41954 Federal Register / Vol. 83, No. 160 / Friday, August 17, 2018 / Proposed Rules 

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. 

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 

§§ 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 


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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 passthrough partners take into account 

adjustments under the alternative to 

payment of the imputed underpayment 

described in section 6226 and under 

rules similar to section 6226 when a 

partnership files an AAR under section 

6227. Written comments were received 

in response to the December 2017 

NPRM. However, no hearing was 

requested or held. 

On January 2, 2018, the Treasury 

Department and the IRS published in 

the Federal Register (82 FR 28398) final 

regulations under section 6221(b) 

providing rules for electing out of the 

centralized partnership audit regime. 

On February 2, 2018, the Treasury 

Department and the IRS published in 

the Federal Register (83 FR 4868) a 

notice of proposed rulemaking (REG– 

118067–17) (February 2018 NPRM) 

proposing rules for adjusting tax 

attributes under the centralized 

partnership audit regime. Written 

comments were received in response to 

the February 2018 NPRM. However, no 

hearing was requested or held. 

On March 23, 2018, Congress enacted 

the TTCA, which made a number of 

technical corrections to the rules under 

the centralized partnership audit 

regime. The amendments under the 

TTCA are effective as if included in 

section 1101 of the BBA, and therefore, 

subject to the effective dates in section 

1101(g) of the BBA. 

On August 9, 2018, the Treasury 

Department and the IRS published in 

the Federal Register (83 FR 39331) final 

regulations under section 6223 

providing rules relating to partnership 

representatives and final regulations 

under § 301.9100–22 providing rules for 

electing into the centralized partnership 

audit regime for taxable years beginning 

on or after November 2, 2015 and before 

January 1, 2018. Corresponding 

temporary regulations under 

§ 301.9100–22T were also withdrawn. 

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 § 301.9100–22T with 

references to § 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 partnershiprelated 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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41956 Federal Register / Vol. 83, No. 160 / Friday, August 17, 2018 / Proposed Rules 

(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 § 301.6221(a)–1 

Proposed rules under § 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 

§ 301.6221(a)–1). Former proposed 

§ 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 § 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 § 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 § 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 § 301.6221(a)–1(b) that 

addressed the scope of what is adjusted 

at the partnership level are now 

incorporated into proposed § 301.6241– 

6 which defines the term ‘‘partnershiprelated item.’’ 

Proposed § 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 

§ 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 § 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 

§ 301.6221(a)–1(b)(1)(ii)(F) and (I). 

B. Proposed § 301.6241–6 

Proposed § 301.6241–6 defines the 

term ‘‘partnership-related item.’’ 

Proposed § 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 § 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 § 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 

§ 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 § 301.6241–6(b)(8) 

provides that any determination 

necessary to make an adjustment to an 

item or amount described in proposed 

§ 301.6241–6(b)(1) through (b)(7) is also 

an item or amount with respect to the 

partnership. 

Proposed § 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 § 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 § 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 § 301.6221(a)–1(b)(1) with a 

few minor revisions. First, the 


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references to ‘‘foreign,’’ ‘‘tax,’’ and 

‘‘§ 1.704–1(b)(4)(viii)(b)’’ in the example 

regarding creditable expenditures were 

removed to clarify that partnershiprelated 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 § 301.6241–6(e) provides 

examples that illustrate the rules under 

proposed § 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 § 301.6222–1 

Proposed rules under § 301.6222–1 

were previously published in the 

Federal Register (82 FR 27375–78) in 

the June 2017 NPRM (former proposed 

§ 301.6222–1). For an explanation of the 

rules under former proposed 301.6222– 

1, see 82 FR 27345–46. 

Former proposed § 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 

§ 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 § 301.6222–1 to the term 

‘‘item’’ have been replaced with 

references to the term ‘‘partnershiprelated 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 §§ 301.6225–1, 301.6225–2, 

and 301.6225–3 

Proposed rules under §§ 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 §§ 301.6225–1, 

301.6225–2, and 301.6225–3). For an 

explanation of the rules under former 

proposed §§ 301.6225–1, 301.6225–2, 

and 301.6225–3, see 82 FR 27350–58, 82 

FR 56766–75, and 82 FR 60152–53. 


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Proposed § 301.6225–1 has been 

reorganized to clarify the process for 

determining an imputed underpayment. 

This reorganization, when compared to 

former proposed § 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 § 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 doublecounting the individual adjustments as 

inputs into the imputed underpayment, 

proposed § 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 § 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 

§ 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 § 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 

§ 301.6225–1(c)(3), however, 

reallocation adjustments to credits are 

placed in the credit grouping, and under 

§ 301.6225–1(c)(4), reallocation 

adjustments to creditable expenditures 

are placed in the creditable expenditure 

grouping, similar to the rule under 

former proposed § 301.6225–1(d)(2)(iv). 

Proposed § 301.6225–1(c)(2)(ii) provides 

that each reallocation adjustment results 

in two separate adjustments—one 

positive adjustment and one negative 

adjustment. Proposed § 301.6225–1(c)(6) 

provides similar rules for 

recharacterization adjustments. 

Proposed § 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 § 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 

§ 301.6225–1(d)(1) provides that when 

the IRS determines a negative 

adjustment (as defined in proposed 

§ 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 § 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 § 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 § 301.6225–1(d)(3) requires 

that positive and negative adjustments 

resulting from reallocation adjustments 

and recharacterization adjustments be 

placed into separate subgroupings. 

Proposed § 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 § 301.6225–1. The 

examples in the proposed rules have 

been revised to reflect these broader 

restrictions on netting. 

Proposed § 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 § 301.6225–3. 

Proposed § 301.6225–1(g) provides 

the IRS may create multiple imputed 

underpayments for a particular tax year. 

Proposed § 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 § 301.6225–2 provides 

guidance on procedures to modify the 

imputed underpayment. Former 

§ 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 § 301.6225–2(b) 


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reflects the rule that modification affects 

the portion of an adjustment. 

Proposed § 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 § 301.6225–2(d)(2) provides 

rules regarding amended returns and the 

alternative procedure to filing amended 

returns. Proposed § 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 § 301.6225– 

2(d)(2)(viii) provided that partners 

could raise a reasonable cause defense 

under section 6664(c) (or other partnerlevel defense as described in former 

proposed § 301.6226–3(i)(3)) with an 

amended return in modification. 

Proposed § 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 § 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 

§ 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 § 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 § 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 § 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 § 301.6225–1(f)). Proposed 

§ 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 

§ 301.6225–2(e) is sufficient. 

Lastly, proposed § 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 

§ 301.6225–2(a). 

Proposed § 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 § 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 § 301.6225–4 

Proposed rules under § 301.6225–4 

were previously published in the 

Federal Register (83 FR 4868–82) in the 

February 2018 NPRM (former proposed 

§ 301.6225–4). For an explanation of the 

rules under former proposed 

§ 301.6225–4, see 82 FR 4877. 

Proposed § 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 

§ 301.6225–4 to conform to the changes 

to the definition of ‘‘tax attribute’’ under 

proposed § 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 

§ 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 


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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 §§ 301.6226–1, 301.6226–2, 

and 301.6226–3 

Proposed rules under §§ 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 

§§ 301.6226–1, 301.6226–2, and 

301.6226–3). For an explanation of the 

rules under former proposed 

§§ 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 § 301.6226–1(b)(2) 

provided that if a partnership makes a 

valid election in accordance with 

proposed § 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 § 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 § 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 § 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 § 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 § 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 § 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 § 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 § 301.6226– 

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

correction amounts determined under 

proposed § 301.6226–3(b) is only 

calculated for taxable years for which 

there is a correction amount greater than 

zero, that is, taxable years for which 

there would have been an increase in 

chapter 1 tax if the adjustments were 

taken into account. 

Proposed § 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 § 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 § 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 


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compute and pay an imputed 

underpayment. 

Former proposed § 301.6226–3(e)(1) 

provided that a pass-through partner (as 

defined in proposed § 301.6241–1(a)(5)) 

that was furnished a statement 

described in proposed § 301.6226–2 

(including a statement as described in 

former proposed § 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 § 301.6226–2, and any passthrough partner receiving a statement 

under former proposed § 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 

§ 301.6226–3(e)(3)(i) and (iv). 

Although the rules under former 

proposed § 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 § 301.6226–3(a)(1) now 

provides that the rules under proposed 

§ 301.6226–3(a)(1) apply to a reviewed 

year partner except to the extent 

otherwise provided in proposed 

§ 301.6226–3. Second, proposed 

§ 301.6226–3(e) now includes a 

requirement that the pass-through 

partner must file a partnership 

adjustment tracking report. Third, 

proposed § 301.6226–3(e) provides a 

default rule that a pass-through partner 

must furnish statements to its own 

partners in accordance with proposed 

§ 301.6226–3(e)(3). If a pass-through 

partner fails to furnish statements in 

accordance with proposed § 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 § 301.6226–3(e) 

was removed to more closely align with 

the statutory language in section 

6226(b)(4). Fourth, proposed 

§ 301.6226–3(e) defines and refers to the 

term ‘‘audited partnership,’’ which 

proposed § 301.6226–3(e)(1) defines as 

the partnership that made the election 

under § 301.6226–1. See section 

6226(b)(4)(D). Lastly, proposed 

§ 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 § 301.6226– 

3(e), pass-through partners compute and 

pay an ‘‘imputed underpayment,’’ rather 

than calculating correction amounts 

under proposed § 301.6226–3(b), 

references in former proposed 

§ 301.6226–3(b) to amended returns 

filed by indirect partners as part of 

modification have been deleted. Passthrough partners computing an imputed 

underpayment under proposed 

§ 301.6226–3(e) may account for 

modifications submitted by their 

indirect partners, but non-pass-through 

partners calculating correction amounts 

under proposed § 301.6226–3(b) cannot. 

Accordingly, the references in former 

proposed § 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 

§ 301.6241–1(a)(10) (see section 11.A. of 

this preamble), proposed §§ 301.6226–2 

and 301.6226–3 now only refer to the 

tax attributes of the partner. For 

example, proposed §§ 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 

§§ 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 

§§ 301.6226–1, 6226–2, and 6226–3. 

First, proposed § 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 

§ 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 § 301.6226– 

1(c)(1), an election under section 6226 

is only valid if all the provisions under 

proposed § 301.6226–1 (regarding 

making the election) and § 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 

§ 301.6226–1(c)(2) to proposed 

§ 301.6226–1(c)(1) to clarify that an 

election that does not fully satisfy the 

requirements of proposed §§ 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 § 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 

§ 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 § 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 § 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. 


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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 § 301.6226–2 or proposed 

§ 301.6226–3(e)(3). Proposed 

§ 301.6226–1(c)(4)(ii) requires the 

partnership to provide correct 

information in its election, and 

proposed § 301.6226–2(e) and proposed 

§ 301.6226–3(e)(3)(iii) require that the 

statements filed and furnished with the 

IRS include correct information. 

Additionally, proposed § 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 § 301.6226– 

2(d)(2) extends the rules governing 

corrections of errors in statements to 

statements furnished by pass-through 

partners under proposed § 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 § 301.6226–3(e)(3)(ii) 

and (e)(4)(ii). 

Fifth, in proposed § 301.6226–3(g), 

the word ‘‘grantor’’ has been added 

between the words ‘‘wholly-owned’’ 

and ‘‘trusts’’ to clarify that ‘‘whollyowned trusts’’ means ‘‘wholly-owned 

grantor trusts.’’ 

Sixth, the phrase ‘‘an entity described 

in § 301.7701–2(c)(2)(i)’’ in former 

proposed § 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 § 301.6241– 

1(a)(4). 

Seventh, proposed § 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 

§ 301.6226–3(c)(2) provided that interest 

was calculated from the first affected 

year. Under proposed § 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 

§ 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 

§ 301.6226–3(h). Examples 2 through 4 

and 6 through 9 under former proposed 

§ 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 

§ 301.6226–1(b) as support for this rule. 

Under proposed § 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 § 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 

§ 301.6226–2(b), and incorrect 

references to § 301.6226–1(b) in 

Examples 6 through 9 under former 

proposed § 301.6226–3(h) have been 

replaced with correct references to 

§ 301.6226–2(b). 

Proposed § 301.6226–4 

Proposed rules under §§ 301.6226–4 

were previously published in the 

Federal Register in the February 2018 

NPRM (83 FR 4868) (former proposed 

§ 301.6226–4). For an explanation of the 

rules under former proposed 

§ 301.6226–4, see 83 FR 4874. 

Proposed § 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 

§ 301.6226–3(e)(4) now provides that a 

reviewed year partner that is a passthrough partner must pay an imputed 

underpayment if the pass-through 

partner does not furnish statements. In 

addition, changes have been made 

throughout former proposed 

§ 301.6226–4 to conform to the change 

to the definition of ‘‘tax attribute’’ under 

proposed § 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 § 301.6226–4(b) to conform to 

the terminology used in proposed 

§ 301.6226–3. Lastly, an incorrect crossreference in former proposed 

§ 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 


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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 §§ 301.6227–1, 301.6227–2, 

and 301.6227–3 

Proposed rules under §§ 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 §§ 301.6227–1, 301.6227–2, 

and 301.6227–3). For an explanation of 

the rules under former proposed 

§§ 301.6227–1, 301.6227–2, and 

301.6227–3, see 82 FR 27366–69, 82 FR 

56769, and 82 FR 60151. 

Former proposed § 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 § 301.6227–3(c). 

Proposed § 301.6227–3(c), however, 

does not provide for the filing of an 

AAR by a partnership-partner. Rather, 

under proposed § 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 

§ 301.6226–3(e) (except to the extent 

otherwise provided). Proposed 

§ 301.6227–1(a) therefore is changed to 

remove the reference to partnershippartners, and now only refers to 

partners filing AARs in their capacity as 

a partnership representative. 

Proposed § 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 

§ 301.6225–1. Under proposed 

§ 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 § 301.6225–2. Under former 

proposed § 301.6227–2(a)(2), these 

modifications included modifications 

that relate to tax-exempt partners 

(proposed § 301.6225–2(d)(3)), rate 

modification (proposed § 301.6225– 

2(d)(4)), modification related to certain 

passive losses of publicly traded 

partnerships (proposed § 301.6225– 

2(d)(5)), modification applicable to 

qualified investment entities described 

in section 860 (proposed § 301.6225– 

2(d)(7)), and other modifications to the 

extent permitted under future IRS 

guidance (proposed § 301.6225– 

2(d)(10)). Proposed § 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 § 301.6225– 

2(d)(6)(ii)) and modifications related to 

tax treaties (proposed § 301.6225– 

2(d)(9)). 

Proposed § 301.6227–2(a)(2) provides 

that other types of modification, such as 

modification under proposed 

§ 301.6225–2(d)(2) with respect to 

amended returns, including the 

alternative procedure to filing amended 

returns, and modification under 

proposed § 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 § 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 

§ 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 § 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 § 301.6227–3, a 

reviewed year partner that receives a 

statement described in proposed 

§ 301.6227–1(d) must treat that 

statement as if it were provided under 

section 6226(a)(2). Former proposed 

§ 301.6227–3(b)(1) also provided that 

the restriction in former proposed 

§ 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 § 301.6227–3(b)(1) no longer 

needs to address that restriction because 

the restriction in former proposed 

§ 301.6226–3(b)(1) no longer exists. 

Therefore, the exception in former 

proposed § 301.6227–3(b)(1) has been 

eliminated. Additionally, the provision 

in former proposed § 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 § 301.6227–3(b)(1). 

Former proposed § 301.6227–1 

included a reserved paragraph regarding 

notice of change to amounts of 

creditable foreign tax expenditures. 

Proposed § 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 

§ 301.6227–1(a) has been replaced with 


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a reference to ‘‘partnership-related 

items.’’ 

B. Revisions to the Regulations Under 

Section 6227 Unrelated to the TTCA 

Amendments 

Proposed § 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 § 301.6223–1. 

Former proposed § 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 § 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 § 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 § 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 § 301.6231–1(f). 

Additions were also made in 

proposed § 301.6227–3(c) to clarify the 

rules for pass-through partners, 

unrelated to the changes made by the 

TTCA. First, proposed § 301.6227– 

3(c)(1) provides that when a passthrough partner takes into account 

adjustments requested in an AAR in 

accordance with proposed § 301.6226– 

3(e), the pass-through partner must 

provide the information described in 

proposed § 301.6227–3(c)(3) as opposed 

to the information in described in 

proposed § 301.6226–3(e)(3)(iii) when 

furnishing statements to its partners. 

Second, under proposed § 301.6227– 

3(c)(1), a pass-through partner that 

computes and pays an imputed 

underpayment in accordance with 

proposed § 301.6226–3(e)(4) may not 

take into account any modifications. 

Third, proposed § 301.6227–3(c)(4) 

provides that when a pass-through 

partner furnishes a statement to an 

affected partner under proposed 

§ 301.6227–3(c), the affected partner 

must treat that statement as if it were a 

statement described in proposed 

§ 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 § 301.6231–1 

Proposed rules under § 301.6231–1 

were previously published in the 

Federal Register (82 FR 60161–62) in 

the December 2017 NPRM (former 

proposed § 301.6231–1). For an 

explanation of the rules under former 

proposed § 301.6231–1, see 82 FR 

60151–52. 

Although not required by statute, 

former proposed § 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 § 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 § 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 § 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 § 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 


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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 § 301.6232–1 

Proposed rules under § 301.6232–1 

were previously published in the 

Federal Register (82 FR 60162–63) in 

the December 2017 NPRM (former 

proposed § 301.6232–1). For an 

explanation of the rules under former 

proposed §§ 301.6232–1, see 82 FR 

60152. 

Former proposed § 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 § 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 

§ 301.6232–1(c) provided limitations on 

assessment of the imputed 

underpayment, except as otherwise 

provided in § 301.6232–1. Because the 

rules under former proposed 

§ 301.6232–1(a) and (b) are consistent 

with the statutory changes to section 

6232(a), those rules are unchanged. 

