[Federal Register Volume 83, Number 160 (Friday, August 17, 2018)]
[Proposed Rules]
[Pages 41954-42015]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-17614]



[[Page 41953]]

Vol. 83

Friday,

No. 160

August 17, 2018

Part IV





Department of the Treasury





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Internal Revenue Service





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26 CFR Parts 1 and 301





Centralized Partnership Audit Regime; Proposed Rule

Federal Register / Vol. 83 , No. 160 / Friday, August 17, 2018 / 
Proposed Rules

[[Page 41954]]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 301

[REG-136118-15, REG-119337-17; REG-118067-17; REG-120232-17 and REG-
120233-17]
RIN 1545-BO03; 1545-BO04


Centralized Partnership Audit Regime

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking; notice of public hearing; 
withdrawal and partial withdrawal of notices of proposed rulemaking.

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SUMMARY: This document contains proposed regulations implementing the 
centralized partnership audit regime. This document withdraws and 
reproposes certain portions of proposed regulations implementing the 
centralized partnership audit regime that have not been finalized to 
reflect the changes made by the Technical Corrections Act of 2018, 
contained in Title II of the Consolidated Appropriations Act of 2018 
(TTCA). The proposed regulations affect partnerships with respect to 
partnership taxable years beginning after December 31, 2017, as well as 
partnerships that make the election under the Bipartisan Budget Act of 
2015 (BBA), to apply the centralized partnership audit regime to 
partnership taxable years beginning on or after November 2, 2015 and 
before January 1, 2018.

DATES: Written or electronic comments must be received by October 1, 
2018. Outlines of topics to be discussed at the public hearing 
scheduled for October 9, 2018, at 10 a.m. must be received by October 
1, 2018.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-136118-15), Room 
5207, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
136118-15), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue NW, Washington, DC 20224, or sent electronically via the Federal 
eRulemaking Portal at www.regulations.gov (IRS REG-136118-15).

FOR FURTHER INFORMATION CONTACT: Concerning the proposed 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 proposed 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 
proposed 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 proposed 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 proposed regulations 
relating to chapters 3 and 4 of subtitle A of the Internal Revenue Code 
(other than section 1446), Subin Seth of the Office of Associate Chief 
Counsel (International), (202) 317-5003; concerning the proposed 
regulations relating to section 1446, Ronald M. Gootzeit of the Office 
of Associate Chief Counsel (International), (202) 317-4953; concerning 
the proposed regulations under sections 704 through 706 and Sec. Sec.  
301.6225-4 and 301.6226-4, Allison R. Carmody or Meghan M. Howard of 
the Office of Associate Chief Counsel (Passthroughs and Special 
Industries), (202) 317-5279; concerning the submission of comments, the 
hearing, or to be placed on the building access list to attend the 
hearing, Regina Johnson, (202) 317-6901 (not toll-free numbers).

SUPPLEMENTARY INFORMATION: 

Background

    This document contains proposed regulations under sections 704 
through 706 to amend the Income Tax Regulations (26 CFR part 1) under 
Subpart--Partners and Partnerships and proposed regulations under 
sections 6221 through 6241 to amend the Procedure and Administration 
Regulations (26 CFR part 301) under Subpart--Tax Treatment of 
Partnership Items to implement the centralized partnership audit regime 
enacted by section 1101 of the BBA, Public Law 114-74 (BBA), as amended 
by the Protecting Americans from Tax Hikes Act of 2015, Public Law 114-
113 (PATH Act) and sections 201 through 207 of the TTCA, Public Law 
115-141. This document also withdraws portions of proposed regulations 
under sections 704 through 706 and 6221 through 6241 that were 
published in the Federal Register on June 14, 2017 (REG-136118-15, 82 
FR 27334), November 30, 2017(REG-119337-17, 82 FR 56765), December 19, 
2017(REG-120232-17 and REG-120233-17, 82 FR 27071), and February 2, 
2018 (REG-118067-17, 83 FR 4868).
    Section 1101(a) of the BBA removed subchapter C of chapter 63 of 
the Internal Revenue Code (Code) effective for partnership taxable 
years beginning after December 31, 2017. Subchapter C of chapter 63 of 
the Code (subchapter C of chapter 63) contained the unified partnership 
audit and litigation rules 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, in 
general, determines, assesses, and collects tax at the partnership 
level.
    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 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 election for partners to take 
partnership adjustments into account, 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

[[Page 41955]]

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 27071) a notice of proposed rulemaking 
(REG-120232-17 and REG-120233-17) (December 2017 NPRM) proposing 
administrative and procedural rules under the centralized partnership 
audit regime, including rules addressing assessment and collection, 
penalties and interest, periods of limitations on making partnership 
adjustments, and judicial review of partnership adjustments. The 
regulations proposed in the December 2017 NPRM also provided rules 
addressing how pass-through partners take into account adjustments 
under the alternative to payment of the imputed underpayment described 
in section 6226 and under rules similar to section 6226 when a 
partnership files an AAR under section 6227. Written comments were 
received in response to the December 2017 NPRM. However, no hearing was 
requested or held.
    On January 2, 2018, the Treasury Department and the IRS published 
in the Federal Register (82 FR 28398) final regulations under section 
6221(b) providing rules for electing out of the centralized partnership 
audit regime.
    On February 2, 2018, the Treasury Department and the IRS published 
in the Federal Register (83 FR 4868) a notice of proposed rulemaking 
(REG-118067-17) (February 2018 NPRM) proposing rules for adjusting tax 
attributes under the centralized partnership audit regime. Written 
comments were received in response to the February 2018 NPRM. However, 
no hearing was requested or held.
    On March 23, 2018, Congress enacted the TTCA, which made a number 
of technical corrections to the rules under the centralized partnership 
audit regime. The amendments under the TTCA are effective as if 
included in section 1101 of the BBA, and therefore, subject to the 
effective dates in section 1101(g) of the BBA.
    On August 9, 2018, the Treasury Department and the IRS published in 
the Federal Register (83 FR 39331) final regulations under section 6223 
providing rules relating to partnership representatives and final 
regulations under Sec.  301.9100-22 providing rules for electing into 
the centralized partnership audit regime for taxable years beginning on 
or after November 2, 2015 and before January 1, 2018. Corresponding 
temporary regulations under Sec.  301.9100-22T were also withdrawn.
    In light of the technical corrections made by the TTCA, to the 
extent regulations have not already been finalized, this document 
withdraws the regulations proposed in the June 2017 NPRM, the November 
2017 NPRM, the December 2017 NPRM, and the February 2018 NPRM 
(collectively, the prior NPRMs) and proposes regulations reflecting the 
technical corrections made by the TTCA. The regulations proposed in 
this document also include clarifications, unrelated to the TTCA as 
discussed in the Explanation of Provisions section of this preamble. In 
addition, certain regulations have been reordered and renumbered, 
typographical errors have been corrected, nonsubstantive editorial 
changes have been made, and the applicability date provisions in the 
regulations have been revised to replace references to Sec.  301.9100-
22T with references to Sec.  301.9100-22. Finally, the assumed highest 
rate of tax for corporations in the examples for all applicable periods 
is now 20 percent to more closely reflect the corporate tax rate in 
effect under section 11 (as amended by section 13001 of ``[a]n Act to 
provide for the reconciliation pursuant to titles II and V of the 
concurrent resolution on the budget for fiscal year 2018,'' Public Law 
115-97 (the ``Act'')).
    Although this document withdraws the prior NPRMs, the Explanation 
of Provisions sections contained in the preambles of the withdrawn 
NPRMs remain relevant. Therefore, to the extent not inconsistent with 
the Explanation of Provisions section of this preamble or the preamble 
to the portions of the proposed regulations that have already been 
finalized, those Explanation of Provision sections are incorporated by 
reference in this document. Federal Register citations are provided to 
assist with locating the relevant section of the preamble in the prior 
NPRMs. The prior NPRMs are also included in the rulemaking docket for 
this notice of proposed rulemaking on www.regulations.gov.
    This document does not address written comments that were submitted 
in response to the regulations proposed in the prior NPRMs or respond 
to any statements made during the public hearing held on September 18, 
2017. Except to the extent that the written comments relate to the 
final regulations under section 6221(b) and section 6223, such comments 
and any comments received in response to this notice of proposed 
rulemaking will be addressed when the regulations proposed in this 
document are finalized.

Explanation of Provisions

1. Scope of the Centralized Partnership Audit Regime and Partnership-
Related Item

    Section 6221(a) provides for the determination of certain 
adjustments at the partnership level under the centralized partnership 
audit regime. 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 for a partnership taxable year (and any 
partner's distributive share thereof) shall be determined, any tax 
attributable thereto shall be assessed and collected, and the 
applicability of any penalty, addition to tax, or additional amount 
which relates to an adjustment to any such item or share shall be 
determined at the partnership level. Prior to amendment by the TTCA, 
section 6241(a)(2) provided that the term ``partnership adjustment'' 
meant any adjustment in the amount of any item of income, gain, loss, 
deduction, or credit of a partnership, or any partner's distributive 
share thereof.
    Section 201(c)(2) of the TTCA amended section 6221(a) by replacing 
the phrase ``items of income, gain, loss, deduction, or credit of a 
partnership for a partnership taxable year (and any partner's 
distributive share thereof)'' with the phrase ``a partnership-related 
item.'' Section 6221(a) now provides that any adjustment to a 
partnership-related item and the applicability of any penalty, addition 
to tax, or additional amount which relates to an adjustment to any 
partnership-related item shall be determined at the partnership level. 
Additionally, section 6221(a) provides that any tax attributable to an 
adjustment to a partnership-related item shall be assessed and 
collected at the partnership level.
    Section 201(a) of the TTCA amended section 6241(2) to provide that 
the term ``partnership adjustment'' means any adjustment to a 
partnership-related item, and the term ``partnership-related item'' 
means any item or amount with respect to the partnership (without 
regard to whether or not such item or amount appears on the 
partnership's return and including an imputed underpayment and any item 
or amount relating to any transaction with, basis in, or liability of, 
the partnership) which is relevant (determined without regard to 
subchapter C of chapter 63) in determining the tax liability of any 
person under chapter 1 of the Code

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(chapter 1) and any partner's distributive share thereof.
    By eliminating the reference to items of income, gain, loss, 
deduction, or credit of a partnership, and instead referring to 
partnership-related items, which is broadly defined, the amendments by 
the TTCA clarify that the scope of the centralized partnership audit 
regime is not narrower than the scope of the partnership audit 
procedures under TEFRA. 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). Rather, 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. Id.
A. Proposed Sec.  301.6221(a)-1
    Proposed rules under Sec.  301.6221(a)-1 were previously published 
in the Federal Register (82 FR 27372-73) in the June 2017 NPRM and the 
November NPRM (82 FR 56776) (former proposed Sec.  301.6221(a)-1). 
Former proposed Sec.  301.6221(a)-1(a) provided that the centralized 
partnership audit regime covers any adjustment to items of income, 
gain, loss, deduction, or credit of a partnership and any partner's 
distributive share of those adjusted items. Former proposed Sec.  
301.6221(a)-1(b)(1)(i) 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 under section 
6031, the regulations thereunder, and the forms and instructions 
prescribed by the IRS for the partnership's taxable year, and any 
information in the partnership's books and records for the taxable 
year. In addition, former proposed Sec.  301.6221(a)-1(b)(1)(ii) 
provided that any factors that needed to be taken into account to 
determine or allocate the tax treatment of items adjusted under the 
centralized partnership audit regime were also to be determined at the 
partnership level. Former proposed Sec.  301.6221(a)-1(b)(2) also 
addressed items included within the phrase ``partner's distributive 
share.'' Because the TTCA's amendment of the scope of the centralized 
partnership audit regime is accomplished by adding a new defined term--
``partnership-related item''--the majority of the rules under former 
proposed Sec.  301.6221(a)-1(b) that addressed the scope of what is 
adjusted at the partnership level are now incorporated into proposed 
Sec.  301.6241-6 which defines the term ``partnership-related item.''
    Proposed Sec.  301.6221(a)-1(a) now provides the general rule that, 
except as otherwise provided under the centralized partnership audit 
regime, any adjustments to partnership-related items and the 
applicability of any penalty, addition to tax, or additional amount 
that relates to an adjustment to any such items are determined at the 
partnership level. In addition, proposed Sec.  301.6221(a)-1(a) 
provides that any chapter 1 tax attributable to an adjustment to a 
partnership-related item is assessed and collected at the partnership 
level. See section 13 of the preamble for a discussion of special 
enforcement matters pertaining to partnership-related items that may be 
adjusted outside of the centralized partnership audit regime.
    Proposed Sec.  301.6221(a)-1(a) further provides that any 
consideration necessary to make a determination at the partnership 
level under the centralized partnership audit regime is made at the 
partnership level. This would include the period of limitations on 
making adjustments under section 6235 as well as any facts necessary to 
calculate any imputed underpayment under section 6225, except as 
otherwise provided under the centralized partnership audit regime. 
These determinations previously constituted factors described under 
former proposed Sec.  301.6221(a)-1(b)(1)(ii)(F) and (I).
B. Proposed Sec.  301.6241-6
    Proposed Sec.  301.6241-6 defines the term ``partnership-related 
item.'' Proposed Sec.  301.6241-6(a) provides the general rule that a 
partnership-related item is any item or amount with respect to the 
partnership which is relevant in determining the tax liability of any 
person under chapter 1 and any partner's distributive share of any such 
item or amount.
    Proposed Sec.  301.6241-6(b) provides that an item or amount is 
with respect to a partnership without regard to whether or not such 
item or amount appears on the partnership return. An item or amount is 
with respect to a partnership if: The item or amount is shown or 
reflected, or required to be shown, or reflected, on a return of the 
partnership; the item or amount is in the partnership's books and 
records; the item or amount is an imputed underpayment; the item or 
amount relates to any transaction with, basis in, or liability of the 
partnership; or the item or amount relates to a transaction under 
section 707(a)(2), 707(b), or 707(c).
    Under proposed Sec.  301.6241-6(b)(4) and (7), an item or amount 
that relates to any transaction with, or liability of, the partnership, 
is with respect to a partnership only if the item or amount relates to 
a transaction or liability between the partnership and a partner acting 
in its capacity as a partner or an indirect partner (as defined in 
proposed Sec.  301.6241-1(a)(4)) acting in its capacity as an indirect 
partner. Accordingly, an item or amount that relates to any transaction 
with or liability of the partnership is not with respect to the 
partnership if the item or amount is reported (or reportable) solely by 
a person other than the partnership, a partner not acting in its 
capacity as a partner, or an indirect partner not acting in its 
capacity as an indirect partner (except for transactions under section 
707). Proposed Sec.  301.6241-6(b)(8) provides that any determination 
necessary to make an adjustment to an item or amount described in 
proposed Sec.  301.6241-6(b)(1) through (b)(7) is also an item or 
amount with respect to the partnership.
    Proposed Sec.  301.6241-6(c) provides that the determination of 
whether an item or amount is relevant in determining the tax liability 
of any person under chapter 1 is made without regard to the provisions 
of the centralized partnership audit regime. Proposed Sec.  301.6241-
6(c) also clarifies that an item or amount of a partnership is relevant 
in determining the liability of any person under chapter 1 without 
regard to whether such item or amount, or adjustment to such item or 
amount, has an effect on the tax liability of any particular person 
under chapter 1. Section 6241(2)(B)(i) does not limit whether an item 
is relevant in determining tax liability under chapter 1 to whether the 
item is relevant to determining the tax liability of a partner of the 
partnership under chapter 1. Rather, the statutory language refers to 
liability under chapter 1 of ``any person.'' An item or amount is a 
partnership-related item if the item or amount is relevant in 
determining any person's liability under chapter 1 if the item might 
have any effect on any person's liability under chapter 1 regardless of 
whether it actually does have such an effect. Consequently, the IRS is 
not required to determine if an adjustment would have an actual effect 
on any person's chapter 1 liability under the Code.
    Proposed Sec.  301.6241-6(d) provides a list of examples of 
partnership-related items. These examples are largely the same as the 
items described in former proposed Sec.  301.6221(a)-1(b)(1) with a few 
minor revisions. First, the

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references to ``foreign,'' ``tax,'' and ``Sec.  1.704-
1(b)(4)(viii)(b)'' in the example regarding creditable expenditures 
were removed to clarify that partnership-related item includes any 
creditable expenditures, not just a creditable foreign tax expenditure. 
Also, the ``including . . .'' phrase from each example was removed to 
be consistent with the broad scope of the centralized partnership audit 
regime and does not reflect a substantive change. No inference should 
be drawn from the removal of that language.
    Proposed Sec.  301.6241-6(e) provides examples that illustrate the 
rules under proposed Sec.  301.6241-6.

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

    Prior to enactment of the TTCA, section 6222 provided that a 
partner shall treat on the partner's return ``each item of income, 
gain, loss, deduction, or credit attributable to a partnership'' 
subject to subchapter C of chapter 63 in a manner that is consistent 
with the treatment of such item on the partnership return. Section 
201(c) of the TTCA amended section 6222 to provide that a partner shall 
treat on the partner's return ``any partnership-related item'' in a 
manner which is consistent with the treatment of such item on the 
partnership return.
A. Proposed Sec.  301.6222-1
    Proposed rules under Sec.  301.6222-1 were previously published in 
the Federal Register (82 FR 27375-78) in the June 2017 NPRM (former 
proposed Sec.  301.6222-1). For an explanation of the rules under 
former proposed 301.6222-1, see 82 FR 27345-46.
    Former proposed Sec.  301.6222-1(a) provided that a partner's 
treatment of each item of income, gain, loss, deduction, or credit 
attributable to a partnership must be consistent with the treatment of 
those items on the partnership return, including treatment with respect 
to the amount, timing, and characterization of those items. The 
reference in former proposed Sec.  301.6222-1(a) to ``each item of 
income, gain, loss, deduction, or credit attributable to a 
partnership'' has been replaced with a reference to ``any partnership-
related item'' to reflect the statutory change to section 6222(a). In 
addition, references throughout former proposed Sec.  301.6222-1 to the 
term ``item'' have been replaced with references to the term 
``partnership-related item,'' as appropriate.

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

    Section 6225 provides rules governing the determination of the 
imputed underpayment, modification of the imputed underpayment, and the 
treatment of adjustments that do not result in an imputed underpayment. 
Section 202(c) of the TTCA amended section 6225(a) to reflect the new 
term ``partnership-related item'' and to provide that in the case of 
adjustments to partnership-related items that result in an imputed 
underpayment the partnership shall pay an amount equal to the imputed 
underpayment in the adjustment year as provided in section 6232. In the 
case of adjustments that do not result in an imputed underpayment, such 
adjustments shall be taken into account by the partnership in the 
adjustment year.
    Section 202(a) of the TTCA amended section 6225(b)(1) to provide 
that the Secretary shall determine any imputed underpayment with 
respect to any reviewed year by appropriately netting all partnership 
adjustments to such reviewed year and applying the highest rate of tax 
in effect for that year under section 1 or 11. Section 202(a) of the 
TTCA also amended section 6225(b)(2) to provide that in the case of any 
adjustment that reallocates the distributive share of any item from one 
partner to another, such adjustment shall be taken into account by 
disregarding so much of such adjustment as results in a decrease in the 
amount of the imputed underpayment.
    Section 202(a) of the TTCA also added paragraphs (b)(3) and (b)(4) 
to section 6225. Section 6225(b)(3) provides that partnership 
adjustments for any reviewed year 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.
    Section 202(b) of the TTCA amended several provisions relating to 
modifications of imputed underpayments. Sections 6225(c)(3), (c)(4)(A), 
and (c)(5)(A)(i), which previously referred to the ``portion of the 
imputed underpayment,'' were amended to refer to the ``portion of the 
adjustment.'' This amendment clarifies that modifications under 
sections 6225(c)(3), (c)(4), and (c)(5) result in disregarding the 
portion of the partnership adjustment affected by the modification, 
rather than the portion of the imputed underpayment. Section 202(c) of 
the TTCA also added section 6225(c)(9), which provides that the 
Secretary shall establish procedures under which the adjustments 
described in section 6225(a)(2)--adjustments that do not result in an 
imputed underpayment--may be modified in such manner as the Secretary 
determines appropriate.
    Section 203 of the TTCA amended section 6225(c)(2) relating to the 
procedures for partners to take adjustments into account during 
modification. Section 6225(c)(2)(A) governs the filing of amended 
returns by partners. Section 6225(c)(2)(B) provides for an alternative 
procedure to the filing of amended returns. Section 6225(c)(2)(C) 
provides rules for adjustments that reallocate the distributive share 
of any item from one partner to another. Section 6225(c)(2)(D) provides 
that sections 6501 and 6511 shall not apply in certain situations 
related to amended returns and the alternative procedure to filing 
amended returns. Section 6225(c)(2)(E) provides that any adjustments to 
tax attributes that occur as a result of a modification under section 
6225(c)(2) are binding on the partners and the partnership. Section 
6225(c)(2)(F) provides rules for tiered structures, including defining 
the term ``relevant partner'' to mean any partner in the chain of 
ownership of any partnerships that are partners in the partnership 
requesting modification.
A. Proposed Sec. Sec.  301.6225-1, 301.6225-2, and 301.6225-3
    Proposed rules under Sec. Sec.  301.6225-1, 301.6225-2, and 
301.6225-3 were previously published in the Federal Register in the 
June 2017 NPRM (82 FR 27382-91), the November 2017 NPRM (82 FR 56776), 
and in the December 2017 NPRM (82 FR 60154) (collectively, former 
proposed Sec. Sec.  301.6225-1, 301.6225-2, and 301.6225-3). For an 
explanation of the rules under former proposed Sec. Sec.  301.6225-1, 
301.6225-2, and 301.6225-3, see 82 FR 27350-58, 82 FR 56766-75, and 82 
FR 60152-53.

[[Page 41958]]

    Proposed Sec.  301.6225-1 has been reorganized to clarify the 
process for determining an imputed underpayment. This reorganization, 
when compared to former proposed Sec.  301.6225-1 (1) more clearly 
describes the steps necessary to determine an imputed underpayment and 
adjustments that do not result in an imputed underpayment; (2) 
consolidates rules regarding adjustments that do not result in an 
imputed underpayment; and (3) relocates rules regarding creditable 
expenditures to more clearly explain how to account for creditable 
expenditures in the determination of the imputed underpayment.
    Proposed Sec.  301.6225-1(b) addresses the calculation of the 
imputed underpayment. Due to the number of adjustments that could be 
made based on the definition of partnership-related item, the IRS will 
need to address circumstances in which multiple partnership-related 
items are adjusted to address a single issue or transaction in the 
administrative proceeding. Adjusting multiple partnership-related items 
that relate to the same issue or transaction could result in an imputed 
underpayment that double-counts some of the adjustments even though, if 
the partnership and partners had properly reported the item, one or 
more adjustments would have been subsumed by another item. To prevent 
double-counting the individual adjustments as inputs into the imputed 
underpayment, proposed Sec.  301.6225-1(b)(4) provides that the IRS may 
treat adjustments that would otherwise be double-counted as zero for 
purposes of determining the imputed underpayment.
    Proposed Sec.  301.6225-1(c) describes the different groupings in 
which adjustments are placed for purposes of determining an imputed 
underpayment. These groupings are the reallocation grouping, the credit 
grouping, the creditable expenditure grouping, and the residual 
grouping. Proposed Sec.  301.6225-1(c)(1) provides authority for the 
IRS to alter the manner in which adjustments are grouped to 
appropriately reflect the facts and circumstances.
    Proposed Sec.  301.6225-1(c)(2) defines the term ``reallocation 
adjustment'' and provides that in general reallocation adjustments are 
placed in the reallocation grouping. Under proposed Sec.  301.6225-
1(c)(3), however, reallocation adjustments to credits are placed in the 
credit grouping, and under Sec.  301.6225-1(c)(4), reallocation 
adjustments to creditable expenditures are placed in the creditable 
expenditure grouping, similar to the rule under former proposed Sec.  
301.6225-1(d)(2)(iv). Proposed Sec.  301.6225-1(c)(2)(ii) provides that 
each reallocation adjustment results in two separate adjustments--one 
positive adjustment and one negative adjustment. Proposed Sec.  
301.6225-1(c)(6) provides similar rules for recharacterization 
adjustments.
    Proposed Sec.  301.6225-1(c)(5)(ii) provides rules for how to 
account for adjustments to partnership-related items that are not 
allocated by the partnership to its partners under section 704(b). 
Proposed Sec.  301.6225-1(d)(2)(iii)(B) provides that adjustments to 
such items, solely for purposes of determining an imputed underpayment, 
are treated as a positive adjustment to income to the extent 
appropriate. The Treasury Department and the IRS request comments 
regarding how to treat recharacterization and reallocation adjustments 
related to items that are not allocated under section 704(b).
    To incorporate the additions of sections 6225(b)(3) and (b)(4), 
proposed Sec.  301.6225-1(d)(1) provides that when the IRS determines a 
negative adjustment (as defined in proposed Sec.  301.6225-
1(d)(2)(ii)), all partnership adjustments are placed into subgroupings 
based on whether the adjusted items are required to be taken into 
account separately under section 702 and other provisions of the Code. 
Proposed Sec.  301.6225-1(d)(1) provides authority for the IRS to alter 
the manner in which adjustments are subgrouped to appropriately reflect 
the facts and circumstances.
    Proposed Sec.  301.6225-1(d)(2) provides for the treatment of 
certain partnership adjustments and defines the terms negative 
adjustment and positive adjustment. A negative adjustment is defined as 
an adjustment that is a decrease in an item of income, treated as a 
decrease in an item of income, or that is an increase in an item of 
credit. A positive adjustment is an adjustment that is not a negative 
adjustment. Proposed Sec.  301.6225-1(d)(3) requires that positive and 
negative adjustments resulting from reallocation adjustments and 
recharacterization adjustments be placed into separate subgroupings.
    Proposed Sec.  301.6225-1(e) provides rules for appropriately 
netting adjustments within each grouping or subgrouping and provides 
that adjustments are not netted between groupings or subgroupings. The 
statutory changes referencing section 702(a) and other provisions of 
the Code and the general inability to net negative adjustments result 
in restrictions on netting in these proposed rules that are broader 
than the restrictions described in former proposed Sec.  301.6225-1. 
The examples in the proposed rules have been revised to reflect these 
broader restrictions on netting.
    Proposed Sec.  301.6225-1(f) provides rules related to determining 
whether adjustments are adjustments that do not result in an imputed 
underpayment. If the adjustments do not result in an imputed 
underpayment, such adjustments are taken into account in accordance 
with Sec.  301.6225-3.
    Proposed Sec.  301.6225-1(g) provides the IRS may create multiple 
imputed underpayments for a particular tax year. Proposed Sec.  
301.6225-1(g)(2)(iii)(B) allows a particular adjustment that does not 
result in an imputed underpayment to be associated with a particular 
imputed underpayment. This rule ensures that adjustments that are 
appropriately associated with the imputed underpayment will be taken 
into account along with the other adjustments underlying the imputed 
underpayment if an election under section 6226 is made with respect to 
that imputed underpayment. For example, a reallocation or 
recharacterization adjustment generally results in more than one 
adjustment. In the case of a reallocation adjustment, there are 
adjustments that affect at least two partners. In a recharacterization 
adjustment, there is an adjustment to correct the characterization and 
an adjustment disallowing the incorrect characterization. As a result, 
if an adjustment that does not result in an imputed underpayment is due 
to a reallocation or recharacterization adjustment and one side of the 
adjustment is used to calculate a specific imputed underpayment, the 
other side of the adjustment, which is an adjustment that does not 
result in an imputed underpayment, is associated with that specific 
imputed underpayment.
    The IRS may also determine that other adjustments that do not 
result in an imputed underpayment should be associated with a specific 
imputed underpayment. An adjustment that does not result in an imputed 
underpayment and that is not associated with a particular specific 
imputed underpayment is associated with the general imputed 
underpayment.
    Proposed Sec.  301.6225-2 provides guidance on procedures to modify 
the imputed underpayment. Former Sec.  301.6225-2(b) provided that the 
effect of modification was determined by considering how the 
modification changed the relevant portion of the adjustment. This 
approach to modification is consistent with the amendments to section 
6225(c). Accordingly, proposed Sec.  301.6225-2(b)

[[Page 41959]]

reflects the rule that modification affects the portion of an 
adjustment.
    Proposed Sec.  301.6225-2(b)(3)(iv) provides rules on rate 
modification in the case of special allocations. Those rules generally 
mirror the statutory rule under section 6225(c)(4)(B)(ii). The rule in 
the statute is complex compared with other rate modifications in that 
they require a valuation analysis. The Treasury Department and the IRS 
request comments on ways to implement these rules efficiently.
    Proposed Sec.  301.6225-2(d)(2) provides rules regarding amended 
returns and the alternative procedure to filing amended returns. 
Proposed Sec.  301.6225-2(d)(2) provides that a partnership may satisfy 
the requirements of amended return modification by submitting all the 
information required for amended return modification and the partners 
paying any amount that would be due if the partners had filed amended 
returns. The Treasury Department and the IRS request comments on how 
best to implement the alternative procedure to filing amended returns.
    Former proposed Sec.  301.6225-2(d)(2)(viii) provided that partners 
could raise a reasonable cause defense under section 6664(c) (or other 
partner-level defense as described in former proposed Sec.  301.6226-
3(i)(3)) with an amended return in modification. Proposed Sec.  
301.6225-(d)(2)(viii) now provides that such partner-level defenses 
should be raised through a claim for refund that is submitted outside 
of the modification process. This rule is similar to the current rule 
regarding partner-level defenses related to adjustments that are taken 
into account by partners under section 6226. See proposed Sec.  
301.6226-3(d)(3).
    Section 6225(c)(6) grants the Secretary authority to ``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 and appropriate to carry out the 
purposes of this section.'' The Treasury Department and the IRS have 
elected to use this authority in two circumstances that were not 
included in former proposed Sec.  301.6225-2. First, the Treasury 
Department and the IRS have concluded that the references to the 
adjustment year in section 6225(c)(5) make the implementation of 
section 6225(c)(5) unworkable. No partner would qualify as a specified 
partner until the adjustment year, but at any time during the 
administrative proceeding that is relevant to modification, the 
adjustment year does not yet exist. As a result, the only time this 
type of modification could be used would be in the case of an AAR 
because in that case, the adjustment year is the year in which the AAR 
is filed. In order for modification under section 6225(c)(5) to be 
administrable, proposed Sec.  301.6225-2(d)(5)(iv) provides that a 
``qualified relevant partner'' is a person that meets the definition of 
a specified partner but in a year that can be determined at the time 
modification is requested. The definition of a specified passive 
activity loss has also been changed to clarify that the years at issue 
do not have to be the adjustment year.
    Second, the Treasury Department and the IRS are also exercising the 
authority under section 6225(c)(6) to add a modification for 
partnerships with partners entitled to benefits under an income tax 
treaty. Proposed Sec.  301.6225-2(d)(9) allows modification if a 
relevant partner would have qualified for a reduction or exemption from 
tax with respect to a particular item under an income tax treaty with 
the United States. The Treasury Department and the IRS request comments 
on this type of modification.
    Proposed Sec.  301.6225-2(e) provides rules for modification of 
certain types of adjustments that do not result in an imputed 
underpayment (as defined in proposed Sec.  301.6225-1(f)). Proposed 
Sec.  301.6225-2(e) limits the ability to modify such adjustments to 
certain types of modification. The Treasury Department and the IRS 
request comments on whether the list of allowed modifications under 
proposed Sec.  301.6225-2(e) is sufficient.
    Lastly, proposed Sec.  301.6225-2 adopts the term ``relevant 
partner'' to describe any direct or indirect partner in the partnership 
seeking modification. See section 6225(c)(2)(F) and proposed Sec.  
301.6225-2(a).
    Proposed Sec.  301.6225-3 provides rules regarding adjustments that 
do not result in in an imputed underpayment. The changes in the TTCA 
comport with former proposed Sec.  301.6225-3, which required that the 
partnership take the adjustments that do not result in an imputed 
underpayment into account as separately stated or non-separately stated 
adjustments as appropriate.
B. Proposed Sec.  301.6225-4
    Proposed rules under Sec.  301.6225-4 were previously published in 
the Federal Register (83 FR 4868-82) in the February 2018 NPRM (former 
proposed Sec.  301.6225-4). For an explanation of the rules under 
former proposed Sec.  301.6225-4, see 82 FR 4877.
    Proposed Sec.  301.6225-4 sets forth rules under which a 
partnership and its partners must adjust specified tax attributes to 
take into account partnership adjustments and the partnership's payment 
of an imputed underpayment. Changes have been made throughout former 
proposed Sec.  301.6225-4 to conform to the changes to the definition 
of ``tax attribute'' under proposed Sec.  301.6241-1(a)(10). See 
section 11.A of this preamble regarding the change to the definition of 
``tax attribute.'' In addition, the definition of ``specified tax 
attributes'' in proposed Sec.  301.6225-4(a)(2) now includes earnings 
and profits under section 312 in response to comments received 
concerning the effect of partnership adjustments on a corporate 
partner's earnings and profits.

4. Election for the Alternative to Payment of the Imputed Underpayment

    Section 6226 provides an alternative to the general rule under 
section 6225(a)(1) that the partnership must pay an imputed 
underpayment. Under section 6226, the partnership may elect to have its 
reviewed year partners take into account adjustments made by the IRS 
and pay any tax due as a result of those adjustments. If this election 
is made, the reviewed year partners must pay any chapter 1 tax 
resulting from taking into account the adjustments, and the partnership 
is not required to pay the imputed underpayment.
    Section 206(d) of TTCA amended section 6226(a) to clarify that if a 
partnership makes a valid election under section 6226 with respect to 
an imputed underpayment, no assessment of such imputed underpayment, 
levy, or proceeding in any court for the collection of such imputed 
underpayment shall be made against such partnership.
    Section 206(e) of the TTCA amended section 6226(b)(1) to provide 
that when a partner takes into account the adjustments, the partner's 
chapter 1 tax is adjusted by the aggregate of the ``correction 
amounts'' determined under section 6226(b)(2). After amendment by the 
TTCA, the correction amounts under section 6226(b)(2) are defined as 
the amounts by which the partner's chapter 1 tax would increase ``or 
decrease'' for the partner's first affected year if the partner's share 
of the adjustments were taken into account for that year. The 
correction amounts are also the amount by which the partner's chapter 1 
tax would increase ``or decrease'' by reason of the adjustment to tax 
attributes for any intervening years. See section 6226(b)(2).
    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

[[Page 41960]]

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. A 
partnership that is a partner must file the partnership adjustment 
tracking report, and furnish statements or pay an imputed underpayment, 
notwithstanding any election out of the centralized partnership audit 
regime under section 6221(b) by the partnership for the tax year that 
includes the end of the reviewed year of the audited partnership. The 
term ``audited partnership'' means the partnership in the chain of 
ownership that originally made the election under section 6226. See 
section 6226(b)(4)(D).
A. Proposed Sec. Sec.  301.6226-1, 301.6226-2, and 301.6226-3
    Proposed rules under Sec. Sec.  301.6226-1, 301.6226-2, and 
301.6226-3 were previously published in the Federal Register in the 
June 2017 NPRM (82 FR 27391-97), the November 2017 NPRM (82 FR 56778-
79), and the December 2017 NPRM (82 FR 60155-61) (collectively, former 
proposed Sec. Sec.  301.6226-1, 301.6226-2, and 301.6226-3). For an 
explanation of the rules under former proposed Sec. Sec.  301.6226-1, 
301.6226-2, and 301.6226-3, see 82 FR 27358-66, 82 FR 56769-71, and 82 
FR 60148-51.
    Former proposed Sec.  301.6226-1(b)(2) provided that if a 
partnership makes a valid election in accordance with proposed Sec.  
301.6226-1, the partnership is not liable for the imputed underpayment 
to which the election relates. To reflect the statutory change to 
section 6226(a), language has been added to proposed Sec.  301.6226-
1(b)(2) to clarify that if a partnership makes a valid election under 
section 6226 with respect to an imputed underpayment, the IRS may not 
assess such imputed underpayment, levy, or bring a proceeding in any 
court for the collection of that imputed underpayment against such 
partnership. A similar change has also been made to proposed Sec.  
301.6226-1(c)(2) (regarding invalid elections) to clarify that if a 
final determination is made that a purported election under section 
6226 is invalid, the IRS may assess the imputed underpayment with 
respect to which the election was made against the partnership without 
regard to the limitations under section 6232(b).
    Former proposed Sec.  301.6226-3 provided that a reviewed year 
partner that is furnished a statement under section 6226(a)(2) is 
required to pay any additional chapter 1 tax (additional reporting year 
tax) that results from taking into account the partnership adjustments 
on that statement. As mentioned above in this section of the preamble, 
section 206(e) of the TTCA amended section 6226(b) to provide that 
decreases, as well as increases, in chapter 1 tax that result from 
taking into account partnership adjustments are used in computing a 
partner's additional reporting year tax. Section 206(e) of the TTCA 
also replaced the term ``adjustment amount'' with ``correction 
amount.'' Accordingly, proposed Sec.  301.6226-3 now refers to 
``correction amount'' instead of ``adjustment amount,'' as appropriate, 
and now provides that a reviewed year partner's chapter 1 tax for the 
reporting year may be increased or decreased by the additional 
reporting year tax. The additional reporting year tax is the sum of the 
correction amounts for the first affected year and any correction 
amounts for the intervening years. Under proposed Sec.  301.6226-
3(b)(2) and (3), the correction amounts are the amounts by which the 
partner's chapter 1 tax for the taxable year would be increased or 
decreased if the partner's taxable income for that year were recomputed 
by taking into account, in the case of the first affected year, the 
partner's share of the partnership adjustments reflected on the 
statement furnished to the partner or, in the case of any intervening 
year, any change to tax attributes of the partner resulting from the 
changes in the first affected year. A correction amount for the first 
affected year or any intervening year may be less than zero and may be 
used to offset any correction amounts from any other year in computing 
the additional reporting year tax. The examples under proposed Sec.  
301.6226-3(h) illustrate situations in which a correction amount may be 
less than zero.
    Furthermore, the additional reporting year tax may be less than 
zero and may offset other taxes owed by the partner on the partner's 
reporting year return. Accordingly, any references to the additional 
reporting year tax as a ``liability'' have been removed from former 
proposed Sec.  301.6226-3 to account for situations in which the 
additional reporting year tax is less than zero.
    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 discussed above in this 
section of the preamble, 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. However, the TTCA 
did not similarly amend the reference to ``increases'' in section 
6226(c)(2) with the result 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 in the case 
of a decrease in chapter 1 tax that would have resulted in the first 
affected year or any intervening year if the adjustments were taken 
into account in those years. Accordingly, proposed Sec.  301.6226-
3(c)(1) provides that interest on the correction amounts determined 
under proposed Sec.  301.6226-3(b) is only calculated for taxable years 
for which there is a correction amount greater than zero, that is, 
taxable years for which there would have been an increase in chapter 1 
tax if the adjustments were taken into account.
    Proposed Sec.  301.6226-3(c)(1) further provides that for purposes 
of calculating interest on the correction amounts, any correction 
amount that is less than zero does not offset any correction amount 
that is greater than zero. Although those amounts may offset when 
determining the additional reporting year tax (as described in proposed 
Sec.  301.6226-3(b)), allowing the same offset for purposes of 
calculating interest is inconsistent with section 6226(c)(2), which 
provides that interest is determined with respect to any increase 
determined under section 6226(b)(2).
    Proposed Sec.  301.6226-3(d)(3) has also been clarified to provide 
that if a partner wants to raise a partner-level defense to any 
penalty, addition to tax, or additional amount, a partner must first 
pay the penalty, addition to tax, or additional amount and file a claim 
for refund for the reporting year in order to raise the defense.
    As discussed above in this section of the preamble, section 204(a) 
of the TTCA amended section 6226(b) to provide that partnerships and S 
corporations that are direct or indirect partners in an audited 
partnership and that receive statements under 6226(a)(2) must file 
partnership adjustment tracking reports with the IRS and furnish 
statements to their owners under rules similar to section 6226. If no 
statements are furnished, the partnership or S corporation must

