefore decline to create an additional unnecessary 
administrative rule that would compel the IRS to make a determination 
if requested by a taxpayer. Accordingly, no changes were made to the 
final regulations as a result of this comment.
    Although the regulations do not require the IRS to make a cease-to-
exist determination upon a formal request, the regulations have been 
revised to provide that a partnership does not cease to exist for 
purposes of section 6241(7) without the IRS determining the partnership 
has ceased to exist. Under proposed Sec.  301.6241-3(b), cease to exist 
was defined as a situation where the partnership terminates under 
section 708(b)(1) or is unable to pay, in full, any amount due under 
subchapter C of chapter 63. It was not clear from the proposed 
regulations whether a partnership meeting those criteria could cease to 
exist without an accompanying determination to that effect by the IRS. 
The final regulations under Sec.  301.6241-3(b) make clear that a 
partnership ceases to exist if the partnership terminates within the 
meaning of section 708(b)(1) or the partnership does not have the 
ability to pay, in full, any amount due under subchapter C of chapter 
63, but only if the IRS makes a determination that the partnership has 
ceased to exist under one of those two situations. The final 
regulations provide certainty to both taxpayers and the IRS about when 
a partnership ceases to exist and make the cease-to-exist rules more 
administrable for the IRS by eliminating any confusion about whether a 
partnership has ceased to exist.
    Proposed Sec.  301.6241-3(b)(1) provided that if the IRS determines 
that a partnership ceased to exist, the IRS will notify the partnership 
and its former partners within 30 days of such determination. The final 
regulations clarify that a failure by the IRS to send a notification 
required under Sec.  301.6241-3(b)(1) to the former partners of the 
partnership does not invalidate a determination that the partnership 
has ceased to exist. In addition, one comment suggested that the IRS 
should also notify the partnership representative (and designated 
individual, if applicable). To the extent the comment is referring to 
the partnership representative of the audited partnership, the comment 
has been adopted. In the case of a determination that the partnership 
has ceased to exist, the IRS will notify the partnership, the former 
partners of the partnership, and when an audited partnership has ceased 
to exit, the partnership representative (and designated individual, if 
applicable) for the reviewed year. This rule is consistent with the 
other notification provisions throughout the centralized partnership 
audit regime, which provide notification to the partnership 
representative and designated individual, if applicable. To the extent 
the comment was referring to a partnership that received a push out 
statement, the comment was not adopted. The partnership representative 
from the reviewed year or any other year of a partnership that received 
a push out statement has no connection to the unpaid, current liability 
and notification would not be appropriate or necessarily beneficial to 
the partnership. In addition, there would be administrative complexity 
for the IRS in determining the appropriate partnership representative 
for a partnership partner to notify because the IRS will only have been 
in contact with the partnership representative of the audited 
partnership, not partnership representatives of other partnerships not 
subject to an administrative proceeding.
    The same comment also suggested that the partnership should be 
allowed to appeal a determination that the partnership has ceased to 
exist to the IRS Office of Appeals within 60 days of the receipt of the 
IRS's determination that the partnership has ceased to exist. This 
comment was not adopted. As discussed in section 11 of this Summary of 
Comments and Explanation of Revisions, any guidance regarding the 
availability of review by the IRS Office of Appeals will be provided 
outside of these regulations to preserve flexibility and allow the IRS 
to revise its procedures as it gains experience with

[[Page 6529]]

the centralized partnership audit regime.
    Former proposed Sec.  301.6241-3(b)(2)(iii) had provided that the 
IRS could not determine that a partnership ceased to exist with respect 
to a partnership adjustment after the expiration of the period of 
limitations on collection applicable to the amount due resulting from 
such adjustment. One comment observed that the reference to the 
``period of limitations on collection applicable to the amount due'' 
did not specify whether the period of limitations related to the 
partnership or the partner. In the August 2018 NPRM, former proposed 
Sec.  301.6241-3(b)(2)(iii) was revised to provide that the relevant 
period of limitations is the period of limitations on collection 
applicable to the assessment made against the partnership for the 
amount due resulting from such adjustment. Because the plain language 
of proposed Sec.  301.6241-3(b)(2)(iii) resolves the ambiguity 
identified by the comment, no further changes were made in the final 
regulations in response to this comment.
ii. Definition of Former Partners
    Proposed Sec.  301.6241-3(d) defined the term ``former partners'' 
as the adjustment year partners of the partnership that ceased to 
exist, unless there are no adjustment year partners in which case the 
former partners are the partners of the partnership during the last 
taxable year for which a partnership return under section 6031 was 
filed with respect to such partnership. If the IRS determined that the 
partnership ceased to exist prior to the partnership adjustments taking 
effect, the former partners of the partnership take into account the 
partnership adjustments as if the partnership had made an election 
under section 6226 to push out the adjustments to the former partners. 
See proposed Sec.  301.6241-3(e).
    One comment expressed concern that, once a partnership was placed 
under examination, the partners could transfer their partnership 
interests to defunct corporations or otherwise uncollectible entities 
such that the IRS would be unable to collect from the ``former 
partners'' under the provisions of proposed Sec.  301.6241-3. 
Similarly, the comment expressed concern that if the partnership was 
able to pay some but not all of the amounts due under the centralized 
partnership audit regime and the IRS did not determine that the 
partnership had ceased to exist, the partners would benefit from the 
improper treatment of the items and the partnership will not have paid 
the amounts owed as a result of the adjustments. The comment suggested 
that the final regulations add the ability for the IRS to assess the 
transferees of the former partners and the owners of the partnership.
    Under section 6232(f), as added by the TTCA after the comment was 
received, if the partnership does not pay any amount of the imputed 
underpayment or specified similar amount (as defined in section 
6232(f)(2)) within 10 days after the date on which the IRS provides 
notice and demand for such payment, the IRS may assess upon each 
partner of the partnership (as of the close of the adjustment year) or, 
if the partnership has ceased to exist, the former partners of the 
partnership, a tax equal to such partner's proportionate share of such 
amount (including any penalties and interest). Section 6232(f) provides 
the IRS with the ability to directly make assessments against the 
partners of a partnership that fails to pay an imputed underpayment or 
specified similar amount much like the assessment authority suggested 
by the comment. In addition, nothing in proposed Sec.  301.6241-3 
limits or otherwise modifies the IRS's existing tools under the Code, 
related case law, or any other law with respect to transferee 
liability. Accordingly, no changes were made to the final regulations 
in response to this comment. For these reasons, the clarification 
recommended by the comment was not adopted.
    Another comment suggested that the definition of ``former 
partners'' under proposed Sec.  301.6241-3(d) should include the 
reviewed year partners of the partnership that has ceased to exist in 
situations where the partnership has made an election under section 
6226. Proposed Sec.  301.6241-3(b)(2)(i)(A) provided that the IRS may 
not determine that a partnership has ceased to exist solely because the 
partnership has a valid election under section 6226 in effect with 
respect to any imputed underpayment. If the partnership makes a valid 
election under section 6226, the partnership is not liable for the 
imputed underpayment to which the election relates. See section 6226(a) 
and Sec.  301.6226-1(b)(2). As a result, the IRS cannot determine the 
partnership ceases to exist with respect to that imputed underpayment 
(see Sec.  301.6241-3(b)(2)), and the cease to exist provisions under 
proposed Sec.  301.6241-3 will not apply to such partnership with 
respect to that imputed underpayment. Therefore, this comment was not 
adopted.
    Although this comment was not adopted, a clarification was made to 
the definition of ``former partners'' under proposed Sec.  301.6241-
3(d)(1)(i). As stated earlier in this section of the preamble, the term 
``former partners'' was defined under proposed Sec.  301.6241-
3(d)(1)(i) as the partners for the adjustment year that corresponds to 
the partnership taxable year to which the partnership adjustment 
relates. The final regulations under Sec.  301.6241-3(d)(1)(i) clarify 
that the term ``former partners'' means, for a partnership that has 
ceased to exist, the partners of the partnership during the adjustment 
year (as defined in Sec.  301.6241-1(a)(2)) that corresponds to the 
reviewed year for which the adjustments were made.
C. Payments Nondeductible
    Proposed Sec.  301.6241-4 provided that no deduction is allowed 
under subtitle A of the Code for any payment required to be made by a 
partnership under the centralized partnership audit regime, which 
includes any imputed underpayment or any interest, penalties, additions 
to tax, or additional amounts with respect to an imputed underpayment. 
Former proposed Sec.  301.6225-1(a) provided that a partnership's 
expenditure for the imputed underpayment ``and the adjustments that 
result in the imputed underpayment'' are taken into account by the 
partnership in accordance with Sec.  301.6241-4.'' One comment 
suggested that, because of the cross reference to Sec.  301.6241-4 in 
former proposed Sec.  301.6225-1(a), that the regulations under Sec.  
301.6241-4 be revised to address the treatment of the adjustments that 
result in the imputed underpayment. This comment was not adopted.
    Proposed Sec.  301.6241-4 addressed the deductibility of payments 
required under the centralized partnership audit regime and did not 
address the treatment of adjustments that were taken into account in 
determining the amount of such payments. In the August 2018 NPRM, 
former proposed Sec.  301.6225-1(a) was revised to remove the erroneous 
cross-reference to the adjustments being taken into account under Sec.  
301.6241-4. To the extent the comment was recommending that revision, 
the comment was addressed by the revisions in the August 2018 NPRM. To 
the extent the comment was recommending guidance on the treatment of 
partnership adjustments in the context of adjusting tax attributes, 
those rules were provided in proposed Sec. Sec.  301.6225-4 and 
301.6226-4.
D. Extension to Entities Filing Partnership Returns
    Proposed Sec.  301.6241-5(c)(2) provided that the centralized 
partnership audit regime would not apply to a taxable year for which a 
partnership return was

[[Page 6530]]

filed for the sole purpose of making an election described in section 
761(a) (regarding election out of subchapter K for certain 
unincorporated organizations). The final regulations under Sec.  
301.6241-5(c)(2) retain this rule but clarify that the centralized 
partnership audit regime will not apply to a taxable year in which a 
valid section 761(a) election is made. This change was made to clarify 
that the election under section 761(a) must be valid in order for the 
rules under Sec.  301.6241-5 not to apply to a partnership return that 
is filed with respect to a taxable year.

11. Comments Concerning IRS Appeals Office

    Several comments were received regarding the interaction between 
the centralized partnership audit regime and the IRS Appeals. For 
example, certain comments suggested the regulations clarify the rules 
regarding a partnership's ability to raise various issues and 
determinations with IRS Appeals, including the timing of any 
involvement by IRS Appeals.
    Procedures governing IRS Appeals are beyond the scope of these 
regulations. Accordingly, except as described in sections 3.B.i., 
3.B.vii., 4.B.v., and 10.B.i. of this preamble, neither this preamble 
nor the regulations address IRS Appeals procedures in the context of 
the centralized partnership audit regime. These procedures are expected 
to be addressed in future guidance.

12. Effect of Provisions Enacted Under the Tax Cuts and Jobs Act

    One comment suggested that the final regulations include guidance 
on the effect of the new partnership-related provisions of the Tax Cuts 
and Jobs Act, formally known as ``An Act to provide for reconciliation 
pursuant to titles II and V of the concurrent resolution on the budget 
for fiscal year 2018,'' Public Law 115-97 (TCJA), including examples of 
how adjustments to partnership-related items and tax attributes 
specific to the new TCJA provisions are treated under sections 6225 and 
6226 by partnerships and their partners.
    The Treasury Department and the IRS have determined not to provide 
guidance on how the provisions of the TCJA, including any partnership-
related provisions, interact with the centralized partnership audit 
regime. The TCJA provisions are substantive tax rules that work 
independently of the procedural rules of the centralized partnership 
audit regime. Therefore, no change would necessarily be required as a 
result of these substantive provisions. However, as the Treasury 
Department and the IRS continue to gain experience with the centralized 
partnership audit regime and implement rules under the new TCJA 
provisions, guidance will be issued if it is later determined that 
doing so would be appropriate. For these reasons, this comment was not 
adopted.

13. Effective Date of Centralized Partnership Audit Regime

    Several comments recommended that the effective date of the 
centralized partnership audit regime be delayed. These comments were 
not adopted because the effective date for the statutory provisions 
governing the centralized partnership audit regime is established by 
statute. See BBA section 1101(g).

Special Analyses

    This regulation is not subject to review under section 6(b) of 
Executive Order 12866 pursuant to the Memorandum of Agreement (April 
11, 2018) between the Treasury Department and the Office of Management 
and Budget regarding review of tax regulations. Therefore, a regulatory 
impact assessment is not required.
    Because the final regulations would not impose a collection of 
information on small entities, the Regulatory Flexibility Act (5 U.S.C. 
chapter 6) does not apply.
    Pursuant to section 7805(f) of the Code, the notice of proposed 
rulemaking preceding these regulations was submitted to the Chief 
Counsel for Advocacy of the Small Business Administration for comment 
on its impact on small business, and no comments were received.

Statement of Availability of IRS Documents

    IRS Revenue Procedures, Revenue Rulings, Notices and other guidance 
cited in this preamble are published in the Internal Revenue Bulletin 
(or Cumulative Bulletin) and are available from the Superintendent of 
Documents, U.S. Government Publishing Office, Washington, DC 20402, or 
by visiting the IRS website at www.irs.gov.

Drafting Information

    The principal authors of these final regulations are Jennifer M. 
Black of the Office of the Associate Chief Counsel (Procedure and 
Administration), Steven L. Karon of the Office of the Associate Chief 
Counsel (Procedure and Administration), and Joy E. Gerdy Zogby of the 
Office of the Associate Chief Counsel (Procedure and Administration). 
However, other personnel from the Treasury Department and the IRS 
participated in their development.

List of Subjects in 26 CFR Part 301

    Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income 
taxes, Penalties, Reporting and recordkeeping requirements.

Amendments to the Regulations

    Accordingly, 26 CFR part 301 is amended as follows:

PART 301--PROCEDURE AND ADMINISTRATION

0
Paragraph 1. The authority citation for part 301 is amended by adding 
entries for Sec. Sec.  301.6221(a)-1, 301.6222-1, 301.6225-1, 301.6225-
2, 301.6225-3, 301.6226-1, 301.6226-2, 301.6226-3, 301.6227-1, 
301.6227-2, 301.6227-3, 301.6231-1, 301.6232-1, 301.6233(a)-1, 
301.6233(b)-1, 301.6234-1, 301.6235-1, 301.6241-1, 301.6241-2, 
301.6241-3, 301.6241-4, 301.6241-5, and 301.6241-6 in numerical order 
to read in part as follows:

    Authority:  26 U.S.C. 7805 * * *
    Section 301.6221(a)-1 also issued under 26 U.S.C. 6221.
    Section 301.6222-1 also issued under 26 U.S.C. 6222 and 6223.
* * * * *
    Section 301.6225-1 also issued under 26 U.S.C. 6225.
    Section 301.6225-2 also issued under 26 U.S.C. 6223 and 6225.
    Section 301.6225-3 also issued under 26 U.S.C. 6225.
* * * * *
    Section 301.6226-1 also issued under 26 U.S.C. 6223 and 6226.
    Section 301.6226-2 also issued under 26 U.S.C. 6226.
    Section 301.6226-3 also issued under 26 U.S.C. 6226.
* * * * *
    Section 301.6227-1 also issued under 26 U.S.C. 6223 and 6227.
    Section 301.6227-2 also issued under 26 U.S.C. 6227.
    Section 301.6227-3 also issued under 26 U.S.C. 6227.
* * * * *
    Section 301.6231-1 also issued under 26 U.S.C. 6231.
* * * * *
    Section 301.6232-1 also issued under 26 U.S.C. 6232.
* * * * *
    Section 301.6233(a)-1 also issued under 26 U.S.C. 6233.
    Section 301.6233(b)-1 also issued under 26 U.S.C. 6233.
    Section 301.6234-1 also issued under 26 U.S.C. 6234.
    Section 301.6235-1 also issued under 26 U.S.C. 6235.
    Section 301.6241-1 also issued under 26 U.S.C. 6241.
* * * * *

[[Page 6531]]

    Section 301.6241-2 also issued under 26 U.S.C. 6241.
    Section 301.6241-3 also issued under 26 U.S.C. 6241.
    Section 301.6241-4 also issued under 26 U.S.C. 6241.
    Section 301.6241-5 also issued under 26 U.S.C. 6241.
* * * * *
    Section 301.6241-6 also issued under 26 U.S.C. 6241.
* * * * *

0
Par. 2. Section 301.6221(a)-1 is added to read as follows:


Sec.  301.6221(a)-1  Determination at partnership level.

    (a) In general. Except as otherwise provided under subchapter C of 
chapter 63 of the Internal Revenue Code (subchapter C of chapter 63) 
and the regulations in this part, any adjustment to a partnership-
related item (as defined in Sec.  301.6241-1(a)(6)(ii)) is determined, 
any tax imposed by chapter 1 of the Internal Revenue Code (Code) 
attributable thereto is assessed and collected, and the applicability 
of any penalty, addition to tax, or additional amount that relates to 
an adjustment to any partnership-related item is determined at the 
partnership level under subchapter C of chapter 63.
    (b) Legal and factual determinations at the partnership level. 
Except as otherwise provided under subchapter C of chapter 63, any 
legal or factual determinations underlying any adjustment or 
determination made in accordance with paragraph (a) of this section are 
also determined at the partnership level under subchapter C of chapter 
63. For instance, determinations under this paragraph (b) include any 
determinations necessary to calculate the imputed underpayment or any 
modification of the imputed underpayment under section 6225 and the 
period of limitations on making adjustments under subchapter C of 
chapter 63.
    (c) Applicability date--(1) In general. Except as provided in 
paragraph (c)(2) of this section, this section applies to partnership 
taxable years beginning after December 31, 2017, and ending after 
August 12, 2018.
    (2) Election under Sec.  301.9100-22 in effect. This section 
applies to any partnership taxable year beginning after November 2, 
2015, and before January 1, 2018, for which a valid election under 
Sec.  301.9100-22 is in effect.

0
Par. 3. Section 301.6222-1 is added to read as follows:


Sec.  301.6222-1  Partner's return must be consistent with partnership 
return.

    (a) Consistent treatment of partnership-related items--(1) In 
general. The treatment of partnership-related items (as defined in 
Sec.  301.6241-1(a)(6)(ii)) on a partner's return must be consistent 
with the treatment of such items on the partnership return in all 
respects, including the amount, timing, and characterization of such 
items. A partner has not satisfied the requirement of this paragraph 
(a) if the treatment of the partnership-related item on the partner's 
return is consistent with how such item was treated on a schedule or 
other information furnished to the partner by the partnership but 
inconsistent with the treatment of the item on the partnership return 
actually filed. For rules relating to the election to be treated as 
having reported the inconsistency where the partner treats a 
partnership-related item consistently with an incorrect schedule or 
other information furnished by the partnership, see paragraph (d) of 
this section. For purposes of this section, the term partner's return 
includes any return, statement, schedule, or list, and any amendment or 
supplement thereto, filed by the partner with respect to any tax 
imposed by the Internal Revenue Code (Code).
    (2) Partner that is a partnership with an election in effect under 
section 6221(b). The rules of this section apply to all partners, 
including a partnership-partner (as defined in Sec.  301.6241-1(a)(7)) 
that has an election in effect under section 6221(b) for any taxable 
year. Accordingly, unless the requirements of paragraph (c) of this 
section are satisfied, a partnership-partner must treat partnership-
related items of a partnership in which it is a partner consistent with 
the treatment of such items on the partnership return filed by the 
partnership in which it is a partner.
    (3) Partnership does not file a return. A partner's treatment of a 
partnership-related item attributable to a partnership that does not 
file a return is per se inconsistent.
    (4) Treatment of items on a partnership return. For purposes of 
this section, the treatment of a partnership-related item on a 
partnership return includes--
    (i) The treatment of such item on the partnership's return of 
partnership income filed with the Internal Revenue Service (IRS) under 
section 6031, and any amendment or supplement thereto, including an 
administrative adjustment request (AAR) filed pursuant to section 6227; 
and
    (ii) The treatment of such item on any statement, schedule or list, 
and any amendment or supplement thereto, filed by the partnership with 
the IRS, including any statements filed pursuant to section 6226.
    (5) Examples. The following examples illustrate the rules of this 
paragraph (a). For purposes of these examples, each partnership is 
subject to the provisions of subchapter C of chapter 63 of the Code 
(subchapter C of chapter 63), and each partnership and its partners are 
calendar year taxpayers, unless otherwise stated.

    (i) Example 1.  A is a partner in Partnership during 2018 and 
2019. In December 2018, Partnership receives an advance payment for 
services to be performed in 2019 and reports this amount as income 
on its partnership return for 2018. A includes its distributive 
share of income from the advance payment on A's income tax return 
for 2019 and not on A's income tax return for 2018. A has not 
satisfied the requirements of paragraph (a) of this section because 
A's treatment of the income attributable to Partnership is 
inconsistent with the treatment of that item by Partnership on its 
partnership return.
    (ii) Example 2.  B is a partner in Partnership during 2018. 
Partnership incurred start-up costs before it was actively engaged 
in its business. Partnership capitalized these costs on its 2018 
partnership return. B deducted his distributive share of the start-
up costs on B's 2018 income tax return. B has not satisfied the 
requirements of paragraph (a) of this section because B's treatment 
of the start-up costs is inconsistent with the treatment of that 
item by Partnership on its partnership return.
    (iii) Example 3.  C is a partner in Partnership during 2018. 
Partnership reports a loss of $100,000 on its partnership return for 
2018. On the 2018 Schedule K-1 attached to the partnership return, 
Partnership reports $5,000 as C's distributive share of that loss. 
On the 2018 Schedule K-1 furnished to C, however, Partnership 
reports $15,000 as C's distributive share of the loss. C reports the 
$15,000 loss on C's 2018 income tax return. C has not satisfied the 
requirements of paragraph (a) of this section because C reported C's 
distributive share of the loss in a manner that is inconsistent with 
how C's distributive share of the loss was reported on the 2018 
partnership return actually filed. See, however, paragraph (d) of 
this section for the election to be treated as having reported the 
inconsistency where the partner treats an item consistently with an 
incorrect schedule.
    (iv) Example 4.  D was a partner in Partnership during 2018. 
Partnership reports a loss of $100,000 on its partnership return for 
2018. In 2020, Partnership files an AAR under section 6227 reporting 
that the amount of the loss on its 2018 partnership return is 
$90,000, rather than $100,000 as originally reported. Pursuant to 
section 6227, Partnership elects to have its partners take the 
adjustment into account, and furnishes D a statement showing D's 
share of the reduced loss for 2018. D fails to take his share of the 
reduced loss for 2018 into account in accordance with section 6227. 
D has not satisfied the requirements of paragraph (a) of this 
section because D has not taken into

[[Page 6532]]

account his share of the loss in a manner consistent with how 
Partnership treated such items on the partnership return actually 
filed.
    (v) Example 5.  E was a partner in Partnership during 2018. In 
2021, Partnership receives a notice of final partnership adjustment 
(FPA) in an administrative proceeding under subchapter C of chapter 
63 with respect to Partnership's 2018 taxable year. The FPA reflects 
an imputed underpayment. Partnership properly elects the application 
of section 6226 with respect to the imputed underpayment and files 
with the IRS and furnishes to E a statement of E's share of 
adjustments with respect to Partnership's 2018 taxable year. E fails 
to take his share of the adjustments into account in accordance with 
section 6226. E has not satisfied the requirements of paragraph (a) 
of this section because E has not taken into account his share of 
adjustments with respect to Partnership's 2018 taxable year in a 
manner consistent with how Partnership treated such items on the 
section 6226 statement filed with the IRS.
    (vi) Example 6.  F was a partner in Partnership during 2018. F 
has a valid election under section 6221(b) in effect with respect to 
F's 2018 partnership taxable year. Notwithstanding F's election 
under section 6221(b) for its 2018 taxable year, F is subject to 
section 6222 for taxable year 2018. F must treat, on its 2018 
partnership return, any items attributable to F's interest in 
Partnership in a manner that is consistent with the treatment of 
those items on the 2018 partnership return actually filed by 
Partnership.
    (vii) Example 7.  G was a partner in Partnership during 2018. 
G's taxable year ends on the same day as Partnership's 2018 taxable 
year. Partnership did not file a partnership return for its 2018 
taxable year. G files an income tax return for its 2018 taxable year 
and reports G's share of a loss attributable to G's interest in 
Partnership. Because Partnership failed to file a partnership 
return, G's treatment of such loss is per se inconsistent pursuant 
to paragraph (a)(3) of this section.

    (b) Effect of inconsistent treatment--(1) Determination of 
underpayment of tax resulting from inconsistent treatment. If a partner 
fails to satisfy the requirements of paragraph (a) of this section, 
unless the partner provides notice in accordance with paragraph (c) of 
this section, the IRS may adjust the inconsistently reported 
partnership-related item on the partner's return to make it consistent 
with the treatment of such item on the partnership return (or where no 
partnership return was filed, remove any treatment of such items from 
the partner's return) and determine any underpayment of tax that 
results from that adjustment. For purposes of this section, except as 
provided in paragraph (b)(3) of this section, the underpayment of tax 
is the amount by which the correct tax, as determined by making the 
partner's return consistent with the partnership return, exceeds the 
tax shown on the partner's return.
    (2) Assessment and collection of tax. The IRS may assess and 
collect any underpayment of tax resulting from an adjustment described 
in paragraph (b)(1) of this section in the same manner as if the 
underpayment of tax were on account of a mathematical or clerical error 
appearing on the partner's return, except that the procedures under 
section 6213(b)(2) for requesting abatement of an assessment do not 
apply.
    (3) Effect when partner is a partnership. For the effect of a 
failure to satisfy the requirements of paragraph (a) of this section 
where the partner is itself a partnership (a partnership-partner), see 
section 6232(d)(1)(B) and Sec.  301.6232-1(d).
    (4) Examples. The following examples illustrate the rules of this 
paragraph (b). For purposes of these examples, each partnership is 
subject to the provisions of subchapter C of chapter 63, and each 
partnership and its partners are calendar year taxpayers, unless 
otherwise stated.

    (i) Example 1.  H, an individual, is a partner in Partnership. 
On its partnership return for taxable year 2018, Partnership reports 
$100,000 in ordinary income. On the Schedule K-1 attached to the 
partnership return, as well as on the Schedule K-1 furnished to H, 
Partnership reports $15,000 as H's distributive share of the 
$100,000 in ordinary income. H reports only $5,000 of the $15,000 of 
ordinary income on his 2018 income tax return. The IRS may determine 
the amount of tax that results from adjusting the ordinary income 
attributable to H's interest in Partnership reported on H's 2018 
income tax return from $5,000 to $15,000 and assess that resulting 
underpayment in tax as if it were on account of a mathematical or 
clerical error appearing on H's return. H may not request an 
abatement of that assessment under section 6213(b).
    (ii) Example 2.  J was a partner in Partnership during 2018. In 
2021, Partnership receives an FPA in an administrative proceeding 
under subchapter C of chapter 63 with respect to Partnership's 2018 
taxable year. The FPA reflects an imputed underpayment. Partnership 
properly elects the application of section 6226 with respect to the 
imputed underpayment and files with the IRS and furnishes to J a 
statement of J's share of adjustments with respect to Partnership's 
2018 taxable year. J fails to report one adjustment reflected on the 
statement, J's share of a decrease in the amount of losses for 2018, 
on J's return as required by section 6226. The IRS may determine the 
amount of tax that results from adjusting the decrease in the amount 
of losses on J's return to be consistent with the amount included on 
the section 6226 statement filed with the IRS and may assess the 
resulting underpayment in tax as if it were on account of a 
mathematical or clerical error appearing on J's return. J may not 
request an abatement of that assessment under section 6213(b).

    (c) Notification to the IRS when items attributable to a 
partnership are treated inconsistently--(1) In general. Paragraphs (a) 
and (b) of this section (regarding the consistent treatment of 
partnership-related items and the effect of inconsistent treatment) do 
not apply to partnership-related items identified as inconsistent (or 
that may be inconsistent) in a statement that the partner provides to 
the IRS according to the forms, instructions, and other guidance 
prescribed by the IRS. Instead, the procedures in paragraph (c)(3) of 
this section apply. A statement does not identify an inconsistency for 
purposes of this paragraph (c) unless it is attached to the partner's 
return on which the partnership-related item is treated inconsistently.
    (2) Coordination with section 6223. Paragraph (c)(1) of this 
section is not applicable to a partnership-related item the treatment 
of which is binding on the partner because of actions taken by the 
partnership under subchapter C of chapter 63 or because of a final 
decision in a proceeding with respect to the partnership under 
subchapter C of chapter 63. For instance, the provisions of paragraph 
(c)(1) of this section do not apply with respect to the partner's 
treatment of a partnership-related item reflected on a statement 
described in Sec.  301.6226-2 filed by the partnership with the IRS. 
See Sec.  301.6226-1(e) (regarding the binding nature of statements 
described in Sec.  301.6226-2). Any underpayment resulting from the 
inconsistent treatment of an item described in this paragraph (c)(2) 
may be assessed and collected in accordance with paragraph (b)(2) of 
this section.
    (3) Partner protected only to extent of notification. A partner who 
reports the inconsistent treatment of a partnership-related item is not 
subject to paragraphs (a) and (b) of this section only with respect to 
those items identified in the statement described in paragraph (c)(1) 
of this section. Thus, if a partner notifying the IRS with respect to 
one partnership-related item does not report the inconsistent treatment 
of another partnership-related item, the IRS may determine the amount 
of tax that results from adjusting the unidentified, inconsistently 
reported item on the partner's return to make it consistent with the 
treatment of such item on the partnership return and assess the 
resulting underpayment of tax in accordance with paragraph (b)(2) of 
this section.
    (4) Adjustment after notification--(i) In general. If a partner 
notifies the IRS of the inconsistent treatment of a partnership-related 
item in accordance with paragraph (c)(1) of this section and

[[Page 6533]]

the IRS disagrees with the inconsistent treatment, the IRS may adjust 
the identified, inconsistently reported item in a proceeding with 
respect to the partner. Nothing in this paragraph (c)(4)(i) precludes 
the IRS from also conducting a proceeding with respect to the 
partnership. If the IRS conducts a proceeding with respect to the 
partnership regarding the identified, inconsistently reported item, 
each partner of the partnership, including any partner that notified 
the IRS of inconsistent treatment in accordance with paragraph (c)(1) 
of this section, is bound by actions taken by the partnership and by 
any final decision in the proceeding with respect to the partnership. 
See paragraph (c)(2) of this section.
    (ii) Adjustments in partner proceeding. In a proceeding with 
respect to a partner described in paragraph (c)(4)(i) of this section, 
the IRS may adjust any identified, inconsistently reported partnership-
related item to make the item consistent with the treatment of that 
item on the partnership return or determine that the correct treatment 
of such item differs from the treatment on the partnership return and 
instead adjust the item to reflect the correct treatment, 
notwithstanding the treatment of that item on the partnership return. 
The IRS may also adjust any item on the partner's return, including 
items that are not partnership-related items. Any final decision with 
respect to an inconsistent position in a proceeding to which the 
partnership is not a party is not binding on the partnership.
    (5) Limitation on treating partnership-related items inconsistently 
after notice of administrative proceeding. After a notice of 
administrative proceeding with respect to a partnership taxable year 
has been mailed by the IRS under section 6231, a partner may not notify 
the IRS the partner is treating a partnership-related item on the 
partner's return inconsistently with how such item was treated on the 
partnership return for such taxable year, except as provided in Sec.  
301.6225-2.
    (6) Examples. The following examples illustrate the rules of this 
paragraph (c). For purposes of these examples, each partnership is 
subject to the provisions of subchapter C of chapter 63, and each 
partnership and partner is a calendar year taxpayer, unless otherwise 
stated.

    (i) Example 1.  K is a partner in Partnership during 2018. K 
treats a deduction and a capital gain attributable to Partnership on 
K's 2018 income tax return in a manner that is inconsistent with the 
treatment of those items by Partnership on its 2018 partnership 
return. K reports the inconsistent treatment of the deduction in 
accordance with paragraph (c)(1) of this section, but not the 
inconsistent treatment of the gain. Because K did not notify the IRS 
of the inconsistent treatment of the gain in accordance with 
paragraph (c)(1) of this section, the IRS may determine the amount 
of tax that results from adjusting the gain reported on K's 2018 
income tax return in order to make the treatment of that gain 
consistent with how the gain was treated on Partnership's 
partnership return. Pursuant to paragraph (c)(3) of this section, 
the IRS may assess and collect the underpayment of tax resulting 
from the adjustment to the gain as if it were on account of a 
mathematical or clerical error appearing on K's return.
    (ii) Example 2.  L is a partner in Partnership during 2018. On 
its 2018 partnership return, Partnership treats partner L's 
distributive share of ordinary loss attributable to Partnership as 
$8,000. L, however, claims an ordinary loss of $9,000 as 
attributable to Partnership on its 2018 income tax return and 
notifies the IRS of the inconsistent treatment in accordance with 
paragraph (c)(1) of this section. As a result of the notice of 
inconsistent treatment, the IRS conducts a separate proceeding under 
subchapter B of chapter 63 of the Internal Revenue Code with respect 
to L's 2018 income tax return, a proceeding to which Partnership is 
not a party. During the proceeding, the IRS determines that the 
proper amount of L's distributive share of the ordinary loss from 
Partnership is $3,000. During the same proceeding, the IRS also 
determines that L overstated a charitable contribution deduction in 
the amount of $2,500 on its 2018 income tax return. The 
determination of the adjustment of L's share of ordinary loss is not 
binding on Partnership. The charitable contribution deduction is not 
attributable to Partnership or to another partnership subject to the 
provisions of subchapter C of chapter 63. The IRS may determine the 
amount of tax that results from adjusting the $9,000 ordinary loss 
deduction to $3,000 and from adjusting the charitable contribution 
deduction. Pursuant to paragraph (c)(4)(ii) of this section, the IRS 
is not limited to only adjusting the ordinary loss of $9,000, as 
originally reported on L's partner return, to $8,000, as originally 
reported by Partnership on its partnership return, nor is the IRS 
prohibited from adjusting the charitable contribution deduction in 
the proceeding with respect to L.

    (d) Partner receiving incorrect information--(1) In general. A 
partner is treated as having complied with section 6222(c)(1)(B) and 
paragraph (c)(1) of this section with respect to a partnership-related 
item if the partner--
    (i) Demonstrates that the treatment of such item on the partner's 
return is consistent with the treatment of that item on the statement, 
schedule, or other form prescribed by the IRS and furnished to the 
partner by the partnership; and
    (ii) The partner makes an election in accordance with paragraph 
(d)(2) of this section.
    (2) Time and manner of making election--(i) In general. An election 
under paragraph (d) of this section must be filed in writing with the 
IRS office set forth in the notice that notified the partner of the 
inconsistency no later than 60 days after the date of such notice.
    (ii) Contents of election. The election described in paragraph 
(d)(2)(i) of this section must be--
    (A) Clearly identified as an election under section 6222(c)(2)(B);
    (B) Signed by the partner making the election;
    (C) Accompanied by a copy of the statement, schedule, or other form 
furnished to the partner by the partnership and a copy of the IRS 
notice that notified the partner of the inconsistency; and
    (D) Include any other information required in forms, instructions, 
or other guidance prescribed by the IRS.
    (iii) Treatment of partnership-related item is unclear. Generally, 
the requirement described in paragraph (d)(2)(ii)(C) of this section 
will be satisfied by attaching a copy of the statement, schedule, or 
other form furnished to the partner by the partnership to the election 
(in addition to a copy of the IRS notice that notified the partner of 
the inconsistency). However, if it is not clear from the statement, 
schedule, or other form furnished by the partnership that the partner's 
treatment of the partnership-related item on the partner's return is 
consistent, the election must also include an explanation of how the 
treatment of such item on the statement, schedule, or other form 
furnished by the partnership is consistent with the treatment of the 
item on the partner's return, including with respect to the 
characterization, timing, and amount of such item.
    (3) Example. M is a partner in Partnership for 2018. Partnership is 
subject to subchapter C of chapter 63, and both Partnership and M are 
calendar year taxpayers. On its 2018 partnership return, Partnership 
reports that M's distributive share of ordinary income attributable to 
Partnership is $1,000. Partnership furnishes to M a Schedule K-1 for 
2018 showing $500 as M's distributive share of ordinary income. M 
reports $500 of ordinary income attributable to Partnership on its 2018 
income tax return consistent with the Schedule K-1 furnished to M. The 
IRS notifies M that M's treatment of the ordinary income attributable 
to Partnership on its 2018 income tax return is inconsistent with how 
Partnership treated the ordinary income allocated to M on its 2018 
partnership

[[Page 6534]]

return. Within 60 days of receiving the notice from the IRS of the 
inconsistency, M files an election with the IRS in accordance with 
paragraph (d)(2) of this section. Because M made a valid election under 
section 6222(c)(2)(B) and paragraph (d)(1) of this section, M is 
treated as having notified the IRS of the inconsistency with respect to 
the ordinary income attributable to Partnership under paragraph (c)(1) 
of this section.
    (e) Applicability date--(1) In general. Except as provided in 
paragraph (e)(2) of this section, this section applies to partnership 
taxable years beginning after December 31, 2017, and ending after 
August 12, 2018.
    (2) Election under Sec.  301.9100-22 in effect. This section 
applies to any partnership taxable year beginning after November 2, 
2015, and before January 1, 2018, for which a valid election under 
Sec.  301.9100-22 is in effect.

0
Par. 4. Section 301.6225-1 is added to read as follows:


Sec.  301.6225-1  Partnership adjustment by the Internal Revenue 
Service.

