6468 Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 

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. 

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 §§ 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 tollfree 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 passthrough 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 


amozie on DSK3GDR082PROD with RULES2
Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 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 § 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 

§ 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 § 301.6225–4 or 

§ 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 

§ 301.6221(a)–1, which was issued 

before the TTCA was enacted. No 

comments were received on proposed 

§ 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 

§ 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 § 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 


amozie on DSK3GDR082PROD with RULES2
6470 Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 

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 § 301.6221(a)–1 to the 

definition of ‘‘partnership-related item’’ 

under proposed § 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 

§ 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 partnershiprelated 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 § 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 

§ 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 § 301.6241– 

1(a)(6) regarding the definition of 

partnership-related item. Proposed 

§ 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 partnershiprelated 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, § 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, 

§ 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 partnershiprelated item are not with respect to a 

partnership and, thus, not partnershiprelated items. Accordingly, only items 

of the partnership, as suggested by the 

comment, are partnership-related items 

under § 301.6241–1(a)(6). 

Proposed § 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 § 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 


amozie on DSK3GDR082PROD with RULES2
Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 6471 

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 

§ 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 § 301.6221(a)–1(a). The 

TTCA amended section 6221(a) to 

provide that adjustments to partnershiprelated 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 § 301.6221(a)–1, the 

list of cross-references from proposed 

§ 301.6221(a)–1(a) was no longer 

necessary. 

A. Penalty Defenses 

Five comments were received with 

respect to former proposed 

§ 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 

§ 301.6221(a)–1(c). 

Several comments stated that the rule 

under former proposed § 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 partnerspecific 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 

§ 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 

§§ 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 § 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 § 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 § 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 § 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 § 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, § 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 § 301.6241– 

6 and placed under the definition of 

‘‘partnership adjustment’’ in 

§ 301.6241–1(a)(6) to more closely track 

the statutory structure of section 

6241(2). 

The final regulations under 

§ 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 


amozie on DSK3GDR082PROD with RULES2
6472 Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 

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 § 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 partnershiprelated 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. 


amozie on DSK3GDR082PROD with RULES2
Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 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 partnershiprelated 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 § 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 PartnershipRelated 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 ‘‘partnershiprelated 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 


amozie on DSK3GDR082PROD with RULES2
6474 Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 

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 § 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 

§ 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 § 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 § 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 

§ 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 § 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 

§ 301.6222–1(a). 

Section 6222(a) and § 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 § 301.6222–1(a) applies to 

each return of the partner, the final 

regulations provide that the term 

‘‘partner’s return’’ for purposes of 

§ 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 § 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 

§ 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 § 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 § 301.6222–1(a), and 

the effect of inconsistent treatment 

under § 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 § 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 

§ 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 § 301.6227–1(b) provided that 

no AAR may be filed after a NAP has 

been mailed by the IRS, except as 

provided in § 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 

§ 301.6222–1(c)(5) provide that a partner 


amozie on DSK3GDR082PROD with RULES2
Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 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 partnershiprelated 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 § 301.6222–1(c)(2) provided 

that the notification procedures under 

§ 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 § 301.6222–1(c)(2), the 

provisions of § 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 § 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 

§ 301.6227–3. 

When taking into account AAR 

adjustments under § 301.6227–3, 

partners must adhere to the consistency 

requirements under section 6222(a). See 

§ 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 § 301.6222– 

1(c)(2) remove the language stating that 

the provisions of § 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 § 301.6227–1 

remove the rule under proposed 

§ 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 § 301.6222–1(c). 

The final regulations under 

§ 301.6222–1(c)(2) maintain the 

language stating that the provisions of 

§ 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 § 301.6226–1(e) was 

also added. In addition, the final 

regulations clarify that the provisions of 

§ 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 § 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 

§ 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 § 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 § 301.6222–1(a)(3), 

Example 7 was added under 

§ 301.6222–1(a)(5). 

In light of the comment, the final 

regulations under § 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 § 301.6222– 

1(c)’’ from proposed § 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 

§ 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 PartnershipRelated Item 

Under proposed § 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 

§ 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 § 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 


amozie on DSK3GDR082PROD with RULES2
6476 Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 

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 § 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 § 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 § 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 

§ 301.6222–1(c). See § 301.6222–1(b). 

Under proposed § 301.6222–1(c)(4)(i), if 

a partner notifies the IRS of an 

inconsistent treatment of a partnershiprelated item in accordance with 

proposed § 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 

§ 301.6222–1(c)(4)(i) precluded the IRS, 

however, from also conducting a 

proceeding with respect to the 

partnership. 

One comment recommended that 

§ 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 § 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 § 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 

§ 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 § 301.6223–2, a separate 

rule within § 301.6222–1 to allow 

notifying partners to be included in a 

partnership-level proceeding is 

unnecessary. Therefore, the revision to 

proposed § 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 partnershiplevel proceeding to adjust an identified, 

inconsistently reported item, proposed 

§ 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 

§ 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 § 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 § 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 § 301.6222–1(d)(2). This 

election must be filed no later than 60 

days after the date of such notice. 

Proposed § 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 

§ 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 


amozie on DSK3GDR082PROD with RULES2
Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 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 § 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 partnershiprelated item. 

Another comment suggested guidance 

is needed as to how the election under 

proposed § 301.6222–1(d)(2) is made. 

Proposed § 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 § 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 

§ 301.6222–1(d)(2) was not revised in 

response to this comment. 

G. Effect of Inconsistent Treatment 

When Partner is a Partnership 

Proposed § 301.6222–1(a)(2) provided 

that the rules of § 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 § 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 § 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 

§ 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 § 301.6222– 

1(b)(3) in favor of providing only a 

cross-reference to the rules under 

section 6232(d)(1)(B) and § 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 

§ 301.6225–1; modification of an 

imputed underpayment under proposed 

§ 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 

§ 301.6225–3. As discussed in the 

Background, comments concerning the 

rules regarding basis and tax attributes 

under proposed § 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 § 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 § 301.6225–2(d)(3) with respect to 

partnership adjustments that are 

allocable to a tax-exempt entity or 

modification under § 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 § 301.6225–1(a)(1) provided 

that each imputed underpayment 

determined under § 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 


amozie on DSK3GDR082PROD with RULES2
6478 Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 

result in an imputed underpayment 

pursuant to § 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 

§ 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 § 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 


amozie on DSK3GDR082PROD with RULES2
Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 6479 

partnership-related items. Therefore, the 

final regulations under § 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 § 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 § 301.6225–1(c) 

according to the type of partnershiprelated 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 § 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 

§ 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 

§ 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 § 301.6225–1, the burden is 

shifted to the partnership to utilize the 

modification procedures under 

§ 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 

§ 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 

§ 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 § 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 


amozie on DSK3GDR082PROD with RULES2
6480 Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 

administrative burdens for the 

government. 

Notwithstanding these challenges, 

proposed § 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 

§ 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 

§ 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 § 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 


amozie on DSK3GDR082PROD with RULES2
Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 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 § 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 

§ 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 § 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 § 301.6225– 

1(d)(1) and (e)(1) or make a modification 

request under § 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 § 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 § 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 

§ 301.6225–1(d) had provided that after 


amozie on DSK3GDR082PROD with RULES2
6482 Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 

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 

§ 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 § 301.6225–1(d) was 

revised in the August 2018 NPRM to 

account for the additions of sections 

6225(b)(3) and (4). Proposed 

§ 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 § 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 § 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 § 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), § 1.702–1(a)(8)(i). Under 

§ 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 

§ 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 § 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 § 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 § 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 

§ 301.6225–1(d)(3)(i) and netted in 

accordance with § 301.6225–1(e). 