[[Page 41961]]

compute and pay an imputed underpayment.
    Former proposed Sec.  301.6226-3(e)(1) provided that a pass-through 
partner (as defined in proposed Sec.  301.6241-1(a)(5)) that was 
furnished a statement described in proposed Sec.  301.6226-2 (including 
a statement as described in former proposed Sec.  301.6226-3(e)(3)) 
must take into account the adjustments reflected on that statement by 
either furnishing statements to its partners or by paying an amount 
calculated like an imputed underpayment. Any statements furnished under 
those provisions were treated as statements described in proposed Sec.  
301.6226-2, and any pass-through partner receiving a statement under 
former proposed Sec.  301.6226-3(e)(3) was required to also take the 
adjustments reflected on the statement into account by furnishing 
statements to its own partners or paying an amount calculated like an 
imputed underpayment. See former proposed Sec.  301.6226-3(e)(3)(i) and 
(iv).
    Although the rules under former proposed Sec.  301.6226-3(e) were 
largely consistent with the rules under section 6226(b)(4), some 
changes were needed to conform the two sets of rules. First, proposed 
Sec.  301.6226-3(a)(1) now provides that the rules under proposed Sec.  
301.6226-3(a)(1) apply to a reviewed year partner except to the extent 
otherwise provided in proposed Sec.  301.6226-3. Second, proposed Sec.  
301.6226-3(e) now includes a requirement that the pass-through partner 
must file a partnership adjustment tracking report. Third, proposed 
Sec.  301.6226-3(e) provides a default rule that a pass-through partner 
must furnish statements to its own partners in accordance with proposed 
Sec.  301.6226-3(e)(3). If a pass-through partner fails to furnish 
statements in accordance with proposed Sec.  301.6226-3(e)(3), the 
pass-through partner must compute and pay an imputed underpayment. 
Additionally, language referring to a pass-through partner ``taking 
into account'' the adjustments under former proposed Sec.  301.6226-
3(e) was removed to more closely align with the statutory language in 
section 6226(b)(4). Fourth, proposed Sec.  301.6226-3(e) defines and 
refers to the term ``audited partnership,'' which proposed Sec.  
301.6226-3(e)(1) defines as the partnership that made the election 
under Sec.  301.6226-1. See section 6226(b)(4)(D). Lastly, proposed 
Sec.  301.6226-3(e)(4) provides that the amount a pass-through partner 
must compute and pay, if it does not furnish statements to its 
partners, is an ``imputed underpayment.'' See section 
6226(b)(4)(A)(ii)(II).
    Because under proposed Sec.  301.6226-3(e), pass-through partners 
compute and pay an ``imputed underpayment,'' rather than calculating 
correction amounts under proposed Sec.  301.6226-3(b), references in 
former proposed Sec.  301.6226-3(b) to amended returns filed by 
indirect partners as part of modification have been deleted. Pass-
through partners computing an imputed underpayment under proposed Sec.  
301.6226-3(e) may account for modifications submitted by their indirect 
partners, but non-pass-through partners calculating correction amounts 
under proposed Sec.  301.6226-3(b) cannot. Accordingly, the references 
in former proposed Sec.  301.6226-3(b) to amended returns filed by 
indirect partners were removed.
    To reflect the change to the definition of ``tax attribute'' under 
proposed Sec.  301.6241-1(a)(10) (see section 11.A. of this preamble), 
proposed Sec. Sec.  301.6226-2 and 301.6226-3 now only refer to the tax 
attributes of the partner. For example, proposed Sec. Sec.  301.6226-
2(e) and 301.6226-3(e)(3)(iii) no longer require that the audited 
partnership report any changes to partnership tax attributes on the 
statements furnished to its partners under section 6226(a)(2). 
Therefore, when a partner computes the partner's correction amount for 
any intervening year, the partner calculates the amount by which the 
partner's chapter 1 tax for any intervening year would increase or 
decrease if any tax attribute of that partner (for example, a net 
operating loss carryover or capital loss carryover) has been adjusted 
after taking into account the partner's share of the adjustments in the 
first affected year.
    Finally, references to ``items'' or ``items of income, gain, loss, 
deduction, or credit'' throughout former Sec. Sec.  301.6226-1, 6226-2, 
and 6226-3 have been replaced with references to ``partnership-related 
items.''
B. Revisions to the Regulations Under Section 6226 Unrelated to the 
TTCA Amendments
    In addition to the changes needed to conform to the amendments by 
the TTCA, some additional changes have been made to former proposed 
Sec. Sec.  301.6226-1, 6226-2, and 6226-3. First, proposed Sec.  
301.6226-1(b)(2) now provides that only those adjustments that do not 
result in an imputed underpayment which are associated with an imputed 
underpayment for which an election under section 6226 is made are 
included in the reviewed year partner's share of the partnership 
adjustments reported to the partner. Any adjustments that do not result 
in an imputed underpayment which are not associated with an imputed 
underpayment for which an election under section 6226 is made are taken 
into account under section 6225. This change was necessary to clarify 
which partnership adjustments are pushed out in the case of multiple 
imputed underpayments where the push out election is not made with 
respect to all imputed underpayments. See proposed Sec.  301.6225-1(g) 
for rules regarding the treatment of adjustments that do not result in 
an imputed underpayment in the context of specific imputed 
underpayments.
    Second, under proposed Sec.  301.6226-1(c)(1), an election under 
section 6226 is only valid if all the provisions under proposed Sec.  
301.6226-1 (regarding making the election) and Sec.  301.6226-2 
(regarding the furnishing of statements) are satisfied, and an election 
made under section 6226 is valid until the IRS determines that the 
election is invalid. The rule that an election is valid until the IRS 
determines it is invalid was moved from former proposed Sec.  301.6226-
1(c)(2) to proposed Sec.  301.6226-1(c)(1) to clarify that an election 
that does not fully satisfy the requirements of proposed Sec. Sec.  
301.6226-1 and 301.6226-2 is valid unless the IRS determines that the 
purported election is invalid. For example, if a partnership makes an 
election in accordance with proposed Sec.  301.6226-1 but fails to 
furnish statements to its partners, that election is valid until the 
IRS determines otherwise.
    In addition, the word ``final'' was removed from before the word 
``determination'' in proposed Sec.  301.6226-1(c)(2) when referring to 
a determination made by the IRS that a purported election under section 
6226 is invalid. The removal of the word ``final'' clarifies 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. Although nothing in the regulations 
precludes the IRS from first notifying the partnership of a potential 
problem with an election before determining the election is invalid, 
proposed Sec.  301.6226-1(c)(2) provides that the IRS may determine 
that an election is invalid even if the partnership has corrected the 
statements required to be filed and furnished in accordance with 
proposed Sec.  301.6226-2(d)(3) and also provides that the IRS is not 
obligated to require the correction of any errors prior to determining 
an election is invalid.

[[Page 41962]]

    Third, several changes were made to clarify that the partnership 
must provide correct information in order to make a valid election 
under section 6226 and in order for statements to be properly furnished 
either under proposed Sec.  301.6226-2 or proposed Sec.  301.6226-
3(e)(3). Proposed Sec.  301.6226-1(c)(4)(ii) requires the partnership 
to provide correct information in its election, and proposed Sec.  
301.6226-2(e) and proposed Sec.  301.6226-3(e)(3)(iii) require that the 
statements filed and furnished with the IRS include correct 
information. Additionally, proposed Sec.  301.6226-2(d)(3) provides 
that if the IRS cannot determine whether the statements filed and 
furnished by the partnership are correct because of a failure by the 
partnership to comply with any requirements (such as filing a 
partnership adjustment tracking report), the IRS may, but is not 
obligated to, require the partnership to provide additional information 
to substantiate the statements. Proposed Sec.  301.6226-2(d)(2) extends 
the rules governing corrections of errors in statements to statements 
furnished by pass-through partners under proposed Sec.  301.6226-
3(e)(3) and to provide that, if consent of the IRS is required for a 
correction, that corrected statements may not be furnished until the 
IRS provides consent.
    Fourth, duplicative language regarding the definition of the 
extended due date for the adjustment year of the audited partnership 
was removed from former proposed Sec.  301.6226-3(e)(3)(ii) and 
(e)(4)(ii).
    Fifth, in proposed Sec.  301.6226-3(g), the word ``grantor'' has 
been added between the words ``wholly-owned'' and ``trusts'' to clarify 
that ``wholly-owned trusts'' means ``wholly-owned grantor trusts.''
    Sixth, the phrase ``an entity described in Sec.  301.7701-
2(c)(2)(i)'' in former proposed Sec.  301.6226-3(j) was changed to ``a 
wholly-owned entity disregarded as separate from its owner for Federal 
tax purposes in the reviewed year'' to conform to the definition of 
disregarded entity under proposed Sec.  301.6241-1(a)(4).
    Seventh, proposed Sec.  301.6226-3(c)(2) now provides that interest 
on any penalties, additions to tax, or additional amounts is calculated 
from each applicable taxable year until the penalty, addition to tax, 
or additional amount is paid. Former proposed Sec.  301.6226-3(c)(2) 
provided that interest was calculated from the first affected year. 
Under proposed Sec.  301.6226-3(d)(2), partners calculate any 
penalties, additions to tax, or additional amounts that relate to the 
partnership adjustments at the partner level. Because the adjustments 
could create tax effects in more than just the first affected year (for 
example, as a result of changes to tax attributes in an intervening 
year), a penalty, addition to tax, or additional amount might likewise 
result in more than just the first affected year. Accordingly, proposed 
Sec.  301.6226-3(c)(2) provides that interest on penalties, additions 
to tax, and additional amounts runs from the applicable taxable year 
(that is, the particular tax year to which the penalty, addition to 
tax, or additional amount relates).
    Finally, certain errors were corrected in the examples under 
proposed Sec.  301.6226-3(h). Examples 2 through 4 and 6 through 9 
under former proposed Sec.  301.6226-3(h) incorrectly listed the last 
day to file a petition under section 6234 as the date the adjustments 
became final, and examples 6 through 9 incorrectly referred to former 
proposed Sec.  301.6226-1(b) as support for this rule. Under proposed 
Sec.  301.6226-2(b), partnership adjustments become finally determined 
on the later of the expiration of the time to file a petition under 
section 6234 or, if a petition is filed under section 6234, the date 
when the court's decision becomes final. The examples under proposed 
Sec.  301.6226-3(h) now reflect that the adjustments become final on 
the day after the last day to file a petition under section 6234 to be 
consistent with the rule under Sec.  301.6226-2(b), and incorrect 
references to Sec.  301.6226-1(b) in Examples 6 through 9 under former 
proposed Sec.  301.6226-3(h) have been replaced with correct references 
to Sec.  301.6226-2(b).
Proposed Sec.  301.6226-4
    Proposed rules under Sec. Sec.  301.6226-4 were previously 
published in the Federal Register in the February 2018 NPRM (83 FR 
4868) (former proposed Sec.  301.6226-4). For an explanation of the 
rules under former proposed Sec.  301.6226-4, see 83 FR 4874.
    Proposed Sec.  301.6226-4 sets forth rules for adjusting reviewed 
year partners' tax attributes to take into account partnership 
adjustments when a partnership makes an election under section 6226. To 
reflect the addition of section 6226(b)(4), proposed Sec.  301.6226-
3(e)(4) now provides that a reviewed year partner that is a pass-
through partner must pay an imputed underpayment if the pass-through 
partner does not furnish statements. In addition, changes have been 
made throughout former proposed Sec.  301.6226-4 to conform to the 
change to the definition of ``tax attribute'' under proposed Sec.  
301.6241-1(a)(10). See section 11.A of this preamble. These changes 
reflect that the adjustments to tax attributes taken into account by a 
partner should be consistent, regardless of whether the partner files 
an amended return during modification, participates in the alternative 
procedure to filing an amended return, or receives a statement under 
section 6226. Accordingly, the proposed regulations under section 6226 
have been revised to refer only to the tax attributes of the partner in 
the intervening years. Additionally, clarifying changes were made in 
proposed Sec.  301.6226-4(b) to conform to the terminology used in 
proposed Sec.  301.6226-3. Lastly, an incorrect cross-reference in 
former proposed Sec.  301.6226-4(c)(4)(iii) has been replaced with the 
correct cross-reference.

5. Administrative Adjustment Requests

    Section 6227 provides a mechanism for a partnership to file an AAR 
to correct errors on a partnership return for a prior year. Prior to 
amendment by the TTCA, section 6227(a) provided that a partnership may 
file a request for administrative adjustment in the amount of one or 
more items of income, gain, loss, deduction, or credit of the 
partnership or any partnership taxable year. Section 201(c) of the TTCA 
amended section 6227(a) by striking ``items of income, gain, loss, 
deduction, or credit of the partnership'' and inserting ``partnership-
related items.''
    Prior to amendment by the TTCA, section 6227(b) provided that any 
adjustment requested in an AAR is taken into account for the 
partnership taxable year in which the AAR is made. Section 206(p) of 
the TTCA amended section 6227(b) by striking ``is made'' both places it 
appears and inserting ``is filed.''
    Prior to amendment by the TTCA, section 6227(b)(1) provided that if 
an adjustment results in an imputed underpayment, the adjustment may be 
determined and taken into account by the partnership under rules 
similar to the rules under section 6225 relating to payment of the 
imputed underpayment by the partnership, except that the provisions 
under section 6225 pertaining to modification of the imputed 
underpayment based on amended returns by partners, the time for 
submitting information to the Secretary for purposes of modification, 
and approval by the Secretary of any modification do not apply.
    Section 206(p) of the TTCA amended section 6227(b)(1) by striking 
the reference to ``paragraphs (2), (6), and (7)'' of section 6225(c) 
(relating to

[[Page 41963]]

modification) and inserting ``paragraphs (2), (7), and (9)'' of section 
6225(c). As a result, section 6227(b)(1) provides that adjustments 
requested in an AAR are taken into account by the partnership under 
rules similar to section 6225 (except for sections 6225(c)(2), (7), and 
(9)). As amended by TTCA, section 6225(c)(2) provides rules allowing 
for amended returns and an alternative procedure to filing amended 
returns for purposes of modification, section 6225(c)(7) provides that 
information required to be submitted for purposes of modification be 
submitted within 270 days from the date on which the notice of a 
proposed partnership adjustment is mailed under section 6231, and 
section 6225(c)(9) provides for modification with respect to 
adjustments that do not result in an imputed underpayment.
    Lastly, section 206(f) of the TTCA added section 6227(d) to provide 
that the Secretary shall issue regulations or other guidance which 
provide for the proper coordination of section 6227 and section 905(c).
A. Proposed Sec. Sec.  301.6227-1, 301.6227-2, and 301.6227-3
    Proposed rules under Sec. Sec.  301.6227-1, 301.6227-2, and 
301.6227-3 were previously published in the Federal Register (82 FR 
27397-99) in the June 2017 NPRM, November 2017 NPRM (82 FR 56779), and 
December 2017 NPRM (82 FR 60161) (collectively, former proposed 
Sec. Sec.  301.6227-1, 301.6227-2, and 301.6227-3). For an explanation 
of the rules under former proposed Sec. Sec.  301.6227-1, 301.6227-2, 
and 301.6227-3, see 82 FR 27366-69, 82 FR 56769, and 82 FR 60151.
    Former proposed Sec.  301.6227-1(a) provided that a partner may not 
file an AAR except if the partner is doing so on behalf of the 
partnership in the partner's capacity as the partnership representative 
or if the partner is a partnership-partner filing an AAR under former 
proposed Sec.  301.6227-3(c). Proposed Sec.  301.6227-3(c), however, 
does not provide for the filing of an AAR by a partnership-partner. 
Rather, under proposed Sec.  301.6227-3(c), a partnership-partner takes 
into account adjustments requested in an AAR by the partnership in 
which it is a partner by following the rules under proposed Sec.  
301.6226-3(e) (except to the extent otherwise provided). Proposed Sec.  
301.6227-1(a) therefore is changed to remove the reference to 
partnership-partners, and now only refers to partners filing AARs in 
their capacity as a partnership representative.
    Proposed Sec.  301.6227-2(a)(1) provides the rules for determining 
whether an imputed underpayment results from adjustments requested in 
an AAR by referring to the rules under proposed Sec.  301.6225-1. Under 
proposed Sec.  301.6227-2(a)(2), in the case of an AAR, a partnership 
may reduce an imputed underpayment as a result of certain modifications 
permitted under proposed Sec.  301.6225-2. Under former proposed Sec.  
301.6227-2(a)(2), these modifications included modifications that 
relate to tax-exempt partners (proposed Sec.  301.6225-2(d)(3)), rate 
modification (proposed Sec.  301.6225-2(d)(4)), modification related to 
certain passive losses of publicly traded partnerships (proposed Sec.  
301.6225-2(d)(5)), modification applicable to qualified investment 
entities described in section 860 (proposed Sec.  301.6225-2(d)(7)), 
and other modifications to the extent permitted under future IRS 
guidance (proposed Sec.  301.6225-2(d)(10)). Proposed Sec.  301.6227-
2(a)(2) adopts this same list of modifications and adds modifications 
related to the composition of the groupings that factor into the 
calculation of the imputed underpayment (proposed Sec.  301.6225-
2(d)(6)(ii)) and modifications related to tax treaties (proposed Sec.  
301.6225-2(d)(9)).
    Proposed Sec.  301.6227-2(a)(2) provides that other types of 
modification, such as modification under proposed Sec.  301.6225-
2(d)(2) with respect to amended returns, including the alternative 
procedure to filing amended returns, and modification under proposed 
Sec.  301.6225-2(d)(8) with respect to closing agreements, are not 
available in the case of an AAR. Modifications with respect to 
adjustments that do not result in an imputed underpayment also are also 
not available in the case of an AAR.
    Former proposed Sec.  301.6227-2(a)(2)(i) provided that a 
partnership did not need to seek IRS approval prior to modifying an 
imputed underpayment that results from adjustments requested in an AAR. 
Section 6227(b)(1) does not explicitly carve out section 
6225(c)(8),which states that any modification to the imputed 
underpayment made under section 6225(c) shall be made only upon 
approval of such modification by the Secretary. Section 6227(b)(1) does 
provide, however, that partnerships take into account adjustments 
requested in an AAR under rules similar to the rules under section 
6225. In proposing rules similar to the rules under section 6225 for 
the purposes of requesting an AAR and taking into account adjustments, 
the Treasury Department and the IRS have determined it is more 
efficient and beneficial for both the IRS and for partnerships to be 
able to apply modifications when filing an AAR without first securing 
approval of permitted modifications. Accordingly, although any 
modifications in connection with an AAR are subject to IRS approval, 
the rules under proposed Sec.  301.6227-2(a)(2)(i) provide that the 
partnership is not required to obtain the approval from the IRS before 
applying modifications when calculating the amount of the imputed 
underpayment the partnership needs to pay when filing the AAR. Proposed 
Sec.  301.6227-2(a)(2)(ii) also provides, however, that modifications 
to an imputed underpayment resulting from adjustments requested in an 
AAR may not be applied by the partnership if the AAR that is filed does 
not include notification to the IRS of the modification, a description 
of the effect of the modification on the imputed underpayment, an 
explanation of the basis for such modification, and all necessary 
documentation to support the partnership's entitlement to such 
modification.
    Under proposed Sec.  301.6227-3, a reviewed year partner that 
receives a statement described in proposed Sec.  301.6227-1(d) must 
treat that statement as if it were provided under section 6226(a)(2). 
Former proposed Sec.  301.6227-3(b)(1) also provided that the 
restriction in former proposed Sec.  301.6226-3(b)(1)--that the 
correction amount for the first affected year and any intervening year 
cannot be less than zero--does not apply in the case of taking into 
account adjustments requested by the partnership in an AAR. Proposed 
Sec.  301.6227-3(b)(1) no longer needs to address that restriction 
because the restriction in former proposed Sec.  301.6226-3(b)(1) no 
longer exists. Therefore, the exception in former proposed Sec.  
301.6227-3(b)(1) has been eliminated. Additionally, the provision in 
former proposed Sec.  301.6227-3(b)(2), stating that when the 
additional reporting tax results in being less than zero the partner 
may reduce his chapter 1 tax for the reporting year, is moved to 
proposed Sec.  301.6227-3(b)(1).
    Former proposed Sec.  301.6227-1 included a reserved paragraph 
regarding notice of change to amounts of creditable foreign tax 
expenditures. Proposed Sec.  301.6227-1 also reserves this same 
paragraph and does not contain rules to coordinate sections 6227 and 
905(c). The Treasury Department and the IRS seek comments regarding the 
coordination of sections 6227 and 905(c) for consideration in future 
guidance.
    Lastly, the reference to ``items of income, gain, loss, deduction, 
or credit of the partnership'' in former proposed Sec.  301.6227-1(a) 
has been replaced with

[[Page 41964]]

a reference to ``partnership-related items.''
B. Revisions to the Regulations Under Section 6227 Unrelated to the 
TTCA Amendments
    Proposed Sec.  301.6227-1(a) now coordinates the rules regarding 
the filing of an AAR and the revocation of a designation of the 
partnership representative under Sec.  301.6223-1. Former proposed 
Sec.  301.6227-1(a) provided that the partnership may not file an AAR 
solely for the purpose of allowing the partnership to change the 
designation of a partnership representative. Proposed Sec.  301.6227-
1(a) now adds that when the partnership changes the designation of the 
partnership representative or the appointment of a designated 
individual in conjunction with the filing of an AAR, the change in 
designation or appointment is treated as occurring prior to the filing 
of the AAR.
    Former proposed Sec.  301.6227-1(b) provided that an AAR may not be 
filed after a notice of administrative proceeding (NAP) has been 
mailed. To account for situations in which the IRS mails a NAP, but 
then withdraws it, proposed Sec.  301.6227-1(b) now provides that an 
AAR may not be filed after a NAP has been mailed, except when the NAP 
has been withdrawn under proposed Sec.  301.6231-1(f).
    Additions were also made in proposed Sec.  301.6227-3(c) to clarify 
the rules for pass-through partners, unrelated to the changes made by 
the TTCA. First, proposed Sec.  301.6227-3(c)(1) provides that when a 
pass-through partner takes into account adjustments requested in an AAR 
in accordance with proposed Sec.  301.6226-3(e), the pass-through 
partner must provide the information described in proposed Sec.  
301.6227-3(c)(3) as opposed to the information in described in proposed 
Sec.  301.6226-3(e)(3)(iii) when furnishing statements to its partners. 
Second, under proposed Sec.  301.6227-3(c)(1), a pass-through partner 
that computes and pays an imputed underpayment in accordance with 
proposed Sec.  301.6226-3(e)(4) may not take into account any 
modifications. Third, proposed Sec.  301.6227-3(c)(4) provides that 
when a pass-through partner furnishes a statement to an affected 
partner under proposed Sec.  301.6227-3(c), the affected partner must 
treat that statement as if it were a statement described in proposed 
Sec.  301.6227-3(a) that was furnished to such affected partner.

6. Notices of Proceedings and Adjustments

    Section 6231(a) provides that the Secretary shall mail to the 
partnership and to the partnership representative a notice of any 
administrative proceeding initiated at the partnership level, notice of 
any proposed partnership adjustment resulting from that proceeding 
(NOPPA), and notice of any final partnership adjustment (FPA). Prior to 
amendment by the TTCA, section 6231(a) also provided that any FPA shall 
be mailed no earlier than 270 days after the date on which the NOPPA is 
mailed. Such notices shall be sufficient if mailed to the last known 
address of the partnership and the partnership representative, even if 
the partnership has terminated its existence. See section 6231(a) flush 
language (prior to amendment by the TTCA).
    Prior to amendment by the TTCA, the statute did not limit the 
period for the IRS to propose adjustments under the centralized 
partnership audit regime. Section 206(h) of the TTCA amended section 
6231 to address this issue. As amended, section 6231(b)(1) provides 
that any NOPPA shall not be mailed later than the date determined under 
section 6235(a)(1), which is generally the date that is 3 years after 
the later of: (1) The date on which the partnership return for the 
taxable year was filed, (2) the return due date for the taxable year, 
or (3) the date on which the partnership filed an AAR with respect to 
the taxable year.
    Section 206(h) of the TTCA makes a conforming amendment to section 
6231(a) to reflect the addition of the period of limitations to made 
partnership adjustments. Prior to amendment, section 6231(a) provided 
that ``Such notices shall be sufficient if mailed to the last known 
address of the partnership representative or the partnership (even if 
the partnership has terminated its existence).'' The amendment replaced 
the words ``Such notices'' with ``Any notice of final partnership 
adjustment.''
    Section 201(c) of the TTCA also makes a conforming amendment to 
section 6231(a) by striking the phrase ``all items of income, gain, 
loss, deduction, or credit of the partnership'' and inserting ``all 
partnership-related items.''
A. Proposed Sec.  301.6231-1
    Proposed rules under Sec.  301.6231-1 were previously published in 
the Federal Register (82 FR 60161-62) in the December 2017 NPRM (former 
proposed Sec.  301.6231-1). For an explanation of the rules under 
former proposed Sec.  301.6231-1, see 82 FR 60151-52.
    Although not required by statute, former proposed Sec.  301.6231-
1(b)(1) provided a period of limitations for making partnership 
adjustment. That section provided that a NOPPA may not be mailed after 
the expiration of the period described in section 6235(a)(1), including 
any extensions of that period and after applying any of the special 
rules in section 6235(c) (providing additional time for situations 
where no return is filed, fraud, and other specified reasons).
    Former proposed Sec.  301.6231-1(c) provided that NAPs, NOPPAs, and 
FPAs are sufficient if mailed to the last known address of the 
partnership and the partnership representative. As discussed above in 
this section of the preamble, section 6231(a) now provides that any FPA 
is sufficient if mailed to the last known address of the partnership 
and the partnership representative. The Treasury Department and the IRS 
have determined that while the last known address requirement under 
section 6231(a) only applies to a notice of final partnership 
adjustment, the IRS will also mail the NAP and the NOPPA to the last 
known address of the partnership and the partnership representative.
    Accordingly, because the rules under former proposed Sec.  
301.6231-1(b)(1) and (c) are consistent with the statutory changes to 
section 6231(a), those rules are unchanged. The only change to former 
proposed Sec.  301.6231-1 was to replace references to ``item of 
income, gain, loss, deduction, or credit'' and to a ``partner's 
distributive share'' in former proposed Sec.  301.6231-1(a)(1) with a 
reference to ``partnership-related item''.

7. Assessment, Collection, and Payment of Imputed Underpayments

    Section 6232(a) provides rules for the assessment, collection, and 
payment of imputed underpayments. Section 206(g) of the TTCA amended 
section 6232(a) to clarify that the assessment of any imputed 
underpayment is not subject to the deficiency procedures under 
subchapter B of chapter 63 of the Code and to clarify that in the case 
of an AAR, the underpayment may be assessed when the AAR is filed. See 
JCX-6-18, at 48.
    Section 6232(b) provides limitations on the assessment of an 
imputed underpayment. Section 206(g) of the TTCA amended section 
6232(b) to correct a reference to ``assessment of a deficiency'' to now 
refer to ``assessment of an imputed underpayment.'' Section 206(p) of 
the TTCA also amends section

[[Page 41965]]

6232(b) to strike the reference to ``this chapter'' and replace it with 
``this subtitle (other than subchapter B of this chapter).''
    Section 205 of the TTCA added a new subsection (f) to section 6232 
to provide a mechanism for collection of tax due in the case of a 
failure of a partnership or S corporation to pay an imputed 
underpayment or specified similar amount. Under section 6232(f)(1), if 
any amount of any imputed underpayment to which section 6225 applies or 
any specified similar amount as defined in section 6232(f)(2) has not 
been paid by the date which is 10 days after the date on which the 
Secretary provides notice and demand for such payment, the Secretary 
may assess upon each partner of the partnership a tax equal to such 
partner's proportionate share of such amount.
    Under section 6232(f)(2), the term ``specified similar amount'' 
means the amount determined under section 6226(b)(4)(ii)(II) and any 
amount assessed upon a partner under section 6232(f)(1)(B) that is a 
partnership or an S corporation. Section 206(g)(2)(B) of the TTCA 
amended section 6232(b) to provide that the limitations on assessment 
with respect to an imputed underpayment do not apply in the case of a 
specified similar amount defined in section 6232(f)(2).
    The Treasury Department and the IRS are not proposing rules under 
section 6232(f) at this time. The Treasury Department and the IRS 
request comments with respect to section 6232(f), including the 
determination of a partner's proportionate share of the unpaid amount, 
for consideration with respect to future guidance.
A. Proposed Sec.  301.6232-1
    Proposed rules under Sec.  301.6232-1 were previously published in 
the Federal Register (82 FR 60162-63) in the December 2017 NPRM (former 
proposed Sec.  301.6232-1). For an explanation of the rules under 
former proposed Sec. Sec.  301.6232-1, see 82 FR 60152.
    Former proposed Sec.  301.6232-1(a) provided that because the 
centralized partnership audit regime under subchapter C of chapter 63 
applies to an assessment of an imputed underpayment, the deficiency 
procedures under subchapter B of chapter 63 do not apply. Former 
proposed Sec.  301.6232-1(b) provided that the IRS may assess an 
underpayment reflected on an AAR on the date the AAR is filed. Former 
proposed Sec.  301.6232-1(c) provided limitations on assessment of the 
imputed underpayment, except as otherwise provided in Sec.  301.6232-1. 
Because the rules under former proposed Sec.  301.6232-1(a) and (b) are 
consistent with the statutory changes to section 6232(a), those rules 
are unchanged.
    Proposed Sec.  301.6232-1(c) is generally the same as former 
proposed Sec.  301.6232-1(c). However, changes were made to take into 
account section 206(g)(2)(B) of TTCA, providing that the limitations on 
assessment do not apply to specified similar amounts, and section 
206(p) of TTCA, providing that the limitations on assessments under 
proposed Sec.  301.6232-1(c) apply except as otherwise provided in 
subtitle F of the Code (other than deficiency procedures under 
subchapter B of chapter 63).
    With respect to former proposed Sec.  301.6232-1(d), the reference 
to ``items of income, gain, loss, deduction, or credit'' in former 
proposed Sec.  301.6232-1(d)(1)(i) was replaced with a reference to 
``partnership-related items.''

8. Interest and Penalties Related to Imputed Underpayments

    Section 6233 provides rules related to interest and penalties with 
respect to imputed underpayments. Section 206(i) of the TTCA amended 
section 6233 by adding a new subsection (c), which provides a cross-
reference to section 6603 for rules allowing deposits to suspend the 
running of interest on potential underpayments.
A. Proposed Sec. Sec.  301.6233(a)-1 and 301.6233(b)-1
    Proposed rules under Sec. Sec.  301.6233(a)-1 and 301.6233(b)-1 
were previously published in the Federal Register (82 FR 60163-65) in 
the December 2017 NPRM (former proposed Sec. Sec.  301.6233(a)-1 and 
301.6233(b)-1). For an explanation of the rules under former proposed 
Sec. Sec.  301.6233(a)-1 and 301.6233(b)-1, see 82 FR 60152-53.
    Proposed Sec.  301.6233(a)-1 provides rules for determining 
interest and penalties from the reviewed year, and proposed Sec.  
301.6233(b)-1 provides rules for determining interest and penalties 
from the adjustment year. Neither former proposed Sec.  301.6233(a)-1 
nor former proposed Sec.  301.6233(b)-1 provided rules regarding 
deposits to suspend the running of interest on underpayments. The 
Treasury Department and the IRS are not proposing rules regarding the 
interaction of the deposit rules under section 6603 and the interest 
rules under section 6233. However, the Treasury Department and the IRS 
request comments for consideration in future guidance regarding the 
interaction between section 6603 and the interest rules under section 
6233.
    Former proposed Sec.  301.6233(a)-1(c)(2)(ii)(C) provided a 
definition of ``negative adjustment'' and defined that term through 
reference to ``items of income, gain, loss, deduction, or credit.'' 
Proposed Sec.  301.6225-1 now uses the term ``negative adjustment'' and 
the phrase ``items of income, gain, loss, deduction, or credit'' has 
been removed from subchapter C of chapter 63. To reflect these changes, 
proposed Sec.  301.6233(a)-1(c)(2)(ii)(C) now provides that a 
``decreasing adjustment'' is ``an adjustment to a partnership-related 
item that resulted in a decrease to the imputed underpayment.'' Example 
3 under proposed Sec.  301.6233(a)-1(c)(3) also reflects changes to 
former proposed Sec. Sec.  301.6225-1 and 301.6225-2.
    Former proposed Sec.  301.6233(a)-1(c)(2)(ii), regarding how to 
calculate the portion of the imputed underpayment to which a penalty 
applies, referred to ``non-credit partnership adjustments'' and 
``credit adjustments.'' Under proposed Sec.  301.6225-1(e)(3)(iii) 
certain adjustments to creditable expenditures are treated as an 
adjustment to a credit and may impact the calculation of the imputed 
underpayment. To properly account for such adjustments when determining 
the portion of an imputed underpayment subject to a penalty, the term 
``non-credit partnership adjustment'' was changed to ``a partnership 
adjustment that is not an adjustment to a credit or treated as an 
adjustment to a credit,'' and the term ``credit adjustment'' changed to 
``an adjustment to a credit or treated as an adjustment to a credit.''
    Former proposed Sec.  301.6233(a)-1(c)(2)(iii)(B), regarding the 
application of the substantial understatement penalty under section 
6662(d)(1)(A)(i) to imputed underpayments, provided that taxable income 
meant the net ordinary business income or loss of the partnership. The 
reference to ``ordinary business'' failed to account for other sources 
of income of the partnership that are appropriate to consider for 
purposes of the substantial understatement penalty. Therefore, proposed 
Sec.  301.6233(a)-1(c)(2)(iii)(B) now provides that for purposes of 
determining the amount of tax required to be shown on the return it is 
the net income or loss of the partnership that is treated as taxable 
income. See Page 5 of Form 1065, Return of Partnership Income.
    Former proposed Sec.  301.6233(a)-1(c)(2)(v), pertaining to 
reasonable cause and good faith defenses, provided that

[[Page 41966]]

partner-level defenses may not be raised in a proceeding of the 
partnership except as provided under the modification procedures 
pertaining to amended returns and partner closing agreements. For 
clarity, this provision has been moved to proposed Sec.  301.6233(a)-
1(c)(1). Furthermore, the provision allowing partner-level defenses to 
penalties to be raised under the modification procedures has been 
removed. A partner may raise a partner-level defense by filing a claim 
for refund under procedures existing outside of the centralized 
partnership audit regime or through an agreement with the IRS regarding 
an adjustment to a partnership-related item.

9. Judicial Review of Partnership Adjustments

    Section 6234(a) provides that within 90 days after the date on 
which an FPA is mailed under section 6231 with respect to any 
partnership taxable year, the partnership may file a petition for 
readjustment for such taxable year with the Tax Court, the district 
court in which the partnership's principal place of business is 
located, or the Court of Federal Claims. Prior to amendment by the 
TTCA, section 6234(b)(1) provided that a petition for readjustment 
under section 6234 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 Secretary, on or before the date the 
petition is filed, the amount of the imputed underpayment. Section 
206(j) of the TTCA amended section 6234(b)(1) to clarify that the 
amount of the jurisdictional deposit that the partnership must make in 
order to file a readjustment petition in a district court or the Court 
of Federal Claims is the amount of (as of the date of the filing of the 
petition) the imputed underpayment, penalties, additions to tax, and 
additional amounts with respect to the imputed underpayment. See JCX-6-
18, at 49.
A. Proposed Sec.  301.6234-1
    Proposed rules under Sec.  301.6234-1 were previously published in 
the Federal Register (82 FR 60165-66) in the December 2017 NPRM (former 
proposed Sec.  301.6234-1). For a further explanation of the rules 
under former proposed Sec.  301.6234-1, see 82 FR 60153.
    Former proposed Sec.  301.6234-1(b) provided that a partnership may 
file a petition for a readjustment of any partnership adjustment in a 
district court or the Court of Federal Claims ``only if the partnership 
filing the petition deposits with the [IRS], on or before the date the 
petition is filed, the amount of any imputed underpayment resulting 
from the partnership adjustment.''
    To reflect the amendment to section 6234(b)(1) made by section 
206(j) of the TTCA regarding the amount of the deposit, proposed Sec.  
301.6234-1(b) now provides that amount required to be deposited is the 
amount (as of the date of the filing of the petition) of any imputed 
underpayment and any penalties, additions to tax, and additional 
amounts with respect to such imputed underpayment.
    To account for the possibility that multiple imputed underpayments 
may be reflected in an FPA, proposed Sec.  301.6234-1(b) also now 
provides that the partnership must only deposit the amount of any 
imputed underpayment to which the petition for readjustment relates and 
the amount of any penalties, additions to tax, and additional amounts 
with respect to such imputed underpayment.

10. Period of Limitations on Making Adjustments

    Section 6235 provides the period of limitations on making 
adjustments under the centralized partnership audit regime. Under 
section 6235(a), the general rule is that no adjustment for any 
partnership taxable year may be made after the later of three specified 
dates. Section 206(k) of the TTCA amended section 6235(a) by inserting 
``or section 905(c)'' after ``Except as otherwise provided in this 
section.'' The amendment makes clear that the period of limitations on 
making adjustments under the centralized partnership audit regime does 
not limit the period for notification of the Secretary and 
redetermination of tax under section 905(c) with respect to foreign tax 
redeterminations.
    In addition, section 206(k) of the TTCA amended section 6235 by 
striking paragraph (d), which provided for a suspension of the period 
on making adjustments when the Secretary mails an FPA. That provision 
was similar to a provision that existed under TEFRA, but the provision 
has no effect on making adjustments under the centralized partnership 
audit regime. See JCX-6-18, at 49-50.
A. Proposed Sec.  301.6235-1
    Proposed rules under Sec.  301.6235-1 were previously published in 
the Federal Register (82 FR 60166-67) in the December 2017 NPRM (former 
proposed Sec.  301.6235-1). For an explanation of the rules under 
former proposed Sec.  301.6235-1, see 82 FR 60153-54.
    Proposed Sec.  301.6235-1(a) now reflects the amendments to section 
6235 to provide an exception for section 905(c) and to remove the 
reference to section 6235(d).