Proposed § 301.6232–1(c) is generally 

the same as former proposed 

§ 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 § 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 

§ 301.6232–1(d), the reference to ‘‘items 

of income, gain, loss, deduction, or 

credit’’ in former proposed § 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 §§ 301.6233(a)–1 and 

301.6233(b)–1 

Proposed rules under §§ 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 §§ 301.6233(a)– 

1 and 301.6233(b)–1). For an 

explanation of the rules under former 

proposed §§ 301.6233(a)–1 and 

301.6233(b)–1, see 82 FR 60152–53. 

Proposed § 301.6233(a)–1 provides 

rules for determining interest and 

penalties from the reviewed year, and 

proposed § 301.6233(b)–1 provides rules 

for determining interest and penalties 

from the adjustment year. Neither 

former proposed § 301.6233(a)–1 nor 

former proposed § 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 § 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 § 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 

§ 301.6233(a)–1(c)(2)(ii)(C) now 

provides that a ‘‘decreasing adjustment’’ 

is ‘‘an adjustment to a partnershiprelated item that resulted in a decrease 

to the imputed underpayment.’’ 

Example 3 under proposed 

§ 301.6233(a)–1(c)(3) also reflects 

changes to former proposed 

§§ 301.6225–1 and 301.6225–2. 

Former proposed § 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 

§ 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 § 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 § 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 § 301.6233(a)– 

1(c)(2)(v), pertaining to reasonable cause 

and good faith defenses, provided that 


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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 

§ 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 partnerlevel 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 § 301.6234–1 

Proposed rules under § 301.6234–1 

were previously published in the 

Federal Register (82 FR 60165–66) in 

the December 2017 NPRM (former 

proposed § 301.6234–1). For a further 

explanation of the rules under former 

proposed § 301.6234–1, see 82 FR 

60153. 

Former proposed § 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 § 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 

§ 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 § 301.6235–1 

Proposed rules under § 301.6235–1 

were previously published in the 

Federal Register (82 FR 60166–67) in 

the December 2017 NPRM (former 

proposed § 301.6235–1). For an 

explanation of the rules under former 

proposed § 301.6235–1, see 82 FR 

60153–54. 

Proposed § 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 § 301.6241–1 

Proposed rules under § 301.6241–1 

were previously published in the 

Federal Register (82 FR 27399–400) in 

the June 2017 NPRM (former proposed 

§ 301.6241–1). For an explanation of the 

rules under former proposed 

§ 301.6241–1, see 82 FR 27369. 

Former proposed § 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 § 301.6241–1(a)(1) now 

provides that an AAR is ‘‘filed’’ and not 

‘‘made.’’ 

Former proposed § 301.6241–1(a)(3) 

defined the term ‘‘imputed 

underpayment’’ as the amount 

determined under § 301.6225–1. 

Because an imputed underpayment may 

also be computed and paid pursuant to 

proposed § 301.6226–3(e)(4) (relating to 

pass-through partners) as well as under 

proposed § 301.6227–2 and § 301.6227– 

3(c) (relating to AARs), proposed 

§ 301.6241–1(a)(3) now refers to 

imputed underpayments determined 

under those provisions. Proposed 

§ 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 § 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 § 301.6225–2 based on 

indirect partners holding an interest 

through a disregarded entity or grantor 

trust. 

Proposed § 301.6241–1(a)(6) now 

provides that the term ‘‘partnership 

adjustment’’ means any adjustment to a 

partnership-related item (as defined in 


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proposed § 301.6241–6), and such term 

includes a portion of a partnership 

adjustment. 

Former proposed § 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 § 301.6241–1(a)(10). The 

reference to ‘‘items of income, gain, loss, 

deduction, or credit’’ in former 

proposed § 301.6241–1(a)(10) was also 

replaced with a reference to 

‘‘partnership-related item.’’ 

B. Proposed § 301.6241–2 

Proposed rules under § 301.6241–2 

were previously published in the 

Federal Register (82 FR 27400) in the 

June 2017 NPRM (former proposed 

§ 301.6241–2). Former proposed 

§ 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 

§ 301.6241–2 are unchanged. For an 

explanation of the rules under former 

proposed § 301.6241–2, see 82 FR 

27369–70. 

C. Proposed § 301.6241–3 

Proposed rules under § 301.6241–3 

were previously published in the 

Federal Register (82 FR 27400–02) in 

the June 2017 NPRM (former proposed 

§ 301.6241–3). For an explanation of the 

rules under former proposed 

§ 301.6241–3, see 82 FR 27370–71. 

Former proposed § 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 

§ 301.6241–3(a)(3) now provides that 

the rules under proposed § 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 

§ 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 § 301.6241–3(f) 

illustrates this rule. 

Former proposed § 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 

§ 301.6241–3(b)(2)(i). In addition, a rule 

was added to former proposed 

§ 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 § 301.6226– 

3(e)(3). This change clarifies that 

partnership-partners that properly 

furnish statements in accordance with 

proposed § 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 § 301.6241–3. First, the 

phrase ‘‘any amounts’’ in former 

proposed § 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 § 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 § 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 § 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 § 301.6241–4 

Proposed rules under § 301.6241–4 

were previously published in the 

Federal Register (82 FR 27402) in the 

June 2017 NPRM (former proposed 

§ 301.6241–4). For an explanation of the 

rules under former proposed 

§ 301.6241–4, see 82 FR 27371. 

Former proposed § 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 

§ 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 § 301.6226–3 in 

former proposed § 301.6241–4 became 

superfluous and thus was removed. 

E. Proposed § 301.6241–5 

Proposed rules under § 301.6241–5 

were previously published in the 

Federal Register (82 FR 27402) in the 

June 2017 NPRM (former proposed 

§ 301.6241–5). For an explanation of the 

rules under former proposed 

§ 301.6241–5, see 82 FR 27371. 

Former proposed § 301.6241–5 

provided rules for extending the 

centralized partnership audit regime to 

entities filing partnership returns. 

References in former proposed 

§ 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 

§ 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 § 301.6241–5(c), the 

centralized partnership audit regime 

does not apply in that case 

notwithstanding the filing of a 

partnership return. 


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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 § 301.6241–7 

Former proposed § 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 § 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 § 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 § 301.6221(a)–1(f) 

provided examples to illustrate this 

concept. 

The rules contained in former 

proposed § 301.6221(a)–1(d), and the 

examples in former proposed 

§ 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 § 301.6221(a)– 

1(d) and (f) are now under proposed 

§ 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 § 301.6241–6. Other 

editorial changes were made to reflect 

revisions to former proposed 

§ 301.6221(a)–1. 

Proposed § 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 § 301.6241–7(a)(2) 

provides examples to illustrate these 

concepts. 

Proposed § 301.6241–7(b) provides 

rules for coordinating the centralized 

partnership audit regime with chapters 

3 and 4 of the Code. Proposed 

§ 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 § 301.6241–7(b)(2) defines the 

terms chapter 3, chapter 4, and amount 

subject to withholding. 

Former proposed §§ 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 § 301.6241– 

7(b)(3) and (b)(4). Proposed § 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 


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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 

§§ 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 

■ Paragraph 1. The authority citation 

for part 1 continues to read in part as 

follows: 

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

■ Par. 2. Section 1.704–1 is amended 

by: 

■ 1. Adding paragraph (b)(1)(viii). 

■ 2. Adding a sentence to the end of 

paragraph (b)(2)(iii)(a). 

■ 3. Adding paragraphs (b)(2)(iii)(f), 

(b)(2)(iv)(i)(4), and (b)(4)(xi) through 

(xv). 

The additions read as follows: 

§ 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 


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under section 704(b) and § 1.704–1(b) 

apply to these items that take into 

account that the item relates to the 

reviewed year (as defined in 

§ 301.6241–1(a)(8) of this chapter) but 

occurs in the adjustment year (as 

defined in § 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 § 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 

§ 301.6241–1(a)(5) of this chapter) under 

§ 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 § 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 

§ 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 

§ 301.6225–4(b) of this chapter) to 

which the expenditure relates, taking 

into account modifications under 

§ 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 § 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 § 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 

§ 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 § 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 § 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 

§ 301.6225–4(b)(3)(ii) and (iv) of this 

chapter, or expense or loss described in 

§ 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 § 301.6225– 

4(b)(3)(iv) of this chapter, or a notional 

item of income or gain described in 

§ 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 


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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 

§ 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 § 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 § 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 § 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 § 301.6241–1(a)(8) of this 

chapter), followed by any intervening 

years (as defined in § 301.6226–3(b)(3) 

of this chapter), concluding with the 

reporting year (as defined in 

§ 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. 

* * * * * 

■ Par. 3. Section 1.705–1 is amended by 

adding paragraph (a)(10) to read as 

follows: 

§ 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 §§ 301.6225–4 and 

301.6226–4 of this chapter. 

* * * * * 

■ 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: 

§ 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 § 301.6226–1 of 

this chapter or for which a pass-through 

partner (as defined in § 301.6241– 

1(a)(5)) pays an imputed underpayment 

under § 301.6226–3(e)(4). 

* * * * * 

PART 301—PROCEDURE AND 

ADMINISTRATION 

■ Par. 5. The authority citation for part 

301 continues to read in part as follows: 

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

■ Par. 6. Section 301.6221(a)–1 is added 

to read as follows: 

§ 301.6221(a)–1 Determination at 

partnership level. 

(a) In general. Except as otherwise 

provided under subchapter C of chapter 

63 of the Internal Revenue Code 

(subchapter C of chapter 63) and the 

regulations thereunder, any adjustment 

to a partnership-related item (as defined 

in § 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 partnershiprelated item, see § 301.6222–1; in the 

case of modification under section 

6225(c), see § 301.6225–2; in the case of 

an election under section 6226, see 

§ 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 

§ 301.6241–7. For rules relating to 

special enforcement matters, see 

§ 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 § 301.9100–22 in 

effect. This section applies to any 

partnership taxable year beginning after 

November 2, 2015 and before January 1, 

2018 for which a valid election under 

§ 301.9100–22 is in effect. 

■ Par. 7. Section 301.6222–1 is added to 

read as follows: 

§ 301.6222–1 Partner’s return must be 

consistent with partnership return. 

(a) Consistent treatment of 

partnership-related items—(1) In 

general. The treatment of partnershiprelated items (as defined in § 301.6241– 

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 


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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 

§ 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 partnershippartner must treat partnership-related 

items of a partnership in which it is a 

partner consistent with the treatment of 

such items on the partnership return 

filed by the partnership in which it is 

a partner. 

(3) Partnership does not file a return. 

A partner’s treatment of a partnershiprelated item attributable to a partnership 

that does not file a return is per se 

inconsistent, 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 partnershiprelated 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 partnershiprelated 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 § 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, 


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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 partnershiprelated item is not subject to paragraphs 

(a) and (b) of this section only with 

respect to those items identified in the 

statement described in paragraph (c)(1) 

of this section. Thus, if a partner 

notifying the IRS with respect to one 

partnership-related item does not report 

the inconsistent treatment of another 

partnership-related item, the IRS may 

determine the amount of tax that results 

from adjusting the unidentified, 

inconsistently reported item on the 

partner’s return to make it consistent 

with the treatment of such item on the 

partnership return, and assess the 

resulting underpayment of tax in 

accordance with paragraph (b)(2) of this 

section. 

(4) Adjustment after notification—(i) 

In general. If a partner notifies the IRS 

of the inconsistent treatment of a 

partnership-related item in accordance 

with paragraph (c)(1) of this section, and 

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 partnershiprelated item to make the item consistent 

with the treatment of that item on the 

partnership return or determine that the 

correct treatment of such item differs 

from the treatment on the partnership 

return and instead adjust the item to 

reflect the correct treatment, 

notwithstanding the treatment of that 

item on the partnership return. The IRS 

may also adjust any item on the 

partner’s return, including items that are 

not partnership-related items. Any final 

decision with respect to an inconsistent 

position in a proceeding to which the 

partnership is not a party is not binding 

on the partnership. 

(5) 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 


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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 partnershiprelated item if the partner— 

(i) Demonstrates that the treatment of 

such item on the partner’s return is 

consistent with the treatment of that 

item on the statement, schedule, or 

other form prescribed by the IRS and 

furnished to the partner by the 

partnership, and 

(ii) The partner makes an election in 

accordance with paragraph (d)(2) of this 

section. 

(2) Time and manner of making 

election—(i) In general. An election 

under paragraph (d) of this section must 

be filed in writing with the IRS office set 

forth in the notice that notified the 

partner of the inconsistency no later 

than 60 days after the date of such 

notice. 

(ii) Contents of election. The election 

described in paragraph (d)(2)(i) of this 

section must be— 

(A) Clearly identified as an election 

under section 6222(c)(2)(B); 

(B) Signed by the partner making the 

election; 

(C) Accompanied by a copy of the 

statement, schedule, or other form 

furnished to the partner by the 

partnership and a copy of the IRS notice 

that notified the partner of the 

inconsistency; and 

(D) Include any other information 

required in forms, instructions, or other 

guidance prescribed by the IRS. 

(iii) Treatment of partnership-related 

item is unclear. Generally, the 

requirement described in paragraph 

(d)(2)(ii)(C) of this section will be 

satisfied by attaching a copy of the 

statement, schedule, or other form 

furnished to the partner by the 

partnership to the election (in addition 

to a copy of the IRS notice that notified 

the partner of the inconsistency). 

However, if it is not clear from the 

statement, schedule, or other form 

furnished by the partnership that the 

partner’s treatment of the partnershiprelated item on the partner’s return is 

consistent, the election must also 

include an explanation of how the 

treatment of such item on the statement, 

schedule, or other form furnished by the 

partnership is consistent with the 

treatment of the item on the partner’s 

return, including with respect to the 

characterization, timing, and amount of 

such item. 

(3) Example. 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 § 301.9100–22 in 

effect. This section applies to any 

partnership taxable year beginning after 

November 2, 2015 and before January 1, 

2018 for which a valid election under 

§ 301.9100–22 is in effect. 

■ Par 8. Section 301.6225–1 is added to 

read as follows: 

§ 301.6225–1 Partnership Adjustment by 

the Internal Revenue Service. 

(a) Imputed underpayment based on 

partnership adjustments—(1) In general. 

In the case of any partnership 

adjustments (as defined in § 301.6241– 

1(a)(6)) by the Internal Revenue Service 

(IRS), if the adjustments result in an 

imputed underpayment (as determined 

in accordance with paragraph (b) of this 

section), the partnership must pay an 

amount equal to such imputed 

underpayment in accordance with 

paragraph (a)(2) of this section. If the 

adjustments do not result in an imputed 

underpayment (as described in 

paragraph (f) of this section), such 

adjustments must be taken into account 

by the partnership in the adjustment 

year (as defined in § 301.6241–1(a)(1)) 

in accordance with § 301.6225–3. 

Partnership adjustments may result in 

more than one imputed underpayment 

pursuant to paragraph (g) of this section. 

Each imputed underpayment 

determined under this section is based 

solely on partnership adjustments with 

respect to a single taxable year. 

(2) Partnership pays the imputed 

underpayment. An imputed 

underpayment (determined in 

accordance with paragraph (b) of this 

section and included in a notice of final 

partnership adjustment (FPA) under 

section 6231(a)(3)) must be paid by the 

partnership in the same manner as if the 

imputed underpayment were a tax 

imposed for the adjustment year in 

accordance with § 301.6232–1. The FPA 

will include the amount of any imputed 

underpayment, as modified under 

§ 301.6225–2 if applicable, unless the 

partnership waives its right to such FPA 

under section 6232(d)(2). See 

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

payment of the imputed underpayment 

by the partnership, see § 301.6226–1. If 

a partnership pays an imputed 

underpayment, the partnership’s 

expenditure for the imputed 

underpayment is taken into account by 

the partnership in accordance with 

§ 301.6241–4. For interest and penalties 

with respect to an imputed 

underpayment, see section 6233. 

(3) Imputed underpayment set forth in 

notice of proposed partnership 

adjustment. An imputed underpayment 

set forth in a notice of proposed 

partnership adjustment (NOPPA) under 

section 6231(a)(2) is determined in 

accordance with paragraph (b) of this 

section without regard to any 

modification under § 301.6225–2. 

Modifications under § 301.6225–2, if 

allowed by the IRS, may change the 

amount of an imputed underpayment 

set forth in the NOPPA and determined 

in accordance with paragraph (b) of this 

section. Only the partnership 

adjustments set forth in a NOPPA are 

taken into account for purposes of 

determining an imputed underpayment 

under this section and any modification 

under § 301.6225–2. 

(b) Determination of an imputed 

underpayment—(1) In general. In the 

case of any partnership adjustment by 

the IRS, an imputed underpayment is 

determined by— 

(i) Grouping the partnership 

adjustments in accordance with 

paragraph (c) of this section and, if 

appropriate, subgrouping such 

adjustments in accordance with 

paragraph (d) of this section; 

(ii) Netting the adjustments in 

accordance with paragraph (e) of this 

section; 

(iii) Calculating the total netted 

partnership adjustment in accordance 

with paragraph (b)(2) of this section; 

(iv) Multiplying the total netted 

partnership adjustment by the highest 

rate of Federal income tax in effect for 


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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 

§ 301.6241–7(b)(2)(ii) and (iii)) that is 

attributable to the partnership 

adjustment. See § 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 § 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 § 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 partnershiprelated item, and the other adjustment 

effectuates the proper allocation of the 

partnership-related item. Generally, a 

reallocation adjustment results in one 

positive adjustment (as defined in 

paragraph (d)(2)(iii) of this section) and 

one negative adjustment (as defined in 

paragraph (d)(2)(ii) of this section). 

(3) Credit grouping. Each adjustment 

to a partnership-related item that is 

reported or could be reported by a 

partnership as a credit on the 

partnership’s return, including a 

reallocation adjustment, is placed in the 

credit grouping. 

(4) Creditable expenditure grouping— 

(i) In general. Each adjustment to a 

creditable expenditure, including a 

reallocation adjustment to a creditable 

expenditure, is placed in the creditable 

expenditure grouping. 