    (a) Imputed underpayment based on partnership adjustments--(1) In 
general. In the case of any partnership adjustments (as defined in 
Sec.  301.6241-1(a)(6)) by the Internal Revenue Service (IRS), if the 
adjustments result in an imputed underpayment (as determined in 
accordance with paragraph (b) of this section), the partnership must 
pay an amount equal to such imputed underpayment in accordance with 
paragraph (a)(2) of this section. If the adjustments do not result in 
an imputed underpayment (as described in paragraph (f) of this 
section), such adjustments must be taken into account by the 
partnership in the adjustment year (as defined in Sec.  301.6241-
1(a)(1)) in accordance with Sec.  301.6225-3. Partnership adjustments 
may result in more than one imputed underpayment pursuant to paragraph 
(g) of this section. Each imputed underpayment determined under this 
section is based solely on partnership adjustments with respect to a 
single taxable year.
    (2) Partnership pays the imputed underpayment. An imputed 
underpayment (determined in accordance with paragraph (b) of this 
section and included in a notice of final partnership adjustment (FPA) 
under section 6231(a)(3)) must be paid by the partnership in the same 
manner as if the imputed underpayment were a tax imposed for the 
adjustment year in accordance with Sec.  301.6232-1. The FPA will 
include the amount of any imputed underpayment, as modified under Sec.  
301.6225-2 if applicable, unless the partnership waives its right to 
such FPA under section 6232(d)(2). See Sec.  301.6232-1(d)(2). For the 
alternative to payment of the imputed underpayment by the partnership, 
see Sec.  301.6226-1. If a partnership pays an imputed underpayment, 
the partnership's expenditure for the imputed underpayment is taken 
into account by the partnership in accordance with Sec.  301.6241-4. 
For interest and penalties with respect to an imputed underpayment, see 
section 6233.
    (3) Imputed underpayment set forth in notice of proposed 
partnership adjustment. An imputed underpayment set forth in a notice 
of proposed partnership adjustment (NOPPA) under section 6231(a)(2) is 
determined in accordance with paragraph (b) of this section without 
regard to any modification under Sec.  301.6225-2. Modifications under 
Sec.  301.6225-2, if allowed by the IRS, may change the amount of an 
imputed underpayment set forth in the NOPPA and determined in 
accordance with paragraph (b) of this section. Only the partnership 
adjustments set forth in a NOPPA are taken into account for purposes of 
determining an imputed underpayment under this section and for any 
modification under Sec.  301.6225-2.
    (b) Determination of an imputed underpayment--(1) In general. In 
the case of any partnership adjustment by the IRS, an imputed 
underpayment is determined by-
    (i) Grouping the partnership adjustments in accordance with 
paragraph (c) of this section and, if appropriate, subgrouping such 
adjustments in accordance with paragraph (d) of this section;
    (ii) Netting the adjustments in accordance with paragraph (e) of 
this section;
    (iii) Calculating the total netted partnership adjustment in 
accordance with paragraph (b)(2) of this section;
    (iv) Multiplying the total netted partnership adjustment by the 
highest rate of Federal income tax in effect for the reviewed year 
under section 1 or 11; and
    (v) Increasing or decreasing the product that results under 
paragraph (b)(1)(iv) of this section by--
    (A) Any amounts treated as net positive adjustments (as defined in 
paragraph (e)(4)(i) of this section) under paragraph (e)(3)(ii) of this 
section; and
    (B) Except as provided in paragraph (e)(3)(ii) of this section, any 
amounts treated as net negative adjustments (as defined in paragraph 
(e)(4)(ii) of this section) under paragraph (e)(3)(ii) of this section.
    (2) Calculation of the total netted partnership adjustment. For 
purposes of determining an imputed underpayment under paragraph (b)(1) 
of this section, the total netted partnership adjustment is the sum of 
all net positive adjustments in the reallocation grouping described in 
paragraph (c)(2) of this section and the residual grouping described in 
paragraph (c)(5) of this section.
    (3) Adjustments to items for which tax has been collected under 
chapters 3 and 4 of the Internal Revenue Code. A partnership adjustment 
is disregarded for purposes of calculating the imputed underpayment 
under paragraph (b) of this section to the extent that the IRS has 
collected the tax required to be withheld under chapter 3 or chapter 4 
(as defined in Sec.  301.6241-6(b)(2)(ii) and (iii)) that is 
attributable to the partnership adjustment. See Sec.  301.6241-6(b)(3) 
for rules that apply when a partnership pays an imputed underpayment 
that includes a partnership adjustment to an amount subject to 
withholding (as defined in Sec.  301.6241-6(b)(2)(i)) under chapter 3 
or chapter 4 for which such tax has not yet been collected.
    (4) Treatment of adjustment as zero for purposes of calculating the 
imputed underpayment. If the effect of one partnership adjustment is 
reflected in one or more other partnership adjustments, the IRS may 
treat the one adjustment as zero solely for purposes of calculating the 
imputed underpayment.
    (c) Grouping of partnership adjustments--(1) In general. To 
determine an imputed underpayment under paragraph (b) of this section, 
partnership adjustments are placed into one of four groupings. These 
groupings are the reallocation grouping described in paragraph (c)(2) 
of this section, the credit grouping described in paragraph (c)(3) of 
this section, the creditable expenditure grouping described in 
paragraph (c)(4) of this section, and the residual grouping described 
in paragraph (c)(5) of this section. Adjustments in groupings may be 
placed in subgroupings, as appropriate, in accordance with paragraph 
(d) of this section. The IRS may, in its discretion, group adjustments 
in a manner other than the manner described in this paragraph (c) when 
such grouping would appropriately reflect the facts and circumstances. 
For requests to modify the groupings, see Sec.  301.6225-2(d)(6).
    (2) Reallocation grouping--(i) In general. Any adjustment that 
allocates or reallocates a partnership-related item to and from a 
particular partner or

[[Page 6535]]

partners is a reallocation adjustment. Except in the case of an 
adjustment to a credit (as described in paragraph (c)(3) of this 
section) or to a creditable expenditure (as described in paragraph 
(c)(4) of this section), reallocation adjustments are placed in the 
reallocation grouping. Adjustments that reallocate a credit to and from 
a particular partner or partners are placed in the credit grouping (see 
paragraph (c)(3) of this section), and adjustments that reallocate a 
creditable expenditure to and from a particular partner or partners are 
placed in the creditable expenditure grouping (see paragraph (c)(4) of 
this section).
    (ii) Each reallocation adjustment results in at least two separate 
adjustments. Each reallocation adjustment generally results in at least 
two separate adjustments. One adjustment reverses the effect of the 
improper allocation of a partnership-related item, and the other 
adjustment effectuates the proper allocation of the partnership-related 
item. Generally, a reallocation adjustment results in one positive 
adjustment (as defined in paragraph (d)(2)(iii) of this section) and 
one negative adjustment (as defined in paragraph (d)(2)(ii) of this 
section).
    (3) Credit grouping. Each adjustment to a partnership-related item 
that is reported or could be reported by a partnership as a credit on 
the partnership's return, including a reallocation adjustment, is 
placed in the credit grouping.
    (4) Creditable expenditure grouping--(i) In general. Each 
adjustment to a creditable expenditure, including a reallocation 
adjustment to a creditable expenditure, is placed in the creditable 
expenditure grouping.
    (ii) Adjustment to a creditable expenditure--(A) In general. For 
purposes of this section, an adjustment to a partnership-related item 
is treated as an adjustment to a creditable expenditure if any person 
could take the item that is adjusted (or item as adjusted if the item 
was not originally reported by the partnership) as a credit. See Sec.  
1.704-1(b)(4)(ii) of this chapter. For instance, if the adjustment is a 
reduction of qualified research expenses, the adjustment is to a 
creditable expenditure for purposes of this section because any person 
allocated the qualified research expenses by the partnership could 
claim a credit with respect to their allocable portion of such expenses 
under section 41, rather than a deduction under section 174.
    (B) Creditable foreign tax expenditures. The creditable expenditure 
grouping includes each adjustment to a creditable foreign tax 
expenditure (CFTE) as defined in Sec.  1.704-1(b)(4)(viii)(b) of this 
chapter, including any reallocation adjustment to a CFTE.
    (5) Residual grouping--(i) In general. Any adjustment to a 
partnership-related item not described in paragraph (c)(2), (3), or (4) 
of this section is placed in the residual grouping.
    (ii) Adjustments to partnership-related items that are not 
allocated under section 704(b). The residual grouping includes any 
adjustment to a partnership-related item that derives from an item that 
would not have been required to be allocated by the partnership to a 
reviewed year partner under section 704(b).
    (6) Recharacterization adjustments--(i) Recharacterization 
adjustment defined. An adjustment that changes the character of a 
partnership-related item is a recharacterization adjustment. For 
instance, an adjustment that changes a loss from ordinary to capital or 
from active to passive is a recharacterization adjustment.
    (ii) Grouping recharacterization adjustments. A recharacterization 
adjustment is placed in the appropriate grouping as described in 
paragraphs (c)(2) through (5) of this section.
    (iii) Recharacterization adjustments result in two partnership 
adjustments. In general, a recharacterization adjustment results in at 
least two separate adjustments in the appropriate grouping under 
paragraph (c)(6)(ii) of this section. One adjustment reverses the 
improper characterization of the partnership-related item, and the 
other adjustment effectuates the proper characterization of the 
partnership-related item. A recharacterization adjustment results in 
two adjustments regardless of whether the amount of the partnership-
related item is being adjusted. Generally, recharacterization 
adjustments result in one positive adjustment and one negative 
adjustment.
    (d) Subgroupings--(1) In general. If all partnership adjustments 
are positive adjustments, this paragraph (d) does not apply. If any 
partnership adjustment within any grouping described in paragraph (c) 
of this section is a negative adjustment, the adjustments within that 
grouping are subgrouped in accordance with this paragraph (d). The IRS 
may, in its discretion, subgroup adjustments in a manner other than the 
manner described in this paragraph (d) when such subgrouping would 
appropriately reflect the facts and circumstances. For requests to 
modify the subgroupings, see Sec.  301.6225-2(d)(6).
    (2) Definition of negative adjustments and positive adjustments--
(i) In general. For purposes of this section, partnership adjustments 
made by the IRS are treated as follows:
    (A) An increase in an item of gain is treated as an increase in an 
item of income;
    (B) A decrease in an item of gain is treated as a decrease in an 
item of income;
    (C) An increase in an item of loss or deduction is treated as a 
decrease in an item of income; and
    (D) A decrease in an item of loss or deduction is treated as an 
increase in an item of income.
    (ii) Negative adjustment. A negative adjustment is any adjustment 
that is a decrease in an item of income, a partnership adjustment 
treated under paragraph (d)(2)(i) of this section as a decrease in an 
item of income, or an increase in an item of credit.
    (iii) Positive adjustment--(A) In general. A positive adjustment is 
any adjustment that is not a negative adjustment as defined in 
paragraph (d)(2)(ii) of this section.
    (B) Treatment of adjustments that cannot be allocated under section 
704(b). For purposes of determining an imputed underpayment under this 
section, an adjustment described in paragraph (c)(5)(ii) of this 
section that could result in an increase in income or decrease in a 
loss, deduction, or credit for any person without regard to any 
particular person's specific circumstances is treated, to the extent 
appropriate, either as a positive adjustment to income or to a credit.
    (3) Subgrouping rules--(i) In general. Except as otherwise provided 
in this paragraph (d)(3), an adjustment is subgrouped according to how 
the adjustment would be required to be taken into account separately 
under section 702(a) or any other provision of the Code, regulations, 
forms, instructions, or other guidance prescribed by the IRS applicable 
to the adjusted partnership-related item. A negative adjustment must be 
placed in the same subgrouping as another adjustment if the negative 
adjustment and the other adjustment would have been properly netted at 
the partnership level and such netted amount would have been required 
to be allocated to the partners of the partnership as a single 
partnership-related item for purposes of section 702(a), other 
provision of the Code, regulations, forms, instructions, or other 
guidance prescribed by the IRS. For purposes of creating subgroupings 
under this section, if any adjustment could be subject to any 
preference, limitation, or restriction under the Code

[[Page 6536]]

(or not allowed, in whole or in part, against ordinary income) if taken 
into account by any person, the adjustment is placed in a separate 
subgrouping from all other adjustments within the grouping.
    (ii) Subgrouping reallocation adjustments--(A) Reallocation 
adjustments in the reallocation grouping. Each positive adjustment and 
each negative adjustment resulting from a reallocation adjustment as 
described in paragraph (c)(2)(ii) of this section is placed in its own 
separate subgrouping within the reallocation grouping. For instance, if 
the reallocation adjustment reallocates a deduction from one partner to 
another partner, the decrease in the deduction (positive adjustment) 
allocated to the first partner is placed in a subgrouping within the 
reallocation grouping separate from the increase in the deduction 
(negative adjustment) allocated to the second partner. Notwithstanding 
the requirement that reallocation adjustments be placed into separate 
subgroupings, if a particular partner or group of partners has two or 
more reallocation adjustments allocable to such partner or group, such 
adjustments may be subgrouped in accordance with paragraph (d)(3)(i) of 
this section and netted in accordance with paragraph (e) of this 
section.
    (B) Reallocation adjustments in the credit grouping. In the case of 
a reallocation adjustment to a credit, which is placed in the credit 
grouping pursuant to paragraph (c)(3) of this section, the decrease in 
credits allocable to one partner or group of partners is treated as a 
positive adjustment, and the increase in credits allocable to another 
partner or group of partners is treated as a negative adjustment. Each 
positive adjustment and each negative adjustment resulting from a 
reallocation adjustment to credits is placed in its own separate 
subgrouping within the credit grouping.
    (iii) Subgroupings within the creditable expenditure grouping--(A) 
In general. Each adjustment in the creditable expenditure grouping 
described in paragraph (c)(4) of this section is subgrouped in 
accordance with paragraphs (d)(3)(i) and (iii) of this section. For 
rules related to creditable expenditures other than CFTEs, see 
paragraph (d)(3)(iii)(C) of this section.
    (B) Subgroupings for adjustments to CFTEs. Each adjustment to a 
CFTE is subgrouped based on the separate category of income to which 
the CFTE relates in accordance with section 904(d) and the regulations 
in part 1 of this chapter, and to account for any different allocation 
of the CFTE between partners. Two or more adjustments to CFTEs are 
included within the same subgrouping only if each adjustment relates to 
CFTEs in the same separate category, and each adjusted partnership-
related item would be allocated to the partners in the same ratio had 
those items been properly reflected on the partnership return for the 
reviewed year.
    (C) [Reserved]
    (iv) Subgrouping recharacterization adjustments. Each positive 
adjustment and each negative adjustment resulting from a 
recharacterization adjustment as described in paragraph (c)(6) of this 
section is placed in its own separate subgrouping within the residual 
grouping. If a particular partner or group of partners has two or more 
recharacterization adjustments allocable to such partner or group, such 
adjustments may be subgrouped in accordance with paragraph (d)(3)(i) of 
this section and netted in accordance with paragraph (e) of this 
section.
    (e) Netting adjustments within each grouping or subgrouping--(1) In 
general. All adjustments within a subgrouping determined in accordance 
with paragraph (d) of this section are netted in accordance with this 
paragraph (e) to determine whether there is a net positive adjustment 
(as defined in paragraph (e)(4)(i) of this section) or net negative 
adjustment (as defined in paragraph (e)(4)(ii) of this section) for 
that subgrouping. If paragraph (d) of this section does not apply 
because a grouping only includes positive adjustments, all adjustments 
in that grouping are netted in accordance with this paragraph (e). For 
purposes of this paragraph (e), netting means summing all adjustments 
together within each grouping or subgrouping, as appropriate.
    (2) Limitations on netting adjustments. Positive adjustments and 
negative adjustments may only be netted against each other if they are 
in the same grouping in accordance with paragraph (c) of this section. 
If a negative adjustment is in a subgrouping in accordance with 
paragraph (d) of this section, the negative adjustment may only net 
with a positive adjustment also in that same subgrouping in accordance 
with paragraph (d) of this section. An adjustment in one grouping or 
subgrouping may not be netted against an adjustment in any other 
grouping or subgrouping. Adjustments from one taxable year may not be 
netted against adjustments from another taxable year.
    (3) Results of netting adjustments within groupings or 
subgroupings--(i) Groupings other than the credit and creditable 
expenditure groupings. Except as described in paragraphs (e)(3)(ii) and 
(iii) of this section, each net positive adjustment (as defined in 
paragraph (e)(4)(i) of this section) with respect to a particular 
grouping or subgrouping that results after netting the adjustments in 
accordance with this paragraph (e) is included in the calculation of 
the total netted partnership adjustment under paragraph (b)(2) of this 
section. Each net negative adjustment (as defined in paragraph 
(e)(4)(ii) of this section) with respect to a grouping or subgrouping 
that results after netting the adjustments in accordance with this 
paragraph (e) is excluded from the calculation of the total netted 
partnership adjustment under paragraph (b)(2) of this section. 
Adjustments underlying a net negative adjustment described in the 
preceding sentence are adjustments that do not result in an imputed 
underpayment (as described in paragraph (f) of this section).
    (ii) Credit grouping. Any net positive adjustment or net negative 
adjustment in the credit grouping (including any such adjustment with 
respect to a subgrouping within the credit grouping) is excluded from 
the calculation of the total netted partnership adjustment. A net 
positive adjustment described in this paragraph (e)(3)(ii) is taken 
into account under paragraph (b)(1)(v) of this section. A net negative 
adjustment described in this paragraph (e)(3)(ii), including a negative 
adjustment to a credit resulting from a reallocation adjustment that 
was placed in a separate subgrouping pursuant to paragraph 
(d)(3)(ii)(B) of this section, is treated as an adjustment that does 
not result in an imputed underpayment in accordance with paragraph 
(f)(1)(i) of this section, unless the IRS determines that such net 
negative adjustment should be taken into account under paragraph 
(b)(1)(v) of this section.
    (iii) Treatment of creditable expenditures--(A) Creditable foreign 
tax expenditures. A net decrease to a CFTE in any CFTE subgrouping (as 
described in paragraph (d)(3)(iii) of this section) is treated as a net 
positive adjustment described in paragraph (e)(3)(ii) of this section 
and is excluded from the calculation of the total netted partnership 
adjustment under paragraph (b)(2) of this section. A net increase to a 
CFTE in any CFTE subgrouping is treated as a net negative adjustment 
described in paragraph (e)(3)(i) of this section. For rules related to 
creditable expenditures other than CFTEs, see paragraph (e)(3)(iii)(B) 
of this section.
    (B) [Reserved]
    (4) Net positive adjustment and net negative adjustment defined--
(i) Net positive adjustment. A net positive

[[Page 6537]]

adjustment means an amount that is greater than zero which results from 
netting adjustments within a grouping or subgrouping in accordance with 
this paragraph (e). A net positive adjustment includes a positive 
adjustment that was not netted with any other adjustment. A net 
positive adjustment includes a net decrease in an item of credit.
    (ii) Net negative adjustment. A net negative adjustment means any 
amount which results from netting adjustments within a grouping or 
subgrouping in accordance with this paragraph (e) that is not a net 
positive adjustment (as defined in paragraph (e)(4)(i) of this 
section). A net negative adjustment includes a negative adjustment that 
was not netted with any other adjustment.
    (f) Partnership adjustments that do not result in an imputed 
underpayment--(1) In general. Except as otherwise provided in paragraph 
(e) of this section, a partnership adjustment does not result in an 
imputed underpayment if--
    (i) After grouping, subgrouping, and netting the adjustments as 
described in paragraphs (c), (d), and (e) of this section, the result 
of netting with respect to any grouping or subgrouping that includes a 
particular partnership adjustment is a net negative adjustment (as 
described in paragraph (e)(4)(ii) of this section); or
    (ii) The calculation under paragraph (b)(1) of this section results 
in an amount that is zero or less than zero.
    (2) Treatment of an adjustment that does not result in an imputed 
underpayment. Any adjustment that does not result in an imputed 
underpayment (as described in paragraph (f)(1) of this section) is 
taken into account by the partnership in the adjustment year in 
accordance with Sec.  301.6225-3. If the partnership makes an election 
pursuant to section 6226 with respect to an imputed underpayment, the 
adjustments that do not result in that imputed underpayment that are 
associated with that imputed underpayment (as described in paragraph 
(g)(2)(iii)(B) of this section) are taken into account by the reviewed 
year partners in accordance with Sec.  301.6226-3.
    (g) Multiple imputed underpayments in a single administrative 
proceeding--(1) In general. The IRS, in its discretion, may determine 
that partnership adjustments for the same partnership taxable year 
result in more than one imputed underpayment. The determination of 
whether there is more than one imputed underpayment for any partnership 
taxable year, and if so, which partnership adjustments are taken into 
account to calculate any particular imputed underpayment is based on 
the facts and circumstances and nature of the partnership adjustments. 
See Sec.  301.6225-2(d)(6) for modification of the number and 
composition of imputed underpayments.
    (2) Types of imputed underpayments--(i) In general. There are two 
types of imputed underpayments: A general imputed underpayment 
(described in paragraph (g)(2)(ii) of this section) and a specific 
imputed underpayment (described in paragraph (g)(2)(iii) of this 
section). Each type of imputed underpayment is separately calculated in 
accordance with this section.
    (ii) General imputed underpayment. The general imputed underpayment 
is calculated based on all adjustments (other than adjustments that do 
not result in an imputed underpayment under paragraph (f) of this 
section) that are not taken into account to determine a specific 
imputed underpayment under paragraph (g)(2)(iii) of this section. There 
is only one general imputed underpayment in any administrative 
proceeding. If there is one imputed underpayment in an administrative 
proceeding, it is a general imputed underpayment and may take into 
account adjustments described in paragraph (g)(2)(iii) of this section, 
if any, and all adjustments that do not result in that general imputed 
underpayment (as described in paragraph (f) of this section) are 
associated with that general imputed underpayment.
    (iii) Specific imputed underpayment--(A) In general. The IRS may, 
in its discretion, designate a specific imputed underpayment with 
respect to adjustments to a partnership-related item or items that were 
allocated to one partner or a group of partners that had the same or 
similar characteristics or that participated in the same or similar 
transaction or on such other basis as the IRS determines properly 
reflects the facts and circumstances. The IRS may designate more than 
one specific imputed underpayment with respect to any partnership 
taxable year. For instance, in a single partnership taxable year there 
may be a specific imputed underpayment with respect to adjustments 
related to a transaction affecting some, but not all, partners of the 
partnership (such as adjustments that are specially allocated to 
certain partners) and a second specific imputed underpayment with 
respect to adjustments resulting from a reallocation of a distributive 
share of income from one partner to another partner. The IRS may, in 
its discretion, determine that partnership adjustments that could be 
taken into account to calculate one or more specific imputed 
underpayments under this paragraph (g)(2)(iii)(A) for a partnership 
taxable year are more appropriately taken into account in determining 
the general imputed underpayment for such taxable year. For instance, 
the IRS may determine that it is more appropriate to calculate only the 
general imputed underpayment if, when calculating the specific imputed 
underpayment requested by the partnership, there is an increase in the 
number of the partnership adjustments that after grouping and netting 
result in net negative adjustments and are disregarded in calculating 
the specific imputed underpayment.
    (B) Adjustments that do not result in an imputed underpayment 
associated with a specific imputed underpayment. If the IRS designates 
a specific imputed underpayment, the IRS will designate which 
adjustments that do not result in an imputed underpayment, if any, are 
appropriate to associate with that specific imputed underpayment. If 
the adjustments underlying that specific imputed underpayment are 
reallocation adjustments or recharacterization adjustments, the net 
negative adjustment that resulted from the reallocation or 
recharacterization is associated with the specific imputed 
underpayment. Any adjustments that do not result in an imputed 
underpayment that are not associated with a specific imputed 
underpayment under this paragraph (g)(2)(iii)(B) are associated with 
the general imputed underpayment.
    (h) Examples. The following examples illustrate the rules of this 
section. For purposes of these examples, unless otherwise stated, each 
partnership is subject to the provisions of subchapter C of chapter 63 
of the Code, each partnership and its partners are calendar year 
taxpayers, all partners are U.S. persons, the highest rate of income 
tax in effect for all taxpayers is 40 percent for all relevant periods, 
and no partnership requests modification under Sec.  301.6225-2.

    (1) Example 1.  Partnership reports on its 2019 partnership 
return $100 of ordinary income and an ordinary deduction of -$70. 
The IRS initiates an administrative proceeding with respect to 
Partnership's 2019 taxable year and determines that ordinary income 
was $105 instead of $100 ($5 adjustment) and that the ordinary 
deduction was -$80 instead of -$70 (-$10 adjustment). Pursuant to 
paragraph (c) of this section, the adjustments are both in the 
residual grouping. The -$10 adjustment to the ordinary deduction 
would not have been netted at the partnership level with the $5

[[Page 6538]]

adjustment to ordinary income and would not have been required to be 
allocated to the partners of the partnership as a single 
partnership-related item for purposes of section 702(a), other 
provision of the Code, regulations, forms, instructions, or other 
guidance prescribed by the IRS. Because the -$10 adjustment to the 
ordinary deduction would result in a decrease in the imputed 
underpayment if netted with the $5 adjustment to ordinary income and 
because it might be limited if taken into account by any person, the 
-$10 adjustment must be placed in a separate subgrouping from the $5 
adjustment to ordinary income. See paragraph (d)(3)(i) of this 
section. The total netted partnership adjustment is $5, which 
results in an imputed underpayment of $2. The -$10 adjustment to the 
ordinary deduction is a net negative amount and is an adjustment 
that does not result in an imputed underpayment which is taken into 
account by Partnership in the adjustment year in accordance with 
Sec.  301.6225-3.
    (2) Example 2.  The facts are the same as Example 1 in paragraph 
(h)(1) of this section, except that the -$10 adjustment to the 
ordinary deduction would have been netted at the partnership level 
with the $5 adjustment to ordinary income and would have been 
required to be allocated to the partners of the partnership as a 
single partnership-related item for purposes of section 702(a), 
other provision of the Code, regulations, forms, instructions, or 
other guidance prescribed by the IRS. Therefore, the $5 adjustment 
and the -$10 adjustment must be placed in the same subgrouping 
within the residual grouping. The $5 adjustment and the -$10 
adjustments are then netted in accordance with paragraph (e) of this 
section. Such netting results in a net negative adjustment (as 
defined under paragraph (e)(4)(ii) of this section) of -$5. Pursuant 
to paragraph (f) of this section, the -$5 net negative adjustment is 
an adjustment that does not result in an imputed underpayment. 
Because the only net adjustment is an adjustment that does not 
result in an imputed underpayment, there is no imputed underpayment.
    (3) Example 3.  Partnership reports on its 2019 partnership 
return ordinary income of $300, long-term capital gain of $125, 
long-term capital loss of -$75, a depreciation deduction of -$100, 
and a tax credit that can be claimed by the partnership of $5. In an 
administrative proceeding with respect to Partnership's 2019 taxable 
year, the IRS determines that ordinary income is $500 ($200 
adjustment), long-term capital gain is $200 ($75 adjustment), long-
term capital loss is -$25 ($50 adjustment), the depreciation 
deduction is -$70 ($30 adjustment), and the tax credit is $3 ($2 
adjustment). Pursuant to paragraph (c) of this section, the 
adjustment to the tax credit is in the credit grouping under 
paragraph (c)(3) of this section. The remaining adjustments are part 
of the residual grouping under paragraph (c)(5) of this section. 
Pursuant to paragraph (d)(2) of this section, all of the adjustments 
in the residual grouping are positive adjustments. Because there are 
no negative adjustments, there are no subgroupings within the 
residual grouping. Under paragraph (b)(2) of this section, the 
adjustments in the residual grouping are summed for a total netted 
partnership adjustment of $355. Under paragraph (b)(1)(iv) of this 
section, the total netted partnership adjustment is multiplied by 40 
percent (highest tax rate in effect), which results in $142. Under 
paragraph (b)(1)(v) of this section, the $142 is increased by the $2 
credit adjustment, resulting in an imputed underpayment of $144.
    (4) Example 4.  Partnership reported on its 2019 partnership 
return long-term capital gain of $125. In an administrative 
proceeding with respect to Partnership's 2019 taxable year, the IRS 
determines the long-term capital gain should have been reported as 
ordinary income of $125. There are no other adjustments for the 2019 
taxable year. This recharacterization adjustment results in two 
adjustments in the residual grouping pursuant to paragraph (c)(6) of 
this section: an increase in ordinary income of $125 ($125 
adjustment) as well as a decrease of long-term capital gain of $125 
(-$125 adjustment). The decrease in long-term capital gain is a 
negative adjustment under paragraph (d)(2)(ii) of this section and 
the increase in ordinary income is a positive adjustment under 
paragraph (d)(2)(iii) of this section. Under paragraph (d)(3)(i) of 
this section, the adjustment to long-term capital gain is placed in 
a subgrouping separate from the adjustment to ordinary income 
because the reduction of long-term capital gain is required to be 
taken into account separately pursuant to section 702(a). The $125 
decrease in long-term capital gain is a net negative adjustment in 
the long-term capital subgrouping and, as a result, is an adjustment 
that does not result in an imputed underpayment under paragraph (f) 
of this section and is taken into account in accordance with Sec.  
301.6225-3. The $125 increase in ordinary income results in a net 
positive adjustment under paragraph (e)(4)(i) of this section. 
Because the ordinary subgrouping is the only subgrouping resulting 
in a net positive adjustment, $125 is the total netted partnership 
adjustment under paragraph (b)(2) of this section. Under paragraph 
(b)(1)(iv) of this section, $125 is multiplied by 40 percent 
resulting in an imputed underpayment of $50.
    (5) Example 5.  Partnership reported a $100 deduction for 
certain expenses on its 2019 partnership return and an additional 
$100 deduction with respect to the same type of expenses on its 2020 
partnership return. The IRS initiates an administrative proceeding 
with respect to Partnership's 2019 and 2020 taxable years and 
determines that Partnership reported a portion of the expenses as a 
deduction in 2019 that should have been taken into account in 2020. 
Therefore, for taxable year 2019, the IRS determines that 
Partnership should have reported a deduction of $75 with respect to 
the expenses ($25 adjustment in the 2019 residual grouping). For 
2020, the IRS determines that Partnership should have reported a 
deduction of $125 with respect to these expenses (-$25 adjustment in 
the 2020 residual grouping). There are no other adjustments for the 
2019 and 2020 partnership taxable years. Pursuant to paragraph 
(e)(2) of this section, the adjustments for 2019 and 2020 are not 
netted with each other. The 2019 adjustment of $25 is the only 
adjustment for that year and a net positive adjustment under 
paragraph (e)(4)(i) of this section, and therefore the total netted 
partnership adjustment for 2019 is $25 pursuant to paragraph (b)(2) 
of this section. The $25 total netted partnership adjustment is 
multiplied by 40 percent resulting in an imputed underpayment of $10 
for Partnership's 2019 taxable year. The $25 increase in the 
deduction for 2020, a net negative adjustment under paragraph 
(e)(4)(ii) of this section, is an adjustment that does not result in 
an imputed underpayment for that year. Therefore, there is no 
imputed underpayment for 2020.
    (6) Example 6.  On its partnership return for the 2020 taxable 
year, Partnership reported ordinary income of $100 and a capital 
gain of $50. Partnership had four equal partners during the 2020 tax 
year, all of whom were individuals. On its partnership return for 
the 2020 tax year, the capital gain was allocated to partner E and 
the ordinary income was allocated to all partners based on their 
interests in Partnership. In an administrative proceeding with 
respect to Partnership's 2020 taxable year, the IRS determines that 
for 2020 the capital gain allocated to E should have been $75 
instead of $50 and that Partnership should have recognized an 
additional $10 in ordinary income. In the NOPPA mailed by the IRS, 
the IRS may determine pursuant to paragraph (g) of this section that 
there is a general imputed underpayment with respect to the increase 
in ordinary income and a specific imputed underpayment with respect 
to the increase in capital gain specially allocated to E.
    (7) Example 7.  On its partnership return for the 2020 taxable 
year, Partnership reported a recourse liability of $100. During an 
administrative proceeding with respect to Partnership's 2020 taxable 
year, the IRS determines that the $100 recourse liability should 
have been reported as a $100 nonrecourse liability. Under paragraph 
(d)(2)(iii)(B) of this section, the adjustment to the character of 
the liability is an adjustment to an item that cannot be allocated 
under section 704(b). The adjustment therefore is treated as a $100 
increase in income because such recharacterization of a liability 
could result in up to $100 in taxable income if taken into account 
by any person. The $100 increase in income is a positive adjustment 
in the residual grouping under paragraph (c)(5)(ii) of this section. 
There are no other adjustments for the 2020 partnership taxable 
year. The $100 positive adjustment is treated as a net positive 
adjustment under paragraph (e)(4)(i) of this section, and the total 
netted partnership adjustment under paragraph (b)(2) of this section 
is $100. Pursuant to paragraph (b)(1) of this section, the total 
netted partnership adjustment is multiplied by 40 percent for an 
imputed underpayment of $40.
    (8) Example 8.  Partnership reports on its 2019 partnership 
return $400 of CFTEs in the general category under section 904(d). 
The IRS initiates an administrative proceeding with respect to 
Partnership's 2019 taxable year and determines that the amount of

[[Page 6539]]

CFTEs was $300 instead of $400 (-$100 adjustment to CFTEs). No other 
adjustments are made for the 2019 taxable year. The -$100 adjustment 
to CFTEs is placed in the creditable expenditure grouping described 
in paragraph (c)(4) of this section. Pursuant to paragraph 
(e)(3)(iii) of this section, the decrease to CFTEs in the creditable 
expenditure grouping is treated as a positive adjustment to 
(decrease in) credits in the credit grouping under paragraph (c)(3) 
of this section. Because no other adjustments have been made, the 
$100 decrease in credits produces an imputed underpayment of $100 
under paragraph (b)(1) of this section.
    (9) Example 9.  Partnership reports on its 2019 partnership 
return $400 of CFTEs in the passive category under section 904(d). 
The IRS initiates an administrative proceeding with respect to 
Partnership's 2019 taxable year and determines that the CFTEs 
reported by Partnership were general category instead of passive 
category CFTEs. No other adjustments are made. Under the rules in 
paragraph (c)(6) of this section, an adjustment to the category of a 
CFTE is treated as two separate adjustments: An increase to general 
category CFTEs of $400 and a decrease to passive category CFTEs of 
$400. Both adjustments are included in the creditable expenditure 
grouping under paragraph (c)(4) of this section, but they are 
included in separate subgroupings. Therefore, the two amounts do not 
net. Instead, the $400 increase to CFTEs in the general category 
subgrouping is treated as a net negative adjustment under paragraph 
(e)(3)(iii)(A) of this section and is an adjustment that does not 
result in an imputed underpayment under paragraph (f) of this 
section. The decrease to CFTEs in the passive category subgrouping 
of the creditable expenditure grouping results in a decrease in 
CFTEs. Therefore, pursuant to paragraph (e)(3)(iii)(A) of this 
section, it is treated as a positive adjustment to (decrease in) 
credits in the credit grouping under paragraph (c)(3) of this 
section, which results in an imputed underpayment of $400 under 
paragraph (b)(1) of this section.
    (10) Example 10.  Partnership has two partners, A and B. Under 
the partnership agreement, $100 of the CFTE is specially allocated 
to A for the 2019 taxable year. The IRS initiates an administrative 
proceeding with respect to Partnership's 2019 taxable year and 
determines that $100 of CFTE should be reallocated from A to B. 
Because the adjustment reallocates a creditable expenditure, 
paragraph (c)(4) of this section provides that it is included in the 
creditable expenditure grouping rather than the reallocation 
grouping. The partnership adjustment is a -$100 adjustment to 
general category CFTE allocable to A and an increase of $100 to 
general category CFTE allocable to B. Pursuant to paragraph 
(d)(3)(iii) of this section, the -$100 adjustment to general 
category CFTE and the increase of $100 to general category CFTE are 
included in separate subgroupings in the creditable expenditure 
grouping. The $100 increase in general category CFTEs, B-allocation 
subgrouping, is a net negative adjustment, which does not result in 
an imputed underpayment and is therefore taken into account by the 
partnership in the adjustment year in accordance with Sec.  
301.6225-3. The net decrease to CFTEs in the general-category, A-
allocation subgrouping, is treated as a positive adjustment to 
(decrease in) credits in the credit grouping under paragraph (c)(3) 
of this section, resulting in an imputed underpayment of $100 under 
paragraph (b)(1) of this section.
    (11) Example 11.  Partnership has two partners, A and B. 
Partnership owns two entities, DE1 and DE2, that are disregarded as 
separate from their owner for Federal income tax purposes and are 
operating in and paying taxes to foreign jurisdictions. The 
partnership agreement provides that all items from DE1 and DE2 are 
allocable to A and B in the following manner. Items related to DE1: 
To A 75 percent and to B 25 percent. Items related to DE2: To A 25 
percent and to B 75 percent. On Partnership's 2018 return, 
Partnership reports CFTEs in the general category of $300, $100 with 
respect to DE1 and $200 with respect to DE2. Partnership allocates 
the $300 of CFTEs $125 and $175 to A and B respectively. During an 
administrative proceeding with respect to Partnership's 2018 taxable 
year, the IRS determines that Partnership understated the amount of 
creditable foreign tax paid by DE2 by $40 and overstated the amount 
of creditable foreign tax paid by DE1 by $80. No other adjustments 
are made. Because the two adjustments each relate to CFTEs that are 
subject to different allocations, the two adjustments are in 
different subgroupings under paragraph (d)(3)(iii)(B) of this 
section. The adjustment reducing the CFTEs related to DE1 results in 
a decrease in CFTEs within that subgrouping and under paragraph 
(e)(3)(iii)(A) of this section is treated as a decrease in credits 
in the credit grouping under paragraph (c)(3) of this section and 
results in an imputed underpayment of $80 under paragraph (b)(1) of 
this section. The increase of $40 of general category CFTE related 
to the DE2 subgrouping results in an increase in CFTEs within that 
subgrouping and is treated as a net negative adjustment, which does 
not result in an imputed underpayment and is taken into account in 
the adjustment year in accordance with Sec.  301.6225-3.
    (12) Example 12.  Partnership has two partners, A and B. For the 
2019 taxable year, Partnership allocated $70 of long term capital 
loss to B as well as $30 of ordinary income. In an administrative 
proceeding with respect to Partnership's 2019 taxable year, the IRS 
determines that the $30 of ordinary income and the $70 of long term 
capital loss should be reallocated from B to A. The partnership 
adjustments are a decrease of $30 of ordinary income (-$30 
adjustment) allocated to B and a corresponding increase of $30 of 
ordinary income ($30 adjustment) allocated to A, as well as a 
decrease of $70 of long term capital loss ($70 adjustment) allocated 
to B and a corresponding increase of $70 of long term capital loss 
(-$70 adjustment) allocated to A. See paragraph (c)(2)(ii) of this 
section. Pursuant to paragraph (d)(3)(ii)(A) of this section, for 
purposes of determining the imputed underpayment, each positive 
adjustment and each negative adjustment allocated to A and B is 
placed in its own separate subgrouping. However, notwithstanding the 
general requirement that reallocation adjustments be subgrouped 
separately, the reallocation adjustments allocated to A and B may be 
subgrouped in accordance with paragraph (d)(3)(i) of this section 
because there are two reallocation adjustments allocated to each of 
A and B, respectively. Pursuant to paragraph (d)(3)(i) of this 
section, because the partnership adjustment allocated to A would not 
have been netted at the partnership level and would not have been 
allocated to A as a single partnership-related item for purposes of 
section 702(a), other provisions of the Code, regulations, forms, 
instructions, or other guidance prescribed by the IRS, the positive 
adjustment and the negative adjustment allocated to A remain in 
separate subgroupings. For the same reasons with respect to the 
adjustments allocated to B, the positive adjustment and the negative 
adjustment allocated to B also remain in separate subgroupings. As a 
result, the reallocation grouping would have four subgroupings, one 
for each adjustment: The decrease in ordinary income allocated to B 
(-$30 adjustment), the increase in ordinary income allocated to A 
($30 adjustment), the decrease in long term capital loss allocated 
to B ($70 adjustment), and the increase long term capital loss 
allocated to A (-$70 adjustment). Pursuant to paragraph (e) of this 
section, no netting may occur between subgroupings. Accordingly, the 
ordinary income allocated to A ($30 adjustment) and the long term 
capital loss allocated to B ($70 adjustment) are both net positive 
adjustments. These net positive adjustments are added together to 
determine the total netted partnership adjustment of $100. The total 
netted partnership adjustment is multiplied by 40 percent, which 
results in an imputed underpayment of $40. The ordinary income 
allocated to B (-$30 adjustment) and the long term capital loss 
allocated to A (-$70 adjustment) are net negative adjustments 
treated as adjustments that do not result in an imputed underpayment 
taken into account by the partnership pursuant to Sec.  301.6225-3.