11. Definitions and Special Rules

A. Proposed Sec.  301.6241-1
    Proposed rules under Sec.  301.6241-1 were previously published in 
the Federal Register (82 FR 27399-400) in the June 2017 NPRM (former 
proposed Sec.  301.6241-1). For an explanation of the rules under 
former proposed Sec.  301.6241-1, see 82 FR 27369.
    Former proposed Sec.  301.6241-1(a)(1) defined the term 
``adjustment year'' to mean the partnership taxable year in which a 
decision of a court becomes final (if a petition is filed under section 
6234), an AAR is made, or, in any other case, when an FPA is mailed (or 
if the partnership waives its right to an FPA, the year the waiver is 
executed by the IRS). Section 206(p) of the TTCA amended section 6227 
to provide that an AAR is ``filed,'' as opposed to ``made.'' To reflect 
this amendment, proposed Sec.  301.6241-1(a)(1) now provides that an 
AAR is ``filed'' and not ``made.''
    Former proposed Sec.  301.6241-1(a)(3) defined the term ``imputed 
underpayment'' as the amount determined under Sec.  301.6225-1. Because 
an imputed underpayment may also be computed and paid pursuant to 
proposed Sec.  301.6226-3(e)(4) (relating to pass-through partners) as 
well as under proposed Sec.  301.6227-2 and Sec.  301.6227-3(c) 
(relating to AARs), proposed Sec.  301.6241-1(a)(3) now refers to 
imputed underpayments determined under those provisions. Proposed Sec.  
301.6241-1(a)(3) was also clarified to provide that an imputed 
underpayment calculated under section 6225 is calculated under section 
6225 and the regulations thereunder.
    Proposed Sec.  301.6241-1(a)(4) now provides that the term 
``indirect partner'' includes a person that holds an interest in the 
partnership through a wholly owned entity that is disregarded as 
separate from its owner for Federal income tax purposes, such as a 
disregarded entity or grantor trust. This change from the language in 
the former proposed regulations clarifies that a partnership may seek 
modification under proposed Sec.  301.6225-2 based on indirect partners 
holding an interest through a disregarded entity or grantor trust.
    Proposed Sec.  301.6241-1(a)(6) now provides that the term 
``partnership adjustment'' means any adjustment to a partnership-
related item (as defined in

[[Page 41967]]

proposed Sec.  301.6241-6), and such term includes a portion of a 
partnership adjustment.
    Former proposed Sec.  301.6241-1(a)(10) defined a tax attribute as 
anything that can affect, with respect to a partnership or partner, the 
amount or timing of an item of income, gain, loss, deduction, or credit 
or that can affect the amount of tax due in any taxable year. As 
discussed in section 4.A. of this preamble, section 203(a) of the TTCA 
amended section 6225 to provide an alternative procedure to filing 
amended returns during modification under which a partner agrees to 
take into account adjustments to the tax attributes ``of such 
partner''. Section 6225(c)(2)(B)(ii). To reflect the amendment to 
section 6225(c)(2)(B) regarding tax attributes of a partner, the phrase 
``with respect to a partnership or a partner'' was removed from the 
definition of tax attribute under former proposed Sec.  301.6241-
1(a)(10). The reference to ``items of income, gain, loss, deduction, or 
credit'' in former proposed Sec.  301.6241-1(a)(10) was also replaced 
with a reference to ``partnership-related item.''
B. Proposed Sec.  301.6241-2
    Proposed rules under Sec.  301.6241-2 were previously published in 
the Federal Register (82 FR 27400) in the June 2017 NPRM (former 
proposed Sec.  301.6241-2). Former proposed Sec.  301.6241-2 provided 
for coordination between Title 11 of the United States Code, which 
deals with bankruptcy, and the centralized partnership audit regime. 
Because the amendments by the TTCA did not affect section 6241(6), the 
rules under former proposed Sec.  301.6241-2 are unchanged. For an 
explanation of the rules under former proposed Sec.  301.6241-2, see 82 
FR 27369-70.
C. Proposed Sec.  301.6241-3
    Proposed rules under Sec.  301.6241-3 were previously published in 
the Federal Register (82 FR 27400-02) in the June 2017 NPRM (former 
proposed Sec.  301.6241-3). For an explanation of the rules under 
former proposed Sec.  301.6241-3, see 82 FR 27370-71.
    Former proposed Sec.  301.6241-3(a)(3) provided that the rules 
requiring former partners to take into account adjustments of a 
partnership which the IRS determined had ceased to exist did not apply 
to the former partners of a partnership that had elected out of the 
centralized partnership audit regime under section 6221(b). Because 
under section 6226(b)(4) a partnership-partner that has elected out of 
the centralized partnership audit regime may be liable for an imputed 
underpayment in the case of a push out election, proposed Sec.  
301.6241-3(a)(3) now provides that the rules under proposed Sec.  
301.6241-3 apply to a partnership-partner and its former partners, 
regardless of whether the partnership-partner has elected out of the 
centralized partnership audit regime. Accordingly, under proposed Sec.  
301.6241-3(a)(3), the former partners of any partnership that may be 
liable for an imputed underpayment, including a partnership-partner 
that has elected out of the centralized partnership audit regime, will 
be required to take into account a partnership adjustment if the IRS 
determines that such partnership ceased to exist before the partnership 
adjustment had taken effect. Example 2 under proposed Sec.  301.6241-
3(f) illustrates this rule.
    Former proposed Sec.  301.6241-3(b)(2)(i) provided that the IRS 
will not determine that a partnership has ceased to exist solely 
because: (i) A partnership has technically terminated under section 
708(b)(1)(B); (ii) the partnership has made a valid election under 
section 6226 and the regulations thereunder with respect to any imputed 
underpayment; or (iii) the partnership has not paid any amount the 
partnership is liable for under subchapter C of chapter 63. To reflect 
the amendment to section 708 by the Act to eliminate technical 
terminations, the reference to section 708(b)(1)(B) was removed from 
former proposed Sec.  301.6241-3(b)(2)(i). In addition, a rule was 
added to former proposed Sec.  301.6241-3(b)(2)(i) to provide that a 
partnership also does not cease to exist solely because it furnished 
statements in accordance with proposed Sec.  301.6226-3(e)(3). This 
change clarifies that partnership-partners that properly furnish 
statements in accordance with proposed Sec.  301.6226-3(e)(3) (and 
therefore are not liable for an imputed underpayment) are treated the 
same as an audited partnership who made a valid election under section 
6226.
    Additional clarifications were made to proposed Sec.  301.6241-3. 
First, the phrase ``any amounts'' in former proposed Sec.  301.6241-
3(a)(2) was replaced with the phrase ``any unpaid amounts.'' This 
clarification was made to eliminate the implication that the 
partnership was not liable for the original amount due and to clarify 
that if the IRS determines that a partnership has ceased to exist, the 
partnership is no longer liable for any remaining unpaid amounts due 
under subchapter C of chapter 63, meaning that if the partnership had 
made a prior payment, the IRS can retain that payment. Second, former 
proposed Sec.  301.6241-3(b)(2)(iii) provided that the IRS may not 
determine that a partnership has ceased to exist after the expiration 
of the period of limitations on collection. Proposed Sec.  301.6241-
3(b)(2)(iii) now provides that the period relevant to this 
determination is the period of limitations on collection with respect 
to the imputed underpayment that was assessed against the partnership 
that ceased to exist. Finally, prior references to section 708(b)(1)(A) 
in former proposed Sec.  301.6241-3(b)(2), (d)(2), and (f) were changed 
to refer to section 708(b)(1) to reflect the amendment to section 708 
made by the Act.
D. Proposed Sec.  301.6241-4
    Proposed rules under Sec.  301.6241-4 were previously published in 
the Federal Register (82 FR 27402) in the June 2017 NPRM (former 
proposed Sec.  301.6241-4). For an explanation of the rules under 
former proposed Sec.  301.6241-4, see 82 FR 27371.
    Former proposed Sec.  301.6241-4 provided that payments made by a 
partnership under the centralized partnership audit regime, including 
payment of any imputed underpayment and any amount under proposed Sec.  
301.6226-3, were not deductible to the partnership. Because the payment 
amount for a partnership-partner in the case of a push out election is 
referred to as an imputed underpayment, reference to any amount under 
Sec.  301.6226-3 in former proposed Sec.  301.6241-4 became superfluous 
and thus was removed.
E. Proposed Sec.  301.6241-5
    Proposed rules under Sec.  301.6241-5 were previously published in 
the Federal Register (82 FR 27402) in the June 2017 NPRM (former 
proposed Sec.  301.6241-5). For an explanation of the rules under 
former proposed Sec.  301.6241-5, see 82 FR 27371.
    Former proposed Sec.  301.6241-5 provided rules for extending the 
centralized partnership audit regime to entities filing partnership 
returns. References in former proposed Sec.  301.6241-5(a) to ``items 
of income, gain, loss, deduction, or credit'' and ``partner's 
distributive share'' were replaced with a reference to ``partnership-
related item.'' Proposed Sec.  301.6241-5(c) now also reflects the fact 
that certain business arrangements, which may not be classified as 
entities, can file partnership returns to make an election under 
section 761(a). Under proposed Sec.  301.6241-5(c), the centralized 
partnership audit regime does not apply in that case notwithstanding 
the filing of a partnership return.

[[Page 41968]]

12. Coordination With Other Chapters of the Code

    Section 201(b) of the TTCA added section 6241(9) to the Code 
regarding the coordination of the centralized partnership audit regime 
with chapters of the Code other than chapter 1. Section 6241(9)(A) 
provides that the centralized partnership audit regime shall not apply 
with respect to any tax imposed (including any amount required to be 
deducted or withheld) under chapter 2, 2A, 3, or 4 of subtitle A of the 
Code, except that any partnership adjustment determined under the 
centralized partnership audit regime for purposes of chapter 1 shall be 
taken into account for purposes of determining any such tax to the 
extent that such adjustment is relevant to such determination. Section 
6241(9)(B) provides that in the case of any tax imposed (including any 
amount required to be deducted or withheld) under chapters 3 and 4 of 
the Code, which is determined with respect to a partnership adjustment, 
such tax shall be so determined with respect to the reviewed year and 
shall be so imposed (or so required to be deducted or withheld) with 
respect to the adjustment year.
    Section 201(b) also added section 6501(c)(12) to the Code regarding 
the statute of limitation on assessment of taxes under chapter 2 or 2A 
which are attributable to any partnership adjustment. Section 
6501(c)(12) provides in the case of any partnership adjustment 
determined under the centralized partnership audit regime, the period 
for assessment of any tax imposed under chapter 2 or 2A of the Code 
which is attributable to such adjustment shall not expire before the 
date that is one year after one of two events. In the case of an 
adjustment pursuant to the decision of a court in a proceeding brought 
under section 6234, the period for assessment shall not expire before 
the date that is one year after the decision becomes final. In any 
other case, the period for assessment shall not expire before the date 
that is one year after 90 days after the date on which the FPA is 
mailed under section 6231.
A. Proposed Sec.  301.6241-7
    Former proposed Sec.  301.6221(a)-1(d) provided that nothing in 
subchapter C of chapter 63 precluded the IRS from making any adjustment 
to an item of a partnership (as described in the prior version of Sec.  
301.6221(a)-1(b)) outside of the centralized partnership audit regime 
for purposes of determining tax imposed by provisions of the Code other 
than chapter 1. Accordingly, under former proposed Sec.  301.6221(a)-
1(d), the IRS was not precluded from examining a partnership's 
compliance with its obligations under chapters 3 and 4 (or any other 
chapter of the Code other than chapter 1) in a proceeding outside of 
the centralized partnership audit regime. Former proposed Sec.  
301.6221(a)-1(f) provided examples to illustrate this concept.
    The rules contained in former proposed Sec.  301.6221(a)-1(d), and 
the examples in former proposed Sec.  301.6221(a)-1(f), are consistent 
with section 6241(9)(A). However, given that these concepts are now 
codified in section 6241, the rules and examples under former proposed 
Sec.  301.6221(a)-1(d) and (f) are now under proposed Sec.  301.6241-
7(a)(1) and (2). References to ``items of income, gain, loss, 
deduction, or credit'' were replaced with references to ``partnership-
related item'' as defined under proposed Sec.  301.6241-6. Other 
editorial changes were made to reflect revisions to former proposed 
Sec.  301.6221(a)-1.
    Proposed Sec.  301.6241-7(a)(1) provides that the centralized 
partnership audit regime does not apply with respect to any tax imposed 
(including any amount required to be deducted or withheld) under any 
chapter of the Code other than chapter 1, including chapter 2, 2A, 3, 
or 4 of the Code. Accordingly, for purposes of determining taxes under 
chapters of the Code other than chapter 1, the IRS may make adjustments 
to partnership-related items in proceedings not subject to the 
centralized partnership audit regime. However, to the extent an 
adjustment to a partnership-related item or a determination made under 
the centralized partnership audit regime is relevant in determining tax 
outside of chapter 1, such adjustment or determination must be taken 
into account in determining that non-chapter 1 tax. Proposed Sec.  
301.6241-7(a)(2) provides examples to illustrate these concepts.
    Proposed Sec.  301.6241-7(b) provides rules for coordinating the 
centralized partnership audit regime with chapters 3 and 4 of the Code. 
Proposed Sec.  301.6241-7(b)(1) restates the rule in section 6241(9)(B) 
regarding the timing of withholding for tax imposed under chapters 3 
and 4 that is determined with respect to a partnership adjustment. 
Proposed Sec.  301.6241-7(b)(2) defines the terms chapter 3, chapter 4, 
and amount subject to withholding.
    Former proposed Sec. Sec.  301.6225-1(a)(4) and 301.6226-2(h) 
provided rules to coordinate the collection of tax in the case of 
partnership adjustments to amounts subject to withholding under 
chapters 3 and 4, including rules for when the partnership pays an 
imputed underpayment resulting from such an adjustment and rules for 
when the partnership makes the election under section 6226 with respect 
to such an imputed underpayment. These rules now fall within proposed 
Sec.  301.6241-7(b)(3) and (b)(4). Proposed Sec.  301.6241-7(b)(4) now 
provides that a partnership required to pay tax under chapter 3 or 
chapter 4 when it makes an election under section 6226 is required to 
pay the tax before the due date of the partnership return for the 
adjustment year (without regard to extension).

13. Other Amendments by the TTCA to the Centralized Partnership Audit 
Regime

    Section 206(l) of the TTCA amended section 6241 by adding a new 
provision, section 6241(11), providing for the treatment of special 
enforcement matters. Under section 6241(11), in the case of 
partnership-related items which involve special enforcement matters, 
the Secretary may prescribe regulations pursuant to which the 
centralized partnership audit regime (or any portion thereof) does not 
apply to such items, and that such items are subject to special rules 
(including rules related to assessment and collection) as the Secretary 
determines to be necessary for the effective and efficient enforcement 
of the Code. For purposes of section 6241(11), the term ``special 
enforcement matters'' means: (1) Failure to comply with the 
requirements of section 6226(b)(4)(A)(ii) (regarding the requirement 
for a pass-through partner to furnish statements or compute and pay an 
imputed underpayment); (2) assessments under section 6851 (relating to 
termination assessments of income tax) or section 6861 (relating to 
jeopardy assessments of income, estate, gift, and certain excise 
taxes); (3) criminal investigations; (4) indirect methods of proof of 
income; (5) foreign partners or partnerships; and (6) other matters 
that the Secretary determines by regulation present special enforcement 
considerations. Rules under this provision may be provided in future 
guidance. The Treasury Department and the IRS are considering proposing 
rules under section 6241(11)(B)(vi) (dealing with other matters that 
present special enforcement considerations) which allow certain 
partnership-related items reported solely by persons other than the 
partnership to be adjusted outside the centralized partnership audit 
regime. The Treasury Department and the IRS request comments on this 
provision, including whether there are

[[Page 41969]]

any additional special enforcement considerations that should be 
addressed through regulations.
    Section 206(m) of the TTCA amended section 6241 by adding a new 
provision, section 6241(12), to clarify that a U.S. shareholder of a 
controlled foreign corporation (CFC) which is a partner of a 
partnership shall be treated as a partner of such partnership for 
purposes of the centralized partnership audit regime. The U.S. 
shareholder's distributive share of the partnership is the U.S. 
shareholder's pro rata share of the CFC's Subpart F income determined 
under rules similar to section 951(a)(2). Similarly, a taxpayer that 
makes a Qualified Electing Fund (QEF) election with respect to a 
passive foreign investment company (PFIC) that is a partner in a 
partnership shall be treated as a partner of such partnership. In this 
case, a taxpayer's distributive share of the partnership is the 
taxpayer's pro rata share of the PFIC's ordinary earnings and net 
capital gain determined under rules similar to section 1293(b). 
Consequently, in both circumstances, the U.S. shareholder of a CFC and 
the taxpayer of a PFIC will be treated as the adjustment year partner 
or reviewed year partner under the centralized partnership audit 
regime, where applicable. Regulatory authority was also given to issue 
regulations or other guidance as necessary or appropriate to carry out 
the purpose of the provision, including regulations which apply the 
rule in similar circumstances or with respect to similarly situated 
persons. Consequently, in both circumstances, the U.S. shareholder of a 
CFC and the taxpayer of a PFIC will be treated as the adjustment year 
partner or reviewed year partner under proposed Sec. Sec.  301.6241-
1(a)(2) and 301.6241-1(a)(9) where applicable.

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 Department of the Treasury and the Office of 
Management and Budget regarding review of tax regulations.
    Because the proposed 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, this notice of proposed 
rulemaking has been submitted to the Chief Counsel for Advocacy of the 
Small Business Administration for comment on its impact on small 
business.

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.

Comments and Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any electronic and written comments that 
are submitted timely to the IRS as prescribed in this preamble under 
the ADDRESSES heading. The Treasury Department and the IRS request 
comments on all aspects of the proposed rules. All comments will be 
available at www.regulations.gov or upon request.
    A public hearing has been scheduled for October 9, 2018, beginning 
at 10 a.m. in the Auditorium of the Internal Revenue Building, 1111 
Constitution Avenue NW, Washington, DC. Due to building security 
procedures, visitors must enter at the Constitution Avenue entrance. In 
addition, all visitors must present photo identification to enter the 
building. Because of access restrictions, visitors will not be admitted 
beyond the immediate entrance area more than 30 minutes before the 
hearing starts. For more information about having your name placed on 
the building access list to attend the hearing, see the FOR FURTHER 
INFORMATION CONTACT section of this preamble.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who 
wish to present oral comments at the hearing must submit an outline of 
the topics to be discussed and the time to be devoted to each topic by 
October 1, 2018. Submit a signed paper or electronic copy of the 
outline as prescribed in this preamble under the ADDRESSES heading. A 
period of 10 minutes will be allotted to each person for making 
comments. An agenda showing the scheduling of the speakers will be 
prepared after the deadline for receiving outlines has passed. Copies 
of the agenda will be available free of charge at the hearing.

Drafting Information

    The principal authors of these proposed regulations are Jennifer M. 
Black, Joy E. Gerdy-Zogby, Steven L. Karon, and Brittany Harrison 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

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 301

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

Withdrawal of Notices of Proposed Rulemaking and Partial Withdrawal of 
Notice of Proposed Rulemaking

    Accordingly, under the authority of 26 U.S.C. 7805, the notices of 
proposed rulemaking (REG-119337-17, REG-120232-17, REG-120233-17, and 
REG-118067-17) that were published in the Federal Register on November 
30, 2017 (82 FR 56765), December 19, 2017 (82 FR 27071), and February 
2, 2018 (83 FR 4868) are withdrawn. Also under the authority of 26 
U.S.C. 7805, 301.6221(a)-1, 301.6222-1, 301.6225-1, 301.6225-2, 
301.6225-3, 301.6225-4, 301.6226-1, 301.6226-2, 301.6226-3, 301.6226-4, 
301.6227-1, 301.6227-2, 301.6227-3 of the notice of proposed rulemaking 
(REG-136118-15) published in the Federal Register on June 14, 2017 (82 
FR 27334) is withdrawn.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR parts 1 and 301 are proposed to be amended as 
follows:

PART 1--INCOME TAX

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority: 26 U.S.C. 7805 * * *

0
Par. 2. Section 1.704-1 is amended by:
0
1. Adding paragraph (b)(1)(viii).
0
2. Adding a sentence to the end of paragraph (b)(2)(iii)(a).
0
3. Adding paragraphs (b)(2)(iii)(f), (b)(2)(iv)(i)(4), and (b)(4)(xi) 
through (xv).
    The additions read as follows:


Sec.  1.704-1  Partner's distributive share.

* * * * *
    (b) * * *
    (1) * * *
    (viii) Items relating to a final determination under the 
centralized partnership audit regime--(a) In general. Certain items of 
income, gain, loss, deduction or credit may result from a final 
determination under subchapter C of chapter 63 of the Internal Revenue 
Code (subchapter C of chapter 63) (relating to the centralized 
partnership audit regime). Special rules

[[Page 41970]]

under section 704(b) and Sec.  1.704-1(b) apply to these items that 
take into account that the item relates to the reviewed year (as 
defined in Sec.  301.6241-1(a)(8) of this chapter) but occurs in the 
adjustment year (as defined in Sec.  301.6241-1(a)(1) of this chapter). 
See paragraphs (b)(2)(iii)(a) and (f), (b)(2)(iv)(i)(4), and (b)(4)(xi) 
through (xv) of this section.
    (b) Successors--(1) In general. In the case of a transfer or 
liquidation of a partnership interest subsequent to a reviewed year, a 
successor has the meaning provided in paragraph (b)(1)(viii)(b) of this 
section. In the case of a subsequent transfer by a successor of a 
partnership interest, the principles of paragraph (b)(1)(viii)(b) of 
this section will also apply to the new successor.
    (2) Identifiable transferee partner. Except as otherwise provided 
in paragraph (b)(1)(viii)(b)(3) of this section, in the case of a 
transfer of all or part of a partnership interest during or subsequent 
to the reviewed year, a successor is the partner to which the reviewed 
year transferor partner's capital account carried over (or would carry 
over if the partnership maintained capital accounts) under paragraph 
(b)(2)(iv)(l) of this section (an identifiable transferee partner).
    (3) Unidentifiable transferee partner. If, after exercising 
reasonable diligence, the partnership cannot determine an identifiable 
transferee partner under paragraph (b)(1)(viii)(b)(2) of this section, 
each partner in the adjustment year that is not an identifiable 
transferee partner and was not a partner in the reviewed year, (an 
unidentifiable transferee partner) is a successor to the extent of the 
proportion of its interest in the partnership to the total interests of 
unidentifiable transferee partners in the partnership (considering all 
facts and circumstances).
    (4) Liquidation of partnership interest. In the case of a 
liquidation of a partner's entire interest in the partnership during or 
subsequent to the reviewed year, the successors to the liquidated 
partner are certain adjustment year partners (as defined in Sec.  
301.6241-1(a)(2) of this chapter) as provided in this paragraph 
(b)(1)(viii)(b)(4). The determination of the extent to which the 
adjustment year partners are treated as successors under this section 
must be made in a manner that reflects the extent to which the 
adjustment year partners' interests in the partnership increased as a 
result of the liquidating distribution (considering all facts and 
circumstances).
    (2) * * *
    (iii) * * *
    (a) * * * Notwithstanding any other sentence of this paragraph 
(b)(2)(iii)(a), an allocation of any of the following will be 
substantial only if the allocation is described in paragraph 
(b)(2)(iii)(f) of this section: an expenditure for any payment required 
to be made by a partnership under subchapter C of chapter 63 (relating 
to the centralized partnership audit regime), adjustments reflected on 
a statement furnished to a pass-through partner (as defined in Sec.  
301.6241-1(a)(5) of this chapter) under Sec.  301.6226-3(e)(4) of this 
chapter, or interest, penalties, additions to tax, or additional 
amounts described in section 6233.
* * * * *
    (f) Certain expenditures under the centralized partnership audit 
regime--(1) In general. The economic effect of an allocation of an 
expenditure for any payment required to be made by a partnership under 
subchapter C of chapter 63 (as described in Sec.  301.6241-4(a) of this 
chapter) is substantial only if the expenditure is allocated in the 
manner described in this paragraph (b)(2)(iii)(f). For partnerships 
with allocations that do not satisfy paragraph (b)(2)(ii) of this 
section, see paragraph (b)(4)(xi) of this section.
    (2) Expenditures for imputed underpayments or similar amounts. 
Except as otherwise provided, an expenditure for an imputed 
underpayment, as defined in Sec.  301.6241-1(a)(3) of this chapter, is 
allocated to the reviewed year partner (or its successor, as defined in 
paragraph (b)(1)(viii)(b) of this section) in proportion to the 
allocation of the notional item (as described in Sec.  301.6225-4(b) of 
this chapter) to which the expenditure relates, taking into account 
modifications under Sec.  301.6225-2 of this chapter attributable to 
that partner.
    (3) Interest, penalties, additions to tax, or additional amounts 
described in section 6233. An expenditure for interest, penalties, 
additions to tax, or additional amounts as determined under section 
6233 (or penalties and interest described in Sec.  301.6226-3(e)(4)(iv) 
of this chapter) is allocated to the reviewed year partner (or its 
successor, as defined in paragraph (b)(1)(viii)(b) of this section) in 
proportion to the allocation of the portion of the imputed underpayment 
with respect to which the penalty applies or related notional item to 
which it relates (whichever is appropriate), taking into account 
modifications under Sec.  301.6225-2 of this chapter attributable to 
that partner.
    (4) Imputed underpayments unrelated to notional items. In the case 
of an imputed underpayment that results from a partnership adjustment 
for which no notional items are created under Sec.  301.6225-4(b)(2) of 
this chapter, the expenditure must be allocated to the reviewed year 
partner (or its successor, as defined in paragraph (b)(1)(viii)(b) of 
this section) that would have borne the economic benefit or burden of 
the partnership adjustment if the partnership and its partners had 
originally reported in a manner consistent with the partnership 
adjustment that resulted in the imputed underpayment with respect to 
the reviewed year.
    (iv) * * *
    (i) * * *
    (4) Certain expenditures under the centralized partnership audit 
regime. Notwithstanding paragraph (b)(2)(iv)(i)(1) of this section, the 
economic effect of an allocation of an expenditure for any payment 
required to be made by a partnership under subchapter C of chapter 63 
(as described in Sec.  301.6241-4(a) of this chapter) is substantial 
only if the expenditure is allocated in the manner described in 
paragraph (b)(2)(iii)(f) of this section. For partnerships with 
allocations that do not satisfy paragraph (b)(2)(ii) of this section, 
see paragraph (b)(4)(xii) of this section.
* * * * *
    (4) * * *
    (xi) Notional items under the centralized partnership audit regime. 
An allocation of a notional item (as described in Sec.  301.6225-
4(b)(3) of this chapter) does not have substantial economic effect 
within the meaning of paragraph (b)(2) of this section. However, the 
allocation of a notional item of income or gain described in Sec.  
301.6225-4(b)(3)(ii) and (iv) of this chapter, or expense or loss 
described in Sec.  301.6225-4(b)(3)(iii) and (v) of this chapter, will 
be deemed to be in accordance with the partners' interests in the 
partnership if the notional item is allocated in the manner in which 
the corresponding actual item would have been allocated in the reviewed 
year under the rules of this section, treating successors (as defined 
in paragraph (b)(1)(viii)(b) of this section) as reviewed year 
partners. Additionally, the allocation of a notional item of expense or 
loss described in Sec.  301.6225-4(b)(3)(iv) of this chapter, or a 
notional item of income or gain described in Sec.  301.6225-4(b)(3)(v) 
of this chapter, will be deemed to be in accordance with the partners' 
interests in the partnership if the notional item is allocated to the 
reviewed year partners (or their successors as defined in paragraph 
(b)(1)(viii)(b) of this section) in the

[[Page 41971]]

manner in which the excess item was allocated in the reviewed year.
    (xii) Certain section 705(a)(2)(B) expenditures under the 
centralized partnership audit regime. An allocation of an expenditure 
for any payment required to be made by a partnership under subchapter C 
of chapter 63 (relating to the centralized partnership audit regime and 
as described in Sec.  301.6241-4(a) of this chapter) will be deemed to 
be in accordance with the partners' interests in the partnership, as 
provided in paragraph (b)(3) of this section, only if the expenditure 
is allocated in the manner described in paragraph (b)(2)(iii)(f) of 
this section and if the partners' distribution rights are reduced by 
the partners' shares of the imputed underpayment.
    (xiii) Partnership adjustments that do not result in an imputed 
underpayment under the centralized partnership audit regime. An 
allocation of an item arising from a partnership adjustment that does 
not result in an imputed underpayment (as defined in Sec.  301.6225-
1(f) of this chapter) does not have substantial economic effect within 
the meaning of paragraph (b)(2) of this section. However, the 
allocation of such an item will be deemed to be in accordance with the 
partners' interests in the partnership if allocated in the manner in 
which the item would have been allocated in the reviewed year under the 
rules of this section, treating successors as defined in paragraph 
(b)(1)(viii)(b) of this section as reviewed year partners.
    (xiv) Partnership adjustments subject to an election under section 
6226. An allocation of an item arising from a partnership adjustment 
that results in an imputed underpayment for which an election is made 
under Sec.  301.6226-1 of this chapter does not have substantial 
economic effect within the meaning of paragraph (b)(2) of this section. 
However, the allocation of such an item will be deemed to be in 
accordance with the partners' interests in the partnership if allocated 
in the adjustment year (as defined in Sec.  301.6241-1(a)(1) of this 
chapter) in the manner in which the item would have been allocated 
under the rules of this section (or otherwise taken into account under 
subtitle A of the Code) in the reviewed year (as defined in Sec.  
301.6241-1(a)(8) of this chapter), followed by any intervening years 
(as defined in Sec.  301.6226-3(b)(3) of this chapter), concluding with 
the reporting year (as defined in Sec.  301.6226-3(a) of this chapter).
    (xv) Substantial economic effect under sections 168(h) and 
514(c)(9)(E)(i)(ll). An allocation described in paragraphs (b)(4)(xi) 
through (xiv) of this section will be deemed to have substantial 
economic effect for purposes of sections 168(h) and 514(c)(9)(E)(i)(ll) 
if the allocation is deemed to be in accordance with the partners' 
interests in the partnership under the applicable rules set forth in 
paragraphs (b)(4)(xi) through (xiv) of this section.
* * * * *
0
Par. 3. Section 1.705-1 is amended by adding paragraph (a)(10) to read 
as follows:


Sec.  1.705-1  Determination of basis of partner's interest.

    (a) * * *
    (10) For rules relating to determining the adjusted basis of a 
partner's interest in a partnership following a final determination 
under subchapter C of chapter 63 of the Internal Revenue Code (relating 
to the centralized partnership audit regime), see Sec. Sec.  301.6225-4 
and 301.6226-4 of this chapter.
* * * * *
0
Par. 4. Section 1.706-4 is amended by redesignating paragraphs 
(e)(2)(viii) through (xi) as paragraphs (e)(2)(ix) through (xii), 
respectively, and adding a new paragraph (e)(2)(viii) to read as 
follows:


Sec.  1.706-4  Determination of distributive share when a partner's 
interest varies.

* * * * *
    (e) * * *
    (2) * * *
    (viii) Any item arising from a final determination under subchapter 
C of chapter 63 of the Internal Revenue Code (relating to the 
centralized partnership audit regime) with respect to a partnership 
adjustment resulting in an imputed underpayment for which no election 
is made under Sec.  301.6226-1 of this chapter or for which a pass-
through partner (as defined in Sec.  301.6241-1(a)(5)) pays an imputed 
underpayment under Sec.  301.6226-3(e)(4).
* * * * *

PART 301--PROCEDURE AND ADMINISTRATION

0
Par. 5. The authority citation for part 301 continues to read in part 
as follows:

    Authority: 26 U.S.C. 7805 * * *

0
Par. 6. Section 301.6221(a)-1 is added to read as follows:


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

    (a) In general. Except as otherwise provided under subchapter C of 
chapter 63 of the Internal Revenue Code (subchapter C of chapter 63) 
and the regulations thereunder, any adjustment to a partnership-related 
item (as defined in Sec.  301.6241-6) is determined, any tax imposed by 
chapter 1 of subtitle A 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. Any consideration 
necessary to make a determination at the partnership level under 
subchapter C of chapter 63, including the period of limitations on 
making partnership adjustments under section 6235 or facts necessary to 
calculate an imputed underpayment under section 6225, is also made at 
the partnership level except as otherwise provided under subchapter C 
of chapter 63 and the regulations thereunder. For rules relating to 
assessment and collection in a proceeding involving inconsistent 
treatment of a partnership-related item, see Sec.  301.6222-1; in the 
case of modification under section 6225(c), see Sec.  301.6225-2; in 
the case of an election under section 6226, see Sec.  301.6226-3. For 
rules relating to tax imposed (including any amount required to be 
deducted or withheld) by chapter 2, 2A, 3 or 4 of subtitle A of the 
Code, see section 6241(9) and Sec.  301.6241-7. For rules relating to 
special enforcement matters, see Sec.  301.6241-8.
    (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.
    (2) Election under Sec.  301.9100-22 in effect. This section 
applies to any partnership taxable year beginning after November 2, 
2015 and before January 1, 2018 for which a valid election under Sec.  
301.9100-22 is in effect.
0
Par. 7. Section 301.6222-1 is added to read as follows:


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

    (a) Consistent treatment of partnership-related items--(1) In 
general. The treatment of partnership-related items (as defined in 
Sec.  301.6241-6) 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

[[Page 41972]]

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.
    (2) Partner that is a partnership. The rules of this section apply 
to a partnership-partner (as defined in Sec.  301.6241-1(a)(7)) 
regardless of whether the partnership-partner has made an election 
under section 6221(b) to elect out of the provisions of subchapter C of 
chapter 63 of the Internal Revenue Code (subchapter C of chapter 63). 
Accordingly, unless the requirements of paragraph (c) of this section 
are satisfied, a partnership-partner must treat partnership-related 
items of a partnership in which it is a partner consistent with the 
treatment of such items on the partnership return filed by the 
partnership in which it is a partner.
    (3) Partnership does not file a return. A partner's treatment of a 
partnership-related item attributable to a partnership that does not 
file a return is per se inconsistent, unless the partner files a notice 
of inconsistent treatment under paragraph (c) of this section.
    (4) Treatment of items on a partnership return. For purposes of 
this section, the treatment of a partnership-related item on a 
partnership return includes--
    (i) The treatment of such item on the partnership's return of 
partnership income filed with the IRS under section 6031, and any 
amendment or supplement thereto, including an administrative adjustment 
request (AAR) filed pursuant to section 6227 and the regulations 
thereunder; 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 Internal Revenue Service (IRS), including any statements filed 
pursuant to section 6226 and the regulations thereunder.
    (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, and each 
partnership and its partners are calendar year taxpayers, unless 
otherwise stated.

    Example 1. B is a partner in Partnership during 2018 and 2019. 
Both B and Partnership are calendar year taxpayers. 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. B includes its distributive share of 
income from the advance payment on B's income tax return for 2019 
and not on B's income tax return for 2018. B did not file a notice 
of inconsistent treatment with respect to the advanced payment. B's 
treatment of the income attributable to Partnership is inconsistent 
with the treatment of that item by Partnership on its partnership 
return.
    Example 2. C 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. C deducted his distributive share of the start-
up costs on C's 2018 income tax return. C's treatment of the start-
up costs is inconsistent with the treatment of that item by 
Partnership on its partnership return.
    Example 3. D 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 D's distributive share of that loss. 
On the 2018 Schedule K-1 furnished to D, however, Partnership 
reports $15,000 as D's distributive share of the loss. D reports the 
$15,000 loss on D's 2018 income tax return. D has not satisfied the 
requirements of paragraph (a) of this section because D reported D's 
distributive share of the loss in a manner that is inconsistent with 
how D'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.
    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 and the regulations thereunder, 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 and the regulations thereunder. D has 
not satisfied the requirements of paragraph (a) of this section 
because D has not taken into account his share of the loss in a 
manner consistent with how Partnership treated such items on the 
partnership return actually filed.
    Example 5. E was a partner in Partnership during 2018. In 2021, 
Partnership receives a notice of final partnership adjustment in an 
administrative proceeding under subchapter C of chapter 63 with 
respect to Partnership's 2018 taxable year. Partnership properly 
elects the application of section 6226 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 and the regulations 
thereunder. 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 
partnership return actually filed.
    Example 6.  In 2018, E is a partner in Partnership. E is a 
partnership-partner with a 2018 taxable year that ends on the same 
day as Partnership's 2018 taxable year. E has filed a valid election 
under section 6221(b) in effect with respect to E's 2018 partnership 
taxable year. Notwithstanding E's election under section 6221(b) for 
its 2018 taxable year, E is subject to section 6222 for taxable year 
2018. E must treat, on its 2018 partnership return, any items 
attributable to E'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.

    (b) Effect of inconsistent treatment--(1) Determination of 
underpayment of tax resulting from inconsistent treatment. If a partner 
fails to satisfy the requirements of paragraph (a) of this section, 
unless the partner provides notice in accordance with paragraph (c) of 
this section, the IRS may adjust the inconsistently reported 
partnership-related item on the partner's return to make it consistent 
with the treatment of such item on the partnership return and determine 
the underpayment of tax that results from that adjustment. For purposes 
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 was 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. If the partner is itself 
a partnership (a partnership-partner), any adjustment on account of 
such partnership-partner's failure to satisfy the requirements of 
paragraph (a) of this section will be treated as an adjustment on 
account of a mathematical or clerical error under section 6213(b), 
except that the procedures under section 6213(b)(2) for requesting 
abatement of an assessment do not apply. See section 6232(d)(1)(B) and 
Sec.  301.6232-1(d).
    (4) Examples. The following examples illustrate the rules of this 
paragraph (b).

    Example 1. D, an individual, is a partner in Partnership. D and 
Partnership are both calendar year taxpayers and Partnership does 
not have an election under section 6221(b) in effect for its 2018 
taxable year. On its partnership return for taxable year 2018,

[[Page 41973]]

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 D, Partnership reports $15,000 as D's distributive 
share of the $100,000 in ordinary income. D 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 D's interest in Partnership reported 
on D's 2018 income tax return from $5,000 to $15,000 and assess that 
resulting underpayment in tax as if it was on account of a 
mathematical or clerical error appearing on D's return. D may not 
request an abatement of that assessment under section 6213(b).
    Example 2. F was a partner in Partnership during 2018. In 2021, 
Partnership receives a notice of final partnership adjustment in an 
administrative proceeding under subchapter C of chapter 63 with 
respect to Partnership's 2018 taxable year. Partnership properly 
elects the application of section 6226 and files with the IRS a 
statement of F's share of adjustments with respect to Partnership's 
2018 taxable year. F fails to report one adjustment, F's share of a 
decrease in the amount of losses for 2018, on F's return as required 
by section 6226 and the regulations thereunder. The IRS may 
determine the amount of tax that results from adjusting the decrease 
in the amount of losses on F'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 was on account 
of a mathematical or clerical error appearing on F's return. F 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. Accordingly, 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 an AAR under 
section 6227 or a statement under section 6226 filed by the partnership 
with the IRS to which the partner is bound under section 6223. 
Therefore, if the partner's treatment of a partnership-related item 
reflected on an AAR or statement described in section 6226 is not 
consistent with the treatment of the partnership to which the partner 
is bound under section 6223, the provisions of section 6222(c) and 
paragraph (c)(1) of this section do not apply with respect to such 
item, and any resulting underpayment may be assessed and collected in 
accordance with paragraph (b)(2) of this section.
    (3) Partner protected only to extent of notification. A partner who 
reports the inconsistent treatment of a partnership-related item is not 
subject to paragraphs (a) and (b) of this section only with respect to 
those items identified in the statement described in paragraph (c)(1) 
of this section. Thus, if a partner notifying the IRS with respect to 
one partnership-related item does not report the inconsistent treatment 
of another partnership-related item, the IRS may determine the amount 
of tax that results from adjusting the unidentified, inconsistently 
reported item on the partner's return to make it consistent with the 
treatment of such item on the partnership return, and assess the 
resulting underpayment of tax in accordance with paragraph (b)(2) of 
this section.
    (4) Adjustment after notification--(i) In general. If a partner 
notifies the IRS of the inconsistent treatment of a partnership-related 
item in accordance with paragraph (c)(1) of this section, and 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.
    (ii) Adjustments in partner proceeding. In a proceeding with 
respect to a partner described in paragraph (c)(4)(i) of this section, 
the IRS may adjust any identified, inconsistently reported partnership-
related item to make the item consistent with the treatment of that 
item on the partnership return or determine that the correct treatment 
of such item differs from the treatment on the partnership return and 
instead adjust the item to reflect the correct treatment, 
notwithstanding the treatment of that item on the partnership return. 
The IRS may also adjust any item on the partner's return, including 
items that are not partnership-related items. Any final decision with 
respect to an inconsistent position in a proceeding to which the 
partnership is not a party is not binding on the partnership.
    (5) 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.

    Example 1. B is a partner in Partnership during 2018. B treats a 
deduction and a capital gain attributable to Partnership on B's 2018 
income tax return in a manner that is inconsistent with the 
treatment of those items by Partnership on its 2018 partnership 
return. B 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 B 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 B'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 was on account of a 
mathematical or clerical error appearing on B's return.
    Example 2. On its 2018 partnership return, Partnership treats 
partner E's distributive share of ordinary loss attributable to 
Partnership as $8,000. E, 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 E'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 E's distributive share of the ordinary loss from 
Partnership is $3,000. During the same proceeding, the IRS also 
determines that E overstated a charitable contribution deduction in 
the amount of $2,500 on its 2018 income tax return. The 
determination of the adjustment of E'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 E's partner return, to $8,000, as originally 
reported by Partnership on its partnership return, nor is the IRS 
prohibited from adjusting the charitable

[[Page 41974]]

contribution deduction in the proceeding with respect to E.