Proposed § 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 § 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 § 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 § 301.6225– 

1(d)(3). The addition of Example 12 

under § 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 § 301.6225– 

1(d)(3)(ii) allowing for adjustments to be 

subgrouped together when the 

adjustments are allocable to a particular 


amozie on DSK3GDR082PROD with RULES2
Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 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 § 301.6225–1(h) of 

the rule under § 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 § 301.6225– 

1(d)(3)(i). 

iii. Negative Adjustments 

Under § 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 

§ 301.6225–1(h) (Example 3 in former 

proposed § 301.6225–1(f)) to 

demonstrate this point. In Example 4, 

the IRS determines that $125 of longterm 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 § 301.6225–3. Under § 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 § 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 

§ 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 § 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 § 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 


amozie on DSK3GDR082PROD with RULES2
6484 Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 

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, § 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 § 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 

§ 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. § 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 § 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. 


amozie on DSK3GDR082PROD with RULES2
Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 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 § 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 longterm 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 § 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 

§ 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 

§ 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 partnershiprelated 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 § 301.6225– 

1(h)). Under proposed § 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 § 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 

§ 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 § 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 § 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 


amozie on DSK3GDR082PROD with RULES2
6486 Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 

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 § 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 § 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 § 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 § 301.6225–1(c)(4). 

Proposed § 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 

§ 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 

§ 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 

§ 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 § 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 § 301.6241–1(a)(6), and the credit 

recapture would constitute a positive 

adjustment under § 301.6225– 

1(d)(2)(iii)(A) and be placed in the 

credit grouping under § 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 

§ 301.6225–1(d)(1), (e)(1), § 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 § 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 

§ 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 § 301.6225–2 provided the 

rules and procedures regarding 

modification of an imputed 


amozie on DSK3GDR082PROD with RULES2
Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 6487 

underpayment by the partnership. The 

Treasury Department and the IRS 

received multiple comments regarding 

proposed § 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 

§ 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 

§ 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 

§ 301.6225–2(d)(6) provided a procedure 

for modifying the composition of an 

imputed underpayment. Under 

§ 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 § 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 § 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 § 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 

§ 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 § 301.6225–2 

permitted a partnership to request 

modification with respect to an indirect 

partner (as defined in § 301.6241– 

1(a)(4)). See, for example, former 

proposed § 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 


amozie on DSK3GDR082PROD with RULES2
6488 Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 

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 

§ 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 whollyowned 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 § 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 

§ 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 § 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 § 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 

§ 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 § 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 

§ 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 § 301.6225–2 in an 

electronic format. The form and manner 

for submission of anything required to 

be submitted under § 301.6225–2 will be 

described in forms, instructions, and 

other guidance prescribed by the IRS. 

Lastly, the final regulations under 

§ 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 § 301.6225–2. 

ii. Timing of Modification 

Proposed § 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 § 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 § 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. 

§ 301.6235–1(b)(2). Accordingly, in the 

case of a modification request, the IRS 


amozie on DSK3GDR082PROD with RULES2
Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 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 

§ 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 

§ 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 § 301.6225–2(c)(3)(i) in 

which everything required for 

modification must be submitted or the 

270-day period under § 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 

§§ 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 § 301.6225–2(d)(2) provided 

rules regarding modification with 

respect to amended returns filed by 

partners. Proposed § 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 

§ 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 § 301.6225–2(d)(2)(i) require that 

even in the case of multiple imputed 


amozie on DSK3GDR082PROD with RULES2
6490 Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 

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 § 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 § 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 

§ 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 

§ 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 

§ 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 § 301.6225–2(c) 

will result in a denial of a modification 

request. 

Proposed § 301.6225–2(c)(3) provided 

that all information required under 

§ 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 


amozie on DSK3GDR082PROD with RULES2
Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 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 

§ 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 § 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 § 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 

§ 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 § 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 


amozie on DSK3GDR082PROD with RULES2
6492 Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 

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 

§ 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 

§ 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 § 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 § 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 passthrough partner, the partnership was not 

permitted to request modification based 

on amended returns filed by upper-tier 

direct and indirect partners of the passthrough partner. Former proposed 

§ 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 

§ 301.6225–2(d)(2). Proposed 

§ 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 

§ 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 passthrough 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 § 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 


amozie on DSK3GDR082PROD with RULES2
Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 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 § 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 § 301.6225– 

2(d)(2) were satisfied. 

Proposed § 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 


amozie on DSK3GDR082PROD with RULES2
6494 Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 

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 

§ 301.6225–2(d)(2)(ii)(C) to mitigate the 

potential impact of the requirement that 

all partners file amended returns. 

Proposed § 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 § 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 

§ 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 § 301.6225–2(d)(3) 

and allocated a share of a reallocation 

adjustment must file an amended return 

to satisfy the requirements under 

§ 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 § 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 § 301.6225– 

2(d)(3) regarding tax-exempt partners. 

The satisfaction of the requirements of 

§ 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 

§ 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 

§ 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 § 301.6225– 

2(d)(2)(vi) because the pass-through 

partner, but for § 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 §§ 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 


amozie on DSK3GDR082PROD with RULES2
Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 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 

§ 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 § 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 

§ 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 § 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 § 301.6225– 

2(d)(2)(vii). 


amozie on DSK3GDR082PROD with RULES2
6496 Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 

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 

§ 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 

§ 301.6225–2(d)(2)(vii)(B). The final 

regulations under § 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 § 301.6225–2(d)(2)(vii)(C) are met. 

v. Rate Modification 

Under § 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 

§ 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 

§ 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 


amozie on DSK3GDR082PROD with RULES2
Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 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 § 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 § 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 

§ 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 § 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 § 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 § 301.6225– 

2(d)(6). Under former proposed 

§ 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 

§ 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 


amozie on DSK3GDR082PROD with RULES2
6498 Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 

necessarily share the same 

characteristics or have participated in 

the same transaction. Accordingly under 

former proposed § 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 § 301.6225– 

1(g)(2)(iii) in the August 2018 NPRM. 

Proposed § 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 

§ 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 

§ 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 

§ 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 § 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 § 301.6225– 

2(b)(3)(iv) is not a revaluation for 

purposes of section 704. 

vi. Certain Passive Losses of Publicly 

Traded Partnerships 

Proposed § 301.6225–2(d)(5) provided 

rules for modification regarding certain 

passive activity losses of publicly traded 

partnerships. Pursuant to proposed 

§ 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 § 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 lowertier 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 

§ 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 § 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 § 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 

§ 301.6225–2(d)(5) was revised in the 

August 2018 NPRM to provide that 

§ 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 

§ 301.6225–2(d)(5) applies only to the 

publicly traded partnership requesting 

modification under § 301.6225–2 (that 

is, the partnership under examination). 

This change makes the modification 

procedures under § 301.6225–2(d)(5) 

more administrable for the IRS because 

only the partnership under examination 

may request modification under 

§ 301.6225–2(d)(5). In this way, the 

change also makes modification 

§ 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 § 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 


amozie on DSK3GDR082PROD with RULES2
Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 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 § 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 § 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 postFPA 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 § 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 


amozie on DSK3GDR082PROD with RULES2
6500 Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 

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 § 301.6225–2(c)(2). 

Specifically, § 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 § 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 § 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 § 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 § 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 

§ 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 § 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 § 301.6225–2(d)(5), the final 

regulations under § 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 § 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 § 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 § 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 § 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 

§ 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 § 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. 


amozie on DSK3GDR082PROD with RULES2
Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 6501 

Second, pursuant to section 6225(c)(7) 

and § 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 

§ 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, § 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 § 301.6225–2(c)(7)(ii), 

addresses the comment’s 

recommendation, the comment was not 

adopted. 

viii. Closing Agreement Modification 

Proposed § 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 § 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 

§ 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 § 301.6225–2(d)(10) 

provided that a partnership may request 

a modification not otherwise described 

in § 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 

§ 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 § 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 § 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 

§ 301.6225–2(c) and (d)(3) are met. 

Proposed § 301.6225–2(d)(9), added in 

the August 2018 NPRM, provided rules 

for tax treaty modifications. Under 

proposed § 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 

§ 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 

§ 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 


amozie on DSK3GDR082PROD with RULES2
6502 Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 

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 

§ 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 § 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 


amozie on DSK3GDR082PROD with RULES2
Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 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 § 301.6225–2(d)(2)(viii) 

provided that a relevant partner may 

raise a partner-level defense (as 

described in § 301.6226–3(d)(3)) by first 

paying the penalty, addition to tax, or 

additional amount with the amended 

return filed under § 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 partnerlevel 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 § 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 partnerlevel defense. However, to address the 

concerns raised by the comment, the 

final regulations under § 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 § 301.6225–3 addressed the 

treatment of adjustments that do not 

result in an imputed underpayment. 