(ii) Adjustment to a creditable 

expenditure—(A) In general. For 

purposes of this section, an adjustment 

to a partnership-related item is treated 

as an adjustment to a creditable 

expenditure if any person could take the 

item that is adjusted (or item as adjusted 

if the item was not originally reported 

by the partnership) as a credit. See 

§ 1.704–1(b)(4)(ii) of this chapter. For 

instance, if the adjustment is a 

reduction of qualified research 

expenses, the adjustment is to a 

creditable expenditure for purposes of 

this section because any person 

allocated the qualified research 

expenses by the partnership could claim 

a credit with respect to their allocable 

portion of such expenses under section 

41, rather than a deduction under 

section 174. 

(B) Creditable foreign tax 

expenditures. The creditable 

expenditure grouping includes each 

adjustment to a creditable foreign tax 

expenditure (CFTE) as defined in 

§ 1.704–1(b)(4)(viii)(b) of this chapter, 

including any reallocation adjustment to 

a CFTE. 

(5) Residual grouping—(i) In general. 

Any adjustment to a partnership-related 

item not described in paragraph (c)(2), 

(3), or (4) of this section is placed in the 

residual grouping. 

(ii) Adjustments to partnershiprelated items that are not allocated 

under section 704(b). The residual 

grouping includes any adjustment to a 

partnership-related item that derives 

from an item that would not have been 

required to be allocated by the 

partnership to a reviewed year partner 

under section 704(b). 

(6) Recharacterization adjustments— 

(i) Recharacterization adjustment 

defined. An adjustment that changes the 

character of a partnership-related item is 

a recharacterization adjustment. For 

instance, an adjustment that changes a 

loss from ordinary to capital or from 

active to passive is a recharacterization 

adjustment. 

(ii) Grouping recharacterization 

adjustments. A recharacterization 

adjustment is placed in the appropriate 

grouping as described in paragraphs 

(c)(2) through (5) of this section. 

(iii) Recharacterization adjustments 

result in two partnership adjustments. 

In general, a recharacterization 

adjustment results in at least two 

separate adjustments in the appropriate 

grouping under paragraph (c)(6)(ii) of 

this section. One adjustment reverses 

the improper characterization of the 

partnership-related item, and the other 

adjustment effectuates the proper 

characterization of the partnershiprelated item. A recharacterization 

adjustment results in two adjustments 

regardless of whether the amount of the 

partnership-related item is being 

adjusted. Generally, recharacterization 

adjustments result in one positive 


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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 § 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 partnershiprelated item would be allocated to the 

partners in the same ratio had those 

items been properly reflected on the 

partnership return for the reviewed 

year. 

(C) 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 


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(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 

§ 301.6225–3. If the partnership makes 

an election pursuant to section 6226 

with respect to an imputed 

underpayment, the adjustments that do 

not result in that imputed 

underpayment that are associated with 

that imputed underpayment (as 

described in paragraph (g)(2)(iii)(B) of 

this section) are taken into account by 

the reviewed year partners in 

accordance with § 301.6226–3. 

(g) Multiple imputed underpayments 

in a single administrative proceeding— 

(1) In general. The IRS, in its discretion, 

may determine that partnership 

adjustments for the same partnership 

taxable year result in more than one 

imputed underpayment. The 

determination of whether there is more 

than one imputed underpayment for any 

partnership taxable year, and if so, 

which partnership adjustments are 

taken into account to calculate any 

particular imputed underpayment is 

based on the facts and circumstances 

and nature of the partnership 

adjustments. See § 301.6225–2(d)(6) for 

modification of the number and 

composition of imputed 

underpayments. 

(2) Types of imputed 

underpayments—(i) In general. There 

are two types of imputed 

underpayments: A general imputed 

underpayment (described in paragraph 

(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 partnershiprelated item or items that were allocated 

to one partner or a group of partners that 

had the same or similar characteristics 

or that participated in the same or 

similar transaction or on such other 

basis as the IRS determines properly 

reflects the facts and circumstances. The 

IRS may designate more than one 

specific imputed underpayment with 

respect to any partnership taxable year. 

For instance, in a single partnership 

taxable year there may be a specific 

imputed underpayment with respect to 

adjustments related to a transaction 

affecting some, but not all, partners of 

the partnership (such as adjustments 


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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 § 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 § 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 longterm capital gain of $125 (<$125> 

adjustment). The decrease in long-term 

capital gain is a negative adjustment under 

paragraph (d)(2)(ii) of this section and the 

increase in ordinary income is a positive 

adjustment under paragraph (d)(2)(iii) of this 

section. Under paragraph (d)(3)(i) of this 

section, the adjustment to long-term capital 

gain is placed in a subgrouping separate from 

the adjustment to ordinary income because 

the reduction of long-term capital gain is 

required to be taken into account separately 

pursuant to section 702(a). The $125 decrease 

in long-term capital gain is a net negative 

adjustment in the long-term capital 

subgrouping and as a result is an adjustment 

that does not result in an imputed 

underpayment under paragraph (f) of this 

section. 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 


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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 § 301.6225–3. The 

net decrease to CFTEs in the generalcategory, 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 

§ 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 § 301.9100–22 in 

effect. This section applies to any 

partnership taxable year beginning after 

November 2, 2015 and before January 1, 

2018 for which a valid election under 

§ 301.9100–22T is in effect. 

■ Par. 9. Section 301.6225–2 is added to 

read as follows: 

§ 301.6225–2 Modification of Imputed 

Underpayment. 

(a) Partnership may request 

modification of an imputed 

underpayment. A partnership that has 

received a notice of proposed 

partnership adjustment (NOPPA) under 

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 


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this section. A partnership may request 

modification with respect to a 

partnership adjustment (as defined in 

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

in an imputed underpayment (as 

described in § 301.6225–1(f)(1)(ii)) as 

described in paragraph (e) of this 

section. Only the partnership 

representative may request modification 

under this section. See section 6223 and 

§ 301.6223–2 for rules regarding the 

binding authority of the partnership 

representative. For purposes of this 

section, the term relevant partner means 

any person for whom modification is 

requested by the partnership that is— 

(1) A reviewed year partner (as 

defined in § 301.6241–1(a)(9)), 

including any pass-through partner (as 

defined in § 301.6241–1(a)(5)), except 

for any reviewed year partner that is a 

wholly-owned entity disregarded as 

separate from its owner for Federal tax 

purposes, or 

(2) An indirect partner (as defined in 

§ 301.6241–1(a)(4)) except for any 

indirect partner that is a wholly-owned 

entity disregarded as separate from its 

owner for Federal 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 

§ 301.6225–1(b). This paragraph (b)(2) 

applies to modifications under— 

(i) Paragraph (d)(2) of this section 

(amended returns and the alternative 

procedure to filing amended returns); 

(ii) Paragraph (d)(3) of this section 

(tax exempt status); 

(iii) Paragraph (d)(5) of this section 

(specified passive activity losses); 

(iv) Paragraph (d)(7) of this section 

(qualified investment entities); 

(v) Paragraph (d)(8) of this section 

(closing agreements), if applicable; 

(vi) Paragraph (d)(9) of this section 

(tax treaty modifications), if applicable; 

and 

(vii) Paragraph (d)(10) of this section 

(other modifications), if applicable. 

(3) Modifications that affect the tax 

rate—(i) In general. If the IRS approves 

a modification with respect to the tax 

rate applied to a partnership 

adjustment, such modification results in 

a reduction in tax rate applied to the 

total netted partnership adjustment with 

respect to the partnership adjustments 

in accordance with this paragraph (b)(3). 

A modification of the tax rate does not 

affect how the partnership adjustment 

factors into the calculation of the total 

netted partnership adjustment. This 

paragraph (b)(3) applies to 

modifications under— 

(A) Paragraph (d)(4) of this section 

(rate modification); 

(B) Paragraph (d)(8) of this section 

(closing agreements), if applicable; 

(C) Paragraph (d)(9) of this section 

(tax treaty modifications), if applicable; 

and 

(D) Paragraph (d)(10) of this section 

(other modifications), if applicable. 

(ii) Determination of the imputed 

underpayment in the case of rate 

modification. Except as described in 

paragraph (b)(3)(iv) of this section, in 

the case of an approved modification 

described under paragraph (b)(3)(i) of 

this section, the imputed underpayment 

is the sum of the total netted 

partnership adjustment consisting of the 

net positive adjustments not subject to 

rate reduction under paragraph (b)(3)(i) 

of this section (taking into account any 

approved modifications under 

paragraph (b)(2) of the section), plus the 

rate-modified netted partnership 

adjustment determined under paragraph 

(b)(3)(iii) of this section, reduced or 

increased by any adjustments to credits 

(taking into account any modifications 

under paragraph (b)(4) of this section). 

The total netted partnership adjustment 

not subject to rate reduction under 

paragraph (b)(3)(i) of this section (taking 

into account any approved 

modifications under paragraph (b)(2) of 

the section) is determined by 

multiplying the partnership adjustments 

included in the total netted partnership 

adjustment that are not subject to rate 

modification under paragraph (b)(3)(i) of 

this section (including any partnership 

adjustment that remains after applying 

paragraph (b)(3)(iii) of this section) by 

the highest tax rate (as described in 

§ 301.6225–1(b)(1)(iv)). 

(iii) Calculation of rate-modified 

netted partnership adjustment in the 

case of a rate modification. The ratemodified netted partnership adjustment 

is determined as follows— 

(A) Determine each relevant partner’s 

distributive share of the partnership 

adjustments subject to an approved 

modification under paragraph (b)(3)(i) of 

this section based on how each 

adjustment subject to rate modification 

would be properly allocated under 

section 702 to such relevant partner in 

the reviewed year (as defined in 

§ 301.6241–1(a)(8)). 

(B) Multiply each partnership 

adjustment determined under paragraph 

(b)(3)(iii)(A) of this section by the tax 

rate applicable to such adjustment based 

on the approved modification described 

under paragraph (b)(3)(i) of this section. 

(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 


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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 § 301.6225–1(c) and (d)) or 

whether the IRS designates one or more 

specific imputed underpayments (as 

described in § 301.6225–1(g)). If the IRS 

approves a request for modification 

under this paragraph (b)(4), the imputed 

underpayment and any specific imputed 

underpayment affected by or resulting 

from the modification is determined 

according to the rules of § 301.6225–1 

subject to any other modifications 

approved by the IRS under this section. 

(5) Other modifications. The effect of 

other modifications described in 

paragraph (d)(10) of this section, 

including the order that such 

modification will be taken into account 

for purposes of paragraph (b)(1) of this 

section, may be set forth in forms, 

instructions, or other guidance 

prescribed by the IRS. 

(c) Time, form, and manner for 

requesting modification—(1) In general. 

In addition to the requirements 

described in paragraph (d) of this 

section, a request for modification under 

this section must be submitted in 

accordance with, and include the 

information required by, the forms, 

instructions, and other guidance 

prescribed by the IRS. The partnership 

representative must submit any request 

for modification and all relevant 

information (including information 

required under paragraphs (c)(2) and 

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 § 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); 

§ 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 


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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 partnershiprelated items may be taken into account 

on an amended return under paragraph 

(d)(2) of this section. A partnership may 

request a modification for purposes of 

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 § 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 § 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 passthrough 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) Passthrough partners may file amended 

returns. A relevant partner that is a 

pass-through partner, including a 

partnership-partner (as defined in 

§ 301.6241–1(a)(7)) that has a valid 

election under section 6221(b) in effect 

for a partnership taxable year, may, in 

accordance with forms, instructions, 

and other guidance provided by the IRS 

and solely for purposes of modification 

under paragraph (d)(2) of this section, 

take into account its share of the 

partnership adjustments and determine 

and pay an amount calculated in the 

same manner as the amount computed 

under § 301.6226–3(e)(4)(iii) subject to 

paragraph (d)(2)(vi)(B) of this section. 

(B) Modifications with respect to 

upper-tier partners of the pass-through 

partner. In accordance with forms, 

instructions, and other guidance 

provided by the IRS, for purposes of 

determining and calculating the amount 

a pass-through partner must pay under 

paragraph (d)(2)(vi)(A) of this section, 

the pass-through partner may take into 

account modifications with respect to 

its direct and indirect partners to the 

extent that such modifications are 


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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 § 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 

§ 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 taxexempt partner not subject to tax. Only 

the portion of the partnership 

adjustments properly allocated to a taxexempt partner with respect to which 

the partner would not be subject to tax 

for the reviewed year (tax-exempt 

portion) may form the basis of a 

modification of the imputed 

underpayment under paragraph (d)(3) of 

this section. A modification under 

paragraph (d)(3) of this section will not 

be approved by the IRS unless the 

partnership provides documentation in 

accordance with paragraph (c)(2) of this 

section to support the tax-exempt 

partner’s status and the tax-exempt 

portion of the partnership adjustment 

allocable to the tax-exempt partner. 

(4) Modification based on a rate of tax 

lower than the highest applicable tax 

rate. A partnership may request 

modification based on a lower rate of 

tax for the reviewed year with respect to 

adjustments that are attributable to a 

relevant partner that is a C corporation 

and adjustments with respect to capital 

gains or qualified dividends that are 

attributable to a relevant partner who is 

an individual. In no event may the 

lower rate determined under the 

preceding sentence be less than the 

highest rate in effect for the reviewed 

year with respect to the type of income 

and taxpayer. For instance, with respect 

to adjustments that are attributable to a 

C corporation, the highest rate in effect 

for the reviewed year with respect to all 

C corporations would apply to that 

adjustment, regardless of the rate that 

would apply to the C corporation based 

on the amount of that C corporation’s 

taxable income. For purposes of this 

paragraph (d)(4), an S corporation is 

treated as an individual. 

(5) Certain passive losses of publicly 

traded partnerships—(i) In general. In 

the case of a publicly traded partnership 

(as defined in section 469(k)(2)) 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 


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§ 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 

§ 301.6225–1(c) and (d)) or specific 

imputed underpayments (as described 

in § 301.6225–1(g)) different from the 

grouping, subgrouping, or imputed 

underpayment set forth in the NOPPA. 

For example, a partnership may request 

under 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 

§ 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 § 301.6225–1 that are also 

adjustments within the meaning of 

section 860(d)(1) or (d)(2) (whichever 

applies). 

(ii) Documentation of deficiency 

dividend. The partnership must provide 

documentation in accordance with 

paragraph (c) of this section of the 

‘‘determination’’ described in section 

860(e). Under section 860(e)(2), § 1.860– 

2(b)(1)(i) of this chapter, and paragraph 

(d)(8) of this section, a closing 

agreement entered into by the QIE 

partner pursuant to section 7121 and 

paragraph (d)(8) of this section is a 

determination described in section 

860(e), and the date of the 

determination is the date in which the 

closing agreement is approved by the 

IRS. In addition, under section 

860(e)(4), a determination also includes 

a Form 8927, Determination Under 

Section 860(e)(4) by a Qualified 

Investment Entity, properly completed 

and filed by the RIC or REIT pursuant 

to section 860(e)(4). To establish the 

date of the determination under section 

860(e)(4) and the amount of deficiency 

dividends actually paid, the partnership 

must provide a copy of Form 976, Claim 

for Deficiency Dividends Deductions by 

a Personal Holding Company, Regulated 

Investment Company, or Real Estate 

Investment Trust (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 § 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 partnershiprelated 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 § 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) 


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of this section, and the IRS will 

determine whether such modification is 

accurate and appropriate in accordance 

with paragraph (c)(4) of this section. 

Additional types of modifications and 

the documentation necessary to 

substantiate such modifications may be 

set forth in forms, instructions, or other 

guidance prescribed by the IRS. 

(e) Modification of adjustments that 

do not result in an imputed 

underpayment. A partnership may 

request modification of adjustments that 

do not result in an imputed 

underpayment (as described in 

§ 301.6225–1(f)(1)(ii)) using 

modifications described in paragraph 

(d)(2) of this section (amended returns 

and the alternative procedure to filing 

amended returns), paragraph (d)(6) of 

this section (number and composition of 

the imputed underpayment), paragraph 

(d)(8) of this section (closing 

agreements), or, if applicable, paragraph 

(d)(10) of this section (other 

modifications). 

(f) Examples. The following examples 

illustrate the rules of this section. For 

purposes of these examples, each 

partnership is subject to the provisions 

of subchapter C of chapter 63, each 

partnership and its relevant partners are 

calendar year taxpayers, all relevant 

partners are U.S. persons (unless 

otherwise stated), the highest rate of 

income tax in effect for all taxpayers is 

40 percent for all relevant periods, and 

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 

§ 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 × 50 percent 

× $100)). The IRS approves the modification 

and, in accordance with paragraph (b)(2) of 

this section, the $25 increase in ordinary 

income allocated to C, through B, is not 

included in the calculation of the total netted 

partnership adjustment (determined in 

accordance with § 301.6225–1). Partnership’s 

total netted partnership adjustment is 

reduced to $75 ($100 adjustment less C’s 

share of the adjustment, $25), and the 

imputed underpayment is reduced to $30 

(total netted partnership adjustment of $75, 

after modification, multiplied by 40 percent). 

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 debtfinanced income within the meaning of 

section 514 (no section 512 UBTI 

modifications apply) with respect to which C 

would be subject to tax if taken into account 

by C. As a result, the modification under 

paragraph (d)(3) of this section with respect 

to C relates only to $15 of the $25 of ordinary 

income allocated to C that is not UBTI. 

Therefore, only a modification of $15 ($25 

less $10) of the total $100 partnership 

adjustment may be approved by the IRS 

under paragraph (d)(3) of this section and, in 

accordance with paragraph (b)(2) of this 

section, excluded when determining the 

imputed underpayment for Partnership’s 

2019 taxable year. The total netted 

partnership adjustment (determined in 

accordance with § 301.6225–1) is reduced to 

$85 ($100 less $15), and the imputed 

underpayment is reduced to $34 (total netted 

partnership adjustment of $85, after 

modification, multiplied by 40 percent). 

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 § 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 § 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 


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paragraph (d)(2) of this section. No tax 

attribute in any other taxable year of D is 

affected by D taking into account D’s share 

of the partnership adjustment for 2019. The 

IRS approves the modification and the $25 

increase in ordinary income allocable to D is 

not included in the calculation of the total 

netted partnership adjustment (determined in 

accordance with § 301.6225–1). As a result, 

Partnership’s total netted partnership 

adjustment is $50 ($100, less $25 allocable to 

C, less $25 taken into account by D), and the 

imputed underpayment, after modification, is 

$20. 