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

    Example. E is a partner in Partnership for 2018. On its 2018 
partnership return, Partnership reports that E's distributive share 
of ordinary income attributable to Partnership is $1,000. 
Partnership furnishes to E a Schedule K-1 for 2018 showing $500 as 
E's distributive share of ordinary income. E reports $500 of 
ordinary income attributable to Partnership on its 2018 income tax 
return consistent with the Schedule K-1 furnished to E. The IRS 
notifies E that E'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 E on its 2018 
partnership return. Within 60 days of receiving the notice from the 
IRS of the inconsistency, E files an election with the IRS in 
accordance with paragraph (d)(2) of this section. Because E made a 
valid election under section 6222(c)(2)(B) and paragraph (d)(1) of 
this section, E 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.
    (2) Election under Sec.  301.9100-22 in effect. This section 
applies to any partnership taxable year beginning after November 2, 
2015 and before January 1, 2018 for which a valid election under Sec.  
301.9100-22 is in effect.
0
Par 8. Section 301.6225-1 is added to read as follows:


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

    (a) Imputed underpayment based on partnership adjustments--(1) In 
general. In the case of any partnership adjustments (as defined in 
Sec.  301.6241-1(a)(6)) by the Internal Revenue Service (IRS), if the 
adjustments result in an imputed underpayment (as determined in 
accordance with paragraph (b) of this section), the partnership must 
pay an amount equal to such imputed underpayment in accordance with 
paragraph (a)(2) of this section. If the adjustments do not result in 
an imputed underpayment (as described in paragraph (f) of this 
section), such adjustments must be taken into account by the 
partnership in the adjustment year (as defined in Sec.  301.6241-
1(a)(1)) in accordance with Sec.  301.6225-3. Partnership adjustments 
may result in more than one imputed underpayment pursuant to paragraph 
(g) of this section. Each imputed underpayment determined under this 
section is based solely on partnership adjustments with respect to a 
single taxable year.
    (2) Partnership pays the imputed underpayment. An imputed 
underpayment (determined in accordance with paragraph (b) of this 
section and included in a notice of final partnership adjustment (FPA) 
under section 6231(a)(3)) must be paid by the partnership in the same 
manner as if the imputed underpayment were a tax imposed for the 
adjustment year in accordance with Sec.  301.6232-1. The FPA will 
include the amount of any imputed underpayment, as modified under Sec.  
301.6225-2 if applicable, unless the partnership waives its right to 
such FPA under section 6232(d)(2). See Sec.  301.6232-1(d)(2). For the 
alternative to payment of the imputed underpayment by the partnership, 
see Sec.  301.6226-1. If a partnership pays an imputed underpayment, 
the partnership's expenditure for the imputed underpayment is taken 
into account by the partnership in accordance with Sec.  301.6241-4. 
For interest and penalties with respect to an imputed underpayment, see 
section 6233.
    (3) Imputed underpayment set forth in notice of proposed 
partnership adjustment. An imputed underpayment set forth in a notice 
of proposed partnership adjustment (NOPPA) under section 6231(a)(2) is 
determined in accordance with paragraph (b) of this section without 
regard to any modification under Sec.  301.6225-2. Modifications under 
Sec.  301.6225-2, if allowed by the IRS, may change the amount of an 
imputed underpayment set forth in the NOPPA and determined in 
accordance with paragraph (b) of this section. Only the partnership 
adjustments set forth in a NOPPA are taken into account for purposes of 
determining an imputed underpayment under this section and any 
modification under Sec.  301.6225-2.
    (b) Determination of an imputed underpayment--(1) In general. In 
the case of any partnership adjustment by the IRS, an imputed 
underpayment is determined by--
    (i) Grouping the partnership adjustments in accordance with 
paragraph (c) of this section and, if appropriate, subgrouping such 
adjustments in accordance with paragraph (d) of this section;
    (ii) Netting the adjustments in accordance with paragraph (e) of 
this section;
    (iii) Calculating the total netted partnership adjustment in 
accordance with paragraph (b)(2) of this section;
    (iv) Multiplying the total netted partnership adjustment by the 
highest rate of Federal income tax in effect for

[[Page 41975]]

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 under paragraph (e)(3)(ii) of this section 
as net positive adjustments (as defined in paragraph (e)(4)(i) of this 
section); and
    (B) Any net negative adjustments (as defined in paragraph 
(e)(4)(ii) of this section), except net negative adjustments resulting 
from reallocation adjustments to credits as described in paragraph 
(d)(3)(ii) of this section and creditable tax expenditures described in 
paragraph (e)(3)(iii) 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. A partnership adjustment is disregarded for purposes 
of calculating the total netted partnership adjustment under paragraph 
(b)(2) of this section to the extent that the IRS has collected the tax 
required to be withheld under chapter 3 or chapter 4 (as defined in 
Sec.  301.6241-7(b)(2)(ii) and (iii)) that is attributable to the 
partnership adjustment. See Sec.  301.6241-7(b)(3) for rules that apply 
when a partnership pays an imputed underpayment that includes a 
partnership adjustment to an amount subject to withholding (as defined 
in Sec.  301.6241-7(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 a partnership adjustment under 
chapter 1 of subtitle A of the Internal Revenue Code (Code) to any 
person is reflected in another adjustment taken into account under this 
section, the IRS may treat an adjustment as zero solely for purposes of 
calculating the imputed underpayment.
    (c) Grouping of partnership adjustments--(1) In general. To 
determine an imputed underpayment under paragraph (b) of this section, 
partnership adjustments are placed into one of four groupings. These 
groupings are the reallocation grouping described in paragraph (c)(2) 
of this section, the credit grouping described in paragraph (c)(3) of 
this section, the creditable expenditure grouping described in 
paragraph (c)(4) of this section, and the residual grouping described 
in paragraph (c)(5) of this section. Adjustments in groupings may be 
placed in subgroupings, as appropriate, in accordance with paragraph 
(d) of this section. The IRS may, in its discretion, group adjustments 
in a manner other than the manner described in this paragraph (c) when 
such grouping would appropriately reflect the facts and circumstances. 
For requests to modify the groupings, see Sec.  301.6225-2(d)(6).
    (2) Reallocation grouping--(i) In general. Any adjustment that 
allocates or reallocates a partnership-related item to and from a 
particular partner or partners is a reallocation adjustment. Except in 
the case of an adjustment to a credit (as described in paragraph (c)(3) 
of this section) or to a creditable expenditure (as described in 
paragraph (c)(4) of this section), reallocation adjustments are placed 
in the reallocation grouping. Adjustments that reallocate a credit to 
and from a particular partner or partners are placed in the credit 
grouping (see paragraph (c)(3) of this section), and adjustments that 
reallocate a creditable expenditure to and from a particular partner or 
partners are placed in the creditable expenditure grouping (see 
paragraph (c)(4) of this section).
    (ii) Each reallocation adjustment results in at least two separate 
adjustments. Each reallocation adjustment generally results in at least 
two separate adjustments. One adjustment reverses the effect of the 
improper allocation of a partnership-related item, and the other 
adjustment effectuates the proper allocation of the partnership-related 
item. Generally, a reallocation adjustment results in one positive 
adjustment (as defined in paragraph (d)(2)(iii) of this section) and 
one negative adjustment (as defined in paragraph (d)(2)(ii) of this 
section).
    (3) Credit grouping. Each adjustment to a partnership-related item 
that is reported or could be reported by a partnership as a credit on 
the partnership's return, including a reallocation adjustment, is 
placed in the credit grouping.
    (4) Creditable expenditure grouping--(i) In general. Each 
adjustment to a creditable expenditure, including a reallocation 
adjustment to a creditable expenditure, is placed in the creditable 
expenditure grouping.
    (ii) Adjustment to a creditable expenditure--(A) In general. For 
purposes of this section, an adjustment to a partnership-related item 
is treated as an adjustment to a creditable expenditure if any person 
could take the item that is adjusted (or item as adjusted if the item 
was not originally reported by the partnership) as a credit. See Sec.  
1.704-1(b)(4)(ii) of this chapter. For instance, if the adjustment is a 
reduction of qualified research expenses, the adjustment is to a 
creditable expenditure for purposes of this section because any person 
allocated the qualified research expenses by the partnership could 
claim a credit with respect to their allocable portion of such expenses 
under section 41, rather than a deduction under section 174.
    (B) Creditable foreign tax expenditures. The creditable expenditure 
grouping includes each adjustment to a creditable foreign tax 
expenditure (CFTE) as defined in Sec.  1.704-1(b)(4)(viii)(b) of this 
chapter, including any reallocation adjustment to a CFTE.
    (5) Residual grouping--(i) In general. Any adjustment to a 
partnership-related item not described in paragraph (c)(2), (3), or (4) 
of this section is placed in the residual grouping.
    (ii) Adjustments to partnership-related items that are not 
allocated under section 704(b). The residual grouping includes any 
adjustment to a partnership-related item that derives from an item that 
would not have been required to be allocated by the partnership to a 
reviewed year partner under section 704(b).
    (6) Recharacterization adjustments--(i) Recharacterization 
adjustment defined. An adjustment that changes the character of a 
partnership-related item is a recharacterization adjustment. For 
instance, an adjustment that changes a loss from ordinary to capital or 
from active to passive is a recharacterization adjustment.
    (ii) Grouping recharacterization adjustments. A recharacterization 
adjustment is placed in the appropriate grouping as described in 
paragraphs (c)(2) through (5) of this section.
    (iii) Recharacterization adjustments result in two partnership 
adjustments. In general, a recharacterization adjustment results in at 
least two separate adjustments in the appropriate grouping under 
paragraph (c)(6)(ii) of this section. One adjustment reverses the 
improper characterization of the partnership-related item, and the 
other adjustment effectuates the proper characterization of the 
partnership-related item. A recharacterization adjustment results in 
two adjustments regardless of whether the amount of the partnership-
related item is being adjusted. Generally, recharacterization 
adjustments result in one positive

[[Page 41976]]

adjustment and one negative adjustment.
    (d) Subgroupings--(1) In general. 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). If all partnership 
adjustments within the groupings are positive adjustments, this 
paragraph (d) does not apply, and no adjustment within the groupings is 
subgrouped in accordance with this paragraph (d). The IRS may, in its 
discretion, subgroup adjustments in a manner other than the manner 
described in this paragraph (d) when such subgrouping would 
appropriately reflect the facts and circumstances. For requests to 
modify the subgroupings, see Sec.  301.6225-2(d)(6).
    (2) Definition of negative adjustments and positive adjustments--
(i) In general. For purposes of this section, partnership adjustments 
made by the IRS are treated as follows:
    (A) An increase in an item of gain is treated as an increase in an 
item of income;
    (B) A decrease in an item of gain is treated as a decrease in an 
item of income;
    (C) An increase in an item of loss or deduction is treated as a 
decrease in an item of income; and
    (D) A decrease in an item of loss or deduction is treated as an 
increase in an item of income.
    (ii) Negative adjustment. A negative adjustment is any adjustment 
that is a decrease in an item of income, a partnership adjustment 
treated under paragraph (d)(2)(i) of this section as a decrease in an 
item of income, or an increase in an item of credit.
    (iii) Positive adjustment--(A) In general. A positive adjustment is 
any adjustment that is not a negative adjustment as defined in 
paragraph (d)(2)(ii) of this section.
    (B) Treatment of adjustments that cannot be allocated under section 
704(b). For purposes of determining an imputed underpayment under this 
section, an adjustment described in paragraph (c)(5)(ii) of this 
section that could result in an increase in income or decrease in a 
loss, deduction, or credit for any person without regard to any 
particular person's specific circumstances is treated as a positive 
adjustment to income to the extent appropriate.
    (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 or regulations 
applicable to the adjusted partnership-related item. For purposes of 
creating subgroupings under this section, 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 a separate 
subgrouping from all other adjustments within the grouping. A negative 
adjustment that is not otherwise required to be placed in its own 
subgrouping under this paragraph (d)(3) 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) or other provision of the Code and 
regulations.
    (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. 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 adjustments. 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 this paragraph (d)(3)(iii).
    (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 
thereunder, and to account for any different allocation of the CFTE 
between partners. Two or more adjustments to CFTEs are included within 
the same subgrouping only if each adjustment relates to CFTEs in the 
same separate category, and each adjusted partnership-related item 
would be allocated to the partners in the same ratio had those items 
been properly reflected on the partnership return for the reviewed 
year.
    (C) Other creditable expenditures. [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 or subgrouping in accordance with the rules in 
paragraphs

[[Page 41977]]

(c) and (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 or net negative adjustment described in this 
paragraph (e)(3)(ii) is taken into account under paragraph (b)(1)(v) of 
this section, except for negative adjustments to credits resulting from 
a reallocation adjustment that were placed in a separate subgrouping 
pursuant to paragraph (d)(3)(ii)(B) of this section. A negative 
adjustment to a credit placed in its separate subgrouping under 
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.
    (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)(B) of this section) is treated as a 
net positive adjustment described in paragraph (e)(3)(ii) 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.
    (B) Other creditable expenditures. [Reserved]
    (4) Net positive adjustment and net negative adjustment defined--
(i) Net positive adjustment. A net positive 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 (b)(2) of this section) is 
taken into account by the partnership in the adjustment year in 
accordance with Sec.  301.6225-3. If the partnership makes an election 
pursuant to section 6226 with respect to an imputed underpayment, the 
adjustments that do not result in that imputed underpayment that are 
associated with that imputed underpayment (as described in paragraph 
(g)(2)(iii)(B) of this section) are taken into account by the reviewed 
year partners in accordance with Sec.  301.6226-3.
    (g) Multiple imputed underpayments in a single administrative 
proceeding--(1) In general. The IRS, in its discretion, may determine 
that partnership adjustments for the same partnership taxable year 
result in more than one imputed underpayment. The determination of 
whether there is more than one imputed underpayment for any partnership 
taxable year, and if so, which partnership adjustments are taken into 
account to calculate any particular imputed underpayment is based on 
the facts and circumstances and nature of the partnership adjustments. 
See Sec.  301.6225-2(d)(6) for modification of the number and 
composition of imputed underpayments.
    (2) Types of imputed underpayments--(i) In general. There are two 
types of imputed underpayments: A general imputed underpayment 
(described in paragraph (d)(2)(ii) of this section) and a specific 
imputed underpayment (described in paragraph (d)(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 (e) of this section) are 
associated with that general imputed underpayment.
    (iii) Specific imputed underpayment--(A) In general. The IRS may, 
in its discretion, designate a specific imputed underpayment with 
respect to adjustments to a partnership-related item or items that were 
allocated to one partner or a group of partners that had the same or 
similar characteristics or that participated in the same or similar 
transaction or on such other basis as the IRS determines properly 
reflects the facts and circumstances. The IRS may designate more than 
one specific imputed underpayment with respect to any partnership 
taxable year. For instance, in a single partnership taxable year there 
may be a specific imputed underpayment with respect to adjustments 
related to a transaction affecting some, but not all, partners of the 
partnership (such as adjustments

[[Page 41978]]

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 (d)(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, 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 (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 under Sec.  301.6225-2.

    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 result in a 
decrease in the imputed underpayment if netted with the $5 
adjustment to ordinary income. Because the <$10> adjustment to the 
ordinary deduction might be limited if taken into account by any 
person, it is grouped in a separate subgrouping from the $5 
adjustment to ordinary income. The total netted partnership 
adjustment is $5, which results in an imputed underpayment of $2. 
The <$10> adjustment to the ordinary deduction is a net negative 
amount and is an adjustment that does not result in an imputed 
underpayment which is taken into account by Partnership in the 
adjustment year in accordance with Sec.  301.6225-3.
    Example 2. The facts are the same as Example 1 of this paragraph 
(h), except that the <$10> adjustment would not be limited if taken 
into account by any of its partners (direct or indirect). The IRS 
may, in its discretion, group the $5 adjustment and the <$10> 
adjustment together in the residual grouping. As a result, the $5 
and the <$10> adjustments are netted under paragraph (e) of this 
section. Such netting results in a net negative adjustment (as 
defined under paragraph (e)(4)(ii)) in the residual grouping of <$5> 
under paragraph (e) of this section. Pursuant to paragraph (f) of 
this section, the <$5> net negative adjustment is an adjustment that 
does not result in an imputed underpayment. Therefore, since the 
only net adjustment is an adjustment that does not result in an 
imputed underpayment, there is no imputed underpayment.
    Example 3. Partnership reports on its 2019 partnership return 
ordinary income of $300, long-term capital gain of $125, long-term 
capital loss of <$75>, a depreciation deduction of <$100>, and a tax 
credit that can be claimed by the partnership of $5. In an 
administrative proceeding with respect to Partnership's 2019 taxable 
year, the IRS determines that ordinary income is $500 ($200 
adjustment), long-term capital gain is $200 ($75 adjustment), long-
term capital loss is <$25> ($50 adjustment), the depreciation 
deduction is <$70> ($30 adjustment), and the tax credit is $3 ($2 
adjustment). Pursuant to paragraph (c) of this section, the 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 is no need for further subgrouping within the residual 
grouping. Under paragraph (b)(2), 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)(iv) of 
this section, the $142 is increased by the $2 credit adjustment, 
resulting in an imputed underpayment of $144.
    Example 4.  Partnership reported on its 2019 partnership return 
long-term capital gain of $125 and long-term capital loss of <$75>. 
In an administrative proceeding with respect to Partnership's 2019 
taxable year, the IRS determines the long-term capital gain should 
have been reported as ordinary income of $125. There are no other 
adjustments for the 2019 taxable year. This recharacterization 
adjustment results in two adjustments in the residual grouping 
pursuant to paragraph (c)(6) of this section: an increase in 
ordinary income of $125 ($125 adjustment) as well as a decrease of 
long-term capital gain of $125 (<$125> adjustment). The decrease in 
long-term capital gain is a negative adjustment under paragraph 
(d)(2)(ii) of this section and the increase in ordinary income is a 
positive adjustment under paragraph (d)(2)(iii) of this section. 
Under paragraph (d)(3)(i) of this section, the adjustment to long-
term capital gain is placed in a subgrouping separate from the 
adjustment to ordinary income because the reduction of long-term 
capital gain is required to be taken into account separately 
pursuant to section 702(a). The $125 decrease in long-term capital 
gain is a net negative adjustment in the long-term capital 
subgrouping and as a result is an adjustment that does not result in 
an imputed underpayment under paragraph (f) of this section. 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.
    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 improperly accelerated accrual of a 
portion of the expenses with respect to the 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

[[Page 41979]]

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.
    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.
    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), the adjustment to the character of the liability 
results in 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.
    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 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.
    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 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.
    Example 10.  Partnership has two partners, A and B. Under the 
partnership agreement, $100 of the CFTE is specially allocated to A 
for the 2019 taxable year. The IRS initiates an administrative 
proceeding with respect to Partnership's 2019 taxable year and 
determines that $100 of CFTE should be reallocated from A to B. 
Because the adjustment reallocates a creditable expenditure, 
paragraph (c)(4) of this section provides that it is included in the 
creditable expenditure grouping rather than the reallocation 
grouping. The partnership adjustment is a <$100> adjustment to 
general category CFTE allocable to A and an increase of $100 to 
general category CFTE allocable to B. Pursuant to paragraph 
(d)(3)(iii) of this section, the <$100> adjustment to general 
category CFTE and the increase of $100 to general category CFTE are 
included in separate subgroupings in the creditable expenditure 
grouping. The $100 increase in general category CFTEs, B-allocation 
subgrouping, is a net negative adjustment, which does not result in 
an imputed underpayment and is therefore taken into account by the 
partnership in the adjustment year in accordance with Sec.  
301.6225-3. The net decrease to CFTEs in the general-category, A-
allocation subgrouping, is treated as a decrease to 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.
    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 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% and to B 25%. 
Items related to DE2: To A 25% and to B 75%. On Partnership's 2018 
return, Partnership reports CFTEs in the general category of $300, 
$100 with respect to DE1 and $200 with respect to DE2. Partnership 
allocates the $300 of CFTEs $125 and $175 to A and B respectively. 
During an administrative proceeding with respect to Partnership's 
2018 taxable year, the IRS determines that Partnership understated 
the amount of creditable foreign tax paid by DE2 by $40 and 
overstated the amount of creditable foreign tax paid by DE1 by $80. 
No other adjustments are made. Because the two adjustments each 
relate to CFTEs that are subject to different allocations, the two 
adjustments are in different subgroupings under paragraph 
(d)(3)(iii)(B) of this section. The adjustment reducing the CFTEs 
related to DE1 results in a decrease in CFTEs within that 
subgrouping and under paragraph (e)(3)(iii)(A) of this section is 
treated as a decrease in credits in the credit grouping under 
paragraph (c)(3) of this section and results in an imputed 
underpayment of $80 under paragraph (b)(1) of this section. The 
increase of $40 of general category CFTE related to the DE2 
subgrouping results in an increase in CFTEs within that subgrouping 
and is treated as a net negative adjustment, which does not result 
in an imputed underpayment and is taken into account in the 
adjustment year in accordance with Sec.  301.6225-3.

    (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.
    (2) Election under Sec.  301.9100-22 in effect. This section 
applies to any partnership taxable year beginning after November 2, 
2015 and before January 1, 2018 for which a valid election under Sec.  
301.9100-22T is in effect.
0
Par. 9. Section 301.6225-2 is added to read as follows:


Sec.  301.6225-2  Modification of Imputed Underpayment.

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

[[Page 41980]]

this section. A partnership may request modification with respect to a 
partnership adjustment (as defined in Sec.  301.6241-1(a)(6)) that does 
not result in an imputed underpayment (as described in Sec.  301.6225-
1(f)(1)(ii)) as described in paragraph (e) of this section. Only the 
partnership representative may request modification under this section. 
See section 6223 and Sec.  301.6223-2 for rules regarding the binding 
authority of the partnership representative. For purposes of this 
section, the term relevant partner means any person for whom 
modification is requested by the partnership that is--
    (1) A reviewed year partner (as defined in Sec.  301.6241-1(a)(9)), 
including any pass-through partner (as defined in Sec.  301.6241-
1(a)(5)), except for any reviewed year partner that is a wholly-owned 
entity disregarded as separate from its owner for Federal tax purposes, 
or
    (2) An indirect partner (as defined in Sec.  301.6241-1(a)(4)) 
except for any indirect partner that is a wholly-owned entity 
disregarded as separate from its owner for Federal 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;
    (iii) Modifications that affect the tax rate under paragraph (b)(3) 
of this section.
    (2) Modifications that affect partnership adjustments for purposes 
of determining the imputed underpayment. If the IRS approves 
modification with respect to a partnership adjustment, such partnership 
adjustment is excluded from the determination of the imputed 
underpayment as determined under Sec.  301.6225-1(b). This paragraph 
(b)(2) applies to modifications under--
    (i) Paragraph (d)(2) of this section (amended returns and the 
alternative procedure to filing amended returns);
    (ii) Paragraph (d)(3) of this section (tax exempt status);
    (iii) Paragraph (d)(5) of this section (specified passive activity 
losses);
    (iv) Paragraph (d)(7) of this section (qualified investment 
entities);
    (v) Paragraph (d)(8) of this section (closing agreements), if 
applicable;
    (vi) Paragraph (d)(9) of this section (tax treaty modifications), 
if applicable; and
    (vii) Paragraph (d)(10) of this section (other modifications), if 
applicable.
    (3) Modifications that affect the tax rate--(i) In general. If the 
IRS approves a modification with respect to the tax rate applied to a 
partnership adjustment, such modification results in a reduction in tax 
rate applied to the total netted partnership adjustment with respect to 
the partnership adjustments in accordance with this paragraph (b)(3). A 
modification of the tax rate does not affect how the partnership 
adjustment factors into the calculation of the total netted partnership 
adjustment. This paragraph (b)(3) applies to modifications under--
    (A) Paragraph (d)(4) of this section (rate modification);
    (B) Paragraph (d)(8) of this section (closing agreements), if 
applicable;
    (C) Paragraph (d)(9) of this section (tax treaty modifications), if 
applicable; and
    (D) Paragraph (d)(10) of this section (other modifications), if 
applicable.
    (ii) Determination of the imputed underpayment in the case of rate 
modification. Except as described in paragraph (b)(3)(iv) of this 
section, in the case of an approved modification described under 
paragraph (b)(3)(i) of this section, the imputed underpayment is the 
sum of the total netted partnership adjustment consisting of the net 
positive adjustments not subject to rate reduction under paragraph 
(b)(3)(i) of this section (taking into account any approved 
modifications under paragraph (b)(2) of the section), plus the rate-
modified netted partnership adjustment determined under paragraph 
(b)(3)(iii) of this section, reduced or increased by any adjustments to 
credits (taking into account any modifications under paragraph (b)(4) 
of this section). The total netted partnership adjustment not subject 
to rate reduction under paragraph (b)(3)(i) of this section (taking 
into account any approved modifications under paragraph (b)(2) of the 
section) is determined by multiplying the partnership adjustments 
included in the total netted partnership adjustment that are not 
subject to rate modification under paragraph (b)(3)(i) of this section 
(including any partnership adjustment that remains after applying 
paragraph (b)(3)(iii) of this section) by the highest tax rate (as 
described in Sec.  301.6225-1(b)(1)(iv)).
    (iii) Calculation of rate-modified netted partnership adjustment in 
the case of a rate modification. The rate-modified netted partnership 
adjustment is determined as follows--
    (A) Determine each relevant partner's distributive share of the 
partnership adjustments subject to an approved modification under 
paragraph (b)(3)(i) of this section based on how each adjustment 
subject to rate modification would be properly allocated under section 
702 to such relevant partner in the reviewed year (as defined in Sec.  
301.6241-1(a)(8)).
    (B) Multiply each partnership adjustment determined under paragraph 
(b)(3)(iii)(A) of this section by the tax rate applicable to such 
adjustment based on the approved modification described under paragraph 
(b)(3)(i) of this section.
    (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

[[Page 41981]]

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) and (3) and (d)(5) through (10) of this section with 
respect to any relevant partner. 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.
    (4) Modification of the number and composition of imputed 
underpayments. Once approved by the IRS, a modification under paragraph 
(d)(6) of this section affects the manner in which adjustments are 
placed into groupings and subgroupings (as described in Sec.  301.6225-
1(c) and (d)) or whether the IRS designates one or more specific 
imputed underpayments (as described in Sec.  301.6225-1(g)). If the IRS 
approves a request for modification under this paragraph (b)(4), the 
imputed underpayment and any specific imputed underpayment affected by 
or resulting from the modification is determined according to the rules 
of Sec.  301.6225-1 subject to any other modifications approved by the 
IRS under this section.
    (5) Other modifications. The effect of other modifications 
described in paragraph (d)(10) of this section, including the order 
that such modification will be taken into account for purposes of 
paragraph (b)(1) of this section, may be set forth in forms, 
instructions, or other guidance prescribed by the IRS.
    (c) Time, form, and manner for requesting modification--(1) In 
general. In addition to the requirements described in paragraph (d) of 
this section, a request for modification under this section must be 
submitted in accordance with, and include the information required by, 
the forms, instructions, and other guidance prescribed by the IRS. The 
partnership representative must submit any request for modification and 
all relevant information (including information required under 
paragraphs (c)(2) and paragraph (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. 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 
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 a detailed description of the partnership's 
structure, allocations, ownership, and ownership changes, its relevant 
partners for each taxable year relevant to the request for 
modification, as well as the partnership agreement as defined in Sec.  
1.704-1(b)(2)(ii)(h) of this chapter for each taxable year relevant to 
the modification request. In the case of any modification request with 
respect to a relevant partner that is an indirect partner, the 
partnership representative must provide to the IRS any information that 
the IRS may require relevant to any pass-through partner 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 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, 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 writing, to waive the 
270-day period after the mailing of the NOPPA and before the IRS may 
issue a notice of final partnership adjustment. See section 
6231(b)(2)(A); Sec.  301.6231-1(b)(2).
    (4) Approval of modification by the IRS. Notification of approval 
will be provided to the partnership only after receipt of all relevant 
information (including any supplemental information required by the 
IRS) and all necessary payments with respect to the particular 
modification requested before expiration of the 270-day period in 
paragraph (c)(3)(i) of this section plus any extension granted by the 
IRS under paragraph (c)(3)(ii) of this section.
    (d) Types of modification--(1) In general. Except as otherwise 
described in this section, a partnership may request one type of 
modification or more than one type of modification described in 
paragraph (d) of this section.
    (2) Amended returns by partners--(i) In general. A partnership may 
request a modification of an imputed underpayment based on an amended 
return filed by a relevant partner provided all of the partnership

[[Page 41982]]

adjustments properly allocable to such relevant partner are taken into 
account and any amount due is paid in accordance with this paragraph 
(d)(2) of this section. Only adjustments to partnership-related items 
or adjustments to a relevant partner's tax attributes affected by 
adjustments to partnership-related items may be taken into account on 
an amended return under paragraph (d)(2) of this section. A partnership 
may request a modification for purposes of this paragraph (d)(2) 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 alternative 
procedures described in paragraph (d)(2)(x) of this section, an amended 
return modification request under this paragraph (d)(2) will not be 
approved unless the provisions of this paragraph (d)(2)(ii) are 
satisfied.
    (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 the adjustments in the first affected year (as 
defined in Sec.  301.6226-3(b)(2)) and all modification years (as 
described in paragraph (d)(2)(ii)(B) of this section) at the time such 
return is filed with the IRS.
    (B) Amended returns for all relevant taxable years must be filed. 
Modification under paragraph (d)(2) of this section will not be 
approved by the IRS unless a relevant partner files an amended return 
for the first affected year and any modification year. A modification 
year is any taxable year with respect to which any tax attribute (as 
defined in Sec.  301.6241-1(a)(10)) of the relevant partner is affected 
by reason of taking into account the relevant partner's distributive 
share of all partnership adjustments in the first affected year. A 
modification year may be a taxable year before or after the first 
affected year, depending on the effect on the relevant partner's tax 
attributes of taking into account the relevant partner's distributive 
share of the partnership adjustments in the first affected year.
    (C) Amended returns for partnership adjustments that reallocate 
distributive shares. Except as described in this paragraph 
(d)(2)(ii)(C), in the case of a partnership adjustment that reallocates 
the distributive share 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 adjustment file 
amended returns in accordance with paragraph (d)(2) of this section and 
all such returns are approved by the IRS for modification purposes. 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 
adjustment file amended returns provided the remaining relevant 
partners affected by the reallocation take into account their 
distributive share of the adjustment through other modifications 
approved by the IRS (including the alternative procedures 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 an adjustment that reallocates 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 adjustment and the 
other affected relevant partner signs a closing agreement with the IRS 
taking into account the adjustments.
    (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 IRS. Except as 
otherwise provided under alternative procedures 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 this paragraph (d)(2) 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 through a pass-through partner 
that could be subject to tax under chapter 1 on the partnership 
adjustments that are properly allocated to such pass-through partner 
will not be approved unless the partnership--
    (A) Establishes that the pass-through partner is not subject to 
chapter 1 tax on the adjustments that are properly allocated to such 
pass-through partner; or
    (B) Requests modification with respect to the adjustments resulting 
in chapter 1 tax for the pass-through partner, including full payment 
of such chapter 1 tax for the first affected year and all modification 
years under paragraph (d)(2) of this section or in accordance with 
forms, instructions, or other guidance prescribed by the IRS.
    (vi) Amended returns in the case of pass-through partners--(A) 
Pass-through partners may file amended returns. A relevant partner that 
is a pass-through partner, including a partnership-partner (as defined 
in Sec.  301.6241-1(a)(7)) that has a valid election under section 
6221(b) in effect for a partnership taxable year, may, in accordance 
with forms, instructions, and other guidance provided by the IRS and 
solely for purposes of modification under paragraph (d)(2) of this 
section, take into account its share of the partnership adjustments and 
determine and pay an amount calculated in the same manner as the amount 
computed under Sec.  301.6226-3(e)(4)(iii) subject to paragraph 
(d)(2)(vi)(B) of this section.
    (B) Modifications with respect to upper-tier partners of the pass-
through partner. In accordance with forms, instructions, and other 
guidance provided by the IRS, for purposes of determining and 
calculating the amount a pass-through partner must pay under paragraph 
(d)(2)(vi)(A) of this section, the pass-through partner may take into 
account modifications with respect to its direct and indirect partners 
to the extent that such modifications are

[[Page 41983]]

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 with respect to partnership 
adjustments or with respect to an imputed underpayment except as 
described in paragraph (d)(2) of this section.
    (B) Further amended returns restricted. If a relevant partner files 
an amended return under paragraph (d)(2) of this section, such partner 
may not file a subsequent amended return without the permission of the 
IRS.
    (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 this paragraph (d)(2). 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. A 
relevant partner may raise a partner-level defense (as described in 
Sec.  301.6226-3(d)(3)) by first paying the penalty, addition to tax, 
or additional amount with the amended return filed under this paragraph 
(d)(2) and then filing a claim for refund in accordance with forms, 
instructions, and other guidance.
    (ix) Effect on tax attributes binding. Any adjustments to the tax 
attributes of any relevant partner which are affected by modification 
under paragraph (d)(2) of this section are binding on the relevant 
partner with respect to the first affected year and all modification 
years (as defined in paragraph (d)(2)(ii)(B) of this section). A 
failure to adjust any tax attribute in accordance with this paragraph 
(d)(2)(ix) is a failure to treat a partnership-related item in a manner 
which is consistent with the treatment of such item on the partnership 
return within the meaning of section 6222. The provisions of section 
6222(c) and Sec.  301.6222-1(c) (regarding notification of inconsistent 
treatment) do not apply 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 
this paragraph (d)(2)(x) 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 this paragraph (d)(2)(x) is not a claim for refund with 
respect to any person.
    (B) Modifications with respect to reallocation adjustments. A 
submission made in accordance with this paragraph (d)(2)(x) with 
respect to any relevant partner is treated as if such relevant partner 
filed an amended return for purposes of paragraph (d)(2)(ii)(C) of this 
section (regarding the requirement that all relevant partners affected 
by a reallocation must file an amended return to be eligible to for the 
modification under paragraph (d)(2) of this section) provided the 
submission is with respect to the first affected year and all 
modification years of such relevant partner as required under paragraph 
(d)(2) of this section.
    (3) Tax-exempt partners--(i) In general. A partnership may request 
modification of an imputed underpayment with respect to partnership 
adjustments that the partnership demonstrates to the satisfaction of 
the IRS are allocable to a relevant partner that would not owe tax by 
reason of its status as a tax-exempt entity (as defined in paragraph 
(d)(3)(ii) of this section) in the reviewed year (tax-exempt partner).
    (ii) Definition of tax-exempt entity. For purposes of paragraph 
(d)(3) of this section, the term tax-exempt entity means a person or 
entity defined in section 168(h)(2)(A), (C), or (D).
    (iii) Modification limited to portion of partnership adjustments 
for which tax-exempt partner not subject to tax. Only the portion of 
the partnership adjustments properly allocated to a tax-exempt partner 
with respect to which the partner would not be subject to tax for the 
reviewed year (tax-exempt portion) may form the basis of a modification 
of the imputed underpayment under paragraph (d)(3) of this section. A 
modification under paragraph (d)(3) of this section will not be 
approved by the IRS unless the partnership provides documentation in 
accordance with paragraph (c)(2) of this section to support the tax-
exempt partner's status and the tax-exempt portion of the partnership 
adjustment allocable to the tax-exempt partner.
    (4) Modification based on a rate of tax lower than the highest 
applicable tax rate. A partnership may request modification based on a 
lower rate of tax for the reviewed year with respect to adjustments 
that are attributable to a relevant partner that is a C corporation and 
adjustments with respect to capital gains or qualified dividends that 
are attributable to a relevant partner who is an individual. In no 
event may the lower rate determined under the preceding sentence be 
less than the highest rate in effect for the reviewed year with respect 
to the type of income and taxpayer. For instance, with respect to 
adjustments that are attributable to a C corporation, the highest rate 
in effect for the reviewed year with respect to all C corporations 
would apply to that adjustment, regardless of the rate that would apply 
to the C corporation based on the amount of that C corporation's 
taxable income. For purposes of this paragraph (d)(4), an S corporation 
is treated as an individual.
    (5) Certain passive losses of publicly traded partnerships--(i) In 
general. In the case of a publicly traded partnership (as defined in 
section 469(k)(2)) that is a relevant partner, the imputed underpayment 
is determined without regard to the 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 either--
    (1) The specified partner's taxable year in which or with which the 
adjustment year (as defined in

[[Page 41984]]

Sec.  301.6241-1(a)(1)) of the partnership ends, reduced to the extent 
any such partner has utilized any portion of its affected year loss to 
offset income or gain relating to the ownership or disposition of its 
interest in such publicly traded partnership during either the 
adjustment year or any other year; or
    (2) The most recent year for which the publicly traded partnership 
has filed a return under section 6031.
    (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 a publicly traded partnership;
    (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 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 suspended passive loss carryovers at the end of the adjustment year 
to take into account the amount of any passive 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 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. The reduction in 
suspended passive loss carryovers as reported to a specified 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 under section 6223 and the regulations thereunder.
    (6) Modification of the number and composition of imputed 
underpayments--(i) In general. A partnership may request modification 
of the number or composition of any imputed underpayment included in 
the NOPPA by requesting that the IRS include one or more partnership 
adjustments in a particular grouping or subgrouping (as described in 
Sec.  301.6225-1(c) and (d)) or specific imputed underpayments (as 
described in Sec.  301.6225-1(g)) different from the grouping, 
subgrouping, or imputed underpayment set forth in the NOPPA. For 
example, a partnership may request under this paragraph (d)(6) that one 
or more partnership adjustments taken into account to determine a 
general imputed underpayment set forth in the NOPPA be taken into 
account to determine a specific imputed underpayment.
    (ii) Request for particular treatment regarding limitations or 
restrictions. A modification request under paragraph (d)(6) of this 
section includes a request that one or more partnership adjustments be 
treated as if no limitations or restrictions under Sec.  301.6225-1(d) 
apply and as a result such adjustments may be subgrouped with other 
adjustments.
    (7) Partnerships with partners that are ``qualified investment 
entities'' described in section 860-(i) In general. A partnership may 
request a modification of an imputed underpayment based on the 
partnership adjustments allocated to a relevant partner where the 
modification is based on deficiency dividends distributed as described 
in section 860(f) by a relevant partner that is a qualified investment 
entity (QIE) under section 860(b) (which includes both a regulated 
investment company (RIC) and a real estate investment trust (REIT)). 
Modification under this paragraph (d)(7) is available only to the 
extent that the deficiency dividends take into account adjustments 
described in Sec.  301.6225-1 that are also adjustments within the 
meaning of section 860(d)(1) or (d)(2) (whichever applies).
    (ii) Documentation of deficiency dividend. The partnership must 
provide documentation in accordance with paragraph (c) of this section 
of the ``determination'' described in section 860(e). Under section 
860(e)(2), Sec.  1.860-2(b)(1)(i) of this chapter, and paragraph (d)(8) 
of this section, a closing agreement entered into by the QIE partner 
pursuant to section 7121 and paragraph (d)(8) of this section is a 
determination described in section 860(e), and the date of the 
determination is the date in which the closing agreement is approved by 
the IRS. In addition, under section 860(e)(4), a determination also 
includes a Form 8927, Determination Under Section 860(e)(4) by a 
Qualified Investment Entity, properly completed and filed by the RIC or 
REIT pursuant to section 860(e)(4). To establish the date of the 
determination under section 860(e)(4) and the amount of deficiency 
dividends actually paid, the partnership must provide a copy of Form 
976, Claim for Deficiency Dividends Deductions by a Personal Holding 
Company, Regulated Investment Company, or Real Estate Investment Trust 
(Form 976), properly completed by or on behalf of the QIE pursuant to 
section 860(g), together with a copy of each of the required 
attachments for Form 976.
    (8) Closing agreements. A partnership may request modification 
based on a closing agreement entered into by the IRS and the 
partnership or any relevant partner, or both if appropriate, pursuant 
to section 7121. If modification under this paragraph (d)(8) is 
approved by the IRS, any partnership adjustment that is taken into 
account under such closing agreement and for which any required payment 
under the closing agreement is made will not be taken into account in 
determining the imputed underpayment under Sec.  301.6225-1. Generally, 
the IRS will not approve any additional modification under this section 
with respect to a relevant partner to which a modification under this 
paragraph (d)(8) has been approved.
    (9) Tax treaty modifications. A partnership may request a 
modification under this paragraph (d)(9) with respect to a relevant 
partner's distributive share of an adjustment to a partnership-related 
item if the relevant partner--
    (i) 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;
    (ii) Would have derived the item (within the meaning of Sec.  
1.894-1(d) of this chapter) had it been taken into account properly in 
the partnership's reviewed year return; and
    (iii) 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 the modification under this 
paragraph (d)(9) is requested.
    (10) Other modifications. A partnership may request a modification 
not otherwise described in paragraph (d)

[[Page 41985]]

of this section, and the IRS will determine whether such modification 
is accurate and appropriate in accordance with paragraph (c)(4) of this 
section. Additional types of modifications and the documentation 
necessary to substantiate such modifications may be set forth in forms, 
instructions, or other guidance prescribed by the IRS.
    (e) Modification of adjustments that do not result in an imputed 
underpayment. A partnership may request modification of adjustments 
that do not result in an imputed underpayment (as described in Sec.  
301.6225-1(f)(1)(ii)) using modifications described in paragraph (d)(2) 
of this section (amended returns and the alternative procedure to 
filing amended returns), paragraph (d)(6) of this section (number and 
composition of the imputed underpayment), paragraph (d)(8) of this 
section (closing agreements), or, if applicable, paragraph (d)(10) of 
this section (other modifications).
    (f) Examples. The following examples illustrate the rules of this 
section. For purposes of these examples, each partnership is subject to 
the provisions of subchapter C of chapter 63, each partnership and its 
relevant partners are calendar year taxpayers, all relevant partners 
are U.S. persons (unless otherwise stated), the highest rate of income 
tax in effect for all taxpayers is 40 percent for all relevant periods, 
and no partnership requests modification under this section except as 
provided in the example.