Proposed § 301.6225–3 provided that a 

net negative adjustment resulting from a 

reallocation adjustment, which does not 

result in an imputed underpayment 

pursuant to § 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 

§ 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 § 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 § 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 § 301.6225–3(b)(4). The final 

regulations add two such examples 

under § 301.6225–3(d). One example 

demonstrates the application of the rule 

under § 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, § 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 


amozie on DSK3GDR082PROD with RULES2
6504 Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 

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 § 301.6226–1; the statements 

furnished to partners and filed with the 

IRS pursuant to proposed § 301.6226–2; 

and the rules regarding how 

adjustments are taken into account by 

partners in accordance with proposed 

§ 301.6226–3. Comments concerning 

basis and tax attribute rules under 

proposed § 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 

§ 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 § 301.6226– 

1(c)(1), (3). 

Several comments recommended 

changes to the 45-day period under 

proposed § 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 § 301.6226–1(c)(3) provided 

that an election under § 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), § 301.6226–1(c)(1) 

provides that an election under 

§ 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 timebarred 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 § 301.6226–1(a), if an 

FPA includes more than one imputed 

underpayment (as described in 

proposed § 301.6225–1(g)), a 

partnership may make an election under 

§ 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 


amozie on DSK3GDR082PROD with RULES2
Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 6505 

regulations under § 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 §§ 301.6226–1 and 

301.6226–2, including the requirement 

under § 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 § 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 § 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 

§ 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 

§ 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 § 301.6226–1(c)(1), 

an election under § 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 

§ 301.6226–1(d). Former proposed 

§ 301.6226–1(c)(2) had provided that if 

the IRS makes a final determination that 

an election under § 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 

§ 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 § 301.6226–1(d) 

(formerly proposed § 301.6226–1(c)(2)). 

Under § 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 

§ 301.6226–1 and § 301.6226–2, 

including an opportunity to correct 

errors in pursuant to § 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 

§ 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 § 301.6226–1(e) 

(§ 301.6226–1(f) in the final regulations), 

a partnership that has made an election 

under § 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 § 301.6234–1(b) provide that 

the jurisdictional deposit is the amount 

of (as of the date of the filing of the 


amozie on DSK3GDR082PROD with RULES2
6506 Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 

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 § 301.6226– 

1(e) expressly provided that a 

partnership making the election under 

§ 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 § 301.6226–1(f) (proposed at 

§ 301.6226–1(e) and renumbered to 

§ 301.6226–1(f)) makes clear that a 

partnership can take both actions. 

Accordingly, no changes were made to 

proposed § 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 § 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 § 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 § 301.6226–1(c) required 

that an election under § 301.6226–1 

must include each reviewed year 

partner’s name, address, and TIN. Under 

§ 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 

§ 301.6226–1 as the address included in 

each statement under § 301.6226–2. 

Accordingly, the final regulations under 

§ 301.6226–1(c) clarify that an election 

under § 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 § 301.6226–2(a) 

provided that a partnership that makes 

an election under § 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 § 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 

§ 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 


amozie on DSK3GDR082PROD with RULES2
Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 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 § 301.6226–2. As a 

result, partners that were only partners 

during intervening years are not 

required to take into account 

partnership adjustments under 

§ 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 § 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 § 301.6226–2 until after 

the partnership has exhausted its rights 

to challenge the audit adjustments 

through an administrative or judicial 

proceeding. 

Under proposed § 301.6226–2(b)(1), a 

partnership that makes an election 

under § 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 § 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 § 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 § 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 


amozie on DSK3GDR082PROD with RULES2
6508 Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 

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 

§ 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 

§ 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 § 301.6226– 

3(e). Under § 301.6226–3(e)(3)(ii), passthrough 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 § 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 

§ 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 

§ 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 § 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 § 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 § 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 

§ 301.6226–1, regarding how an election 

must be made, or § 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 


amozie on DSK3GDR082PROD with RULES2
Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 6509 

§ 301.6226–1 or § 301.6226–2. To the 

contrary, pursuant to § 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 

§ 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 

§ 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 

§ 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 § 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 § 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 § 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 § 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 § 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 

§ 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 

§ 301.6226–2. The plain language of 

proposed § 301.6226–1(c)(1) made clear 

that if a valid election is made under 

§ 301.6226–1, the partnership is not 

liable for the imputed underpayment to 

which the election applies. 

Additionally, under proposed 

§ 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 § 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 


amozie on DSK3GDR082PROD with RULES2
6510 Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 

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 § 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 

§ 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 

§ 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 § 301.6226–2(d)(3). 

The correction rules under proposed 

§ 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 § 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 

§ 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 § 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 

§ 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 § 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 

§ 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 § 301.6226–2(e), each 

statement described in proposed 


amozie on DSK3GDR082PROD with RULES2
Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 6511 

§ 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 § 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 § 301.6226– 

3(h). 

i. Calculation of the Additional 

Reporting Year Tax 

Former proposed § 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 § 301.6226–3(b). Under 

former proposed § 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 

§ 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 § 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 

§ 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 

§ 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 

§ 301.6226–3(b)(1) were further revised 

to provide that nothing in § 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 

§ 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 § 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 § 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 

§ 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 § 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 § 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 § 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 § 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 § 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 

§ 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 

§ 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 


amozie on DSK3GDR082PROD with RULES2
6512 Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 

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 § 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 

§ 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 § 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 § 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, § 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 § 301.6226–3(b) as revised in 

the August 2018 NPRM. As discussed 

earlier in this section of this preamble, 

the plain language of § 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, 

§ 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 § 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 § 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 § 301.6226–3(a) 

provided that a reviewed year partner 


amozie on DSK3GDR082PROD with RULES2
Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 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 

§ 301.6226–2. See former proposed 

§ 301.6226–2(e)(7) and (f)(3). Example 1 

in former proposed § 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 

§ 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 § 301.6226–3(d), as revised in 

the December 2017 NPRM. As revised, 

proposed § 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 § 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 § 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 § 301.6226–3(h) was 

also revised to account for this rule 

change. 

I. Penalty Defenses 

Former proposed § 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 § 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 § 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 

§ 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 § 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 partnerlevel 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 

§ 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 § 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 


amozie on DSK3GDR082PROD with RULES2
6514 Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 

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 § 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 partnerlevel 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 partnershiplevel 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 

§ 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 

§ 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 § 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 § 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 

§ 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, 

§ 301.6226–3(c)(2) now provides that 


amozie on DSK3GDR082PROD with RULES2
Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 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 § 301.6226– 

3(c)(1) provided that interest on the 

correction amounts determined under 

proposed § 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 

§ 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 § 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 § 301.6226–3(e)(1). The 

regulations created an iterative process 

under which any pass-through partner 

receiving a statement from another passthrough 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-passthrough 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 passthrough partner failed to take into 

account the adjustments in accordance 

with former proposed § 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 

§ 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 § 301.6226–3(e). The 

comments focused on three topics: (1) 

The statements furnished under 

proposed § 301.6226–3(e)(3); (2) the 

computation of an imputed 

underpayment under proposed 

§ 301.6226–3(e)(4); and (3) the payment 

of the additional reporting year tax by 

affected partners in accordance with 

proposed § 301.6226–3(e)(4)(iv). 

I. Statements Furnished Under 

§ 301.6226–3(e)(3) 

Proposed § 301.6226–3(e)(1) provided 

that each pass-through partner that is 

furnished a statement described in 

§ 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 passthrough 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 § 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 passthrough partner could apply to the IRS 

for a discretionary short-term extension 

of the time period set out in proposed 

§ 301.6226–3(e)(3)(ii). This extension 

would address exceptional or unusual 

circumstances in which a pass-through 


amozie on DSK3GDR082PROD with RULES2
6516 Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 

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 

§ 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 

§ 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 § 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 § 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 § 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 § 301.6226–3(e) include 

the partner’s TIN ‘‘or alternative form of 

identification as prescribed by forms, 

instructions, or other guidance.’’ See 

also § 301.6226–2(e) (imposing the same 

requirement for push out statements 

furnished to reviewed year partners). In 

addition, the election under § 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 § 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 § 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 

§ 301.6226–3. First, § 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 


amozie on DSK3GDR082PROD with RULES2
Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 6517 

adjustments that are taken into account 

by the affected partner. 