Example 7. The IRS initiates an 

administrative proceeding with respect to 

Partnership’s 2019 taxable year. All of 

Partnership’s partners during its 2019 taxable 

year are individuals. The IRS mails a NOPPA 

to Partnership for the 2019 taxable year 

proposing three partnership adjustments. The 

first partnership adjustment is an increase to 

ordinary income of $75 for 2019. The second 

partnership adjustment is an increase in the 

depreciation deduction allowed for 2019 of 

$25, which under § 301.6225–1(d)(2)(i) is 

treated as a $25 decrease in income. The 

third adjustment is an increase in long-term 

capital gain of $10 for 2019. In accordance 

with § 301.6225–1, the total netted 

partnership adjustment is $85 ($75 increase 

in ordinary income + $10 increase in longterm 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 § 301.6225–1(f). Under 

the partnership agreement in effect for 

Partnership’s 2019 taxable year, the longterm 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 § 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 

§ 301.6225–1(d), the two adjustments are 

placed in separate subgroupings within the 

residual grouping, the total netted 

partnership adjustment is $100, the imputed 

underpayment is $40 ($100 × 40 percent), 

and the $30 increase in loss is an adjustment 

that does not result in an imputed 

underpayment under § 301.6225–1(f). 

Partnership requests modification under 

paragraph (d)(6) of this section, 

substantiating to the satisfaction of the IRS 

that C1 and C2 are publicly traded C 

corporations, and therefore, the passive 

activity loss limitations under section 469 of 

the Code do not apply. Partnership also 

substantiates to the satisfaction of the IRS 

that no other limitation or restriction applies 

that would prevent the grouping of the $100 

with the $30 loss. The IRS approves 

Partnership’s modification request and places 

the $100 of income and the $30 loss into the 

subgrouping in the residual grouping under 

the rules described in § 301.6225–1(c)(5). 

Under § 301.6225–1(e), because the two 

adjustments are in one subgrouping, they are 

netted together, resulting in a total netted 

partnership adjustment of $70 ($100 plus 

<$30>) and an imputed underpayment of $28 

($70 × 40 percent). After modification, there 

are not adjustments treated as an adjustment 

that does not result in an imputed 

underpayment under § 301.6225–1(f) because 

the $30 loss is now netted with the $100 of 

income. 

(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 § 301.9100–22 in 

effect. This section applies to any 

partnership taxable year beginning after 

November 2, 2015, and before January 1, 

2018 for which a valid election under 

§ 301.9100–22 is in effect. 

■ Par. 10. Section 301.6225–3 is added 

to read as follows: 

§ 301.6225–3 Treatment of partnership 

adjustments that do not result in an 

imputed underpayment. 

(a) In general. Partnership 

adjustments (as defined in § 301.6241– 

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

underpayment (as described in 

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

by a partnership in the adjustment year 

(as defined in § 301.6241–1(a)(1)) in 

accordance with paragraph (b) of this 

section. 

(b) Treatment of adjustments by the 

partnership—(1) In general. Except as 

described in paragraphs (b)(2) through 

(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 nonseparately stated loss for the adjustment 

year depending on whether the 

adjustment is to a partnership-related 

item that is an item of income or loss. 

(2) Separately stated items. In the case 

of a partnership adjustment to 

partnership-related item that is required 

to be separately stated under section 

702, the adjustment is taken into 

account by the partnership in the 

adjustment year as a reduction in such 

separately stated item or as an increase 

in such separately stated item 

depending on whether the adjustment is 

a reduction or an increase to the 

separately stated item. 

(3) Credits. In the case of an 

adjustment to a partnership-related item 

that is reported or could be reported by 

a partnership as a credit on the 

partnership’s return for the reviewed 

year (as defined in § 301.6241–1(a)(8)), 

the adjustment is taken into account by 

the partnership in the adjustment year 

as a separately stated item. 

(4) Reallocation adjustments. A 

partnership adjustment that reallocates 

a partnership-related item to or from a 

particular partner or partners that also 

does not result in an imputed 

underpayment pursuant to § 301.6225– 

1(f) is taken into account by the 

partnership in the adjustment year as a 

separately stated item or a nonseparately stated item, as required by 

section 702. The portion of an 

adjustment allocated under this 

paragraph (b)(4) is allocated to 

adjustment year partners (as defined in 

§ 301.6241–1(a)(2)) who are also 

reviewed year partners (as defined in 

§ 301.6241–1(a)(9)) with respect to 

whom the amount was reallocated. 

(5) Adjustments taken into account by 

partners as part of the modification 

process. If, as part of modification under 

§ 301.6225–2, a relevant partner (as 

defined in § 301.6225–2(a)) takes into 

account a partnership adjustment that 

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 § 301.6225–1(a). 


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(6) Effect of election under section 

6226. If a partnership makes a valid 

election under § 301.6226–1 with 

respect to an imputed underpayment, a 

partnership adjustment that does not 

result in an imputed underpayment and 

that is associated with such imputed 

underpayment as described in 

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

the reviewed year partners in 

accordance with § 301.6226–3 and is not 

taken into account under this section. 

(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 § 301.9100–22 in 

effect. This section applies to any 

partnership taxable year beginning after 

November 2, 2015 and before January 1, 

2018 for which a valid election under 

§ 301.9100–22 is in effect. 

■ Par. 11. Section 301.6225–4 is added 

to read as follows: 

§ 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 

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

its adjustment year partners (as defined 

in § 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 

§ 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 § 301.6241–1(a)(9)) or their 

successors (as defined in § 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 

§ 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 § 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 § 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 § 301.6225–2(d)(2), the 

alternative procedure to filing amended 

returns as described in § 301.6225– 

2(d)(2)(x), or a closing agreement 

described in § 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 § 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 § 301.6226–1 in 

accordance with § 301.6226–4, and not 

the rules of this section. 

(ii) Pass-through partners and indirect 

partners. A pass-through partner (as 

defined in § 301.6241–1(a)(5)) that is a 

partnership and pays an imputed 

underpayment under § 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 § 301.6226– 

3(e)(4)(iii) as an imputed underpayment 

determined under § 301.6225–1 for 

purposes of § 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 

§ 1.704–1(b)(2)(iii)(f)(3) of this chapter. 

(6) Reflection of economic 

arrangement. This section and the rules 

in § 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 

§ 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 


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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 § 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 § 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 § 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 § 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 

§ 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 § 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 taxexempt entity (as defined in § 301.6225– 

2(d)(3)(ii)) is a successor under § 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 § 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 

§ 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 § 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 

§ 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 

§ 301.6225–3(c). Accordingly, tax 

attributes (as defined in § 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 

§ 301.6225–1(f)) is allocated under 

§ 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 § 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 


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balance in his capital account following the 

liquidation of his interest must restore that 

deficit to the partnership (as provided in 

§ 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 

basis Book Value Outside 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 

basis Book Value Outside 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 × 40 percent). 

Partnership did not request modification 

under § 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 § 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 § 301.6241–4. Under § 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 

§ 1.704–1(b)(2)(ii) of this chapter and, 

because the allocation of the expenditure is 

determined in accordance with § 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 § 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 

basis Book Value Outside 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 § 301.6225– 

2(d)(3) with respect to A, which is a taxexempt entity, and under § 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 § 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 

§ 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 


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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 

basis Book Value Outside 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 § 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 

§ 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 § 1.704–1(b)(2)(ii) of 

this chapter. However, the economic effect of 

this allocation is not substantial under 

§ 1.704–1(b)(2)(iii)(a) of this chapter because 

it is not allocated in the manner described in 

§ 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 § 1.704–1(b)(3)(ix) of this 

chapter because it is not allocated pursuant 

to the rules under § 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 § 1.752–1(a)(4) of this chapter. The 

liability is treated as a nonrecourse liability 

as defined in § 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 § 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 

§ 1.752–1(a)(1) of this chapter, and that A 

should have no share of the recourse liability 

under § 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 § 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 §§ 1.752–1(c) 

and 1.731–1(a)(1)(i) of this chapter and 

determines an imputed underpayment of $40 

($100 × 40 percent). Partnership does not 

request modification under § 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 § 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 § 301.9100–22 in 

effect. This section applies to any 

partnership taxable year beginning after 

November 2, 2015 and before January 1, 

2018 for which a valid election under 

§ 301.9100–22 is in effect. 

■ Par. 12. Section 301.6226–1 is added 

to read as follows: 

§ 301.6226–1 Election for an alternative to 

the payment of the imputed underpayment. 

(a) In general. A partnership may elect 

under this section an alternative to the 

payment by the partnership of an 

imputed underpayment determined 

under section 6225 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 § 301.6241–1(a)(3)) to which the 

election applies. If a notice of final 

partnership adjustment (FPA) mailed 

under section 6231 includes more than 

one imputed underpayment (as 

described in § 301.6225–1(g)), a 

partnership may make an election under 

this section with respect to one or more 

imputed underpayments identified in 

the FPA. See § 301.6226–2(f) regarding 

the determination of each reviewed year 

partner’s (as defined in § 301.6241– 

1(a)(9)) share of the partnership 

adjustments (as defined in § 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 § 301.6226–3. If an election 

is made under this section, any 

modification approved by the IRS under 

§ 301.6225–2 is taken into account by 

the reviewed year partners in 

accordance with § 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 

§ 301.6225–1(f) that are associated with 

an imputed underpayment (as described 

in § 301.6225–1(g)) for which an 

election under this section is made are 

not taken into account by the 

partnership in the adjustment year (as 

defined in § 301.6241–1(a)(1)) and 

instead each reviewed year partners’ 

share of the adjustment determined in 

accordance with § 301.6226–2(f) must 

be included on the statement described 

in § 301.6226–2. 

(c) Time, form, and manner for 

making the election—(1) In general. An 

election under this section is valid only 

if all of the provisions of this section 


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and § 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 

§ 301.6226–2(d)(2) or if a correction is 

not made as required in accordance 

with § 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 

§ 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 § 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 partnershiprelated items (as defined in § 301.6241– 

6) reflected on a statement described in 

§ 301.6226–2 on the partner’s return 

inconsistently with how those items are 

treated on the statement that is filed 

with the IRS. See § 301.6222–1(c)(2) 

(regarding partnership-related items the 

treatment of which a partner is bound 

to under section 6223). 

(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 

§ 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 § 301.9100–22 in 

effect. This section applies to any 

partnership taxable year beginning after 

November 2, 2015 and before January 1, 

2018 for which a valid election under 

§ 301.9100–22 is in effect. 

■ Par. 13. Section 301.6226–2 is added 

to read as follows: 

§ 301.6226–2 Statements furnished to 

partners and filed with the IRS. 

(a) In general. A partnership that 

makes an election under § 301.6226–1 

must furnish to each reviewed year 

partner (as defined in § 301.6241– 

1(a)(9)) and file with the Internal 

Revenue Service (IRS) a statement that 

includes the items required by 

paragraphs (e) and (f) of this section 

with respect to each reviewed year 

partner’s share of partnership 

adjustments (as defined in § 301.6241– 

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

underpayment for which an election 

under § 301.6226–1 is made. The 

statements furnished to the reviewed 

year partners under this section are in 

addition to, and must be filed and 

furnished separate from, any other 

statements required to be filed with the 

IRS and furnished to partners, including 

any statements under section 6031(b). A 

separate statement under this section 

must be furnished to each reviewed year 

partner with respect to each reviewed 

year (as defined in § 301.6241–1(a)(8)) 

subject to an election under § 301.6226– 

1. 

(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 § 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 


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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 § 301.6226–1 with respect 

to the imputed underpayment. Partnership 

timely files a petition for readjustment under 

section 6234 with the Tax Court. The IRS 

prevails, and the Tax Court sustains all of the 

adjustments in the FPA with respect to the 

2020 taxable year. The time to appeal the Tax 

Court decision expires, and the Tax Court 

decision becomes final on April 10, 2025. 

Under paragraph (b)(1)(ii) of this section, the 

adjustments in the FPA are finally 

determined on April 10, 2025, and 

Partnership must furnish the statements 

described in paragraph (a) of this section to 

its reviewed year partners and electronically 

file the statements with the IRS no later than 

June 9, 2025. See paragraph (c) of this section 

for the rules regarding filing the statements 

with the IRS. 

(c) Time and manner for filing the 

statements with the IRS. No later than 

60 days after the date the partnership 

adjustments are finally determined (as 

described in paragraph (b)(1) of this 

section), the partnership must 

electronically file with the IRS the 

statements that the partnership 

furnishes to each reviewed year partner 

under this section, along with a 

transmittal that includes a summary of 

the statements filed and such other 

information required in forms, 

instructions, and other guidance 

prescribed by the IRS. 

(d) Correction of statements—(1) In 

general. A partnership corrects an error 

in a statement furnished under 

paragraph (b) of this section or filed 

under paragraph (c) of this section by 

filing the corrected statement with the 

IRS in the manner prescribed in 

paragraph (c) of this section and 

furnishing a copy of the corrected 

statement to the reviewed year partner 

to whom the statement relates in 

accordance with the forms, instructions, 

and other guidance prescribed by the 

IRS. 

(2) Error discovered by partnership— 

(i) Discovery within 60 days of 

statement due date. If a partnership 

discovers an error in a statement within 

60 days of the due date for furnishing 

the statements to partners and filing the 

statements with the IRS (as described in 

paragraphs (b) and (c) of this section 

and § 301.6226–3(e)(3)(ii)), the 

partnership must correct the error in 

accordance with paragraph (d)(1) of this 

section and does not have to seek 

consent of the IRS prior to doing so. 

(ii) Error discovered more than 60 

days after statement due date. If a 

partnership discovers an error more 

than 60 days after the due date for 

furnishing the statements to partners 

and filing the statements with the IRS 

(as described in paragraphs (b) and (c) 

of this section and § 301.6226– 

3(e)(3)(ii)), the partnership may only 

correct the error after receiving consent 

of the IRS in accordance with the forms, 

instructions, and other guidance 

prescribed by the IRS. The partnership 

may not furnish corrected statements 

unless it receives consent of the IRS to 

make the correction. 

(3) Error discovered by the IRS. If the 

IRS discovers an error in the statements 

furnished or filed under paragraphs (b) 

and (c) of this section and § 301.6226– 

3(e)(3) or the IRS cannot determine 

whether the statements furnished or 

filed by the partnership are correct 

because of a failure by the partnership 

to comply with any requirement under 

this section or § 301.6226–3(e), the IRS 

may require the partnership to correct 

such errors in accordance with 

paragraph (d)(1) of this section or to 

provide additional information as 

necessary. Failure by the partnership to 

correct an error or to provide 

information when required by the IRS 

may be treated by the IRS as a failure 

to properly furnish correct statements to 

partners and file the correct statements 

with the IRS as described in paragraphs 

(b) and (c) of this section or in 

§ 301.6226–3(e)(3). Whether the IRS 

requires the partnership to correct any 

errors discovered by the IRS or provide 

additional information is discretionary 

on the part of the IRS and the IRS is 

under no obligation to require the 

partnership to provide additional 

information or to correct any errors 

discovered or brought to the IRS’s 

attention at any time. 

(4) Adjustments in the corrected 

statements taken into account by the 

reviewed year partners. The adjustments 

included on a corrected statement are 

taken into account by a reviewed year 

partner in accordance with § 301.6226– 

3 for the reporting year (as defined in 

§ 301.6226–3(a)). 

(e) Content of the statements. Each 

statement described in paragraph (a) of 

this section must include the following 

correct information: 

(1) The name and TIN 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 § 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 partnershipVerDate Sep<11>2014 22:10 Aug 16, 2018 Jkt 244001 PO 00000 Frm 00040 Fmt 4701 Sfmt 4702 E:\FR\FM\17AUP3.SGM 17AUP3

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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 

§ 301.6241–1(a)(4)) that holds its 

interest in the partnership through its 

interest in the reviewed year partner) 

under § 301.6225–2 are disregarded for 

purposes of determining each partner’s 

share of the adjustments under 

paragraph (f)(1) of this section. 

(g) Coordination with other provisions 

under subtitle A of the Code—(1) 

Statements furnished to qualified 

investment entities described in section 

860. If a reviewed year partner is a 

qualified investment entity within the 

meaning of section 860(b) and the 

partner receives a statement described 

in paragraph (a) of this section, the 

partner may be able to avail itself of the 

deficiency dividend procedure 

described in § 301.6226–3(b)(4). 

(2) Liability for tax under section 

7704(g)(3). An election under this 

section has no effect on a partnership’s 

liability for any tax under section 

7704(g)(3) (regarding the exception for 

electing 1987 partnerships from the 

general rule that certain publicly traded 

partnerships are treated as 

corporations). 

(3) Adjustments subject to chapters 3 

and 4. A partnership that makes an 

election under § 301.6226–1 with 

respect to an imputed underpayment 

must pay the amount of tax required to 

be withheld under chapter 3 or chapter 

4, if any, in accordance with 

§ 301.6241–7(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 § 301.9100–22 in 

effect. This section applies to any 

partnership taxable year beginning after 

November 2, 2015 and before January 1, 

2018 for which a valid election under 

§ 301.9100–22 is in effect. 

■ Par. 14. Section 301.6226–3 is added 

to read as follows: 

§ 301.6226–3 Adjustments taken into 

account by partners. 

(a) Effect of taking adjustments into 

account on tax imposed by chapter 1. 

Except as otherwise provided in this 

section, the tax imposed by chapter 1 of 

subtitle A of the Internal Revenue Code 

(chapter 1 tax) for each reviewed year 

partner (as defined in § 301.6241– 

1(a)(9)) for the taxable year that includes 

the date a statement was furnished in 

accordance with § 301.6226–2 (the 

reporting year) is increased by the 

additional reporting year tax, or if the 

additional reporting year tax is less than 

zero, decreased by such amount. The 

additional reporting year tax is the 

aggregate of the correction amounts 

(determined in accordance with 

paragraph (b) of this section). In 

addition to being liable for the 

additional reporting year tax, a reviewed 

year partner must also calculate and pay 

for the reporting year any penalties, 

additions to tax, and additional amounts 

(as determined under paragraph (d) of 

this section). Finally, a reviewed year 

partner must also calculate and pay for 

the reporting year any interest (as 

determined under paragraph (c) of this 

section). 