    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 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, I, and J, all individuals. For purposes of this 
section, if Partnership requests modification with respect to A, B, 
C, F, G, H, I, and J, 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 tax purposes and modification was not requested 
with respect to P and S.
    Example 2. The IRS initiates an administrative proceeding with 
respect to Partnership's 2019 taxable year. The IRS mails a NOPPA to 
Partnership for the 2019 partnership taxable year proposing a single 
partnership adjustment increasing ordinary income by $100, resulting 
in a $40 imputed underpayment ($100 multiplied by the 40 percent tax 
rate). Partner A, an individual, held a 20 percent interest in 
Partnership during 2019. Partnership timely requests modification 
under paragraph (d)(2) of this section based on A's filing an 
amended return for the 2019 taxable year taking into account $20 of 
the partnership adjustment and paying the tax and interest due 
attributable to A's share of the increased income and the tax rate 
applicable to A for the 2019 tax year. No tax attribute in any other 
taxable year of A is affected by A's taking into account A's share 
of the partnership adjustment for 2019. In accordance with paragraph 
(d)(2)(iii) of this section, Partnership's partnership 
representative provides the IRS with documentation demonstrating 
that A filed the 2019 return and paid all tax and interest due. The 
IRS approves the modification and, in accordance with paragraph 
(b)(2) of this section, the $20 increase in ordinary income 
allocable to A is not included in the calculation of the total 
netted partnership adjustment (determined in accordance with Sec.  
301.6225-1). Partnership's total netted partnership adjustment is 
reduced to $80 ($100 adjustment less $20 taken into account by A), 
and the imputed underpayment is reduced to $32 (total netted 
partnership adjustment of $80 after modification multiplied by 40 
percent).
    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 
distributive share of the partnership adjustment allocated to B 
(which is $25 (50 percent x 50 percent x $100)). The IRS approves 
the modification and, in accordance with paragraph (b)(2) of this 
section, the $25 increase in ordinary income allocated to C, through 
B, is not included in the calculation of the total netted 
partnership adjustment (determined in accordance with Sec.  
301.6225-1). Partnership's total netted partnership adjustment is 
reduced to $75 ($100 adjustment less C's share of the adjustment, 
$25), and the imputed underpayment is reduced to $30 (total netted 
partnership adjustment of $75, after modification, multiplied by 40 
percent).
    Example 4. The facts are the same as in Example 3 of this 
paragraph (f), except $10 of the $25 of the adjustment allocated to 
C is unrelated business taxable income (UBTI) as defined in section 
512 because it is debt-financed income within the meaning of section 
514 (no section 512 UBTI modifications apply) with respect to which 
C would be subject to tax if taken into account by C. As a result, 
the modification under paragraph (d)(3) of this section with respect 
to C relates only to $15 of the $25 of ordinary income allocated to 
C that is not UBTI. Therefore, only a modification of $15 ($25 less 
$10) of the total $100 partnership adjustment may be approved by the 
IRS under paragraph (d)(3) of this section and, in accordance with 
paragraph (b)(2) of this section, excluded when determining the 
imputed underpayment for Partnership's 2019 taxable year. The total 
netted partnership adjustment (determined in accordance with Sec.  
301.6225-1) is reduced to $85 ($100 less $15), and the imputed 
underpayment is reduced to $34 (total netted partnership adjustment 
of $85, after modification, multiplied by 40 percent).
    Example 5. The facts are the same as in Example 3 of this 
paragraph (f), except that Partnership also timely requests 
modification under paragraph (d)(2) with respect to an amended 
return filed by B, and, in accordance with (d)(2)(iii) of this 
section, Partnership's partnership representative provides the IRS 
with documentation demonstrating that B filed the 2019 return and 
paid all tax and interest due. B reports 50 percent of the 
partnership adjustments ($50) on its amended return, and B 
calculates an amount under paragraph (d)(2)(vi)(A) of this section 
and Sec.  301.6226-3(e)(4)(iii) that, pursuant to paragraph 
(d)(2)(vi)(B) of this section, takes into account the modification 
under paragraph (d)(3) approved by the IRS with respect to B's 
partner C, a tax-exempt entity. B makes a payment pursuant to 
paragraph (d)(2)(ii)(A) of this section, and the IRS approves the 
requested modification. Partnership's total netted partnership 
adjustment is reduced by $50 (the amount taken into account by B). 
Partnership's total netted partnership adjustment (determined in 
accordance with Sec.  301.6225-1) is $50, and the imputed 
underpayment, after modification, is $20.
    Example 6.  The facts are the same as in Example 3 of this 
paragraph (f), 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 (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

[[Page 41986]]

paragraph (d)(2) of this section. No tax attribute in any other 
taxable year of D is affected by D taking into account D's share of 
the partnership adjustment for 2019. The IRS approves the 
modification and the $25 increase in ordinary income allocable to D 
is not included in the calculation of the total netted partnership 
adjustment (determined in accordance with Sec.  301.6225-1). As a 
result, Partnership's total netted partnership adjustment is $50 
($100, less $25 allocable to C, less $25 taken into account by D), 
and the imputed underpayment, after modification, is $20.
    Example 7. The IRS initiates an administrative proceeding with 
respect to Partnership's 2019 taxable year. All of Partnership's 
partners during its 2019 taxable year are individuals. The IRS mails 
a NOPPA to Partnership for the 2019 taxable year proposing three 
partnership adjustments. The first partnership adjustment is an 
increase to ordinary income of $75 for 2019. The second partnership 
adjustment is an increase in the depreciation deduction allowed for 
2019 of $25, which under Sec.  301.6225-1(d)(2)(i) is treated as a 
$25 decrease in income. The third adjustment is an increase in long-
term capital gain of $10 for 2019. In accordance with Sec.  
301.6225-1, the total netted partnership adjustment is $85 ($75 
increase in ordinary income + $10 increase in long-term capital 
gain), resulting in an imputed underpayment of $34 ($85 multiplied 
by 40 percent). The $25 decrease in income as a result of the 
increase in depreciation is an adjustment that does not result in an 
imputed underpayment under Sec.  301.6225-1(f). Under the 
partnership agreement in effect for Partnership's 2019 taxable year, 
the long-term capital gain and the increase in depreciation is 
specially allocated to B and the increase in ordinary income is 
specially allocated to A. 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 is $30 ($75 multiplied by 40 
percent), the general imputed underpayment is $4 ($10 multiplied by 
40 percent), and the increase in depreciation of $25 remains an 
adjustment that does not result in an imputed underpayment under 
Sec.  301.6225-1(f) and is associated with the general imputed 
underpayment.
    Example 8.  Partnership has two reviewed year partners, C1 and 
C2, both of which are C corporations. The IRS mails to Partnership a 
NOPPA with two adjustments, both based on rental real estate 
activity. The first adjustment is an increase of rental real estate 
income of $100 attributable to Property A. The second adjustment is 
an increase of rental real estate loss of $30 attributable to 
Property B. The Partnership did not treat the leasing arrangement 
with respect to Property A and Property B as an appropriate economic 
unit for purposes of section 469. If the $100 increase in income 
attributable to Property A and the $30 increase in loss attributable 
to Property B were included in the same subgrouping and netted, then 
taking the $30 increase in loss into account would result in a 
decrease in the amount of the imputed underpayment. Also, the $30 
increased loss might be limited or restricted if taken into account 
by any person under the passive activity rules under section 469. 
For instance, under section 469, rental activities of the two 
properties could be treated as two activities, which could limit a 
partner's ability to claim the loss. In addition to the potential 
limitations under section 469, there are other potential limitations 
that might apply if the $30 loss were taken into account by any 
person. Therefore, in accordance with Sec.  301.6225-1(d), the two 
adjustments are placed in separate subgroupings within the residual 
grouping, the total netted partnership adjustment is $100, the 
imputed underpayment is $40 ($100 x 40 percent), and the $30 
increase in loss is an adjustment that does not result in an imputed 
underpayment under Sec.  301.6225-1(f). Partnership requests 
modification under paragraph (d)(6) of this section, substantiating 
to the satisfaction of the IRS that C1 and C2 are publicly traded C 
corporations, and therefore, the passive activity loss limitations 
under section 469 of the Code do not apply. Partnership also 
substantiates to the satisfaction of the IRS that no other 
limitation or restriction applies that would prevent the grouping of 
the $100 with the $30 loss. The IRS approves Partnership's 
modification request and places the $100 of income and the $30 loss 
into the subgrouping in the residual grouping under the rules 
described in Sec.  301.6225-1(c)(5). Under Sec.  301.6225-1(e), 
because the two adjustments are in one subgrouping, they are netted 
together, resulting in a total netted partnership adjustment of $70 
($100 plus <$30>) and an imputed underpayment of $28 ($70 x 40 
percent). After modification, there are not adjustments treated as 
an adjustment that does not result in an imputed underpayment under 
Sec.  301.6225-1(f) because the $30 loss is now netted with the $100 
of income.

    (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.
    (2) Election under Sec.  301.9100-22 in effect. This section 
applies to any partnership taxable year beginning after November 2, 
2015, and before January 1, 2018 for which a valid election under Sec.  
301.9100-22 is in effect.
0
Par. 10. Section 301.6225-3 is added to read as follows:


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

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

[[Page 41987]]

    (6) Effect of election under section 6226. If a partnership makes a 
valid election under Sec.  301.6226-1 with respect to an imputed 
underpayment, a partnership adjustment that does not result in an 
imputed underpayment and that is associated with such imputed 
underpayment as described in Sec.  301.6225-1(g) is taken into account 
by the reviewed year partners in accordance with Sec.  301.6226-3 and 
is not taken into account under this section.
    (c) Treatment of adjustment year partners. The rules under 
subchapter K with respect to the treatment of partners apply in the 
case of adjustments taken into account by the partnership under this 
section.
    (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.
    (2) Election under Sec.  301.9100-22 in effect. This section 
applies to any partnership taxable year beginning after November 2, 
2015 and before January 1, 2018 for which a valid election under Sec.  
301.9100-22 is in effect.
0
Par. 11. Section 301.6225-4 is added to read as follows:


Sec.  301.6225-4  Effect of a partnership adjustment on specified tax 
attributes of partnerships and their partners.

    (a) Adjustments to specified tax attributes--(1) In general. When 
there is a partnership adjustment (as defined in Sec.  301.6241-
1(a)(6)), the partnership and its adjustment year partners (as defined 
in Sec.  301.6241-1(a)(2)) generally must adjust their specified tax 
attributes (as defined in paragraph (a)(2) of this section) in 
accordance with the rules in this section. For a partnership adjustment 
that results in an imputed underpayment (as defined in Sec.  301.6241-
1(a)(3)), specified tax attributes are generally adjusted by making 
appropriate adjustments to the book value and basis of partnership 
property under paragraph (b)(2) of this section, creating notional 
items based on the partnership adjustment under paragraph (b)(3) of 
this section, allocating those notional items as described in paragraph 
(b)(5) of this section, and determining the effect of those notional 
items for the partnership and its reviewed year partners (as defined in 
Sec.  301.6241-1(a)(9)) or their successors (as defined in Sec.  1.704-
1(b)(1)(viii)(b) of this chapter) under paragraph (b)(6) of this 
section. Paragraph (c) of this section describes how to treat an 
expenditure for any payment required to be made by a partnership under 
subchapter C of chapter 63 of the Internal Revenue Code (subchapter C 
of chapter 63) including any imputed underpayment. Paragraph (d) of 
this section describes adjustments to tax attributes of a partnership 
and its partners in the case of a partnership adjustment that does not 
result in an imputed underpayment (as described in Sec.  301.6225-
1(f)).
    (2) Specified tax attributes. Specified tax attributes are the tax 
basis and book value of a partnership's property, amounts determined 
under section 704(c), adjustment year partners' bases in their 
partnership interests, adjustment year partners' capital accounts 
determined and maintained in accordance with Sec.  1.704-1(b)(2) of 
this chapter, and earnings and profits under section 312.
    (3) Timing. Adjustments to specified tax attributes under this 
section are made in the adjustment year (as defined in Sec.  301.6241-
1(a)(1)). Thus, to the extent that an adjustment to a specified tax 
attribute under this section is reflected on a federal tax return, the 
partnership adjustment is generally first reflected on any return filed 
with respect to the adjustment year.
    (4) Effect of other sections. The determination of specified tax 
attributes under this section is not conclusive as to tax attributes of 
a partnership or its partners determined under other sections of the 
Internal Revenue Code (Code), including the subchapter C of chapter 63. 
For example, a partnership that files an administrative adjustment 
request (AAR) under section 6227 adjusts partnership tax attributes as 
appropriate. Further, to the extent a partner or partnership 
appropriately adjusted its tax attributes prior to a final 
determination under subchapter C of chapter 63 with respect to a 
partnership adjustment (for example, in the context of an amended 
return modification described in Sec.  301.6225-2(d)(2), the 
alternative procedure to filing amended returns as described in Sec.  
301.6225-2(d)(2)(x), or a closing agreement described in Sec.  
301.6225-2(d)(8)), those tax attributes are not adjusted under this 
section. Similarly, to the extent a partner filed a return inconsistent 
with the treatment of items on a partnership return, a reviewed year 
partner (or its successor) does not adjust its tax attributes to the 
extent the partner's prior return was consistent with the partnership 
adjustment. For the rules regarding consistent treatment by partners, 
see Sec.  301.6222-1.
    (5) Election under section 6226--(i) In general. Except as 
otherwise provided in paragraph (a)(5)(ii) of this section, tax 
attributes of a partnership and its partners are adjusted for a 
partnership adjustment that results in an imputed underpayment with 
respect to which an election is made under Sec.  301.6226-1 in 
accordance with Sec.  301.6226-4, and not the rules of this section.
    (ii) Pass-through partners and indirect partners. A pass-through 
partner (as defined in Sec.  301.6241-1(a)(5)) that is a partnership 
and pays an imputed underpayment under Sec.  301.6226-3(e)(4) treats 
its share of each partnership adjustment reflected on the relevant 
statement as a partnership adjustment described in paragraph (a)(1) of 
this section, treats the imputed underpayment under Sec.  301.6226-
3(e)(4)(iii) as an imputed underpayment determined under Sec.  
301.6225-1 for purposes of Sec.  1.704-1(b)(2)(iii)(a) and (f) of this 
chapter, treats items arising from an adjustment that does not result 
in an imputed underpayment as an item under paragraph (d) of this 
section, and finally treats amounts with respect to any penalties, 
additions to tax, and additional amounts and interest computed as an 
amount described in Sec.  1.704-1(b)(2)(iii)(f)(3) of this chapter.
    (6) Reflection of economic arrangement. This section and the rules 
in Sec.  1.704-1(b)(1)(viii), (b)(2)(iii)(a) and (f), (b)(2)(iv)(i)(4), 
and (b)(4)(xi), (xii), (xiii), (xiv), and (xv) of this chapter must be 
interpreted in a manner that reflects the economic arrangement of the 
parties and the principles of subchapter K of the Code, taking into 
account the rules of the centralized partnership audit regime.
    (b) Adjusting specified tax attributes in the case of a partnership 
adjustment that results in an imputed underpayment--(1) In general. 
This paragraph (b) applies with respect to each partnership adjustment 
that was taken into account in the determination of the imputed 
underpayment under Sec.  301.6225-1, except to the extent partner or 
partnership tax attributes were already adjusted as part of the 
partnership adjustment.
    (2) Book value and basis of partnership property. Partnership-level 
specified tax attributes must be adjusted under this paragraph (b)(2). 
Specifically, the partnership must make appropriate adjustments to the 
book value and basis of property to take into account any partnership 
adjustment. No adjustments are made with respect to property that was 
held by the partnership in the reviewed year but is no longer held by 
the partnership in the adjustment year. Amounts determined under 
section 704(c) must also be adjusted to take into account the 
partnership adjustment.
    (3) Creation of notional items based on partnership adjustment--(i) 
In general. In order to give appropriate effect to each partnership 
adjustment for

[[Page 41988]]

partner-level specified tax attributes, notional items are created with 
respect to each partnership adjustment, except as provided in paragraph 
(b)(4) of this section.
    (ii) Increase in income or gain. In the case of a partnership 
adjustment that is an increase to income or gain, a notional item of 
income or gain is created in an amount equal to the partnership 
adjustment.
    (iii) Increase in expense or loss. In the case of a partnership 
adjustment that is an increase to an expense or a loss, a notional item 
of an expense or loss is created in an amount equal to the partnership 
adjustment.
    (iv) Decrease in income or gain. In the case of a partnership 
adjustment that is a decrease to income or gain, a notional item of 
expense or loss is created in an amount equal to the partnership 
adjustment.
    (v) Decrease in expense or loss. In the case of a partnership 
adjustment that is a decrease to an expense or to a loss, a notional 
item of income or gain is created in an amount equal to the partnership 
adjustment.
    (vi) Credits. If a partnership adjustment reflects a net increase 
or net decrease in credits as determined in accordance with Sec.  
301.6225-1, the partnership may have one or more notional items of 
income, gain, loss, or deduction that reflects the change in the item 
that gives rise to the credit, and those items are treated as items in 
paragraph (b)(3)(ii), (iii), (iv), or (v) of this section. For example, 
if a partnership adjustment is to a credit, a notional item of 
deduction may be created when appropriate. See section 280C.
    (4) Situations in which notional items are not created--(i) In 
general. In the case of a partnership adjustment described in this 
paragraph (b)(4), or when the creation of a notional item would 
duplicate a specified tax attribute or an actual item already taken 
into account, notional items are not created. Nevertheless, in these 
situations specified tax attributes are adjusted for the partnership 
and its reviewed year partners or their successors (as defined in Sec.  
1.704-1(b)(i)(viii)(b) of this chapter) in a manner that is consistent 
with how the partnership adjustment would have been taken into account 
under the partnership agreement in effect for the reviewed year taking 
into account all facts and circumstances. See Sec.  1.704-
1(b)(2)(iii)(f)(4) of this chapter for rules for allocating the 
expenditure for an imputed underpayment in these circumstances.
    (ii) Adjustments for non-section 704(b) items. Notional items are 
not created for a partnership adjustment that does not derive from 
items that would have been allocated in the reviewed year under section 
704(b). See paragraph (e) of this section, Example 5.
    (iii) Section 705(a)(2)(B) expenditures. Notional items are not 
created for a partnership adjustment that is a change of an item of 
deduction to a section 705(a)(2)(B) expenditure.
    (iv) Tax-exempt income. Notional items are not created for a 
partnership adjustment to an item of income of a partnership exempt 
from tax under subtitle A of the Code.
    (5) Allocation of the notional items. Notional items are allocated 
to the reviewed year partners or their successors under Sec.  1.704-
1(b)(4)(xi) of this chapter.
    (6) Effect of notional items--(i) In general. The partnership 
creates notional items of income, gain, loss, deduction, or credit in 
order to make appropriate adjustments to specified tax attributes. See 
paragraph (e), Example 1 of this section.
    (ii) Partner capital accounts. For purposes of capital accounts 
determined and maintained in accordance with Sec.  1.704-1(b)(2) of 
this chapter, a notional item of income, gain, loss, deduction or 
credit is treated as an item of income, gain, loss, deduction or credit 
(including for purposes of determining book value). Similar adjustments 
may be appropriate for partnerships that do not determine and maintain 
capital accounts in accordance with Sec.  1.704-1(b)(2) of this 
chapter.
    (iii) Partner's basis in its interest--(A) In general. Except as 
otherwise provided, the basis of a partner's interest in a partnership 
is adjusted (but not below zero) to reflect any notional item allocated 
to the partner by treating the notional item as an item described in 
section 705(a).
    (B) Special basis rules. The basis of a partner's interest in a 
partnership is not adjusted for any notional items allocated to the 
partner--
    (1) When a partner that is not a tax-exempt entity (as defined in 
Sec.  301.6225-2(d)(3)(ii)) is a successor under Sec.  1.704-
1(b)(1)(viii)(b) of this chapter to a reviewed year tax-exempt partner, 
to the extent that the IRS approved a modification under Sec.  
301.6225-2 because the tax-exempt partner was not subject to tax; or
    (2) When the notional item would be allocated to a successor that 
is related (within the meaning of sections 267(b) or 707(b)) to the 
reviewed year partner, the successor acquired its interest from the 
reviewed year partner in a transaction (or series of transactions) in 
which not all gain or loss is recognized during an administrative 
adjustment proceeding with respect to the partnership's reviewed year 
under subchapter C of chapter 63, and a principal purpose of the 
interest transfer (or transfers) was to shift the economic burden of 
the imputed underpayment among the related parties.
    (c) Determining a partner's share of an expenditure for any payment 
required to be made by a partnership under subchapter C of chapter 63. 
Payment by a partnership of any amount required to be paid under 
subchapter C of chapter 63 as described in Sec.  301.6241-4(a) is 
treated as an expenditure described in section 705(a)(2)(B). Rules for 
determining whether the economic effect of an allocation of these 
expenses is substantial are provided in Sec.  1.704-1(b)(2)(iii)(f) of 
this chapter and rules for determining whether an allocation of these 
expenses is deemed to be in accordance with the partners' interests in 
the partnership are provided in Sec.  1.704-1(b)(4)(xii) of this 
chapter.
    (d) Adjusting tax attributes for a partnership adjustment that does 
not result in an imputed underpayment. The rules under subchapter K of 
the Code apply in the case of a partnership adjustment that does not 
result in an imputed underpayment. See Sec.  301.6225-3(c). 
Accordingly, tax attributes (as defined in Sec.  301.6241-1(a)(10)) of 
a partnership and its partners are adjusted under those rules. An item 
arising from a partnership adjustment that does not result in an 
imputed underpayment (as defined in Sec.  301.6225-1(f)) is allocated 
under Sec.  1.704-1(b)(4)(xiii) of this chapter.
    (e) Examples. The following examples illustrate the rules of this 
section. For purposes of these examples, unless otherwise stated, 
Partnership is subject to the provisions of subchapter C of chapter 63, 
Partnership and its partners are calendar year taxpayers, all partners 
are U.S. persons, and the highest rate of income tax in effect for all 
taxpayers is 20 percent for all relevant periods.

    Example 1. (i) In 2019, A, B, and C are individuals that form 
Partnership. A contributes Whiteacre, which is unimproved land with 
an adjusted basis of $400 and a fair market value of $1,000, and B 
and C each contribute $1,000 in cash. The partnership agreement 
provides that all income, gain, loss, and deduction will be 
allocated in equal \1/3\ shares among the partners. The partnership 
agreement also provides that the partners' capital accounts will be 
determined and maintained in accordance with Sec.  1.704-1(b)(2)(iv) 
of this chapter, distributions in liquidation of the partnership (or 
any partner's interest) will be made in accordance with the 
partners' positive capital account balances, and any partner with a 
deficit

[[Page 41989]]

balance in his capital account following the liquidation of his 
interest must restore that deficit to the partnership (as provided 
in Sec.  1.704-1(b)(2)(ii)(b)(2) and (3) of this chapter).

    (ii) Upon formation, Partnership has the following assets and 
capital accounts:

----------------------------------------------------------------------------------------------------------------
                                 Partnership                                      Outside
                                    basis         Book      Value                  basis       Book      Value
----------------------------------------------------------------------------------------------------------------
Cash.........................          $2,000     $2,000     $2,000          A        $400     $1,000     $1,000
Whiteacre....................             400      1,000      1,000          B       1,000      1,000      1,000
                               ..............  .........  .........           C      1,000      1,000      1,000
                              ----------------------------------------------------------------------------------
    Totals...................           2,400      3,000      3,000  ..........      2,400      3,000      3,000
----------------------------------------------------------------------------------------------------------------

    (iii) In 2019, Partnership makes a $120 payment for Asset that 
it treats as a deductible expense on its partnership return.

----------------------------------------------------------------------------------------------------------------
                                 Partnership                                      Outside
                                    basis         Book      Value                  basis       Book      Value
----------------------------------------------------------------------------------------------------------------
Cash.........................          $1,880     $1,880     $1,880          A        $360       $960     $1,000
Whiteacre....................             400      1,000      1,000          B         960        960      1,000
Asset........................               0          0        120           C        960        960      1,000
                              ----------------------------------------------------------------------------------
    Totals...................           2,280      2,880      3,000  ..........      2,280      2,880      3,000
----------------------------------------------------------------------------------------------------------------

    (iv) Partnership does not file an AAR for 2020. In 2021 (the 
adjustment year) it is finally determined that Partnership's $120 
expenditure was not allowed as a deduction in 2019 (the reviewed 
year), but rather was the acquisition of an asset for which cost 
recovery deductions are unavailable. Accordingly, the IRS makes a 
partnership adjustment that disallows the entire $120 deduction, 
which results in an imputed underpayment of $48 ($120 x 40 percent). 
Partnership did not request modification under Sec.  301.6225-2. 
Partnership pays the $48 imputed underpayment.
    (v) Partnership first determines its tax attribute adjustments 
resulting from the partnership adjustment by applying paragraph (b) 
of this section. Pursuant to paragraph (b)(2) of this section, 
Partnership must re-state the basis and book value of Asset to $120. 
Further, pursuant to paragraph (b)(3)(v) of this section, a $120 
notional item of income is created. The $120 item of notional income 
is allocated in equal shares ($40) to A, B, and C in 2021 under 
Sec.  1.704-1(b)(4)(xi) of this chapter. Accordingly, in 2021 
Partnership increases the capital accounts of A, B, and C by $40 
each, and increases A, B, and C's outside bases by $40 each under 
paragraph (b)(6)(ii) and (iii) of this section, respectively.
    (vi) As described in paragraph (c) of this section, 
Partnership's payment of the $48 imputed underpayment is treated as 
an expenditure described in section 705(a)(2)(B) under Sec.  
301.6241-4. Under Sec.  1.704-1(b)(4)(xii) of this chapter, 
Partnership determines each partner's properly allocable share of 
this expenditure in 2021 by allocating the expenditure in proportion 
to the allocations of the notional item to which the expenditure 
relates. Accordingly, each of A, B, and C have a properly allocable 
share of $16 each, which is the same proportion (\1/3\ each) in 
which A, B, and C share the $120 item of notional income. Thus, A, B 
and C's capital accounts are each decreased by $16 in 2021 and A, B 
and C's outside bases are each decreased by $16 in 2021. The 
allocation of the expenditure under the partnership agreement has 
economic effect under Sec.  1.704-1(b)(2)(ii) of this chapter and, 
because the allocation of the expenditure is determined in 
accordance with Sec.  1.704-1(b)(2)(iii)(f) of this chapter, the 
economic effect of these allocations is deemed to be substantial.
    (vii) The payment is also reflected by a $48 decrease in 
partnership cash for book purposes under Sec.  1.704-1(b)(4)(ii) of 
this chapter. Therefore, in 2021, A's basis in Partnership is $384 
and his capital account is $984. B and C each have a basis and 
capital account of $984.

----------------------------------------------------------------------------------------------------------------
                                 Partnership                                      Outside
                                    basis         Book      Value                  basis       Book      Value
----------------------------------------------------------------------------------------------------------------
Cash.........................          $1,832     $1,832     $1,832          A        $384       $984       $984
Whiteacre....................             400      1,000      1,000          B         984        984        984
Asset........................             120        120        120           C        984        984        984
                              ----------------------------------------------------------------------------------
    Totals...................           2,352      2,952      2,952  ..........      2,352      2,952      2,952
----------------------------------------------------------------------------------------------------------------


    Example 2. (i) The facts are the same as in Example 1 of this 
paragraph (e), except the IRS approves modification under Sec.  
301.6225-2(d)(3) with respect to A, which is a tax-exempt entity, 
and under Sec.  301.6225-2(d)(4) with respect to C, which is a 
corporation subject to a tax rate of 20 percent. These modifications 
reduce Partnership's overall imputed underpayment from $48 to $30.
    (ii) As in Example 1 of this paragraph (e), Partnership 
determines its tax attribute adjustments resulting from the 
partnership adjustment by applying paragraph (b) of this section. 
Pursuant to paragraph (b)(3)(v) of this section, a $120 notional 
item of income is created. The $120 item of notional income is 
allocated in equal shares ($40) to A, B, and C in 2021 under Sec.  
1.704-1(b)(4)(xi) of this chapter. Accordingly, in 2021 Partnership 
increases the capital accounts of A, B, and C by $40 each, and 
increases A, B, and C's outside bases by $40 each under paragraph 
(b)(6)(ii) and (iii) of this section, respectively.
    (iii) However, the modifications affect how Partnership must 
allocate the imputed underpayment expenditure among A, B, and C in 
2021 (the adjustment year) pursuant to Sec.  1.704-1(b)(2)(iii)(f) 
of this chapter. Specifically, Partnership allocates the $24 
expenditure in 2021 in proportion to the allocation of the notional 
item to which it relates (which is \1/3\ each as in Example 1 of 
this paragraph (e)), but it must also take into account 
modifications attributable to each partner. Accordingly, B's 
allocation is $16 (its share of the imputed underpayment, for which 
no modification occurred), and A and C have properly allocable 
shares of $0 and $8, respectively (their shares, taking into account 
modification). Thus, A's capital account is decreased by $0, B's 
capital account is decreased by $16, and C's capital

[[Page 41990]]

account is decreased by $8 in 2021 and their respective outside 
bases are decreased by the same amounts in 2021.
    (iv) The payment is also reflected by a $24 decrease in 
partnership cash for book purposes. Therefore, in 2021, A's basis in 
Partnership is $400 and his capital account is $1000, B's basis and 
capital account are both $984, and C's basis and capital account are 
both $992.

----------------------------------------------------------------------------------------------------------------
                                 Partnership                                      Outside
                                    basis         Book      Value                  basis       Book      Value
----------------------------------------------------------------------------------------------------------------
Cash.........................          $1,856     $1,856     $1,856          A        $400     $1,000     $1,000
Whiteacre....................             400      1,000      1,000          B         984        984        984
Asset........................             120        120        120           C        992        992        992
                              ----------------------------------------------------------------------------------
    Totals...................           2,376      2,976      2,976  ..........      2,376      2,976      2,976
----------------------------------------------------------------------------------------------------------------

    Example 3. The facts are the same as in Example 1 of this 
paragraph (e). However, in 2020, C transfers its entire interest in 
Partnership to D (an individual) for cash. Under Sec.  1.704-
1(b)(2)(iv)(l) of this chapter, C's capital account carries over to 
D. In 2021, the year the IRS determines that Partnership's $120 
expense is not allowed as a deduction, D is C's successor under 
Sec.  1.704-1(b)(1)(viii)(b)(2) of this chapter with respect to 
specified tax attributes and the payment of the imputed underpayment 
treated as an expenditure under section 705(a)(2)(B).
    Example 4. The facts are the same as in Example 1 of this 
paragraph (e), except that the partnership agreement provides that 
the section 705(a)(2)(B) expenditure for imputed underpayments made 
by the partnership are specially allocated to A (all other items 
continue to be allocated in equal shares). Accordingly, in 2021, the 
section 705(a)(2)(B) expenditure is allocated entirely to A, which 
reduces its capital account by $48, which has economic effect under 
Sec.  1.704-1(b)(2)(ii) of this chapter. However, the economic 
effect of this allocation is not substantial under Sec.  1.704-
1(b)(2)(iii)(a) of this chapter because it is not allocated in the 
manner described in Sec.  1.704-1(b)(2)(iii)(f) of this chapter. The 
allocation will also not be deemed to be in accordance with the 
partners' interests in the partnership under Sec.  1.704-1(b)(3)(ix) 
of this chapter because it is not allocated pursuant to the rules 
under Sec.  1.704-1(b)(4)(xii) of this chapter.
    Example 5. (i) In 2019, Partnership has two partners, A and B. 
Both A and B have a $0 basis in their interests in Partnership. 
Further, Partnership has a $200 liability as defined in Sec.  1.752-
1(a)(4) of this chapter. The liability is treated as a nonrecourse 
liability as defined in Sec.  1.752-1(a)(2) of this chapter so that 
A and B both are treated as having a $100 share of the liability 
under Sec.  1.752-3 of this chapter. In 2021 (the adjustment year), 
the IRS determines that the liability was inappropriately classified 
as a nonrecourse liability, should have been classified as a 
recourse liability as defined in Sec.  1.752-1(a)(1) of this 
chapter, and that A should have no share of the recourse liability 
under Sec.  1.752-2 of this chapter. The recharacterization of the 
liability from nonrecourse to recourse and the decrease in A's share 
of partnership liabilities are adjustments that are not allocated 
under section 704(b) under Sec.  301.6225-1(c)(5)(ii). As a result 
of the adjustments, the IRS includes in the residual grouping $100 
of increased income to account for the cumulative effects of these 
adjustments to reflect the $100 decrease in A's share of partnership 
liabilities under Sec. Sec.  1.752-1(c) and 1.731-1(a)(1)(i) of this 
chapter and determines an imputed underpayment of $40 ($100 x 40 
percent). Partnership does not request modification under Sec.  
301.6225-2. Partnership pays the $40 imputed underpayment.
    (ii) Pursuant to paragraph (b)(4)(ii) of this of this section, 
notional items are not created with respect to this partnership 
adjustment. Instead, under paragraph (b)(4)(i) of this section, 
specified tax attributes are adjusted in a manner that is consistent 
with how the partnership adjustment would have been taken into 
account under the partnership agreement in effect for the reviewed 
year taking into account all facts and circumstances. In this case, 
no specified tax attributes are adjusted.
    (iii) However, because A would have borne the economic burden of 
the partnership adjustment if the partnership and its partners had 
originally reported in a manner consistent with the partnership 
adjustment, the $40 imputed underpayment section 705(a)(2)(B) 
expenditure is allocated to A under Sec.  1.704-1(b)(2)(iii)(f)(4) 
of this chapter.

    (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.
    (2) Election under Sec.  301.9100-22 in effect. This section 
applies to any partnership taxable year beginning after November 2, 
2015 and before January 1, 2018 for which a valid election under Sec.  
301.9100-22 is in effect.
0
Par. 12. Section 301.6226-1 is added to read as follows:


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

    (a) In general. A partnership may elect under this section an 
alternative to the payment by the partnership of an imputed 
underpayment determined under section 6225 and the regulations 
thereunder. In addition, a partnership making a valid election under 
paragraph (b) of this section is no longer liable for the imputed 
underpayment (as defined in Sec.  301.6241-1(a)(3)) to which the 
election applies. If a notice of final partnership adjustment (FPA) 
mailed under section 6231 includes more than one imputed underpayment 
(as described in Sec.  301.6225-1(g)), a partnership may make an 
election under this section with respect to one or more imputed 
underpayments identified in the FPA. See Sec.  301.6226-2(f) regarding 
the determination of each reviewed year partner's (as defined in Sec.  
301.6241-1(a)(9)) share of the partnership adjustments (as defined in 
Sec.  301.6241-1(a)(6)) and related penalties, additions to tax, and 
additional amounts that must be taken into account.
    (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 must take into 
account their share of the partnership adjustments that relate to that 
imputed underpayment and are liable for any tax, penalties, additions 
to tax, additional amounts, and interest as described in Sec.  
301.6226-3. If an election is made under this section, any modification 
approved by the IRS under Sec.  301.6225-2 is taken into account by the 
reviewed year partners in accordance with Sec.  301.6226-2(f)(2).
    (2) Partnership. A partnership making a valid election under this 
section is not liable for the imputed underpayment to which the 
election applies (and no assessment of tax, levy, or proceeding in any 
court for the collection of such imputed underpayment may be made 
against such partnership). Any adjustments that do not result in an 
imputed underpayment described in Sec.  301.6225-1(f) that are 
associated with an imputed underpayment (as described in Sec.  
301.6225-1(g)) for which an election under this section is made are not 
taken into account by the partnership in the adjustment year (as 
defined in Sec.  301.6241-1(a)(1)) and instead each reviewed year 
partners' share of the adjustment determined in accordance with Sec.  
301.6226-2(f) must be included on the statement described in Sec.  
301.6226-2.
    (c) Time, form, and manner for making the election--(1) In general. 
An election under this section is valid only if all of the provisions 
of this section

[[Page 41991]]

and Sec.  301.6226-2 (regarding statements filed with the Internal 
Revenue Service (IRS) and furnished to reviewed year partners) are 
satisfied. However, 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) Invalid election. 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. 
An election under this section may be determined to be invalid even if 
a correction is made in accordance with Sec.  301.6226-2(d)(2) or if a 
correction is not made as required in accordance with Sec.  301.6226-
2(d)(3). However, the IRS has no obligation to require correction of 
errors discovered by the IRS and may determine an election to be 
invalid without providing an opportunity to correct under Sec.  
301.6226-2(d)(3).
    (3) 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.
    (4) 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 and 
include the information specified in paragraph (c)(4)(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(s) to which 
the election applies,
    (E) Each reviewed year partner's name, address, and TIN, and
    (F) Any other information prescribed by the IRS in forms, 
instructions, and other guidance.
    (d) Binding nature of statements. The election under this section, 
which includes filing and furnishing statements described in Sec.  
301.6226-2, are actions of the partnership under section 6223 and the 
regulations thereunder and, unless determined otherwise by the IRS, the 
partner's share of the adjustments and the applicability of any 
penalties, additions to tax, and additional amounts as set forth in the 
statement are binding on the partner pursuant to section 6223. 
Accordingly, a partner may not treat any partnership-related items (as 
defined in Sec.  301.6241-6) reflected on a statement described in 
Sec.  301.6226-2 on the partner's return inconsistently with how those 
items are treated on the statement that is filed with the IRS. See 
Sec.  301.6222-1(c)(2) (regarding partnership-related items the 
treatment of which a partner is bound to under section 6223).
    (e) Coordination with section 6234 regarding judicial review. 
Nothing in this section affects the rules regarding judicial review of 
a partnership adjustment. Accordingly, a partnership that makes an 
election under this section is not precluded from filing a petition 
under section 6234(a). See Sec.  301.6226-2(b)(3), Example 3.
    (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.
    (2) Election under Sec.  301.9100-22 in effect. This section 
applies to any partnership taxable year beginning after November 2, 
2015 and before January 1, 2018 for which a valid election under Sec.  
301.9100-22 is in effect.
0
Par. 13. Section 301.6226-2 is added to read as follows:


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

    (a) In general. A partnership that makes an election under Sec.  
301.6226-1 must furnish to each reviewed year partner (as defined in 
Sec.  301.6241-1(a)(9)) and file with the Internal Revenue Service 
(IRS) a statement that includes the items required by paragraphs (e) 
and (f) of this section with respect to each reviewed year partner's 
share of partnership adjustments (as defined in Sec.  301.6241-1(a)(6)) 
associated with the imputed underpayment for which an election under 
Sec.  301.6226-1 is made. The statements furnished to the reviewed year 
partners under this section are in addition to, and must be filed and 
furnished separate from, any other statements required to be filed with 
the IRS and furnished to partners, including any statements under 
section 6031(b). A separate statement under this section must be 
furnished to each reviewed year partner with respect to each reviewed 
year (as defined in Sec.  301.6241-1(a)(8)) subject to an election 
under Sec.  301.6226-1.
    (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 statement described in paragraph (a) of this section to 
each reviewed year 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.
    (3) Examples. The following examples illustrate the rules of this 
paragraph (b).

    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 setting forth a single imputed 
underpayment. Partnership makes a timely election under section 6226 
in accordance with Sec.  301.6226-1 with respect to the imputed 
underpayment and on May 31, 2024, timely mails a statement described 
in paragraph (a) of this section to A at 456 Broad St. Although the 
statement was mailed to the last address for A that was known to 
Partnership, it is returned to Partnership as undeliverable

[[Page 41992]]

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.
    Example 2. The facts are the same as in Example 1 of this 
paragraph (b)(3), 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.
    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 setting forth a 
single imputed underpayment. Partnership makes a timely election 
under section 6226 in accordance with Sec.  301.6226-1 with respect 
to the imputed underpayment. Partnership timely files a petition for 
readjustment under section 6234 with the Tax Court. The IRS 
prevails, and the Tax Court sustains all of the adjustments in the 
FPA with respect to the 2020 taxable year. The time to appeal the 
Tax Court decision expires, and the Tax Court decision becomes final 
on April 10, 2025. Under paragraph (b)(1)(ii) of this section, the 
adjustments in the FPA are finally determined on April 10, 2025, and 
Partnership must furnish the statements described in paragraph (a) 
of this section to its reviewed year partners and electronically 
file the statements with the IRS no later than June 9, 2025. See 
paragraph (c) of this section for the rules regarding filing the 
statements with the IRS.