In addition, § 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 § 301.6226– 

3(e)(4)(iv)(B) with the language in 

§ 301.6226–3(c) regarding interest on 

correction amounts. 

II. Modifications Available to PassThrough 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 § 301.6226–3(e)(4). 

Section 6226(b)(4)(A)(ii)(II); proposed 

§ 301.6226–3(e)(2). Pursuant to 

proposed § 301.6226–3(e)(4)(iii), this 

imputed underpayment is computed in 

the same manner as an imputed 

underpayment under section 6225 and 

§ 301.6225–1. In calculating an imputed 

underpayment under proposed 

§ 301.6226–3(e)(4)(iii), a modification is 

taken into account if it was approved by 

the IRS under § 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 passthrough partner. Any modification that 

was not approved by the IRS under 

§ 301.6225–2 may not be taken into 

account. Proposed § 301.6226– 

3(e)(4)(iii). 

One comment suggested that it was 

unclear under proposed § 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 § 301.6226– 

3(e)(4)(iii) only allows modifications 

approved by the IRS under proposed 

§ 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 § 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 

§ 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 § 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 § 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 § 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 § 301.6226–3(e)(3) in 

accordance with proposed § 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 

§ 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 passthrough 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 

§ 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 § 301.6226–3(e)(3)(iv) provide a 

30-day period in which the IRS will not 


amozie on DSK3GDR082PROD with RULES2
6518 Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 

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 § 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 § 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 § 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 

§ 301.6226–3(h) 

Proposed § 301.6226–3(h) provided 

examples that illustrated the rules of 

proposed § 301.6226–3. One comment 

recommended that additional examples 

be added to § 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 taxexempt 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 § 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 § 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 

§ 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 § 301.6226–3(d) as previously 

revised in the December 2017 NPRM. As 

discussed earlier in this section of the 

preamble, proposed § 301.6226–3(d)(2) 

provided that each reviewed year 

partner calculates its penalty amount by 

treating the correction amounts 

determined under § 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 § 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 § 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 accuracyrelated 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 § 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 taxexempt entity pursuant to § 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 


amozie on DSK3GDR082PROD with RULES2
Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 6519 

for an intervening year. This 

recommendation was also not adopted. 

Former proposed § 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 

§ 301.6241–1(a)(10), as revised, did not 

refer to either the partnership or its 

partners. 

Former proposed § 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 

§ 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 § 301.6226–3(b)(3) as revised 

in the August 2018 NPRM, partnershiplevel tax attributes no longer factor into 

the calculation of an intervening year 

correction amount. See proposed 

§ 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 

§ 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 § 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 

§ 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 § 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 § 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 

§ 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 § 301.6226– 

3(h) to ‘‘[t]he last day to file a petition 

is.’’ Under § 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 § 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 crossreferences in the examples under former 

proposed § 301.6226–3. These errors 

were fixed in proposed § 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 § 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 

§ 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 


amozie on DSK3GDR082PROD with RULES2
6520 Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 

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 § 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. § 301.6223–1(e)(1). Both 

the revocation and the designation are 

effective on the date the partnership 

files the AAR. § 301.6223–1(e)(3). 

Proposed § 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 

§ 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 § 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 § 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 § 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 

§ 301.6225–1. Generally, a partnership 

must pay any imputed underpayment 

determined under § 301.6227–2(a) 

resulting from the adjustments 

requested in an AAR on the date the 

partnership files the AAR. Proposed 

§ 301.6227–2(b). In lieu of paying the 

imputed underpayment under 

§ 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 § 301.6227–3. Proposed 

§ 301.6227–2(c). 

One comment observed that it was 

unclear whether the references to ‘‘an 

imputed underpayment’’ in proposed 

§ 301.6227–2(a)(1) and to ‘‘the imputed 

underpayment’’ in proposed 

§ 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 partnershiprelated items. To allow the IRS to 

respond to issues that arise in 

implementing the new partnership audit 

regime, proposed § 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, §§ 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 § 301.6227–2(a)(2) provided 

that a partnership may apply 

modifications to the amount of the 

imputed underpayment determined 

under proposed § 301.6227–2(a)(1) 

using only certain, enumerated 

modifications as described in proposed 

§ 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 § 301.6227– 

2(a)(2). 

Proposed § 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 § 301.6225– 

2(d), and the IRS will determine 

whether such modification is accurate 

and appropriate. Similarly, proposed 

§ 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 

§ 301.6227–2(a)(2) be revised to allow 

for the catch-all provision under 

proposed § 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 § 301.6225–2(d)(10), in 

the context of an audit, and proposed 

§ 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 § 301.6225–2(d)(10) 

catch-all provision in § 301.6227–2(a)(2) 

would allow the IRS to set forth other 

modifications not specifically described 

in proposed § 301.6227–2(a)(2), that 

ability is already provided for by the 

plain language of § 301.6227–2(a)(2). 

To the extent the comment was 

recommending a rule in which a 

partnership could request a 


amozie on DSK3GDR082PROD with RULES2
Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 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 § 301.6227–2(a)(2). Under 

proposed § 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 

§ 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, 

§ 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 § 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 passthrough partner to push out its share of 

adjustments to the next tier of partners. 

The December 2017 NPRM contained 

proposed rules under § 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 § 301.6226–3(e). The 

rules under proposed § 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 

§ 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 

§ 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 § 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 § 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 § 301.6226–3 should be 

available in the case of a partner that 

must take into account adjustments 

requested in an AAR under proposed 

§ 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 § 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 


amozie on DSK3GDR082PROD with RULES2
6522 Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 

partnership that has made a valid 

election under section 6221(b) in 

accordance with § 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 § 301.6227–1(c)(2) provided 

that a valid AAR must include the 

adjustments requested, the statements 

described in § 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 

§ 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 § 301.6227–2(b)(1) to clarify 

that only a valid election under 

§ 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 § 301.6225–1(f)(1), two 

situations occur where there may be 

adjustments that do not result in an 

imputed underpayment. Under 

§ 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 § 301.6225–1(f)(1)(ii), 

a partnership adjustment does not result 

in an imputed underpayment if the 

calculation under § 301.6225–1(b)(1) 

resulted in an amount that is zero or less 

than zero. Proposed § 301.6227–3(c)(2) 

provided rules regarding how a passthrough 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 § 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 § 301.6225–1(f)(1)(i) and 

adjustments that do not result in an 

imputed underpayment pursuant to 

§ 301.6225–1(f)(1)(ii). This rule also 

applies in situations where the passthrough partner pays an imputed 

underpayment. The final regulations 

under § 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 

§ 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 § 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 § 301.6227–2(b)(2). 

To conform the rules under proposed 

§ 301.6227–2(b)(2) with the rules under 

proposed §§ 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 § 301.6233(b)–1(c). 

6. Notices of Proceedings and 

Adjustments 

Former proposed § 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 

§ 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 § 301.6231–1 

comported with the TTCA amendments 

to section 6231, former proposed 

§ 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 

§ 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 

§ 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); § 301.6227–1(b). Proposed 

§ 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 § 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 § 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 § 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 § 301.6227–1(b).’’ 

The comment suggested a 

corresponding change to proposed 

§ 301.6227–1(b) to provide that the 


amozie on DSK3GDR082PROD with RULES2
Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 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 § 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 

§ 301.6223–1(d)(2) and (e)(2), however, 

if the IRS withdraws a NAP pursuant to 

§ 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 

§ 301.6231–1(f) clarify that a withdrawn 

NAP has no effect for purposes of 

subchapter C of chapter 63 except as 

described in § 301.6223–1(d)(2) and 

(e)(2). 

In addition, proposed § 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 § 301.6231– 

1(f) more closely with the language of 

section 6227(c). 

Lastly, the final regulations under 

§ 301.6231–1(f) clarify that the 

withdrawal of a NAP or NOPPA 

obviates the limitation under 

§ 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 § 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 partnershiprelated 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 § 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 

§ 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 § 301.6232–1(d)(1)(i) is due to 

the failure of a partnership-partner to 

comply with section 6222(a). Proposed 

§ 301.6232–1(d)(1)(ii). 