    (i) Applicability date--(1) In general. Except as provided in 
paragraph (i)(2) of this section, this section applies to partnership 
taxable years beginning after December 31, 2017, and ending after 
August 12, 2018.
    (2) Election under Sec.  301.9100-22 in effect. This section 
applies to any partnership taxable year beginning after November 2, 
2015 and before January 1, 2018, for which a valid election under Sec.  
301.9100-22T is in effect.

0
Par. 5. Section 301.6225-2 is added to read as follows:


Sec.  301.6225-2  Modification of imputed underpayment.

    (a) Partnership may request modification of an imputed 
underpayment. A partnership that has received a notice of proposed 
partnership adjustment (NOPPA) under

[[Page 6540]]

section 6231(a)(2) from the Internal Revenue Service (IRS) may request 
modification of a proposed imputed underpayment set forth in the NOPPA 
in accordance with this section and any forms, instructions, and other 
guidance prescribed by the IRS. The effect of modification on a 
proposed imputed underpayment is described in paragraph (b) of this 
section. Unless otherwise described in paragraph (d) of this section, a 
partnership may request any type of modification of an imputed 
underpayment described in paragraph (d) of this section in the time and 
manner described in paragraph (c) of this section. A partnership may 
request modification with respect to a partnership adjustment (as 
defined in Sec.  301.6241-1(a)(6)) that does not result in an imputed 
underpayment (as described in Sec.  301.6225-1(f)(1)(ii)) as described 
in paragraph (e) of this section. Only the partnership representative 
may request modification under this section. See section 6223 and Sec.  
301.6223-2 for rules regarding the binding authority of the partnership 
representative. For purposes of this section, the term relevant partner 
means any person for whom modification is requested by the partnership 
that is--
    (1) A reviewed year partner (as defined in Sec.  301.6241-1(a)(9)), 
including any pass-through partner (as defined in Sec.  301.6241-
1(a)(5)), except for any reviewed year partner that is a wholly-owned 
entity disregarded as separate from its owner for Federal income tax 
purposes; or
    (2) An indirect partner (as defined in Sec.  301.6241-1(a)(4)) 
except for any indirect partner that is a wholly-owned entity 
disregarded as separate from its owner for Federal income tax purposes.
    (b) Effect of modification-(1) In general. A modification of an 
imputed underpayment under this section that is approved by the IRS may 
result in an increase or decrease in the amount of an imputed 
underpayment set forth in the NOPPA. A modification under this section 
has no effect on the amount of any partnership adjustment determined 
under subchapter C of chapter 63 of the Internal Revenue Code 
(subchapter C of chapter 63). See paragraph (e) of this section for the 
effect of modification on adjustments that do not result in an imputed 
underpayment. A modification may increase or decrease an imputed 
underpayment by affecting the extent to which adjustments factor into 
the determination of the imputed underpayment (as described in 
paragraph (b)(2) of this section), the tax rate that is applied in 
calculating the imputed underpayment (as described in paragraph (b)(3) 
of this section), and the number and composition of imputed 
underpayments, including the placement of adjustments in groupings and 
subgroupings (if applicable) (as described in paragraph (b)(4) of this 
section), as well as to the extent of other modifications allowed under 
rules provided in forms, instructions, or other guidance prescribed by 
the IRS (as described in paragraph (b)(5) of this section). If a 
partnership requests more than one modification under this section, 
modifications are taken into account in the following order:
    (i) Modifications that affect the extent to which an adjustment 
factors into the determination of the imputed underpayment under 
paragraph (b)(2) of this section;
    (ii) Modification of the number and composition of imputed 
underpayments under paragraph (b)(4) of this section; and
    (iii) Modifications that affect the tax rate under paragraph (b)(3) 
of this section.
    (2) Modifications that affect partnership adjustments for purposes 
of determining the imputed underpayment. If the IRS approves 
modification with respect to a partnership adjustment, such partnership 
adjustment is excluded from the determination of the imputed 
underpayment as determined under Sec.  301.6225-1(b). This paragraph 
(b)(2) applies to modifications under--
    (i) Paragraph (d)(2) of this section (amended returns and the 
alternative procedure to filing amended returns);
    (ii) Paragraph (d)(3) of this section (tax-exempt status);
    (iii) Paragraph (d)(5) of this section (specified passive activity 
losses);
    (iv) Paragraph (d)(7) of this section (qualified investment 
entities);
    (v) Paragraph (d)(8) of this section (closing agreements), if 
applicable;
    (vi) Paragraph (d)(9) of this section (tax treaty modifications), 
if applicable; and
    (vii) Paragraph (d)(10) of this section (other modifications), if 
applicable.
    (3) Modifications that affect the tax rate--(i) In general. If the 
IRS approves a modification with respect to the tax rate applied to a 
partnership adjustment, such modification results in a reduction in tax 
rate applied to the total netted partnership adjustment with respect to 
the partnership adjustments in accordance with this paragraph (b)(3). A 
modification of the tax rate does not affect how the partnership 
adjustment factors into the calculation of the total netted partnership 
adjustment. This paragraph (b)(3) applies to modifications under--
    (A) Paragraph (d)(4) of this section (rate modification);
    (B) Paragraph (d)(8) of this section (closing agreements), if 
applicable;
    (C) Paragraph (d)(9) of this section (tax treaty modifications), if 
applicable; and
    (D) Paragraph (d)(10) of this section (other modifications), if 
applicable.
    (ii) Determination of the imputed underpayment in the case of rate 
modification. Except as described in paragraph (b)(3)(iv) of this 
section, in the case of an approved modification described under 
paragraph (b)(3)(i) of this section, the imputed underpayment is the 
sum of the total netted partnership adjustment consisting of the net 
positive adjustments not subject to rate reduction under paragraph 
(b)(3)(i) of this section (taking into account any approved 
modifications under paragraph (b)(2) of the section), plus the rate-
modified netted partnership adjustment determined under paragraph 
(b)(3)(iii) of this section, reduced or increased by any adjustments to 
credits (taking into account any modifications under paragraph (b)(4) 
of this section). The total netted partnership adjustment not subject 
to rate reduction under paragraph (b)(3)(i) of this section (taking 
into account any approved modifications under paragraph (b)(2) of the 
section) is determined by multiplying the partnership adjustments 
included in the total netted partnership adjustment that are not 
subject to rate modification under paragraph (b)(3)(i) of this section 
(including any partnership adjustment that remains after applying 
paragraph (b)(3)(iii) of this section) by the highest tax rate (as 
described in Sec.  301.6225-1(b)(1)(iv)).
    (iii) Calculation of rate-modified netted partnership adjustment in 
the case of a rate modification. The rate-modified netted partnership 
adjustment is determined as follows--
    (A) Determine each relevant partner's distributive share of the 
partnership adjustments subject to an approved modification under 
paragraph (b)(3)(i) of this section based on how each adjustment 
subject to rate modification was allocated in the NOPPA, or if the 
appropriate allocation was not addressed in the NOPPA, how the 
adjustment would be properly allocated under subchapter K of chapter 1 
of the Internal Revenue Code (subchapter K) to such relevant partner in 
the reviewed year (as defined in Sec.  301.6241-1(a)(8)).
    (B) Multiply each partnership adjustment determined under paragraph 
(b)(3)(iii)(A) of this section by the tax rate applicable to such 
adjustment based on the approved modification described under paragraph 
(b)(3)(i) of this section.

[[Page 6541]]

    (C) Add all of the amounts calculated under paragraph 
(b)(3)(iii)(B) of this section with respect to each partnership 
adjustment subject to an approved modification described under 
paragraph (b)(3)(i) of this section.
    (iv) Rate modification in the case of special allocations. If an 
imputed underpayment results from adjustments to more than one 
partnership-related item and any relevant partner for whom modification 
described under paragraph (b)(3)(i) of this section is approved has a 
distributive share of such items that is not the same with respect to 
all such items, the imputed underpayment as modified based on the 
modification types described under paragraph (b)(3)(i) of this section 
is determined as described in paragraphs (b)(3)(ii) and (iii) of this 
section except that each relevant partner's distributive share is 
determined based on the amount of net gain or loss to the partner that 
would have resulted if the partnership had sold all of its assets at 
their fair market value as of the close of the reviewed year 
appropriately adjusted to reflect any approved modification under 
paragraphs (d)(2), (3), and (5) through (10) of this section with 
respect to any relevant partner. Notwithstanding the preceding 
sentence, the partnership may request that the IRS apply the rule in 
paragraph (b)(3)(iii)(A) of this section when determining each relevant 
partner's distributive share for purposes of this paragraph (b)(3)(iv). 
Upon request by the IRS, the partnership may be required to provide the 
relevant partners' capital account calculation through the end of the 
reviewed year, a calculation of asset liquidation gain or loss, and any 
other information necessary to determine whether rate modification is 
appropriate, consistent with the rules of paragraph (c)(2) of this 
section. Any calculation by the partnership that is necessary to comply 
with the rules in this paragraph (b)(3)(iv) is not considered a 
revaluation for purposes of section 704.
    (4) Modification of the number and composition of imputed 
underpayments. Once approved by the IRS, a modification under paragraph 
(d)(6) of this section affects the manner in which adjustments are 
placed into groupings and subgroupings (as described in Sec.  301.6225-
1(c) and (d)) or whether the IRS designates one or more specific 
imputed underpayments (as described in Sec.  301.6225-1(g)). If the IRS 
approves a request for modification under this paragraph (b)(4), the 
imputed underpayment and any specific imputed underpayment affected by 
or resulting from the modification is determined according to the rules 
of Sec.  301.6225-1 subject to any other modifications approved by the 
IRS under this section.
    (5) Other modifications. The effect of other modifications 
described in paragraph (d)(10) of this section, including the order 
that such modification will be taken into account for purposes of 
paragraph (b)(1) of this section, may be set forth in forms, 
instructions, or other guidance prescribed by the IRS.
    (c) Time, form, and manner for requesting modification--(1) In 
general. In addition to the requirements described in paragraph (d) of 
this section, a request for modification under this section must be 
submitted in accordance with, and include the information required by, 
the forms, instructions, and other guidance prescribed by the IRS. The 
partnership representative must submit any request for modification and 
all relevant information (including information required under 
paragraphs (c)(2) and (d) of this section) to the IRS within the time 
described in paragraph (c)(3) of this section. The IRS will notify the 
partnership representative in writing of the approval or denial, in 
whole or in part, of any request for modification. A request for 
modification, including a request by the IRS for information related to 
a request for modification, and the determination by the IRS to approve 
or not approve all or a portion of a request for modification, is part 
of the administrative proceeding with respect to the partnership under 
subchapter C of chapter 63 and does not constitute an examination, 
inspection, or other administrative proceeding with respect to any 
other person for purposes of section 7605(b).
    (2) Partnership must substantiate facts supporting a request for 
modification--(i) In general. A partnership requesting modification 
under this section must substantiate the facts supporting such a 
request to the satisfaction of the IRS. The documents and other 
information necessary to substantiate a particular request for 
modification are based on the facts and circumstances of each request, 
as well as the type of modification requested under paragraph (d) of 
this section, and may include tax returns, partnership operating 
documents, certifications in the form and manner required with respect 
to the particular modification, and any other information necessary to 
support the requested modification. The IRS may, in forms, 
instructions, or other guidance, set forth procedures with respect to 
information and documents supporting the modification, including 
procedures to require particular documents or other information to 
substantiate a particular type of modification, the manner for 
submitting documents and other information to the IRS, and 
recordkeeping requirements. Pursuant to section 6241(10), the IRS may 
require the partnership to file or submit anything required to be filed 
or submitted under this section to be filed or submitted 
electronically. The IRS will deny a request for modification if a 
partnership fails to provide information the IRS determines is 
necessary to substantiate a request for modification, or if the IRS 
determines there is a failure by any person to make any required 
payment, within the time restrictions described in paragraph (c) of 
this section.
    (ii) Information to be furnished for any modification request. In 
the case of any modification request, the partnership representative 
must furnish to the IRS such information as is required by forms, 
instructions, and other guidance prescribed by the IRS or that is 
otherwise requested by the IRS related to the requested modification. 
Such information may include a detailed description of the 
partnership's structure, allocations, ownership, and ownership changes, 
its relevant partners for each taxable year relevant to the request for 
modification, as well as the partnership agreement as defined in Sec.  
1.704-1(b)(2)(ii)(h) of this chapter for each taxable year relevant to 
the modification request. In the case of any modification request with 
respect to a relevant partner that is an indirect partner, the 
partnership representative must provide to the IRS any information that 
the IRS may require relevant to any pass-through partner or wholly-
owned entity disregarded as separate from its owner for Federal income 
tax purposes through which the relevant partner holds its interest in 
the partnership. For instance, if the partnership requests modification 
with respect to an amended return filed by a relevant partner pursuant 
to paragraph (d)(2) of this section, the partnership representative may 
be required to provide to the IRS information that would have been 
required to have been filed by pass-through partners through which the 
relevant partner holds its interest in the partnership as if those 
pass-through partners had also filed their own amended returns.
    (3) Time for submitting modification request and information--(i) 
Modification request. Unless the IRS grants an extension of time, all 
information required under this section with respect to a request for 
modification must be submitted to the IRS in the form and manner 
prescribed

[[Page 6542]]

by the IRS on or before 270 days after the date the NOPPA is mailed.
    (ii) Extension of the 270-day period. The IRS may, in its 
discretion, grant a request for extension of the 270-day period 
described in paragraph (c)(3)(i) of this section provided the 
partnership submits such request to the IRS, in the form and manner 
prescribed by forms, instructions, or other guidance prescribed by the 
IRS before expiration of such period, as extended by any prior 
extension granted under this paragraph (c)(3)(ii).
    (iii) Expiration of the 270-day period by agreement. The 270-day 
period described in paragraph (c)(3)(i) of this section (including any 
extensions under paragraph (c)(3)(ii) of this section) expires as of 
the date the partnership and the IRS agree, in the form and manner 
prescribed by form, instructions, or other guidance prescribed by the 
IRS to waive the 270-day period after the mailing of the NOPPA and 
before the IRS may issue a notice of final partnership adjustment. See 
section 6231(b)(2)(A); Sec.  301.6231-1(b)(2).
    (4) Approval of modification by the IRS. Notification of approval 
will be provided to the partnership only after receipt of all relevant 
information (including any supplemental information required by the 
IRS) and all necessary payments with respect to the particular 
modification requested before expiration of the 270-day period in 
paragraph (c)(3)(i) of this section plus any extension granted by the 
IRS under paragraph (c)(3)(ii) of this section.
    (d) Types of modification--(1) In general. Except as otherwise 
described in this section, a partnership may request one type of 
modification or more than one type of modification described in 
paragraph (d) of this section.
    (2) Amended returns by partners--(i) In general. A partnership may 
request a modification of an imputed underpayment based on an amended 
return filed by a relevant partner provided all of the partnership 
adjustments properly allocable to such relevant partner are taken into 
account and any amount due is paid in accordance with paragraph (d)(2) 
of this section. Only adjustments to partnership-related items or 
adjustments to a relevant partner's tax attributes affected by 
adjustments to partnership-related items may be taken into account on 
an amended return under paragraph (d)(2) of this section. A partnership 
may request a modification for purposes of paragraph (d)(2) of this 
section by submitting a modification request based on the alternative 
procedure to filing amended returns as described in paragraph (d)(2)(x) 
of this section. The partnership may not request an additional 
modification of any imputed underpayment for a partnership taxable year 
under this section with respect to any relevant partner that files an 
amended return (or utilizes the alternative procedure to filing amended 
returns) under paragraph (d)(2) of this section or with respect to any 
partnership adjustment allocated to such relevant partner.
    (ii) Requirements for approval of a modification request based on 
amended return. Except as otherwise provided under the alternative 
procedure described in paragraph (d)(2)(x) of this section, an amended 
return modification request under paragraph (d)(2) of this section will 
not be approved unless the provisions of this paragraph (d)(2)(ii) are 
satisfied. The partnership may satisfy the requirements of paragraph 
(d)(2) of this section by demonstrating in accordance with forms, 
instructions, and other guidance provided by the IRS that a relevant 
partner has previously taken into account the partnership adjustments 
described in paragraph (d)(2)(i) of this section, made any required 
adjustments to tax attributes resulting from the partnership 
adjustments for the years described in paragraph (d)(2)(ii)(B) of this 
section, and made all required payments under paragraph (d)(2)(ii)(A) 
of this section.
    (A) Full payment required. An amended return modification request 
under paragraph (d)(2) of this section will not be approved unless the 
relevant partner filing the amended return has paid all tax, penalties, 
additions to tax, additional amounts, and interest due as a result of 
taking into account all partnership adjustments in the first affected 
year (as defined in Sec.  301.6226-3(b)(2)) and all modification years 
(as described in paragraph (d)(2)(ii)(B) of this section) at the time 
such return is filed with the IRS. Except for a pass-through partner 
calculating its payment amount pursuant to paragraph (d)(2)(vi) of this 
section, for purposes of this paragraph (d)(2)(ii)(A), the term tax 
means tax imposed by chapter 1 of the Internal Revenue Code (chapter 
1).
    (B) Amended returns for all relevant taxable years must be filed. 
Modification under paragraph (d)(2) of this section will not be 
approved by the IRS unless a relevant partner files an amended return 
for the first affected year and any modification year. A modification 
year is any taxable year with respect to which any tax attribute (as 
defined in Sec.  301.6241-1(a)(10)) of the relevant partner is affected 
by reason of taking into account the relevant partner's distributive 
share of all partnership adjustments in the first affected year. A 
modification year may be a taxable year before or after the first 
affected year, depending on the effect on the relevant partner's tax 
attributes of taking into account the relevant partner's distributive 
share of the partnership adjustments in the first affected year.
    (C) Amended returns for partnership adjustments that reallocate 
distributive shares. Except as described in this paragraph 
(d)(2)(ii)(C), in the case of partnership adjustments that reallocate 
the distributive shares of any partnership-related item from one 
partner to another, a modification under paragraph (d)(2) of this 
section will be approved only if all partners affected by such 
adjustments file amended returns in accordance with paragraph (d)(2) of 
this section. The IRS may determine that the requirements of this 
paragraph (d)(2)(ii)(C) are satisfied even if not all relevant partners 
affected by such adjustments file amended returns provided any relevant 
partners affected by the reallocation not filing amended returns take 
into account their distributive share of the adjustments through other 
modifications approved by the IRS (including the alternative procedure 
to filing amended returns under paragraph (d)(2)(x) of this section) or 
if a pass-through partner takes into account the relevant adjustments 
in accordance with paragraph (d)(2)(vi) of this section. For instance, 
in the case of adjustments that reallocate a loss from one partner to 
another, the IRS may determine that the requirements of this paragraph 
(d)(2)(ii)(C) have been satisfied if one affected relevant partner 
files an amended return taking into account the adjustments and the 
other affected relevant partner signs a closing agreement with the IRS 
taking into account the adjustments. Similarly, in the case of 
adjustment that reallocate income from one partner to another, the IRS 
may determine that the requirements of this paragraph (d)(2)(ii)(C) 
have been satisfied to the extent an affected relevant partner meets 
the requirements of paragraph (d)(3) of this section (regarding tax-
exempt partners) and through such modification fully takes into account 
all adjustments reallocated to the affected relevant partner.
    (iii) Form and manner for filing amended returns. A relevant 
partner must file all amended returns required for modification under 
paragraph (d)(2) of this section with the IRS in accordance with forms, 
instructions, and other guidance prescribed by the

[[Page 6543]]

IRS. Except as otherwise provided under the alternative procedure 
described in paragraph (d)(2)(x) of this section, the IRS will not 
approve modification under paragraph (d)(2) of this section unless 
prior to the expiration of the 270-day period described in paragraph 
(c)(3) of this section, the partnership representative provides to the 
IRS, in the form and manner prescribed by the IRS, an affidavit from 
each relevant partner signed under penalties of perjury by such partner 
stating that all of the amended returns required to be filed under 
paragraph (d)(2) of this section has been filed (including the date on 
which such amended returns were filed) and that the full amount of tax, 
penalties, additions to tax, additional amounts, and interest was paid 
(including the date on which such amounts were paid).
    (iv) Period of limitations. Generally, the period of limitations 
under sections 6501 and 6511 do not apply to an amended return filed 
under paragraph (d)(2) of this section provided the amended return 
otherwise meets the requirements of paragraph (d)(2) of this section.
    (v) Amended returns in the case of adjustments allocated through 
certain pass-through partners. A request for modification related to an 
amended return of a relevant partner that is an indirect partner 
holding its interest in the partnership (directly or indirectly) 
through a pass-through partner that could be subject to tax imposed by 
chapter 1 (chapter 1 tax) on the partnership adjustments that are 
properly allocated to such pass-through partner will not be approved 
unless the partnership--
    (A) Establishes that the pass-through partner is not subject to 
chapter 1 tax on the adjustments that are properly allocated to such 
pass-through partner; or
    (B) Requests modification with respect to the adjustments resulting 
in chapter 1 tax for the pass-through partner, including full payment 
of such chapter 1 tax for the first affected year and all modification 
years under paragraph (d)(2) of this section or in accordance with 
forms, instructions, or other guidance prescribed by the IRS.
    (vi) Amended returns in the case of pass-through partners--(A) 
Pass-through partners may file amended returns. A relevant partner that 
is a pass-through partner, including a partnership-partner (as defined 
in Sec.  301.6241-1(a)(7)) that has a valid election under section 
6221(b) in effect for a partnership taxable year, may, in accordance 
with forms, instructions, and other guidance provided by the IRS and 
solely for purposes of modification under paragraph (d)(2) of this 
section, take into account its share of the partnership adjustments and 
determine and pay an amount calculated in the same manner as the amount 
computed under Sec.  301.6226-3(e)(4)(iii) subject to paragraph 
(d)(2)(vi)(B) of this section.
    (B) Modifications with respect to upper-tier partners of the pass-
through partner. In accordance with forms, instructions, and other 
guidance provided by the IRS, for purposes of determining and 
calculating the amount a pass-through partner must pay under paragraph 
(d)(2)(vi)(A) of this section, the pass-through partner may take into 
account modifications with respect to its direct and indirect partners 
to the extent that such modifications are requested by the partnership 
requesting modification and approved by the IRS under this section.
    (vii) Limitations on amended returns--(A) In general. A relevant 
partner may not file an amended return or claim for refund that takes 
into account partnership adjustments except as described in paragraph 
(d)(2) of this section.
    (B) Further amended returns restricted. Except as described in 
paragraph (d)(2)(vii)(C) of this section, if a relevant partner files 
an amended return under paragraph (d)(2) of this section, or satisfies 
paragraph (d)(2) of this section by following the alternative procedure 
under paragraph (d)(2)(x) of this section (the alternative procedure), 
such partner may not file a subsequent amended return or claim for 
refund to change the treatment of partnership adjustments taken into 
account through amended return or the alternative procedure.
    (C) Subsequent returns in the case of changes to partnership 
adjustments or denial of modification. Notwithstanding paragraph 
(d)(2)(vii)(B) of this section, a relevant partner that has previously 
filed an amended return under paragraph (d)(2) of this section, or 
satisfied the requirements of paragraph (d)(2) of this section through 
the alternative procedure, to take partnership adjustments into account 
may, in accordance with forms, instructions, and other guidance 
prescribed by the IRS, file a subsequent return or claim for refund if 
a determination is made by a court or by the IRS that results in a 
change to the partnership adjustments taken into account in 
modification under paragraph (d)(2) of this section or a denial of 
modification by the IRS under paragraph (c)(2)(i) of this section with 
respect to a modification request under paragraph (d)(2) of this 
section. Such determinations include a court decision that changes the 
partnership adjustments for which modification was requested or a 
settlement between the IRS and the partnership pursuant to which the 
partnership is not liable for all or a portion of the imputed 
underpayment for which modification was requested. Any amended return 
or claim for refund filed under this paragraph (d)(2)(vii) is subject 
to the period of limitations under section 6511.
    (viii) Penalties. The applicability of any penalties, additions to 
tax, or additional amounts that relate to an adjustment to a 
partnership-related item is determined at the partnership level in 
accordance with section 6221(a). However, the amount of penalties, 
additions to tax, and additional amounts a relevant partner must pay 
under paragraph (d)(2)(ii)(A) of this section for the first affected 
year and for any modification year is based on the underpayment or 
understatement of tax, if any, reflected on the amended return filed by 
the relevant partner under paragraph (d)(2) of this section. For 
instance, if after taking into account the adjustments, the return of 
the relevant partner for the first affected year or any modification 
year reflects an underpayment or an understatement that falls below the 
applicable threshold for the imposition of a penalty under section 
6662(d), no penalty would be due from that relevant partner for such 
year. Unless forms, instructions or other guidance provided by the IRS 
allow for an alternative procedure for raising a partner-level defense 
(as described in Sec.  301.6226-3(d)(3)), a relevant partner may raise 
a partner-level defense by first paying the penalty, addition to tax, 
or additional amount with the amended return filed under paragraph 
(d)(2) of this section and then filing a claim for refund in accordance 
with forms, instructions, and other guidance.
    (ix) Effect on tax attributes binding. Any adjustments to the tax 
attributes of any relevant partner which are affected by modification 
under paragraph (d)(2) of this section are binding on the relevant 
partner with respect to the first affected year and all modification 
years (as defined in paragraph (d)(2)(ii)(B) of this section). A 
failure to adjust any tax attribute in accordance with this paragraph 
(d)(2)(ix) is a failure to treat a partnership-related item in a manner 
which is consistent with the treatment of such item on the partnership 
return within the meaning of section 6222. The provisions of section 
6222(c) and Sec.  301.6222-1(c) (regarding notification of inconsistent 
treatment) do not apply

[[Page 6544]]

with respect to tax attributes under this paragraph (d)(2)(ix).
    (x) Alternative procedure to filing amended returns--(A) In 
general. A partnership may satisfy the requirements of paragraph (d)(2) 
of this section by submitting on behalf of a relevant partner, in 
accordance with forms, instructions, and other guidance provided by the 
IRS, all information and payment of any tax, penalties, additions to 
tax, additional amounts, and interest that would be required to be 
provided if the relevant partner were filing an amended return under 
paragraph (d)(2) of this section, except as otherwise provided in 
relevant forms, instructions, and other guidance provided by the IRS. A 
relevant partner for which the partnership seeks modification under 
paragraph (d)(2)(x) of this section must agree to take into account, in 
accordance with forms, instructions, and other guidance provided by the 
IRS, adjustments to any tax attributes of such relevant partner. A 
modification request submitted in accordance with the alternative 
procedure under paragraph (d)(2)(x) of this section is not a claim for 
refund with respect to any person.
    (B) Modifications with respect to reallocation adjustments. A 
submission made in accordance with paragraph (d)(2)(x) of this section 
with respect to any relevant partner is treated as if such relevant 
partner filed an amended return for purposes of paragraph (d)(2)(ii)(C) 
of this section (regarding the requirement that all relevant partners 
affected by a reallocation must file an amended return to be eligible 
to for the modification under paragraph (d)(2) of this section) 
provided the submission is with respect to the first affected year and 
all modification years of such relevant partner as required under 
paragraph (d)(2) of this section.
    (3) Tax-exempt partners--(i) In general. A partnership may request 
modification of an imputed underpayment with respect to partnership 
adjustments that the partnership demonstrates to the satisfaction of 
the IRS are allocable to a relevant partner that would not owe tax by 
reason of its status as a tax-exempt entity (as defined in paragraph 
(d)(3)(ii) of this section) in the reviewed year (tax-exempt partner).
    (ii) Definition of tax-exempt entity. For purposes of paragraph 
(d)(3) of this section, the term tax-exempt entity means a person or 
entity defined in section 168(h)(2)(A), (C), or (D).
    (iii) Modification limited to portion of partnership adjustments 
for which tax-exempt partner not subject to tax. Only the portion of 
the partnership adjustments properly allocated to a tax-exempt partner 
with respect to which the partner would not be subject to tax for the 
reviewed year (tax-exempt portion) may form the basis of a modification 
of the imputed underpayment under paragraph (d)(3) of this section. A 
modification under paragraph (d)(3) of this section will not be 
approved by the IRS unless the partnership provides documentation in 
accordance with paragraph (c)(2) of this section to support the tax-
exempt partner's status and the tax-exempt portion of the partnership 
adjustment allocable to the tax-exempt partner.
    (4) Modification based on a rate of tax lower than the highest 
applicable tax rate. A partnership may request modification based on a 
lower rate of tax for the reviewed year with respect to adjustments 
that are attributable to a relevant partner that is a C corporation and 
adjustments with respect to capital gains or qualified dividends that 
are attributable to a relevant partner who is an individual. In no 
event may the lower rate determined under the preceding sentence be 
less than the highest rate in effect for the reviewed year with respect 
to the type of income and taxpayer. For instance, with respect to 
adjustments that are attributable to a C corporation, the highest rate 
in effect for the reviewed year with respect to all C corporations 
would apply to that adjustment, regardless of the rate that would apply 
to the C corporation based on the amount of that C corporation's 
taxable income. For purposes of this paragraph (d)(4), an S corporation 
is treated as an individual.
    (5) Certain passive losses of publicly traded partnerships--(i) In 
general. In the case of a publicly traded partnership (as defined in 
section 469(k)(2)) requesting modification under this section, an 
imputed underpayment is determined without regard to any adjustment 
that the partnership demonstrates would be reduced by a specified 
passive activity loss (as defined in paragraph (d)(5)(ii) of this 
section) which is allocable to a specified partner (as defined in 
paragraph (d)(5)(iii) of this section) or qualified relevant partner 
(as defined in paragraph (d)(5)(iv) of this section).
    (ii) Specified passive activity loss. A specified passive activity 
loss carryover amount for any specified partner or qualified relevant 
partner of a publicly traded partnership is the lesser of the section 
469(k) passive activity loss of that partner which is separately 
determined with respect to such partnership--
    (A) At the end of the first affected year (affected year loss); or
    (B) At the end of--
    (1) The specified partner's taxable year in which or with which the 
adjustment year (as defined in Sec.  301.6241-1(a)(1)) of the 
partnership ends, reduced to the extent any such partner has utilized 
any portion of its affected year loss to offset income or gain relating 
to the ownership or disposition of its interest in such publicly traded 
partnership during either the adjustment year or any other year; or
    (2) If the adjustment year has not yet been determined, the most 
recent year for which the publicly traded partnership has filed a 
return under section 6031, reduced to the extent any such partner has 
utilized any portion of its affected year loss to offset income or gain 
relating to the ownership or disposition of its interest in such 
publicly traded partnership during any year.
    (iii) Specified partner. A specified partner is a person that for 
each taxable year beginning with the first affected year through the 
person's taxable year in which or with which the partnership adjustment 
year ends satisfies the following three requirements-
    (A) The person is a partner of the publicly traded partnership 
requesting modification under this section;
    (B) The person is an individual, estate, trust, closely held C 
corporation, or personal service corporation; and
    (C) The person has a specified passive activity loss with respect 
to the publicly traded partnership.
    (iv) Qualified relevant partner. A qualified relevant partner is a 
relevant partner that meets the three requirements to be a specified 
partner (as described in paragraphs (d)(5)(iii)(A), (B), and (C) of 
this section) for each year beginning with the first affected year 
through the year described in paragraph (d)(5)(ii)(B)(2) of this 
section. Notwithstanding the preceding sentence, an indirect partner of 
the publicly traded partnership requesting modification under this 
section may also be a qualified relevant partner under this paragraph 
(d)(5)(iv) if that indirect partner meets the requirements of paragraph 
(d)(5)(iii)(B) and (C) of this section for each year beginning with the 
first affected year through the year described in paragraph 
(d)(5)(ii)(B)(2) of this section.
    (v) Partner notification requirement to reduce passive losses. If 
the IRS approves a modification request under paragraph (d)(5) of this 
section, the partnership must report, in accordance with forms, 
instructions, or other guidance prescribed by the IRS, to each 
specified partner the amount of that specified partner's reduction of 
its

[[Page 6545]]

suspended passive activity loss carryovers at the end of the adjustment 
year to take into account the amount of any passive activity losses 
applied in connection with such modification request. In the case of a 
qualified relevant partner, the partnership must report, in accordance 
with forms, instructions, or other guidance prescribed by the IRS, to 
each qualified relevant partner the amount of that qualified relevant 
partner's reduction of its suspended passive activity loss carryovers 
at the end of the taxable year for which the partnership's next return 
is due to be filed under section 6031 to be taken into account by the 
qualified relevant partner on the partner's return for the year that 
includes the end of the partnership's taxable year for which the 
partnership's next return is due to be filed under section 6031. In the 
case of an indirect partner that is a qualified relevant partner, the 
IRS may prescribe additional guidance through forms, instructions, or 
other guidance to require reporting under this paragraph (d)(5)(v). The 
reduction in suspended passive activity loss carryovers as reported to 
a specified partner or qualified relevant partner under this paragraph 
(d)(5)(v) is a determination of the partnership under subchapter C of 
chapter 63 and is binding on the specified partners and qualified 
relevant partners under section 6223.
    (6) Modification of the number and composition of imputed 
underpayments--(i) In general. A partnership may request modification 
of the number or composition of any imputed underpayment included in 
the NOPPA by requesting that the IRS include one or more partnership 
adjustments in a particular grouping or subgrouping (as described in 
Sec.  301.6225-1(c) and (d)) or specific imputed underpayments (as 
described in Sec.  301.6225-1(g)) different from the grouping, 
subgrouping, or imputed underpayment set forth in the NOPPA. For 
example, a partnership may request under paragraph (d)(6) of this 
section that one or more partnership adjustments taken into account to 
determine a general imputed underpayment set forth in the NOPPA be 
taken into account to determine a specific imputed underpayment.
    (ii) Request for particular treatment regarding limitations or 
restrictions. A modification request under paragraph (d)(6) of this 
section includes a request that one or more partnership adjustments be 
treated as if no limitations or restrictions under Sec.  301.6225-1(d) 
apply and as a result such adjustments may be subgrouped with other 
adjustments.
    (7) Partnerships with partners that are ``qualified investment 
entities'' described in section 860--(i) In general. A partnership may 
request a modification of an imputed underpayment based on the 
partnership adjustments allocated to a relevant partner where the 
modification is based on deficiency dividends distributed as described 
in section 860(f) by a relevant partner that is a qualified investment 
entity (QIE) under section 860(b) (which includes both a regulated 
investment company (RIC) and a real estate investment trust (REIT)). 
Modification under paragraph (d)(7) of this section is available only 
to the extent that the deficiency dividends take into account 
adjustments described in Sec.  301.6225-1 that are also adjustments 
within the meaning of section 860(d)(1) or (d)(2) (whichever applies).
    (ii) Documentation of deficiency dividend. The partnership must 
provide documentation in accordance with paragraph (c) of this section 
of the ``determination'' described in section 860(e). Under section 
860(e)(2), Sec.  1.860-2(b)(1)(i) of this chapter, and paragraph (d)(8) 
of this section, a closing agreement entered into by the QIE partner 
pursuant to section 7121 and paragraph (d)(8) of this section is a 
determination described in section 860(e), and the date of the 
determination is the date in which the closing agreement is approved by 
the IRS. In addition, under section 860(e)(4), a determination also 
includes a Form 8927, Determination Under Section 860(e)(4) by a 
Qualified Investment Entity, properly completed and filed by the RIC or 
REIT pursuant to section 860(e)(4). To establish the date of the 
determination under section 860(e)(4) and the amount of deficiency 
dividends actually paid, the partnership must provide a copy of Form 
976, Claim for Deficiency Dividends Deductions by a Personal Holding 
Company, Regulated Investment Company, or Real Estate Investment Trust, 
properly completed by or on behalf of the QIE pursuant to section 
860(g), together with a copy of each of the required attachments for 
Form 976.
    (8) Closing agreements. A partnership may request modification 
based on a closing agreement entered into by the IRS and the 
partnership or any relevant partner, or both if appropriate, pursuant 
to section 7121. If modification under this paragraph (d)(8) is 
approved by the IRS, any partnership adjustment that is taken into 
account under such closing agreement and for which any required payment 
under the closing agreement is made will not be taken into account in 
determining the imputed underpayment under Sec.  301.6225-1. Any 
required payment under the closing agreement may include amounts of 
tax, including tax under chapters other than chapter 1, interest, 
penalties, additions to tax and additional amounts. Generally, the IRS 
will not approve any additional modification under this section with 
respect to a relevant partner to which a modification under this 
paragraph (d)(8) has been approved.
    (9) Tax treaty modifications. A partnership may request a 
modification under this paragraph (d)(9) with respect to a relevant 
partner's distributive share of an adjustment to a partnership-related 
item if, in the reviewed year, the relevant partner was a foreign 
person who qualified under an income tax treaty with the United States 
for a reduction or exemption from tax with respect to such partnership-
related item. A partnership requesting modification under this section 
may also request a treaty modification under this paragraph (d)(9) 
regardless of the treaty status of its partners if, in the reviewed 
year, the partnership itself was an entity eligible for such treaty 
benefits.
    (10) Other modifications. A partnership may request a modification 
not otherwise described in paragraph (d) of this section, and the IRS 
will determine whether such modification is accurate and appropriate in 
accordance with paragraph (c)(4) of this section. Additional types of 
modifications and the documentation necessary to substantiate such 
modifications may be set forth in forms, instructions, or other 
guidance prescribed by the IRS.
    (e) Modification of adjustments that do not result in an imputed 
underpayment. A partnership may request modification of adjustments 
that do not result in an imputed underpayment (as described in Sec.  
301.6225-1(f)(1)(ii)) using modifications described in paragraph (d)(2) 
of this section (amended returns and the alternative procedure to 
filing amended returns), paragraph (d)(6) of this section (number and 
composition of the imputed underpayment), paragraph (d)(8) of this 
section (closing agreements), or, if applicable, paragraph (d)(10) of 
this section (other modifications).
    (f) Examples. The following examples illustrate the rules of this 
section. For purposes of these examples, each partnership is subject to 
the provisions of subchapter C of chapter 63, each partnership and its 
relevant partners are calendar year taxpayers, all relevant partners 
are U.S. persons (unless otherwise stated), the highest rate of income 
tax in effect for all taxpayers is 40 percent for all relevant periods, 
and

[[Page 6546]]

no partnership requests modification under this section except as 
provided in the example.