(b) Determining the aggregate of the 

correction amounts—(1) In general. For 

purposes of paragraph (a) of this section, 

the aggregate of the correction amounts 

is the sum of the correction amounts 

described in paragraphs (b)(2) and (3) of 

this section. A correction amount under 

paragraph (b)(2) or (3) of this section 

may be less than zero, and any 

correction amount that is less than zero 

may reduce any other correction amount 

with the result that the aggregate of the 

correction amounts under this 

paragraph (b)(1) may also be less than 

zero. However, see paragraphs (c) and 

(d) of this section requiring a separate 

determination of interest and penalties, 

additions to tax, and additional amounts 

on the correction amount for each 

applicable taxable year (as defined in 

paragraph (c)(1) of this section) without 

regard to the correction amount for any 

other applicable taxable year. 

(2) Correction amount for the first 

affected year—(i) In general. The 

correction amount for the taxable year of 

the partner that includes the end of the 

reviewed year (the first affected year) is 

the amount by which the reviewed year 

partner’s chapter 1 tax would increase 

or decrease for the first affected year if 

the partner’s taxable income for such 

year was recomputed by taking into 

account the reviewed year partner’s 

share of the partnership adjustments (as 

defined in § 301.6241–1(a)(6)) reflected 

on the statement described in 

§ 301.6226–2 with respect to the 

partner. 

(ii) Calculation of the correction 

amount for the first affected year. The 

correction amount is the amount of 

chapter 1 tax that would have been 

imposed for the first affected year if the 

items as adjusted in the statement 

described in § 301.6226–2 had been 

reported as such on the return for the 

first affected year less the sum of: 

(A) The amount of chapter 1 tax 

shown by the partner on the return for 

the first affected year (which includes 

amounts shown on an amended return 

for such year, including an amended 

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 § 1.6664–2(d) 

of this chapter), less 

(C) The amount of rebates made (as 

defined in § 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 § 301.6241– 

1(a)(10)) of the partner under this 

paragraph (b)(3). 


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(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 § 1.6664–2(d) 

of this chapter), less 

(C) The amount of rebates made (as 

defined in § 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 

§ 301.6226–2(a) and correctly makes a 

determination within the meaning of 

section 860(e)(4) that one or more of the 

adjustments reflected in the statement is 

an adjustment within the meaning of 

section 860(d) with respect to that QIE 

for a taxable year, the QIE may 

distribute deficiency dividends within 

the meaning of section 860(f) for that 

taxable year and avail itself of the 

deficiency dividend procedures set forth 

in section 860. If the QIE utilizes the 

deficiency dividend procedures with 

respect to adjustments in a statement 

described in § 301.6226–2(a), the QIE 

may claim a deduction for deficiency 

dividends against the adjustments 

furnished to the QIE in the statement in 

calculating any correction amounts 

under paragraphs (b)(2) and (3) of this 

section, and interest on such correction 

amounts under paragraph (c) of this 

section, to the extent that the QIE makes 

deficiency dividend distributions under 

section 860(f) and complies with all 

requirements of section 860 and the 

regulations 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 partnershiprelated item is determined at the 

partnership level in accordance with 

section 6221(a). The partnership’s 

reviewed year partners are liable for 

such penalties, additions to tax, and 

additional amounts as determined 

under paragraph (d)(2) of this section. 

(2) Amount calculated at partner 

level. A reviewed year partner calculates 

the amount of any penalty, addition to 

tax, or additional amount relating to the 

partnership adjustments taken into 

account under paragraph (b)(1) of this 

section as if the correction amount were 

an underpayment or understatement of 

the reviewed year partner for the first 

affected year or intervening year, as 

applicable. The calculation of any 

penalty, addition to tax, or additional 

amount is based on the characteristics 

of, and facts and circumstances 

applicable to, the reviewed year partner 

for the first affected year or intervening 

year, as applicable after taking into 

account the partnership adjustments 

reflected on the statement. If after taking 

into account the partnership 

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 § 301.6226–2 (or paragraph 

(e)(3) of this section) is not due because 

of a partner-level defense must first pay 

the penalty and file a claim for refund 

for the reporting year. Partner-level 

defenses are limited to those that are 

personal to the reviewed year partner 

(for example, a reasonable cause and 

good faith defense under section 6664(c) 

that is based on the facts and 

circumstances applicable to the 

partner). 

(e) Pass-through partners—(1) In 

general. Except as provided in 

paragraph (e)(6) of this section, if a passthrough partner (as defined in 

§ 301.6241–1(a)(5)) is furnished a 

statement described in § 301.6226–2 

(including a statement described in 

paragraph (e)(3) of this section) with 

respect to adjustments of a partnership 

that made an election under § 301.6226– 

1 (audited partnership), the passthrough 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 


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comply with paragraph (e) of this 

section with respect to each statement 

furnished to the pass-through partner. 

(2) Failure to file and furnish required 

documents—(i) Failure to timely file 

and furnish statements. If any passthrough partner fails to timely file and 

furnish correct statements in accordance 

with paragraph (e)(3) of this section, the 

pass-through partner must compute and 

pay an imputed underpayment, as well 

as any penalties, additions to tax, 

additional amounts, and interest with 

respect to the adjustments reflected on 

the statement furnished to the passthrough partner in accordance with 

paragraph (e)(4) of this section. The IRS 

may assess such imputed underpayment 

against such pass-through partner 

without regard to the limitations under 

section 6232(b). See § 301.6232–1(c)(2). 

A failure to furnish statements in 

accordance with paragraph (e)(3) of this 

section is treated as a failure to timely 

pay an imputed underpayment required 

under paragraph (e)(4)(i) of this section, 

unless the pass-through partner 

computes and pays an imputed 

underpayment in accordance with 

paragraph (e)(4) of this section. See 

section 6651(i). 

(ii) Failures relating to partnership 

adjustment tracking report. Failure to 

timely file the partnership adjustment 

tracking report as required in paragraph 

(e)(1) of this section, or filing such 

report without showing the information 

required under paragraph (e)(1) of this 

section, is subject to the penalty 

imposed by section 6698. 

(3) Furnishing statements to 

partners—(i) In general. A pass-through 

partner described in paragraph (e)(1) of 

this section must furnish a statement 

that includes the items required by 

paragraph (e)(3)(iii) of this section to 

each partner that held an interest in the 

pass-through partner at any time during 

the taxable year of the pass-through 

partner to which the adjustments in the 

statement furnished to the pass-through 

partner relate (affected partner). The 

statements described in this paragraph 

(e)(3) must be filed with the IRS by the 

due date prescribed in paragraph 

(e)(3)(ii) of this section. Except as 

otherwise provided in paragraphs 

(e)(3)(ii), (iii), and (v) of this section, the 

rules applicable to statements described 

in § 301.6226–2 are applicable to 

statements described in this paragraph 

(e)(3). 

(ii) Time for filing and furnishing the 

statements. The pass-through partner 

must file with the IRS and furnish to its 

affected partners the statements 

described in paragraph (e)(3) of this 

section no later than the extended due 

date for the return for the adjustment 

year (as defined in § 301.6241–1(a)(1)) of 

the audited partnership. For purposes of 

this section, the extended due date is 

the extended due date under section 

6081 regardless of whether the audited 

partnership is required to file a return 

for the adjustment year or timely files a 

request for an extension under section 

6081 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 § 301.6226–2(b); 

(E) The name and TIN of the 

partnership that furnished the statement 

to the pass-through partner if different 

from the audited partnership; 

(F) The name and TIN of the passthrough partner; 

(G) The pass-through partner’s taxable 

year to which the adjustments reflected 

on the statements described in 

paragraph (e)(3) of this section relates; 

(H) The name and TIN of the affected 

partner to whom the statement is being 

furnished; 

(I) The current or last address of the 

affected partner that is known to the 

pass-through partner; 

(J) The affected partner’s share of 

items as originally reported to such 

partner under section 6031(b) and, if 

applicable, section 6227, for the taxable 

year to which the adjustments reflected 

on the statement furnished to the passthrough partner relate; 

(K) The affected partner’s share of 

partnership adjustments determined 

under § 301.6226–2(f)(1) as if the 

affected partner were the reviewed year 

partner and the pass-through partner 

were the partnership; 

(L) Modifications approved by the IRS 

with respect to the affected partner that 

holds its interest in the audited 

partnership through the pass-through 

partner; 

(M) The applicability of any penalties, 

additions to tax, or additional amounts 

that relate to any adjustments allocable 

to the affected partner and the 

adjustments allocated to the affected 

partner to which such penalties, 

additions to tax, or additional amounts 

relate, the section of the Internal 

Revenue Code under which each 

penalty, addition to tax, or additional 

amount is imposed, and the applicable 

rate of each penalty, addition to tax, or 

additional amount; and 

(N) Any other information required by 

forms, instructions, and other guidance 

prescribed by the IRS. 

(iv) Affected partner must take into 

account the adjustments. A statement 

furnished to an affected partner in 

accordance with paragraph (e)(3) of this 

section is treated as if it were a 

statement described in § 301.6226–2. An 

affected partner that is a pass-through 

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 § 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 

§ 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 


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references to the return for the 

adjustment year of the audited 

partnership as described in paragraph 

(e)(3)(ii) of this section. 

(4) Pass-through partner pays an 

imputed underpayment—(i) In general. 

If a pass-through partner described in 

paragraph (e)(1) of this section does not 

furnish statements in accordance with 

paragraph (e)(3) of this section, the passthrough partner must compute and pay 

an imputed underpayment determined 

under paragraph (e)(4)(iii) of this 

section. The pass-through partner must 

also pay any penalties, additions to tax, 

additional amounts, and interest as 

determined under paragraph (e)(4)(iv) of 

this section. A failure to timely pay an 

imputed underpayment required under 

this paragraph (e)(4) is subject to 

penalty under section 6651(i). 

(ii) Time of payment. A pass-through 

partner must file a partnership 

adjustment tracking report and compute 

and pay the imputed underpayment and 

any penalties, additions to tax, 

additional amounts, and interest, as 

described in paragraph (e)(4)(i) of this 

section, in accordance with forms, 

instructions, and other guidance no later 

than the extended due date for the 

return for the adjustment year of the 

audited partnership. 

(iii) Computation of the imputed 

underpayment. The imputed 

underpayment under paragraph (e)(4)(i) 

of this section is computed in the same 

manner as an imputed underpayment 

under section 6225 and § 301.6225–1, 

except that adjustments reflected on the 

statement furnished to the pass-through 

partner under § 301.6226–2 are treated 

as partnership adjustments (as defined 

in § 301.6241–1(a)(6)) for the first 

affected year. Any modification 

approved by the IRS under § 301.6225– 

2 with respect to the pass-through 

partner (including any modifications 

with respect to a relevant partner (as 

defined in § 301.6225–2(a)) that holds 

its interest in the audited partnership 

through its interest in the pass-through 

partner) reflected on the statement 

furnished to the pass-through partner 

under § 301.6226–2 (or paragraph (e)(3) 

of this section) is taken into account in 

calculating the imputed underpayment 

under this paragraph (e)(4)(iii). Any 

modification that was not approved by 

the IRS under § 301.6225–2 may not be 

taken into account in calculating the 

imputed underpayment under this 

paragraph (e)(4)(iii). 

(iv) Penalties and interest—(A) 

Penalties. A pass-through partner must 

compute and pay any applicable 

penalties, additions to tax, and 

additional amounts on the imputed 

underpayment calculated under 

paragraph (e)(4)(iii) of this section as if 

such amount were an imputed 

underpayment for the pass-through 

partner’s first affected year. See 

§ 301.6233(a)–1(c). 

(B) Interest. A pass-through partner 

must pay interest on the imputed 

underpayment calculated under 

paragraph (e)(4)(iii) of this section in 

accordance with paragraph (c) of this 

section as if such imputed 

underpayment were 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 § 301.6225–1(f)) are taken 

into account by the pass-through partner 

in accordance with § 301.6225–3 in the 

taxable year of the pass-through partner 

that includes the date the imputed 

underpayment required under 

paragraph (e)(4)(i) of this section is paid. 

If, after making the computation 

described in paragraph (e)(4)(iii) of this 

section, no imputed underpayment 

exists and therefore no payment is 

required under paragraph (e)(4)(i) of this 

section, the adjustments that did not 

result in an imputed underpayment are 

taken into account by the pass-through 

partner in accordance with § 301.6225– 

3 in the taxable year of the pass-through 

partner that includes the date the 

statement described in § 301.6226–2 (or 

paragraph (e)(3) of this section) is 

furnished to the pass-through partner. 

(vi) Coordination with chapters 3 and 

4. If a pass-through partner pays an 

imputed underpayment described in 

paragraph (e)(4)(i) of this section, 

§ 301.6241–7(b)(3) applies to the passthrough partner by substituting ‘‘passthrough partner’’ for ‘‘partnership’’ 

where § 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 § 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 passthrough partner fails to comply with the 

requirements of this paragraph (e)(6), 

the pass-through partner must compute 

and pay an imputed underpayment, as 

well as any penalties, additions to tax, 

additional amounts, and interest with 

respect to the adjustments reflected on 

the statement furnished to such partner 

in accordance with paragraph (e)(4) of 

this section. 

(f) Partners subject to withholding 

under chapters 3 and 4. A reviewed 

year partner that is subject to 

withholding under § 301.6241–7(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 § 1.6012– 

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

chapter). The amount of tax paid by a 

partnership under § 301.6241–7(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 

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

actually withheld from the reviewed 

year partner (within the meaning of 

§ 1.1464–1(a) or § 1.1474–3 of this 

chapter). The credit is allowed against 

the reviewed year partner’s income tax 

liability for its reporting year. The 

reviewed year partner must substantiate 

the credit by attaching the applicable 

Form 1042–S, ‘‘Foreign Person’s U.S. 

Source Income Subject to Withholding,’’ 

or Form 8805, ‘‘Foreign Partner’s 

Information Statement of Section 1446 

Withholding Tax,’’ to its income tax 

return for the reporting year, as well as 

satisfying any other requirements 

prescribed by the IRS in forms and 

instructions. 

(g) Treatment of disregarded entities 

and wholly-owned grantor trusts. In the 

case of a reviewed year partner that is 

a wholly-owned entity disregarded as 


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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 § 1.671– 

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

furnished a statement described in 

§ 301.6226–2 (or paragraph (e)(3) of this 

section), the owner of the disregarded 

entity or wholly-owned grantor trust 

must take into account the adjustments 

reflected on that statement in 

accordance with this section as if the 

owner were the reviewed year partner. 

(h) Examples. The following examples 

illustrate the rules of this section. For 

purposes of these examples, each 

partnership is subject to subchapter C of 

chapter 63 of the Code, each partnership 

and partner has a calendar year taxable 

year, no modifications are requested by 

any partnership under § 301.6225–2 

(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 accuracyrelated penalty under section 6662(b) applies 

to the disallowance of the charitable 

contribution, and setting forth a single 

imputed underpayment with respect to such 

adjustments. Partnership makes a timely 

election under section 6226 in accordance 

with § 301.6226–1 with respect to the 

imputed underpayment in the FPA for 

Partnership’s 2020 year and files a timely 

petition in the Tax Court challenging the 

partnership adjustments. The Tax Court 

determines that Partnership is not entitled to 

any of the claimed $400 in charitable 

contributions and upholds the applicability 

of the penalty. The decision regarding 

Partnership’s 2020 tax year becomes final on 

December 15, 2025. Pursuant to § 301.6226– 

2(b), the partnership adjustments are finally 

determined on December 15, 2025. On 

February 2, 2026, Partnership files the 

statements described under § 301.6226–2 

with the IRS and furnishes to partner A, an 

individual who was a partner in Partnership 

during 2020, a statement described in 

§ 301.6226–2. A had a 25 percent interest in 

Partnership during all of 2020 and was 

allocated 25 percent of all items from 

Partnership for that year. The statement 

shows A’s share of ordinary income reported 

on Partnership’s return for the reviewed year 

of $250 and A’s share of the charitable 

contribution reported on Partnership’s return 

for the reviewed year of $100. The statement 

also shows 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 accuracyrelated 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 § 301.6225–1(f). Partnership makes a 

timely election under section 6226 in 

accordance with § 301.6226–1 with respect to 

the imputed underpayment in the FPA and 

does not file a petition for readjustment 

under section 6234. Accordingly, under 

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

the adjustment year partners (as defined in 

§ 301.6241–1(a)(2)) do not take into account 

the $300 long-term capital loss that does not 

result in an imputed underpayment. Rather, 

the $300 long-term capital loss is taken into 

account by the reviewed year partners. The 

time to file a petition expires on August 30, 

2023. Pursuant to § 301.6226–2(b), the 

partnership adjustments become finally 

determined on August 31, 2023. On 

September 30, 2023, Partnership files with 

the IRS statements described in § 301.6226– 

2 and furnishes statements to all of its 

reviewed year partners in accordance with 

§ 301.6226–2. One partner of Partnership in 

2020, B (an individual), had a 25 percent 

interest in Partnership during all of 2020 and 

was allocated 25 percent of all items from 

Partnership for that year. The statement filed 

with the IRS and furnished to B shows B’s 

allocable share of the ordinary loss reported 

on Partnership’s return for the 2020 taxable 

year as $125. The statement also shows an 

adjustment to B’s allocable share of the 

ordinary loss in the amount of <$75>, 

resulting in a corrected ordinary loss 

allocated to B of $50 for taxable year 2020 

($125 originally allocated to B less $75 which 

is B’s share of the adjustment to the ordinary 

loss). In addition, the statement shows an 

increase to B’s share of long-term capital loss 

in the amount of $75 (B’s share of the 

adjustment that did not result in the imputed 

underpayment with respect to Partnership). B 

must pay the additional reporting year tax as 

determined in accordance with paragraph (b) 

of this section. B computes his additional 

reporting year tax as follows. First, B 

determines the correction amount for the first 

affected year (the 2020 taxable year) by taking 

into account B’s share of the partnership 

adjustments (a $75 reduction in ordinary loss 

and an increase of $75 in long-term capital 

loss) for the 2020 taxable year. B determines 

the amount by which his chapter 1 tax for 

2020 would have increased or decreased if 

the $75 adjustment to ordinary loss and the 

$75 adjustment to long-term capital loss from 

Partnership were taken into account for that 

year. Second, B determines if there is any 

increase or decrease in chapter 1 tax for any 

intervening year as a result of the adjustment 

to the ordinary and capital losses for 2020. 