One comment recommended that the 

regulations include a statement that the 

assessment procedures under 

§ 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 § 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 partnershippartner). 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 § 301.6232–1(d)(1)(iii). 

For all other partnership-partners, the 

IRS may assess an imputed 

underpayment against such partnershippartner on account of a failure to meet 

the consistency requirements under 

section 6222(a). See § 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 


amozie on DSK3GDR082PROD with RULES2
6524 Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 

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 partnershippartner’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 partnershippartner 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 § 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 § 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 

§§ 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 § 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 § 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 § 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 § 301.6232–1(d) in response to 

this comment. 

8. Interest and Penalties Related to 

Imputed Underpayments 

Proposed § 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 § 301.6233(a)–1(c). Proposed 

§ 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 § 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 § 301.6233(a)–1(c)(1) 

provided that a partner-level defense (as 

described in § 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 


amozie on DSK3GDR082PROD with RULES2
Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 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 § 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 § 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 § 301.6233(a)–1(c) 

applied rules similar to the ordering 

rules under § 1.6664–3 by disregarding 

the grouping and subgrouping rules 

under § 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 

§ 301.6233(a)–1(c) were consistent with 

the rules § 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 

§ 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 

§ 1.6664–3 within each grouping or 

subgrouping determined in accordance 

with § 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 § 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 § 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 § 301.6225–1 or § 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 § 301.6225– 

1 (or § 301.6225–2 in the case of 

modification). If negative credit 

adjustments remain after the application 

of negative adjustments in accordance 

with § 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 


amozie on DSK3GDR082PROD with RULES2
6526 Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 

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 § 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 

§ 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 § 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 

§ 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 

§ 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 

§ 301.6234–1(b). 

Under proposed § 301.6226–1(e), a 

partnership that has made an election 

under § 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 § 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 


amozie on DSK3GDR082PROD with RULES2
Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 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 

§ 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 § 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 § 301.6241–1, 

the rules regarding cease to exist 

determinations in accordance with 

proposed § 301.6241–3, and the rules 

regarding the nondeductibility of 

payments made under the centralized 

partnership audit regime as provided in 

proposed § 301.6241–4. 

A. Definitions 

Proposed § 301.6241–1 defined 

certain terms for purposes of the 

centralized partnership audit regime. 

Proposed § 301.6241(a)(5) defined a 

‘‘pass-through partner’’ as ‘‘a passthrough entity that holds an interest in 

a partnership’’ and a ‘‘pass-through 

entity’’ to include a partnership 

described in § 301.7701–2(c)(1), among 

other types of entities. A partnership as 

described in § 301.7701–2(c)(1) means a 

business entity that is not a corporation 

under § 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 

§ 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 

§ 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 

§ 301.6241–1(a)(5), which defines 

partnership by reference to § 301.7701– 

2(c)(1), and the exception under 

proposed § 301.6241–5(c)(2) for entities 

that have elected out of subchapter K. 

The comment observed that the 

definition of partnership under 

§ 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 ‘‘passthrough 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 

§ 301.6241–1(a)(5) be revised to 

eliminate the reference to § 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 ‘‘passthrough partners.’’ This change is 

consistent with the definition of 

‘‘partnership’’ under section 6241(1). 

Accordingly, the definition of ‘‘passthrough partner’’ under § 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 passthrough partners as a result of the 

proposed regulations. Proposed 

§ 301.6226–3 provided that a passthrough partner that is furnished a 

statement described in § 301.6226–2 

must comply with proposed § 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 § 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 § 301.6226–2 and 

complying with § 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 passthrough 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 § 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 


amozie on DSK3GDR082PROD with RULES2
6528 Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 

centralized partnership audit regime in 

its capacity as a partnership. Nothing in 

proposed § 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 § 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 § 301.6241–3(d). 

i. Determination That Partnership Has 

Ceased To Exist 

Proposed § 301.6241–3 provided that, 

if the IRS determined a partnership 

ceased to exist (as described in 

proposed § 301.6241–3(b)(2)) before the 

partnership adjustments take effect (as 

described in proposed § 301.6241–3(c)), 

the partnership adjustments are taken 

into account by the former partners (as 

described in proposed § 301.6241–3(d)) 

in accordance with proposed 

§ 301.6241–3(e). Proposed § 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 § 301.6241–3(b)(2). 

One comment stated that the language 

in proposed § 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 § 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 § 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 § 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 § 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 

§ 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 


amozie on DSK3GDR082PROD with RULES2
Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 6529 

the centralized partnership audit 

regime. 

Former proposed § 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 § 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 

§ 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 § 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 § 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 § 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 

§ 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 § 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 § 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 

§ 301.6226–1(b)(2). As a result, the IRS 

cannot determine the partnership ceases 

to exist with respect to that imputed 

underpayment (see § 301.6241–3(b)(2)), 

and the cease to exist provisions under 

proposed § 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 § 301.6241–3(d)(1)(i). As 

stated earlier in this section of the 

preamble, the term ‘‘former partners’’ 

was defined under proposed 

§ 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 § 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 § 301.6241–1(a)(2)) that 

corresponds to the reviewed year for 

which the adjustments were made. 

C. Payments Nondeductible 

Proposed § 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 

§ 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 

§ 301.6241–4.’’ One comment suggested 

that, because of the cross reference to 

§ 301.6241–4 in former proposed 

§ 301.6225–1(a), that the regulations 

under § 301.6241–4 be revised to 

address the treatment of the adjustments 

that result in the imputed 

underpayment. This comment was not 

adopted. 

Proposed § 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 

§ 301.6225–1(a) was revised to remove 

the erroneous cross-reference to the 

adjustments being taken into account 

under § 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 

§§ 301.6225–4 and 301.6226–4. 

D. Extension to Entities Filing 

Partnership Returns 

Proposed § 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 


amozie on DSK3GDR082PROD with RULES2
6530 Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 

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 § 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 

§ 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 partnershiprelated 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 

■ Paragraph 1. The authority citation 

for part 301 is amended by adding 

entries for §§ 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. 

* * * * * 


amozie on DSK3GDR082PROD with RULES2
Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 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. 

* * * * * 

■ Par. 2. Section 301.6221(a)–1 is added 

to read as follows: 

§ 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 § 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 § 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 

§ 301.9100–22 is in effect. 

■ Par. 3. Section 301.6222–1 is added to 

read as follows: 

§ 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 partnershiprelated items (as defined in § 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 partnershippartner (as defined in § 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 partnershippartner 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 partnershiprelated 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 partnershiprelated 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 


amozie on DSK3GDR082PROD with RULES2
6532 Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 

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 partnershiprelated 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 

§ 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 

§ 301.6226–2 filed by the partnership 

with the IRS. See § 301.6226–1(e) 

(regarding the binding nature of 

statements described in § 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 partnershiprelated 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 


amozie on DSK3GDR082PROD with RULES2
Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 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 partnershiprelated 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 partnershiprelated 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 § 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 partnershiprelated 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 partnershiprelated 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 


amozie on DSK3GDR082PROD with RULES2
6534 Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 

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 § 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 

§ 301.9100–22 is in effect. 

■ Par. 4. Section 301.6225–1 is added to 

read as follows: 

§ 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 § 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 § 301.6241–1(a)(1)) 

in accordance with § 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 § 301.6232–1. The FPA 

will include the amount of any imputed 

underpayment, as modified under 

§ 301.6225–2 if applicable, unless the 

partnership waives its right to such FPA 

under section 6232(d)(2). See 

§ 301.6232–1(d)(2). For the alternative to 

payment of the imputed underpayment 

by the partnership, see § 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 

§ 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 § 301.6225–2. 

Modifications under § 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 § 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 § 301.6241–6(b)(2)(ii) and 

(iii)) that is attributable to the 

partnership adjustment. See § 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 

§ 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 § 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 


amozie on DSK3GDR082PROD with RULES2
Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 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 partnershiprelated 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 

§ 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 

§ 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 partnershiprelated 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 partnershiprelated 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 § 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 


amozie on DSK3GDR082PROD with RULES2
6536 Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 

(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 partnershiprelated 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 


amozie on DSK3GDR082PROD with RULES2
Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 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 

§ 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 § 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 § 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 partnershiprelated 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 

§ 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 


amozie on DSK3GDR082PROD with RULES2
6538 Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 

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 § 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, longterm 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 longterm 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 § 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 


amozie on DSK3GDR082PROD with RULES2
Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 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 § 301.6225–3. The 

net decrease to CFTEs in the generalcategory, 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 

§ 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 

§ 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 § 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 

§ 301.9100–22T is in effect. 