    (1) Example 1.  Partnership has two partners during its 2019 
partnership taxable year: P and S. P is a partnership, and S is an S 
corporation. P has four partners during its 2019 partnership taxable 
year: A, C, T and DE. A is an individual, C is a C corporation, T is 
a trust, and DE is a wholly-owned entity disregarded as separate 
from its owner for Federal income tax purposes. The owner of DE is 
B, an individual. T has two beneficiaries during its 2019 taxable 
year: F and G, both individuals. S has 3 shareholders during its 
2019 taxable year: H, J, and K, all individuals. For purposes of 
this section, if Partnership requests modification with respect to 
A, B, C, F, G, H, J, and K, those persons are all relevant partners 
(as defined in paragraph (a) of this section). P, S, and DE are not 
relevant partners (as defined in paragraph (a) of this section) 
because DE is a wholly-owned entity disregarded as separate from its 
owner for Federal income tax purposes and modification was not 
requested with respect to P and S.
    (2) Example 2.  The IRS initiates an administrative proceeding 
with respect to Partnership's 2019 taxable year. The IRS mails a 
NOPPA to Partnership for the 2019 partnership taxable year proposing 
a single partnership adjustment increasing ordinary income by $100, 
resulting in a $40 imputed underpayment ($100 multiplied by the 40 
percent tax rate). Partner A, an individual, held a 20 percent 
interest in Partnership during 2019. Partnership timely requests 
modification under paragraph (d)(2) of this section based on A's 
filing an amended return for the 2019 taxable year taking into 
account $20 of the partnership adjustment and paying the tax and 
interest due attributable to A's share of the increased income and 
the tax rate applicable to A for the 2019 tax year. No tax attribute 
in any other taxable year of A is affected by A's taking into 
account A's share of the partnership adjustment for 2019. In 
accordance with paragraph (d)(2)(iii) of this section, Partnership's 
partnership representative provides the IRS with documentation 
demonstrating that A filed the 2019 return and paid all tax and 
interest due. The IRS approves the modification and, in accordance 
with paragraph (b)(2) of this section, the $20 increase in ordinary 
income allocable to A is not included in the calculation of the 
total netted partnership adjustment (determined in accordance with 
Sec.  301.6225-1). Partnership's total netted partnership adjustment 
is reduced to $80 ($100 adjustment less $20 taken into account by 
A), and the imputed underpayment is reduced to $32 (total netted 
partnership adjustment of $80 after modification multiplied by 40 
percent).
    (3) Example 3.  The IRS initiates an administrative proceeding 
with respect to Partnership's 2019 taxable year. Partnership has two 
equal partners during its entire 2019 taxable year: an individual, 
A, and a partnership-partner, B. During all of 2019, B has two equal 
partners: a tax-exempt entity, C, and an individual, D. The IRS 
mails a NOPPA to Partnership for its 2019 taxable year proposing a 
single partnership adjustment increasing Partnership's ordinary 
income by $100, resulting in a $40 imputed underpayment ($100 total 
netted partnership adjustment multiplied by 40 percent). Partnership 
timely requests modification under paragraph (d)(3) of this section 
with respect to B's partner, C, a tax-exempt entity. In accordance 
with paragraph (d)(3)(iii) of this section, Partnership's 
partnership representative provides the IRS with documentation 
substantiating to the IRS's satisfaction that C held a 25 percent 
indirect interest in Partnership through its interest in B during 
the 2019 taxable year, that C was a tax-exempt entity defined in 
paragraph (d)(3)(ii) of this section during the 2019 taxable year, 
and that C was not subject to tax with respect to its entire 
allocable share of the partnership adjustment allocated to B (which 
is $25 (50 percent x 50 percent x $100)). The IRS approves the 
modification and, in accordance with paragraph (b)(2) of this 
section, the $25 increase in ordinary income allocated to C, through 
B, is not included in the calculation of the total netted 
partnership adjustment (determined in accordance with Sec.  
301.6225-1). Partnership's total netted partnership adjustment is 
reduced to $75 ($100 adjustment less C's share of the adjustment, 
$25), and the imputed underpayment is reduced to $30 (total netted 
partnership adjustment of $75, after modification, multiplied by 40 
percent).
    (4) Example 4.  The facts are the same as in Example 3 in 
paragraph (f)(3) of this section, except $10 of the $25 of the 
adjustment allocated to C is unrelated business taxable income 
(UBTI) as defined in section 512 because it is debt-financed income 
within the meaning of section 514 (no section 512 UBTI modifications 
apply) with respect to which C would be subject to tax if taken into 
account by C. As a result, the modification under paragraph (d)(3) 
of this section with respect to C relates only to $15 of the $25 of 
ordinary income allocated to C that is not UBTI. Therefore, only a 
modification of $15 ($25 less $10) of the total $100 partnership 
adjustment may be approved by the IRS under paragraph (d)(3) of this 
section and, in accordance with paragraph (b)(2) of this section, 
excluded when determining the imputed underpayment for Partnership's 
2019 taxable year. The total netted partnership adjustment 
(determined in accordance with Sec.  301.6225-1) is reduced to $85 
($100 less $15), and the imputed underpayment is reduced to $34 
(total netted partnership adjustment of $85, after modification, 
multiplied by 40 percent).
    (5) Example 5.  The facts are the same as in Example 3 in 
paragraph (f)(3) of this section, except that Partnership also 
timely requests modification under paragraph (d)(2) of this section 
with respect to an amended return filed by B, and, in accordance 
with (d)(2)(iii) of this section, Partnership's partnership 
representative provides the IRS with documentation demonstrating 
that B filed the 2019 return and paid all tax and interest due. B 
reports 50 percent of the partnership adjustments ($50) on its 
amended return, and B calculates an amount under paragraph 
(d)(2)(vi)(A) of this section and Sec.  301.6226-3(e)(4)(iii) that, 
pursuant to paragraph (d)(2)(vi)(B) of this section, takes into 
account the modification under paragraph (d)(3) of this section 
approved by the IRS with respect to B's partner C, a tax-exempt 
entity. B makes a payment pursuant to paragraph (d)(2)(ii)(A) of 
this section, and the IRS approves the requested modification. 
Partnership's total netted partnership adjustment is reduced by $50 
(the amount taken into account by B). Partnership's total netted 
partnership adjustment (determined in accordance with Sec.  
301.6225-1) is $50, and the imputed underpayment, after 
modification, is $20.
    (6) Example 6.  The facts are the same as in Example 3 in 
paragraph (f)(3) of this section, except that in addition to the 
modification with respect to tax-exempt entity C, which reduced the 
imputed underpayment by excluding from the determination of the 
imputed underpayment $25 of the $100 partnership adjustment 
reflected in the NOPPA, Partnership timely requests modification 
under paragraph (d)(2) of this section with respect to an amended 
return filed by individual D, and, in accordance with paragraph 
(d)(2)(iii) of this section, Partnership's partnership 
representative provides the IRS with documentation demonstrating 
that D filed the 2019 return and paid all tax and interest due. D's 
amended return for D's 2019 taxable year takes into account D's 
share of the partnership adjustment (50 percent of B's 50 percent 
interest in Partnership, or $25) and D paid the tax and interest due 
as a result of taking into account D's share of the partnership 
adjustment in accordance with paragraph (d)(2) of this section. No 
tax attribute in any other taxable year of D is affected by D taking 
into account D's share of the partnership adjustment for 2019. The 
IRS approves the modification and the $25 increase in ordinary 
income allocable to D is not included in the calculation of the 
total netted partnership adjustment (determined in accordance with 
Sec.  301.6225-1). As a result, Partnership's total netted 
partnership adjustment is $50 ($100, less $25 allocable to C, less 
$25 taken into account by D), and the imputed underpayment, after 
modification, is $20.
    (7) Example 7.  The IRS initiates an administrative proceeding 
with respect to Partnership's 2019 taxable year. All of 
Partnership's partners during its 2019 taxable year are individuals. 
The IRS mails a NOPPA to Partnership for the 2019 taxable year 
proposing three partnership adjustments. The first partnership 
adjustment is an increase to ordinary income of $75 for 2019. The 
second partnership adjustment is an increase in the depreciation 
deduction allowed for 2019 of $25, which under Sec.  301.6225-
1(d)(2)(i) is treated as a $25 decrease in income. The third 
adjustment is an increase in long-term capital gain of $10 for 2019. 
Under the partnership agreement in effect for Partnership's 2019 
taxable year, the long-term capital gain and the increase in 
depreciation would be specially allocated to B and the increase in 
ordinary income would be specially allocated to A. In accordance 
with Sec.  301.6225-1(c) and (d), the three adjustments are placed 
into three separate

[[Page 6547]]

subgroupings within the residual grouping because the partnership 
adjustments would not have been netted at the partnership level and 
would not have been required to be allocated to the partners of the 
partnership as a single, net partnership-related item for purposes 
of section 702(a), other provisions of the Code, regulations, forms, 
instructions, or other guidance prescribed by the IRS. Accordingly, 
the total netted partnership adjustment is $85 ($75 net positive 
adjustment to ordinary income plus $10 net positive adjustment to 
long term capital gain), and the imputed under payment is $34 ($85 
multiplied by 40 percent). The net negative adjustment to 
depreciation is an adjustment that does not result in an imputed 
underpayment subject to treatment under Sec.  301.6225-3. 
Partnership requests a modification under paragraph (d)(6) of this 
section to determine a specific imputed underpayment with respect to 
the $75 adjustment to ordinary income allocated to A. The specific 
imputed underpayment is with respect to $75 of the increase in 
income specially allocated to A and the general imputed underpayment 
is with respect to $10 of the increase in capital gain and the $25 
increase in depreciation deduction specially allocated to B. If the 
modification is approved by the IRS, the specific imputed 
underpayment would consist of the $75 increase in ordinary income, 
and thus the total netted partnership adjustment for the specific 
imputed underpayment would be $75. The specific imputed underpayment 
is thus $30 ($75 multiplied by 40 percent). The general imputed 
underpayment would consist of two adjustments: The long term capital 
gain adjustment and the depreciation adjustment. The long term 
capital gain adjustment and the depreciation adjustment would be 
placed in different subgroupings under Sec.  301.6225-1(d) because 
they are treated separately under section 702. Accordingly, the long 
term capital gain adjustment and the depreciation adjustment are not 
netted, and the long term capital gain adjustment would be a net 
positive adjustment while the depreciation adjustment would be a net 
negative adjustment. The long term capital gain net positive 
adjustment would be the only net positive adjustment, resulting in a 
total netted partnership adjustment of $10. The general imputed 
underpayment is $4 ($10 multiplied by 40 percent), and the net 
negative adjustment to depreciation of $25 would be an adjustment 
that does not result in an imputed underpayment under Sec.  
301.6225-1(f) associated with the general imputed underpayment.
    (8) Example 8.  Partnership has two reviewed year partners, C1 
and C2, both of which are C corporations. The IRS mails to 
Partnership a NOPPA with two adjustments, both based on rental real 
estate activity. The first adjustment is an increase of rental real 
estate income of $100 attributable to Property A. The second 
adjustment is an increase of rental real estate loss of $30 
attributable to Property B. The Partnership did not treat the 
leasing arrangement with respect to Property A and Property B as an 
appropriate economic unit for purposes of section 469. If the $100 
increase in income attributable to Property A and the $30 increase 
in loss attributable to Property B were included in the same 
subgrouping and netted, then taking the $30 increase in loss into 
account would result in a decrease in the amount of the imputed 
underpayment. Also, the $30 increased loss might be limited or 
restricted if taken into account by any person under the passive 
activity rules under section 469. For instance, under section 469, 
rental activities of the two properties could be treated as two 
activities, which could limit a partner's ability to claim the loss. 
In addition to the potential limitations under section 469, there 
are other potential limitations that might apply if the $30 loss 
were taken into account by any person. Therefore, in accordance with 
Sec.  301.6225-1(d), the two adjustments are placed in separate 
subgroupings within the residual grouping, the total netted 
partnership adjustment is $100, the imputed underpayment is $40 
($100 x 40 percent), and the $30 increase in loss is an adjustment 
that does not result in an imputed underpayment under Sec.  
301.6225-1(f). Partnership requests modification under paragraph 
(d)(6) of this section, substantiating to the satisfaction of the 
IRS that C1 and C2 are publicly traded C corporations, and 
therefore, the passive activity loss limitations under section 469 
of the Code do not apply. Partnership also substantiates to the 
satisfaction of the IRS that no other limitation or restriction 
applies that would prevent the grouping of the $100 with the $30 
loss. The IRS approves Partnership's modification request and places 
the $100 of income and the $30 loss into the subgrouping in the 
residual grouping under the rules described in Sec.  301.6225-
1(c)(5). Under Sec.  301.6225-1(e), because the two adjustments are 
in one subgrouping, they are netted together, resulting in a total 
netted partnership adjustment of $70 ($100 plus -$30) and an imputed 
underpayment of $28 ($70 x 40 percent). After modification, none of 
the adjustments is an adjustment that does not result in an imputed 
underpayment under Sec.  301.6225-1(f) because the $30 loss is now 
netted with the $100 of income in a net positive adjustment for the 
residual grouping.

    (g) Applicability date--(1) In general. Except as provided in 
paragraph (g)(2) of this section, this section applies to partnership 
taxable years beginning after December 31, 2017, and ending after 
August 12, 2018.
    (2) Election under Sec.  301.9100-22 in effect. This section 
applies to any partnership taxable year beginning after November 2, 
2015, and before January 1, 2018, for which a valid election under 
Sec.  301.9100-22 is in effect.

0
Par. 6. Section 301.6225-3 is added to read as follows:


Sec.  301.6225-3  Treatment of partnership adjustments that do not 
result in an imputed underpayment.

    (a) In general. Partnership adjustments (as defined in Sec.  
301.6241-1(a)(6)) that do not result in an imputed underpayment (as 
described in Sec.  301.6225-1(f)) are taken into account by a 
partnership in the adjustment year (as defined in Sec.  301.6241-
1(a)(1)) in accordance with paragraph (b) of this section.
    (b) Treatment of adjustments by the partnership--(1) In general. 
Except as described in paragraphs (b)(2) through (7) of this section, a 
partnership adjustment that does not result in an imputed underpayment 
is taken into account as a reduction in non-separately stated income or 
as an increase in non-separately stated loss for the adjustment year 
depending on whether the adjustment is to a partnership-related item 
that is an item of income or loss.
    (2) Separately stated items. In the case of a partnership 
adjustment to partnership-related item that is required to be 
separately stated under section 702, the adjustment is taken into 
account by the partnership in the adjustment year as a reduction in 
such separately stated item or as an increase in such separately stated 
item depending on whether the adjustment is a reduction or an increase 
to the separately stated item.
    (3) Credits. In the case of an adjustment to a partnership-related 
item that is reported or could be reported by a partnership as a credit 
on the partnership's return for the reviewed year (as defined in Sec.  
301.6241-1(a)(8)), the adjustment is taken into account by the 
partnership in the adjustment year as a separately stated item.
    (4) Reallocation adjustments. A partnership adjustment that 
reallocates a partnership-related item to or from a particular partner 
or partners that also does not result in an imputed underpayment 
pursuant to Sec.  301.6225-1(f) is taken into account by the 
partnership in the adjustment year as a separately stated item or a 
non-separately stated item, as required by section 702. Except as 
provided in forms, instructions, and other guidance prescribed by the 
Internal Revenue Service (IRS), the portion of an adjustment allocated 
under this paragraph (b)(4) is allocated to adjustment year partners 
(as defined in Sec.  301.6241-1(a)(2)) who are also reviewed year 
partners (as defined in Sec.  301.6241-1(a)(9)) with respect to whom 
the amount was reallocated.
    (5) Adjustments taken into account by partners as part of the 
modification process. If, as part of modification under Sec.  301.6225-
2, a relevant partner (as defined in Sec.  301.6225-2(a)) takes into 
account a partnership adjustment that does not result in an imputed 
underpayment, and the IRS approves the modification, such partnership 
adjustment is not taken into account by

[[Page 6548]]

the partnership in the adjustment year in accordance with Sec.  
301.6225-1(a).
    (6) Effect of election under section 6226. If a partnership makes a 
valid election under Sec.  301.6226-1 with respect to an imputed 
underpayment, a partnership adjustment that does not result in an 
imputed underpayment and that is associated with such imputed 
underpayment as described in Sec.  301.6225-1(g) is taken into account 
by the reviewed year partners in accordance with Sec.  301.6226-3 and 
is not taken into account under this section.
    (7) Adjustments taken into account previously by partners. If, 
prior to the mailing of a notice of administrative proceeding by the 
IRS or the filing of an administrative adjustment request by the 
partnership, a partner has previously taken into account an adjustment 
that does not result in an imputed underpayment that would have been 
taken into account under this section, such partnership adjustment is 
not taken into account by such partner.
    (c) Treatment of adjustment year partners. The rules under 
subchapter K of chapter 1 of the Internal Revenue Code with respect to 
the treatment of partners apply in the case of adjustments taken into 
account by the partnership under this section.
    (d) Examples. The following examples illustrate the rules of this 
section. For purposes of these examples, unless otherwise provided, 
each partnership is subject to the provisions of subchapter C of 
chapter 63 of the Internal Revenue Code, each partnership and its 
relevant partners are calendar year taxpayers, all relevant partners 
are U.S. persons (unless otherwise stated), the highest rate of income 
tax in effect for all taxpayers is 40 percent for all relevant periods, 
and no partnership requests modification.

    (1) Example 1.  For all of Partnership's 2019, 2020, and 2021 
partnership taxable years, Partnership has two equal partners, A and 
B. The IRS initiates an administrative proceeding with respect to 
Partnership's 2019 partnership taxable year. The IRS mails a notice 
of proposed partnership adjustment (NOPPA) to Partnership for the 
2019 partnership taxable year proposing a recharacterization 
adjustment, changing a $100 ordinary loss to a $100 long term 
capital loss. Under Sec.  301.6225-1, this recharacterization 
adjustment results in two adjustments: A $100 increase to ordinary 
income (positive adjustment) and a -$100 decrease in long term 
capital gain (negative adjustment). Under Sec.  301.6225-1(b), the 
$100 positive adjustment is the total netted partnership adjustment, 
which is multiplied by the highest rate of 40 percent, resulting in 
a $40 imputed underpayment. Under Sec.  301.6225-1(f), the -$100 
negative adjustment is an adjustment that does not result in an 
imputed underpayment and is taken into account in accordance with 
this section. On March 1, 2021, the IRS mails a notice of final 
partnership adjustment (FPA), and because Partnership does not file 
a petition for readjustment with respect to the FPA, the adjustments 
are finally determined in 2021, and the adjustment year is 
determined to be 2021 pursuant to Sec.  301.6241-1(a)(1). Pursuant 
to paragraph (a) of this section, Partnership takes into account the 
-$100 adjustment that does not result in an imputed underpayment on 
its 2021 partnership return. In addition to the -$100 adjustment to 
partnership's 2019 taxable year taken into account under this 
section, Partnership has an additional $300 in long term capital 
gain reportable in its 2021 taxable year. The -$100 negative 
adjustment and the $300 long term capital gain are Partnership's 
only long term capital gains and losses for its 2021 taxable year. 
Because the -$100 net negative adjustment is an adjustment to long 
term capital gain, which is a separately stated item under section 
702(a)(2), the -$100 negative adjustment must be taken into account 
in accordance with paragraph (b)(2) of this section. Partnership 
includes both the -$100 negative adjustment and the $300 in long 
term capital gain as separately stated items on its 2021 tax return.
    (2) Example 2.  The facts are the same as in Example 1 in 
paragraph (d)(1) of this section, except that the IRS proposes a 
reallocation adjustment instead of a recharacterization adjustment. 
The IRS determines that the -$100 ordinary loss that the Partnership 
allocated equally to A and B should instead all be allocated all to 
A. The IRS mails a NOPPA for the 2019 partnership taxable year 
proposing a reallocation adjustment resulting in a $50 increase in 
ordinary loss allocated to A (negative adjustment) and a $50 
decrease in ordinary loss allocated to B (positive adjustment). 
Because the adjustments are the result of a reallocation, they are 
placed in separate subgroupings pursuant to Sec.  301.6225-1(d). 
Because the adjustments are in different subgroupings, the 
adjustments are not netted under Sec.  301.6225-1(e), resulting in a 
net negative adjustment of -$50 allocated to A and a net positive 
adjustment of $50 to B. Pursuant to Sec.  301.6225-1(b), the total 
netted partnership adjustment includes the $50 net positive 
adjustment, and the imputed underpayment is $20 ($50 total netted 
partnership adjustment x 40 percent). Pursuant to Sec.  301.6225-
1(f), the -$50 net negative adjustment is an adjustment that does 
not result in an imputed underpayment and is taken into account in 
accordance with this section. On March 1, 2021, the IRS mails an 
FPA, and because Partnership does not file a petition for 
readjustment with respect to the FPA, the adjustments are finally 
determined in 2021, and the adjustment year is determined to be 2021 
pursuant to Sec.  301.6241-1(a)(1). Pursuant to paragraph (a) of 
this section, Partnership takes into account the -$50 adjustment 
that does not result in an imputed underpayment on its 2021 
partnership return. In addition to the -$50 net negative adjustment 
to partnership's 2019 taxable year taken into account under this 
section, Partnership also has an additional $300 in ordinary income 
reportable in its 2021 taxable year unrelated to the administrative 
proceeding with respect to Partnership's 2019 partnership taxable 
year. Because the -$50 net negative adjustment is due to a 
reallocation, the adjustment must be taken into account under 
paragraph (b)(4) of this section. Because the net negative 
adjustment was determined to have been entirely allocable to A, and 
because A was a reviewed year partner and is also an adjustment year 
partner, the net negative adjustment is taken into account by 
Partnership by allocating the entire adjustment to A on its 2021 tax 
return. The -$50 negative adjustment does not reduce the $300 in 
ordinary income.

    (e) Applicability date--(1) In general. Except as provided in 
paragraph (e)(2) of this section, this section applies to partnership 
taxable years beginning after December 31, 2017, and ending after 
August 12, 2018.
    (2) Election under Sec.  301.9100-22 in effect. This section 
applies to any partnership taxable year beginning after November 2, 
2015, and before January 1, 2018, for which a valid election under 
Sec.  301.9100-22 is in effect.

0
Par. 7. Section 301.6226-1 is added to read as follows:


Sec.  301.6226-1  Election for an alternative to the payment of the 
imputed underpayment.

    (a) In general. A partnership may elect under this section an 
alternative to the payment by the partnership of an imputed 
underpayment determined under section 6225. In addition, a partnership 
making a valid election under paragraph (c) of this section is no 
longer liable for the imputed underpayment (as defined in Sec.  
301.6241-1(a)(3)) to which the election applies. If a notice of final 
partnership adjustment (FPA) mailed under section 6231 includes more 
than one imputed underpayment (as described in Sec.  301.6225-1(g)), a 
partnership may make an election under this section with respect to one 
or more imputed underpayments included in the FPA.
    (b) Effect of election--(1) Reviewed year partners. If a 
partnership makes a valid election under this section with respect to 
any imputed underpayment, the reviewed year partners (as defined in 
Sec.  301.6241-1(a)(9)) must take into account their share of the 
partnership adjustments (as defined in Sec.  301.6241-1(a)(6)) that are 
associated with that imputed underpayment and are liable for any tax, 
penalties, additions to tax, additional amounts, and interest as 
described in Sec.  301.6226-3. See Sec.  301.6226-2(f) regarding the 
determination of each reviewed year partner's share of the partnership 
adjustments, including the effect of any

[[Page 6549]]

modification approved by the Internal Revenue Service (IRS) under Sec.  
301.6225-2.
    (2) Partnership. A partnership making a valid election under this 
section is not liable for the imputed underpayment to which the 
election applies (and no assessment of tax, levy, or proceeding in any 
court for the collection of such imputed underpayment may be made 
against such partnership). Any adjustments that do not result in an 
imputed underpayment described in Sec.  301.6225-1(f) that are 
associated with an imputed underpayment (as described in Sec.  
301.6225-1(g)) for which an election under this section is made are not 
taken into account by the partnership in the adjustment year (as 
defined in Sec.  301.6241-1(a)(1)) and instead each reviewed year 
partners' share of the adjustments determined in accordance with Sec.  
301.6226-2(f) must be included on the statement described in Sec.  
301.6226-2.
    (c) Time, form, and manner for making the election--(1) In general. 
An election under this section is valid only if all of the provisions 
of this section and Sec.  301.6226-2 (regarding statements filed with 
the IRS and furnished to reviewed year partners) are satisfied. An 
election under this section is valid until the IRS determines that the 
election is invalid. An election under this section may only be revoked 
with the consent of the IRS.
    (2) Time for making the election. An election under this section 
must be filed within 45 days of the date the FPA is mailed by the IRS. 
The time for filing such an election may not be extended.
    (3) Form and manner of the election--(i) In general. An election 
under this section must be signed by the partnership representative and 
filed in accordance with forms, instructions, and other guidance 
prescribed by the IRS and include the information specified in 
paragraph (c)(3)(ii) of this section.
    (ii) Contents of the election. An election under this section must 
include the following correct information--
    (A) The name, address, and taxpayer identification number (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) In the case of an FPA that includes more than one imputed 
underpayment, identification of the imputed underpayment to which the 
election applies;
    (E) The name and TIN (or alternative form of identification as 
prescribed by forms, instructions, or other guidance) of each reviewed 
year partner of the partnership;
    (F) The current or last address of each reviewed year partner that 
is known to the partnership; and
    (G) Any other information prescribed by the IRS in forms, 
instructions, and other guidance.
    (d) Determining an election is invalid. The IRS may determine an 
election to be invalid without first notifying the partnership or 
providing the partnership an opportunity to correct any failure to 
satisfy all of the provisions of this section and Sec.  301.6226-2. If 
an election under this section is determined by the IRS to be invalid, 
the IRS will notify the partnership and the partnership representative 
within 30 days of the determination that the election is invalid and 
the reason for the determination that the election is invalid. If the 
IRS makes a determination that an election under this section is 
invalid, section 6225 applies with respect to the imputed underpayment 
as if the election was never made, the IRS may assess the imputed 
underpayment against the partnership (without regard to the limitations 
under section 6232(b)), and the partnership must pay the imputed 
underpayment under section 6225 and any penalties and interest under 
section 6233. The IRS may not determine that an election is invalid 
based on errors timely corrected by the partnership in accordance with 
Sec.  301.6226-2(d).
    (e) Binding nature of statements. The election under this section, 
which includes filing and furnishing statements described in Sec.  
301.6226-2, are actions of the partnership under section 6223 and, 
unless determined otherwise by the IRS, the partner's share of the 
adjustments and the applicability of any penalties, additions to tax, 
and additional amounts as set forth in the statement are binding on the 
partner pursuant to section 6223. Accordingly, a partner may not treat 
any partnership-related items (as defined in Sec.  301.6241-
1(a)(6)(ii)) reflected on a statement described in Sec.  301.6226-2 on 
the partner's return inconsistently with how those items are treated on 
the statement that is filed with the IRS. See Sec.  301.6222-1(c)(2) 
(regarding partnership-related items the treatment of which a partner 
is bound to under section 6223).
    (f) Coordination with section 6234 regarding judicial review. 
Nothing in this section affects the rules regarding judicial review of 
a partnership adjustment. Accordingly, a partnership that makes an 
election under this section is not precluded from filing a petition 
under section 6234(a). See Sec.  301.6226-2(b)(3)(iii).
    (g) Applicability date--(1) In general. Except as provided in 
paragraph (g)(2) of this section, this section applies to partnership 
taxable years beginning after December 31, 2017, and ending after 
August 12, 2018.
    (2) Election under Sec.  301.9100-22 in effect. This section 
applies to any partnership taxable year beginning after November 2, 
2015, and before January 1, 2018, for which a valid election under 
Sec.  301.9100-22 is in effect.

0
Par. 8. Section 301.6226-2 is added to read as follows:


Sec.  301.6226-2  Statements furnished to partners and filed with the 
IRS.

    (a) In general. A partnership that makes an election under Sec.  
301.6226-1 must furnish to each reviewed year partner (as defined in 
Sec.  301.6241-1(a)(9)) and file with the Internal Revenue Service 
(IRS) a statement that includes the items required by paragraphs (e) 
and (f) of this section with respect to each reviewed year partner's 
share of partnership adjustments (as defined in Sec.  301.6241-1(a)(6)) 
associated with the imputed underpayment for which an election under 
Sec.  301.6226-1 is made. The statements furnished to the reviewed year 
partners under this section are in addition to, and must be filed and 
furnished separate from, any other statements required to be filed with 
the IRS and furnished to partners, including any statements under 
section 6031(b). A separate statement under this section must be 
furnished to each reviewed year partner with respect to each reviewed 
year (as defined in Sec.  301.6241-1(a)(8)) subject to an election 
under Sec.  301.6226-1. A failure to furnish a correct statement in 
accordance with this section is subject to penalty under section 6722. 
See section 6724(d)(2).
    (b) Time and manner for furnishing the statements to partners--(1) 
In general. The statements described in paragraph (a) of this section 
must be furnished to the reviewed year partners no later than 60 days 
after the date all of the partnership adjustments to which the 
statement relates are finally determined. The partnership adjustments 
are finally determined upon the later of:
    (i) The expiration of the time to file a petition under section 
6234; or
    (ii) If a petition under section 6234 is filed, the date when the 
court's decision becomes final.
    (2) Address used for reviewed year partners. The partnership must 
furnish the statements described in paragraph (a) of this section to 
each reviewed year

[[Page 6550]]

partner in accordance with the forms, instructions, and other guidance 
prescribed by the IRS. If the partnership mails the statement, it must 
mail the statement to the current or last address of the reviewed year 
partner that is known to the partnership. If a statement is returned to 
the partnership as undeliverable, the partnership must undertake 
reasonable diligence to identify a correct address for the reviewed 
year partner to which the statement relates and, if a correct address 
is identified, mail the statement to the reviewed year partner at the 
correct address.
    (3) Examples. The following examples illustrate the rules of this 
paragraph (b).

    (i) Example 1.  During Partnership's 2020 taxable year, A, an 
individual, was a partner in Partnership and had an address at 123 
Main St. On February 1, 2021, A sells his interest in Partnership 
and informs Partnership that A moved to 456 Broad St. On March 15, 
2021, Partnership mails A's statement under section 6031(b) for the 
2020 taxable year to 456 Broad St. On June 1, 2023, A moves again 
but does not inform Partnership of A's new address. In 2023, the IRS 
initiates an administrative proceeding with respect to Partnership's 
2020 taxable year and mails a notice of final partnership adjustment 
(FPA) to Partnership for that year that includes a single imputed 
underpayment. Partnership makes a timely election under section 6226 
in accordance with Sec.  301.6226-1 with respect to the imputed 
underpayment and on May 31, 2024, timely mails a statement described 
in paragraph (a) of this section to A at 456 Broad St. Although the 
statement was mailed to the last address for A that was known to 
Partnership, it is returned to Partnership as undeliverable because 
unknown to Partnership, A had moved. After undertaking reasonable 
diligence to obtain the correct address of A, Partnership is unable 
to ascertain the correct address. Therefore, pursuant to paragraph 
(b)(2) of this section, Partnership properly furnished the statement 
to A when it mailed the statement to 456 Broad St.
    (ii) Example 2.  The facts are the same as in Example 1 in 
paragraph (b)(3)(i) of this section, except that A lives at 789 
Forest Ave during all of 2024 and reasonable diligence would have 
revealed that 789 Forest Ave is the correct address for A, but 
Partnership did not undertake such diligence. Because the statement 
was returned as undeliverable and Partnership did not undertake 
reasonable diligence to obtain the correct address for A, 
Partnership failed to properly furnish the statement with respect to 
A pursuant to paragraph (b)(2) of this section.
    (iii) Example 3.  Partnership is a calendar year taxpayer. The 
IRS initiates an administrative proceeding with respect to 
Partnership's 2020 taxable year. On January 1, 2024, the IRS mails 
an FPA with respect to the 2020 taxable year to Partnership that 
includes a single imputed underpayment. Partnership makes a timely 
election under section 6226 in accordance with Sec.  301.6226-1 with 
respect to the imputed underpayment. Partnership timely files a 
petition for readjustment under section 6234 with the Tax Court. The 
IRS prevails, and the Tax Court sustains all of the adjustments in 
the FPA with respect to the 2020 taxable year. The time to appeal 
the Tax Court decision expires, and the Tax Court decision becomes 
final on April 10, 2025. Under paragraph (b)(1)(ii) of this section, 
the adjustments in the FPA are finally determined on April 10, 2025, 
and Partnership must furnish the statements described in paragraph 
(a) of this section to its reviewed year partners and electronically 
file the statements with the IRS no later than June 9, 2025. See 
paragraph (c) of this section for the rules regarding filing the 
statements with the IRS.

    (c) Time and manner for filing the statements with the IRS. No 
later than 60 days after the date the partnership adjustments are 
finally determined (as described in paragraph (b)(1) of this section), 
the partnership must electronically file with the IRS the statements 
that the partnership furnishes to each reviewed year partner under this 
section, along with a transmittal that includes a summary of the 
statements filed and such other information required in forms, 
instructions, and other guidance prescribed by the IRS.
    (d) Correction of statements--(1) In general. A partnership 
corrects an error in a statement furnished under paragraph (b) of this 
section or filed under paragraph (c) of this section by filing the 
corrected statement with the IRS in the manner prescribed in paragraph 
(c) of this section and furnishing a copy of the corrected statement to 
the reviewed year partner to whom the statement relates in accordance 
with the forms, instructions, and other guidance prescribed by the IRS.
    (2) Error discovered by partnership--(i) Discovery within 60 days 
of statement due date. If a partnership discovers an error in a 
statement within 60 days of the due date for furnishing the statements 
to partners and filing the statements with the IRS (as described in 
paragraphs (b) and (c) of this section and Sec.  301.6226-3(e)(3)(ii)), 
the partnership must correct the error in accordance with paragraph 
(d)(1) of this section and does not have to seek consent of the IRS 
prior to doing so.
    (ii) Error discovered more than 60 days after statement due date. 
If a partnership discovers an error more than 60 days after the due 
date for furnishing the statements to partners and filing the 
statements with the IRS (as described in paragraphs (b) and (c) of this 
section and Sec.  301.6226-3(e)(3)(ii)), the partnership may only 
correct the error after receiving consent of the IRS in accordance with 
the forms, instructions, and other guidance prescribed by the IRS. The 
partnership may not furnish corrected statements unless it receives 
consent of the IRS to make the correction.
    (3) Error discovered by the IRS. If the IRS discovers an error in 
the statements furnished or filed under paragraphs (b) and (c) of this 
section and Sec.  301.6226-3(e)(3) or the IRS cannot determine whether 
the statements furnished or filed by the partnership are correct 
because of a failure by the partnership to comply with any requirement 
under this section or Sec.  301.6226-3(e), the IRS may require the 
partnership to correct such errors in accordance with paragraph (d)(1) 
of this section or to provide additional information as necessary. 
Failure by the partnership to correct an error or to provide 
information when required by the IRS may be treated by the IRS as a 
failure to properly furnish correct statements to partners and file the 
correct statements with the IRS as described in paragraphs (b) and (c) 
of this section or in Sec.  301.6226-3(e)(3). Whether the IRS requires 
the partnership to correct any errors discovered by the IRS or provide 
additional information is discretionary on the part of the IRS and the 
IRS is under no obligation to require the partnership to provide 
additional information or to correct any errors discovered or brought 
to the IRS's attention at any time.
    (4) Adjustments in the corrected statements taken into account by 
the reviewed year partners. The adjustments included on a corrected 
statement are taken into account by a reviewed year partner in 
accordance with Sec.  301.6226-3 for the reporting year (as defined in 
Sec.  301.6226-3(a)).
    (e) Content of the statements. Each statement described in 
paragraph (a) of this section must include the following correct 
information:
    (1) The name and TIN (or alternative form of identification as 
prescribed by forms, instructions, or other guidance) of the reviewed 
year partner to whom the statement is being furnished;
    (2) The current or last address of the reviewed year partner that 
is known to the partnership;
    (3) The reviewed year partner's share of items as originally 
reported for the reviewed year to the partner on statements furnished 
to the partner under section 6031(b) and, if applicable, section 6227;
    (4) The reviewed year partner's share of partnership adjustments 
determined under paragraph (f)(1) of this section;
    (5) Modifications approved by the IRS with respect to the reviewed 
year

[[Page 6551]]

partner (or with respect to any indirect partner (as defined in Sec.  
301.6241-1(a)(4)) that holds its interest in the partnership through 
its interest in the reviewed year partner);
    (6) The applicability of any penalty, addition to tax, or 
additional amount determined at the partnership level that relates to 
any adjustments allocable to the reviewed year partner and the 
adjustments to which the penalty, addition to tax, or additional amount 
relates, the section of the Internal Revenue Code (Code) under which 
each penalty, addition to tax, or additional amount is imposed, and the 
applicable rate of each penalty, addition to tax, or additional amount 
determined at the partnership level;
    (7) The date the statement is furnished to the reviewed year 
partner;
    (8) The partnership taxable year to which the adjustments relate; 
and
    (9) Any other information required by forms, instructions, and 
other guidance prescribed by the IRS.
    (f) Determination of each partner's share of adjustments--(1) 
Adjustments and other amounts--(i) In general. Except as described in 
paragraph (f)(1)(ii) or (iii) or (f)(2) of this section, the 
adjustments set forth in the statement described in paragraph (a) of 
this section are reported to the reviewed year partner in the same 
manner as each adjusted partnership-related item was originally 
allocated to the reviewed year partner on the partnership return for 
the reviewed year.
    (ii) Adjusted partnership-related item not reported on the 
partnership's return for the reviewed year. Except as described in 
paragraph (f)(1)(iii) of this section, if the adjusted partnership-
related item was not reported on the partnership return for the 
reviewed year, each reviewed year partner's share of the adjustments 
must be determined in accordance with how such partnership-related 
items would have been allocated under rules that apply with respect to 
partnership allocations, including under the partnership agreement.
    (iii) Adjustments that specifically allocate items. If an 
adjustment involves an allocation of a partnership-related item to a 
specific partner or in a specific manner, including a reallocation of 
such an item, the reviewed year partner's share of the adjustment set 
forth in the statement is determined in accordance with the adjustment 
as finally determined (as described in paragraph (b)(1) of this 
section).
    (2) Treatment of modifications disregarded. Any modifications 
approved by the IRS with respect to the reviewed year partner (or with 
respect to any indirect partner that holds its interest in the 
partnership through its interest in the reviewed year partner) under 
Sec.  301.6225-2 are disregarded for purposes of determining each 
partner's share of the adjustments under paragraph (f)(1) of this 
section.
    (g) Coordination with other provisions under subtitle A of the 
Code--(1) Statements furnished to qualified investment entities 
described in section 860. If a reviewed year partner is a qualified 
investment entity within the meaning of section 860(b) and the partner 
receives a statement described in paragraph (a) of this section, the 
partner may be able to avail itself of the deficiency dividend 
procedure described in Sec.  301.6226-3(b)(4).
    (2) Liability for tax under section 7704(g)(3). An election under 
this section has no effect on a partnership's liability for any tax 
under section 7704(g)(3) (regarding the exception for electing 1987 
partnerships from the general rule that certain publicly traded 
partnerships are treated as corporations).
    (3) Adjustments subject to chapters 3 and 4 of the Internal Revenue 
Code. A partnership that makes an election under Sec.  301.6226-1 with 
respect to an imputed underpayment must pay the amount of tax required 
to be withheld under chapter 3 or chapter 4, if any, in accordance with 
Sec.  301.6241-6(b)(4).
    (h) Applicability date--(1) In general. Except as provided in 
paragraph (h)(2) of this section, this section applies to partnership 
taxable years beginning after December 31, 2017, and ending after 
August 12, 2018.
    (2) Election under Sec.  301.9100-22 in effect. This section 
applies to any partnership taxable year beginning after November 2, 
2015, and before January 1, 2018, for which a valid election under 
Sec.  301.9100-22 is in effect.