B’s aggregate of the correction amounts is the 

correction amount for 2020, B’s first affected 

year plus any correction amounts for any 

intervening years. B is also liable for any 

interest on the correction amount for the first 

affected year and for any intervening year as 

determined in accordance with paragraph (c) 

of this section. 

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 


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2020 year increasing the amount of U.S. 

source dividend income to $4,000 and 

determining that a 20 percent accuracyrelated penalty under section 6662(b) applies 

to the increase in U.S. source dividend 

income. Partnership makes a timely election 

under section 6226 in accordance with 

§ 301.6226–1 with respect to the imputed 

underpayment in the FPA for Partnership’s 

2020 year and does not file a petition for 

readjustment under section 6234. The time to 

file a petition expires on August 30, 2023. 

Pursuant to § 301.6226–2(b), the partnership 

adjustments become finally determined on 

August 31, 2023. On September 30, 2023, 

Partnership files the statements described 

under § 301.6226–2 with the IRS and 

furnishes to partner C, a nonresident alien 

individual who was a partner in Partnership 

during 2020 (and remains a partner in 

Partnership in 2023), a statement described 

in § 301.6226–2. C had a 50 percent interest 

in Partnership during all of 2020 and was 

allocated 50 percent of all items from 

Partnership for that year. The statement 

shows C’s share of U.S. source dividend 

income reported on Partnership’s return for 

the reviewed year of $1,000 and an 

adjustment to U.S. source dividend income 

of $1,000. In addition, the statement reports 

that a 20 percent accuracy-related penalty 

under section 6662(b) applies. Under 

§ 301.6241–7(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 § 301.6241– 

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

tax required to be withheld on the 

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

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

§ 301.6241–7(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 

§ 1.1461–1 of this chapter. On his 2023 

return, C must report the additional reporting 

year tax determined in accordance with 

paragraph (b) of this section, the accuracyrelated penalty determined in accordance 

with paragraph (d) of this section, and 

interest determined in accordance with 

paragraph (c) of this section on the correction 

amount for the first affected year, the 

correction amount for any intervening year, 

and the penalty. Under paragraph (f) of this 

section, C may claim the $100 withholding 

tax paid by Partnership pursuant to 

§ 301.6241–7(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 § 301.6225–1(g)(2)(iii)(B). 

Partnership makes a timely election under 

section 6226 in accordance with § 301.6226– 

1 with respect to the specific imputed 

underpayment relating to the reallocation of 

long-term capital gain. Partnership does not 

file a petition for readjustment under section 

6234. The time to file a petition expires on 

August 30, 2023. Pursuant to § 301.6226– 

2(b), the partnership adjustments become 

finally determined on August 31, 2023. 

Partnership timely pays 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 

§ 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 × 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 

§ 301.6225–2(d)(2), F files an amended return 

for 2020 taking into account F’s share of the 

partnership adjustment ($100 reduction in 

long-term capital loss) and pays the tax owed 

for 2020, including interest. Also as part of 

the modification process, F also files 

amended returns for 2021 and 2022 and pays 

additional tax (and interest) for these years 

because the reduction in long-term capital 

loss for 2020 affected the tax due from F for 

2021 and 2022. See § 301.6225–2(d)(2). The 

reduction of the long-term capital loss in 

2020 did not affect any other taxable year of 

F. This is the only modification requested. 

The IRS approves the modification with 

respect to F and on June 1, 2023, mails an 

FPA to Partnership for Partnership’s 2020 

year reflecting the partnership adjustment 

reducing the long-term capital loss in the 

amount of $200. The FPA also reflects the 

modification to the imputed underpayment 

based on the amended returns filed by F 

taking into account F’s share of the reduction 

in the long-term capital loss. Therefore, the 

imputed underpayment in the FPA is $40 

($100 × 40 percent). Partnership makes a 

timely election under section 6226 in 

accordance with § 301.6226–1 with respect to 

the imputed underpayment in the FPA for 

Partnership’s 2020 year and files a timely 

petition in the Tax Court challenging the 

partnership adjustments. The Tax Court 

upholds the determinations in the FPA and 

the decision regarding Partnership’s 2020 tax 

year becomes final on December 15, 2025. 

Pursuant to § 301.6226–2(b), the partnership 

adjustments are finally determined on 

December 15, 2025. On February 1, 2026, 

Partnership files the statements described 

under § 301.6226–2 with the IRS and 

furnishes to its partners statements reflecting 

their shares of the partnership adjustment. 

The statement issued to F reflects F’s share 

of the partnership adjustment for 

Partnership’s 2020 taxable year as finally 

determined by the Tax Court. The statement 

shows F’s share of the long-term capital loss 

adjustment for the reviewed year of $100, as 

well as the $100 long-term capital loss taken 

into account by F as part of the amended 

return modification. Accordingly, in 

accordance with paragraph (b) of this section, 

when F computes its correction amounts for 

the first affected year (the 2020 taxable year) 

and the intervening years (the 2021 through 

2026 taxable years), F computes any increase 


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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 § 301.6226–1 with respect to the 

imputed underpayment in the FPA for 

Partnership’s 2020 year and does not file a 

petition for readjustment under section 6234. 

The time to file a petition expires on August 

30, 2023. Pursuant to § 301.6226–2(b), the 

partnership adjustments become finally 

determined on August 31, 2023. Therefore, 

Partnership’s adjustment year is 2023, the 

due date of the adjustment year return is 

March 15, 2024 and the extended due date 

for the adjustment year return is September 

16, 2024. On October 12, 2023, Partnership 

timely files with the IRS statements 

described in § 301.6226–2 and timely 

furnishes statements to its partners reflecting 

their share of the partnership adjustments as 

finally determined in the FPA. The 

statements to 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 × 40 percent). Partnership 

makes a timely election under section 6226 

in accordance with § 301.6226–1 with respect 

to the imputed underpayment in the FPA for 

Partnership’s 2020 year and does not file a 

petition for readjustment under section 6234. 

The time to file a petition expires on August 

30, 2023. Pursuant to § 301.6226–2(b), the 

partnership adjustments become finally 

determined on August 31, 2023. On October 

12, 2023, Partnership timely files with the 

IRS statements described in § 301.6226–2 and 

furnishes statements to its partners reflecting 

their share of the partnership adjustments as 

finally determined in the FPA. The 

statements to M and N reflect a partnership 

adjustment of $6,000 of ordinary income for 

the 2020 tax year. On February 1, 2024, N 

takes the adjustments into account under 

paragraph (e)(3) of this section by filing 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 × 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 × 40 percent) 

with respect to the $1,000 reduction to 

ordinary loss and reflecting an adjustment 

that does not result in an imputed 

underpayment of a $500 capital loss. 

Partnership makes a timely election under 

section 6226 in accordance with § 301.6226– 

1 with respect to the imputed underpayment 

in the FPA for Partnership’s 2020 year and 

does not file a petition for readjustment 

under section 6234. The time to file a 

petition expires on August 30, 2023. 

Pursuant to § 301.6226–2(b), the partnership 

adjustments become finally determined on 

August 31, 2023. On October 12, 2023, 

Partnership timely files with the IRS 

statements described in § 301.6226–2 and 

furnishes statements to its partners reflecting 

their share of the partnership adjustments as 

finally determined in the FPA. The 

statements to P and Q each reflect a 

partnership adjustment of a $500 increase in 

ordinary income and a $250 increase in 

capital loss in accordance with § 301.6225– 

3(b)(6). P takes the adjustments into account 

under paragraph (e)(3) of this section by 

timely filing 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 § 301.6225–1, Q calculates the 

imputed underpayment that it is required to 

pay of $200 ($500 adjustment to ordinary 

income × 40 percent). Q also has one 

adjustment that does not result in an imputed 

underpayment—the $250 increase to capital 

loss. 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 § 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 × 40 percent). 

On July 17, 2023, Partnership timely submits 

a request to modify the rate used in 

calculating the imputed underpayment under 

§ 301.6225–2(d)(4). Partnership submits 

sufficient information demonstrating that 

$375 of the $500 adjustment is allocable to 

individuals (50 percent of the $500 

adjustment allocable to U and 25 percent of 

the $500 adjustment allocable to W) and the 

remaining $125 is allocable to C corporations 

(the indirect partners Y and Z). The IRS 

approves the modification and the imputed 

underpayment is reduced to $81.25 (($375 × 

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

§ 301.6225–2(b)(3). No other modifications 

are requested. On February 28, 2024, the IRS 

mails an FPA to Partnership for Partnership’s 

2020 year determining a $500 increase in the 

long-term capital gain on the sale of Stock 

and asserting an imputed underpayment of 

$81.25 after taking into account the approved 

modifications. Partnership makes a timely 

election under section 6226 in accordance 

with § 301.6226–1 with respect to the 

imputed underpayment in the FPA for 

Partnership’s 2020 year and does not file a 

petition for readjustment under section 6234. 

The time to file a petition expires on May 28, 

2024. Pursuant to § 301.6226–2(b), the 

partnership adjustments become finally 

determined on May 29, 2024. On July 26, 

2024, Partnership timely files with the IRS 


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statements described in § 301.6226–2 and 

furnishes statements to its partners reflecting 

their share of the partnership adjustments as 

finally determined in the FPA. The 

statements to U and V each reflect a 

partnership adjustment of a $250 increase in 

long-term capital gain. V timely files the 

adjustment tracking report but fails to furnish 

statements and therefore must calculate and 

pay an imputed underpayment under 

paragraph (e)(4) of this section as well as 

interest on the imputed underpayment 

determined under paragraph (e)(4)(iv)(B) of 

this section. On February 3, 2025, V pays an 

imputed underpayment of $43.75 (($125 × 20 

percent for the adjustments allocable to X) + 

($125 × 15 percent for the adjustments 

allocable to W)) which takes into account the 

rate modifications approved by the IRS with 

respect to Y and Z. V must also pay any 

interest on the amount as determined in 

accordance with paragraph (e)(4)(iv)(B) of 

this section. V must file the adjustment 

tracking report and pay the amounts due 

under paragraph (e)(4) of this section no later 

than September 15, 2025, the extended due 

date of Partnership’s return for the 2024 year, 

which is the adjustment year. 

(i) Applicability date—(1) In general. 

Except as provided in paragraph (i)(2) of 

this section, this section applies to 

partnership taxable years beginning 

after December 31, 2017. 

(2) Election under § 301.9100–22 in 

effect. This section applies to any 

partnership taxable year beginning after 

November 2, 2015, and before January 1, 

2018, for which a valid election under 

§ 301.9100–22 is in effect. 

■ Par. 15. Section 301.6226–4 is added 

to read as follows: 

§ 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 § 301.6241– 

1(a)(6)) is taken into account by the 

reviewed year partners (as defined in 

§ 301.6241–1(a)(9)) or affected partners 

(as described in § 301.6226–3(e)(3)(i)) 

pursuant to an election made by a 

partnership under § 301.6226–1, the 

partnership and its reviewed year 

partners or affected partners must adjust 

their tax attributes (as defined in 

§ 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 § 301.6241–1(a)(5)) pays an 

imputed underpayment under 

§ 301.6226–3(e)(4)(iii), such passthrough partner and its affected partners 

or their successors must make 

adjustments to their tax attributes in 

accordance with the rules in 

§ 301.6225–4. 

(3) Allocation of partnership 

adjustments. Partnership adjustments 

are allocated to the reviewed year 

partners or affected partners under 

§ 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 § 301.6226–1, 

the partnership adjustments to be taken 

into account by each partner are 

determined under § 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 

§ 301.6226–2 or § 301.6226–3(e)(3) in 

accordance with § 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 § 301.6226–2 or 

§ 301.6226–3(e)(3) with respect to the 

reviewed year (as defined in 

§ 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 § 301.6226–2 or 

§ 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 § 301.6226–3(b)(2)(i)), 

followed by any intervening years (as 

defined in § 301.6226–3(b)(3)(i)), 

concluding with the reporting year (as 

defined in § 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 

basis Book Value Outside 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 § 301.6226–1 with respect to 

the imputed underpayment. Therefore, J, K 

and L each are furnished a statement 

described in § 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 § 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 § 301.6226– 

1 and taking into account other activities of 

Partnership in 2023, accounts are stated as 

follows: 


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Partnership 

basis Book Value Outside 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 § 301.9100–22 in 

effect. This section applies to any 

partnership taxable year beginning after 

November 2, 2015 and before January 1, 

2018 for which a valid election under 

§ 301.9100–22 is in effect. 

■ Par. 16. Section 301.6227–1 is added 

to read as follows: 

§ 301.6227–1 Administrative adjustment 

request by partnership. 

(a) In general. A partnership may file 

a request for an administrative 

adjustment with respect to any 

partnership-related item (as defined in 

§ 301.6241–6) 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 

§ 301.6227–2(a) for the reviewed year 

(as defined in § 301.6241–1(a)(8)). If the 

adjustments requested in the AAR result 

in an imputed underpayment, the 

partnership must take the adjustments 

into account under the rules described 

in § 301.6227–2(b) unless the 

partnership makes an election under 

§ 301.6227–2(c), in which case each 

reviewed year partner (as defined in 

§ 301.6241–1(a)(9)) must take the 

adjustments into account in accordance 

with § 301.6227–3. If the adjustments 

requested in the AAR do not result in 

an imputed underpayment (as 

determined under § 301.6227–2(a)), 

such adjustments must be taken into 

account by the reviewed year partners 

in accordance with § 301.6227–3. A 

partner may not 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 § 301.6223–1 (regarding designation 

of the partnership representative). When 

the partnership changes the designation 

of the partnership representative (or 

appointment of the designated 

individual) in conjunction with the 

filing of an AAR in accordance with 

§ 301.6223–1(e), the change in 

designation (or appointment) is treated 

as occurring prior to the filing of the 

AAR. 

(b) Time for filing an AAR. An AAR 

may only be filed by a partnership with 

respect to a partnership taxable year 

after a partnership return for that 

taxable year has been filed with the 

Internal Revenue Service (IRS). A 

partnership may not file an AAR with 

respect to a partnership taxable year 

more than three years after the later of 

the date the partnership return for such 

partnership taxable year was filed or the 

last day for filing such partnership 

return (determined without regard to 

extensions). Except as provided in 

§ 301.6231–1(f), an AAR 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 

§ 301.6227–3, statements described in 

paragraph (e) of this section, including 

any transmittal with respect to such 

statements required by forms, 

instructions, and other guidance 

prescribed by the IRS, and 

(iii) Other information prescribed by 

the IRS in forms, instructions, or other 

guidance. 

(d) Copy of statement furnished to 

reviewed year partners in certain cases. 

If a reviewed year partner is required to 

take into account adjustments requested 

in an AAR under § 301.6227–3, the 

partnership must furnish a copy of the 

statement described in paragraph (e) of 

this section to the reviewed year partner 

to whom the statement relates in 

accordance with the forms, instructions 

and other guidance prescribed by the 

IRS. If the partnership mails the 

statement, it must mail the statement to 

the current or last address of the 

reviewed year partner that is known to 

the partnership. The statement must be 

furnished to the reviewed year partner 

on the date the AAR is filed with the 

IRS. 

(e) Statements—(1) Contents. Each 

statement described in this paragraph 

(e) must include the following correct 

information: 

(i) The name and TIN of the reviewed 

year partner to whom the statement is 

being furnished; 

(ii) The current or last address of the 

partner that is known to the partnership; 

(iii) The reviewed year partner’s share 

of items as originally reported on 

statements furnished to the partner 

under section 6031(b) and, if applicable, 

section 6227; 

(iv) The reviewed year partner’s share 

of the adjustments as described under 

paragraph (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 partnershiprelated item was not reported on the 

partnership return for the reviewed 

year, each reviewed year partner’s share 


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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 partnershiprelated 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 § 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 

§ 301.6227–2(a)(1), including any 

modifications determined by the 

partnership under § 301.6227–2(a)(2), 

may be re-determined by the IRS. 

(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 § 301.9100–22 in 

effect. This section applies to any 

partnership taxable year beginning after 

November 2, 2015 and before January 1, 

2018 for which a valid election under 

§ 301.9100–22 is in effect. 

■ Par. 17. Section 301.6227–2 is added 

to read as follows: 

§ 301.6227–2 Determining and accounting 

for adjustments requested in an 

administrative adjustment request by the 

partnership. 

(a) Determining whether adjustments 

result in an imputed underpayment—(1) 

Determination of 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 § 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 

§ 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 

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

(regarding modification of applicable 

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

specified passive activity losses), 

§ 301.6225–2(d)(6)(ii) (regarding 

limitations or restrictions in the 

grouping of adjustments), § 301.6225– 

2(d)(7) (regarding certain qualified 

investment entities), § 301.6225–2(d)(9) 

(regarding tax treaty modifications), or 

as provided in forms, instructions, or 

other guidance prescribed by the IRS 

with respect to AARs. The partnership 

may not modify an imputed 

underpayment resulting from 

adjustments requested in an AAR except 

as described in this paragraph (a)(2). 

When applying modifications to the 

amount of an imputed underpayment 

under this paragraph (a)(2): 

(i) The partnership is not required to 

seek the approval from the Internal 

Revenue Service (IRS) prior to applying 

modifications to the amount of any 

imputed underpayment under 

paragraph (a)(1) of this section reported 

on the AAR; and 

(ii) As part of the AAR filed with the 

IRS in accordance with forms, 

instructions, and other guidance 

prescribed by the IRS, the partnership 

must— 

(A) Notify the IRS of any 

modification, 

(B) Describe the effect of the 

modification on the imputed 

underpayment, 

(C) Provide an explanation of the 

basis for such modification, and 

(D) Provide documentation to support 

the partnership’s eligibility for the 

modification. 

(b) Adjustments resulting in an 

imputed underpayment taken into 

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 § 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 

§ 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 

§ 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 § 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 § 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 


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requested in an AAR, the rules in 

§ 301.6226–2(g)(3) apply to the 

partnership, and the rules in 

§ 301.6226–3(f) apply to the reviewed 

year partners that take into account the 

adjustments pursuant to § 301.6227–3. 