■ Par. 5. Section 301.6225–2 is added to 

read as follows: 

§ 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 


amozie on DSK3GDR082PROD with RULES2
6540 Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 

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 

§ 301.6241–1(a)(6)) that does not result 

in an imputed underpayment (as 

described in § 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 

§ 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 § 301.6241–1(a)(9)), 

including any pass-through partner (as 

defined in § 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 

§ 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 

§ 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 

§ 301.6225–1(b)(1)(iv)). 

(iii) Calculation of rate-modified 

netted partnership adjustment in the 

case of a rate modification. The ratemodified 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 § 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. 


amozie on DSK3GDR082PROD with RULES2
Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 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 § 301.6225–1(c) and (d)) or 

whether the IRS designates one or more 

specific imputed underpayments (as 

described in § 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 § 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 

§ 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 


amozie on DSK3GDR082PROD with RULES2
6542 Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 

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); § 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 partnershiprelated 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 § 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 passthrough 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 § 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 


amozie on DSK3GDR082PROD with RULES2
Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 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) Passthrough partners may file amended 

returns. A relevant partner that is a 

pass-through partner, including a 

partnership-partner (as defined in 

§ 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 § 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 

§ 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 

§ 301.6222–1(c) (regarding notification 

of inconsistent treatment) do not apply 


amozie on DSK3GDR082PROD with RULES2
6544 Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 

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 taxexempt partner not subject to tax. Only 

the portion of the partnership 

adjustments properly allocated to a taxexempt 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 

§ 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 


amozie on DSK3GDR082PROD with RULES2
Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 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 

§ 301.6225–1(c) and (d)) or specific 

imputed underpayments (as described 

in § 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 

§ 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 § 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), § 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 § 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 partnershiprelated 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 

§ 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 


amozie on DSK3GDR082PROD with RULES2
6546 Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 

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 

§ 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 × 50 percent × 

$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 § 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 § 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 § 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 taxexempt 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 § 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 § 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 § 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 longterm 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 § 301.6225–1(c) and (d), the three 

adjustments are placed into three separate 


amozie on DSK3GDR082PROD with RULES2
Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 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 

§ 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 § 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 

§ 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 

§ 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 × 40 percent), 

and the $30 increase in loss is an adjustment 

that does not result in an imputed 

underpayment under § 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 § 301.6225–1(c)(5). 

Under § 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 × 40 percent). After modification, none 

of the adjustments is an adjustment that does 

not result in an imputed underpayment 

under § 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 § 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 

§ 301.9100–22 is in effect. 

■ Par. 6. Section 301.6225–3 is added to 

read as follows: 

§ 301.6225–3 Treatment of partnership 

adjustments that do not result in an 

imputed underpayment. 

(a) In general. Partnership 

adjustments (as defined in § 301.6241– 

1(a)(6)) that do not result in an imputed 

underpayment (as described in 

§ 301.6225–1(f)) are taken into account 

by a partnership in the adjustment year 

(as defined in § 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 nonseparately 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 § 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 § 301.6225– 

1(f) is taken into account by the 

partnership in the adjustment year as a 

separately stated item or a nonseparately 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 

§ 301.6241–1(a)(2)) who are also 

reviewed year partners (as defined in 

§ 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 

§ 301.6225–2, a relevant partner (as 

defined in § 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 


amozie on DSK3GDR082PROD with RULES2
6548 Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 

the partnership in the adjustment year 

in accordance with § 301.6225–1(a). 

(6) Effect of election under section 

6226. If a partnership makes a valid 

election under § 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 

§ 301.6225–1(g) is taken into account by 

the reviewed year partners in 

accordance with § 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 § 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 § 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 

§ 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 

§ 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 § 301.6225–1(d). 

Because the adjustments are in different 

subgroupings, the adjustments are not netted 

under § 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 § 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 × 40 percent). 

Pursuant to § 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 

§ 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 § 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 

§ 301.9100–22 is in effect. 

■ Par. 7. Section 301.6226–1 is added to 

read as follows: 

§ 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 

§ 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 § 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 § 301.6241–1(a)(9)) must take into 

account their share of the partnership 

adjustments (as defined in § 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 § 301.6226–3. See 

§ 301.6226–2(f) regarding the 

determination of each reviewed year 

partner’s share of the partnership 

adjustments, including the effect of any 


amozie on DSK3GDR082PROD with RULES2
Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 6549 

modification approved by the Internal 

Revenue Service (IRS) under 

§ 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 

§ 301.6225–1(f) that are associated with 

an imputed underpayment (as described 

in § 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 § 301.6241–1(a)(1)) and 

instead each reviewed year partners’ 

share of the adjustments determined in 

accordance with § 301.6226–2(f) must 

be included on the statement described 

in § 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 § 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 § 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 § 301.6226–2(d). 

(e) Binding nature of statements. The 

election under this section, which 

includes filing and furnishing 

statements described in § 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 partnershiprelated items (as defined in § 301.6241– 

1(a)(6)(ii)) reflected on a statement 

described in § 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 

§ 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 

§ 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 § 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 

§ 301.9100–22 is in effect. 

■ Par. 8. Section 301.6226–2 is added to 

read as follows: 

§ 301.6226–2 Statements furnished to 

partners and filed with the IRS. 

(a) In general. A partnership that 

makes an election under § 301.6226–1 

must furnish to each reviewed year 

partner (as defined in § 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 § 301.6241– 

1(a)(6)) associated with the imputed 

underpayment for which an election 

under § 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 § 301.6241–1(a)(8)) 

subject to an election under § 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 


amozie on DSK3GDR082PROD with RULES2
6550 Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 

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 § 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 § 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 § 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 § 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 § 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 § 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 

§ 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 § 301.6226– 

3 for the reporting year (as defined in 

§ 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 


amozie on DSK3GDR082PROD with RULES2
Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 6551 

partner (or with respect to any indirect 

partner (as defined in § 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 partnershiprelated 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 § 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 § 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 § 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 § 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 § 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 

§ 301.9100–22 is in effect. 

■ Par. 9. Section 301.6226–3 is added to 

read as follows: 

§ 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 § 301.6241–1(a)(9)) for the 

taxable year that includes the date a 

statement was furnished in accordance 

with § 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 § 301.6241–1(a)(6)) reflected 

on the statement described in 

§ 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 § 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 


amozie on DSK3GDR082PROD with RULES2
6552 Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 

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 

§ 1.6664–2(d) of this chapter and any 

amounts paid by the partner in 

accordance with § 301.6225–2); less 

(C) The amount of rebates made (as 

defined in § 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 § 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 § 1.6664–2(d) of this 

chapter and any amounts paid by the 

partner in accordance with § 301.6225– 

2); less 

(C) The amount of rebates made (as 

defined in § 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 

§ 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 § 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 partnershiprelated 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 


amozie on DSK3GDR082PROD with RULES2
Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 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 

§ 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 § 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 passthrough partner is furnished a statement 

described in § 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 § 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 passthrough 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 passthrough 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 § 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 § 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 

§ 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 § 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 passthrough 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 passthrough partner relate; 

(K) The affected partner’s share of 

partnership adjustments determined 

under § 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 § 301.6226–2. An 

affected partner that is a pass-through 


amozie on DSK3GDR082PROD with RULES2
6554 Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 

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 

§ 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 

§ 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 passthrough 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 § 301.6225–1, 

except that adjustments reflected on the 

statement furnished to the pass-through 

partner under § 301.6226–2 are treated 

as partnership adjustments (as defined 

in § 301.6241–1(a)(6)) for the first 

affected year. Any modification 

approved by the IRS under § 301.6225– 

2 with respect to the pass-through 

partner (including any modifications 

with respect to a relevant partner (as 

defined in § 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 § 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 § 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 

§ 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 § 301.6225–1(f)) are taken 

into account by the pass-through partner 

in accordance with § 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 § 301.6225– 