0
Par. 9. Section 301.6226-3 is added to read as follows:


Sec.  301.6226-3  Adjustments taken into account by partners.

    (a) Effect of taking adjustments into account on tax imposed by 
chapter 1. Except as otherwise provided in this section, the tax 
imposed by chapter 1 of the Internal Revenue Code (chapter 1 tax) for 
each reviewed year partner (as defined in Sec.  301.6241-1(a)(9)) for 
the taxable year that includes the date a statement was furnished in 
accordance with Sec.  301.6226-2 (the reporting year) is increased by 
the additional reporting year tax, or if the additional reporting year 
tax is less than zero, decreased by such amount. The additional 
reporting year tax is the aggregate of the correction amounts 
(determined in accordance with paragraph (b) of this section). In 
addition to being liable for the additional reporting year tax, a 
reviewed year partner must also calculate and pay for the reporting 
year any penalties, additions to tax, and additional amounts (as 
determined under paragraph (d) of this section). Finally, a reviewed 
year partner must also calculate and pay for the reporting year any 
interest (as determined under paragraph (c) of this section).
    (b) Determining the aggregate of the correction amounts--(1) In 
general. For purposes of paragraph (a) of this section, the aggregate 
of the correction amounts is the sum of the correction amounts 
described in paragraphs (b)(2) and (3) of this section. A correction 
amount under paragraph (b)(2) or (3) of this section may be less than 
zero, and any correction amount that is less than zero may reduce any 
other correction amount with the result that the aggregate of the 
correction amounts under this paragraph (b)(1) may also be less than 
zero. However, nothing in this section entitles any partner to a refund 
of chapter 1 tax to which such partner is not entitled. See paragraphs 
(c) and (d) of this section requiring a separate determination of 
interest and penalties, additions to tax, and additional amounts on the 
correction amount for each applicable taxable year (as defined in 
paragraph (c)(1) of this section) without regard to the correction 
amount for any other applicable taxable year.
    (2) Correction amount for the first affected year--(i) In general. 
The correction amount for the taxable year of the partner that includes 
the end of the reviewed year (the first affected year) is the amount by 
which the reviewed year partner's chapter 1 tax would increase or 
decrease for the first affected year if the partner's taxable income 
for such year was recomputed by taking into account the reviewed year 
partner's share of the partnership adjustments (as defined in Sec.  
301.6241-1(a)(6)) reflected on the statement described in Sec.  
301.6226-2 with respect to the partner.
    (ii) Calculation of the correction amount for the first affected 
year. The correction amount is the amount of chapter 1 tax that would 
have been imposed for the first affected year if the items as adjusted 
in the statement described in Sec.  301.6226-2 had been reported as 
such on the return for the first affected year less the sum of:
    (A) The amount of chapter 1 tax shown by the partner on the return 
for the first affected year (which includes amounts shown on an amended 
return for such year, including an amended

[[Page 6552]]

return filed under section 6225(c)(2) by the reviewed year partner); 
plus
    (B) Amounts not included in paragraph (b)(2)(ii)(A) of this section 
but previously assessed or collected (including the amounts defined in 
Sec.  1.6664-2(d) of this chapter and any amounts paid by the partner 
in accordance with Sec.  301.6225-2); less
    (C) The amount of rebates made (as defined in Sec.  1.6664-2(e) of 
this chapter).
    (iii) Formulaic expression of the correction amount for the first 
affected year. The correction amount also may be expressed as--

Correction amount = A-(B + C-D)

Where:

A = the amount of chapter 1 tax that would have been imposed had the 
items as adjusted been properly reported on the return for the first 
affected year;
B = the amount shown as chapter 1 tax on the return for the first 
affected year (taking into account amended returns);
C = amounts previously assessed or collected; and
D = the amount of rebates made.

    (3) Correction amount for the intervening years--(i) In general. 
The correction amount for all taxable years after the first affected 
year and before the reporting year (the intervening years) is the 
aggregate of the correction amounts determined for each intervening 
year. Determining the correction amount for each intervening year is a 
year-by-year determination. The correction amount for each intervening 
year is the amount by which the reviewed year partner's chapter 1 tax 
for such year would increase or decrease if the partner's taxable 
income for such year was recomputed by taking into account any 
adjustments to tax attributes (as defined in Sec.  301.6241-1(a)(10)) 
of the partner under paragraph (b)(3) of this section.
    (ii) Calculation of the correction amount for the intervening 
years. The correction amount for each intervening year is the amount of 
chapter 1 tax that would have been imposed for the intervening year if 
any tax attribute of the partner for the intervening year had been 
adjusted after taking into account the reviewed year partner's share of 
the adjustments for the first affected year as described in paragraph 
(b)(2) of this section (and if any tax attribute of the partner for the 
intervening year had been adjusted, after taking into account any 
adjustments to tax attributes of the partner in any prior intervening 
year(s)) exceeds less the sum of--
    (A) The amount of chapter 1 tax shown by the partner on the return 
for the intervening year (which includes amounts shown on an amended 
return for such year, including an amended return filed under section 
6225(c)(2) by a reviewed year partner); plus
    (B) Amounts not included in paragraph (b)(3)(ii)(A) of this section 
but previously or collected (including the amounts defined in Sec.  
1.6664-2(d) of this chapter and any amounts paid by the partner in 
accordance with Sec.  301.6225-2); less
    (C) The amount of rebates made (as defined in Sec.  1.6664-2(e) of 
this chapter).
    (iii) Formulaic expression of the correction amount for the 
intervening years. The correction amount also may be expressed as--

Correction amount = A-(B + C-D)

Where:

A = the amount of chapter 1 tax that would have been imposed for the 
intervening year;
B = the amount shown as chapter 1 tax on the return for the 
intervening year (taking into account amended returns);
C = amounts previously assessed or collected; and
D = the amount of rebates made.

    (4) Coordination of sections 860 and 6226. If a qualified 
investment entity (QIE) within the meaning of section 860(b) receives a 
statement described in Sec.  301.6226-2(a) and correctly makes a 
determination within the meaning of section 860(e)(4) that one or more 
of the adjustments reflected in the statement is an adjustment within 
the meaning of section 860(d) with respect to that QIE for a taxable 
year, the QIE may distribute deficiency dividends within the meaning of 
section 860(f) for that taxable year and avail itself of the deficiency 
dividend procedures set forth in section 860. If the QIE utilizes the 
deficiency dividend procedures with respect to adjustments in a 
statement described in Sec.  301.6226-2(a), the QIE may claim a 
deduction for deficiency dividends against the adjustments furnished to 
the QIE in the statement in calculating any correction amounts under 
paragraphs (b)(2) and (3) of this section, and interest on such 
correction amounts under paragraph (c) of this section, to the extent 
that the QIE makes deficiency dividend distributions under section 
860(f) and complies with all requirements of section 860 and the 
regulations under part 1 of this chapter.
    (c) Interest--(1) Interest on the correction amounts. Interest on 
the correction amounts determined under paragraph (b) of this section 
is the aggregate of all interest calculated for each applicable taxable 
year in which there was a correction amount greater than zero at the 
rate set forth in paragraph (c)(3) of this section. For each applicable 
taxable year, interest on the correction amount is calculated from the 
due date (without extension) of the reviewed year partner's return for 
such applicable taxable year until the amount is paid. For purposes of 
this paragraph (c)(1), the term applicable taxable year means the 
reviewed year partner's taxable year affected by taking into account 
adjustments as described in paragraph (b) of this section (for 
instance, the first affected year and any intervening year in which 
there is a correction amount greater than zero). For purposes of 
calculating interest under this paragraph (c), a correction amount 
under paragraph (b)(2) or (3) of this section for an applicable taxable 
year that is less than zero does not reduce the correction amount for 
any other applicable taxable year.
    (2) Interest on penalties. Interest on any penalties, additions to 
tax, or additional amounts determined under paragraph (d) of this 
section is calculated at the rate set forth in paragraph (c)(3) of this 
section from the due date (including any extension) of the reviewed 
year partner's return for the applicable taxable year until the amount 
is paid.
    (3) Rate of interest. For purposes of paragraph (c) of this 
section, interest is calculated using the underpayment rate under 
section 6621(a)(2) by substituting ``5 percentage points'' for ``3 
percentage points'' in section 6621(a)(2)(B).
    (d) Penalties--(1) Applicability determined at the partnership 
level. In the case of a partnership that makes an election under 
section 6226, the applicability of any penalty, addition to tax, and 
additional amount that relates to an adjustment to any partnership-
related item is determined at the partnership level in accordance with 
section 6221(a). The partnership's reviewed year partners are liable 
for such penalties, additions to tax, and additional amounts as 
determined under paragraph (d)(2) of this section.
    (2) Amount calculated at partner level. A reviewed year partner 
calculates the amount of any penalty, addition to tax, or additional 
amount relating to the partnership adjustments taken into account under 
paragraph (b)(1) of this section as if the correction amount were an 
underpayment or understatement of the reviewed year partner for the 
first affected year or intervening year, as applicable. The calculation 
of any penalty, addition to tax, or additional amount is based on the 
characteristics of, and facts and circumstances applicable to, the 
reviewed year partner for the first affected year or intervening year, 
as applicable after taking into account the partnership adjustments 
reflected on the statement. If after taking into account the 
partnership

[[Page 6553]]

adjustments in accordance with this section, the reviewed year partner 
does not have an underpayment, or has an understatement that falls 
below the applicable threshold for the imposition of a penalty, no 
penalty is due from that reviewed year partner under this paragraph 
(d)(2). For penalties in the case of a pass-through partner that makes 
a payment under paragraph (e)(4) of this section, see paragraph 
(e)(4)(iv) of this section.
    (3) Partner-level defenses to penalties. A reviewed year partner 
(including a pass-through partner (as defined in Sec.  301.6241-
1(a)(5))) claiming that a penalty, addition to tax, or additional 
amount that relates to a partnership adjustment reflected on a 
statement described in Sec.  301.6226-2 (or paragraph (e)(3) of this 
section) is not due because of a partner-level defense must first pay 
the penalty and file a claim for refund for the reporting year. 
Partner-level defenses are limited to those that are personal to the 
reviewed year partner (for example, a reasonable cause and good faith 
defense under section 6664(c) that is based on the facts and 
circumstances applicable to the partner).
    (e) Pass-through partners--(1) In general. Except as provided in 
paragraph (e)(6) of this section, if a pass-through partner is 
furnished a statement described in Sec.  301.6226-2 (including a 
statement described in paragraph (e)(3) of this section) with respect 
to adjustments of a partnership that made an election under Sec.  
301.6226-1 (audited partnership), the pass-through partner must file 
with the IRS a partnership adjustment tracking report in accordance 
with forms, instructions, or other guidance prescribed by the IRS on or 
before the due date described in paragraph (e)(3)(ii) of this section, 
and file and furnish statements in accordance with paragraph (e)(3) of 
this section. The pass-through partner must comply with paragraph (e) 
of this section with respect to each statement furnished to the pass-
through partner.
    (2) Failure to file and furnish required documents--(i) Failure to 
timely file and furnish statements. If any pass-through partner fails 
to timely file and furnish correct statements in accordance with 
paragraph (e)(3) of this section, the pass-through partner must compute 
and pay an imputed underpayment, as well as any penalties, additions to 
tax, additional amounts, and interest with respect to the adjustments 
reflected on the statement furnished to the pass-through partner in 
accordance with paragraph (e)(4) of this section. The IRS may assess 
such imputed underpayment against such pass-through partner without 
regard to the limitations under section 6232(b). See Sec.  301.6232-
1(c)(2). A failure to furnish statements in accordance with paragraph 
(e)(3) of this section is treated as a failure to timely pay an imputed 
underpayment required under paragraph (e)(4)(i) of this section, unless 
the pass-through partner computes and pays an imputed underpayment in 
accordance with paragraph (e)(4) of this section. See section 6651(i).
    (ii) Failures relating to partnership adjustment tracking report. 
Failure to timely file the partnership adjustment tracking report as 
required in paragraph (e)(1) of this section, or filing such report 
without showing the information required under paragraph (e)(1) of this 
section, is subject to the penalty imposed by section 6698.
    (3) Furnishing statements to partners--(i) In general. A pass-
through partner described in paragraph (e)(1) of this section must 
furnish a statement that includes the items required by paragraph 
(e)(3)(iii) of this section to each partner that held an interest in 
the pass-through partner at any time during the taxable year of the 
pass-through partner to which the adjustments in the statement 
furnished to the pass-through partner relate (affected partner). The 
statements described in this paragraph (e)(3) must be filed with the 
IRS by the due date prescribed in paragraph (e)(3)(ii) of this section. 
Except as otherwise provided in paragraphs (e)(3)(ii), (iii), and (v) 
of this section, the rules applicable to statements described in Sec.  
301.6226-2 are applicable to statements described in this paragraph 
(e)(3).
    (ii) Time for filing and furnishing the statements. In accordance 
with forms, instructions, and other guidance prescribed by the IRS, the 
pass-through partner must file with the IRS and furnish to its affected 
partners the statements described in paragraph (e)(3) of this section 
no later than the extended due date for the return for the adjustment 
year (as defined in Sec.  301.6241-1(a)(1)) of the audited partnership. 
For purposes of this section, the extended due date is the extended due 
date under section 6081 regardless of whether the audited partnership 
is required to file a return for the adjustment year or timely files a 
request for an extension under section 6081.
    (iii) Contents of statements. Each statement described in paragraph 
(e)(3) of this section must include the following correct information--
    (A) The name and taxpayer identification number (TIN) of the 
audited partnership;
    (B) The adjustment year of the audited partnership;
    (C) The extended due date for the return for the adjustment year of 
the audited partnership (as described in paragraph (e)(3)(ii) of this 
section);
    (D) The date on which the audited partnership furnished its 
statements required under Sec.  301.6226-2(b);
    (E) The name and TIN of the partnership that furnished the 
statement to the pass-through partner if different from the audited 
partnership;
    (F) The name and TIN of the pass-through partner;
    (G) The pass-through partner's taxable year to which the 
adjustments reflected on the statements described in paragraph (e)(3) 
of this section relates;
    (H) The name and TIN (or alternative form of identification as 
prescribed by forms, instructions, or other guidance) of the affected 
partner to whom the statement is being furnished;
    (I) The current or last address of the affected partner that is 
known to the pass-through partner;
    (J) The affected partner's share of items as originally reported to 
such partner under section 6031(b) and, if applicable, section 6227, 
for the taxable year to which the adjustments reflected on the 
statement furnished to the pass-through partner relate;
    (K) The affected partner's share of partnership adjustments 
determined under Sec.  301.6226-2(f)(1) as if the affected partner were 
the reviewed year partner and the pass-through partner were the 
partnership;
    (L) Modifications approved by the IRS with respect to the affected 
partner that holds its interest in the audited partnership through the 
pass-through partner;
    (M) The applicability of any penalties, additions to tax, or 
additional amounts determined at the audited partnership level that 
relate to any adjustments allocable to the affected partner and the 
adjustments allocated to the affected partner to which such penalties, 
additions to tax, or additional amounts relate, the section of the 
Internal Revenue Code under which each penalty, addition to tax, or 
additional amount is imposed, and the applicable rate of each penalty, 
addition to tax, or additional amount; and
    (N) Any other information required by forms, instructions, and 
other guidance prescribed by the IRS.
    (iv) Affected partner must take into account the adjustments. A 
statement furnished to an affected partner in accordance with paragraph 
(e)(3) of this section is treated as if it were a statement described 
in Sec.  301.6226-2. An affected partner that is a pass-through

[[Page 6554]]

partner must take into account the adjustments reflected on such a 
statement in accordance with this paragraph (e). An affected partner 
that is not a pass-through partner must take into account the 
adjustments reflected on such a statement in accordance with this 
section by treating references to ``reviewed year partner'' as 
``affected partner''. For purposes of this paragraph (e)(3)(iv), an 
affected partner that is not a pass-through partner takes into account 
the adjustments in accordance with this section by determining its 
reporting year based on the date upon which the audited partnership 
furnished its statements to its reviewed year partners (as described in 
paragraph (a) of this section). No addition to tax under section 6651 
related to any additional reporting year tax will be imposed if an 
affected partner that is not a pass-through partner reports and pays 
the additional reporting year tax within 30 days of the extended due 
date for the return for the adjustment year of the audited partnership 
(as described in paragraph (e)(3)(ii) of this section).
    (v) Adjustments subject to chapters 3 and 4 of the Internal Revenue 
Code. If a pass-through partner furnishes statements to its affected 
partners in accordance with paragraph (e)(3) of this section, the pass-
through partner must comply with the requirements of Sec.  301.6241-
6(b)(4), and an affected partner must comply with the requirements of 
paragraph (f) of this section. For purposes of applying both Sec.  
301.6241-6(b)(4) and paragraph (f) of this section, as appropriate, 
references to the ``partnership'' should be replaced with references to 
the ``pass-through partner''; references to the ``reviewed year 
partner'' should be replaced with references to the ``affected 
partner''; references to the statement required under paragraph (a) of 
this section and its due date should be replaced with references to the 
statement required under paragraph (e)(3) of this section and its due 
date described in paragraph (e)(3)(ii) of this section; references to 
the ``reporting year'' should be read in accordance with paragraph 
(e)(3)(iv) of this section; and references to the partnership return 
should be read as references to the return for the adjustment year of 
the audited partnership as described in paragraph (e)(3)(ii) of this 
section.
    (4) Pass-through partner pays an imputed underpayment--(i) In 
general. If a pass-through partner described in paragraph (e)(1) of 
this section does not furnish statements in accordance with paragraph 
(e)(3) of this section, the pass-through partner must compute and pay 
an imputed underpayment determined under paragraph (e)(4)(iii) of this 
section. The pass-through partner must also pay any penalties, 
additions to tax, additional amounts, and interest as determined under 
paragraph (e)(4)(iv) of this section. A failure to timely pay an 
imputed underpayment required under this paragraph (e)(4) is subject to 
penalty under section 6651(i).
    (ii) Time of payment. A pass-through partner must file a 
partnership adjustment tracking report and compute and pay the imputed 
underpayment and any penalties, additions to tax, additional amounts, 
and interest, as described in paragraph (e)(4)(i) of this section, in 
accordance with forms, instructions, and other guidance no later than 
the extended due date for the return for the adjustment year of the 
audited partnership.
    (iii) Computation of the imputed underpayment. The imputed 
underpayment under paragraph (e)(4)(i) of this section is computed in 
the same manner as an imputed underpayment under section 6225 and Sec.  
301.6225-1, except that adjustments reflected on the statement 
furnished to the pass-through partner under Sec.  301.6226-2 are 
treated as partnership adjustments (as defined in Sec.  301.6241-
1(a)(6)) for the first affected year. Any modification approved by the 
IRS under Sec.  301.6225-2 with respect to the pass-through partner 
(including any modifications with respect to a relevant partner (as 
defined in Sec.  301.6225-2(a)) that holds its interest in the audited 
partnership through its interest in the pass-through partner) reflected 
on the statement furnished to the pass-through partner under Sec.  
301.6226-2 (or paragraph (e)(3) of this section) is taken into account 
in calculating the imputed underpayment under this paragraph 
(e)(4)(iii). Any modification that was not approved by the IRS under 
Sec.  301.6225-2 may not be taken into account in calculating the 
imputed underpayment under this paragraph (e)(4)(iii).
    (iv) Penalties and interest--(A) Penalties. A pass-through partner 
must compute and pay any applicable penalties, additions to tax, and 
additional amounts on the imputed underpayment calculated under 
paragraph (e)(4)(iii) of this section as if such amount were an imputed 
underpayment for the pass-through partner's first affected year. See 
Sec.  301.6233(a)-1(c).
    (B) Interest. A pass-through partner must pay interest on the 
imputed underpayment calculated under paragraph (e)(4)(iii) of this 
section in accordance with paragraph (c) of this section as if such 
imputed underpayment were a correction amount for the first affected 
year.
    (v) Adjustments that do not result in an imputed underpayment. 
Adjustments taken into account under paragraph (e)(4) of this section 
that do not result in an imputed underpayment (as defined in Sec.  
301.6225-1(f)) are taken into account by the pass-through partner in 
accordance with Sec.  301.6225-3 in the taxable year of the pass-
through partner that includes the date the imputed underpayment 
required under paragraph (e)(4)(i) of this section is paid. If, after 
making the computation described in paragraph (e)(4)(iii) of this 
section, no imputed underpayment exists and therefore no payment is 
required under paragraph (e)(4)(i) of this section, the adjustments 
that did not result in an imputed underpayment are taken into account 
by the pass-through partner in accordance with Sec.  301.6225-3 in the 
taxable year of the pass-through partner that includes the date the 
statement described in Sec.  301.6226-2 (or paragraph (e)(3) of this 
section) is furnished to the pass-through partner.
    (vi) Coordination with chapters 3 and 4. If a pass-through partner 
pays an imputed underpayment described in paragraph (e)(4)(i) of this 
section, Sec.  301.6241-6(b)(3) applies to the pass-through partner by 
substituting ``pass-through partner'' for ``partnership'' where Sec.  
301.6241-6(b)(3) refers to the partnership that pays the imputed 
underpayment.
    (5) Treatment of pass-through partners that are not partnerships--
(i) S corporations. For purposes of this paragraph (e), an S 
corporation is treated as a partnership and its shareholders are 
treated as partners.
    (ii) Trusts and estates. Except as provided in paragraph (g) of 
this section, for purposes of paragraph (e) of this section, a trust 
and its beneficiaries, and an estate and its beneficiaries are treated 
in the same manner as a partnership and its partners.
    (6) Pass-through partners subject to chapter 1 tax. A pass-through 
partner that is subject to tax under chapter 1 of the Code on the 
adjustments (or a portion of the adjustments) reflected on the 
statement furnished to such partner under Sec.  301.6226-2 (or 
paragraph (e)(3) of this section) takes the adjustments into account 
under this paragraph (e)(6) when the pass-through partner calculates 
and pays the additional reporting year tax as determined under 
paragraph (b) of this section and furnishes statements to its partners 
in accordance with paragraph (e)(3) of this section. Notwithstanding 
the prior sentence, a pass-through partner is only required to include 
on a statement

[[Page 6555]]

under paragraph (e)(3) of this section the adjustments that would be 
required to be included on statements furnished to owners or 
beneficiaries under sections 6037 and 6034A, as applicable, if the 
pass-through partner had correctly reported the items for the year to 
which the adjustments relate. If the pass-through partner fails to 
comply with the requirements of this paragraph (e)(6), the pass-through 
partner must compute and pay an imputed underpayment, as well as any 
penalties, additions to tax, additional amounts, and interest with 
respect to the adjustments reflected on the statement furnished to such 
partner in accordance with paragraph (e)(4) of this section.
    (f) Partners subject to withholding under chapters 3 and 4. A 
reviewed year partner that is subject to withholding under Sec.  
301.6241-6(b)(4) must file an income tax return for the reporting year 
to report its additional reporting year tax and its share of any 
penalties, additions to tax, additional amounts, and interest 
(notwithstanding any filing exception in Sec.  1.6012-1(b)(2)(i) or 
Sec.  1.6012-2(g)(2)(i) of this chapter). The amount of tax paid by a 
partnership under Sec.  301.6241-6(b)(4) is allowed as a credit under 
section 33 to the reviewed year partner to the extent that the tax is 
allocable to the reviewed year partner (within the meaning of Sec.  
1.1446-3(d)(2) of this chapter) or is actually withheld from the 
reviewed year partner (within the meaning of Sec.  1.1464-1(a) or Sec.  
1.1474-3 of this chapter). The credit is allowed against the reviewed 
year partner's income tax liability for its reporting year. The 
reviewed year partner must substantiate the credit by attaching the 
applicable Form 1042-S, Foreign Person's U.S. Source Income Subject to 
Withholding, or Form 8805, Foreign Partner's Information Statement of 
Section 1446 Withholding Tax, to its income tax return for the 
reporting year, as well as satisfying any other requirements prescribed 
by the IRS in forms and instructions.
    (g) Treatment of disregarded entities and wholly-owned grantor 
trusts. In the case of a reviewed year partner that is a wholly-owned 
entity disregarded as separate from its owner for Federal income tax 
purposes in the reviewed year or a trust that is wholly owned by only 
one person in the reviewed year, whether the grantor or another person, 
and where the trust reports the owner's information to payors under 
Sec.  1.671-4(b)(2)(i)(A) of this chapter and that is furnished a 
statement described in Sec.  301.6226-2 (or paragraph (e)(3) of this 
section), the owner of the disregarded entity or wholly-owned grantor 
trust must take into account the adjustments reflected on that 
statement in accordance with this section as if the owner were the 
reviewed year partner.
    (h) Examples. The following examples illustrate the rules of this 
section. For purposes of these examples, unless otherwise stated, each 
partnership is subject to subchapter C of chapter 63 of the Code, each 
partnership and partner has a calendar year taxable year, no 
modifications are requested by any partnership under Sec.  301.6225-2, 
no penalties, additions to tax, or additional amounts are determined at 
the partnership level, all persons are U.S. persons, the highest rate 
of income tax in effect for is 40 percent for all relevant periods, the 
highest rate of income tax in effect for corporations is 20 percent for 
all relevant periods, and the highest rate of tax for individuals for 
capital gains is 15 percent for all relevant periods.

    (1) Example 1.  On its partnership return for the 2020 tax year, 
Partnership reported ordinary income of $1,000 and charitable 
contributions of $400. On June 1, 2023, the IRS mails a notice of 
final partnership adjustment (FPA) to Partnership for Partnership's 
2020 year disallowing the charitable contribution in its entirety 
and determining that a 20 percent accuracy-related penalty under 
section 6662(b) applies to the disallowance of the charitable 
contribution, and setting forth a single imputed underpayment with 
respect to such adjustments. Partnership makes a timely election 
under section 6226 in accordance with Sec.  301.6226-1 with respect 
to the imputed underpayment in the FPA for Partnership's 2020 year 
and files a timely petition in the Tax Court challenging the 
partnership adjustments. The Tax Court determines that Partnership 
is not entitled to any of the claimed $400 in charitable 
contributions and upholds the applicability of the penalty. The 
decision regarding Partnership's 2020 tax year becomes final on 
December 15, 2025. Pursuant to Sec.  301.6226-2(b), the partnership 
adjustments are finally determined on December 15, 2025. On February 
2, 2026, Partnership files the statements described under Sec.  
301.6226-2 with the IRS and furnishes to partner A, an individual 
who was a partner in Partnership during 2020, a statement described 
in Sec.  301.6226-2. A had a 25 percent interest in Partnership 
during all of 2020 and was allocated 25 percent of all items from 
Partnership for that year. The statement shows A's share of ordinary 
income reported on Partnership's return for the reviewed year of 
$250 and A's share of the charitable contribution reported on 
Partnership's return for the reviewed year of $100. The statement 
also shows an adjustment to A's share of the charitable 
contribution, a reduction of $100 resulting in $0 charitable 
contribution allocated to A from Partnership for 2020. In addition, 
the statement reports that a 20 percent accuracy-related penalty 
under section 6662(b) applies. A must pay the additional reporting 
year tax as determined in accordance with paragraph (b) of this 
section, in addition to A's penalties and interest. A computes his 
additional reporting year tax as follows. First, A determines the 
correction amount for the first affected year (the 2020 taxable 
year) by taking into account A's share of the partnership adjustment 
(-$100 reduction in charitable contribution) for the 2020 taxable 
year. A determines the amount by which his chapter 1 tax for 2020 
would have increased or decreased if the $100 adjustment to the 
charitable contribution from Partnership were taken into account for 
that year. There is no adjustment to tax attributes in A's 
intervening years as a result of the adjustment to the charitable 
contribution for 2020. Therefore, A's aggregate of the correction 
amounts is the correction amount for 2020, A's first affected year. 
In addition to the aggregate of the correction amounts being added 
to the chapter 1 tax that A owes for 2026, the reporting year, A 
must calculate a 20 percent accuracy-related penalty on A's 
underpayment attributable to the $100 adjustment to the charitable 
contribution, as well as interest on the correction amount for the 
first affected year and the penalty determined in accordance with 
paragraph (c) of this section. Interest on the correction amount for 
the first affected tax year runs from April 15, 2021, the due date 
of A's 2020 return (the first affected tax year) until A pays this 
amount. In addition, interest runs on the penalty from April 15, 
2021, the due date of A's 2020 return for the first affected year 
until A pays this amount. On his 2026 income tax return, A must 
report the additional reporting year tax determined in accordance 
with paragraph (b) of this section, which is the correction amount 
for 2020, plus the accuracy-related penalty determined in accordance 
with paragraph (d) of this section, and interest determined in 
accordance with paragraph (c) of this section on the correction 
amount for 2020 and the penalty.
    (2) Example 2.  On its partnership return for the 2020 tax year, 
Partnership reported an ordinary loss of $500. On June 1, 2023, the 
IRS mails an FPA to Partnership for the 2020 taxable year 
determining that $300 of the $500 in ordinary loss should be 
recharacterized as a long-term capital loss. Partnership has no 
long-term capital gain for its 2020 tax year. The FPA for 
Partnership's 2020 tax year reflects an adjustment of an increase in 
ordinary income of $300 (as a result of the disallowance of the 
recharacterization of $300 from ordinary loss to long-term capital 
loss) and an imputed underpayment related to that adjustment, as 
well as an adjustment of an additional $300 in long-term capital 
loss for 2020 which does not result in an imputed underpayment under 
Sec.  301.6225-1(f). Partnership makes a timely election under 
section 6226 in accordance with Sec.  301.6226-1 with respect to the 
imputed underpayment in the FPA and does not file a petition for 
readjustment under section 6234. Accordingly, under Sec.  301.6226-
1(b)(2) and Sec.  301.6225-3(b)(6), the adjustment year partners (as 
defined in Sec.  301.6241-1(a)(2)) do not take into account the $300 
long-term capital loss that does not result in an imputed 
underpayment. Rather,

[[Page 6556]]

the $300 long-term capital loss is taken into account by the 
reviewed year partners. The time to file a petition expires on 
August 30, 2023. Pursuant to Sec.  301.6226-2(b), the partnership 
adjustments become finally determined on August 31, 2023. On 
September 30, 2023, Partnership files with the IRS statements 
described in Sec.  301.6226-2 and furnishes statements to all of its 
reviewed year partners in accordance with Sec.  301.6226-2. One 
partner of Partnership in 2020, B (an individual), had a 25 percent 
interest in Partnership during all of 2020 and was allocated 25 
percent of all items from Partnership for that year. The statement 
filed with the IRS and furnished to B shows B's allocable share of 
the ordinary loss reported on Partnership's return for the 2020 
taxable year as $125. The statement also shows an adjustment to B's 
allocable share of the ordinary loss in the amount of -$75, 
resulting in a corrected ordinary loss allocated to B of $50 for 
taxable year 2020 ($125 originally allocated to B less $75 which is 
B's share of the adjustment to the ordinary loss). In addition, the 
statement shows an increase to B's share of long-term capital loss 
in the amount of $75 (B's share of the adjustment that did not 
result in the imputed underpayment with respect to Partnership). B 
must pay the additional reporting year tax as determined in 
accordance with paragraph (b) of this section. B computes his 
additional reporting year tax as follows. First, B determines the 
correction amount for the first affected year (the 2020 taxable 
year) by taking into account B's share of the partnership 
adjustments (a $75 reduction in ordinary loss and an increase of $75 
in long-term capital loss) for the 2020 taxable year. B determines 
the amount by which his chapter 1 tax for 2020 would have increased 
or decreased if the $75 adjustment to ordinary loss and the $75 
adjustment to long-term capital loss from Partnership were taken 
into account for that year. Second, B determines if there is any 
increase or decrease in chapter 1 tax for any intervening year as a 
result of the adjustment to the ordinary and capital losses for 
2020. B's aggregate of the correction amounts is the correction 
amount for 2020, B's first affected year plus any correction amounts 
for any intervening years. B is also liable for any interest on the 
correction amount for the first affected year and for any 
intervening year as determined in accordance with paragraph (c) of 
this section.
    (3) Example 3.  On its partnership return for the 2020 tax year, 
Partnership, a domestic partnership, reported U.S. source dividend 
income of $2,000. On June 1, 2023, the IRS mails an FPA to 
Partnership for Partnership's 2020 year increasing the amount of 
U.S. source dividend income to $4,000 and determining that a 20 
percent accuracy-related penalty under section 6662(b) applies to 
the increase in U.S. source dividend income. Partnership makes a 
timely election under section 6226 in accordance with Sec.  
301.6226-1 with respect to the imputed underpayment in the FPA for 
Partnership's 2020 year and does not file a petition for 
readjustment under section 6234. The time to file a petition expires 
on August 30, 2023. Pursuant to Sec.  301.6226-2(b), the partnership 
adjustments become finally determined on August 31, 2023. On 
September 30, 2023, Partnership files the statements described under 
Sec.  301.6226-2 with the IRS and furnishes to partner C, a 
nonresident alien individual who was a partner in Partnership during 
2020 (and remains a partner in Partnership in 2023), a statement 
described in Sec.  301.6226-2. C had a 50 percent interest in 
Partnership during all of 2020 and was allocated 50 percent of all 
items from Partnership for that year. The statement shows C's share 
of U.S. source dividend income reported on Partnership's return for 
the reviewed year of $1,000 and an adjustment to U.S. source 
dividend income of $1,000. In addition, the statement reports that a 
20 percent accuracy-related penalty under section 6662(b) applies. 
Under Sec.  301.6241-6(b)(4)(i), because the additional $1,000 in 
U.S. source dividend income allocated to C is an amount subject to 
withholding (as defined in Sec.  301.6241-6(b)(2)), Partnership must 
pay the amount of tax required to be withheld on the adjustment. See 
Sec. Sec.  1.1441-1(b)(1) and 1.1441-5(b)(2)(i)(A) of this chapter. 
Under Sec.  301.6241-6(b)(4)(ii), Partnership may reduce the amount 
of withholding tax it must pay because it has valid documentation 
from 2020 that establishes that C was entitled to a reduced rate of 
withholding in 2020 on U.S. source dividend income of 10 percent 
pursuant to a treaty. Partnership withholds $100 of tax from C's 
distributive share, remits the tax to the IRS, and files the 
necessary return and information returns required by Sec.  1.1461-1 
of this chapter. On his 2023 return, C must report the additional 
reporting year tax determined in accordance with paragraph (b) of 
this section, the accuracy-related penalty determined in accordance 
with paragraph (d) of this section, and interest determined in 
accordance with paragraph (c) of this section on the correction 
amount for the first affected year, the correction amount for any 
intervening year, and the penalty. Under paragraph (f) of this 
section, C may claim the $100 withholding tax paid by Partnership 
pursuant to Sec.  301.6241-6(b)(4)(i) as a credit under section 33 
against C's income tax liability on his 2023 return.
    (4) Example 4.  On its partnership return for the 2020 tax year, 
Partnership reported ordinary income of $100 and a long-term capital 
gain of $40. Partnership had four equal partners during the 2020 tax 
year: E, F, G, and H, all of whom were individuals. On its 
partnership return for the 2020 tax year, the entire long-term 
capital gain was allocated to partner E and the ordinary income was 
allocated to all partners based on their equal (25 percent) interest 
in Partnership. The IRS initiates an administrative proceeding with 
respect to Partnership's 2020 taxable year and determines that the 
long-term capital gain should have been allocated equally to all 
four partners and that Partnership should have recognized an 
additional $10 in ordinary income. On June 1, 2023, the IRS mails an 
FPA to Partnership reflecting the reallocation of the $40 long-term 
capital gain so that F, G, and H each have $10 increase in long-term 
capital gain and E has a $30 reduction in long-term capital gain for 
2020. In addition, the FPA reflects the partnership adjustment 
increasing ordinary income by $10. The FPA reflects a general 
imputed underpayment with respect to the increase in ordinary income 
and a specific imputed underpayment with respect to the increase in 
long-term capital gain allocated to F, G, and H. In addition, the 
FPA reflects a $30 partnership adjustment that does not result in an 
imputed underpayment, that is, the reduction of $30 in long-term 
capital gain with respect to E that is associated with the specific 
imputed underpayment in accordance with Sec.  301.6225-
1(g)(2)(iii)(B). Partnership makes a timely election under section 
6226 in accordance with Sec.  301.6226-1 with respect to the 
specific imputed underpayment relating to the reallocation of long-
term capital gain. Partnership does not file a petition for 
readjustment under section 6234. The time to file a petition expires 
on August 30, 2023. Pursuant to Sec.  301.6226-2(b), the partnership 
adjustments become finally determined on August 31, 2023. 
Partnership timely pays the general imputed underpayment that 
resulted from the partnership adjustment to ordinary income. On 
September 30, 2023, Partnership files with the IRS statements 
described in Sec.  301.6226-2 and furnishes statements to its 
partners reflecting their share of the partnership adjustments as 
finally determined in the FPA that relate to the specific imputed 
underpayment, that is, the reallocation of long-term capital gain. 
The statements for F, G, and H each reflect a partnership adjustment 
of an additional $10 of long-term capital gain for 2020. The 
statement for E reflects a partnership adjustment of a reduction of 
$30 of long-term capital gain for 2020. Because E, F, G, and H are 
all individuals, all partners must report the additional reporting 
year tax as determined in accordance with paragraph (b) of this 
section in the partners' reporting year, which is 2023. They compute 
their additional reporting year tax as follows. First, they 
determine the correction amount for the first affected year (the 
2020 taxable year) by taking into account their share of the 
partnership adjustments for the 2020 taxable year. They each 
determine the amount by which their chapter 1 tax for 2020 would 
have increased or decreased if the adjustment to long-term capital 
gain from Partnership were taken into account for that year. Second, 
they determine if there is any increase or decrease in chapter 1 tax 
for any intervening year as a result of the adjustment to the long-
term capital gain for 2020. Their aggregate of the correction 
amounts is the sum of the correction amount for 2020, their first 
affected year and any correction amounts for any intervening years. 
They are also liable for any interest on the correction amount for 
the first affected year and for any intervening year as determined 
in accordance with paragraph (c) of this section.
    (5) Example 5.  On its partnership return for the 2020 taxable 
year, Partnership reported a long-term capital loss of $500. During 
an administrative proceeding with respect to Partnership's 2020 
taxable year, the IRS mails a notice of proposed partnership 
adjustment (NOPPA) in which it proposes to disallow $200 of the 
reported