    (c) Time and manner for filing the statements with the IRS. No 
later than 60 days after the date the partnership adjustments are 
finally determined (as described in paragraph (b)(1) of this section), 
the partnership must electronically file with the IRS the statements 
that the partnership furnishes to each reviewed year partner under this 
section, along with a transmittal that includes a summary of the 
statements filed and such other information required in forms, 
instructions, and other guidance prescribed by the IRS.
    (d) Correction of statements--(1) In general. A partnership 
corrects an error in a statement furnished under paragraph (b) of this 
section or filed under paragraph (c) of this section by filing the 
corrected statement with the IRS in the manner prescribed in paragraph 
(c) of this section and furnishing a copy of the corrected statement to 
the reviewed year partner to whom the statement relates in accordance 
with the forms, instructions, and other guidance prescribed by the IRS.
    (2) Error discovered by partnership--(i) Discovery within 60 days 
of statement due date. If a partnership discovers an error in a 
statement within 60 days of the due date for furnishing the statements 
to partners and filing the statements with the IRS (as described in 
paragraphs (b) and (c) of this section and Sec.  301.6226-3(e)(3)(ii)), 
the partnership must correct the error in accordance with paragraph 
(d)(1) of this section and does not have to seek consent of the IRS 
prior to doing so.
    (ii) Error discovered more than 60 days after statement due date. 
If a partnership discovers an error more than 60 days after the due 
date for furnishing the statements to partners and filing the 
statements with the IRS (as described in paragraphs (b) and (c) of this 
section and Sec.  301.6226-3(e)(3)(ii)), the partnership may only 
correct the error after receiving consent of the IRS in accordance with 
the forms, instructions, and other guidance prescribed by the IRS. The 
partnership may not furnish corrected statements unless it receives 
consent of the IRS to make the correction.
    (3) Error discovered by the IRS. If the IRS discovers an error in 
the statements furnished or filed under paragraphs (b) and (c) of this 
section and Sec.  301.6226-3(e)(3) or the IRS cannot determine whether 
the statements furnished or filed by the partnership are correct 
because of a failure by the partnership to comply with any requirement 
under this section or Sec.  301.6226-3(e), the IRS may require the 
partnership to correct such errors in accordance with paragraph (d)(1) 
of this section or to provide additional information as necessary. 
Failure by the partnership to correct an error or to provide 
information when required by the IRS may be treated by the IRS as a 
failure to properly furnish correct statements to partners and file the 
correct statements with the IRS as described in paragraphs (b) and (c) 
of this section or in Sec.  301.6226-3(e)(3). Whether the IRS requires 
the partnership to correct any errors discovered by the IRS or provide 
additional information is discretionary on the part of the IRS and the 
IRS is under no obligation to require the partnership to provide 
additional information or to correct any errors discovered or brought 
to the IRS's attention at any time.
    (4) Adjustments in the corrected statements taken into account by 
the reviewed year partners. The adjustments included on a corrected 
statement are taken into account by a reviewed year partner in 
accordance with Sec.  301.6226-3 for the reporting year (as defined in 
Sec.  301.6226-3(a)).
    (e) Content of the statements. Each statement described in 
paragraph (a) of this section must include the following correct 
information:
    (1) The name and TIN 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 partner (or with respect to any indirect partner (as defined in 
Sec.  301.6241-1(a)(4)) that holds its interest in the partnership 
through its interest in the reviewed year partner);
    (6) The applicability of any penalty, addition to tax, or 
additional amount determined at the partnership level that relates to 
any adjustments allocable to the reviewed year partner and the 
adjustments to which the penalty, addition to tax, or additional amount 
relates, the section of the Internal Revenue Code (Code) under which 
each penalty, addition to tax, or additional amount is imposed, and the 
applicable rate of each penalty, addition to tax, or additional amount 
determined at the partnership level;
    (7) The date the statement is furnished to the reviewed year 
partner;
    (8) The partnership taxable year to which the adjustments relate; 
and
    (9) Any other information required by forms, instructions, and 
other guidance prescribed by the IRS.
    (f) Determination of each partner's share of adjustments--(1) 
Adjustments and other amounts--(i) In general. Except as described in 
paragraphs (f)(1)(ii), (f)(1)(iii), or (f)(2) of this section, the 
adjustments set forth in the statement described in paragraph (a) of 
this section are reported to the reviewed year partner in the same 
manner as each adjusted partnership-related item was originally 
allocated to the reviewed year partner on the partnership return for 
the reviewed year.
    (ii) Adjusted partnership-related item not reported on the 
partnership's return for the reviewed year. Except as described in 
paragraph (f)(1)(iii) of this section, if the adjusted partnership-

[[Page 41993]]

related item was not reported on the partnership return for the 
reviewed year, each reviewed year partner's share of the adjustments 
must be determined in accordance with how such partnership-related 
items would have been allocated under rules that apply with respect to 
partnership allocations, including under the partnership agreement.
    (iii) Adjustments that specifically allocate items. If an 
adjustment involves an allocation of a partnership-related item to a 
specific partner or in a specific manner, including a reallocation of 
such an item, the reviewed year partner's share of the adjustment set 
forth in the statement is determined in accordance with the adjustment 
as finally determined (as described in paragraph (b)(1) of this 
section).
    (2) Treatment of modifications disregarded. Any modifications 
approved by the IRS with respect to the reviewed year partner (or with 
respect to any indirect partner (as defined in Sec.  301.6241-1(a)(4)) 
that holds its interest in the partnership through its interest in the 
reviewed year partner) under Sec.  301.6225-2 are disregarded for 
purposes of determining each partner's share of the adjustments under 
paragraph (f)(1) of this section.
    (g) Coordination with other provisions under subtitle A of the 
Code--(1) Statements furnished to qualified investment entities 
described in section 860. If a reviewed year partner is a qualified 
investment entity within the meaning of section 860(b) and the partner 
receives a statement described in paragraph (a) of this section, the 
partner may be able to avail itself of the deficiency dividend 
procedure described in Sec.  301.6226-3(b)(4).
    (2) Liability for tax under section 7704(g)(3). An election under 
this section has no effect on a partnership's liability for any tax 
under section 7704(g)(3) (regarding the exception for electing 1987 
partnerships from the general rule that certain publicly traded 
partnerships are treated as corporations).
    (3) Adjustments subject to chapters 3 and 4. A partnership that 
makes an election under Sec.  301.6226-1 with respect to an imputed 
underpayment must pay the amount of tax required to be withheld under 
chapter 3 or chapter 4, if any, in accordance with Sec.  301.6241-
7(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.
    (2) Election under Sec.  301.9100-22 in effect. This section 
applies to any partnership taxable year beginning after November 2, 
2015 and before January 1, 2018 for which a valid election under Sec.  
301.9100-22 is in effect.
0
Par. 14. Section 301.6226-3 is added to read as follows:


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

    (a) Effect of taking adjustments into account on tax imposed by 
chapter 1. Except as otherwise provided in this section, the tax 
imposed by chapter 1 of subtitle A of the Internal Revenue Code 
(chapter 1 tax) for each reviewed year partner (as defined in Sec.  
301.6241-1(a)(9)) for the taxable year that includes the date a 
statement was furnished in accordance with Sec.  301.6226-2 (the 
reporting year) is increased by the additional reporting year tax, or 
if the additional reporting year tax is less than zero, decreased by 
such amount. The additional reporting year tax is the aggregate of the 
correction amounts (determined in accordance with paragraph (b) of this 
section). In addition to being liable for the additional reporting year 
tax, a reviewed year partner must also calculate and pay for the 
reporting year any penalties, additions to tax, and additional amounts 
(as determined under paragraph (d) of this section). Finally, a 
reviewed year partner must also calculate and pay for the reporting 
year any interest (as determined under paragraph (c) of this section).
    (b) Determining the aggregate of the correction amounts--(1) In 
general. For purposes of paragraph (a) of this section, the aggregate 
of the correction amounts is the sum of the correction amounts 
described in paragraphs (b)(2) and (3) of this section. A correction 
amount under paragraph (b)(2) or (3) of this section may be less than 
zero, and any correction amount that is less than zero may reduce any 
other correction amount with the result that the aggregate of the 
correction amounts under this paragraph (b)(1) may also be less than 
zero. However, see paragraphs (c) and (d) of this section requiring a 
separate determination of interest and penalties, additions to tax, and 
additional amounts on the correction amount for each applicable taxable 
year (as defined in paragraph (c)(1) of this section) without regard to 
the correction amount for any other applicable taxable year.
    (2) Correction amount for the first affected year--(i) In general. 
The correction amount for the taxable year of the partner that includes 
the end of the reviewed year (the first affected year) is the amount by 
which the reviewed year partner's chapter 1 tax would increase or 
decrease for the first affected year if the partner's taxable income 
for such year was recomputed by taking into account the reviewed year 
partner's share of the partnership adjustments (as defined in Sec.  
301.6241-1(a)(6)) reflected on the statement described in Sec.  
301.6226-2 with respect to the partner.
    (ii) Calculation of the correction amount for the first affected 
year. The correction amount is the amount of chapter 1 tax that would 
have been imposed for the first affected year if the items as adjusted 
in the statement described in Sec.  301.6226-2 had been reported as 
such on the return for the first affected year less the sum of:
    (A) The amount of chapter 1 tax shown by the partner on the return 
for the first affected year (which includes amounts shown on an amended 
return for such year, including an amended return filed, or alternative 
to an amended return submitted, under section 6225(c)(2) by the 
reviewed year partner), plus
    (B) Amounts not so shown previously assessed (or collected without 
assessment) (as defined in Sec.  1.6664-2(d) of this chapter), less
    (C) The amount of rebates made (as defined in Sec.  1.6664-2(e) of 
this chapter).
    (iii) Definition 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 (or alternatives)); C = amounts not so shown previously 
assessed (or collected without assessment); and D = the amount of 
rebates made.

    (3) Correction amount for the intervening years--(i) In general. 
The correction amount for all taxable years after the first affected 
year and before the reporting year (the intervening years) is the 
aggregate of the correction amounts determined for each intervening 
year. Determining the correction amount for each intervening year is a 
year-by-year determination. The correction amount for each intervening 
year is the amount by which the reviewed year partner's chapter 1 tax 
for such year would increase or decrease if the partner's taxable 
income for such year was recomputed by taking into account any 
adjustments to tax attributes (as defined in Sec.  301.6241-1(a)(10)) 
of the partner under this paragraph (b)(3).

[[Page 41994]]

    (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, or alternative 
to an amended return submitted, under section 6225(c)(2) by a reviewed 
year partner), plus
    (B) Amounts not so shown previously assessed (or collected without 
assessment) (as defined in Sec.  1.6664-2(d) of this chapter), less
    (C) The amount of rebates made (as defined in Sec.  1.6664-2(e) of 
this chapter).
    (iii) Definition 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 (or alternatives)); C = amounts not so shown previously 
assessed (or collected without assessment); and D = the amount of 
rebates made.

    (4) Coordination of sections 860 and 6226. If a qualified 
investment entity (QIE) within the meaning of section 860(b) receives a 
statement described in Sec.  301.6226-2(a) and correctly makes a 
determination within the meaning of section 860(e)(4) that one or more 
of the adjustments reflected in the statement is an adjustment within 
the meaning of section 860(d) with respect to that QIE for a taxable 
year, the QIE may distribute deficiency dividends within the meaning of 
section 860(f) for that taxable year and avail itself of the deficiency 
dividend procedures set forth in section 860. If the QIE utilizes the 
deficiency dividend procedures with respect to adjustments in a 
statement described in Sec.  301.6226-2(a), the QIE may claim a 
deduction for deficiency dividends against the adjustments furnished to 
the QIE in the statement in calculating any correction amounts under 
paragraphs (b)(2) and (3) of this section, and interest on such 
correction amounts under paragraph (c) of this section, to the extent 
that the QIE makes deficiency dividend distributions under section 
860(f) and complies with all requirements of section 860 and the 
regulations thereunder.
    (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 (without extension) of the reviewed year 
partner's return for the applicable taxable year until the amount is 
paid.
    (3) Rate of interest. For purposes of paragraph (c) of this 
section, interest is calculated using the underpayment rate under 
section 6621(a)(2) by substituting ``5 percentage points'' for ``3 
percentage points'' in section 6621(a)(2)(B).
    (d) Penalties--(1) Applicability determined at the partnership 
level. In the case of a partnership that makes an election under 
section 6226, the applicability of any penalty, addition to tax, and 
additional amount that relates to an adjustment to any partnership-
related item is determined at the partnership level in accordance with 
section 6221(a). The partnership's reviewed year partners are liable 
for such penalties, additions to tax, and additional amounts as 
determined under paragraph (d)(2) of this section.
    (2) Amount calculated at partner level. A reviewed year partner 
calculates the amount of any penalty, addition to tax, or additional 
amount relating to the partnership adjustments taken into account under 
paragraph (b)(1) of this section as if the correction amount were an 
underpayment or understatement of the reviewed year partner for the 
first affected year or intervening year, as applicable. The calculation 
of any penalty, addition to tax, or additional amount is based on the 
characteristics of, and facts and circumstances applicable to, the 
reviewed year partner for the first affected year or intervening year, 
as applicable after taking into account the partnership adjustments 
reflected on the statement. If after taking into account the 
partnership 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 
claiming that a penalty, addition to tax, or additional amount that 
relates to a partnership adjustment reflected on a statement described 
in Sec.  301.6226-2 (or paragraph (e)(3) of this section) is not due 
because of a partner-level defense must first pay the penalty and file 
a claim for refund for the reporting year. Partner-level defenses are 
limited to those that are personal to the reviewed year partner (for 
example, a reasonable cause and good faith defense under section 
6664(c) that is based on the facts and circumstances applicable to the 
partner).
    (e) Pass-through partners--(1) In general. Except as provided in 
paragraph (e)(6) of this section, if a pass-through partner (as defined 
in Sec.  301.6241-1(a)(5)) is furnished a statement described in Sec.  
301.6226-2 (including a statement described in paragraph (e)(3) of this 
section) with respect to adjustments of a partnership that made an 
election under Sec.  301.6226-1 (audited partnership), the pass-through 
partner must file with the IRS a partnership adjustment tracking report 
in accordance with forms, instructions, or other guidance prescribed by 
the IRS on or before the due date described in paragraph (e)(3)(ii) of 
this section, and file and furnish statements in accordance with 
paragraph (e)(3) of this section. The pass-through partner must

[[Page 41995]]

comply with paragraph (e) of this section with respect to each 
statement furnished to the pass-through partner.
    (2) Failure to file and furnish required documents--(i) Failure to 
timely file and furnish statements. If any pass-through partner fails 
to timely file and furnish correct statements in accordance with 
paragraph (e)(3) of this section, the pass-through partner must compute 
and pay an imputed underpayment, as well as any penalties, additions to 
tax, additional amounts, and interest with respect to the adjustments 
reflected on the statement furnished to the pass-through partner in 
accordance with paragraph (e)(4) of this section. The IRS may assess 
such imputed underpayment against such pass-through partner without 
regard to the limitations under section 6232(b). See Sec.  301.6232-
1(c)(2). A failure to furnish statements in accordance with paragraph 
(e)(3) of this section is treated as a failure to timely pay an imputed 
underpayment required under paragraph (e)(4)(i) of this section, unless 
the pass-through partner computes and pays an imputed underpayment in 
accordance with paragraph (e)(4) of this section. See section 6651(i).
    (ii) Failures relating to partnership adjustment tracking report. 
Failure to timely file the partnership adjustment tracking report as 
required in paragraph (e)(1) of this section, or filing such report 
without showing the information required under paragraph (e)(1) of this 
section, is subject to the penalty imposed by section 6698.
    (3) Furnishing statements to partners--(i) In general. A pass-
through partner described in paragraph (e)(1) of this section must 
furnish a statement that includes the items required by paragraph 
(e)(3)(iii) of this section to each partner that held an interest in 
the pass-through partner at any time during the taxable year of the 
pass-through partner to which the adjustments in the statement 
furnished to the pass-through partner relate (affected partner). The 
statements described in this paragraph (e)(3) must be filed with the 
IRS by the due date prescribed in paragraph (e)(3)(ii) of this section. 
Except as otherwise provided in paragraphs (e)(3)(ii), (iii), and (v) 
of this section, the rules applicable to statements described in Sec.  
301.6226-2 are applicable to statements described in this paragraph 
(e)(3).
    (ii) Time for filing and furnishing the statements. The pass-
through partner must file with the IRS and furnish to its affected 
partners the statements described in paragraph (e)(3) of this section 
no later than the extended due date for the return for the adjustment 
year (as defined in Sec.  301.6241-1(a)(1)) of the audited partnership. 
For purposes of this section, the extended due date is the extended due 
date under section 6081 regardless of whether the audited partnership 
is required to file a return for the adjustment year or timely files a 
request for an extension under section 6081 and the regulations 
thereunder.
    (iii) Contents of statements. Each statement described in paragraph 
(e)(3) of this section must include the following correct information--
    (A) The name and taxpayer identification number (TIN) of the 
audited partnership;
    (B) The adjustment year of the audited partnership;
    (C) The extended due date for the return for the adjustment year of 
the audited partnership (as described in paragraph (e)(3)(ii) of this 
section);
    (D) The date on which the audited partnership furnished its 
statements required under Sec.  301.6226-2(b);
    (E) The name and TIN of the partnership that furnished the 
statement to the pass-through partner if different from the audited 
partnership;
    (F) The name and TIN of the pass-through partner;
    (G) The pass-through partner's taxable year to which the 
adjustments reflected on the statements described in paragraph (e)(3) 
of this section relates;
    (H) The name and TIN of the affected partner to whom the statement 
is being furnished;
    (I) The current or last address of the affected partner that is 
known to the pass-through partner;
    (J) The affected partner's share of items as originally reported to 
such partner under section 6031(b) and, if applicable, section 6227, 
for the taxable year to which the adjustments reflected on the 
statement furnished to the pass-through partner relate;
    (K) The affected partner's share of partnership adjustments 
determined under Sec.  301.6226-2(f)(1) as if the affected partner were 
the reviewed year partner and the pass-through partner were the 
partnership;
    (L) Modifications approved by the IRS with respect to the affected 
partner that holds its interest in the audited partnership through the 
pass-through partner;
    (M) The applicability of any penalties, additions to tax, or 
additional amounts that relate to any adjustments allocable to the 
affected partner and the adjustments allocated to the affected partner 
to which such penalties, additions to tax, or additional amounts 
relate, the section of the Internal Revenue Code under which each 
penalty, addition to tax, or additional amount is imposed, and the 
applicable rate of each penalty, addition to tax, or additional amount; 
and
    (N) Any other information required by forms, instructions, and 
other guidance prescribed by the IRS.
    (iv) Affected partner must take into account the adjustments. A 
statement furnished to an affected partner in accordance with paragraph 
(e)(3) of this section is treated as if it were a statement described 
in Sec.  301.6226-2. An affected partner that is a pass-through 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. If a pass-through 
partner furnishes statements to its affected partners in accordance 
with paragraph (e)(3) of this section, the pass-through partner must 
comply with the requirements of Sec.  301.6241-7(b)(4), and an affected 
partner must comply with the requirements of paragraph (f) of this 
section. For purposes of applying both Sec.  301.6241-7(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

[[Page 41996]]

references to the return for the adjustment year of the audited 
partnership as described in paragraph (e)(3)(ii) of this section.
    (4) Pass-through partner pays an imputed underpayment--(i) In 
general. If a pass-through partner described in paragraph (e)(1) of 
this section does not furnish statements in accordance with paragraph 
(e)(3) of this section, the pass-through partner must compute and pay 
an imputed underpayment determined under paragraph (e)(4)(iii) of this 
section. The pass-through partner must also pay any penalties, 
additions to tax, additional amounts, and interest as determined under 
paragraph (e)(4)(iv) of this section. A failure to timely pay an 
imputed underpayment required under this paragraph (e)(4) is subject to 
penalty under section 6651(i).
    (ii) Time of payment. A pass-through partner must file a 
partnership adjustment tracking report and compute and pay the imputed 
underpayment and any penalties, additions to tax, additional amounts, 
and interest, as described in paragraph (e)(4)(i) of this section, in 
accordance with forms, instructions, and other guidance no later than 
the extended due date for the return for the adjustment year of the 
audited partnership.
    (iii) Computation of the imputed underpayment. The imputed 
underpayment under paragraph (e)(4)(i) of this section is computed in 
the same manner as an imputed underpayment under section 6225 and Sec.  
301.6225-1, except that adjustments reflected on the statement 
furnished to the pass-through partner under Sec.  301.6226-2 are 
treated as partnership adjustments (as defined in Sec.  301.6241-
1(a)(6)) for the first affected year. Any modification approved by the 
IRS under Sec.  301.6225-2 with respect to the pass-through partner 
(including any modifications with respect to a relevant partner (as 
defined in Sec.  301.6225-2(a)) that holds its interest in the audited 
partnership through its interest in the pass-through partner) reflected 
on the statement furnished to the pass-through partner under Sec.  
301.6226-2 (or paragraph (e)(3) of this section) is taken into account 
in calculating the imputed underpayment under this paragraph 
(e)(4)(iii). Any modification that was not approved by the IRS under 
Sec.  301.6225-2 may not be taken into account in calculating the 
imputed underpayment under this paragraph (e)(4)(iii).
    (iv) Penalties and interest--(A) Penalties. A pass-through partner 
must compute and pay any applicable penalties, additions to tax, and 
additional amounts on the imputed underpayment calculated under 
paragraph (e)(4)(iii) of this section as if such amount were an imputed 
underpayment for the pass-through partner's first affected year. See 
Sec.  301.6233(a)-1(c).
    (B) Interest. A pass-through partner must pay interest on the 
imputed underpayment calculated under paragraph (e)(4)(iii) of this 
section in accordance with paragraph (c) of this section as if such 
imputed underpayment were an imputed underpayment due for the first 
affected year.
    (v) Adjustments that do not result in an imputed underpayment. 
Adjustments taken into account under paragraph (e)(4) of this section 
that do not result in an imputed underpayment (as defined in Sec.  
301.6225-1(f)) are taken into account by the pass-through partner in 
accordance with Sec.  301.6225-3 in the taxable year of the pass-
through partner that includes the date the imputed underpayment 
required under paragraph (e)(4)(i) of this section is paid. If, after 
making the computation described in paragraph (e)(4)(iii) of this 
section, no imputed underpayment exists and therefore no payment is 
required under paragraph (e)(4)(i) of this section, the adjustments 
that did not result in an imputed underpayment are taken into account 
by the pass-through partner in accordance with Sec.  301.6225-3 in the 
taxable year of the pass-through partner that includes the date the 
statement described in Sec.  301.6226-2 (or paragraph (e)(3) of this 
section) is furnished to the pass-through partner.
    (vi) Coordination with chapters 3 and 4. If a pass-through partner 
pays an imputed underpayment described in paragraph (e)(4)(i) of this 
section, Sec.  301.6241-7(b)(3) applies to the pass-through partner by 
substituting ``pass-through partner'' for ``partnership'' where Sec.  
301.6241-7(b)(3) refers to the partnership that pays the imputed 
underpayment.
    (5) Treatment of pass-through partners that are not partnerships--
(i) S corporations. For purposes of this paragraph (e), an S 
corporation is treated as a partnership and its shareholders are 
treated as partners.
    (ii) Trusts and estates. Except as provided in paragraph (g) of 
this section, for purposes of paragraph (e) of this section, a trust 
and its beneficiaries, and an estate and its beneficiaries are treated 
in the same manner as a partnership and its partners.
    (6) Pass-through partners subject to chapter 1 tax. A pass-through 
partner that is subject to tax under chapter 1 of the Code on the 
adjustments (or a portion of the adjustments) reflected on the 
statement furnished to such partner under Sec.  301.6226-2 (or 
paragraph (e)(3) of this section) takes the adjustments into account 
under this paragraph (e)(6) when the pass-through partner calculates 
and pays the additional reporting year tax as determined under 
paragraph (b) of this section and furnishes statements to its partners 
in accordance with paragraph (e)(3) of this section. Notwithstanding 
the prior sentence, a pass-through partner is only required to include 
on a statement under paragraph (e)(3) of this section the adjustments 
that would be required to be included on statements furnished to owners 
or beneficiaries under sections 6037 and 6034A, as applicable, if the 
pass-through partner had correctly reported the items for the year to 
which the adjustments relate. If the pass-through partner fails to 
comply with the requirements of this paragraph (e)(6), the pass-through 
partner must compute and pay an imputed underpayment, as well as any 
penalties, additions to tax, additional amounts, and interest with 
respect to the adjustments reflected on the statement furnished to such 
partner in accordance with paragraph (e)(4) of this section.
    (f) Partners subject to withholding under chapters 3 and 4. A 
reviewed year partner that is subject to withholding under Sec.  
301.6241-7(b)(4) must file an income tax return for the reporting year 
to report its additional reporting year tax and its share of any 
penalties, additions to tax, additional amounts, and interest 
(notwithstanding any filing exception in Sec.  1.6012-1(b)(2)(i) or 
Sec.  1.6012-2(g)(2)(i) of this chapter). The amount of tax paid by a 
partnership under Sec.  301.6241-7(b)(4) is allowed as a credit under 
section 33 to the reviewed year partner to the extent that the tax is 
allocable to the reviewed year partner (within the meaning of Sec.  
1.1446-3(d)(2) of this chapter) or is actually withheld from the 
reviewed year partner (within the meaning of Sec.  1.1464-1(a) or Sec.  
1.1474-3 of this chapter). The credit is allowed against the reviewed 
year partner's income tax liability for its reporting year. The 
reviewed year partner must substantiate the credit by attaching the 
applicable Form 1042-S, ``Foreign Person's U.S. Source Income Subject 
to Withholding,'' or Form 8805, ``Foreign Partner's Information 
Statement of Section 1446 Withholding Tax,'' to its income tax return 
for the reporting year, as well as satisfying any other requirements 
prescribed by the IRS in forms and instructions.
    (g) Treatment of disregarded entities and wholly-owned grantor 
trusts. In the case of a reviewed year partner that is a wholly-owned 
entity disregarded as

[[Page 41997]]

separate from its owner for Federal tax purposes in the reviewed year 
or a trust that is wholly owned by only one person in the reviewed 
year, whether the grantor or another person, and where the trust 
reports the owner's information to payors under Sec.  1.671-
4(b)(2)(i)(A) of this chapter and that is furnished a statement 
described in Sec.  301.6226-2 (or paragraph (e)(3) of this section), 
the owner of the disregarded entity or wholly-owned grantor trust must 
take into account the adjustments reflected on that statement in 
accordance with this section as if the owner were the reviewed year 
partner.
    (h) Examples. The following examples illustrate the rules of this 
section. For purposes of these examples, each partnership is subject to 
subchapter C of chapter 63 of the Code, each partnership and partner 
has a calendar year taxable year, no modifications are requested by any 
partnership under Sec.  301.6225-2 (unless otherwise stated), no 
penalties, additions to tax, or additional amounts are determined at 
the partnership level (unless otherwise stated), all persons are U.S. 
persons (unless otherwise stated), 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.

    Example 1.  On its partnership return for the 2020 tax year, 
Partnership reported ordinary income of $1,000 and charitable 
contributions of $400. On June 1, 2023, the IRS mails a notice of 
final partnership adjustment (FPA) to Partnership for Partnership's 
2020 year disallowing the charitable contribution in its entirety 
and determining that a 20 percent accuracy-related penalty under 
section 6662(b) applies to the disallowance of the charitable 
contribution, and setting forth a single imputed underpayment with 
respect to such adjustments. Partnership makes a timely election 
under section 6226 in accordance with Sec.  301.6226-1 with respect 
to the imputed underpayment in the FPA for Partnership's 2020 year 
and files a timely petition in the Tax Court challenging the 
partnership adjustments. The Tax Court determines that Partnership 
is not entitled to any of the claimed $400 in charitable 
contributions and upholds the applicability of the penalty. The 
decision regarding Partnership's 2020 tax year becomes final on 
December 15, 2025. Pursuant to Sec.  301.6226-2(b), the partnership 
adjustments are finally determined on December 15, 2025. On February 
2, 2026, Partnership files the statements described under Sec.  
301.6226-2 with the IRS and furnishes to partner A, an individual 
who was a partner in Partnership during 2020, a statement described 
in Sec.  301.6226-2. A had a 25 percent interest in Partnership 
during all of 2020 and was allocated 25 percent of all items from 
Partnership for that year. The statement shows A's share of ordinary 
income reported on Partnership's return for the reviewed year of 
$250 and A's share of the charitable contribution reported on 
Partnership's return for the reviewed year of $100. The statement 
also shows no adjustment to A's share of ordinary income, but does 
show 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.
    Example 2. On its partnership return for the 2020 tax year, 
Partnership reported an ordinary loss of $500. On June 1, 2023, the 
IRS mails an FPA to Partnership for the 2020 taxable year 
determining that $300 of the $500 in ordinary loss should be 
recharacterized as a long-term capital loss. Partnership has no 
long-term capital gain for its 2020 tax year. The FPA for 
Partnership's 2020 tax year reflects an adjustment of an increase in 
ordinary income of $300 (as a result of the disallowance of the 
recharacterization of $300 from ordinary loss to long-term capital 
loss) and an imputed underpayment related to that adjustment, as 
well as an adjustment of an additional $300 in long-term capital 
loss for 2020 which does not result in an imputed underpayment under 
Sec.  301.6225-1(f). Partnership makes a timely election under 
section 6226 in accordance with Sec.  301.6226-1 with respect to the 
imputed underpayment in the FPA and does not file a petition for 
readjustment under section 6234. Accordingly, under Sec.  301.6226-
1(b)(2) and Sec.  301.6225-3(b)(6), the adjustment year partners (as 
defined in Sec.  301.6241-1(a)(2)) do not take into account the $300 
long-term capital loss that does not result in an imputed 
underpayment. Rather, the $300 long-term capital loss is taken into 
account by the reviewed year partners. The time to file a petition 
expires on August 30, 2023. Pursuant to Sec.  301.6226-2(b), the 
partnership adjustments become finally determined on August 31, 
2023. On September 30, 2023, Partnership files with the IRS 
statements described in Sec.  301.6226-2 and furnishes statements to 
all of its reviewed year partners in accordance with Sec.  301.6226-
2. One partner of Partnership in 2020, B (an individual), had a 25 
percent interest in Partnership during all of 2020 and was allocated 
25 percent of all items from Partnership for that year. The 
statement filed with the IRS and furnished to B shows B's allocable 
share of the ordinary loss reported on Partnership's return for the 
2020 taxable year as $125. The statement also shows an adjustment to 
B's allocable share of the ordinary loss in the amount of <$75>, 
resulting in a corrected ordinary loss allocated to B of $50 for 
taxable year 2020 ($125 originally allocated to B less $75 which is 
B's share of the adjustment to the ordinary loss). In addition, the 
statement shows an increase to B's share of long-term capital loss 
in the amount of $75 (B's share of the adjustment that did not 
result in the imputed underpayment with respect to Partnership). B 
must pay the additional reporting year tax as determined in 
accordance with paragraph (b) of this section. B computes his 
additional reporting year tax as follows. First, B determines the 
correction amount for the first affected year (the 2020 taxable 
year) by taking into account B's share of the partnership 
adjustments (a $75 reduction in ordinary loss and an increase of $75 
in long-term capital loss) for the 2020 taxable year. B determines 
the amount by which his chapter 1 tax for 2020 would have increased 
or decreased if the $75 adjustment to ordinary loss and the $75 
adjustment to long-term capital loss from Partnership were taken 
into account for that year. Second, B determines if there is any 
increase or decrease in chapter 1 tax for any intervening year as a 
result of the adjustment to the ordinary and capital losses for 
2020. B's aggregate of the correction amounts is the correction 
amount for 2020, B's first affected year plus any correction amounts 
for any intervening years. B is also liable for any interest on the 
correction amount for the first affected year and for any 
intervening year as determined in accordance with paragraph (c) of 
this section.
    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

[[Page 41998]]

2020 year increasing the amount of U.S. source dividend income to 
$4,000 and determining that a 20 percent accuracy-related penalty 
under section 6662(b) applies to the increase in U.S. source 
dividend income. Partnership makes a timely election under section 
6226 in accordance with Sec.  301.6226-1 with respect to the imputed 
underpayment in the FPA for Partnership's 2020 year and does not 
file a petition for readjustment under section 6234. The time to 
file a petition expires on August 30, 2023. Pursuant to Sec.  
301.6226-2(b), the partnership adjustments become finally determined 
on August 31, 2023. On September 30, 2023, Partnership files the 
statements described under Sec.  301.6226-2 with the IRS and 
furnishes to partner C, a nonresident alien individual who was a 
partner in Partnership during 2020 (and remains a partner in 
Partnership in 2023), a statement described in Sec.  301.6226-2. C 
had a 50 percent interest in Partnership during all of 2020 and was 
allocated 50 percent of all items from Partnership for that year. 
The statement shows C's share of U.S. source dividend income 
reported on Partnership's return for the reviewed year of $1,000 and 
an adjustment to U.S. source dividend income of $1,000. In addition, 
the statement reports that a 20 percent accuracy-related penalty 
under section 6662(b) applies. Under Sec.  301.6241-7(b)(4)(i), 
because the additional $1,000 in U.S. source dividend income 
allocated to C is an amount subject to withholding (as defined in 
Sec.  301.6241-7(b)(2)), Partnership must pay the amount of tax 
required to be withheld on the adjustment. See Sec. Sec.  1.1441-
1(b)(1) and 1.1441-5(b)(2)(i)(A) of this chapter. Under Sec.  
301.6241-7(b)(4)(ii), Partnership may reduce the amount of 
withholding tax it must pay because it has valid documentation from 
2020 that establishes that C was entitled to a reduced rate of 
withholding in 2020 on U.S. source dividend income of 10 percent 
pursuant to a treaty. Partnership withholds $100 of tax from C's 
distributive share, remits the tax to the IRS, and files the 
necessary return and information returns required by Sec.  1.1461-1 
of this chapter. On his 2023 return, C must report the additional 
reporting year tax determined in accordance with paragraph (b) of 
this section, the accuracy-related penalty determined in accordance 
with paragraph (d) of this section, and interest determined in 
accordance with paragraph (c) of this section on the correction 
amount for the first affected year, the correction amount for any 
intervening year, and the penalty. Under paragraph (f) of this 
section, C may claim the $100 withholding tax paid by Partnership 
pursuant to Sec.  301.6241-7(b)(4)(i) as a credit under section 33 
against C's income tax liability on his 2023 return.
    Example 4.  On its partnership return for the 2020 tax year, 
Partnership reported ordinary income of $100 and a long-term capital 
gain of $40. Partnership had four equal partners during the 2020 tax 
year: E, F, G, and H, all of whom were individuals. On its 
partnership return for the 2020 tax year, the entire long-term 
capital gain was allocated to partner E and the ordinary income was 
allocated to all partners based on their equal (25 percent) interest 
in Partnership. The IRS initiates an administrative proceeding with 
respect to Partnership's 2020 taxable year and determines that the 
long-term capital gain should have been allocated equally to all 
four partners and that Partnership should have recognized an 
additional $10 in ordinary income. On June 1, 2023, the IRS mails an 
FPA to Partnership reflecting the reallocation of the $40 long-term 
capital gain so that F, G, and H each have $10 increase in long-term 
capital gain and E has a $30 reduction in long-term capital gain for 
2020. In addition, the FPA reflects the partnership adjustment 
increasing ordinary income by $10. The FPA reflects a general 
imputed underpayment with respect to the increase in ordinary income 
and a specific imputed underpayment with respect to the increase in 
long-term capital gain allocated to F, G, and H. In addition, the 
FPA reflects a $30 partnership adjustment that does not result in an 
imputed underpayment, that is, the reduction of $30 in long-term 
capital gain with respect to E that is associated with the specific 
imputed underpayment in accordance with Sec.  301.6225-
1(g)(2)(iii)(B). Partnership makes a timely election under section 
6226 in accordance with Sec.  301.6226-1 with respect to the 
specific imputed underpayment relating to the reallocation of long-
term capital gain. Partnership does not file a petition for 
readjustment under section 6234. The time to file a petition expires 
on August 30, 2023. Pursuant to Sec.  301.6226-2(b), the partnership 
adjustments become finally determined on August 31, 2023. 
Partnership timely pays and reports the general imputed underpayment 
relating to the partnership adjustment to ordinary income. On 
September 30, 2023, Partnership files with the IRS statements 
described in Sec.  301.6226-2 and furnishes statements to its 
partners reflecting their share of the partnership adjustments as 
finally determined in the FPA that relate to the specific imputed 
underpayment, that is, the reallocation of long-term capital gain. 
The statements for F, G, and H each reflect a partnership adjustment 
of an additional $10 of long-term capital gain for 2020. The 
statement for E reflects a partnership adjustment of a reduction of 
$30 of long-term capital gain for 2020. 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.
    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 $500 
long-term capital loss, the only adjustment. Accordingly, the 
imputed underpayment reflected in the NOPPA is $80 ($200 x 40 
percent). F, a C corporation partner with a 50 percent interest in 
Partnership, received 50 percent of all long-term capital losses for 
2020. As part of the modification process described in Sec.  
301.6225-2(d)(2), F files an amended return for 2020 taking into 
account F's share of the partnership adjustment ($100 reduction in 
long-term capital loss) and pays the tax owed for 2020, including 
interest. Also as part of the modification process, F also files 
amended returns for 2021 and 2022 and pays additional tax (and 
interest) for these years because the reduction in long-term capital 
loss for 2020 affected the tax due from F for 2021 and 2022. See 
Sec.  301.6225-2(d)(2). The reduction of the long-term capital loss 
in 2020 did not affect any other taxable year of F. This is the only 
modification requested. The IRS approves the modification with 
respect to F and on June 1, 2023, mails an FPA to Partnership for 
Partnership's 2020 year reflecting the partnership adjustment 
reducing the long-term capital loss in the amount of $200. The FPA 
also reflects the modification to the imputed underpayment based on 
the amended returns filed by F taking into account F's share of the 
reduction in the long-term capital loss. Therefore, the imputed 
underpayment in the FPA is $40 ($100 x 40 percent). Partnership 
makes a timely election under section 6226 in accordance with Sec.  
301.6226-1 with respect to the imputed underpayment in the FPA for 
Partnership's 2020 year and files a timely petition in the Tax Court 
challenging the partnership adjustments. The Tax Court upholds the 
determinations in the FPA and the decision regarding Partnership's 
2020 tax year becomes final on December 15, 2025. Pursuant to Sec.  
301.6226-2(b), the partnership adjustments are finally determined on 
December 15, 2025. On February 1, 2026, Partnership files the 
statements described under Sec.  301.6226-2 with the IRS and 
furnishes to its partners statements reflecting their shares of the 
partnership adjustment. The statement issued to F reflects F's share 
of the partnership adjustment for Partnership's 2020 taxable year as 
finally determined by the Tax Court. The statement shows F's share 
of the long-term capital loss adjustment for the reviewed year of 
$100, as well as the $100 long-term capital loss taken into account 
by F as part of the amended return modification. Accordingly, in 
accordance with paragraph (b) of this section, when F computes its 
correction amounts for the first affected year (the 2020 taxable 
year) and the intervening years (the 2021 through 2026 taxable 
years), F computes any increase

[[Page 41999]]