3 in the taxable year of the pass-through 

partner that includes the date the 

statement described in § 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, 

§ 301.6241–6(b)(3) applies to the passthrough partner by substituting ‘‘passthrough partner’’ for ‘‘partnership’’ 

where § 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 § 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 


amozie on DSK3GDR082PROD with RULES2
Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 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 passthrough 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 § 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 § 1.6012– 

1(b)(2)(i) or § 1.6012–2(g)(2)(i) of this 

chapter). The amount of tax paid by a 

partnership under § 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 

§ 1.1446–3(d)(2) of this chapter) or is 

actually withheld from the reviewed 

year partner (within the meaning of 

§ 1.1464–1(a) or § 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 § 1.671– 

4(b)(2)(i)(A) of this chapter and that is 

furnished a statement described in 

§ 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 § 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 accuracyrelated 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 § 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 § 301.6226– 

2(b), the partnership adjustments are finally 

determined on December 15, 2025. On 

February 2, 2026, Partnership files the 

statements described under § 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 

§ 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 § 301.6225–1(f). Partnership makes a 

timely election under section 6226 in 

accordance with § 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 

§ 301.6226–1(b)(2) and § 301.6225–3(b)(6), 

the adjustment year partners (as defined in 

§ 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, 


amozie on DSK3GDR082PROD with RULES2
6556 Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 

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 § 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 § 301.6226– 

2 and furnishes statements to all of its 

reviewed year partners in accordance with 

§ 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 accuracyrelated 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 

§ 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 § 301.6226–2(b), the partnership 

adjustments become finally determined on 

August 31, 2023. On September 30, 2023, 

Partnership files the statements described 

under § 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 § 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 

§ 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 § 301.6241– 

6(b)(2)), Partnership must pay the amount of 

tax required to be withheld on the 

adjustment. See §§ 1.1441–1(b)(1) and 

1.1441–5(b)(2)(i)(A) of this chapter. Under 

§ 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 

§ 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 accuracyrelated 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 

§ 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 § 301.6225–1(g)(2)(iii)(B). 

Partnership makes a timely election under 

section 6226 in accordance with § 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 § 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 

§ 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 


amozie on DSK3GDR082PROD with RULES2
Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 6557 

$500 long-term capital loss, the only 

adjustment. Accordingly, the imputed 

underpayment reflected in the NOPPA is $80 

($200 × 40 percent). F, a C corporation 

partner with a 50 percent interest in 

Partnership, received 50 percent of all longterm capital losses for 2020. As part of the 

modification process described in 

§ 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 § 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 × 40 percent). Partnership makes a 

timely election under section 6226 in 

accordance with § 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 § 301.6226–2(b), the partnership 

adjustments are finally determined on 

December 15, 2025. On February 1, 2026, 

Partnership files the statements described 

under § 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 § 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 § 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 § 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 × 40 percent). Partnership 

makes a timely election under section 6226 

in accordance with § 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 § 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 § 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 × 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 × 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 § 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 § 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 § 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 § 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 


amozie on DSK3GDR082PROD with RULES2
6558 Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 

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 § 301.6225–1, Q calculates the imputed 

underpayment that it is required to pay of 

$200 ($500 adjustment to ordinary income × 

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 § 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 × 40 percent). 

On July 17, 2023, Partnership timely submits 

a request to modify the rate used in 

calculating the imputed underpayment under 

§ 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 × 

15 percent) + ($125 × 20 percent)). See 

§ 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 § 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 § 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 § 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 × 20 

percent for the adjustments allocable to X) + 

($125 × 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 § 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 

§ 301.9100–22 is in effect. 

■ Par. 10. Section 301.6227–1 is added 

to read as follows: 

§ 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 

§ 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 

§ 301.6227–2(a) for the reviewed year 

(as defined in § 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 § 301.6227–2(b) unless the 

partnership makes an election under 

§ 301.6227–2(c), in which case each 

reviewed year partner (as defined in 

§ 301.6241–1(a)(9)) must take the 

adjustments into account in accordance 

with § 301.6227–3. If the adjustments 

requested in the AAR are adjustments 

described in § 301.6225–1(f)(1) that do 

not result in an imputed underpayment 

(as determined under § 301.6227–2(a)), 

such adjustments must be taken into 

account by the reviewed year partners 

in accordance with § 301.6227–3. A 

partner may not make a request for an 

administrative adjustment of a 

partnership-related item except in 

accordance with § 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 § 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 

§ 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 

§ 301.6231–1(f), an AAR (including a 

request filed by a partner in accordance 

with § 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 §§ 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, 


amozie on DSK3GDR082PROD with RULES2
Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 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 

§ 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 § 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 

§ 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 § 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 partnershiprelated 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 

§ 301.6227–2(a)(1), including any 

modifications determined by the 

partnership under § 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 § 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 

§ 301.9100–22 is in effect. 

■ Par. 11. Section 301.6227–2 is added 

to read as follows: 

§ 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 § 301.6241–1(a)(8)) and the 

determination of the amount of any 

imputed underpayment is made in 

accordance with the rules under 

§ 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 

§ 301.6225–2(d)(3) (regarding taxexempt partners), § 301.6225–2(d)(4) 

(regarding modification of applicable 

tax rate), § 301.6225–2(d)(5) (regarding 

specified passive activity losses), 

§ 301.6225–2(d)(6)(ii) (regarding 

limitations or restrictions in the 

grouping of adjustments), § 301.6225– 

2(d)(7) (regarding certain qualified 

investment entities), § 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 


amozie on DSK3GDR082PROD with RULES2
6560 Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 

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 § 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 § 301.6241–1(a)(8)) 

(determined without regard to 

extension) and ending on the date the 

AAR is filed. See § 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 

§ 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 § 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 § 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 

§ 301.6226–2(g)(3) apply to the 

partnership, and the rules in 

§ 301.6226–3(f) apply to the reviewed 

year partners that take into account the 

adjustments pursuant to § 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 § 301.6241–1(a)(9)) take into 

account the adjustments requested in 

the AAR that are associated with such 

imputed underpayment in accordance 

with § 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 § 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 § 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 § 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 

§ 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 § 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 

§ 301.9100–22 is in effect. 

■ Par. 12. Section 301.6227–3 is added 

to read as follows: 

§ 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 § 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 

§ 301.6225–1(f)(1)) or are associated 

with an imputed underpayment for 

which the partnership makes an 

election under § 301.6227–2(c). Each 

reviewed year partner receiving a 

statement furnished in accordance with 

§ 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 § 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 § 301.6226–3. A 

reviewed year partner may, in 

accordance with § 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 § 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 

§ 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 


amozie on DSK3GDR082PROD with RULES2
Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 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 § 301.6241–1(a)(5)), the passthrough partner must take into account 

the adjustments reflected on that 

statement in accordance with 

§ 301.6226–3(e) by treating the 

partnership that filed the AAR as the 

partnership that made an election under 

§ 301.6226–1. A pass-through partner 

that furnishes statements in accordance 

with § 301.6226–3(e)(3) must provide 

the information described in paragraph 

(c)(3) of this section in lieu of the 

information described in § 301.6226– 

3(e)(3)(iii) on the statements the passthrough partner furnishes to its partners. 

A pass-through partner that computes 

and pays an imputed underpayment in 

accordance with § 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 § 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 § 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 § 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 § 301.6226–3(e)(4)(iii). The passthrough partner must provide the 

information described in paragraph 

(c)(3) of this section in lieu of the 

information described in § 301.6226– 

3(e)(3)(iii) on the statements the passthrough partner furnishes to its affected 

partners (as defined in § 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 

§ 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 

§ 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 § 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 passthrough 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 passthrough partner relate; 

(xi) The affected partner’s share of 

partnership adjustments determined 

under § 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 

§ 301.6226–3(e)(3)(iv), the rules under 

§ 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 § 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 

§ 301.9100–22 is in effect. 

■ Par. 13. Section 301.6231–1 is added 

to read as follows: 

§ 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 § 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 § 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)). 


amozie on DSK3GDR082PROD with RULES2
6562 Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 

(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 § 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 § 301.6232– 

1(d)(2) for the rules regarding a waiver 

of the limitations on assessment under 

§ 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 

§ 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 

§ 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 § 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 § 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 

§ 301.9100–22 is in effect. 