[[Page 6557]]

$500 long-term capital loss, the only adjustment. Accordingly, the 
imputed underpayment reflected in the NOPPA is $80 ($200 x 40 
percent). F, a C corporation partner with a 50 percent interest in 
Partnership, received 50 percent of all long-term capital losses for 
2020. As part of the modification process described in Sec.  
301.6225-2(d)(2), F files an amended return for 2020 taking into 
account F's share of the partnership adjustment ($100 reduction in 
long-term capital loss) and pays the tax owed for 2020, including 
interest. Also as part of the modification process, F also files 
amended returns for 2021 and 2022 and pays additional tax (and 
interest) for these years because the reduction in long-term capital 
loss for 2020 affected the tax due from F for 2021 and 2022. See 
Sec.  301.6225-2(d)(2). The reduction of the long-term capital loss 
in 2020 did not affect any other taxable year of F. This is the only 
modification requested. The IRS approves the modification with 
respect to F and on June 1, 2023, mails an FPA to Partnership for 
Partnership's 2020 year reflecting the partnership adjustment 
reducing the long-term capital loss in the amount of $200. The FPA 
also reflects the modification to the imputed underpayment based on 
the amended returns filed by F taking into account F's share of the 
reduction in the long-term capital loss. Therefore, the imputed 
underpayment in the FPA is $40 ($100 x 40 percent). Partnership 
makes a timely election under section 6226 in accordance with Sec.  
301.6226-1 with respect to the imputed underpayment in the FPA for 
Partnership's 2020 year and files a timely petition in the Tax Court 
challenging the partnership adjustments. The Tax Court upholds the 
determinations in the FPA and the decision regarding Partnership's 
2020 tax year becomes final on December 15, 2025. Pursuant to Sec.  
301.6226-2(b), the partnership adjustments are finally determined on 
December 15, 2025. On February 1, 2026, Partnership files the 
statements described under Sec.  301.6226-2 with the IRS and 
furnishes to its partners statements reflecting their shares of the 
partnership adjustment. The statement issued to F reflects F's share 
of the partnership adjustment for Partnership's 2020 taxable year as 
finally determined by the Tax Court. The statement shows F's share 
of the long-term capital loss adjustment for the reviewed year of 
$100, as well as the $100 long-term capital loss taken into account 
by F as part of the amended return modification. Accordingly, in 
accordance with paragraph (b) of this section, when F computes its 
correction amounts for the first affected year (the 2020 taxable 
year) and the intervening years (the 2021 through 2026 taxable 
years), F computes any increase or decrease in chapter 1 tax for 
those years using the returns for the 2020, 2021, and 2022 taxable 
years as amended during the modification process and taking into 
account any chapter 1 tax paid with those amended returns. F also 
takes into account the interest paid with F's amended returns when 
determining the interest under paragraph (c) of this section that 
must be paid in the reporting year.
    (6) Example 6.  Partnership has two equal partners for the 2020 
tax year: M (an individual) and J (a partnership). For the 2020 tax 
year, J has two equal partners--K and L--both individuals. On June 
1, 2023, the IRS mails an FPA to Partnership for Partnership's 2020 
year increasing Partnership's ordinary income by $500,000 and 
asserting an imputed underpayment of $200,000. Partnership makes a 
timely election under section 6226 in accordance with Sec.  
301.6226-1 with respect to the imputed underpayment in the FPA for 
Partnership's 2020 year and does not file a petition for 
readjustment under section 6234. The time to file a petition expires 
on August 30, 2023. Pursuant to Sec.  301.6226-2(b), the partnership 
adjustments become finally determined on August 31, 2023. Therefore, 
Partnership's adjustment year is 2023, the due date of the 
adjustment year return is March 15, 2024 and the extended due date 
for the adjustment year return is September 16, 2024. On October 12, 
2023, Partnership timely files with the IRS statements described in 
Sec.  301.6226-2 and timely furnishes statements to its partners 
reflecting their share of the partnership adjustments as finally 
determined in the FPA. The statements to M and J each reflect a 
partnership adjustment of $250,000 of ordinary income. M takes her 
share of the adjustments reflected on the statements furnished by 
Partnership into account on M's return for the 2023 tax year in 
accordance with paragraph (b) of this section. On April 1, 2024, J 
files the adjustment tracking report and files and furnishes 
statements to K and L reflecting each partner's share of the 
adjustments reflected on the statements Partnership furnished to J. 
K and L must take their share of adjustments reflected on the 
statements furnished by J into account on their returns for the 2023 
tax year in accordance with paragraph (b) of this section by 
treating themselves as reviewed year partners for purposes of 
paragraph (b).
    (7) Example 7.  On its partnership return for the 2020 tax year, 
Partnership reported that it placed Asset, which had a depreciable 
basis of $210,000, into service in 2020 and depreciated Asset over 5 
years, using the straight-line method. Accordingly, Partnership 
claimed depreciation of $42,000 in each year related to Asset. 
Partnership has two equal partners for the 2020 tax year: M (a 
partnership) and N (an S corporation). For the 2020 tax year, N has 
one shareholder, O, who is an individual. On June 1, 2023, the IRS 
mails an FPA to Partnership for Partnership's 2020 year. In the FPA, 
the IRS determines that Asset should have been depreciated over 7 
years instead of 5 years and adjusts the depreciation for the 2020 
tax year to $30,000 instead of $42,000 resulting in a $12,000 
adjustment. This adjustment results in an imputed underpayment of 
$4,800 ($12,000 x 40 percent). Partnership makes a timely election 
under section 6226 in accordance with Sec.  301.6226-1 with respect 
to the imputed underpayment in the FPA for Partnership's 2020 year 
and does not file a petition for readjustment under section 6234. 
The time to file a petition expires on August 30, 2023. Pursuant to 
Sec.  301.6226-2(b), the partnership adjustments become finally 
determined on August 31, 2023. On October 12, 2023, Partnership 
timely files with the IRS statements described in Sec.  301.6226-2 
and furnishes statements to its partners reflecting their share of 
the partnership adjustments as finally determined in the FPA. The 
statements to M and N reflect a partnership adjustment of $6,000 of 
ordinary income for the 2020 tax year. On February 1, 2024, N takes 
the adjustments into account under paragraph (e)(3) of this section 
by filing a partnership adjustment tracking report and furnishing a 
statement to O reflecting her share of the adjustments reported to N 
on the statement it received from Partnership. M does not furnish 
statements and instead chooses to calculate and pay an imputed 
underpayment under paragraph (e)(4) of this section equal to $1,200 
($6,000 x 40 percent) on the adjustments reflected on the statement 
it received from Partnership plus interest on the amount calculated 
in accordance with paragraph (e)(4)(iv)(B) of this section. On her 
2023 return, O properly takes the adjustments into account under 
this section. Therefore, O reports and pays the additional reporting 
year tax determined in accordance with paragraph (b) of this 
section, which is the correction amount for 2020 plus any correction 
amounts for 2021 and 2022 (if the adjustments in 2020 resulted in 
any changes to the tax attributes of O in those years), and pays 
interest determined in accordance with paragraph (c) of this section 
on the correction amounts for each of those years.
    (8) Example 8.  On its partnership return for the 2020 tax year, 
Partnership reported $1,000 of ordinary loss. Partnership has two 
equal partners for the 2020 tax year: P and Q, both S corporations. 
For the 2020 tax year, P had one shareholder, R, an individual. For 
the 2020 tax year, Q had two shareholders, S and T, both 
individuals. On June 1, 2023, the IRS mails an FPA to Partnership 
for Partnership's 2020 year determining $500 of the $1,000 of 
ordinary loss should be recharacterized as $500 of long-term capital 
loss and $500 of the ordinary loss should be disallowed. The FPA 
asserts an imputed underpayment of $400 ($1,000 x 40 percent) with 
respect to the $1,000 reduction to ordinary loss and reflecting an 
adjustment that does not result in an imputed underpayment of a $500 
capital loss. Partnership makes a timely election under section 6226 
in accordance with Sec.  301.6226-1 with respect to the imputed 
underpayment in the FPA for Partnership's 2020 year and does not 
file a petition for readjustment under section 6234. The time to 
file a petition expires on August 30, 2023. Pursuant to Sec.  
301.6226-2(b), the partnership adjustments become finally determined 
on August 31, 2023. On October 12, 2023, Partnership timely files 
with the IRS statements described in Sec.  301.6226-2 and furnishes 
statements to its partners reflecting their share of the partnership 
adjustments as finally determined in the FPA. The statements to P 
and Q each reflect a partnership adjustment of $500 increase in 
ordinary income and a $250 increase in capital loss in accordance 
with Sec.  301.6225-3(b)(6). P takes the adjustments into account 
under paragraph (e)(3) of this section by timely filing a 
partnership adjustment tracking report and furnishing a statement to 
R. Q timely filed a partnership adjustment

[[Page 6558]]

tracking report, but chooses not to furnish statements and instead 
must calculate and pay an imputed underpayment under paragraph 
(e)(4) of this section as well as interest on the imputed 
underpayment determined under paragraph (e)(4)(iv)(B) of this 
section. After applying the rules set forth in Sec.  301.6225-1, Q 
calculates the imputed underpayment that it is required to pay of 
$200 ($500 adjustment to ordinary income x 40 percent). Q also has 
one adjustment that does not result in an imputed underpayment--the 
$250 increase to capital loss. Pursuant to paragraph (e)(1) of this 
section, Q files the partnership adjustment tracking report and pay 
the amounts due under paragraph (e)(4) of this section by September 
15, 2024, the extended due date of Partnership's return for the 
adjustment year, 2023. Pursuant to paragraph (e)(4)(v) of this 
section, on its 2024 return, the year in which Q made its payment of 
the imputed underpayment, Q reports and allocates the $250 capital 
loss to its shareholders for its 2024 taxable year as a capital loss 
as provided in Sec.  301.6225-3.
    (9) Example 9.  On its partnership return for the 2020 tax year, 
Partnership reported a $1,000 long-term capital gain on the sale of 
Stock. Partnership has two equal partners for the 2020 tax year: U 
(an individual) and V (a partnership). For the 2020 tax year, V has 
two equal partners: W (an individual) and X (a partnership). For the 
2020 tax year, X has two equal partners: Y and Z, both of which are 
C corporations. On June 1, 2023, the IRS mails a NOPPA to 
Partnership for Partnership's 2020 year proposing a $500 increase in 
the long-term capital gain from the sale of Stock and an imputed 
underpayment of $200 ($500 x 40 percent). On July 17, 2023, 
Partnership timely submits a request to modify the rate used in 
calculating the imputed underpayment under Sec.  301.6225-2(d)(4). 
Partnership submits sufficient information demonstrating that $375 
of the $500 adjustment is allocable to individuals (50 percent of 
the $500 adjustment allocable to U and 25 percent of the $500 
adjustment allocable to W) and the remaining $125 is allocable to C 
corporations (the indirect partners Y and Z). The IRS approves the 
modification and the imputed underpayment is reduced to $81.25 
(($375 x 15 percent) + ($125 x 20 percent)). See Sec.  301.6225-
2(b)(3). No other modifications are requested. On February 28, 2024, 
the IRS mails an FPA to Partnership for Partnership's 2020 year 
determining a $500 increase in the long-term capital gain on the 
sale of Stock and asserting an imputed underpayment of $81.25 after 
taking into account the approved modifications. Partnership makes a 
timely election under section 6226 in accordance with Sec.  
301.6226-1 with respect to the imputed underpayment in the FPA for 
Partnership's 2020 year and does not file a petition for 
readjustment under section 6234. The time to file a petition expires 
on May 28, 2024. Pursuant to Sec.  301.6226-2(b), the partnership 
adjustments become finally determined on May 29, 2024. On July 26, 
2024, Partnership timely files with the IRS statements described in 
Sec.  301.6226-2 and furnishes statements to its partners reflecting 
their share of the partnership adjustments as finally determined in 
the FPA. The statements to U and V each reflect a partnership 
adjustment of a $250 increase in long-term capital gain. V timely 
files the adjustment tracking report but fails to furnish statements 
and therefore must calculate and pay an imputed underpayment under 
paragraph (e)(4) of this section as well as interest on the imputed 
underpayment determined under paragraph (e)(4)(iv)(B) of this 
section. On February 3, 2025, V pays an imputed underpayment of 
$43.75 (($125 x 20 percent for the adjustments allocable to X) + 
($125 x 15 percent for the adjustments allocable to W)) which takes 
into account the rate modifications approved by the IRS with respect 
to Y and Z. V must also pay any interest on the amount as determined 
in accordance with paragraph (e)(4)(iv)(B) of this section. V must 
file the adjustment tracking report and pay the amounts due under 
paragraph (e)(4) of this section no later than September 15, 2025, 
the extended due date of Partnership's return for the 2024 year, 
which is the adjustment year.

    (i) Applicability date--(1) In general. Except as provided in 
paragraph (i)(2) of this section, this section applies to partnership 
taxable years beginning after December 31, 2017, and ending after 
August 12, 2018.
    (2) Election under Sec.  301.9100-22 in effect. This section 
applies to any partnership taxable year beginning after November 2, 
2015, and before January 1, 2018, for which a valid election under 
Sec.  301.9100-22 is in effect.

0
Par. 10. Section 301.6227-1 is added to read as follows:


Sec.  301.6227-1  Administrative adjustment request by partnership.

    (a) In general. A partnership may file a request for an 
administrative adjustment with respect to any partnership-related item 
(as defined in Sec.  301.6241-1(a)(6)(ii)) for any partnership taxable 
year. When filing an administrative adjustment request (AAR), the 
partnership must determine whether the adjustments requested in the AAR 
result in an imputed underpayment in accordance with Sec.  301.6227-
2(a) for the reviewed year (as defined in Sec.  301.6241-1(a)(8)). If 
the adjustments requested in the AAR result in an imputed underpayment, 
the partnership must take the adjustments into account under the rules 
described in Sec.  301.6227-2(b) unless the partnership makes an 
election under Sec.  301.6227-2(c), in which case each reviewed year 
partner (as defined in Sec.  301.6241-1(a)(9)) must take the 
adjustments into account in accordance with Sec.  301.6227-3. If the 
adjustments requested in the AAR are adjustments described in Sec.  
301.6225-1(f)(1) that do not result in an imputed underpayment (as 
determined under Sec.  301.6227-2(a)), such adjustments must be taken 
into account by the reviewed year partners in accordance with Sec.  
301.6227-3. A partner may not make a request for an administrative 
adjustment of a partnership-related item except in accordance with 
Sec.  301.6222-1 or if the partner is doing so on behalf of the 
partnership in the partner's capacity as the partnership representative 
designated under section 6223. In addition, a partnership may not file 
an AAR solely for the purpose of changing the designation of a 
partnership representative or changing the appointment of a designated 
individual. See Sec.  301.6223-1 (regarding designation of the 
partnership representative). When the partnership changes the 
designation of the partnership representative (or appointment of the 
designated individual) in conjunction with the filing of an AAR in 
accordance with Sec.  301.6223-1(e), the change in designation (or 
appointment) is treated as occurring prior to the filing of the AAR. 
For rules regarding a notice of change to the amount of creditable 
foreign tax expenditures see paragraph (g) of this section.
    (b) Time for filing an AAR. An AAR may only be filed by a 
partnership with respect to a partnership taxable year after a 
partnership return for that taxable year has been filed with the 
Internal Revenue Service (IRS). A partnership may not file an AAR with 
respect to a partnership taxable year more than three years after the 
later of the date the partnership return for such partnership taxable 
year was filed or the last day for filing such partnership return 
(determined without regard to extensions). Except as provided in Sec.  
301.6231-1(f), an AAR (including a request filed by a partner in 
accordance with Sec.  301.6222-1) may not be filed for a partnership 
taxable year after a notice of administrative proceeding with respect 
to such taxable year has been mailed by the IRS under section 6231.
    (c) Form and manner for filing an AAR--(1) In general. An AAR by a 
partnership, including any required statements, forms, and schedules as 
described in this section, must be filed with the IRS in accordance 
with the forms, instructions, and other guidance prescribed by the IRS, 
and must be signed under penalties of perjury by the partnership 
representative (as described in Sec. Sec.  301.6223-1 and 301.6223-2).
    (2) Contents of AAR filed with the IRS. A partnership must include 
the information described in this paragraph (c)(2) when filing an AAR 
with the IRS. In the case of a failure by the partnership to provide 
the information described in this paragraph (c)(2), the IRS may, but is 
not required to,

[[Page 6559]]

invalidate an AAR or readjust any items that were adjusted on the AAR. 
An AAR filed with the IRS must include--
    (i) The adjustments requested;
    (ii) If a reviewed year partner is required to take into account 
the adjustments requested under Sec.  301.6227-3, statements described 
in paragraph (e) of this section, including any transmittal with 
respect to such statements required by forms, instructions, and other 
guidance prescribed by the IRS; and
    (iii) Other information prescribed by the IRS in forms, 
instructions, or other guidance.
    (d) Copy of statement furnished to reviewed year partners in 
certain cases. If a reviewed year partner is required to take into 
account adjustments requested in an AAR under Sec.  301.6227-3, the 
partnership must furnish a copy of the statement described in paragraph 
(e) of this section to the reviewed year partner to whom the statement 
relates in accordance with the forms, instructions and other guidance 
prescribed by the IRS. If the partnership mails the statement, it must 
mail the statement to the current or last address of the reviewed year 
partner that is known to the partnership. The statement must be 
furnished to the reviewed year partner on the date the AAR is filed 
with the IRS.
    (e) Statements--(1) Contents. Each statement described in this 
paragraph (e) must include the following correct information:
    (i) The name and TIN of the reviewed year partner to whom the 
statement is being furnished;
    (ii) The current or last address of the partner that is known to 
the partnership;
    (iii) The reviewed year partner's share of items as originally 
reported on statements furnished to the partner under section 6031(b) 
and, if applicable, section 6227;
    (iv) The reviewed year partner's share of the adjustments as 
described under paragraph (e)(2) of this section;
    (v) The date the statement is furnished to the partner;
    (vi) The partnership taxable year to which the adjustments relate; 
and
    (vii) Any other information required by forms, instructions, and 
other guidance prescribed by the IRS.
    (2) Determination of each partner's share of adjustments--(i) In 
general. Except as provided in paragraphs (e)(2)(ii) and (iii) of this 
section, each reviewed year partner's share of the adjustments 
requested in the AAR is determined in the same manner as each adjusted 
partnership-related item was originally allocated to the reviewed year 
partner on the partnership return for the reviewed year. If the 
partnership pays an imputed underpayment under Sec.  301.6227-2(b) with 
respect to the adjustments requested in the AAR, the reviewed year 
partner's share of the adjustments requested in the AAR only includes 
any adjustments that did not result in the imputed underpayment, as 
determined under Sec.  301.6227-2(a).
    (ii) Adjusted partnership-related item not reported on the 
partnership's return for the reviewed year. Except as provided in 
paragraph (e)(2)(iii) of this section, if the adjusted partnership-
related item was not reported on the partnership return for the 
reviewed year, each reviewed year partner's share of the adjustments 
must be determined in accordance with how such items would have been 
allocated under rules that apply with respect to partnership 
allocations, including under the partnership agreement.
    (iii) Allocation adjustments. If an adjustment involves allocation 
of a partnership-related item to a specific partner or in a specific 
manner, including a reallocation of an item, the reviewed year 
partner's share of the adjustment requested in the AAR is determined in 
accordance with the AAR.
    (f) Administrative proceeding for a taxable year for which an AAR 
is filed. Within the period described in section 6235, the IRS may 
initiate an administrative proceeding with respect to the partnership 
for any partnership taxable year regardless of whether the partnership 
filed an AAR with respect to such taxable year and may adjust any 
partnership-related item, including any partnership-related item 
adjusted in an AAR filed by the partnership. The amount of an imputed 
underpayment determined by the partnership under Sec.  301.6227-
2(a)(1), including any modifications determined by the partnership 
under Sec.  301.6227-2(a)(2), may be re-determined by the IRS.
    (g) [Reserved]
    (h) Applicability date--(1) In general. Except as provided in 
paragraph (h)(2) of this section, this section applies to partnership 
taxable years beginning after December 31, 2017, and ending after 
August 12, 2018.
    (2) Election under Sec.  301.9100-22 in effect. This section 
applies to any partnership taxable year beginning after November 2, 
2015, and before January 1, 2018, for which a valid election under 
Sec.  301.9100-22 is in effect.

0
Par. 11. Section 301.6227-2 is added to read as follows:


Sec.  301.6227-2  Determining and accounting for adjustments requested 
in an administrative adjustment request by the partnership.

    (a) Determining whether adjustments result in an imputed 
underpayment--(1) Determination of an imputed underpayment. The 
determination of whether adjustments requested in an administrative 
adjustment request (AAR) result in an imputed underpayment in the 
reviewed year (as defined in Sec.  301.6241-1(a)(8)) and the 
determination of the amount of any imputed underpayment is made in 
accordance with the rules under Sec.  301.6225-1.
    (2) Modification of imputed underpayment for purposes of this 
section. A partnership may apply modifications to the amount of an 
imputed underpayment determined under paragraph (a)(1) of this section 
using only the provisions under Sec.  301.6225-2(d)(3) (regarding tax-
exempt partners), Sec.  301.6225-2(d)(4) (regarding modification of 
applicable tax rate), Sec.  301.6225-2(d)(5) (regarding specified 
passive activity losses), Sec.  301.6225-2(d)(6)(ii) (regarding 
limitations or restrictions in the grouping of adjustments), Sec.  
301.6225-2(d)(7) (regarding certain qualified investment entities), 
Sec.  301.6225-2(d)(9) (regarding tax treaty modifications), or as 
provided in forms, instructions, or other guidance prescribed by the 
IRS with respect to AARs. The partnership may not modify an imputed 
underpayment resulting from adjustments requested in an AAR except as 
described in this paragraph (a)(2). When applying modifications to the 
amount of an imputed underpayment under this paragraph (a)(2):
    (i) The partnership is not required to seek the approval from the 
Internal Revenue Service (IRS) prior to applying modifications to the 
amount of any imputed underpayment under paragraph (a)(1) of this 
section reported on the AAR; and
    (ii) As part of the AAR filed with the IRS in accordance with 
forms, instructions, and other guidance prescribed by the IRS, the 
partnership must--
    (A) Notify the IRS of any modification;
    (B) Describe the effect of the modification on the imputed 
underpayment;
    (C) Provide an explanation of the basis for such modification; and
    (D) Provide documentation to support the partnership's eligibility 
for the modification.
    (b) Adjustments resulting in an imputed underpayment taken into

[[Page 6560]]

account by the partnership--(1) In general. Except in the case of a 
valid election under paragraph (c) of this section, a partnership must 
pay any imputed underpayment (as determined under paragraph (a) of this 
section) resulting from the adjustments requested in an AAR on the date 
the partnership files the AAR. For the rules applicable to the 
partnership's expenditure for an imputed underpayment, as well as any 
penalties and interest paid by the partnership with respect to an 
imputed underpayment, see Sec.  301.6241-4.
    (2) Penalties and interest. The IRS may impose a penalty, addition 
to tax, and additional amount with respect to any imputed underpayment 
determined under this section in accordance with section 6233(a)(3) 
(penalties determined from the reviewed year). In addition, the IRS may 
impose a penalty, addition to tax, and additional amount with respect 
to a failure to pay any imputed underpayment on the date an AAR is 
filed in accordance with section 6233(b)(3) (penalties with respect to 
the adjustment year return). Interest on an imputed underpayment is 
determined under chapter 67 of the Internal Revenue Code for the period 
beginning on the date after the due date of the partnership return for 
the reviewed year (as defined in Sec.  301.6241-1(a)(8)) (determined 
without regard to extension) and ending on the date the AAR is filed. 
See Sec.  301.6233(a)-1(b). In the case of any failure to pay an 
imputed underpayment on the date the AAR is filed, interest is 
determined in accordance with section 6233(b)(2) and Sec.  301.6233(b)-
1(c).
    (3) Coordination with chapters 3 and 4 of the Internal Revenue 
Code--(i) Coordination when partnership pays an imputed underpayment. 
If a partnership pays an imputed underpayment resulting from 
adjustments requested in an AAR under paragraph (b)(1) of this section, 
the rules in Sec.  301.6241-6(b)(3) apply to treat the partnership as 
having paid the amount required to be withheld under chapter 3 or 
chapter 4 (as defined in Sec.  301.6241-6(b)(2)).
    (ii) Coordination when partnership elects to have adjustments taken 
into account by reviewed year partners. If a partnership elects under 
paragraph (c) of this section to have its reviewed year partners take 
into account adjustments requested in an AAR, the rules in Sec.  
301.6226-2(g)(3) apply to the partnership, and the rules in Sec.  
301.6226-3(f) apply to the reviewed year partners that take into 
account the adjustments pursuant to Sec.  301.6227-3.
    (c) Election to have adjustments resulting in an imputed 
underpayment taken into account by reviewed year partners. In lieu of 
paying an imputed underpayment under paragraph (b) of this section, the 
partnership may elect to have each reviewed year partner (as defined in 
Sec.  301.6241-1(a)(9)) take into account the adjustments requested in 
the AAR that are associated with such imputed underpayment in 
accordance with Sec.  301.6227-3. A partnership makes an election under 
this paragraph (c) at the time the AAR is filed in accordance with the 
forms, instructions, and other guidance prescribed by the IRS. If the 
partnership makes a valid election in accordance with this paragraph 
(c), the partnership is not liable for, nor required to pay, the 
imputed underpayment to which the election relates. Rather, each 
reviewed year partner must take into account their share of the 
adjustments requested in the AAR that are associated with such imputed 
underpayment in accordance with Sec.  301.6227-3. If an election is 
made under this paragraph (c) with respect to an imputed underpayment, 
modifications applied under paragraph (a)(2) of this section to such 
imputed underpayment are disregarded and all adjustments requested in 
the AAR that are associated with such imputed underpayment must be 
taken into account by each reviewed year partner in accordance with 
Sec.  301.6227-3.
    (d) Adjustments not resulting in an imputed underpayment. If any 
adjustments requested in an AAR are adjustments that do not result in 
an imputed underpayment (as determined under paragraph (a) of this 
section), the partnership must furnish statements to each reviewed year 
partner and file such statements with the IRS in accordance with Sec.  
301.6227-1. Each reviewed year partner must take into account its share 
of the adjustments that do not result in an imputed underpayment 
requested in the AAR in accordance with Sec.  301.6227-3.
    (e) Applicability date--(1) In general. Except as provided in 
paragraph (e)(2) of this section, this section applies to partnership 
taxable years beginning after December 31, 2017, and ending after 
August 12, 2018.
    (2) Election under Sec.  301.9100-22 in effect. This section 
applies to any partnership taxable year beginning after November 2, 
2015, and before January 1, 2018, for which a valid election under 
Sec.  301.9100-22 is in effect.

0
Par. 12. Section 301.6227-3 is added to read as follows:


Sec.  301.6227-3  Adjustments requested in an administrative adjustment 
request taken into account by reviewed year partners.

    (a) In general. Each reviewed year partner (as defined in Sec.  
301.6241-1(a)(9)) is required to take into account its share of 
adjustments requested in an administrative adjustment request (AAR) 
that either do not result in an imputed underpayment (as described in 
Sec.  301.6225-1(f)(1)) or are associated with an imputed underpayment 
for which the partnership makes an election under Sec.  301.6227-2(c). 
Each reviewed year partner receiving a statement furnished in 
accordance with Sec.  301.6227-1(d) must take into account adjustments 
reflected in the statement in the reviewed year partner's taxable year 
that includes the date the statement is furnished (reporting year) in 
accordance with paragraph (b) of this section.
    (b) Adjustments taken into account by the reviewed year partner in 
the reporting year--(1) In general. Except as provided in paragraph (c) 
of this section, a reviewed year partner that is furnished a statement 
described in paragraph (a) of this section must treat the statement as 
if it were issued under section 6226(a)(2) and, on or before the due 
date for the reporting year must report and pay the additional 
reporting year tax (as defined in Sec.  301.6226-3(a)), if any, 
determined after taking into account that partner's share of the 
adjustments requested in the AAR in accordance with Sec.  301.6226-3. A 
reviewed year partner may, in accordance with Sec.  301.6226-3(a), 
reduce chapter 1 tax for the reporting year where the additional 
reporting year tax is less than zero. For purposes of paragraph (b) of 
this section, the rule under Sec.  301.6226-3(c)(3) (regarding the 
increased rate of interest) does not apply. Nothing in this section 
entitles any partner to a refund of tax imposed by chapter 1 of the 
Internal Revenue Code (chapter 1 tax) to which such partner is not 
entitled. For instance, a partnership-partner (as defined in Sec.  
301.6241-1(a)(7)) may not claim a refund with respect to its share of 
any adjustment.
    (2) Examples. The following examples illustrate the rules of 
paragraph (b) of this section.

    (i) Example 1.  In 2022, partner A, an individual, received a 
statement described in paragraph (a) of this section from 
Partnership with respect to Partnership's 2020 taxable year. Both A 
and Partnership are calendar year taxpayers and A is not claiming 
any refundable tax credit in 2020. The only adjustment shown on the 
statement is an increase in ordinary loss. Taking into account the 
adjustment, A determines that his

[[Page 6561]]

additional reporting year tax for 2022 (the reporting year) is -$100 
(that is, a reduction of $100.) A's chapter 1 tax for 2022 (without 
regard to any additional reporting year tax) is $150. Applying the 
rules in paragraph (b)(1) of this section, A's chapter 1 tax for 
2022 is reduced to $50 ($150 chapter 1 tax without regard to the 
additional reporting year tax plus -$100 additional reporting year 
tax).
    (ii) Example 2.  The facts are the same as in Example 1 in 
paragraph (b)(2)(i) of this section, except A's chapter 1 tax for 
2022 (without regard to any additional reporting year tax) is $75. 
Applying the rules in paragraph (b)(1) of this section, A's chapter 
1 tax for 2022 is reduced by the -$100 of additional reporting year 
tax. Accordingly, A's chapter 1 tax for 2022 is -$25 ($75 chapter 1 
tax without regard to any additional reporting year tax plus -$100 
of additional reporting year tax), A owes no chapter 1 tax for 2022, 
and A may make a claim for refund with respect to any overpayment.

    (c) Reviewed year partners that are pass-through partners--(1) In 
general. Except as provided in paragraph (c) of this section, if a 
statement described in paragraph (a) of this section (including a 
statement described in this paragraph (c)(1)) is furnished to a 
reviewed year partner that is a pass-through partner (as defined in 
Sec.  301.6241-1(a)(5)), the pass-through partner must take into 
account the adjustments reflected on that statement in accordance with 
Sec.  301.6226-3(e) by treating the partnership that filed the AAR as 
the partnership that made an election under Sec.  301.6226-1. A pass-
through partner that furnishes statements in accordance with Sec.  
301.6226-3(e)(3) must provide the information described in paragraph 
(c)(3) of this section in lieu of the information described in Sec.  
301.6226-3(e)(3)(iii) on the statements the pass-through partner 
furnishes to its partners. A pass-through partner that computes and 
pays an imputed underpayment in accordance with Sec.  301.6226-
3(e)(4)(iii) may not apply any modifications to the amount of imputed 
underpayment. For purposes of this paragraph (c)(1), the statement 
furnished to the pass-through partner by the partnership filing the AAR 
is treated as if it were a statement issued under section 6226(a)(2) 
and described in Sec.  301.6226-2.
    (2) Adjustments that do not result in an imputed underpayment. If 
adjustments on a statement received by the pass-through partner under 
paragraph (a) or (c)(1) of this section do not result in an imputed 
underpayment for the pass-through partner (as described in Sec.  
301.6225-1(f)(1)), the pass-through partner must take the adjustments 
that do not result in an imputed underpayment into account in 
accordance with Sec.  301.6226-3(e)(3). The pass-through partner must 
take such adjustments into account under this paragraph (c)(2) even in 
situations where the pass-through partner pays an imputed underpayment 
in accordance with Sec.  301.6226-3(e)(4)(iii). The pass-through 
partner must provide the information described in paragraph (c)(3) of 
this section in lieu of the information described in Sec.  301.6226-
3(e)(3)(iii) on the statements the pass-through partner furnishes to 
its affected partners (as defined in Sec.  301.6226-3(e)(3)(i)).
    (3) Contents of statements. Each statement described in paragraph 
(c)(1) or (2) of this section must include the following correct 
information--
    (i) The name and taxpayer identification number (TIN) of the 
partnership that filed the AAR with respect to the adjustments 
reflected on the statements described in paragraph (c)(1) of this 
section;
    (ii) The adjustment year (as defined in Sec.  301.6241-1(a)(1)) of 
the partnership described in paragraph (c)(3)(i) of this section;
    (iii) The extended due date for the return for the adjustment year 
of the partnership described in paragraph (c)(3)(i) of this section (as 
described in Sec.  301.6226-3(e)(3)(ii));
    (iv) The date on which the partnership described in paragraph 
(c)(3)(i) of this section furnished its statements required under Sec.  
301.6227-1(d);
    (v) The name and TIN of the partnership that furnished the 
statement to the pass-through partner if different from the partnership 
described in paragraph (c)(3)(i) of this section;
    (vi) The name and TIN of the pass-through partner;
    (vii) The pass-through partner's taxable year to which the 
adjustments set forth in the statement described in paragraph (c)(1) of 
this section relate;
    (viii) The name and TIN of the affected partner to whom the 
statement is being furnished;
    (ix) The current or last address of the affected partner that is 
known to the pass-through partner;
    (x) The affected partner's share of items as originally reported to 
such partner under section 6031(b) and, if applicable, section 6227, 
for the taxable year to which the adjustments reflected on the 
statement furnished to the pass-through partner relate;
    (xi) The affected partner's share of partnership adjustments 
determined under Sec.  301.6227-1(e)(2) as if the affected partner were 
the reviewed year partner and the partnership were the pass-through 
partner;
    (xii) Any other information required by forms, instructions, and 
other guidance prescribed by the IRS.
    (4) Affected partners must take into account the adjustments. A 
statement furnished to an affected partner in accordance with paragraph 
(c)(1) or (2) of this section is to be treated by the affected partner 
as if it were a statement described in paragraph (a) of this section. 
The affected partner must take into account its share of the 
adjustments reflected on such a statement in accordance with this 
section by treating references to ``reviewed year partner'' as 
``affected partner.'' When taking into account the adjustments as 
described in Sec.  301.6226-3(e)(3)(iv), the rules under Sec.  
301.6226-3(c)(3) (regarding the increased rate of interest) do not 
apply.
    (d) Applicability date--(1) In general. Except as provided in 
paragraph (d)(2) of this section, this section applies to partnership 
taxable years beginning after December 31, 2017, and ending after 
August 12, 2018.
    (2) Election under Sec.  301.9100-22 in effect. This section 
applies to any partnership taxable year beginning after November 2, 
2015, and before January 1, 2018, for which a valid election under 
Sec.  301.9100-22 is in effect.

0
Par. 13. Section 301.6231-1 is added to read as follows:


Sec.  301.6231-1  Notice of proceedings and adjustments.

    (a) Notices to which this section applies. In the case of any 
administrative proceeding under subchapter C of chapter 63 of the 
Internal Revenue Code (subchapter C of chapter 63), including an 
administrative proceeding with respect to an administrative adjustment 
request (AAR) filed by a partnership under section 6227, the following 
notices must be mailed to the partnership and the partnership 
representative (as described in section 6223 and Sec.  301.6223-1)--
    (1) Notice of any administrative proceeding initiated at the 
partnership level with respect to an adjustment of any partnership-
related item (as defined in Sec.  301.6241-1(a)(6)(ii)) for any 
partnership taxable year under subchapter C of chapter 63 (notice of 
administrative proceeding (NAP));
    (2) Notice of any proposed partnership adjustment resulting from an 
administrative proceeding under subchapter C of chapter 63 (notice of 
proposed partnership adjustment (NOPPA)); and
    (3) Notice of any final partnership adjustment resulting from an 
administrative proceeding under subchapter C of chapter 63 (notice of 
final partnership adjustment (FPA)).

[[Page 6562]]

    (b) Time for mailing notices--(1) Notice of proposed partnership 
adjustment. A NOPPA is timely if it is mailed before the expiration of 
the period for making adjustments under section 6235(a)(1) (including 
any extensions under section 6235(b) and any special rules under 
section 6235(c)).
    (2) Notice of final partnership adjustment. An FPA may not be 
mailed earlier than 270 days after the date on which the NOPPA is 
mailed unless the partnership agrees, in writing, with the Internal 
Revenue Service (IRS) to waive the 270-day period. See Sec.  301.6225-
2(c)(3)(iii) for the effect of a waiver under this paragraph (b)(2) on 
the 270-period for requesting a modification under section 6225(c). See 
Sec.  301.6232-1(d)(2) for the rules regarding a waiver of the 
limitations on assessment under Sec.  301.6232-1(c).
    (c) Last known address. A notice described in paragraph (a) of this 
section is sufficient if mailed to the last known address of the 
partnership representative and the partnership (even if the partnership 
or partnership representative has terminated its existence).
    (d) Notice mailed to partnership representative--(1) In general. A 
notice described in paragraph (a) of this section will be treated as 
mailed to the partnership representative if the notice is mailed to the 
partnership representative that is reflected in the IRS records as of 
the date the letter is mailed.
    (2) No partnership representative in effect. In any case in which 
no partnership representative designation is in effect in accordance 
with Sec.  301.6223-1(f), a notice described in paragraph (a) of this 
section mailed to ``PARTNERSHIP REPRESENTATIVE'' at the last known 
address of the partnership satisfies the requirements of this section.
    (e) Restrictions on additional FPAs after petition filed. The IRS 
may mail more than one FPA to any partnership for any partnership 
taxable year. However, except in the case of fraud, malfeasance, or 
misrepresentation of a material fact, the IRS may not mail an FPA to a 
partnership with respect to a partnership taxable year after the 
partnership has filed a timely petition for readjustment under section 
6234 with respect to an FPA issued with respect to such partnership 
taxable year.
    (f) Withdrawal of NAP or NOPPA. The IRS may, without consent of the 
partnership, withdraw any NAP or NOPPA. Except as described in Sec.  
301.6223-1(d)(2) and (e)(2), if the IRS withdraws a NAP or NOPPA under 
this paragraph (f), the NAP or NOPPA is treated as if it were never 
issued, and the withdrawn NAP or NOPPA has no effect for purposes of 
subchapter C of chapter 63. For instance, if the IRS withdraws a NAP 
with respect to a partnership taxable year, the limitation under Sec.  
301.6222-1(c)(5) regarding inconsistent treatment, and the prohibition 
under section 6227(c) on filing an AAR, after the mailing of a NAP no 
longer applies with respect to such taxable year.
    (g) Rescission of FPA. The IRS may, with the consent of the 
partnership, rescind any FPA. An FPA that is rescinded is not an FPA 
for purposes of subchapter C of chapter 63, and the partnership cannot 
bring a proceeding under section 6234 with respect to such FPA.
    (h) Applicability date--(1) In general. Except as provided in 
paragraph (h)(2) of this section, this section applies to partnership 
taxable years beginning after December 31, 2017, and ending after 
August 12, 2018.
    (2) Election under Sec.  301.9100-22 in effect. This section 
applies to any partnership taxable year beginning after November 2, 
2015, and before January 1, 2018, for which a valid election under 
Sec.  301.9100-22 is in effect.