(c) Election to have adjustments 

resulting in an imputed underpayment 

taken into account by reviewed year 

partners. In lieu of paying the imputed 

underpayment under paragraph (b) of 

this section, the partnership may elect 

to have each reviewed year partner (as 

defined in § 301.6241–1(a)(9)) take into 

account the adjustments requested in 

the AAR in accordance with 

§ 301.6227–3. A partnership makes an 

election under this paragraph (c) at the 

time the AAR is filed in accordance 

with the forms, instructions, and other 

guidance prescribed by the IRS. If the 

partnership makes a valid election in 

accordance with this paragraph (c), the 

partnership is not liable for, nor 

required to pay, the imputed 

underpayment 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 § 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 § 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 § 301.6227– 

1. Each reviewed year partner must take 

into account its share of the adjustments 

requested in the AAR in accordance 

with § 301.6227–3. 

(e) Applicability date—(1) In general. 

Except as provided in paragraph (e)(2) 

of this section, this section applies to 

partnership taxable years beginning 

after December 31, 2017. 

(2) Election under § 301.9100–22 in 

effect. This section applies to any 

partnership taxable year beginning after 

November 2, 2015 and before January 1, 

2018 for which a valid election under 

§ 301.9100–22 is in effect. 

■ Par. 18. Section 301.6227–3 is added 

to read as follows: 

§ 301.6227–3 Adjustments requested in an 

administrative adjustment request taken 

into account by reviewed year partners. 

(a) In general. Each reviewed year 

partner (as defined in § 301.6241– 

1(a)(9)) is required to take into account 

its share of adjustments requested in an 

administrative adjustment request 

(AAR) if the partnership makes an 

election under § 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 § 301.6241–1(a)(3)) as 

determined under § 301.6227–2(a). Each 

reviewed year partner receiving a 

statement furnished in accordance with 

§ 301.6227–1(d) must take into account 

adjustments reflected in the statement 

in the reviewed year partner’s taxable 

year that includes the date the statement 

is furnished (reporting year) in 

accordance with paragraph (b) of this 

section. 

(b) Adjustments taken into account by 

the reviewed year partner in the 

reporting year—(1) In general. Except as 

provided in paragraph (c) of this 

section, a reviewed year partner that is 

furnished a statement described in 

paragraph (a) of this section must treat 

the statement as if it were issued under 

section 6226(a)(2) and, on or before the 

due date for the reporting year must 

report and pay the additional reporting 

year tax (as defined in § 301.6226–3(a)), 

if any, determined after taking into 

account that partner’s share of the 

adjustments requested in the AAR in 

accordance with § 301.6226–3. A 

reviewed year partner may, in 

accordance with § 301.6226–3(a), reduce 

chapter 1 tax for the reporting year 

where the additional reporting year tax 

is less than zero. For purposes of 

paragraph (b) of this section, the rule 

under § 301.6226–3(c)(3) (regarding the 

increased rate of interest) does not 

apply. Nothing in this section entitles 

any partner to a refund of tax imposed 

by chapter 1 of 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 § 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 § 301.6241–1(a)(5)), the passthrough partner must take into account 

the adjustments reflected on that 

statement in accordance with 

§ 301.6226–3(e) by treating the 

partnership that filed the AAR as the 

partnership that made an election under 

§ 301.6226–1. A pass-through partner 

that furnishes statements in accordance 

with § 301.6226–3(e)(3) must provide 

the information described in paragraph 

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

information described in § 301.6226– 

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

A pass-through partner that computes 

and pays an imputed underpayment in 

accordance with § 301.6226–3(e)(4)(iii) 

may not apply any modifications to the 

amount of imputed underpayment. For 

purposes of this paragraph (c)(1), the 

statement furnished to the pass-through 

partner by the partnership filing the 

AAR is treated as if it were a statement 

issued under section 6226(a)(2) and 

described in § 301.6226–2. 

(2) Adjustments that do not result in 

an imputed underpayment. If the 

adjustments requested in an AAR do not 

result in an imputed underpayment (as 

described in § 301.6227–2(d)), 

§ 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 

§ 301.6226–3(e)(3), except that the passVerDate Sep<11>2014 22:10 Aug 16, 2018 Jkt 244001 PO 00000 Frm 00051 Fmt 4701 Sfmt 4702 E:\FR\FM\17AUP3.SGM 17AUP3

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through partner must provide the 

information described in paragraph 

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

information described in § 301.6226– 

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

§ 301.6241–1(a)(1)) of the partnership 

described in paragraph (c)(3)(i) of this 

section; 

(iii) The extended due date for the 

return for the adjustment year of the 

partnership described in paragraph 

(c)(3)(i) of this section (as described in 

§ 301.6226–3(e)(3)(ii)); 

(iv) The date on which the 

partnership described in paragraph 

(c)(3)(i) of this section furnished its 

statements required under § 301.6227– 

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 passthrough partner; 

(vii) The pass-through partner’s 

taxable year to which the adjustments 

set forth in the statement described in 

paragraph (c)(1) of this section relate; 

(viii) The name and TIN of the 

affected partner (as defined in 

§ 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 passthrough partner relate; 

(xi) The affected partner’s share of 

partnership adjustments determined 

under § 301.6227–1(e)(2) as if the 

affected partner were the reviewed year 

partner and the partnership were the 

pass-through partner; 

(xii) Any other information required 

by forms, instructions, and other 

guidance prescribed by the IRS. 

(4) Affected partners must take into 

account the adjustments. A statement 

furnished to an affected partner in 

accordance with paragraph (c)(1) or (2) 

of this section is to be treated by the 

affected partner as if it were a statement 

described in paragraph (a) of this 

section. The affected partner must take 

into account its share of the adjustments 

reflected on such a statement in 

accordance with this section by treating 

references to ‘‘reviewed year partner’’ as 

‘‘affected partner.’’ When taking into 

account the adjustments as described in 

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

§ 301.6226–3(c)(3) (regarding the 

increased rate of interest) do not apply. 

(d) Applicability date—(1) In general. 

Except as provided in paragraph (d)(2) 

of this section, this section applies to 

partnership taxable years beginning 

after December 31, 2017. 

(2) Election under § 301.9100–22 in 

effect. This section applies to any 

partnership taxable year beginning after 

November 2, 2015 and before January 1, 

2018 for which a valid election under 

§ 301.9100–22 is in effect. 

■ Par. 19. Section 301.6231–1 is added 

to read as follows: 

§ 301.6231–1 Notice of proceedings and 

adjustments. 

(a) Notices to which this section 

applies. In the case of any 

administrative proceeding under 

subchapter C of chapter 63 of the 

Internal Revenue Code (subchapter C of 

chapter 63), including an administrative 

proceeding with respect to an 

administrative adjustment request 

(AAR) filed by a partnership under 

section 6227, the following notices must 

be mailed to the partnership and the 

partnership representative (as described 

in section 6223 and § 301.6223–1)— 

(1) Notice of any administrative 

proceeding initiated at the partnership 

level with respect to an adjustment of 

any partnership-related item (as defined 

in § 301.6241–6) 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 § 301.6225– 

2(c)(3)(iii) for the effect of a waiver 

under this paragraph (b)(2) on the 270- 

period for requesting a modification 

under section 6225(c). See § 301.6232– 

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

of the limitations on assessment under 

§ 301.6232–1(c). 

(c) Last known address. A notice 

described in paragraph (a) of this 

section is sufficient if mailed to the last 

known address of the partnership 

representative and the partnership (even 

if the partnership or partnership 

representative has terminated its 

existence). 

(d) Notice mailed to partnership 

representative—(1) In general. A notice 

described in paragraph (a) of this 

section will be treated as mailed to the 

partnership representative if the notice 

is mailed to the partnership 

representative that is reflected in the 

IRS records as of the date the letter is 

mailed. 

(2) No partnership representative in 

effect. In any case in which no 

partnership representative designation 

is in effect in accordance with 

§ 301.6223–1(f), a notice described in 

paragraph (a) of this section mailed to 

‘‘PARTNERSHIP REPRESENTATIVE’’ at 

the last known address of the 

partnership satisfies the requirements of 

this section. 

(e) Restrictions on additional FPAs 

after petition filed. The IRS may mail 

more than one FPA to any partnership 

for any partnership taxable year. 

However, except in the case of fraud, 

malfeasance, or misrepresentation of a 

material fact, the IRS may not mail an 

FPA to a partnership with respect to a 

partnership taxable year after the 

partnership has filed a timely petition 

for readjustment under section 6234 

with respect to an FPA issued with 

respect to such partnership taxable year. 

(f) Withdrawal of NAP or NOPPA. The 

IRS may, without consent of the 

partnership, withdraw any NAP or 

NOPPA. 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 


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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 § 301.9100–22 in 

effect. This section applies to any 

partnership taxable year beginning after 

November 2, 2015 and before January 1, 

2018 for which a valid election under 

§ 301.9100–22 is in effect. 

■ Par. 20. Section 301.6232–1 is added 

to read as follows: 

§ 301.6232–1 Assessment, collection, and 

payment of imputed underpayment. 

(a) In general. An imputed 

underpayment determined under 

subchapter C of chapter 63 of the 

Internal Revenue Code (Code) is 

assessed and collected in the same 

manner as if the imputed underpayment 

were a tax imposed by subtitle A of the 

Code for the adjustment year (as defined 

in § 301.6241–1(a)(1)) except that the 

deficiency procedures under subchapter 

B of chapter 63 of the Code do not apply 

to an assessment of an imputed 

underpayment. Accordingly, no notice 

under section 6212 is required for, and 

the restrictions under section 6213 do 

not apply to, the assessment of any 

imputed underpayment. See paragraph 

(c) of this section for limitations on 

assessment and paragraph (d) of this 

section for exceptions to restrictions on 

adjustments. 

(b) Payment of the imputed 

underpayment. Upon receipt of notice 

and demand from the Internal Revenue 

Service (IRS), an imputed 

underpayment must be paid by the 

partnership at the place and time stated 

in the notice. In the case of an 

adjustment requested in an 

administrative adjustment request 

(AAR) under section 6227(b)(1) that is 

taken into account by the partnership 

under § 301.6227–2(b), payment of the 

imputed underpayment is due on the 

date the AAR is filed. The IRS may 

assess the amount of the imputed 

underpayment reflected on the AAR on 

the date the AAR is filed. For interest 

with respect to an imputed 

underpayment, see § 301.6233(a)–1(b). 

(c) Limitation on assessment—(1) In 

general. Except as otherwise provided 

by this section or subtitle F of the Code 

(except for subchapter B of chapter 63), 

no assessment of an imputed 

underpayment may be made (and no 

levy or proceeding in any court for the 

collection of an imputed underpayment 

may be made, begun, or prosecuted) 

before— 

(i) The close of the 90th day after the 

day on which a notice of a final 

partnership adjustment (FPA) under 

section 6231(a)(3) was mailed; and 

(ii) If a petition for readjustment is 

filed under section 6234 with respect to 

such FPA, the decision of the court has 

become final. 

(2) Specified similar amount. The 

limitations under paragraph (c)(1) of 

this section do not apply in the case of 

a specified similar amount as defined in 

section 6232(f)(2). 

(d) Exceptions to restrictions on 

adjustments and assessments—(1) 

Adjustments treated as mathematical or 

clerical errors—(i) In general. A notice 

to a partnership that, on account of a 

mathematical or clerical error appearing 

on the partnership return or as a result 

of a failure by a partnership-partner (as 

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

with section 6222(a), the IRS has 

adjusted or will adjust partnershiprelated items (as defined in § 301.6241– 

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 § 301.6225–1) resulting 

from the adjustment is not considered 

an FPA under section 6231(a)(3). A 

petition for readjustment under section 

6234 may not be filed with respect to 

such notice. The limitations under 

section 6232(b) and paragraph (c) of this 

section do not apply to an assessment 

under this paragraph (d)(1)(i). For the 

definition of mathematical or clerical 

error generally, see section 6213(g)(2). 

For application of mathematical or 

clerical error in the case of inconsistent 

treatment by a partner that fails to give 

notice, see § 301.6222–1(b). 

(ii) Request for abatement—(A) In 

general. Except as provided in 

paragraph (d)(1)(ii)(B) of this section, a 

partnership that is mailed a notice 

described in paragraph (d)(1)(i) of this 

section may file with the IRS, within 60 

days after the date of such notice, a 

request for abatement of any assessment 

of an imputed underpayment specified 

in such notice. Upon receipt of the 

request, the IRS must abate the 

assessment. Any subsequent assessment 

of an imputed underpayment with 

respect to which abatement was made is 

subject to the provisions of subchapter 

C of chapter 63 of the Code, including 

the limitations under paragraph (c) of 

this section. 

(B) Adjustments with respect to 

inconsistent treatment by a partnershippartner. If an adjustment that is the 

subject of a notice described in 

paragraph (d)(1)(i) of this section is due 

to the failure of a partnership-partner to 

comply with section 6222(a), paragraph 

(d)(1)(ii)(A) of this section does not 

apply, and abatement of any assessment 

specified in such notice is not available. 

However, prior to assessment, a 

partnership-partner that has failed to 

comply with section 6222(a) may 

correct the inconsistency by filing an 

administrative adjustment request 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 

§ 301.6241–1(a)(8)), any tax resulting 

from an adjustment due to the 

partnership-partner’s failure to comply 

with section 6222(a) may be assessed 

with respect to the reviewed year 

partners (as defined in § 301.6241– 

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

indirect partners of the partnershippartner, as defined in § 301.6241– 

1(a)(4)). Such tax may be assessed in the 

same manner as if the tax were on 

account of a mathematical or clerical 

error appearing on the reviewed year 

partner’s or indirect partner’s return, 

except that the procedures under 

section 6213(b)(2) for requesting an 

abatement of such assessment do not 

apply. 

(2) Partnership may waive limitations. 

A partnership may at any time by a 

signed notice in writing filed with the 

IRS waive the limitations under 

paragraph (c) of this section (whether or 

not an FPA under section 6231(a)(3) has 

been mailed by the IRS at the time of the 

waiver). 

(e) Limit on amount of imputed 

underpayment where no proceeding is 

begun. If no proceeding under section 

6234 is begun with respect to an FPA 

under section 6231(a)(3) before the close 

of the 90th day after the day on which 

such FPA was mailed, the amount for 

which the partnership is liable under 

section 6225 with respect to such FPA 

cannot exceed the amount determined 

in such FPA. 

(f) Applicability date—(1) In general. 

Except as provided in paragraph (f)(2) of 

this section, this section applies to 

partnership taxable years beginning 

after December 31, 2017. 

(2) Election under § 301.9100–22 in 

effect. This section applies to any 

partnership taxable year beginning after 

November 2, 2015 and before January 1, 

2018 for which a valid election under 

§ 301.9100–22 is in effect. 

■ Par. 21. Section 301.6233(a)–1 is 

added to read as follows: 


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§ 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 § 301.6241–1(a)(6)) for a reviewed 

year (as defined in § 301.6241–1(a)(8)), a 

partnership is liable for— 

(1) Interest computed in accordance 

with paragraph (b) of this section; and 

(2) Any penalty, addition to tax, or 

additional amount as provided under 

paragraph (c) of this section. 

(b) Computation of interest with 

respect to partnership adjustments for 

the reviewed year. 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 § 301.6232–1(b)); 

(2) The due date of the partnership 

return (without regard to extension) for 

the adjustment year (as defined in 

§ 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 § 301.6241– 

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

defined in § 301.6241–1(a)(4)) that is 

unrelated to an adjustment to a 

partnership-related item under 

subchapter C of chapter 63 of the Code. 

A partner-level defense (as described in 

§ 301.6226–3(d)(3)) may not be raised in 

a proceeding of the partnership. 

(2) Coordination with accuracyrelated 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 

§ 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 § 301.6225–1(e)(3)(iii) by 

the rate that applied to such portion 

when calculating the imputed 

underpayment. See §§ 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 

§ 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 


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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 § 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 accuracyrelated 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) × 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 × 40 

percent), and the penalty is $8 ($40 × 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 accuracyrelated penalty applies under section 6662(a). 

Because the Partnership did not request 

modification, the imputed underpayment is 

$170 (($100 + $300) × 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 accuracyrelated 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 × 40 percent) + $10), and the 

penalty is $10 ($50 × 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 § 301.6225–1 and 

§ 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) 

× 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 × 40 percent) + $10), and the 

penalty is $10 ($50 × 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) × 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 × 40 percent)¥($50 × 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 × 20 percent). The 

portion of the imputed underpayment to 

which the 40-percent gross valuation 

misstatement penalty applies is $120 ($300 × 

40 percent), and the penalty is $48 ($120 × 

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 × 40 percent) and that the 

20-percent penalty applies to the entire 

imputed underpayment. The penalty is 

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

requests modification under § 301.6225– 

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

respect to the amount of additional income 

allocated to C, and the IRS approves the 

request. After modification of the imputed 

underpayment, the imputed underpayment is 

$120,000 (($400,000¥$100,000) × 40 

percent), and the penalty is $24,000 

($120,000 × 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 


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modification with respect to C’s tax-exempt 

status, Partnership requests a modification 

under § 301.6225–2(d)(2) (regarding amended 

returns) with respect to the $100,000 of 

additional income allocated to D. In 

accordance with the rules under § 301.6225– 

2(d)(2), D files an amended return for D’s 

2019 taxable year taking into account 

$100,000 of additional ordinary income. In 

addition, in accordance with § 301.6225– 

2(d)(2)(viii), D takes into account on D’s 

return the 20-percent accuracy-related 

penalty for negligence or disregard of rules or 

regulations that relates to the ordinary 

income adjustment. D’s tax attributes for 

other taxable years are not affected. The IRS 

approves the modification. As a result, 

Partnership’s total netted partnership 

adjustment under § 301.6225–1(b)(2) is 

$200,000 ($400,000 less $100,000 allocable to 

C and $100,000 taken into account by D). The 

imputed underpayment, after modification, is 

$80,000 ($200,000 × 40 percent), and the 

penalty is $16,000 ($80,000 × 20 percent). 