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.
    Example 6.  Partnership has two equal partners for the 2020 tax 
year: I (an individual) and J (a partnership). For the 2020 tax 
year, J has two equal partners--K and L--both individuals. On June 
1, 2023, the IRS mails an FPA to Partnership for Partnership's 2020 
year increasing Partnership's ordinary income by $500,000 and 
asserting an imputed underpayment of $200,000. Partnership makes a 
timely election under section 6226 in accordance with Sec.  
301.6226-1 with respect to the imputed underpayment in the FPA for 
Partnership's 2020 year and does not file a petition for 
readjustment under section 6234. The time to file a petition expires 
on August 30, 2023. Pursuant to Sec.  301.6226-2(b), the partnership 
adjustments become finally determined on August 31, 2023. Therefore, 
Partnership's adjustment year is 2023, the due date of the 
adjustment year return is March 15, 2024 and the extended due date 
for the adjustment year return is September 16, 2024. On October 12, 
2023, Partnership timely files with the IRS statements described in 
Sec.  301.6226-2 and timely furnishes statements to its partners 
reflecting their share of the partnership adjustments as finally 
determined in the FPA. The statements to I and J each reflect a 
partnership adjustment of $250,000 of ordinary income. I takes its 
share of the adjustments reflected on the statements furnished by 
Partnership into account on I'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 that 
paragraph.
    Example 7. On its partnership return for the 2020 tax year, 
Partnership reported that it placed Asset, which had a depreciable 
basis of $210,000, into service in 2020 and depreciated Asset over 5 
years, using the straight-line method. Accordingly, Partnership 
claimed depreciation of $42,000 in each year related to Asset. 
Partnership has two equal partners for the 2020 tax year: M (a 
partnership) and N (an S corporation). For the 2020 tax year, N has 
one shareholder, O, who is an individual. On June 1, 2023, the IRS 
mails an FPA to Partnership for Partnership's 2020 year. In the FPA, 
the IRS determines that Asset should have been depreciated over 7 
years instead of 5 years and adjusts the depreciation for the 2020 
tax year to $30,000 instead of $42,000 resulting in a $12,000 
adjustment. This adjustment results in an imputed underpayment of 
$4,800 ($12,000 x 40 percent). Partnership makes a timely election 
under section 6226 in accordance with Sec.  301.6226-1 with respect 
to the imputed underpayment in the FPA for Partnership's 2020 year 
and does not file a petition for readjustment under section 6234. 
The time to file a petition expires on August 30, 2023. Pursuant to 
Sec.  301.6226-2(b), the partnership adjustments become finally 
determined on August 31, 2023. On October 12, 2023, Partnership 
timely files with the IRS statements described in Sec.  301.6226-2 
and furnishes statements to its partners reflecting their share of 
the partnership adjustments as finally determined in the FPA. The 
statements to M and N reflect a partnership adjustment of $6,000 of 
ordinary income for the 2020 tax year. On February 1, 2024, N takes 
the adjustments into account under paragraph (e)(3) of this section 
by filing an adjustment tracking reporting and issuing a statement 
to O reflecting her share of the adjustments reported to N on the 
statement it received from Partnership. M does not furnish 
statements and instead chooses to calculate and pay an imputed 
underpayment under paragraph (e)(4) of this section equal to $1,200 
($6,000 x 40 percent) on the adjustments reflected on the statement 
it received from Partnership plus interest on the amount calculated 
in accordance with paragraph (e)(4)(iv)(B) of this section. On her 
2023 return, O properly takes the adjustments into account under 
this section. Therefore, O reports and pays the additional reporting 
year tax determined in accordance with paragraph (b) of this 
section, which is the correction amount for 2020 plus any correction 
amounts for 2021 and 2022 (if the adjustments in 2020 resulted in 
any changes to the tax attributes of O in those years), and pays 
interest determined in accordance with paragraph (c) of this section 
on the correction amounts for each of those years.
    Example 8. On its partnership return for the 2020 tax year, 
Partnership reported $1,000 of ordinary loss. Partnership has two 
equal partners for the 2020 tax year: P and Q, both S corporations. 
For the 2020 tax year, P had one shareholder, R, an individual. For 
the 2020 tax year, Q had two shareholders, S and T, both 
individuals. On June 1, 2023, the IRS mails an FPA to Partnership 
for Partnership's 2020 year determining $500 of the $1,000 of 
ordinary loss should be recharacterized as $500 of long-term capital 
loss and $500 of the ordinary loss should be disallowed. The FPA 
asserts an imputed underpayment of $400 ($1,000 x 40 percent) with 
respect to the $1,000 reduction to ordinary loss and reflecting an 
adjustment that does not result in an imputed underpayment of a $500 
capital loss. Partnership makes a timely election under section 6226 
in accordance with Sec.  301.6226-1 with respect to the imputed 
underpayment in the FPA for Partnership's 2020 year and does not 
file a petition for readjustment under section 6234. The time to 
file a petition expires on August 30, 2023. Pursuant to Sec.  
301.6226-2(b), the partnership adjustments become finally determined 
on August 31, 2023. On October 12, 2023, Partnership timely files 
with the IRS statements described in Sec.  301.6226-2 and furnishes 
statements to its partners reflecting their share of the partnership 
adjustments as finally determined in the FPA. The statements to P 
and Q each reflect a partnership adjustment of a $500 increase in 
ordinary income and a $250 increase in capital loss in accordance 
with Sec.  301.6225-3(b)(6). P takes the adjustments into account 
under paragraph (e)(3) of this section by timely filing an 
adjustment tracking reporting and furnishing a statement to R. Q 
timely filed an adjustment 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 on the imputed underpayment. After 
applying the rules set forth in Sec.  301.6225-1, Q calculates the 
imputed underpayment that it is required to pay of $200 ($500 
adjustment to ordinary income x 40 percent). Q also has one 
adjustment that does not result in an imputed underpayment--the $250 
increase to capital loss. On its 2023 return, Q reports and 
allocates the $250 capital loss to its shareholders for its 2023 
taxable year as a capital loss as provided in Sec.  301.6225-3. Q 
must file the adjustment tracking report and pay the amounts due 
under paragraph (e)(4) of this section no later than September 15, 
2024, the extended due date of Partnership's return for the 2023 
year, which is the adjustment year.
    Example 9. On its partnership return for the 2020 tax year, 
Partnership reported a $1,000 long-term capital gain on the sale of 
Stock. Partnership has two equal partners for the 2020 tax year: U 
(an individual) and V (a partnership). For the 2020 tax year, V has 
two equal partners: W (an individual) and X (a partnership). For the 
2020 tax year, X has two equal partners: Y and Z, both of which are 
C corporations. On June 1, 2023, the IRS mails a NOPPA to 
Partnership for Partnership's 2020 year proposing a $500 increase in 
the long-term capital gain from the sale of Stock and an imputed 
underpayment of $200 ($500 x 40 percent). On July 17, 2023, 
Partnership timely submits a request to modify the rate used in 
calculating the imputed underpayment under Sec.  301.6225-2(d)(4). 
Partnership submits sufficient information demonstrating that $375 
of the $500 adjustment is allocable to individuals (50 percent of 
the $500 adjustment allocable to U and 25 percent of the $500 
adjustment allocable to W) and the remaining $125 is allocable to C 
corporations (the indirect partners Y and Z). The IRS approves the 
modification and the imputed underpayment is reduced to $81.25 
(($375 x 15 percent) + ($125 x 20 percent)). See Sec.  301.6225-
2(b)(3). No other modifications are requested. On February 28, 2024, 
the IRS mails an FPA to Partnership for Partnership's 2020 year 
determining a $500 increase in the long-term capital gain on the 
sale of Stock and asserting an imputed underpayment of $81.25 after 
taking into account the approved modifications. Partnership makes a 
timely election under section 6226 in accordance with Sec.  
301.6226-1 with respect to the imputed underpayment in the FPA for 
Partnership's 2020 year and does not file a petition for 
readjustment under section 6234. The time to file a petition expires 
on May 28, 2024. Pursuant to Sec.  301.6226-2(b), the partnership 
adjustments become finally determined on May 29, 2024. On July 26, 
2024, Partnership timely files with the IRS

[[Page 42000]]

statements described in Sec.  301.6226-2 and furnishes statements to 
its partners reflecting their share of the partnership adjustments 
as finally determined in the FPA. The statements to U and V each 
reflect a partnership adjustment of a $250 increase in long-term 
capital gain. V timely files the adjustment tracking report but 
fails to furnish statements and therefore must calculate and pay an 
imputed underpayment under paragraph (e)(4) of this section as well 
as interest on the imputed underpayment determined under paragraph 
(e)(4)(iv)(B) of this section. On February 3, 2025, V pays an 
imputed underpayment of $43.75 (($125 x 20 percent for the 
adjustments allocable to X) + ($125 x 15 percent for the adjustments 
allocable to W)) which takes into account the rate modifications 
approved by the IRS with respect to Y and Z. V must also pay any 
interest on the amount as determined in accordance with paragraph 
(e)(4)(iv)(B) of this section. V must file the adjustment tracking 
report and pay the amounts due under paragraph (e)(4) of this 
section no later than September 15, 2025, the extended due date of 
Partnership's return for the 2024 year, which is the adjustment 
year.

    (i) Applicability date--(1) In general. Except as provided in 
paragraph (i)(2) of this section, this section applies to partnership 
taxable years beginning after December 31, 2017.
    (2) Election under Sec.  301.9100-22 in effect. This section 
applies to any partnership taxable year beginning after November 2, 
2015, and before January 1, 2018, for which a valid election under 
Sec.  301.9100-22 is in effect.
0
Par. 15. Section 301.6226-4 is added to read as follows:

Sec.  301.6226-4  Effect of a partnership adjustment on tax attributes 
of partnerships and their partners.

    (a) Adjustments to tax attributes--(1) In general. When a 
partnership adjustment (as defined in Sec.  301.6241-1(a)(6)) is taken 
into account by the reviewed year partners (as defined in Sec.  
301.6241-1(a)(9)) or affected partners (as described in Sec.  301.6226-
3(e)(3)(i)) pursuant to an election made by a partnership under Sec.  
301.6226-1, the partnership and its reviewed year partners or affected 
partners must adjust their tax attributes (as defined in Sec.  
301.6241-1(a)(10)) in accordance with the rules in this section.
    (2) Application to pass-through partners and indirect partners. To 
the extent a pass-through partner (as defined in Sec.  301.6241-
1(a)(5)) pays an imputed underpayment under Sec.  301.6226-
3(e)(4)(iii), such pass-through partner and its affected partners or 
their successors must make adjustments to their tax attributes in 
accordance with the rules in Sec.  301.6225-4.
    (3) Allocation of partnership adjustments. Partnership adjustments 
are allocated to the reviewed year partners or affected partners under 
Sec.  1.704-1(b)(4)(xiv) of this chapter.
    (b) Adjusting tax attributes of a partnership and its partners when 
an election under section 6226 is made. For partnership adjustments 
that are taken into account by the reviewed year partners or affected 
partners because an election is made under Sec.  301.6226-1, the 
partnership adjustments to be taken into account by each partner are 
determined under Sec.  301.6226-2(f). Accordingly, the reviewed year 
partners or affected partners must take into account the partnership 
adjustments as reflected on the statements described in Sec.  301.6226-
2 or Sec.  301.6226-3(e)(3) in accordance with Sec.  301.6226-3. The 
reviewed year partners or affected partners and the partnership adjust 
partnership tax attributes affected by reason of an adjustment 
reflected on the statements described in Sec.  301.6226-2 or Sec.  
301.6226-3(e)(3) with respect to the reviewed year (as defined in Sec.  
301.6241-1(a)(8)), except to the extent partner or partnership tax 
attributes were already adjusted as part of the partnership adjustment. 
Additionally, reviewed year partners or affected partners adjust their 
partner tax attributes that are affected by the adjustments reflected 
on the statements described in Sec.  301.6226-2 or Sec.  301.6226-
3(e)(3), but these adjustments to partner tax attributes are calculated 
with respect to each year beginning with the first affected year (as 
defined in Sec.  301.6226-3(b)(2)(i)), followed by any intervening 
years (as defined in Sec.  301.6226-3(b)(3)(i)), concluding with the 
reporting year (as defined in Sec.  301.6226-3(a)).
    (c) Example. The following example illustrates the rules of this 
section. For purposes of this example, Partnership is subject to the 
provisions of subchapter C of chapter 63 of the Internal Revenue Code, 
Partnership and its partners are calendar year taxpayers, all partners 
are U.S. persons, and the highest rate of income tax in effect for all 
taxpayers is 40 percent for all relevant periods.

    Example. (i) In 2021, J, K and L form Partnership by each 
contributing $500 in exchange for partnership interests that share 
all items of income, gain, loss and deduction in identical shares. 
Partnership immediately purchases Asset on January 1, 2021 for 
$1,500, which it depreciates using the straight-line method with a 
10-year recovery period beginning in 2021 ($150) so that each 
partner has a $50 distributive share of the depreciation, resulting 
in an outside basis of $450 for each partner. Accordingly, at the 
end of 2022, J, K and L have an outside basis and capital account of 
$400 each ($500 less $50 of their respective allocable shares of 
depreciation in 2021 and $50 in 2022).


----------------------------------------------------------------------------------------------------------------
                                 Partnership                                      Outside
                                    basis         Book      Value                  basis       Book      Value
----------------------------------------------------------------------------------------------------------------
Asset........................           $1200      $1200      $1500          J        $400       $400       $500
                               ..............  .........  .........          K         400        400        500
                               ..............  .........  .........          L         400        400        500
                              ----------------------------------------------------------------------------------
    Totals...................            1200       1200       1500  ..........       1200       1200       1500
----------------------------------------------------------------------------------------------------------------

    (ii) The IRS initiates an administrative proceeding with respect 
to Partnership's 2021 taxable year (reviewed year) and in 2023 
(adjustment year) finally determines that Asset should have been 
depreciated with a 20-year recovery period beginning in 2021, 
resulting in a $75 partnership adjustment that results in an imputed 
underpayment. The IRS does not initiate an administrative proceeding 
with respect to Partnership's 2022 taxable year, and Partnership 
does not file an administrative adjustment request for that taxable 
year. Partnership makes an election under Sec.  301.6226-1 with 
respect to the imputed underpayment. Therefore, J, K and L each are 
furnished a statement described in Sec.  301.6226-2 by Partnership 
reflecting the $25 income adjustment for 2021.
    (iii) Tax attributes of the partners must be adjusted to reflect 
the $75 partnership adjustment reflected on the statements described 
in Sec.  301.6226-2 that is taken into account in equal shares ($25) 
by J, K, and L with respect to 2021. Specifically, J, K and L's 
outside bases and capital accounts must be increased $25 each with 
respect to the 2021 tax year. As a result, J, K and L each have an 
outside basis and capital account of $425 ($400 plus $25 of income 
realized with respect to 2021). Asset's basis and book value must 
also be changed in 2023. Thus, after adjusting tax attributes of the 
partners to take into account the election under Sec.  301.6226-1 
and taking into account other activities of Partnership in 2023, 
accounts are stated as follows:


[[Page 42001]]



----------------------------------------------------------------------------------------------------------------
                                 Partnership                                      Outside
                                    basis         Book      Value                  basis       Book      Value
----------------------------------------------------------------------------------------------------------------
Asset........................           $1275      $1275      $1500          J        $425       $425       $500
                               ..............  .........  .........          K         425        425        500
                               ..............  .........  .........          L         425        425        500
                              ----------------------------------------------------------------------------------
    Totals...................            1275       1275       1500  ..........       1275       1275       1500
----------------------------------------------------------------------------------------------------------------


    (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.
    (2) Election under Sec.  301.9100-22 in effect. This section 
applies to any partnership taxable year beginning after November 2, 
2015 and before January 1, 2018 for which a valid election under Sec.  
301.9100-22 is in effect.
0
Par. 16. Section 301.6227-1 is added to read as follows:


Sec.  301.6227-1   Administrative adjustment request by partnership.

    (a) In general. A partnership may file a request for an 
administrative adjustment with respect to any partnership-related item 
(as defined in Sec.  301.6241-6) for any partnership taxable year. When 
filing an administrative adjustment request (AAR), the partnership must 
determine whether the adjustments requested in the AAR result in an 
imputed underpayment in accordance with Sec.  301.6227-2(a) for the 
reviewed year (as defined in Sec.  301.6241-1(a)(8)). If the 
adjustments requested in the AAR result in an imputed underpayment, the 
partnership must take the adjustments into account under the rules 
described in Sec.  301.6227-2(b) unless the partnership makes an 
election under Sec.  301.6227-2(c), in which case each reviewed year 
partner (as defined in Sec.  301.6241-1(a)(9)) must take the 
adjustments into account in accordance with Sec.  301.6227-3. If the 
adjustments requested in the AAR do not result in an imputed 
underpayment (as determined under Sec.  301.6227-2(a)), such 
adjustments must be taken into account by the reviewed year partners in 
accordance with Sec.  301.6227-3. A partner may not file an AAR except 
if the partner is doing so on behalf of the partnership in the 
partner's capacity as the partnership representative designated under 
section 6223. In addition, a partnership may not file an AAR solely for 
the purpose of changing the designation of a partnership representative 
or changing the appointment of a designated individual. See Sec.  
301.6223-1 (regarding designation of the partnership representative). 
When the partnership changes the designation of the partnership 
representative (or appointment of the designated individual) in 
conjunction with the filing of an AAR in accordance with Sec.  
301.6223-1(e), the change in designation (or appointment) is treated as 
occurring prior to the filing of the AAR.
    (b) Time for filing an AAR. An AAR may only be filed by a 
partnership with respect to a partnership taxable year after a 
partnership return for that taxable year has been filed with the 
Internal Revenue Service (IRS). A partnership may not file an AAR with 
respect to a partnership taxable year more than three years after the 
later of the date the partnership return for such partnership taxable 
year was filed or the last day for filing such partnership return 
(determined without regard to extensions). Except as provided in Sec.  
301.6231-1(f), an AAR 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, 
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 
defined in section 6223(a) and the regulations thereunder).
    (2) Contents of AAR filed with the IRS. A valid AAR filed with the 
IRS must include--
    (i) The adjustments requested,
    (ii) If a reviewed year partner is required to take into account 
the adjustments requested under Sec.  301.6227-3, statements described 
in paragraph (e) of this section, including any transmittal with 
respect to such statements required by forms, instructions, and other 
guidance prescribed by the IRS, and
    (iii) Other information prescribed by the IRS in forms, 
instructions, or other guidance.
    (d) Copy of statement furnished to reviewed year partners in 
certain cases. If a reviewed year partner is required to take into 
account adjustments requested in an AAR under Sec.  301.6227-3, the 
partnership must furnish a copy of the statement described in paragraph 
(e) of this section to the reviewed year partner to whom the statement 
relates in accordance with the forms, instructions and other guidance 
prescribed by the IRS. If the partnership mails the statement, it must 
mail the statement to the current or last address of the reviewed year 
partner that is known to the partnership. The statement must be 
furnished to the reviewed year partner on the date the AAR is filed 
with the IRS.
    (e) Statements--(1) Contents. Each statement described in this 
paragraph (e) must include the following correct information:
    (i) The name and TIN of the reviewed year partner to whom the 
statement is being furnished;
    (ii) The current or last address of the partner that is known to 
the partnership;
    (iii) The reviewed year partner's share of items as originally 
reported on statements furnished to the partner under section 6031(b) 
and, if applicable, section 6227;
    (iv) The reviewed year partner's share of the adjustments as 
described under paragraph (c)(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.
    (ii) Adjusted partnership-related item not reported on the 
partnership's return for the reviewed year. Except as provided in 
paragraph (e)(2)(iii) of this section, if the adjusted partnership-
related item was not reported on the partnership return for the 
reviewed year, each reviewed year partner's share

[[Page 42002]]

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) Binding nature of AAR. Filing an AAR as described in paragraph 
(c) of this section and furnishing statements as described in paragraph 
(d) of this section are actions of the partnership under section 6223 
and the regulations thereunder. Accordingly, unless determined 
otherwise by the IRS, each partner's share of the adjustments set forth 
in a statement described in paragraph (e) of this section are binding 
on the partner pursuant to section 6223. A partner may not treat 
partnership-related items on the partner's return inconsistently with 
how those items are treated on the statement that is filed with the IRS 
under paragraph (c) of this section. See Sec.  301.6222-1(c)(2) 
(regarding partnership-related items the treatment of which a partner 
is bound to under section 6223).
    (g) Administrative proceeding for a taxable year for which an AAR 
is filed. Within the period described in section 6235 and the 
regulations thereunder, the IRS may initiate an administrative 
proceeding with respect to the partnership for any partnership taxable 
year regardless of whether the partnership filed an AAR with respect to 
such taxable year and may adjust any partnership-related item, 
including any partnership-related item adjusted in an AAR filed by the 
partnership. The amount of an imputed underpayment determined by the 
partnership under Sec.  301.6227-2(a)(1), including any modifications 
determined by the partnership under Sec.  301.6227-2(a)(2), may be re-
determined by the IRS.
    (h) Notice of change to the amount of creditable foreign tax 
expenditures. [Reserved]
    (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.
    (2) Election under Sec.  301.9100-22 in effect. This section 
applies to any partnership taxable year beginning after November 2, 
2015 and before January 1, 2018 for which a valid election under Sec.  
301.9100-22 is in effect.
0
Par. 17. Section 301.6227-2 is added to read as follows:

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

    (a) Determining whether adjustments result in an imputed 
underpayment--(1) Determination of the imputed underpayment. The 
determination of whether adjustments requested in an administrative 
adjustment request (AAR) result in an imputed underpayment in the 
reviewed year (as defined in Sec.  301.6241-1(a)(8)) and the 
determination of the amount of the imputed underpayment, if any, is 
made in accordance with the rules under Sec.  301.6225-1.
    (2) Modification of imputed underpayment for purposes of this 
section. A partnership may apply modifications to the amount of the 
imputed underpayment determined under paragraph (a)(1) of this section 
using only the provisions under Sec.  301.6225-2(d)(3) (regarding tax-
exempt partners), Sec.  301.6225-2(d)(4) (regarding modification of 
applicable tax rate), Sec.  301.6225-2(d)(5) (regarding specified 
passive activity losses), Sec.  301.6225-2(d)(6)(ii) (regarding 
limitations or restrictions in the grouping of adjustments), Sec.  
301.6225-2(d)(7) (regarding certain qualified investment entities), 
Sec.  301.6225-2(d)(9) (regarding tax treaty modifications), or as 
provided in forms, instructions, or other guidance prescribed by the 
IRS with respect to AARs. The partnership may not modify an imputed 
underpayment resulting from adjustments requested in an AAR except as 
described in this paragraph (a)(2). When applying modifications to the 
amount of an imputed underpayment under this paragraph (a)(2):
    (i) The partnership is not required to seek the approval from the 
Internal Revenue Service (IRS) prior to applying modifications to the 
amount of any imputed underpayment under paragraph (a)(1) of this 
section reported on the AAR; and
    (ii) As part of the AAR filed with the IRS in accordance with 
forms, instructions, and other guidance prescribed by the IRS, the 
partnership must--
    (A) Notify the IRS of any modification,
    (B) Describe the effect of the modification on the imputed 
underpayment,
    (C) Provide an explanation of the basis for such modification, and
    (D) Provide documentation to support the partnership's eligibility 
for the modification.
    (b) Adjustments resulting in an imputed underpayment taken into 
account by the partnership--(1) In general. Except in the case of an 
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 the imputed underpayment, as well as any 
penalties and interest paid by the partnership with respect to the 
imputed underpayment, see Sec.  301.6241-4.
    (2) Penalties and interest. The IRS may impose a penalty, addition 
to tax, and additional amount with respect to an 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 an 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 the imputed underpayment is 
determined under chapter 67 for the period beginning on the date after 
the due date of the partnership return for the reviewed year (as 
defined in Sec.  301.6241-1(a)(8)) (determined without regard to 
extension) and ending on the earlier of the date payment of the imputed 
underpayment is made, or the due date of the partnership return for the 
adjustment year (as defined in Sec.  301.6241-1(a)(1)). See section 
6233(a)(2). 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).
    (3) Coordination with chapters 3 and 4--(i) Coordination when 
partnership pays an imputed underpayment. If a partnership pays an 
imputed underpayment resulting from adjustments requested in an AAR 
under paragraph (b)(1) of this section, the rules in Sec.  301.6241-
7(b)(3) apply to treat the partnership as having paid the amount 
required to be withheld under chapter 3 or chapter 4 (as defined in 
Sec.  301.6241-7(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

[[Page 42003]]

requested in an AAR, the rules in Sec.  301.6226-2(g)(3) apply to the 
partnership, and the rules in Sec.  301.6226-3(f) apply to the reviewed 
year partners that take into account the adjustments pursuant to Sec.  
301.6227-3.
    (c) Election to have adjustments resulting in an imputed 
underpayment taken into account by reviewed year partners. In lieu of 
paying the imputed underpayment under paragraph (b) of this section, 
the partnership may elect to have each reviewed year partner (as 
defined in Sec.  301.6241-1(a)(9)) take into account the adjustments 
requested in the AAR in accordance with Sec.  301.6227-3. A partnership 
makes an election under this paragraph (c) at the time the AAR is filed 
in accordance with the forms, instructions, and other guidance 
prescribed by the IRS. If the partnership makes a valid election in 
accordance with this paragraph (c), the partnership is not liable for, 
nor required to pay, the imputed underpayment resulting from the 
adjustments requested in the AAR. Rather, each reviewed year partner 
must take into account their share of the adjustments requested in the 
AAR in accordance with Sec.  301.6227-3. If an election is made under 
this paragraph (c), modifications applied under paragraph (a)(2) of 
this section are disregarded and all adjustments requested in the AAR 
must be taken into account by each reviewed year partner in accordance 
with Sec.  301.6227-3.
    (d) Adjustments not resulting in an imputed underpayment. If the 
adjustments requested in an AAR do not result in an imputed 
underpayment (as determined under paragraph (a) of this section), the 
partnership must furnish statements to each reviewed year partner and 
file such statements with the IRS in accordance with Sec.  301.6227-1. 
Each reviewed year partner must take into account its share of the 
adjustments requested in the AAR in accordance with Sec.  301.6227-3.
    (e) Applicability date--(1) In general. Except as provided in 
paragraph (e)(2) of this section, this section applies to partnership 
taxable years beginning after December 31, 2017.
    (2) Election under Sec.  301.9100-22 in effect. This section 
applies to any partnership taxable year beginning after November 2, 
2015 and before January 1, 2018 for which a valid election under Sec.  
301.9100-22 is in effect.
0
Par. 18. Section 301.6227-3 is added to read as follows:

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

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

    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 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)(2) 
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).
    Example 2.  The facts are the same as in Example 1 of this 
paragraph (b)(2), 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 $0 ($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 the overpayment of $25.

    (c) Reviewed year partners that are pass-through partners--(1) In 
general. Except as provided in this paragraph (c), if a statement 
described in paragraph (a) of this section (including a statement 
described in this paragraph (c)(1)) is furnished to a reviewed year 
partner that is a pass-through partner (as defined in Sec.  301.6241-
1(a)(5)), the pass-through partner must take into account the 
adjustments reflected on that statement in accordance with Sec.  
301.6226-3(e) by treating the partnership that filed the AAR as the 
partnership that made an election under Sec.  301.6226-1. A pass-
through partner that furnishes statements in accordance with Sec.  
301.6226-3(e)(3) must provide the information described in paragraph 
(c)(3) of this section in lieu of the information described in Sec.  
301.6226-3(e)(3)(iii) on the statements the pass-through partner 
furnishes to its partners. A pass-through partner that computes and 
pays an imputed underpayment in accordance with Sec.  301.6226-
3(e)(4)(iii) may not apply any modifications to the amount of imputed 
underpayment. For purposes of this paragraph (c)(1), the statement 
furnished to the pass-through partner by the partnership filing the AAR 
is treated as if it were a statement issued under section 6226(a)(2) 
and described in Sec.  301.6226-2.
    (2) Adjustments that do not result in an imputed underpayment. If 
the adjustments requested in an AAR do not result in an imputed 
underpayment (as described in Sec.  301.6227-2(d)), Sec.  301.6226-
3(e)(2) does not apply. The pass-through partner must take into account 
the adjustments reflected on the statement described in paragraphs (a) 
or (c)(1) of this section in accordance with Sec.  301.6226-3(e)(3), 
except that the pass-

[[Page 42004]]

through partner must provide the information described in paragraph 
(c)(3) of this section in lieu of the information described in Sec.  
301.6226-3(e)(3)(iii) on the statements the pass-through partner 
furnishes to its partners.
    (3) Contents of statements. Each statement described in paragraph 
(c)(1) or (2) of this section must include the following correct 
information--
    (i) The name and taxpayer identification number (TIN) of the 
partnership that filed the AAR with respect to the adjustments 
reflected on the statements described in paragraph (c)(1) of this 
section;
    (ii) The adjustment year (as defined in Sec.  301.6241-1(a)(1)) of 
the partnership described in paragraph (c)(3)(i) of this section;
    (iii) The extended due date for the return for the adjustment year 
of the partnership described in paragraph (c)(3)(i) of this section (as 
described in Sec.  301.6226-3(e)(3)(ii));
    (iv) The date on which the partnership described in paragraph 
(c)(3)(i) of this section furnished its statements required under Sec.  
301.6227-2(d);
    (v) The name and TIN of the partnership that furnished the 
statement to the pass-through partner if different from the partnership 
described in paragraph (c)(3)(i) of this section;
    (vi) The name and TIN of the pass-through partner;
    (vii) The pass-through partner's taxable year to which the 
adjustments set forth in the statement described in paragraph (c)(1) of 
this section relate;
    (viii) The name and TIN of the affected partner (as defined in 
Sec.  301.6226-3(e)(3)(i)) to whom the statement is being furnished;
    (ix) The current or last address of the affected partner that is 
known to the pass-through partner;
    (x) The affected partner's share of items as originally reported to 
such partner under section 6031(b) and, if applicable, section 6227, 
for the taxable year to which the adjustments reflected on the 
statement furnished to the pass-through partner relate;
    (xi) The affected partner's share of partnership adjustments 
determined under Sec.  301.6227-1(e)(2) as if the affected partner were 
the reviewed year partner and the partnership were the pass-through 
partner;
    (xii) Any other information required by forms, instructions, and 
other guidance prescribed by the IRS.
    (4) Affected partners must take into account the adjustments. A 
statement furnished to an affected partner in accordance with paragraph 
(c)(1) or (2) of this section is to be treated by the affected partner 
as if it were a statement described in paragraph (a) of this section. 
The affected partner must take into account its share of the 
adjustments reflected on such a statement in accordance with this 
section by treating references to ``reviewed year partner'' as 
``affected partner.'' When taking into account the adjustments as 
described in Sec.  301.6226-3(e)(3)(iv), the rules under Sec.  
301.6226-3(c)(3) (regarding the increased rate of interest) do not 
apply.
    (d) Applicability date--(1) In general. Except as provided in 
paragraph (d)(2) of this section, this section applies to partnership 
taxable years beginning after December 31, 2017.
    (2) Election under Sec.  301.9100-22 in effect. This section 
applies to any partnership taxable year beginning after November 2, 
2015 and before January 1, 2018 for which a valid election under Sec.  
301.9100-22 is in effect.
0
Par. 19. Section 301.6231-1 is added to read as follows:

Sec.  301.6231-1  Notice of proceedings and adjustments.

    (a) Notices to which this section applies. In the case of any 
administrative proceeding under subchapter C of chapter 63 of the 
Internal Revenue Code (subchapter C of chapter 63), including an 
administrative proceeding with respect to an administrative adjustment 
request (AAR) filed by a partnership under section 6227, the following 
notices must be mailed to the partnership and the partnership 
representative (as described in section 6223 and Sec.  301.6223-1)--
    (1) Notice of any administrative proceeding initiated at the 
partnership level with respect to an adjustment of any partnership-
related item (as defined in Sec.  301.6241-6) 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)).
    (b) Time for mailing notices--(1) Notice of proposed partnership 
adjustment. A NOPPA is timely if it is mailed before the expiration of 
the period for making adjustments under section 6235(a)(1) (including 
any extensions under section 6235(b) and any special rules under 
section 6235(c)).
    (2) Notice of final partnership adjustment. An FPA may not be 
mailed earlier than 270 days after the date on which the NOPPA is 
mailed unless the partnership agrees, in writing, with the Internal 
Revenue Service (IRS) to waive the 270-day period. See Sec.  301.6225-
2(c)(3)(iii) for the effect of a waiver under this paragraph (b)(2) on 
the 270-period for requesting a modification under section 6225(c). See 
Sec.  301.6232-1(d)(2) for the rules regarding a waiver of the 
limitations on assessment under Sec.  301.6232-1(c).
    (c) Last known address. A notice described in paragraph (a) of this 
section is sufficient if mailed to the last known address of the 
partnership representative and the partnership (even if the partnership 
or partnership representative has terminated its existence).
    (d) Notice mailed to partnership representative--(1) In general. A 
notice described in paragraph (a) of this section will be treated as 
mailed to the partnership representative if the notice is mailed to the 
partnership representative that is reflected in the IRS records as of 
the date the letter is mailed.
    (2) No partnership representative in effect. In any case in which 
no partnership representative designation is in effect in accordance 
with Sec.  301.6223-1(f), a notice described in paragraph (a) of this 
section mailed to ``PARTNERSHIP REPRESENTATIVE'' at the last known 
address of the partnership satisfies the requirements of this section.
    (e) Restrictions on additional FPAs after petition filed. The IRS 
may mail more than one FPA to any partnership for any partnership 
taxable year. However, except in the case of fraud, malfeasance, or 
misrepresentation of a material fact, the IRS may not mail an FPA to a 
partnership with respect to a partnership taxable year after the 
partnership has filed a timely petition for readjustment under section 
6234 with respect to an FPA issued with respect to such partnership 
taxable year.
    (f) Withdrawal of NAP or NOPPA. The IRS may, without consent of the 
partnership, withdraw any NAP or NOPPA. A NAP or NOPPA that has been 
withdrawn by the IRS 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 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

[[Page 42005]]

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.
    (2) Election under Sec.  301.9100-22 in effect. This section 
applies to any partnership taxable year beginning after November 2, 
2015 and before January 1, 2018 for which a valid election under Sec.  
301.9100-22 is in effect.
0
Par. 20. Section 301.6232-1 is added to read as follows:


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

    (a) In general. An imputed underpayment determined under subchapter 
C of chapter 63 of the Internal Revenue Code (Code) is assessed and 
collected in the same manner as if the imputed underpayment were a tax 
imposed by subtitle A of the Code for the adjustment year (as defined 
in Sec.  301.6241-1(a)(1)) except that the deficiency procedures under 
subchapter B of chapter 63 of the Code do not apply to an assessment of 
an imputed underpayment. Accordingly, no notice under section 6212 is 
required for, and the restrictions under section 6213 do not apply to, 
the assessment of any imputed underpayment. See paragraph (c) of this 
section for limitations on assessment and paragraph (d) of this section 
for exceptions to restrictions on adjustments.
    (b) Payment of the imputed underpayment. Upon receipt of notice and 
demand from the Internal Revenue Service (IRS), an imputed underpayment 
must be paid by the partnership at the place and time stated in the 
notice. In the case of an adjustment requested in an administrative 
adjustment request (AAR) under section 6227(b)(1) that is taken into 
account by the partnership under Sec.  301.6227-2(b), payment of the 
imputed underpayment is due on the date the AAR is filed. The IRS may 
assess the amount of the imputed underpayment reflected on the AAR on 
the date the AAR is filed. For interest with respect to an imputed 
underpayment, see Sec.  301.6233(a)-1(b).
    (c) Limitation on assessment--(1) In general. Except as otherwise 
provided by this section or subtitle F of the Code (except for 
subchapter B of chapter 63), no assessment of an imputed underpayment 
may be made (and no levy or proceeding in any court for the collection 
of an imputed underpayment may be made, begun, or prosecuted) before--
    (i) The close of the 90th day after the day on which a notice of a 
final partnership adjustment (FPA) under section 6231(a)(3) was mailed; 
and
    (ii) If a petition for readjustment is filed under section 6234 
with respect to such FPA, the decision of the court has become final.
    (2) Specified similar amount. The limitations under paragraph 
(c)(1) of this section do not apply in the case of a specified similar 
amount as defined in section 6232(f)(2).
    (d) Exceptions to restrictions on adjustments and assessments--(1) 
Adjustments treated as mathematical or clerical errors--(i) In general. 
A notice to a partnership that, on account of a mathematical or 
clerical error appearing on the partnership return or as a result of a 
failure by a partnership-partner (as defined in Sec.  301.6241-1(a)(7)) 
to comply with section 6222(a), the IRS has adjusted or will adjust 
partnership-related items (as defined in Sec.  301.6241-6) to correct 
the error or to make the items consistent under section 6222(a) and has 
assessed or will assess any imputed underpayment (determined in 
accordance with Sec.  301.6225-1) resulting from the adjustment is not 
considered an FPA under section 6231(a)(3). A petition for readjustment 
under section 6234 may not be filed with respect to such notice. The 
limitations under section 6232(b) and paragraph (c) of this section do 
not apply to an assessment under this paragraph (d)(1)(i). For the 
definition of mathematical or clerical error generally, see section 
6213(g)(2). For application of mathematical or clerical error in the 
case of inconsistent treatment by a partner that fails to give notice, 
see Sec.  301.6222-1(b).
    (ii) Request for abatement--(A) In general. Except as provided in 
paragraph (d)(1)(ii)(B) of this section, a partnership that is mailed a 
notice described in paragraph (d)(1)(i) of this section may file with 
the IRS, within 60 days after the date of such notice, a request for 
abatement of any assessment of an imputed underpayment specified in 
such notice. Upon receipt of the request, the IRS must abate the 
assessment. Any subsequent assessment of an imputed underpayment with 
respect to which abatement was made is subject to the provisions of 
subchapter C of chapter 63 of the Code, including the limitations under 
paragraph (c) of this section.
    (B) Adjustments with respect to inconsistent treatment by a 
partnership-partner. If an adjustment that is the subject of a notice 
described in paragraph (d)(1)(i) of this section is due to the failure 
of a partnership-partner to comply with section 6222(a), paragraph 
(d)(1)(ii)(A) of this section does not apply, and abatement of any 
assessment specified in such notice is not available. However, prior to 
assessment, a partnership-partner that has failed to comply with 
section 6222(a) may correct the inconsistency by filing an 
administrative adjustment request under section 6227 or filing an 
amended partnership return and furnishing amended statements, as 
appropriate.
    (iii) Partnerships that have an election under section 6221(b) in 
effect. In the case of a partnership-partner that has an election under 
section 6221(b) in effect for the reviewed year (as defined in Sec.  
301.6241-1(a)(8)), any tax resulting from an adjustment due to the 
partnership-partner's failure to comply with section 6222(a) may be 
assessed with respect to the reviewed year partners (as defined in 
Sec.  301.6241-1(a)(9)) of the partnership-partner (or indirect 
partners of the partnership-partner, as defined in Sec.  301.6241-
1(a)(4)). Such tax may be assessed in the same manner as if the tax 
were on account of a mathematical or clerical error appearing on the 
reviewed year partner's or indirect partner's return, except that the 
procedures under section 6213(b)(2) for requesting an abatement of such 
assessment do not apply.
    (2) Partnership may waive limitations. A partnership may at any 
time by a signed notice in writing filed with the IRS waive the 
limitations under paragraph (c) of this section (whether or not an FPA 
under section 6231(a)(3) has been mailed by the IRS at the time of the 
waiver).
    (e) Limit on amount of imputed underpayment where no proceeding is 
begun. If no proceeding under section 6234 is begun with respect to an 
FPA under section 6231(a)(3) before the close of the 90th day after the 
day on which such FPA was mailed, the amount for which the partnership 
is liable under section 6225 with respect to such FPA cannot exceed the 
amount determined in such FPA.
    (f) Applicability date--(1) In general. Except as provided in 
paragraph (f)(2) of this section, this section applies to partnership 
taxable years beginning after December 31, 2017.
    (2) Election under Sec.  301.9100-22 in effect. This section 
applies to any partnership taxable year beginning after November 2, 
2015 and before January 1, 2018 for which a valid election under Sec.  
301.9100-22 is in effect.
0
Par. 21. Section 301.6233(a)-1 is added to read as follows:

[[Page 42006]]

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

    (a) Interest and penalties with respect to the reviewed year. 
Except to the extent provided in section 6226(c) and the regulations 
thereunder, in the case of a partnership adjustment (as defined in 
Sec.  301.6241-1(a)(6)) for a reviewed year (as defined in Sec.  
301.6241-1(a)(8)), a partnership is liable for--
    (1) Interest computed in accordance with paragraph (b) of this 
section; and
    (2) Any penalty, addition to tax, or additional amount as provided 
under paragraph (c) of this section.
    (b) Computation of interest with respect to partnership adjustments 
for the reviewed year. 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 this paragraph (b) 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--
    (1) The date prescribed for payment (as described in Sec.  
301.6232-1(b));
    (2) The due date of the partnership return (without regard to 
extension) for the adjustment year (as defined in Sec.  301.6241-
1(a)(1)); or
    (3) The date the imputed underpayment is fully paid.
    (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 subtitle A of the Code for the reviewed year, and the imputed 
underpayment were an actual underpayment of tax or understatement for 
such year. Nothing in this paragraph (c)(1) affects the application of 
any penalty, addition to tax, or additional amount that may apply to 
the partnership or to any reviewed year partner (as defined in Sec.  
301.6241-1(a)(9)) or to any indirect partner (as defined in Sec.  
301.6241-1(a)(4)) that is unrelated to an adjustment to a partnership-
related item under subchapter C of chapter 63 of the Code. A partner-
level defense (as described in Sec.  301.6226-3(d)(3)) may not be 
raised in a proceeding of the partnership.
    (2) Coordination with accuracy-related and fraud penalty 
provisions--(i) In general. In the case of penalties imposed under 
section 6662, section 6662A, and section 6663 with respect to 
partnership adjustments in accordance with paragraph (c)(1) of this 
section, the rules described in paragraphs (c)(2)(ii), (iii), (iv), and 
(v) of this section apply.
    (ii) Determining the portion of the imputed underpayment to which a 
penalty applies--(A) In general. In the case of penalties imposed under 
section 6662, section 6662A, and section 6663, paragraph (c)(2)(ii) of 
this section applies if--
    (1) There is 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) There are at least two adjustments with respect to which 
penalties have been imposed and the penalties have different rates.
    (B) Calculating the portion of the imputed underpayment to which 
the penalty applies. In computing the portion of an imputed 
underpayment to which a penalty applies, adjustments that do not result 
in the imputed underpayment (as described in Sec.  301.6225-1(f)) are 
not taken into account. The portion of an imputed underpayment to which 
a penalty applies is calculated as follows--
    (1) All the partnership adjustments that resulted in the imputed 
underpayment are grouped together according to whether they are 
adjustments with respect to which a penalty has been imposed and, if 
so, according to rate of penalty. Decreasing adjustments as defined in 
paragraph (c)(2)(ii)(C) of this section are grouped in accordance with 
paragraphs (c)(2)(ii)(D) and (E) of this section.
    (2) Within each grouping described in paragraph (c)(2)(ii)(B)(1) of 
this section, multiply the portion of each partnership adjustment that 
is not an adjustment to a credit or treated as an adjustment to a 
credit under Sec.  301.6225-1(e)(3)(iii) by the rate that applied to 
such portion when calculating the imputed underpayment. See Sec. Sec.  
301.6225-1(b)(1)(iv), 301.6225-2(b)(3).
    (3) Within each grouping, add the amounts that were calculated 
under paragraph (c)(2)(ii)(B)(2) of this section.
    (4) Within each grouping, increase or decrease the amounts that 
were calculated under paragraph (c)(2)(ii)(B)(3) of this section by any 
adjustments to credits (or adjustments treated as adjustments to 
credits under Sec.  301.6225-1(e)(3)(iii)).
    (C) Decreasing adjustments. An adjustment to a partnership-related 
item that resulted in a decrease to the imputed underpayment is a 
decreasing adjustment.
    (D) Grouping of decreasing adjustments. Decreasing adjustments are 
grouped under paragraph (c)(2)(ii)(B)(1) of this section in the 
following order--
    (1) First, decreasing adjustments are grouped with partnership 
adjustments with respect to which no penalties have been imposed until 
the amount of the adjustments remaining in this group is zero in 
accordance with paragraph (c)(2)(ii)(E) of this section;
    (2) Second, decreasing adjustments remaining after application of 
paragraph (c)(2)(ii)(D)(1) of this section (taking into account 
application of paragraph (c)(2)(ii)(E) of this section) are grouped 
with partnership adjustments with respect to which a penalty has been 
imposed at a 20 percent rate;
    (3) Third, decreasing adjustments remaining after application of 
paragraph (c)(2)(ii)(D)(2) of this section (taking into account 
application of paragraph (c)(2)(ii)(E) of this section) are grouped 
with partnership adjustments with respect to which a penalty has been 
imposed at a 30 percent rate;
    (4) Fourth, decreasing adjustments remaining after application of 
paragraph (c)(2)(ii)(D)(3) of this section (taking into account 
application of paragraph (c)(2)(ii)(E) of this section) are grouped 
with partnership adjustments with respect to which a penalty has been 
imposed at a 40 percent rate;
    (5) Fifth, decreasing adjustments remaining after application of 
paragraph (c)(2)(ii)(D)(4) of this section (taking into account 
application of paragraph (c)(2)(ii)(E) of this section) are grouped 
with partnership adjustments with respect to which a penalty has been 
imposed at a 75 percent rate.
    (E) Decreasing adjustments that reduce a grouping to zero. If, when 
allocating the decreasing adjustments under paragraph (c)(2)(ii)(D) of 
this section, the amount calculated in paragraph (c)(2)(ii)(B) of this 
section for a particular grouping equals zero, any remaining decreasing 
adjustments (or portion thereof) that would otherwise reduce the amount 
to less than zero are allocated to the next grouping in sequential 
order under paragraph (c)(2)(ii)(D) of this section.
    (F) 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)(ii)(F) does not apply to any portion of 
the imputed underpayment the partnership establishes by a

[[Page 42007]]

preponderance of the evidence is not attributable to fraud.
    (iii) Substantial understatement penalty under section 6662(d)--(A) 
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)(3)(iii)(A) 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)(iii)(B) of this section as the tax required to be shown on the 
return for the taxable year under section 6662(d)(1)(A)(i).
    (B) Amount of tax required to be shown on the return. The amount 
described in this paragraph (c)(2)(iii)(B) 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)).
    (iv) 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).
    (v) Reasonable cause and good faith. For purposes of determining 
whether a partnership satisfies the reasonable cause and good faith 
exception under section 6664(c) or (d) with respect to a penalty under 
section 6662, section 6662A, or section 6663, the partnership is 
treated as the taxpayer. See Sec.  1.6664-4 of this chapter. 
Accordingly, the facts and circumstances taken into account to 
determine whether the partnership has established reasonable cause and 
good faith are the facts and circumstances applicable to the 
partnership.
    (3) 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.