0
Par. 14. Section 301.6232-1 is added to read as follows:


Sec.  301.6232-1  Assessment, collection, and payment of imputed 
underpayment.

    (a) In general. An imputed underpayment determined under subchapter 
C of chapter 63 of the Internal Revenue Code (Code) is assessed and 
collected in the same manner as if the imputed underpayment were a tax 
imposed by subtitle A of the Code for the adjustment year (as defined 
in Sec.  301.6241-1(a)(1)) except that the deficiency procedures under 
subchapter B of chapter 63 of the Code do not apply to an assessment of 
an imputed underpayment. Accordingly, no notice under section 6212 is 
required for, and the restrictions under section 6213 do not apply to, 
the assessment of any imputed underpayment. See paragraph (c) of this 
section for limitations on assessment and paragraph (d) of this section 
for exceptions to restrictions on adjustments.
    (b) Payment of the imputed underpayment. Upon receipt of notice and 
demand from the Internal Revenue Service (IRS), an imputed underpayment 
must be paid by the partnership at the place and time stated in the 
notice. In the case of an adjustment requested in an administrative 
adjustment request (AAR) under section 6227(b)(1) that is taken into 
account by the partnership under Sec.  301.6227-2(b), payment of the 
imputed underpayment is due on the date the AAR is filed. The IRS may 
assess the amount of the imputed underpayment reflected on the AAR on 
the date the AAR is filed. For interest with respect to an imputed 
underpayment, see Sec.  301.6233(a)-1(b).
    (c) Limitation on assessment--(1) In general. Except as otherwise 
provided by this section or subtitle F of the Code (except for 
subchapter B of chapter 63), no assessment of an imputed underpayment 
may be made (and no levy or proceeding in any court for the collection 
of an imputed underpayment may be made, begun, or prosecuted) before--
    (i) The close of the 90th day after the day on which a notice of a 
final partnership adjustment (FPA) under section 6231(a)(3) was mailed; 
and
    (ii) If a petition for readjustment is filed under section 6234 
with respect to such FPA, the decision of the court has become final.
    (2) Specified similar amount. The limitations under paragraph 
(c)(1) of this section do not apply in the case of a specified similar 
amount as defined in section 6232(f)(2).
    (d) Exceptions to restrictions on adjustments and assessments--(1) 
Adjustments treated as mathematical or clerical errors--(i) In general. 
A notice to a partnership that, on account of a mathematical or 
clerical error appearing on the partnership return or as a result of a 
failure by a partnership-partner (as defined in Sec.  301.6241-1(a)(7)) 
to comply with section 6222(a), the IRS has adjusted or will adjust 
partnership-related items (as defined in Sec.  301.6241-1(a)(6)(ii)) to 
correct the error or to make the items consistent under section 6222(a) 
and has assessed or will assess any imputed underpayment (determined in 
accordance with Sec.  301.6225-1) resulting from the adjustment is not 
considered an FPA under section 6231(a)(3). A petition for readjustment 
under section 6234 may not be filed with respect to such notice. The 
limitations under section 6232(b) and paragraph (c) of this section do 
not apply to an assessment under this paragraph (d)(1)(i). For the 
definition of mathematical or clerical error generally, see section 
6213(g)(2). For application of mathematical or clerical error in the 
case of inconsistent treatment by a partner that fails to give notice, 
see Sec.  301.6222-1(b).
    (ii) Request for abatement--(A) In general. Except as provided in 
paragraph (d)(1)(ii)(B) of this section, a partnership that is mailed a 
notice described in paragraph (d)(1)(i) of this section may file with 
the IRS, within 60

[[Page 6563]]

days after the date of such notice, a request for abatement of any 
assessment of an imputed underpayment specified in such notice. Upon 
receipt of the request, the IRS must abate the assessment. Any 
subsequent assessment of an imputed underpayment with respect to which 
abatement was made is subject to the provisions of subchapter C of 
chapter 63 of the Code, including the limitations under paragraph (c) 
of this section.
    (B) Adjustments with respect to inconsistent treatment by a 
partnership-partner. If an adjustment that is the subject of a notice 
described in paragraph (d)(1)(i) of this section is due to the failure 
of a partnership-partner to comply with section 6222(a), paragraph 
(d)(1)(ii)(A) of this section does not apply, and abatement of any 
assessment specified in such notice is not available. However, prior to 
assessment, a partnership-partner that has failed to comply with 
section 6222(a) may correct the inconsistency by filing an 
administrative adjustment request in accordance with section 6227 or 
filing an amended partnership return and furnishing amended statements, 
as appropriate.
    (iii) Partnerships that have an election under section 6221(b) in 
effect. In the case of a partnership-partner that has an election under 
section 6221(b) in effect for the reviewed year (as defined in Sec.  
301.6241-1(a)(8)), any tax resulting from an adjustment due to the 
partnership-partner's failure to comply with section 6222(a) may be 
assessed with respect to the reviewed year partners (as defined in 
Sec.  301.6241-1(a)(9)) of the partnership-partner (or indirect 
partners of the partnership-partner, as defined in Sec.  301.6241-
1(a)(4)). Such tax may be assessed in the same manner as if the tax 
were on account of a mathematical or clerical error appearing on the 
reviewed year partner's or indirect partner's return, except that the 
procedures under section 6213(b)(2) for requesting an abatement of such 
assessment do not apply.
    (2) Partnership may waive limitations. A partnership may at any 
time by a signed notice in writing filed with the IRS waive the 
limitations under paragraph (c) of this section (whether or not an FPA 
under section 6231(a)(3) has been mailed by the IRS at the time of the 
waiver).
    (e) Limit on amount of imputed underpayment where no proceeding is 
begun. If no proceeding under section 6234 is begun with respect to an 
FPA under section 6231(a)(3) before the close of the 90th day after the 
day on which such FPA was mailed, the amount for which the partnership 
is liable under section 6225 with respect to such FPA cannot exceed the 
amount determined in such FPA.
    (f) Applicability date--(1) In general. Except as provided in 
paragraph (f)(2) of this section, this section applies to partnership 
taxable years beginning after December 31, 2017, and ending after 
August 12, 2018.
    (2) Election under Sec.  301.9100-22 in effect. This section 
applies to any partnership taxable year beginning after November 2, 
2015, and before January 1, 2018, for which a valid election under 
Sec.  301.9100-22 is in effect.

0
Par. 15. Section 301.6233(a)-1 is added to read as follows:


Sec.  301.6233(a)-1  Interest and penalties determined from reviewed 
year.

    (a) Interest and penalties with respect to the reviewed year. 
Except to the extent provided in section 6226(c), in the case of a 
partnership adjustment (as defined in Sec.  301.6241-1(a)(6)) for a 
reviewed year (as defined in Sec.  301.6241-1(a)(8)), a partnership is 
liable for--
    (1) Interest computed in accordance with paragraph (b) of this 
section; and
    (2) Any penalty, addition to tax, or additional amount as provided 
under paragraph (c) of this section.
    (b) Computation of interest with respect to partnership adjustments 
for the reviewed year--(1) Interest on an imputed underpayment. The 
interest imposed on an imputed underpayment resulting from partnership 
adjustments for the reviewed year is the interest that would be imposed 
under chapter 67 of the Internal Revenue Code (Code) if the imputed 
underpayment were treated as an underpayment of tax for the reviewed 
year. The interest imposed on an imputed underpayment under paragraph 
(b) of this section begins on the day after the due date of the 
partnership return (without regard to extension) for the reviewed year 
and ends on the earlier of--
    (i) The date prescribed for payment (as described in Sec.  
301.6232-1(b));
    (ii) The due date of the partnership return (without regard to 
extension) for the adjustment year (as defined in Sec.  301.6241-
1(a)(1)); or
    (iii) The date the imputed underpayment is fully paid.
    (2) Interest on penalties with respect to the reviewed year. The 
interest imposed on any penalties, additions to tax, and additional 
amounts determined under paragraph (c) of this section is the interest 
that would be imposed under chapter 67 of the Code treating the 
partnership return for the reviewed year as the return of tax with 
respect to which such penalty, addition to tax, or additional amount is 
imposed.
    (c) Penalties with respect to partnership adjustments for the 
reviewed year--(1) In general. In accordance with section 6221(a), the 
applicability of any penalties, additions to tax, and additional 
amounts that relate to an adjustment to any partnership-related item 
for the reviewed year is determined at the partnership level as if the 
partnership had been an individual subject to tax imposed by chapter 1 
of the Code for the reviewed year, and the imputed underpayment were an 
actual underpayment of tax or understatement for such year. Nothing in 
this paragraph (c)(1) affects the application of any penalty, addition 
to tax, or additional amount that may apply to the partnership or to 
any reviewed year partner (as defined in Sec.  301.6241-1(a)(9)) or to 
any indirect partner (as defined in Sec.  301.6241-1(a)(4)) that is 
unrelated to an adjustment to a partnership-related item under 
subchapter C of chapter 63 of the Code. Except as provided in Sec.  
301.6225-2(d), a partner-level defense (as described in Sec.  301.6226-
3(d)(3)) may not be raised in a proceeding of the partnership.
    (2) Determination of the amount of accuracy-related penalty and 
fraud penalty--(i) In general. The amount of any penalty under part II 
of subchapter A of chapter 68 of the Code (accuracy-related or fraud 
penalties) that relates to any partnership adjustment for the reviewed 
year is determined in accordance with this paragraph (c)(2). If in 
determining the imputed underpayment under Sec.  301.6225-1 (or Sec.  
301.6225-2 in the case of modification), any grouping or subgrouping 
contains a negative adjustment (as defined in Sec.  301.6225-
1(d)(2)(ii)) and at least one positive adjustment (as defined in Sec.  
301.6225-1(d)(2)(iii)) that is subject to penalty, first apply the 
rules for allocating negative adjustments in paragraph (c)(2)(iii) of 
this section. Then, apply the rules in paragraph (c)(2)(ii) of this 
section to calculate penalty amounts. If there are no negative 
adjustments, do not apply the rules in paragraph (c)(2)(iii) of this 
section and instead apply only the rules in paragraph (c)(2)(ii) of 
this section. For all purposes under paragraph (c)(2) of this section, 
adjustments that do not result in the imputed underpayment (as 
described in Sec.  301.6225-1(f)) and adjustments excluded from the 
determination of the imputed underpayment under Sec.  301.6225-2(b)(2) 
are disregarded.
    (ii) Calculating the portion of an imputed underpayment subject to

[[Page 6564]]

penalty and penalty amounts. To determine the portion of an imputed 
underpayment subject to a penalty and the amount of a particular 
penalty, apply the following steps to all adjustments subject to 
penalty remaining after application of negative adjustments (as 
described in paragraph (c)(2)(iii) of this section) and to all 
adjustments subject to penalty contained in groupings or subgroupings 
that do not contain a negative adjustment.
    (A) For purposes of applying this paragraph (c)(2)(ii)(A), 
disregard adjustments to credits or adjustments treated as adjustments 
to credits. Total all adjustments to which a particular penalty was 
imposed and to which the highest rate of tax in effect for the reviewed 
year under section 1 or 11 was applied when calculating the imputed 
underpayment. See Sec.  301.6225-1(b)(1)(iv).
    (B) Multiply the total in paragraph (c)(2)(ii)(A) of this section 
by the highest rate of tax in effect for the reviewed year under 
section 1 or 11.
    (C) If the imputed underpayment was modified in accordance with 
Sec.  301.6225-2(b)(3), repeat the steps in paragraphs (c)(2)(ii)(A) 
and (B) of this section for every tax rate applied in calculating the 
imputed underpayment by substituting the applicable tax rate determined 
under Sec.  301.6225-2(b)(3) for the highest rate of tax in effect for 
the reviewed year under section 1 or 11.
    (D) Total all amounts determined after completing the steps in 
paragraphs (c)(2)(ii)(A) through (C) of this section.
    (E) Adjust the amount calculated in paragraph (c)(2)(ii)(D) of this 
section by:
    (1) Increasing by the net adjustments subject to the penalty in the 
credit grouping (as described in paragraph (c)(2)(iii)(C)(1) of this 
section) after application of paragraph (c)(2)(iii)(A) of this section; 
or
    (2) Decreasing in accordance with the rules in paragraph 
(c)(2)(iii)(C)(2) of this section by the amount of negative adjustments 
in the credit grouping if, after application of paragraph 
(c)(2)(iii)(A) of this section, only negative adjustments in the credit 
grouping remain.
    (3) The result after completing the calculation in paragraphs 
(c)(2)(ii)(E)(1) and (2) of this section is the portion of the imputed 
underpayment to which the particular penalty was imposed.
    (F) Multiply the total calculated in paragraph (c)(2)(ii)(E) of 
this section by the penalty rate applicable to the particular penalty. 
This is the total penalty amount for adjustments to which the 
particular penalty was imposed.
    (iii) Allocating negative adjustments--(A) In general. Negative 
adjustments offset positive adjustments within the same grouping or, if 
the negative adjustment is in a subgrouping, within that same 
subgrouping. For purposes of applying this paragraph (c)(2)(iii), all 
adjustments to credits and adjustments treated as adjustments to 
credits are treated as grouped in the credit grouping without regard to 
whether the adjustments were subgrouped for purposes of Sec.  301.6225-
1 (or Sec.  301.6225-2 in the case of modification). Adjustments that 
do not result in the imputed underpayment are disregarded as provided 
in paragraph (c)(2) of this section. Negative adjustments are allocated 
in accordance with the following rules:
    (1) Negative adjustments are first applied to offset positive 
adjustments to which no penalties have been imposed.
    (2) Any amount of negative adjustments remaining after application 
of paragraph (c)(2)(iii)(A)(1) of this section are applied to offset 
adjustments to which a penalty has been imposed at the lowest penalty 
rate.
    (3) Any amount of negative adjustments remaining after application 
of paragraph (c)(2)(iii)(A)(2) of this section are applied to offset 
adjustments to which a penalty has been imposed at the next highest 
rate in ascending order of rate until no amount of negative adjustments 
remain or no positive adjustments to which a penalty has been imposed 
remain.
    (B) Allocation of negative adjustment within a penalty rate. The 
Internal Revenue Service (IRS) may provide additional guidance 
regarding the ordering or allocation of negative adjustments for 
purposes of paragraph (c)(2)(iii)(A) of this section where more than 
one penalty is imposed at the same penalty rate.
    (C) Adjustments remaining after allocation of negative 
adjustments--(1) In general. For purposes of paragraph (c)(2)(ii) of 
this section, any positive adjustment to which a penalty has been 
imposed that has not been fully offset by a negative adjustment after 
application of paragraph (c)(2)(iii)(A) of this section is a net 
adjustment subject to penalty remaining after allocation of negative 
adjustments.
    (2) Additional rules regarding allocation of negative credit 
amounts. If, after application of paragraph (c)(2)(iii)(A) of this 
section, an amount of negative adjustments remain in the credit 
grouping, the amount of remaining negative adjustments may reduce the 
portion of the imputed underpayment that is subject to a penalty, but 
not below zero, in accordance with the following rules:
    (i) The amount of remaining negative adjustments in the credit 
grouping are first applied to the portion of the imputed underpayment 
to which no penalty has been imposed, as calculated in accordance with 
paragraph (c)(2)(iii)(C)(3) of this section.
    (ii) Any amount of negative adjustment in the credit grouping 
remaining after application of paragraph (c)(2)(iii)(C)(2)(i) of this 
section is applied to the portion of the imputed underpayment to which 
a penalty has been imposed at the lowest penalty rate as calculated in 
accordance with paragraph (c)(2)(ii) of this section.
    (iii) Any amount of negative adjustments in the credit grouping 
remaining after application of paragraph (c)(2)(iii)(C)(1)(ii) of this 
section is applied to the portion of the imputed underpayment to which 
a penalty has been imposed at the next highest rate in ascending order 
of rate in accordance with paragraph (c)(2)(iii) of this section until 
no negative amount remains.
    (3) Calculating the portion of the imputed underpayment to which no 
penalty was imposed before the application of negative adjustments to 
credits. To determine the portion of the imputed underpayment that is 
not subject to penalty for purposes of paragraph (c)(2)(iii)(C)(2)(i) 
of this section, apply the rules in paragraphs (c)(2)(ii)(A) through 
(E) of this section of this section but substitute adjustment to which 
no penalty was imposed for adjustments to which a particular penalty 
was imposed.
    (iv) Special rules--(A) Fraud penalties under section 6663. If any 
portion of an imputed underpayment is determined by the IRS to be 
attributable to fraud, the entire imputed underpayment is treated as 
attributable to fraud. This paragraph (c)(2)(iv)(A) does not apply to 
any portion of the imputed underpayment the partnership establishes by 
a preponderance of the evidence is not attributable to fraud.
    (B) Substantial understatement penalty under section 6662(d)--(1) 
In general. For purposes of application of the penalty under section 
6662(d) (substantial understatement of income tax), the imputed 
underpayment is treated as an understatement under section 6662(d)(2). 
To determine whether an imputed underpayment treated as an 
understatement under this paragraph (c)(2)(iv)(B)(1) is a substantial 
understatement under section 6662(d)(1), the rules of section 
6662(d)(1)(A) apply by treating the amount described in paragraph 
(c)(2)(iv)(B)(2) of this section as the tax

[[Page 6565]]

required to be shown on the return for the taxable year under section 
6662(d)(1)(A)(i).
    (2) Amount of tax required to be shown on the return. The amount 
described in this paragraph (c)(2)(iv)(B)(2) is the tax that would 
result by treating the net income or loss of the partnership for the 
reviewed year, reflecting any partnership adjustments as finally 
determined, as taxable income described in section 1(c) (determined 
without regard to section 1(h)).
    (C) Reportable transaction understatement under section 6662A. For 
purposes of application of the penalty under section 6662A (reportable 
transaction understatement penalty), the portion of an imputed 
underpayment attributable to an item described under section 
6662A(b)(2) is treated as a reportable transaction understatement under 
section 6662A(b).
    (D) Reasonable cause and good faith. For purposes of determining 
whether a partnership satisfies the reasonable cause and good faith 
exception under section 6664(c) or (d) with respect to a penalty under 
section 6662, section 6662A, or section 6663, the partnership is 
treated as the taxpayer. See Sec.  1.6664-4 of this chapter. 
Accordingly, the facts and circumstances taken into account to 
determine whether the partnership has established reasonable cause and 
good faith are the facts and circumstances applicable to the 
partnership.
    (v) Examples. The following examples illustrate the rules of 
paragraph (c) of this section. For purposes of these examples, each 
partnership has a calendar taxable year, and the highest tax rate in 
effect for all taxpayers is 40 percent for all relevant periods.

    (A) Example 1.  In an administrative proceeding with respect to 
Partnership's 2018 partnership return, the IRS makes a positive 
adjustment to ordinary income of $100. The $100 adjustment is due to 
negligence or disregard of rules or regulations under section 
6662(c), and a 20-percent accuracy-related penalty applies under 
section 6662(a). The IRS also makes a positive adjustment to long-
term capital gain of $300, but no penalty applies with respect to 
that adjustment. These are the only adjustments. The portion of the 
imputed underpayment to which the 20-percent penalty applies is $40 
($100 x 40 percent), and the penalty is $8 ($40 x 20 percent).
    (B) Example 2.  The facts are the same as in Example 1 in 
paragraph (c)(2)(v)(A) of this section, except that the IRS makes a 
positive adjustment to credits of $10. The adjustment to credits is 
due to negligence or disregard of rules or regulations under section 
6662(c), and a 20-percent accuracy-related penalty applies under 
section 6662(a). The portion of the imputed underpayment to which 
the 20-percent accuracy-related penalty applies is $50 (($100 x 40 
percent) + $10), and the penalty is $10 ($50 x 20 percent).
    (C) Example 3.  The facts are the same as in Example 2 in 
paragraph (c)(2)(v)(B) of this section, except that there is also a 
negative adjustment to ordinary income of $50 that was subgrouped 
under Sec.  301.6225-1 with the $100 positive adjustment to 
ordinary. Because the $50 negative adjustment to ordinary income was 
subgrouped under Sec.  301.6225-1 with the $100 positive adjustment 
to ordinary income, in determining the portion of the imputed 
underpayment subject to penalty, the $50 negative adjustment is 
applied to offset part of the $100 positive adjustment to ordinary 
income ($100-$50 = $50). Accordingly, the portion of the imputed 
underpayment to which the 20-percent accuracy-related penalty 
applies is $30 (($50 x 40 percent) + $10), and the penalty is $6 
($30 x 20 percent).
    (D) Example 4.  The facts are the same as in Example 3 in 
paragraph (c)(2)(v)(C) of this section, except that the $300 
adjustment to long-term capital gain is due to a gross valuation 
misstatement. A 40-percent accuracy-related penalty under section 
6662(a) and (h) applies to the portion of the imputed underpayment 
attributable to the gross valuation misstatement. The portion of the 
imputed underpayment to which the 20 percent accuracy-related 
penalty applies remains $30, and the 20-percent accuracy-related 
penalty remains $6. The portion of the imputed underpayment to which 
the 40-percent gross valuation misstatement penalty applies is $120 
($300 x 40 percent), and the gross valuation misstatement penalty is 
$48 ($120 x 40 percent). The total accuracy-related penalty under 
section 6662(a) is $54.
    (E) Example 5.  Partnership has four equal partners during its 
2019 taxable year: Two partners are partnerships, A and B; one 
partner is a tax-exempt entity, C; and the fourth partner is an 
individual, D. In an administrative proceeding with respect to 
Partnership's 2019 taxable year, the IRS timely mails a notice of 
proposed partnership adjustment (NOPPA) to Partnership for its 2019 
taxable year proposing a single partnership positive adjustment to 
Partnership's ordinary income by $400,000. The $400,000 positive 
adjustment is due to negligence or disregard of rules or regulations 
under section 6662(c). A 20-percent accuracy-related penalty under 
section 6662(a) and (c) applies to the portion of the imputed 
underpayment attributable to the negligence or disregard of the 
rules or regulations. In the NOPPA, the IRS determines an imputed 
underpayment of $160,000 ($400,000 x 40 percent) and that the 20-
percent penalty applies to the entire imputed underpayment. The 
penalty is $32,000 ($160,000 x 20 percent). Partnership requests 
modification under Sec.  301.6225-2(d)(3) (regarding tax-exempt 
partners) with respect to the amount of additional income allocated 
to C, and the IRS approves the modification request. As a result, 
Partnership's total netted partnership adjustment under Sec.  
301.6225-1(b)(2) is $300,000 ($400,000 less $100,000 allocable to 
C). The imputed underpayment is $120,000 (($300,000) x 40 percent), 
and the penalty is $24,000 ($120,000 x 20 percent).
    (F) Example 6.  The facts are the same as in Example 5 in 
paragraph (c)(2)(v)(E) of this section, except in addition to the 
modification with respect to C's tax-exempt status, Partnership 
requests a modification under Sec.  301.6225-2(d)(2) (regarding 
amended returns) with respect to the $100,000 of additional income 
allocated to D. In accordance with the rules under Sec.  301.6225-
2(d)(2), D files an amended return for D's 2019 taxable year taking 
into account $100,000 of additional ordinary income. In addition, in 
accordance with Sec.  301.6225-2(d)(2)(viii), D takes into account 
on D's return the 20-percent accuracy-related penalty for negligence 
or disregard of rules or regulations that relates to the ordinary 
income adjustment. D's tax attributes for other taxable years are 
not affected. The IRS approves the modification request. As a 
result, Partnership's total netted partnership adjustment under 
Sec.  301.6225-1(b)(2) is $200,000 ($400,000 less $100,000 allocable 
to C and $100,000 taken into account by D). The imputed 
underpayment, after modification, is $80,000 ($200,000 x 40 
percent), and the penalty is $16,000 ($80,000 x 20 percent).

    (d) Applicability date--(1) In general. Except as provided in 
paragraph (d)(2) of this section, this section applies to partnership 
taxable years beginning after December 31, 2017, and ending after 
August 12, 2018.
    (2) Election under Sec.  301.9100-22 in effect. This section 
applies to any partnership taxable year beginning after November 2, 
2015, and before January 1, 2018, for which a valid election under 
Sec.  301.9100-22 is in effect.

0
Par. 16. Section 301.6233(b)-1 is added to read as follows:


Sec.  301.6233(b)-1  Interest and penalties with respect to the 
adjustment year return.

    (a) Interest and penalties with respect to failure to pay imputed 
underpayment on the date prescribed. In the case of any failure to pay 
an imputed underpayment on the date prescribed for such payment (as 
described in Sec.  301.6232-1(b)), a partnership is liable for--
    (1) Interest as determined under paragraph (c) of this section; and
    (2) Any penalty, addition to tax, or additional amount as 
determined under paragraph (d) of this section.
    (b) Imputed underpayments to which this section applies. This 
section applies to the portion of an imputed underpayment determined by 
the Internal Revenue Service (IRS) under section 6225(a)(1), or an 
imputed underpayment resulting from adjustments requested by a 
partnership in an administrative adjustment request under section 6227, 
that is not paid by the date prescribed for payment under Sec.  
301.6232-1(b).
    (c) Interest. Interest determined under this paragraph (c) is the 
interest that

[[Page 6566]]

would be imposed under chapter 67 of the Internal Revenue Code (Code) 
by treating any unpaid amount of the imputed underpayment as an 
underpayment of tax imposed for the adjustment year (as defined in 
Sec.  301.6241-1(a)(1)). The interest under this paragraph (c) begins 
on the date prescribed for payment (as described in Sec.  301.6232-
1(b)) and ends on the date payment of the imputed underpayment is made.
    (d) Penalties. If a partnership fails to pay an imputed 
underpayment by the date prescribed for payment (as described in Sec.  
301.6232-1(b)), section 6651(a)(2) applies to such failure, and any 
unpaid amount of the imputed underpayment is treated as if it were an 
underpayment of tax for purposes of part II of subchapter A of chapter 
68 of the Code. For purposes of this section, the penalty under 
6651(a)(2) is applied by treating the unpaid amount of the imputed 
underpayment as the unpaid amount shown as tax on a return required 
under subchapter A of chapter 61 of the Code.
    (e) Applicability date--(1) In general. Except as provided in 
paragraph (e)(2) of this section, this section applies to partnership 
taxable years beginning after December 31, 2017, and ending after 
August 12, 2018.
    (2) Election under Sec.  301.9100-22 in effect. This section 
applies to any partnership taxable year beginning after November 2, 
2015, and before January 1, 2018, for which a valid election under 
Sec.  301.9100-22 is in effect.

0
Par. 17. Section 301.6234-1 is added to read as follows:


Sec.  301.6234-1  Judicial review of partnership adjustment.

    (a) In general. Within 90 days after the date on which a notice of 
a final partnership adjustment (FPA) under section 6231(a)(3) with 
respect to any partnership taxable year is mailed, a partnership may 
file a petition for a readjustment of any partnership adjustment (as 
defined in Sec.  301.6241-1(a)(6)) reflected in the FPA for such 
taxable year (without regard to whether an election under section 6226 
has been made with respect to any imputed underpayment (as defined in 
Sec.  301.6241-1(a)(3)) reflected in such FPA) with--
    (1) The Tax Court;
    (2) The district court of the United States for the district in 
which the partnership's principal place of business is located; or
    (3) The Court of Federal Claims.
    (b) Jurisdictional requirement for bringing action in district 
court or Court of Federal Claims. A petition for readjustment under 
this section with respect to any partnership adjustment may be filed in 
a district court of the United States or the Court of Federal Claims 
only if the partnership filing the petition deposits with the Internal 
Revenue Service (IRS), on or before the date the petition is filed, the 
amount of (as of the date of the filing of the petition) any imputed 
underpayment (as shown on the FPA) and any penalties, additions to tax, 
and additional amounts with respect to such imputed underpayment. If 
there is more than one imputed underpayment reflected in the FPA, the 
partnership must deposit the amount of each imputed underpayment to 
which the petition for readjustment relates and the amount of any 
penalties, additions to tax, and additional amounts with respect to 
each such imputed underpayment.
    (c) Treatment of deposit as payment of tax. Any amount deposited in 
accordance with paragraph (b) of this section, while deposited, will 
not be treated as a payment of tax for purposes of the Internal Revenue 
Code (Code). Notwithstanding the preceding sentence, an amount 
deposited in accordance with paragraph (b) of this section will be 
treated as a payment of tax for purposes of chapter 67 of the Code 
(relating to interest). Interest will be allowed and paid in accordance 
with section 6611.
    (d) Effect of decision dismissing action. If an action brought 
under this section is dismissed other than by reason of a rescission of 
the FPA under section 6231(d) and Sec.  301.6231-1(g), the decision of 
the court dismissing the action is considered as its decision that the 
FPA is correct.
    (e) Amount deposited may be applied against assessment. If the 
limitations on assessment under section 6232(b) and Sec.  301.6232-1(c) 
no longer apply with respect to an imputed underpayment for which a 
deposit under paragraph (b) of this section was made, the IRS may apply 
the amount deposited against any such imputed underpayment that is 
assessed. In the case of a deposit made under this section that is in 
an amount in excess of the amount assessed against the partnership 
(excess deposit), a partnership may obtain a return of the excess 
deposit by making a request in writing in accordance with forms, 
instructions, or other guidance prescribed by the IRS.
    (f) Applicability date--(1) In general. Except as provided in 
paragraph (f)(2) of this section, this section applies to partnership 
taxable years beginning after December 31, 2017, and ending after 
August 12, 2018.
    (2) Election under Sec.  301.9100-22 in effect. This section 
applies to any partnership taxable year beginning after November 2, 
2015, and before January 1, 2018, for which a valid election under 
Sec.  301.9100-22 is in effect.

0
Par. 18. Section 301.6235-1 is added to read as follows:


Sec.  301.6235-1  Period of limitations on making adjustments.

    (a) In general. Except as provided in section 6235(c), section 
905(c), or paragraph (d) of this section (regarding extensions), no 
partnership adjustment (as defined in Sec.  301.6241-1(a)(6)) for any 
partnership taxable year may be made after the later of the date that 
is--
    (1) 3 years after the latest of--
    (i) The date on which the partnership return for such taxable year 
was filed;
    (ii) The return due date (as defined in section 6241(3)) for the 
taxable year; or
    (iii) The date on which the partnership filed an administrative 
adjustment request with respect to such taxable year under section 
6227;
    (2) The date described in paragraph (b) of this section with 
respect to a request for modification; or
    (3) The date described in paragraph (c) of this section with 
respect to a notice of proposed partnership adjustment.
    (b) Modification requested under section 6225(c)--(1) In general. 
For purposes of paragraph (a)(2) of this section, in the case of any 
request for modification of any imputed underpayment under section 
6225(c), the date by which the Internal Revenue Service (IRS) may make 
a partnership adjustment is the date that is 270 days (plus the number 
of days of an extension of the period for requesting modification (as 
described in Sec.  301.6225-2(c)(3)(i)) agreed to by the IRS under 
section 6225(c)(7) and Sec.  301.6225-2(c)(3)(ii)) after the date on 
which everything required to be submitted to the IRS pursuant to 
section 6225(c) is so submitted.
    (2) Date on which everything is required to be submitted--(i) In 
general. For purposes of paragraph (b)(1) of this section, the date on 
which everything required to be submitted to the IRS pursuant to 
section 6225(c) is so submitted is the earlier of--
    (A) The date the period for requesting modification ends (including 
extensions) as described in Sec.  301.6225-2(c)(3)(i) and (ii); or
    (B) The date the period for requesting modification expires as a 
result of a waiver of the prohibition on mailing a notice of final 
partnership adjustment (FPA) under Sec.  301.6231-1(b)(2). See Sec.  
301.6225-2(c)(3)(iii).

[[Page 6567]]

    (ii) Incomplete submission has no effect. A determination by the 
IRS that the information submitted as part of a request for 
modification is incomplete has no effect on the applicability of 
paragraph (b)(2) of this section.
    (c) Notice of proposed partnership adjustment. For purposes of 
paragraph (a)(3) of this section, the date by which the IRS may make a 
partnership adjustment is the date that is 330 days (plus the number of 
days of an extension of the modification period (as described in Sec.  
301.6225-2(c)(3)(i)) agreed to by the IRS under section 6225(c)(7) and 
Sec.  301.6225-2(c)(3)(ii)) after the date the last notice of proposed 
partnership adjustment (NOPPA) under section 6231(a)(2) is mailed, 
regardless of whether modification is requested by the partnership 
under section 6225(c).
    (d) Extension by agreement. The periods described in paragraphs 
(a), (b), and (c) of this section (including any extension of those 
periods pursuant to this paragraph (d)) may be extended by an 
agreement, in writing, entered into by the partnership and the IRS 
before the expiration of such period.
    (e) Examples. The following examples illustrate the rules of this 
section. For purposes of these examples, each partnership has a 
calendar taxable year.

    (1) Example 1.  Partnership timely files its partnership return 
for the 2020 taxable year on March 1, 2021. On September 1, 2023, 
Partnership files an administrative adjustment request (AAR) under 
section 6227 with respect to its 2020 taxable year. As of September 
1, 2023, the IRS has not initiated an administrative proceeding 
under subchapter C of chapter 63 of the Internal Revenue Code with 
respect to Partnership's 2020 taxable year. Therefore, as of 
September 1, 2023, under paragraph (a)(1) of this section, the 
period for making partnership adjustments with respect to 
Partnership's 2020 taxable year expires on September 1, 2026.
    (2) Example 2.  Partnership timely files its partnership return 
for the 2020 taxable year on the due date, March 15, 2021. On 
February 1, 2023, the IRS mails to Partnership and the partnership 
representative of Partnership (PR) a notice of administrative 
proceeding under section 6231(a)(1) with respect to Partnership's 
2020 taxable year. Assuming no AAR has been filed with respect to 
Partnership's 2020 taxable year and the IRS has not yet mailed a 
NOPPA under section 6231(a)(2) with respect to Partnership's 2020 
taxable year, the period for making partnership adjustments for 
Partnership's 2020 taxable year expires on the date determined under 
paragraph (a)(1) of this section, March 15, 2024.
    (3) Example 3.  The facts are the same as in Example 2 in 
paragraph (e)(2) of this section, except that on June 1, 2023, 
pursuant to paragraph (d) of this section, PR signs an agreement 
extending the period for making partnership adjustments under 
section 6235(a) for Partnership's 2020 taxable year to December 31, 
2025. In addition, on June 2, 2025, the IRS mails to Partnership and 
PR a timely NOPPA under section 6231(a)(2). Pursuant to Sec.  
301.6225-2(c)(3)(i), the period for requesting modification expires 
on February 27, 2026 (270 days after June 2, 2025, the date the 
NOPPA is mailed), but PR does not submit a request for modification 
on or before this date. Under paragraph (c) of this section, the 
date for purposes of paragraph (a)(3) of this section is April 28, 
2026, the date that is 330 days from the mailing of the NOPPA. 
Because April 28, 2026 is later than the date under paragraph (a)(1) 
of this section (December 31, 2025, as extended under paragraph (d) 
of this section), and because no modification was requested, 
paragraph (a)(2) of this section is not applicable, April 28, 2026 
is the date on which the period for making partnership adjustments 
expires under section 6235.
    (4) Example 4.  The facts are the same as in Example 3 in 
paragraph (e)(3) of this section, except that PR notifies the IRS 
that Partnership will be requesting modification. On January 5, 
2026, PR and the IRS agree to extend the period for requesting 
modification pursuant to section 6225(c)(7) and Sec.  301.6225-
2(c)(3)(ii) for 45 days--from February 27, 2026 to April 13, 2026. 
PR submits the request for modification to the IRS on April 13, 
2026. Therefore, the date determined under paragraph (b) of this 
section is February 22, 2027, which is 270 days after the date 
everything required to be submitted was so submitted pursuant to 
paragraph (b)(2) of this section plus the additional 45-day 
extension of the period for requesting modification agreed to by PR 
and the IRS. Because February 22, 2027 is later than the date under 
paragraph (a)(1) of this section (December 31, 2025, as extended 
under paragraph (d) of this section) and the date under paragraph 
(a)(3) of this section (June 12, 2026, which is 330 days from the 
date the NOPPA was mailed plus the 45-day extension under section 
6225(c)(7)), February 22, 2027 is the date on which the period for 
making partnership adjustments expires under section 6235.
    (5) Example 5.  The facts are the same as in Example 4 in 
paragraph (e)(4) of this section, except that PR does not request an 
extension of the period for requesting modification. On February 1, 
2026, PR submits a request for modification and PR, and the IRS 
agree in writing to waive the prohibition on mailing an FPA pursuant 
to Sec.  301.6231-1(b)(2). Pursuant to Sec.  301.6225-2(c)(3)(iii), 
the period for requesting modification expires as of February 1, 
2026, rather than February 27, 2026. Accordingly, under paragraph 
(b)(2) of this section, the date on which everything required to be 
submitted pursuant to section 6225(c) is so submitted is February 1, 
2026, and the 270-day period described in paragraph (b)(1) of this 
section begins to run on that date. Therefore, the date for purposes 
of paragraph (a)(2) of this section is October 29, 2026, which is 
270 days after February 1, 2026, the date on which everything 
required to be submitted under section 6225(c) is so submitted. 
Because October 29, 2026 is later than the date under paragraph 
(a)(1) of this section (December 31, 2025, as extended under 
paragraph (d) of this section) and the date under paragraph (a)(3) 
of this section (April 28, 2026), October 29, 2026 is the date on 
which the period for making partnership adjustments expires under 
section 6235.
    (6) Example 6.  The facts are the same as in Example 5 in 
paragraph (e)(5) of this section, except PR completes its submission 
of information to support a request for modification on July 1, 
2025, but does not execute a waiver pursuant to Sec.  301.6231-
1(b)(2). Therefore, pursuant to paragraph (b)(2) of this section, 
February 27, 2026, the date the period requesting modification 
expires, is the date on which everything required to be submitted 
pursuant to section 6225(c) is so submitted. As a result, the 270-
day period described in paragraph (b)(1) of this section expires on 
November 24, 2026. Because November 24, 2026 is later than the date 
under paragraph (a)(1) of this section (December 31, 2025, as 
extended under paragraph (d) of this section) and the date under 
paragraph (a)(3) of this section (April 28, 2026), November 24, 2026 
is the date on which the period for making partnership adjustments 
expires under section 6235.