■ Par. 14. Section 301.6232–1 is added 

to read as follows: 

§ 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 § 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 § 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 § 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 § 301.6241–1(a)(7)) to comply 

with section 6222(a), the IRS has 

adjusted or will adjust partnershiprelated items (as defined in § 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 

§ 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 

§ 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 


amozie on DSK3GDR082PROD with RULES2
Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 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 partnershippartner. 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 

§ 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 § 301.6241– 

1(a)(9)) of the partnership-partner (or 

indirect partners of the partnershippartner, as defined in § 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 § 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 

§ 301.9100–22 is in effect. 

■ Par. 15. Section 301.6233(a)–1 is 

added to read as follows: 

§ 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 § 301.6241–1(a)(6)) for a 

reviewed year (as defined in 

§ 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 § 301.6232–1(b)); 

(ii) The due date of the partnership 

return (without regard to extension) for 

the adjustment year (as defined in 

§ 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 § 301.6241– 

1(a)(9)) or to any indirect partner (as 

defined in § 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 § 301.6225–2(d), 

a partner-level defense (as described in 

§ 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 (accuracyrelated 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 § 301.6225–1 (or 

§ 301.6225–2 in the case of 

modification), any grouping or 

subgrouping contains a negative 

adjustment (as defined in § 301.6225– 

1(d)(2)(ii)) and at least one positive 

adjustment (as defined in § 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 

§ 301.6225–1(f)) and adjustments 

excluded from the determination of the 

imputed underpayment under 

§ 301.6225–2(b)(2) are disregarded. 

(ii) Calculating the portion of an 

imputed underpayment subject to 


amozie on DSK3GDR082PROD with RULES2
6564 Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 

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 § 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 

§ 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 § 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 § 301.6225– 

1 (or § 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 


amozie on DSK3GDR082PROD with RULES2
Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 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 § 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 × 40 percent), 

and the penalty is $8 ($40 × 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 × 40 percent) + $10), and the 

penalty is $10 ($50 × 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 § 301.6225–1 with the 

$100 positive adjustment to ordinary. 

Because the $50 negative adjustment to 

ordinary income was subgrouped under 

§ 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 × 40 percent) + 

$10), and the penalty is $6 ($30 × 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 accuracyrelated penalty remains $6. The portion of 

the imputed underpayment to which the 40- 

percent gross valuation misstatement penalty 

applies is $120 ($300 × 40 percent), and the 

gross valuation misstatement penalty is $48 

($120 × 40 percent). The total accuracyrelated 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 × 40 percent) and that the 

20-percent penalty applies to the entire 

imputed underpayment. The penalty is 

$32,000 ($160,000 × 20 percent). Partnership 

requests modification under § 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 § 301.6225–1(b)(2) is 

$300,000 ($400,000 less $100,000 allocable to 

C). The imputed underpayment is $120,000 

(($300,000) × 40 percent), and the penalty is 

$24,000 ($120,000 × 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 § 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 § 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 § 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 § 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 × 40 percent), and the 

penalty is $16,000 ($80,000 × 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 § 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 

§ 301.9100–22 is in effect. 

■ Par. 16. Section 301.6233(b)–1 is 

added to read as follows: 

§ 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 

§ 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 

§ 301.6232–1(b). 

(c) Interest. Interest determined under 

this paragraph (c) is the interest that 


amozie on DSK3GDR082PROD with RULES2
6566 Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 

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 

§ 301.6241–1(a)(1)). The interest under 

this paragraph (c) begins on the date 

prescribed for payment (as described in 

§ 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 § 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 § 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 

§ 301.9100–22 is in effect. 

■ Par. 17. Section 301.6234–1 is added 

to read as follows: 

§ 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 § 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 

§ 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 § 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 

§ 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 § 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 

§ 301.9100–22 is in effect. 

■ Par. 18. Section 301.6235–1 is added 

to read as follows: 

§ 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 § 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 

§ 301.6225–2(c)(3)(i)) agreed to by the 

IRS under section 6225(c)(7) and 

§ 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 § 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 § 301.6231–1(b)(2). See 

§ 301.6225–2(c)(3)(iii). 


amozie on DSK3GDR082PROD with RULES2
Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 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 § 301.6225–2(c)(3)(i)) 

agreed to by the IRS under section 

6225(c)(7) and § 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 § 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 

§ 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 

§ 301.6231–1(b)(2). Pursuant to § 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 § 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 § 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 

§ 301.9100–22 is in effect. 

■ Par. 19. Section 301.6241–1 is added 

to read as follows: 

§ 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. 


amozie on DSK3GDR082PROD with RULES2
6568 Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 

(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, § 301.6225–1, and, if applicable, 

§ 301.6225–2. In the case of an election 

under section 6226, the term imputed 

underpayment means the amount 

determined in accordance with 

§ 301.6226–3(e)(4). In the case of an 

administrative adjustment request, the 

term imputed underpayment means the 

amount determined in accordance with 

§ 301.6227–2 or § 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 whollyowned entity disregarded as separate 

from its owner for Federal income tax 

purposes. 

(5) Pass-through partner. The term 

pass-through partner means a passthrough 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 partnershiprelated 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 § 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 


amozie on DSK3GDR082PROD with RULES2
Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 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 noncash 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 

§ 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 § 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 

§ 301.9100–22 is in effect. 

■ Par. 20. Section 301.6241–2 is added 

to read as follows: 

§ 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 

§ 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 

§ 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 § 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 

§ 301.9100–22 is in effect. 

■ Par. 21. Section 301.6241–3 is added 

to read as follows: 

§ 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 


amozie on DSK3GDR082PROD with RULES2
6570 Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 

(including a partnership-partner as 

defined in § 301.6241–1(a)(7)) ceases to 

exist (as defined in paragraph (b) of this 

section) before any partnership 

adjustment (as defined in § 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 

§ 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 

§ 301.6241–1(a)(3)); 

(ii) Received a statement under 

section 6226(a)(2) (or § 301.6226–3(e)) 

and has furnished statements to its 

partners in accordance with § 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 § 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 § 301.6226– 

3. 


amozie on DSK3GDR082PROD with RULES2
Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 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 

§ 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 § 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 § 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 § 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 

§ 301.9100–22 is in effect. 

■ Par. 22. Section 301.6241–4 is added 

to read as follows: 

§ 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 § 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 § 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 

§ 301.9100–22 is in effect. 

■ Par. 23. Section 301.6241–5 is added 

to read as follows: 

§ 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 § 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). 


amozie on DSK3GDR082PROD with RULES2
6572 Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 

(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 § 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 

§ 301.9100–22 is in effect. 

■ Par. 24. Section 301.6241–6 is added 

to read as follows: 

§ 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 

§ 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 §§ 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 

§ 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 

§§ 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 

§ 301.6221(a)–1(a), only chapter 1 tax 

attributable to adjustments to partnershiprelated 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 § 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 § 301.6241–1(a)(8)) 

and is imposed (or required to be 

deducted and withheld) with respect to 

the adjustment year (as defined in 

§ 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 § 1.1441–2(a) 

of this chapter), a withholdable payment 

(as defined in § 1.1473–1(a) of this 

chapter), or the allocable share of 

effectively connected taxable income (as 

computed under § 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 § 301.6225–1(b)) and the total 

netted partnership adjustment (as 

calculated under § 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 §§ 1.1463–1 and 1.1474–4 of 

this chapter. See § 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 § 301.6226–1 with respect to an 

imputed underpayment must pay the 

amount of tax required to be withheld 


amozie on DSK3GDR082PROD with RULES2
Federal Register / Vol. 84, No. 39 / Wednesday, February 27, 2019 / Rules and Regulations 6573 

under chapter 3 or chapter 4 on the 

amount of any adjustment set forth in 

the statement described in § 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 § 301.6226–2, see § 301.6226–3(f). 

See § 301.6226–3(e)(3)(v) for the 

application of the rules of this 

paragraph (b)(4) to pass-through 

partners (as defined in § 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 § 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 § 1.1441– 

1(e)(4)(ii), § 1.1446–1(c)(2)(iv)(A), or 

§ 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 §§ 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 

§ 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 § 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 

§ 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 


amozie on DSK3GDR082PROD with RULES2