    Example 1. One adjustment with respect to which a penalty is 
imposed. In an administrative proceeding with respect to 
Partnership's 2018 partnership return, the IRS determines that 
Partnership understated ordinary income by $100. The $100 
understatement 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 determines that 
Partnership understated long-term capital gain by $300, but no 
penalty applies with respect to that adjustment. Partnership does 
not request modification of the imputed underpayment under section 
6225 and does not raise any penalty defenses prior to issuance of 
the notice of final partnership adjustment (FPA). In the FPA, the 
IRS determines that the imputed underpayment is $160 (($100 + $300) 
x 40 percent). In determining the penalty, the $100 adjustment (to 
which the 20-percent penalty relates) is grouped separately from the 
$300 adjustment (to which no penalty applies). The portion of the 
imputed underpayment to which the 20-percent penalty applies is $40 
($100 x 40 percent), and the penalty is $8 ($40 x 20 percent).
    Example 2. More than one adjustment with respect to which the 
same rate of penalty is imposed. The facts are the same as in 
Example 1 of this paragraph (c)(3), except that the IRS determines 
that Partnership also overstated its credits by $10. The 
overstatement of 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). Because the 
Partnership did not request modification, the imputed underpayment 
is $170 (($100 + $300) x 40 percent) + $10). In determining the 
penalty, the $10 credit adjustment and the $100 understatement of 
income, both of which are adjustments with respect to which the 20-
percent accuracy-related penalty is imposed, are grouped together. 
Accordingly, the portion of the imputed underpayment to which the 
20-percent accuracy-related penalty applies is $50 (($100 x 40 
percent) + $10), and the penalty is $10 ($50 x 20 percent).
    Example 3. Decreasing adjustment. The facts are the same as in 
Example 2 of this paragraph (c)(3), except that there is also an 
adjustment that reduces ordinary income by $50. In calculating the 
imputed underpayment under Sec.  301.6225-1 and Sec.  301.6225-2, 
the partnership demonstrates to the satisfaction of the IRS that the 
$50 decrease to ordinary income is appropriately netted with the 
$100 increase in ordinary income. Therefore, the $50 reduction in 
ordinary income is an adjustment that resulted in the imputed 
underpayment and therefore a decreasing adjustment described in 
paragraph (c)(2)(ii)(C) of this section. Because Partnership did not 
request any further modifications, the imputed underpayment is $150 
(($100-$50) + $300) x 40 percent) + $10). To determine the portion 
of the imputed underpayment to which the 20-percent accuracy-related 
penalty applies, the $50 reduction to ordinary income is grouped 
with the $300 adjustment to long-term capital gain (in accordance 
with paragraph (c)(2)(ii)(D) of this section). Accordingly, the 
portion of the imputed underpayment to which the 20-percent 
accuracy-related penalty applies is $50 (($100 x 40 percent) + $10), 
and the penalty is $10 ($50 x 20 percent).
    Example 4. Two adjustments with respect to which penalties of 
different rates have been imposed. The facts are the same as in 
Example 3 of this paragraph (c)(3), 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 imputed underpayment is $150 
(($100-$50) + $300) x 40 percent) + $10). Under paragraph 
(c)(2)(ii)(B) of this section, the adjustment to long-term capital 
gain (the adjustment to which the 40-percent penalty relates) and 
the adjustments to ordinary income and credits (the adjustments to 
which the 20-percent penalty relates) are grouped separately. In 
accordance with paragraph (c)(2)(ii)(D) of this section, because all 
partnership adjustments other than the decreasing adjustment are 
subject to penalties, the $50 reduction in ordinary income (the 
decreasing adjustment) is allocated to the grouping of adjustments 
with respect to which the 20-percent penalty is imposed. The amount 
described under paragraph (c)(2)(ii)(B) of this section with respect 
to the 20-percent penalty grouping is $30 (($100 x 40 percent)-($50 
x 40 percent) + $10). Therefore, the portion of the imputed 
underpayment to which the 20 percent accuracy-related penalty 
applies is $30 and the penalty is $6 ($30 x 20 percent). The portion 
of the imputed underpayment to which the 40-percent gross valuation 
misstatement penalty applies is $120 ($300 x 40 percent), and the 
penalty is $48 ($120 x 40 percent). The accuracy-related penalty 
under section 6662(a) is $54.
    Example 5. Modification with respect to tax-exempt partner. The 
IRS initiates an administrative proceeding with respect to 
Partnership's 2019 taxable year. 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. The IRS timely mails a notice of proposed 
partnership adjustment (NOPPA) to Partnership for its 2019 taxable 
year proposing a single partnership adjustment increasing 
Partnership's ordinary income by $400,000. The $400,000 increase in 
income is due to negligence or disregard of rules or regulations 
under section 6662(c). A 20-percent accuracy-related penalty under 
section 6662(a) and (c) applies to the portion of the imputed 
underpayment attributable to the negligence or disregard of the 
rules or regulations. In the NOPPA, the IRS determines an imputed 
underpayment of $160,000 ($400,000 x 40 percent) and that the 20-
percent penalty applies to the entire imputed underpayment. The 
penalty is $32,000 ($160,000 x 20 percent). Partnership requests 
modification under Sec.  301.6225-2(d)(3) (regarding tax-exempt 
partners) with respect to the amount of additional income allocated 
to C, and the IRS approves the request. After modification of the 
imputed underpayment, the imputed underpayment is $120,000 
(($400,000-$100,000) x 40 percent), and the penalty is $24,000 
($120,000 x 20 percent).
    Example 6. Amended return modification. The facts are the same 
as in Example 5 of this paragraph (c)(3), except in addition to the

[[Page 42008]]

modification with respect to C's tax-exempt status, Partnership 
requests a modification under Sec.  301.6225-2(d)(2) (regarding 
amended returns) with respect to the $100,000 of additional income 
allocated to D. In accordance with the rules under Sec.  301.6225-
2(d)(2), D files an amended return for D's 2019 taxable year taking 
into account $100,000 of additional ordinary income. In addition, in 
accordance with Sec.  301.6225-2(d)(2)(viii), D takes into account 
on D's return the 20-percent accuracy-related penalty for negligence 
or disregard of rules or regulations that relates to the ordinary 
income adjustment. D's tax attributes for other taxable years are 
not affected. The IRS approves the modification. As a result, 
Partnership's total netted partnership adjustment under Sec.  
301.6225-1(b)(2) is $200,000 ($400,000 less $100,000 allocable to C 
and $100,000 taken into account by D). The imputed underpayment, 
after modification, is $80,000 ($200,000 x 40 percent), and the 
penalty is $16,000 ($80,000 x 20 percent).

    (d) Applicability date--(1) In general. Except as provided in 
paragraph (d)(2) of this section, this section applies to partnership 
taxable years beginning after December 31, 2017.
    (2) Election under Sec.  301.9100-22 in effect. This section 
applies to any partnership taxable year beginning after November 2, 
2015 and before January 1, 2018 for which a valid election under Sec.  
301.9100-22 is in effect.
0
Par. 22. Section 301.6233(b)-1 is added to read as follows:


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

    (a) Interest and penalties with respect to failure to pay imputed 
underpayment on the date prescribed. In the case of any failure to pay 
an imputed underpayment on the date prescribed for such payment (as 
described in Sec.  301.6232-1(b)), a partnership is liable for--
    (1) Interest as determined under paragraph (c) of this section; and
    (2) Any penalty, addition to tax, or additional amount as 
determined under paragraph (d) of this section.
    (b) Imputed underpayments to which this section applies. This 
section applies to the portion of an imputed underpayment determined by 
the IRS under section 6225(a)(1), or an imputed underpayment resulting 
from adjustments requested by a partnership in an administrative 
adjustment request under section 6227, that is not paid by the date 
prescribed for payment under Sec.  301.6232-1(b).
    (c) Interest. Interest determined under this paragraph (c) is the 
interest that would be imposed under chapter 67 of the Internal Revenue 
Code (Code) by treating any unpaid amount of the imputed underpayment 
as an underpayment of tax imposed for the adjustment year (as defined 
in Sec.  301.6241-1(a)(1)). The interest under this paragraph (c) 
begins on the date prescribed for payment (as described in Sec.  
301.6232-1(b)) and ends on the date payment of the imputed underpayment 
is made.
    (d) Penalties. If a partnership fails to pay an imputed 
underpayment by the date prescribed for payment (as described in Sec.  
301.6232-1(b)), section 6651(a)(2) applies to such failure, and any 
unpaid amount of the imputed underpayment is treated as if it were an 
underpayment of tax for purposes of part II of subchapter A of chapter 
68 of the Code. For purposes of this section, the penalty under 
6651(a)(2) is applied by treating the unpaid amount of the imputed 
underpayment as the unpaid amount shown as tax on a return required 
under subchapter A of chapter 61 of the Code.
    (e) Applicability date--(1) In general. Except as provided in 
paragraph (e)(2) of this section, this section applies to partnership 
taxable years beginning after December 31, 2017.
    (2) Election under Sec.  301.9100-22 in effect. This section 
applies to any partnership taxable year beginning after November 2, 
2015 and before January 1, 2018 for which a valid election under Sec.  
301.9100-22 is in effect.
0
Par. 23. Section 301.6234-1 is added to read as follows:


Sec.  301.6234-1  Judicial review of partnership adjustment.

    (a) In general. Within 90 days after the date on which a notice of 
a final partnership adjustment (FPA) under section 6231(a)(3) with 
respect to any partnership taxable year is mailed, a partnership may 
file a petition for a readjustment of any partnership adjustment (as 
defined in Sec.  301.6241-1(a)(6)) reflected in the FPA for such 
taxable year (without regard to whether an election under section 6226 
has been made with respect to any imputed underpayment (as defined in 
Sec.  301.6241-1(a)(3)) reflected in such FPA) with--
    (1) The Tax Court;
    (2) The district court of the United States for the district in 
which the partnership's principal place of business is located; or
    (3) The Court of Federal Claims.
    (b) Jurisdictional requirement for bringing action in district 
court or Court of Federal Claims. A petition for readjustment under 
this section with respect to any partnership adjustment may be filed in 
a district court of the United States or the Court of Federal Claims 
only if the partnership filing the petition deposits with the Internal 
Revenue Service (IRS), on or before the date the petition is filed, the 
amount of (as of the date of the filing of the petition) any imputed 
underpayment (as shown on the FPA) and any penalties, additions to tax, 
and additional amounts with respect to such imputed underpayment. If 
there is more than one imputed underpayment reflected in the FPA, the 
partnership must deposit the amount of each imputed underpayment to 
which the petition for readjustment relates and the amount of any 
penalties, additions to tax, and additional amounts with respect to 
each such imputed underpayment.
    (c) Treatment of deposit as payment of tax. Any amount deposited in 
accordance with paragraph (b) of this section, while deposited, will 
not be treated as a payment of tax for purposes of the Internal Revenue 
Code (Code). Notwithstanding the preceding sentence, an amount 
deposited in accordance with paragraph (b) of this section will be 
treated as a payment of tax for purposes of chapter 67 of the Code 
(relating to interest). Interest will be allowed and paid in accordance 
with section 6611.
    (d) Effect of decision dismissing action. If an action brought 
under this section is dismissed other than by reason of a rescission of 
the FPA under section 6231(d) and Sec.  301.6231-1(g), the decision of 
the court dismissing the action is considered as its decision that the 
FPA is correct.
    (e) Amount deposited may be applied against assessment. If the 
limitations on assessment under section 6232(b) and Sec.  301.6232-1(c) 
no longer apply with respect to an imputed underpayment for which a 
deposit under paragraph (b) of this section was made, the IRS may apply 
the amount deposited against any such imputed underpayment that is 
assessed.
    (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.
    (2) Election under Sec.  301.9100-22 in effect. This section 
applies to any partnership taxable year beginning after November 2, 
2015 and before January 1, 2018 for which a valid election under Sec.  
301.9100-22 is in effect.
0
Par. 24. Section 301.6235-1 is added to read as follows:


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

    (a) In general. Except as provided in section 6235(c), section 
905(c) or paragraph (b) of this section (regarding extensions), no 
partnership adjustment (as defined in Sec.  301.6241-1(a)(6)) for

[[Page 42009]]

any partnership taxable year may be made after the later of the date 
that is--
    (1) Three 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; or
    (2) The date described in paragraph (b) of this section with 
respect to a request for modification; or
    (3) The date described in paragraph (c) of this section with 
respect to a notice of proposed partnership adjustment.
    (b) Modification requested under section 6225(c)--(1) In general. 
For purposes of paragraph (a)(2) of this section, in the case of any 
request for modification of any imputed underpayment under section 
6225(c), the date by which the Internal Revenue Service (IRS) may make 
a partnership adjustment is the date that is 270 days (plus the number 
of days of an extension of the period for requesting modification (as 
described in Sec.  301.6225-2(c)(3)(i)) agreed to by the IRS under 
section 6225(c)(7) and Sec.  301.6225-2(c)(3)(ii)) after the date on 
which everything required to be submitted to the IRS pursuant to 
section 6225(c) is so submitted.
    (2) Date on which everything is required to be submitted--(i) In 
general. For purposes of paragraph (b)(1) of this section, the date on 
which everything required to be submitted to the IRS pursuant to 
section 6225(c) is so submitted is the earlier of--
    (A) The date the period for requesting modification ends (including 
extensions) as described in Sec.  301.6225-2(c)(3)(i) and (ii); or
    (B) The date the period for requesting modification expires as a 
result of a waiver of the prohibition on mailing a notice of final 
partnership adjustment (FPA) under Sec.  301.6231-1(b)(2). See Sec.  
301.6225-2(c)(3)(iii).
    (ii) Incomplete submission has no effect. A determination by the 
IRS that the information submitted as part of a request for 
modification is incomplete has no effect on the applicability of 
paragraph (b)(2) of this section.
    (c) Notice of proposed partnership adjustment. For purposes of 
paragraph (a)(3) of this section, the date by which the IRS may make a 
partnership adjustment is the date that is 330 days (plus the number of 
days of an extension of the modification period (as described in Sec.  
301.6225-2(c)(3)(i)) agreed to by the IRS under section 6225(c)(7) and 
Sec.  301.6225-2(c)(3)(ii)) after the date the last notice of proposed 
partnership adjustment (NOPPA) under section 6231(a)(2) is mailed, 
regardless of whether modification is requested by the partnership 
under section 6225(c).
    (d) Extension by agreement. The periods described in paragraphs 
(a), (b), and (c) of this section (including any extension of those 
periods pursuant to this paragraph (d)) may be extended by an 
agreement, in writing, entered into by the partnership and the IRS 
before the expiration of such period.
    (e) Examples. The following examples illustrate the rules of this 
section. For purposes of these examples, each partnership has a 
calendar taxable year.

    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.
    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.
    Example 3. The facts are the same as in Example 2 of this 
paragraph (e), except that on June 1, 2023, pursuant to Sec.  
301.6235-1(d), PR signs an agreement extending the period for making 
partnership adjustments under section 6235(a)(1) for Partnership's 
2020 taxable year to December 31, 2025. In addition, on June 2, 
2025, the IRS mails to Partnership and PR a timely NOPPA under 
section 6231(a)(2). Pursuant to Sec.  301.6225-2(c)(3)(i), the 
period for requesting modification expires on February 27, 2026 (270 
days after June 2, 2025, the date the NOPPA is mailed), but PR does 
not submit a request for modification on or before this date. Under 
paragraph (c) of this section, the date for purposes of paragraph 
(a)(3) of this section is April 28, 2026, the date that is 330 days 
from the mailing of the NOPPA. Because April 28, 2026 is later than 
the date under paragraph (a)(1) of this section (December 31, 2025, 
as extended under paragraph (d) of this section), and because no 
modification was requested, paragraph (a)(2) of this section is not 
applicable, April 28, 2026 is the date on which the period for 
making partnership adjustments expires under section 6235.
    Example 4. The facts are the same as in Example 3 of this 
paragraph (e), except that PR notifies the IRS that Partnership will 
be requesting modification. On January 5, 2026, PR and the IRS agree 
to extend the period for requesting modification pursuant to section 
6225(c)(7) and Sec.  301.6225-2(c)(3)(ii) for 45 days--from February 
27, 2026 to April 13, 2026. PR submits the request for modification 
to the IRS on April 13, 2026. Therefore, the date determined under 
paragraph (b) of this section is February 22, 2027, which is 270 
days after the date everything required to be submitted was so 
submitted pursuant to paragraph (b)(2) of this section plus the 
additional 45-day extension of the period for requesting 
modification agreed to by PR and the IRS. Because February 22, 2027 
is later than the date under paragraph (a)(1) of this section 
(December 31, 2025, as extended under paragraph (d) of this section) 
and the date under paragraph (a)(3) of this section (June 12, 2026, 
which is 330 days from the date the NOPPA was mailed plus the 45-day 
extension under section 6225(c)(7)), February 22, 2027 is the date 
on which the period for making partnership adjustments expires under 
section 6235.
    Example 5. The facts are the same as in Example 4 of this 
paragraph (e), except that PR does not request an extension of the 
period for requesting modification. On February 1, 2026, PR submits 
a request for modification and PR, and the IRS agree in writing to 
waive the prohibition on mailing an FPA pursuant to Sec.  301.6231-
1(b)(2). Pursuant to Sec.  301.6225-2(c)(3)(iii), the period for 
requesting modification expires as of February 1, 2026, rather than 
February 27, 2026. Accordingly, under paragraph (b)(2) of this 
section, the date on which everything required to be submitted 
pursuant to section 6225(c) is so submitted is February 1, 2026, and 
the 270-day period described in paragraph (b)(1) of this section 
begins to run on that date. Therefore, the date for purposes of 
paragraph (a)(2) of this section is October 29, 2026, which is 270 
days after February 1, 2026, the date on which everything required 
to be submitted under section 6225(c) is so submitted. Because 
October 29, 2026 is later than the date under paragraph (a)(1) of 
this section (December 31, 2025, as extended under paragraph (d) of 
this section) and the date under paragraph (a)(3) of this section 
(April 28, 2026), October 29, 2026 is the date on which the period 
for making partnership adjustments expires under section 6235.
    Example 6. The facts are the same as in Example 5 of this 
paragraph (e), except PR completes its submission of information to 
support a request for modification on July 1, 2025, but does not 
execute a waiver pursuant to Sec.  301.6231-1(b)(2). Therefore, 
pursuant to paragraph (b)(2) of this section, February 26, 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

[[Page 42010]]

paragraph (b)(1) of this section expires on November 23, 2026. 
Because November 23, 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 23, 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.
    (2) Election under Sec.  301.9100-22 in effect. This section 
applies to any partnership taxable year beginning after November 2, 
2015 and before January 1, 2018 for which a valid election under Sec.  
301.9100-22 is in effect.
0
Par. 25. Section 301.6241-1 is added to read as follows:


Sec.  301.6241-1  Definitions.

    (a) Definitions. For purposes of subchapter C of chapter 63 of the 
Internal Revenue Code--
    (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.
    (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 and the regulations 
thereunder. In the case of an election under section 6226, the term 
imputed underpayment means the amount determined in accordance with 
Sec.  301.6226-3(e)(4). In the case of an administrative adjustment 
request, the term imputed underpayment means the amount determined in 
accordance with Sec.  301.6227-2 or Sec.  301.6227-3(c).
    (4) Indirect partner. The term indirect partner means any person 
who has an interest in a partnership through their interest in one or 
more pass-through partners (as defined in paragraph (a)(5) of this 
section) or through a wholly-owned entity disregarded as separate from 
its owner for Federal tax purposes.
    (5) Pass-through partner. The term pass-through partner means a 
pass-through entity that holds an interest in a partnership. A pass-
through entity is a partnership as described in Sec.  301.7701-2(c)(1) 
(including a foreign entity that is classified as a partnership under 
Sec.  301.7701-3(b)(2)(i)(A) or (c)), an S corporation, a trust (other 
than a wholly-owned trust disregarded as separate from its owner for 
Federal 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 tax purposes.
    (6) Partnership adjustment. The term partnership adjustment means 
any adjustment to a partnership-related item (as defined in Sec.  
301.6241-6) and includes any portion of a partnership adjustment.
    (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 Sec.  
301.6241-6) 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.
    (2) Election under Sec.  301.9100-22 in effect. This section 
applies to any partnership taxable year beginning after November 2, 
2015 and before January 1, 2018 for which a valid election under Sec.  
301.9100-22 is in effect.
0
Par. 26. Section 301.6241-2 is added to read as follows:


Sec.  301.6241-2  Bankruptcy of the partnership.

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

[[Page 42011]]

    (2) Election under Sec.  301.9100-22 in effect. This section 
applies to any partnership taxable year beginning after November 2, 
2015 and before January 1, 2018 for which a valid election under Sec.  
301.9100-22 is in effect.
0
Par. 27. Section 301.6241-3 is added to read as follows:


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

    (a) Former partners take adjustments into account--(1) In general. 
Except as described in paragraphs (a)(2) and (3) of this section, if 
the Internal Revenue Service (IRS) determines that any partnership 
(including a partnership-partner as defined in Sec.  301.6241-1(a)(7)) 
ceases to exist (as defined in paragraph (b)(2) of this section) before 
any partnership adjustment (as defined in Sec.  301.6241-1(a)(6)) under 
subchapter C of chapter 63 of the Internal Revenue Code (subchapter C 
of chapter 63) takes effect (as described in paragraph (c) of this 
section), the partnership adjustment is taken into account by the 
former partners (as described in paragraph (d) of this section) of the 
partnership in accordance with paragraph (e) of this section.
    (2) Partnership no longer liable for any unpaid amounts resulting 
from a partnership adjustment. A partnership that ceases to exist is no 
longer liable for any unpaid amounts resulting from a partnership 
adjustment required to be taken into account by a former partner under 
this section.
    (3) Application of this section to partnership-partners. This 
section applies to a partnership-partner and its former partners, 
regardless of whether the partnership-partner has an election under 
section 6221(b) in effect for any relevant partnership taxable year.
    (b) Determination that partnership ceases to exist--(1) In general. 
For purposes of this section, the IRS may, in its sole discretion, make 
a determination that a partnership ceases to exist for purposes of this 
section, but the IRS is not required to do so even if the definition in 
paragraph (b)(2) of this section applies with respect to such 
partnership. If the IRS determines that 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.
    (2) Cease to exist defined--(i) In general. The IRS may determine 
that a partnership ceases to exist if the partnership terminates within 
the meaning of section 708(b)(1), or 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. For purposes of this section, a partnership does not 
cease to exist solely because the partnership has--
    (A) A valid election under section 6226 and the regulations 
thereunder in effect with respect to any imputed underpayment (as 
defined in Sec.  301.6241-1(a)(3));
    (B) Received a statement under section 6226(a)(2) (or Sec.  
301.6226-3(e)) and has furnished statements to its partners in 
accordance with Sec.  301.6226-3(e)(3); or
    (C) Not paid any amount required to be paid under subchapter C of 
chapter 63.
    (ii) 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)(2)(i) 
of this section that the partnership ceases to exist.
    (iii) 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 the adjustment year partners 
(as defined in Sec.  301.6241-1(a)(2)) of a partnership that ceases to 
exist for the partnership taxable year to which the partnership 
adjustment relates.
    (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 (as 
defined in Sec.  301.6241-1(a)(1)) 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 partnership taxable year for which the 
final 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) (and therefore ceases to exist under paragraph 
(b)(2)(i) of this section) 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

[[Page 42012]]

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

    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 IRS has determined that 
Partnership does not have the ability to pay under paragraph 
(b)(2)(i) of this section. Under Sec.  301.6241-1(a)(1), the 
adjustment year is 2025 and A and B, both individuals, are the only 
adjustment year partners of Partnership during 2025. Accordingly, 
under paragraph (d)(1) of this section, A and B are former partners. 
Therefore, A and B are required to take their share of the 
partnership adjustments determined in the FPA into account under 
paragraph (e) of this section.
    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 the IRS has determined that P does not have the 
ability to pay under paragraph (b)(2)(i) 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)(2)(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.
    (2) Election under Sec.  301.9100-22 in effect. This section 
applies to any partnership taxable year beginning after November 2, 
2015 and before January 1, 2018 for which a valid election under Sec.  
301.9100-22 is in effect.
0
Par. 28. Section 301.6241-4 is added to read as follows:


Sec.  301.6241-4  Payments nondeductible.

    (a) Payments nondeductible. No deduction is allowed under subtitle 
A of the Internal Revenue Code for any payment required to be made by a 
partnership under subchapter C of chapter 63 of the Internal Revenue 
Code (subchapter C of chapter 63). Payment by a partnership of any 
amount required to be paid under subchapter C of chapter 63, including 
any imputed underpayment (as defined in Sec.  301.6241-1(a)(3)), or 
interest, penalties, additions to tax, or additional amounts with 
respect to an imputed underpayment, is treated as an expenditure 
described in section 705(a)(2)(B).
    (b) Applicability date--(1) In general. Except as provided in 
paragraph (b)(2) of this section, this section applies to partnership 
taxable years beginning after December 31, 2017.
    (2) Election under Sec.  301.9100-22 in effect. This section 
applies to any partnership taxable year beginning after November 2, 
2015 and before January 1, 2018 for which a valid election under Sec.  
301.9100-22 is in effect.
0
Par. 29. Section 301.6241-5 is added to read as follows:


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

    (a) Entities filing a partnership return. Except as described in 
paragraph (c) of this section, an entity that files a partnership 
return for any taxable year is subject to the provisions of subchapter 
C of chapter 63 of the Internal Revenue Code (subchapter C of chapter 
63) and the regulations thereunder with respect to such taxable year 
even if it is determined that the entity filing the partnership return 
was not a partnership for such taxable year. Accordingly, any 
partnership-related item (as defined in Sec.  301.6241-6) 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 and the regulations thereunder 
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

[[Page 42013]]

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 partnership return was filed for 
the sole purpose of making the election described in section 761(a) 
(regarding election out of subchapter K for certain unincorporated 
organizations).
    (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.
    (2) Election under Sec.  301.9100-22 in effect. This section 
applies to any partnership taxable year beginning after November 2, 
2015 and before January 1, 2018 for which a valid election under Sec.  
301.9100-22 is in effect.
0
Par. 30. Section 301.6241-6 is added to read as follows:


Sec.  301.6241-6   Partnership-related Item.

    (a) In general. The term partnership-related item means--
    (1) Any item or amount with respect to the partnership (as 
described in paragraph (b) of this section) which is relevant in 
determining the tax liability of any person under chapter 1 of subtitle 
A of the Internal Revenue Code (chapter 1) (as described in paragraph 
(c) of this section), and
    (2) Any partner's distributive share of any such item or amount.
    (b) Item or amount with respect to the partnership. For purposes of 
this section, an item or amount is with respect to the partnership 
without regard to whether or not such item or amount appears on the 
partnership return. An item or amount is with respect to the 
partnership if--
    (1) The item or amount is shown or reflected, or required to be 
shown or reflected, on a return of the partnership under section 6031, 
the regulations thereunder, or the forms and instructions prescribed by 
the Internal Revenue Service (IRS) for the partnership's taxable year;
    (2) The item or amount is in the partnership's books or records;
    (3) The item or amount is an imputed underpayment;
    (4) The item or amount relates to a transaction with the 
partnership by a partner acting in its capacity as a partner or by an 
indirect partner (as defined in Sec.  301.6241-1(a)(4)) acting its 
capacity as an indirect partner;
    (5) The item or amount relates to a transaction that is described 
in section 707(a)(2), 707(b), or 707(c);
    (6) The item or amount relates to basis in the partnership;
    (7) The item or amount relates to a liability of the partnership 
that is reported or reportable by a partner acting in its capacity as a 
partner or an indirect partner acting in its capacity as an indirect 
partner, including such partner or indirect partner's share of the 
liability; or
    (8) Any legal or factual determinations necessary to make an 
adjustment to an item or amount described in paragraphs (b)(1) through 
(7) of this section, such as a determination regarding--
    (i) The validity of any election made by the partnership,
    (ii) The partnership's accounting practices and methods;
    (iii) Whether a partnership exists for tax purposes and whether 
multiple partnerships should be treated as a single partnership;
    (iv) Whether any items or transactions of the partnership lack 
economic substance or should otherwise be disregarded, collapsed, 
recharacterized, or attributed to other persons;
    (v) Whether a partnership terminates under section 708(b)(1) or as 
a result of a transaction under Rev. Rul. 99-6 (1999-1 C.B. 432) (see 
Sec.  601.601(d)(2) of this chapter); or
    (vi) The type of partnership interest held by any partner.
    (c) Relevant in determining the tax liability of any person under 
chapter 1. For purposes of this section, an item or amount is relevant 
in determining the tax liability of any person under chapter 1 without 
regard to application of subchapter C of chapter 63 of the Internal 
Revenue Code (subchapter C of chapter 63) and without regard to whether 
such item or amount, or adjustment to such item or amount, has an 
effect on the tax liability of any particular person under chapter 1.
    (d) Examples of partnership-related items. The term partnership-
related item includes--
    (1) The character, timing, source, and amount of the partnership's 
income, gain, loss, deductions, and credits;
    (2) The character, timing, and source of the partnership's 
activities;
    (3) The character, timing, source, value, and amount of any 
contributions to, and distributions from, the partnership;
    (4) The partnership's basis in its assets, the character and type 
of the assets, and the value (or revaluation such as under Sec.  1.704-
1(b)(2)(iv)(f) or (s) of this chapter) of the assets;
    (5) The amount and character of partnership liabilities and any 
changes to those liabilities from the preceding tax year;
    (6) The category, timing, and amount of the partnership's 
creditable expenditures;
    (7) Any item or amount resulting from a partnership termination;
    (8) Any item or amount relating to an election under section 754;
    (9) Partnership allocations and any special allocations; and
    (10) Whether any person is a partner in the partnership.
    (e) 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.

    Example 1.  Partnership enters into a transaction with A to 
purchase widgets for $100 in taxable year 2020. A is not a partner 
of Partnership or an indirect partner of Partnership. The 
transaction is not a transaction described in 707(a)(2), 707(b), or 
707(c). 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 that relates to a transaction with Partnership and is 
relevant to determining the liability of any person under chapter 1 
pursuant to paragraph (c) 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 (b) of this 
section because although the amount of income relates to a 
transaction with Partnership, the amount of income is reported or 
reportable by A, and A is not a partner (direct or indirect) of 
Partnership. Accordingly, the amount of income reportable by A is 
not a partnership-related item.
    Example 2. B loans Partnership $100 in Partnership's 2020 
taxable year. Partnership makes an interest payment to B in 2020 of 
$5. B is a partner in Partnership in the 2020 taxable year, but B 
loaned the $100 to Partnership in a capacity other than B's capacity 
as a partner. 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 relates to a transaction with or liability 
of Partnership and are relevant to determining the liability of any 
person under chapter 1 pursuant to paragraph (c) 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 (b) of this section because although 
they relate to a transaction with or liability of Partnership, the 
loan and interest income are reportable by B, and B was not acting 
in his capacity as a partner when he loaned the $100 to Partnership. 
Accordingly, the loan as treated by B and the amount of interest 
income to B is not a partnership-related item.


[[Page 42014]]


    (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.
    (2) Election under Sec.  301.9100-22 in effect. This section 
applies to any partnership taxable year beginning after November 2, 
2015 and before January 1, 2018 for which a valid election under Sec.  
301.9100-22 is in effect.
0
Par. 31. Section 301.6241-7 is added to read as follows:


Sec.  301.6241-7   Coordination with Other Chapters of the Internal 
Revenue Code.

    (a) Coordination with other chapters--(1) In general. Subchapter C 
of chapter 63 of the Internal Revenue Code (subchapter C of chapter 63) 
only applies to tax imposed by chapter 1 of the Internal Revenue Code 
(Code) and not to any tax imposed (including any amount required to be 
deducted or withheld) under any chapter of the Code other than chapter 
1 of the Code (chapter 1), including chapter 2, 2A, 3, or 4 of the 
Code. Accordingly, for purposes of determining taxes imposed under 
chapters of the Code other than chapter 1, the Internal Revenue Service 
(IRS) may make an adjustment to any partnership-related item (as 
defined in Sec.  301.6241-6) 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 this 
paragraph (a) 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.

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

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

[[Page 42015]]

the statement described in Sec.  301.6226-2(a) to the extent that it is 
an adjustment to an amount subject to withholding, and the IRS has not 
already collected tax attributable to the adjustment under chapter 3 or 
chapter 4. The partnership must pay the amount due under this paragraph 
(b)(4)(i) on or before the due date of the partnership return for the 
adjustment year (without regard to extension), and must make the 
payment in the manner prescribed by the IRS in forms, instructions, and 
other guidance. For the rules governing partners subject to the taxes 
imposed by chapters 3 and 4 when the partner receives a statement under 
Sec.  301.6226-2, see Sec.  301.6226-3(f). See Sec.  301.6226-
3(e)(3)(v) for the application of the rules of this paragraph (b)(4) to 
pass-through partners (as defined in Sec.  301.6241-1(a)(5)).
    (ii) Reduced rate of tax. A partnership may reduce the amount of 
tax it is required to pay under paragraph (b)(4)(i) of this section to 
the extent that it can associate valid documentation from a reviewed 
year partner pursuant to the regulations under chapter 3 or chapter 4 
(other than pursuant to Sec.  1.1446-6 of this chapter) with the 
portion of the adjustment that would have been subject to a reduced 
rate of tax in the reviewed year. For this purpose, the partnership may 
rely on documentation that the partnership possesses that is valid with 
respect to the reviewed year (determined without regard to the 
expiration after the reviewed year of any validity period prescribed in 
Sec.  1.1441-1(e)(4)(ii), Sec.  1.1446-1(c)(2)(iv)(A), or Sec.  1.1471-
3(c)(6)(ii) of this chapter), or new documentation that the partnership 
obtains from the reviewed year partner that includes a signed affidavit 
stating that the information and representations associated with the 
documentation are accurate with respect to the reviewed year.
    (iii) Reporting requirements. A partnership required to pay tax 
under paragraph (b)(4)(i) of this section must file the appropriate 
return and issue information returns as required by regulations under 
chapter 3 or chapter 4. For return and information return requirements, 
see Sec.  1.1446-3(d)(1)(iii); Sec.  1.1461-1(b), (c); Sec.  1.1474-
1(c), (d) of this chapter. The partnership must file the return and 
issue information returns for the year that includes the date on which 
the partnership pays the tax required to be withheld under paragraph 
(b)(4)(i) of this section. The partnership must report the information 
on the return and information returns in the manner prescribed by the 
IRS in forms, instructions, and other guidance.
    (iv) Partners subject to withholding. A reviewed year partner that 
is subject to withholding under paragraph (b)(4)(i) of this section 
must follow the rules under Sec.  301.6226-3(f).
    (c) Applicability date--(1) In general. Except as provided in 
paragraph (c)(2) of this section, this section applies to partnership 
taxable years beginning after December 31, 2017.
    (2) Election under Sec.  301.9100-22 in effect. This section 
applies to any partnership taxable year beginning after November 2, 
2015 and before January 1, 2018 for which a valid election under Sec.  
301.9100-22 is in effect.
0
Par. 32. Section 301.6241-8 is added to read as follows:.


Sec.  301.6241-8  Treatment of special enforcement matters--[Reserved]

Douglas W. O'Donnell,
Acting Deputy Commissioner for Service and Enforcement.
[FR Doc. 2018-17614 Filed 8-13-18; 4:15 pm]
 BILLING CODE 4830-01-P