    (f) Applicability date--(1) In general. Except as provided in 
paragraph (f)(2) of this section, this section applies to partnership 
taxable years beginning after December 31, 2017, and ending after 
August 12, 2018.
    (2) Election under Sec.  301.9100-22 in effect. This section 
applies to any partnership taxable year beginning after November 2, 
2015, and before January 1, 2018, for which a valid election under 
Sec.  301.9100-22 is in effect.

0
Par. 19. Section 301.6241-1 is added to read as follows:


Sec.  301.6241-1  Definitions.

    (a) Definitions. For purposes of subchapter C of chapter 63 of the 
Internal Revenue Code (Code) and the regulations in this part under 
sections 6221 through 6241 of the Code--
    (1) Adjustment year. The term adjustment year means the partnership 
taxable year in which--
    (i) In the case of an adjustment pursuant to the decision of a 
court in a proceeding brought under section 6234, such decision becomes 
final;
    (ii) In the case of an administrative adjustment request (AAR) 
under section 6227, such AAR is filed; or
    (iii) In any other case, a notice of final partnership adjustment 
is mailed under section 6231 or, if the partnership waives the 
restrictions under section 6232(b) (regarding limitations on 
assessment), the waiver is executed by the IRS.
    (2) Adjustment year partner. The term adjustment year partner means 
any person who held an interest in a partnership at any time during the 
adjustment year.

[[Page 6568]]

    (3) Imputed underpayment. Except as otherwise provided in this 
paragraph (a)(3), the term imputed underpayment means the amount 
determined in accordance with section 6225 of the Code, Sec.  301.6225-
1, and, if applicable, Sec.  301.6225-2. In the case of an election 
under section 6226, the term imputed underpayment means the amount 
determined in accordance with Sec.  301.6226-3(e)(4). In the case of an 
administrative adjustment request, the term imputed underpayment means 
the amount determined in accordance with Sec.  301.6227-2 or Sec.  
301.6227-3(c).
    (4) Indirect partner. The term indirect partner means any person 
who has an interest in a partnership through their interest in one or 
more pass-through partners (as defined in paragraph (a)(5) of this 
section) or through a wholly-owned entity disregarded as separate from 
its owner for Federal income tax purposes.
    (5) Pass-through partner. The term pass-through partner means a 
pass-through entity that holds an interest in a partnership. A pass-
through entity is a partnership required to file a return under section 
6031(a), an S corporation, a trust (other than a wholly-owned trust 
disregarded as separate from its owner for Federal income tax 
purposes), and a decedent's estate. For purposes of this paragraph 
(a)(5), a pass-through entity is not a wholly-owned entity disregarded 
as separate from its owner for Federal income tax purposes.
    (6) Partnership adjustment--(i) In general. The term partnership 
adjustment means any adjustment to a partnership-related item and 
includes any portion of an adjustment to a partnership-related item.
    (ii) Partnership-related item. The term partnership-related item 
means--
    (A) Any item or amount with respect to the partnership (as defined 
in paragraph (a)(6)(iii) of this section) which is relevant in 
determining the tax liability of any person under chapter 1 of the Code 
(chapter 1) (as defined in paragraph (a)(6)(iv) of this section);
    (B) Any partner's distributive share of any such item or amount; 
and
    (C) Any imputed underpayment determined under subchapter C of 
chapter 63 of the Code (subchapter C of chapter 63).
    (iii) Item or amount with respect to the partnership. For purposes 
of paragraph (a)(6)(ii) of this section, an item or amount is with 
respect to the partnership if the item or amount is shown or reflected, 
or required to be shown or reflected, on a return of the partnership 
under section 6031 or the forms and instructions prescribed by the 
Internal Revenue Service (IRS) for the partnership's taxable year or is 
required to be maintained in the partnership's books or records. Items 
or amounts relating to any transaction with, liability of, or basis in 
the partnership are with respect to the partnership only if those items 
or amounts are described in the preceding sentence. An item or amount 
shown or required to be shown on a return of a person other than the 
partnership (or in that person's books and records) that results after 
application of the Code to a partnership-related item based upon the 
person's specific facts and circumstances, including an incorrect 
application of the Code or taking into account erroneous facts and 
circumstances of the partner, is not an item or amount with respect to 
the partnership. For instance, a deduction shown on the return of a 
partner that results after applying a limitation under the Code (such 
as section 170(b)) at the partner level to a partnership-related item 
based on the partner's facts and circumstances is not an item or amount 
with respect to the partnership, even though the corresponding expense 
on the return of the partnership is an item or amount with respect to 
the partnership. Likewise, an amount on the return of a partner that is 
after either an incorrect application of a limitation under the Code or 
based on facts and circumstances of the partner that are erroneous, or 
both (such as an incorrect application of section 170(b)) at the 
partner level to a partnership-related item is not an item or amount 
with respect to the partnership. Similarly, a partner's adjusted basis 
is not with respect to the partnership because it is an item or amount 
shown in the partner's books or records that results after application 
of the Code to partnership-related items taking into account the facts 
and circumstances specific to that partner.
    (iv) Relevant in determining the tax liability of any person under 
chapter 1. For purposes of this section, an item or amount with respect 
to the partnership is relevant in determining the tax liability of any 
person under chapter 1 without regard to the application of subchapter 
C of chapter 63 and without regard to whether such item or amount, or 
an adjustment to such item or amount, has an effect on the tax 
liability of any particular person under chapter 1.
    (v) Examples of partnership-related items. The term partnership-
related item includes--
    (A) The character, timing, source, and amount of the partnership's 
income, gain, loss, deductions, and credits;
    (B) The character, timing, and source of the partnership's 
activities;
    (C) The character, timing, source, value, and amount of any 
contributions to, and distributions from, the partnership;
    (D) The partnership's basis in its assets, the character and type 
of the assets, and the value (or revaluation such as under Sec.  1.704-
1(b)(2)(iv)(f) or (s) of this chapter) of the assets;
    (E) The amount and character of partnership liabilities and any 
changes to those liabilities from the preceding tax year;
    (F) The category, timing, and amount of the partnership's 
creditable expenditures;
    (G) Any item or amount resulting from a partnership termination;
    (H) Any item or amount of the partnership resulting from an 
election under section 754;
    (I) Partnership allocations and any special allocations; and
    (J) The identity of a person as a partner in the partnership.
    (vi) Examples. The following examples illustrate the provisions of 
this section. For purposes of these examples, Partnership is subject to 
the provisions of subchapter C of chapter 63 and all taxpayers are 
calendar year taxpayers.

    (A) Example 1. Partnership enters into a transaction with A to 
purchase widgets for $100 in taxable year 2020. Partnership pays A 
$100 for the widgets. Any deduction or expense of the Partnership 
for the purchase of the widgets is an item or amount with respect to 
Partnership because it is shown on Partnership's return and is 
relevant to determining the liability of any person under chapter 1 
pursuant to paragraphs (a)(6)(iii) and (iv) of this section. 
Therefore, the deduction or expense is a partnership-related item. 
However, the income to A resulting from the transaction with 
Partnership is not an item or amount with respect to Partnership 
under paragraph (a)(6)(iii) of this section because although the 
amount of income relates to a transaction with Partnership and 
Partnership is required to show a deduction or expense related to 
the payment to A, the amount of income to A is not shown or required 
to be shown on Partnership's return. It is only required to be shown 
of the return of A, a person other than Partnership and requires 
determinations about A's reporting of the item. Accordingly, the 
amount of income shown, or required to be shown, by A on his return 
is not a partnership-related item.
    (B) Example 2. B loans Partnership $100 in Partnership's 2020 
taxable year. Partnership makes an interest payment to B in 2020 of 
$5. Partnership's liability relating to the loan by B to Partnership 
and the $5 of interest expense paid by the Partnership are items or 
amounts that are with respect to Partnership because they were shown 
on Partnership's return and are relevant in determining the

[[Page 6569]]

liability of any person under chapter 1 pursuant to paragraphs 
(a)(6)(iii) and (iv) of this section. However, the treatment of the 
loan by B and the amount of interest income received by B are not 
items or amounts with respect to Partnership under paragraph 
(a)(6)(iii) of this section because although they relate to a 
transaction with or liability of Partnership and Partnership's 
treatment of the loan is shown on Partnership's return, B's 
treatment of the loan and the amount of interest income to B are 
shown, or required to be shown, on the return of B, a person other 
than Partnership and require determinations about B's reporting of 
the items. Accordingly, the loan as treated by B and the amount of 
interest income to B is not a partnership-related item.
    (C) Example 3. On its partnership return for the 2020 tax year, 
Partnership reported $200 of non-cash charitable contributions 
related to its contribution of merchandise. Partnership has two 
equal partners for the 2020 tax year: C and D, both individuals. 
Partnership correctly reports $100 in non-cash charitable 
contributions to both C and D for the 2020 taxable year. On her 
return for the 2020 taxable year, C erroneously deducts the entire 
$100 of non-cash charitable contributions, even though C's deduction 
for charitable contributions would be limited by section 
170(b)(1)(A) to $50 because of C's income. The $100 of non-cash 
charitable contribution reported by Partnership to C is a 
partnership-related item. However, the amount of the deduction taken 
by C on her return for 2020 and the amount of that deduction allowed 
after application of the limitation contained in section 
170(b)(1)(A) to the $100 in non-cash charitable contributions 
reported by Partnership to C is not a partnership-related item under 
paragraph (a)(6)(ii) of this section because it is not with respect 
to the partnership.
    (D) Example 4. The facts are the same as in Example 3 in 
paragraph (a)(6)(vi)(C) of this section. On his return for the 2020 
taxable year, D also deducts the entire $100 in charitable 
contributions but treats the charitable contributions as if they 
were cash contributions, instead of non-cash contributions. D does 
not file a notice of inconsistent treatment under section 6222. If D 
had treated the $100 in charitable contributions as non-cash 
contributions, D's deduction for the charitable contributions from 
Partnership would have be limited by section 170(b)(1)(A) due to D's 
income. D's deduction of the $100 in charitable contributions is an 
item or amount shown on D's return, derives from the charitable 
contributions reported by the partnership, and is subject to the 
application of the limitation under section 170(b)(1)(A). Therefore, 
D's deduction is not an item or amount with respect to the 
partnership. The charitable contribution reported by the partnership 
and its character are items or amounts with respect to the 
partnership pursuant to paragraph (a)(6)(iii) of this section. An 
adjustment to the character of the contributions is a partnership 
adjustment. Because D's treatment of the charitable contributions is 
inconsistent with the treatment of that item by Partnership on its 
partnership return, the IRS may make that partnership adjustment in 
a proceeding with respect to D and determine and assess any 
underpayment that results from conforming D's treatment to the 
treatment of the contributions by Partnership and applying the limit 
in section 170(b)(1)(A). See Sec.  301.6222-1(b).

    (7) Partnership-partner. The term partnership-partner means a 
partnership that holds an interest in another partnership.
    (8) Reviewed year. The term reviewed year means the partnership 
taxable year to which a partnership adjustment relates.
    (9) Reviewed year partner. The term reviewed year partner means any 
person who held an interest in a partnership at any time during the 
reviewed year.
    (10) Tax attribute. A tax attribute is anything that can affect the 
amount or timing of a partnership-related item (as defined in paragraph 
(a)(6)(ii) of this section) or that can affect the amount of tax due in 
any taxable year. Examples of tax attributes include, but are not 
limited to, basis and holding period, as well as the character of items 
of income, gain, loss, deduction, or credit and carryovers and 
carrybacks of such items.
    (b) Applicability date--(1) In general. Except as provided in 
paragraph (b)(2) of this section, this section applies to partnership 
taxable years beginning after December 31, 2017, and ending after 
August 12, 2018.
    (2) Election under Sec.  301.9100-22 in effect. This section 
applies to any partnership taxable year beginning after November 2, 
2015, and before January 1, 2018, for which a valid election under 
Sec.  301.9100-22 is in effect.

0
Par. 20. Section 301.6241-2 is added to read as follows:


Sec.  301.6241-2  Bankruptcy of the partnership.

    (a) Coordination between Title 11 and proceedings under subchapter 
C of chapter 63--(1) In general. If a partnership is a debtor in a case 
under Title 11 of the United States Code (Title 11 case), the running 
of any period of limitations under section 6235 with respect to the 
time for making a partnership adjustment (as defined in Sec.  301.6241-
1(a)(6)) and under sections 6501 and 6502 with respect to the 
assessment or collection of any imputed underpayment (as defined in 
Sec.  301.6241-1(a)(3)) determined under subchapter C of chapter 63 of 
the Internal Revenue Code (subchapter C of chapter 63) is suspended 
during the period the Internal Revenue Service (IRS) is prohibited by 
reason of the Title 11 case from making the adjustment, assessment, or 
collection until--
    (i) 60 days after the suspension ends, for adjustments or 
assessments; and
    (ii) 6 months after the suspension ends, for collection.
    (2) Interaction with section 6232(b). The filing of a proof of 
claim or request for payment (or the taking of any other action) in a 
Title 11 case is not be treated as an action prohibited by section 
6232(b) (regarding limitations on assessment).
    (3) Suspension of the time for judicial review. In a Title 11 case, 
the running of the period specified in section 6234 (regarding judicial 
review of partnership adjustments) is suspended during the period 
during which the partnership is prohibited by reason of the Title 11 
case from filing a petition under section 6234, and for 60 days 
thereafter.
    (4) Actions not prohibited. The filing of a petition under Title 11 
does not prohibit the following actions:
    (i) An administrative proceeding with respect to a partnership 
under subchapter C of chapter 63;
    (ii) The mailing of any notice with respect to a proceeding with 
respect to a partnership under subchapter C of chapter 63, including:
    (A) A notice of administrative proceeding;
    (B) A notice of proposed partnership adjustment; and
    (C) A notice of final partnership adjustment;
    (iii) A demand for tax returns;
    (iv) The assessment of any tax, including the assessment of any 
imputed underpayment with respect to a partnership; and
    (v) The issuance of notice and demand for payment of an assessment 
under subchapter C of chapter 63 (but see section 362(b)(9)(D) of Title 
11 of the United States Code regarding the timing of when a tax lien 
takes effect by reason of such assessment).
    (b) Applicability date--(1) In general. Except as provided in 
paragraph (b)(2) of this section, this section applies to partnership 
taxable years beginning after December 31, 2017, and ending after 
August 12, 2018.
    (2) Election under Sec.  301.9100-22 in effect. This section 
applies to any partnership taxable year beginning after November 2, 
2015, and before January 1, 2018, for which a valid election under 
Sec.  301.9100-22 is in effect.

0
Par. 21. Section 301.6241-3 is added to read as follows:


Sec.  301.6241-3  Treatment where a partnership ceases to exist.

    (a) Former partners take adjustments into account--(1) In general. 
If the Internal Revenue Service (IRS) determines that any partnership

[[Page 6570]]

(including a partnership-partner as defined in Sec.  301.6241-1(a)(7)) 
ceases to exist (as defined in paragraph (b) of this section) before 
any partnership adjustment (as defined in Sec.  301.6241-1(a)(6)) under 
subchapter C of chapter 63 of the Internal Revenue Code (subchapter C 
of chapter 63) takes effect (as described in paragraph (c) of this 
section), the partnership adjustment is taken into account by the 
former partners (as described in paragraph (d) of this section) of the 
partnership in accordance with paragraph (e) of this section.
    (2) Partnership no longer liable for any unpaid amounts resulting 
from a partnership adjustment. A partnership that ceases to exist is no 
longer liable for any unpaid amounts resulting from a partnership 
adjustment required to be taken into account by a former partner under 
this section.
    (3) Application of this section to partnership-partners. This 
section applies to a partnership-partner and its former partners, 
regardless of whether the partnership-partner has an election under 
section 6221(b) in effect for any relevant partnership taxable year.
    (b) Cease to exist defined--(1) In general. If a partnership ceases 
to exist, the IRS will notify the partnership and the former partners 
(as defined in paragraph (d) of this section), in writing, within 30 
days of such determination using the last known address of the 
partnership and the former partners. A failure by the IRS to send a 
notification under this paragraph (b)(1) to a former partner of the 
partnership does not invalidate the determination by the IRS that the 
partnership ceases to exist. If an audited partnership (as defined in 
Sec.  301.6226-3(e)(1)) ceases to exist, the IRS will also notify the 
partnership representative for the reviewed year. For purposes of this 
section, a partnership ceases to exist if the IRS makes a determination 
that a partnership ceases to exist because:
    (i) The partnership terminates within the meaning of section 
708(b)(1); or
    (ii) The partnership does not have the ability to pay, in full, any 
amount due under the provisions of subchapter C of chapter 63 for which 
the partnership is or becomes liable. For purposes of this section, a 
partnership does not have the ability to pay if the IRS determines that 
the amount due with respect to the partnership is not collectible based 
on the information the IRS has at the time of such determination.
    (2) Exceptions. For purposes of this section, the IRS will not 
determine that a partnership ceases to exist solely because the 
partnership has--
    (i) A valid election under section 6226 in effect with respect to 
any imputed underpayment (as defined in Sec.  301.6241-1(a)(3));
    (ii) Received a statement under section 6226(a)(2) (or Sec.  
301.6226-3(e)) and has furnished statements to its partners in 
accordance with Sec.  301.6226-3(e)(3); or
    (iii) Not paid any amount required to be paid under subchapter C of 
chapter 63.
    (3) Year in which a partnership ceases to exist. If a partnership 
terminates under section 708(b)(1), the partnership ceases to exist on 
the last day of the partnership's final taxable year. If a partnership 
does not have the ability to pay, the partnership ceases to exist on 
the date that the IRS makes a determination under paragraph (b)(1) of 
this section that the partnership ceases to exist.
    (4) Limitation on IRS determination that partnership ceases to 
exist. In no event may the IRS determine that a partnership ceases to 
exist with respect to a partnership adjustment after the expiration of 
the period of limitations on collection applicable to the assessment 
made against the partnership for the amount due resulting from such 
adjustment.
    (c) Partnership adjustment takes effect--(1) Full payment of 
amounts resulting from a partnership adjustment. For purposes of this 
section, a partnership adjustment under subchapter C of chapter 63 
takes effect when there is full payment of amounts resulting from a 
partnership adjustment. For purposes of this section, full payment of 
amounts resulting from a partnership adjustment means all amounts due 
under subchapter C of chapter 63 resulting from the partnership 
adjustment are fully paid by the partnership.
    (2) Partial payment of amount due by the partnership. If a 
partnership pays part, but not all, of any amount due resulting from a 
partnership adjustment before the partnership ceases to exist, the 
former partners (as defined in paragraph (d) of this section) of the 
partnership that has ceased to exist are not required to take into 
account any partnership adjustment to the extent amounts have been paid 
by the partnership with respect to such adjustment. The notification 
that the IRS has determined that the partnership has ceased to exist 
will include information regarding the portion of the partnership 
adjustments with respect to which appropriate amounts have not already 
been paid by the partnership and therefore must be taken into account 
by the former partners (described in paragraph (d) of this section) in 
accordance with paragraph (e) of this section.
    (d) Former partners--(1) Adjustment year partners--(i) In general. 
Except as described in paragraphs (d)(1)(ii) and (d)(2) of this 
section, the term former partners means, for a partnership that has 
ceased to exist, the partners of the partnership during the adjustment 
year (as defined in Sec.  301.6241-1(a)(1)) that corresponds to the 
reviewed year for which the adjustments were made.
    (ii) Partnership-partner ceases to exist. If the adjustment year 
partner is a partnership-partner that the IRS has determined ceased to 
exist, the partners of such partnership-partner during the partnership-
partner's taxable year that includes the end of the adjustment year of 
the partnership that is subject to a proceeding under subchapter C of 
chapter 63 are the former partners for purposes of this section. If the 
partnership-partner ceased to exist before the partnership-partner's 
taxable year that includes the end of the adjustment year of the 
partnership that is subject to a proceeding under subchapter C of 
chapter 63, the former partners for purposes of this section are the 
partners of such partnership-partner during the last partnership 
taxable year for which the a partnership return of the partnership-
partner under section 6031 is filed.
    (2) No adjustment year partners. If there are no adjustment year 
partners of a partnership that ceases to exist, the term former 
partners means the partners of the partnership during the last taxable 
year for which a partnership return under section 6031 was filed with 
respect to such partnership. For instance, if a partnership terminates 
under section 708(b)(1) before the adjustment year and files a final 
partnership return for the partnership taxable year of such 
partnership, the former partners for purposes of this section are the 
partners of the partnership during the partnership taxable year for 
which a final partnership return is filed.
    (e) Taking adjustments into account--(1) In general. For purposes 
of paragraph (a) of this section, a former partner of a partnership 
that ceases to exist takes a partnership adjustment into account as if 
the partnership had made an election under section 6226 (regarding the 
alternative to payment of the imputed underpayment). A former partner 
must take into account the former partner's share of a partnership 
adjustment as set forth in the statement described in paragraph (e)(2) 
of this section in accordance with Sec.  301.6226-3.

[[Page 6571]]

    (2) Statements furnished to former partners. If a partnership is 
notified by the IRS that the partnership has ceased to exist as 
described in paragraph (b)(1) of this section, the partnership must 
furnish to each former partner a statement reflecting such former 
partner's share of the partnership adjustment required to be taken into 
account under this section and file a copy of such statement with the 
IRS in accordance with the rules under Sec.  301.6226-2, except that--
    (i) The adjustments are taken into account by the applicable former 
partner (as described in paragraph (d) of this section), rather than 
the reviewed year partners (as defined in Sec.  301.6241-1(a)(9)); and
    (ii) The partnership must furnish statements to the former partners 
and file the statements with the IRS no later than 30 days after the 
date of the notification to the partnership that the IRS has determined 
that the partnership has ceased to exist.
    (3) Authority to issue statements. If any statements required by 
paragraph (e) of this section are not timely furnished to a former 
partner and filed with the IRS in accordance with paragraph (e)(2)(ii) 
of this section, the IRS may notify the former partner in writing of 
such partner's share of the partnership adjustments based on the 
information reasonably available to the IRS at the time such 
notification is provided. For purposes of paragraph (e) of this 
section, a notification to a former partner under this paragraph (e)(3) 
is treated the same as a statement required to be furnished and filed 
under paragraph (e)(2) of this section.
    (f) Examples. The following examples illustrate the provisions of 
this section. For purposes of the examples, all partnerships and 
partners are calendar year taxpayers and each partnership is subject to 
the provisions of subchapter C of chapter 63 of the Code (unless 
otherwise stated).

    (1) Example 1. The IRS initiates a proceeding under subchapter C 
of chapter 63 with respect to the 2020 partnership taxable year of 
Partnership. During 2023, in accordance with section 6235(b), 
Partnership extends the period of limitations on adjustments under 
section 6235(a) until December 31, 2025. On February 1, 2025, the 
IRS mails Partnership a notice of final partnership adjustment (FPA) 
that determines partnership adjustments that result in a single 
imputed underpayment. Partnership does not timely file a petition 
under section 6234 and does not make a valid election under section 
6226. On June 2, 2025, the IRS mails Partnership notice and demand 
for payment of the amount due resulting from the adjustments 
determined in the FPA. Partnership fails to make a payment. On 
September 1, 2029, the IRS determines Partnership ceases to exist 
for purposes of this section because the Partnership does not have 
the ability to pay under paragraph (b)(1)(ii) of this section. Under 
Sec.  301.6241-1(a)(1), the adjustment year is 2025 and A and B, 
both individuals, are the only adjustment year partners of 
Partnership during 2025. Accordingly, under paragraph (d)(1) of this 
section, A and B are former partners. Therefore, A and B are 
required to take their share of the partnership adjustments 
determined in the FPA into account under paragraph (e) of this 
section.
    (2) Example 2. The IRS initiates a proceeding under subchapter C 
of chapter 63 with respect to the 2020 partnership taxable year of 
P, a partnership. G, a partnership that has an election under 
section 6221(b) in effect for the 2020 taxable year, is a partner of 
P during 2020 and for every year thereafter. On February 3, 2025, 
the IRS mails P an FPA that determines partnership adjustments that 
result in a single imputed underpayment. P does not timely file a 
petition under section 6234 and does not make a timely election 
under section 6226. On May 6, 2025, the IRS mails P notice and 
demand for payment of the amount due resulting from the adjustments 
determined in the FPA. P does not make a payment. On September 1, 
2025, the IRS determines P ceases to exist for purposes of this 
section because P does not have the ability to pay under paragraph 
(b)(1)(ii) of this section. G terminated under section 708(b)(1) on 
December 31, 2024. On September 1, 2025, the IRS determines that G 
ceased to exist in 2024 for purposes of this section in accordance 
with paragraph (b)(1)(i) of this section. J and K, individuals, were 
the only partners of G during 2024. Therefore, under paragraph 
(d)(1)(ii) of this section, J and K, the partners of G during G's 
2024 partnership taxable year, are the former partners of G for 
purposes of this section. Therefore, J and K are required to take 
into account their share of the adjustments contained in the 
statement furnished by P to G in accordance with paragraph (e) of 
this section.

    (g) Applicability date--(1) In general. Except as provided in 
paragraph (g)(2) of this section, this section applies to partnership 
taxable years beginning after December 31, 2017, and ending after 
August 12, 2018.
    (2) Election under Sec.  301.9100-22 in effect. This section 
applies to any partnership taxable year beginning after November 2, 
2015, and before January 1, 2018, for which a valid election under 
Sec.  301.9100-22 is in effect.

0
Par. 22. Section 301.6241-4 is added to read as follows:


Sec.  301.6241-4  Payments nondeductible.

    (a) Payments nondeductible. No deduction is allowed under subtitle 
A of the Internal Revenue Code (Code) for any payment required to be 
made by a partnership under subchapter C of chapter 63 of the Code 
(subchapter C of chapter 63). Payment by a partnership of any amount 
required to be paid under subchapter C of chapter 63, including any 
imputed underpayment (as defined in Sec.  301.6241-1(a)(3)), or 
interest, penalties, additions to tax, or additional amounts with 
respect to an imputed underpayment, is treated as an expenditure 
described in section 705(a)(2)(B).
    (b) Applicability date--(1) In general. Except as provided in 
paragraph (b)(2) of this section, this section applies to partnership 
taxable years beginning after December 31, 2017, and ending after 
August 12, 2018.
    (2) Election under Sec.  301.9100-22 in effect. This section 
applies to any partnership taxable year beginning after November 2, 
2015, and before January 1, 2018, for which a valid election under 
Sec.  301.9100-22 is in effect.

0
Par. 23. Section 301.6241-5 is added to read as follows:


Sec.  301.6241-5  Extension to entities filing partnership returns.

    (a) Entities filing a partnership return. Except as described in 
paragraph (c) of this section, an entity that files a partnership 
return for any taxable year is subject to the provisions of subchapter 
C of chapter 63 of the Internal Revenue Code (subchapter C of chapter 
63) with respect to such taxable year even if it is determined that the 
entity filing the partnership return was not a partnership for such 
taxable year. Accordingly, any partnership-related item (as defined in 
Sec.  301.6241-1(a)(6)(ii)) and any person holding an interest in the 
entity, either directly or indirectly, at any time during that taxable 
year are subject to the provisions of subchapter C of chapter 63 for 
such taxable year.
    (b) Partnership return filed but no entity found to exist. 
Paragraph (a) of this section also applies where a partnership return 
is filed for a taxable year, but the IRS determines that no entity 
existed at all for such taxable year. For purposes of applying 
paragraph (a) of this section, the partnership return is treated as if 
it were filed by an entity.
    (c) Exceptions. Paragraph (a) of this section does not apply to--
    (1) Any taxable year for which an election under section 6221(b) is 
in effect, treating the return as if it were filed by a partnership for 
the taxable year to which the election relates; and
    (2) Any taxable year for which a valid section 761(a) election is 
made (regarding election out of subchapter K of chapter 1 of the 
Internal Revenue Code for certain unincorporated organizations).

[[Page 6572]]

    (d) Applicability date--(1) In general. Except as provided in 
paragraph (d)(2) of this section, this section applies to partnership 
taxable years beginning after December 31, 2017, and ending after 
August 12, 2018.
    (2) Election under Sec.  301.9100-22 in effect. This section 
applies to any partnership taxable year beginning after November 2, 
2015, and before January 1, 2018, for which a valid election under 
Sec.  301.9100-22 is in effect.

0
Par. 24. Section 301.6241-6 is added to read as follows:


Sec.  301.6241-6  Coordination with other chapters of the Internal 
Revenue Code.

    (a) Coordination with other chapters--(1) In general. Subchapter C 
of chapter 63 of the Internal Revenue Code (subchapter C of chapter 63) 
only applies to tax imposed by chapter 1 of the Internal Revenue Code 
(Code) and not to any tax imposed (including any amount required to be 
deducted or withheld) under any chapter of the Code other than chapter 
1 of the Code (chapter 1), including chapter 2, 2A, 3, or 4 of the 
Code. Accordingly, for purposes of determining taxes imposed under 
chapters of the Code other than chapter 1, the Internal Revenue Service 
(IRS) may make an adjustment to any partnership-related item (as 
defined in Sec.  301.6241-1(a)(6)(ii)) in a proceeding that is not 
under subchapter C of chapter 63. To the extent an adjustment or 
determination is made under subchapter C of chapter 63 for purposes of 
chapter 1 and is relevant in determining tax imposed under a chapter of 
the Code other than chapter 1, such adjustment or determination must be 
taken into account for purposes of determining such tax.
    (2) Examples. The following examples illustrate the rules of 
paragraph (a) of this section as applied to cases in which a 
partnership has a withholding obligation under chapter 3 or chapter 4 
with respect to income that the partnership earns. For purposes of 
these examples, each partnership is subject to the provisions of 
subchapter C of chapter 63 of the Code, and the partnership and its 
partners are calendar year taxpayers.

    (i) Example 1.  Partnership, a partnership created or organized 
in the United States, has two equal partners, A and B. A is a 
nonresident alien who is a resident of Country A, and B is a U.S. 
citizen. In 2018, Partnership earned $200 of U.S. source royalty 
income. Partnership was required to withhold 30 percent of the gross 
amount of the royalty income allocable to A unless Partnership had 
documentation that it could rely on to establish that A was entitled 
to a reduced rate of withholding. See Sec. Sec.  1.1441-1(b)(1) and 
1.1441-5(b)(2)(i)(A) of this chapter. Partnership withheld $15 from 
the $100 of royalty income allocable to A based on its incorrect 
belief that A is entitled to a reduced rate of withholding under the 
U.S.-Country A Income Tax Treaty. In 2020, the IRS determines in an 
examination of Partnership's Form 1042, Annual Withholding Tax 
Return for U.S. Source Income of Foreign Persons, that Partnership 
should have withheld $30 instead of $15 on the $100 of royalty 
income allocable to A because Partnership failed to obtain 
documentation from A establishing a valid treaty claim for a reduced 
rate of withholding. The tax imposed on Partnership for its failure 
to withhold on that income, however, is not a tax imposed by chapter 
1. Rather, it is a tax imposed by chapter 3, which is not a 
partnership-related item under Sec.  301.6241-1(a)(6)(ii). 
Therefore, in accordance with section 6221(a), the adjustment to 
increase Partnership's withholding tax liability by $15 is not 
determined under subchapter C of chapter 63, and instead must be 
determined as part of the Form 1042 examination.
    (ii) Example 2.  Partnership, a partnership created or organized 
in the United States, has two equal partners, A and B. A is a 
nonresident alien who is a resident of Country A, and B is a U.S. 
citizen. In 2018, Partnership earned $100 of U.S. source dividend 
income. Partnership was required to report the dividend income on 
its 2018 Form 1065, U.S. Return of Partnership Income, and withhold 
30 percent of the gross amount of the dividend income allocable to A 
unless Partnership had documentation that it could rely on to 
establish that A was entitled to a reduced rate of withholding. See 
Sec. Sec.  1.1441-1(b)(1) and 1.1441-5(b)(2)(i)(A) of this chapter. 
In 2020, in an examination of Partnership's Form 1042, the IRS 
determines that Partnership earned but failed to report the $100 of 
U.S. source dividend income in 2018. The adjustment to increase 
Partnership's dividend income by $100 is an adjustment to a 
partnership-related item. The tax imposed on Partnership for its 
failure to withhold on that income, however, is not a tax imposed by 
chapter 1; rather, it is a tax imposed by chapter 3. Pursuant to 
Sec.  301.6221(a)-1(a), only chapter 1 tax attributable to 
adjustments to partnership-related items is assessed under 
subchapter C of chapter 63. Therefore, because the tax imposed with 
respect to the adjustment is a chapter 3 tax, under paragraph (a)(1) 
of this section, the IRS may determine, assess, and collect chapter 
3 tax attributable to an adjustment to a partnership-related item 
without conducting a proceeding under subchapter C of chapter 63. 
Accordingly, the IRS may determine the chapter 3 tax in the 
examination of Partnership's Form 1042 by adjusting Partnership's 
withholding tax liability by an additional $15 for failing to 
withhold on the $50 of dividend income allocable to A. However, the 
IRS must initiate an administrative proceeding under subchapter C of 
chapter 63 to make any adjustments for purposes of chapter 1 
attributable to the income. If the IRS subsequently initiates an 
administrative proceeding under subchapter C of chapter 63 and makes 
an adjustment to the same item of income, the portion of the 
dividend income allocable to A will be disregarded in the 
calculation of the total netted partnership adjustment to the extent 
that the chapter 3 tax has been collected with respect to such 
income. See Sec.  301.6225-1(b)(3).

    (b) Coordination with chapters 3 and 4--(1) In general. In the case 
of any tax imposed under chapter 3 or chapter 4 that is determined with 
respect to a partnership adjustment determined under subchapter C of 
chapter 63 for purposes of chapter 1, such tax is determined with 
respect to the reviewed year (as defined in Sec.  301.6241-1(a)(8)) and 
is imposed (or required to be deducted and withheld) with respect to 
the adjustment year (as defined in Sec.  301.6241-1(a)(1)).
    (2) Definitions. The following definitions apply for purposes of 
this paragraph (b) and the regulations under subchapter C of chapter 
63.
    (i) Amount subject to withholding. The term amount subject to 
withholding means an amount subject to withholding (as defined in Sec.  
1.1441-2(a) of this chapter), a withholdable payment (as defined in 
Sec.  1.1473-1(a) of this chapter), or the allocable share of 
effectively connected taxable income (as computed under Sec.  1.1446-
2(b) of this chapter).
    (ii) Chapter 3. The term chapter 3 means sections 1441 through 1464 
of the Code, but does not include section 1443(b) of the Code.
    (iii) Chapter 4. The term chapter 4 means sections 1471 through 
1474 of the Code.
    (3) Partnership pays an imputed underpayment. If a partnership pays 
an imputed underpayment (as determined under Sec.  301.6225-1(b)) and 
the total netted partnership adjustment (as calculated under Sec.  
301.6225-1(b)(2)) includes a partnership adjustment to an amount 
subject to withholding, the partnership is treated as having paid (at 
the time that the imputed underpayment is paid) the amount required to 
be withheld with respect to that partnership adjustment under chapter 3 
or chapter 4 for purposes of applying Sec. Sec.  1.1463-1 and 1.1474-4 
of this chapter. See Sec.  301.6225-1(b)(3) for the coordination rule 
that applies for calculating an imputed underpayment when an adjustment 
is made to an amount subject to withholding for which tax has been 
collected under chapter 3 or chapter 4.
    (4) Partnership makes an election under section 6226 with respect 
to an imputed underpayment--(i) In general. A partnership that makes an 
election under Sec.  301.6226-1 with respect to an imputed underpayment 
must pay the amount of tax required to be withheld

[[Page 6573]]

under chapter 3 or chapter 4 on the amount of any adjustment set forth 
in the statement described in Sec.  301.6226-2(a) to the extent that it 
is an adjustment to an amount subject to withholding, and the IRS has 
not already collected tax attributable to the adjustment under chapter 
3 or chapter 4. The partnership must pay the amount due under this 
paragraph (b)(4)(i) on or before the due date of the partnership return 
for the adjustment year (without regard to extension), and must make 
the payment in the manner prescribed by the IRS in forms, instructions, 
and other guidance. For the rules governing partners subject to the 
taxes imposed by chapters 3 and 4 when the partner receives a statement 
under Sec.  301.6226-2, see Sec.  301.6226-3(f). See Sec.  301.6226-
3(e)(3)(v) for the application of the rules of this paragraph (b)(4) to 
pass-through partners (as defined in Sec.  301.6241-1(a)(5)).
    (ii) Reduced rate of tax. A partnership may reduce the amount of 
tax it is required to pay under paragraph (b)(4)(i) of this section to 
the extent that it can associate valid documentation from a reviewed 
year partner pursuant to the regulations under chapter 3 or chapter 4 
(other than pursuant to Sec.  1.1446-6 of this chapter) with the 
portion of the adjustment that would have been subject to a reduced 
rate of tax in the reviewed year. For this purpose, the partnership may 
rely on documentation that the partnership possesses that is valid with 
respect to the reviewed year (determined without regard to the 
expiration after the reviewed year of any validity period prescribed in 
Sec.  1.1441-1(e)(4)(ii), Sec.  1.1446-1(c)(2)(iv)(A), or Sec.  1.1471-
3(c)(6)(ii) of this chapter), or new documentation that the partnership 
obtains from the reviewed year partner that includes a signed affidavit 
stating that the information and representations associated with the 
documentation are accurate with respect to the reviewed year.
    (iii) Reporting requirements. A partnership required to pay tax 
under paragraph (b)(4)(i) of this section must file the appropriate 
return and issue information returns as required by regulations under 
chapter 3 or chapter 4. For return and information return requirements, 
see Sec. Sec.  1.1446-3(d)(1)(iii); 1.1461-1(b), (c); and 1.1474-1(c), 
(d) of this chapter. The partnership must file the return and issue 
information returns for the year that includes the date on which the 
partnership pays the tax required to be withheld under paragraph 
(b)(4)(i) of this section. The partnership must report the information 
on the return and information returns in the manner prescribed by the 
IRS in forms, instructions, and other guidance.
    (iv) Partners subject to withholding. A reviewed year partner that 
is subject to withholding under paragraph (b)(4)(i) of this section 
must follow the rules under Sec.  301.6226-3(f).
    (c) Applicability date--(1) In general. Except as provided in 
paragraph (c)(2) of this section, this section applies to partnership 
taxable years beginning after December 31, 2017, and ending after 
August 12, 2018.
    (2) Election under Sec.  301.9100-22 in effect. This section 
applies to any partnership taxable year beginning after November 2, 
2015, and before January 1, 2018, for which a valid election under 
Sec.  301.9100-22 is in effect.

Kirsten Wielobob,
Deputy Commissioner for Services and Enforcement.
    Approved: December 17, 2018.
David J. Kautter,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2018-28140 Filed 2-21-19; 11:15 am]
 BILLING CODE 4830-01-P