(d) Applicability date—(1) In general. 

Except as provided in paragraph (d)(2) 

of this section, this section applies to 

partnership taxable years beginning 

after December 31, 2017. 

(2) Election under § 301.9100–22 in 

effect. This section applies to any 

partnership taxable year beginning after 

November 2, 2015 and before January 1, 

2018 for which a valid election under 

§ 301.9100–22 is in effect. 

■ Par. 22. Section 301.6233(b)–1 is 

added to read as follows: 

§ 301.6233(b)–1 Interest and penalties with 

respect to the adjustment year return. 

(a) Interest and penalties with respect 

to failure to pay imputed underpayment 

on the date prescribed. In the case of 

any failure to pay an imputed 

underpayment on the date prescribed 

for such payment (as described in 

§ 301.6232–1(b)), a partnership is liable 

for— 

(1) Interest as determined under 

paragraph (c) of this section; and 

(2) Any penalty, addition to tax, or 

additional amount as determined under 

paragraph (d) of this section. 

(b) Imputed underpayments to which 

this section applies. This section applies 

to the portion of an imputed 

underpayment determined by the IRS 

under section 6225(a)(1), or an imputed 

underpayment resulting from 

adjustments requested by a partnership 

in an administrative adjustment request 

under section 6227, that is not paid by 

the date prescribed for payment under 

§ 301.6232–1(b). 

(c) Interest. Interest determined under 

this paragraph (c) is the interest that 

would be imposed under chapter 67 of 

the Internal Revenue Code (Code) by 

treating any unpaid amount of the 

imputed underpayment as an 

underpayment of tax imposed for the 

adjustment year (as defined in 

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

this paragraph (c) begins on the date 

prescribed for payment (as described in 

§ 301.6232–1(b)) and ends on the date 

payment of the imputed underpayment 

is made. 

(d) Penalties. If a partnership fails to 

pay an imputed underpayment by the 

date prescribed for payment (as 

described in § 301.6232–1(b)), section 

6651(a)(2) applies to such failure, and 

any unpaid amount of the imputed 

underpayment is treated as if it were an 

underpayment of tax for purposes of 

part II of subchapter A of chapter 68 of 

the Code. For purposes of this section, 

the penalty under 6651(a)(2) is applied 

by treating the unpaid amount of the 

imputed underpayment as the unpaid 

amount shown as tax on a return 

required under subchapter A of chapter 

61 of the Code. 

(e) Applicability date—(1) In general. 

Except as provided in paragraph (e)(2) 

of this section, this section applies to 

partnership taxable years beginning 

after December 31, 2017. 

(2) Election under § 301.9100–22 in 

effect. This section applies to any 

partnership taxable year beginning after 

November 2, 2015 and before January 1, 

2018 for which a valid election under 

§ 301.9100–22 is in effect. 

■ Par. 23. Section 301.6234–1 is added 

to read as follows: 

§ 301.6234–1 Judicial review of 

partnership adjustment. 

(a) In general. Within 90 days after 

the date on which a notice of a final 

partnership adjustment (FPA) under 

section 6231(a)(3) with respect to any 

partnership taxable year is mailed, a 

partnership may file a petition for a 

readjustment of any partnership 

adjustment (as defined in § 301.6241– 

1(a)(6)) reflected in the FPA for such 

taxable year (without regard to whether 

an election under section 6226 has been 

made with respect to any imputed 

underpayment (as defined in 

§ 301.6241–1(a)(3)) reflected in such 

FPA) with— 

(1) The Tax Court; 

(2) The district court of the United 

States for the district in which the 

partnership’s principal place of business 

is located; or 

(3) The Court of Federal Claims. 

(b) Jurisdictional requirement for 

bringing action in district court or Court 

of Federal Claims. A petition for 

readjustment under this section with 

respect to any partnership adjustment 

may be filed in a district court of the 

United States or the Court of Federal 

Claims only if the partnership filing the 

petition deposits with the Internal 

Revenue Service (IRS), on or before the 

date the petition is filed, the amount of 

(as of the date of the filing of the 

petition) any imputed underpayment (as 

shown on the FPA) and any penalties, 

additions to tax, and additional amounts 

with respect to such imputed 

underpayment. If there is more than one 

imputed underpayment reflected in the 

FPA, the partnership must deposit the 

amount of each imputed underpayment 

to which the petition for readjustment 

relates and the amount of any penalties, 

additions to tax, and additional amounts 

with respect to each such imputed 

underpayment. 

(c) Treatment of deposit as payment 

of tax. Any amount deposited in 

accordance with paragraph (b) of this 

section, while deposited, will not be 

treated as a payment of tax for purposes 

of the Internal Revenue Code (Code). 

Notwithstanding the preceding 

sentence, an amount deposited in 

accordance with paragraph (b) of this 

section will be treated as a payment of 

tax for purposes of chapter 67 of the 

Code (relating to interest). Interest will 

be allowed and paid in accordance with 

section 6611. 

(d) Effect of decision dismissing 

action. If an action brought under this 

section is dismissed other than by 

reason of a rescission of the FPA under 

section 6231(d) and § 301.6231–1(g), the 

decision of the court dismissing the 

action is considered as its decision that 

the FPA is correct. 

(e) Amount deposited may be applied 

against assessment. If the limitations on 

assessment under section 6232(b) and 

§ 301.6232–1(c) no longer apply with 

respect to an imputed underpayment for 

which a deposit under paragraph (b) of 

this section was made, the IRS may 

apply the amount deposited against any 

such imputed underpayment that is 

assessed. 

(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 § 301.9100–22 in 

effect. This section applies to any 

partnership taxable year beginning after 

November 2, 2015 and before January 1, 

2018 for which a valid election under 

§ 301.9100–22 is in effect. 

■ Par. 24. Section 301.6235–1 is added 

to read as follows: 

§ 301.6235–1 Period of limitations on 

making adjustments. 

(a) In general. Except as provided in 

section 6235(c), section 905(c) or 

paragraph (b) of this section (regarding 

extensions), no partnership adjustment 

(as defined in § 301.6241–1(a)(6)) for 


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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 

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

IRS under section 6225(c)(7) and 

§ 301.6225–2(c)(3)(ii)) after the date on 

which everything required to be 

submitted to the IRS pursuant to section 

6225(c) is so submitted. 

(2) Date on which everything is 

required to be submitted—(i) In general. 

For purposes of paragraph (b)(1) of this 

section, the date on which everything 

required to be submitted to the IRS 

pursuant to section 6225(c) is so 

submitted is the earlier of— 

(A) The date the period for requesting 

modification ends (including 

extensions) as described in § 301.6225– 

2(c)(3)(i) and (ii); or 

(B) The date the period for requesting 

modification expires as a result of a 

waiver of the prohibition on mailing a 

notice of final partnership adjustment 

(FPA) under § 301.6231–1(b)(2). See 

§ 301.6225–2(c)(3)(iii). 

(ii) Incomplete submission has no 

effect. A determination by the IRS that 

the information submitted as part of a 

request for modification is incomplete 

has no effect on the applicability of 

paragraph (b)(2) of this section. 

(c) Notice of proposed partnership 

adjustment. For purposes of paragraph 

(a)(3) of this section, the date by which 

the IRS may make a partnership 

adjustment is the date that is 330 days 

(plus the number of days of an 

extension of the modification period (as 

described in § 301.6225–2(c)(3)(i)) 

agreed to by the IRS under section 

6225(c)(7) and § 301.6225–2(c)(3)(ii)) 

after the date the last notice of proposed 

partnership adjustment (NOPPA) under 

section 6231(a)(2) is mailed, regardless 

of whether modification is requested by 

the partnership under section 6225(c). 

(d) Extension by agreement. The 

periods described in paragraphs (a), (b), 

and (c) of this section (including any 

extension of those periods pursuant to 

this paragraph (d)) may be extended by 

an agreement, in writing, entered into 

by the partnership and the IRS before 

the expiration of such period. 

(e) Examples. The following examples 

illustrate the rules of this section. For 

purposes of these examples, each 

partnership has a calendar taxable year. 

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 § 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 § 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 § 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 § 301.6231–1(b)(2). 

Pursuant to § 301.6225–2(c)(3)(iii), the period 

for requesting modification expires as of 

February 1, 2026, rather than February 27, 

2026. Accordingly, under paragraph (b)(2) of 

this section, the date on which everything 

required to be submitted pursuant to section 

6225(c) is so submitted is February 1, 2026, 

and the 270-day period described in 

paragraph (b)(1) of this section begins to run 

on that date. Therefore, the date for purposes 

of paragraph (a)(2) of this section is October 

29, 2026, which is 270 days after February 1, 

2026, the date on which everything required 

to be submitted under section 6225(c) is so 

submitted. Because October 29, 2026 is later 

than the date under paragraph (a)(1) of this 

section (December 31, 2025, as extended 

under paragraph (d) of this section) and the 

date under paragraph (a)(3) of this section 

(April 28, 2026), October 29, 2026 is the date 

on which the period for making partnership 

adjustments expires under section 6235. 

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 § 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 


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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 § 301.9100–22 in 

effect. This section applies to any 

partnership taxable year beginning after 

November 2, 2015 and before January 1, 

2018 for which a valid election under 

§ 301.9100–22 is in effect. 

■ Par. 25. Section 301.6241–1 is added 

to read as follows: 

§ 301.6241–1 Definitions. 

(a) Definitions. For purposes of 

subchapter C of chapter 63 of the 

Internal Revenue Code— 

(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 

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

administrative adjustment request, the 

term imputed underpayment means the 

amount determined in accordance with 

§ 301.6227–2 or § 301.6227–3(c). 

(4) Indirect partner. The term indirect 

partner means any person who has an 

interest in a partnership through their 

interest in one or more pass-through 

partners (as defined in paragraph (a)(5) 

of this section) or through a whollyowned entity disregarded as separate 

from its owner for Federal tax purposes. 

(5) Pass-through partner. The term 

pass-through partner means a passthrough entity that holds an interest in 

a partnership. A pass-through entity is 

a partnership as described in 

§ 301.7701–2(c)(1) (including a foreign 

entity that is classified as a partnership 

under § 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 passthrough 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 § 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 § 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 § 301.9100–22 in 

effect. This section applies to any 

partnership taxable year beginning after 

November 2, 2015 and before January 1, 

2018 for which a valid election under 

§ 301.9100–22 is in effect. 

■ Par. 26. Section 301.6241–2 is added 

to read as follows: 

§ 301.6241–2 Bankruptcy of the 

partnership. 

(a) Coordination between Title 11 and 

proceedings under subchapter C of 

chapter 63—(1) In general. If a 

partnership is a debtor in a case under 

Title 11 of the United States Code (Title 

11 case), the running of any period of 

limitations under section 6235 with 

respect to the time for making a 

partnership adjustment (as defined in 

§ 301.6241–1(a)(6)) and under sections 

6501 and 6502 with respect to the 

assessment or collection of any imputed 

underpayment (as defined in 

§ 301.6241–1(a)(3)) determined under 

subchapter C of chapter 63 of the 

Internal Revenue Code (subchapter C of 

chapter 63) is suspended during the 

period the Internal Revenue Service 

(IRS) is prohibited by reason of the Title 

11 case from making the adjustment, 

assessment, or collection until— 

(i) 60 days after the suspension ends, 

for adjustments or assessments, and 

(ii) 6 months after the suspension 

ends, for collection. 

(2) Interaction with section 6232(b). 

The filing of a proof of claim or request 

for payment (or the taking of any other 

action) in a Title 11 case is not be 

treated as an action prohibited by 

section 6232(b) (regarding limitations on 

assessment). 

(3) Suspension of the time for judicial 

review. In a Title 11 case, the running 

of the period specified in section 6234 

(regarding judicial review of partnership 

adjustments) is suspended during the 

period during which the partnership is 

prohibited by reason of the Title 11 case 

from filing a petition under section 

6234, and for 60 days thereafter. 

(4) Actions not prohibited. The filing 

of a petition under Title 11 does not 

prohibit the following actions: 

(i) An administrative proceeding with 

respect to a partnership under 

subchapter C of chapter 63; 

(ii) The mailing of any notice with 

respect to a proceeding with respect to 

a partnership under subchapter C of 

chapter 63, including: 

(A) A notice of administrative 

proceeding, 

(B) A notice of proposed partnership 

adjustment, and 

(C) A notice of final partnership 

adjustment; 

(iii) A demand for tax returns; 

(iv) The assessment of any tax, 

including the assessment of any 

imputed underpayment with respect to 

a partnership; and 

(v) The issuance of notice and 

demand for payment of an assessment 

under subchapter C of chapter 63 (but 

see section 362(b)(9)(D) of Title 11 of the 

United States Code regarding the timing 

of when a tax lien takes effect by reason 

of such assessment). 

(b) Applicability date—(1) In general. 

Except as provided in paragraph (b)(2) 

of this section, this section applies to 

partnership taxable years beginning 

after December 31, 2017. 


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(2) Election under § 301.9100–22 in 

effect. This section applies to any 

partnership taxable year beginning after 

November 2, 2015 and before January 1, 

2018 for which a valid election under 

§ 301.9100–22 is in effect. 

■ Par. 27. Section 301.6241–3 is added 

to read as follows: 

§ 301.6241–3 Treatment where a 

partnership ceases to exist. 

(a) Former partners take adjustments 

into account—(1) In general. Except as 

described in paragraphs (a)(2) and (3) of 

this section, if the Internal Revenue 

Service (IRS) determines that any 

partnership (including a partnershippartner as defined in § 301.6241–1(a)(7)) 

ceases to exist (as defined in paragraph 

(b)(2) of this section) before any 

partnership adjustment (as defined in 

§ 301.6241–1(a)(6)) under subchapter C 

of chapter 63 of the Internal Revenue 

Code (subchapter C of chapter 63) takes 

effect (as described in paragraph (c) of 

this section), the partnership adjustment 

is taken into account by the former 

partners (as described in paragraph (d) 

of this section) of the partnership in 

accordance with paragraph (e) of this 

section. 

(2) Partnership no longer liable for 

any unpaid amounts resulting from a 

partnership adjustment. A partnership 

that ceases to exist is no longer liable for 

any unpaid amounts resulting from a 

partnership adjustment required to be 

taken into account by a former partner 

under this section. 

(3) Application of this section to 

partnership-partners. This section 

applies to a partnership-partner and its 

former partners, regardless of whether 

the partnership-partner has an election 

under section 6221(b) in effect for any 

relevant partnership taxable year. 

(b) 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 

§ 301.6241–1(a)(3)); 

(B) Received a statement under 

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

and has furnished statements to its 

partners in accordance with § 301.6226– 

3(e)(3); or 

(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 § 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 § 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 


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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 § 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 

§ 301.6226–2, except that— 

(i) The adjustments are taken into 

account by the applicable former 

partner (as described in paragraph (d) of 

this section), rather than the reviewed 

year partners (as defined in § 301.6241– 

1(a)(9)), and 

(ii) The partnership must furnish 

statements to the former partners and 

file the statements with the IRS no later 

than 30 days after the date of the 

notification to the partnership that the 

IRS has determined that the partnership 

has ceased to exist. 

(3) Authority to issue statements. If 

any statements required by paragraph 

(e) of this section are not timely 

furnished to a former partner and filed 

with the IRS in accordance with 

paragraph (e)(2)(ii) of this section, the 

IRS may notify the former partner in 

writing of such partner’s share of the 

partnership adjustments based on the 

information reasonably available to the 

IRS at the time such notification is 

provided. For purposes of paragraph (e) 

of this section, a notification to a former 

partner under this paragraph (e)(3) is 

treated the same as a statement required 

to be furnished and filed under 

paragraph (e)(2) of this section. 

(f) Examples. The following examples 

illustrate the provisions of this section. 

For purposes of the examples, all 

partnerships and partners are calendar 

year taxpayers and each partnership is 

subject to the provisions of subchapter 

C of chapter 63 of the Code (unless 

otherwise stated). 

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 § 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 § 301.9100–22 in 

effect. This section applies to any 

partnership taxable year beginning after 

November 2, 2015 and before January 1, 

2018 for which a valid election under 

§ 301.9100–22 is in effect. 

■ Par. 28. Section 301.6241–4 is added 

to read as follows: 

§ 301.6241–4 Payments nondeductible. 

(a) Payments nondeductible. No 

deduction is allowed under subtitle A of 

the Internal Revenue Code 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 

§ 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 § 301.9100–22 in 

effect. This section applies to any 

partnership taxable year beginning after 

November 2, 2015 and before January 1, 

2018 for which a valid election under 

§ 301.9100–22 is in effect. 

■ Par. 29. Section 301.6241–5 is added 

to read as follows: 

§ 301.6241–5 Extension to entities filing 

partnership returns. 

(a) Entities filing a partnership return. 

Except as described in paragraph (c) of 

this section, an entity that files a 

partnership return for any taxable year 

is subject to the provisions of 

subchapter C of chapter 63 of the 

Internal Revenue Code (subchapter C of 

chapter 63) 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 § 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 


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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 § 301.9100–22 in 

effect. This section applies to any 

partnership taxable year beginning after 

November 2, 2015 and before January 1, 

2018 for which a valid election under 

§ 301.9100–22 is in effect. 

■ Par. 30. Section 301.6241–6 is added 

to read as follows: 

§ 301.6241–6 Partnership-related Item. 

(a) In general. The term partnershiprelated 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 § 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 § 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 § 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 partnershiprelated 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. 


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(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 § 301.9100–22 in 

effect. This section applies to any 

partnership taxable year beginning after 

November 2, 2015 and before January 1, 

2018 for which a valid election under 

§ 301.9100–22 is in effect. 

■ Par. 31. Section 301.6241–7 is added 

to read as follows: 

§ 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 

§ 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 §§ 1.1441– 

1(b)(1) and 1.1441–5(b)(2)(i)(A) of this 

chapter. Partnership withheld $15 from the 

$100 of royalty income allocable to A based 

on its incorrect belief that A is entitled to a 

reduced rate of withholding under the U.S.- 

Country A Income Tax Treaty. In 2020, the 

IRS determines in an examination of 

Partnership’s Form 1042, Annual 

Withholding Tax Return for U.S. Source 

Income of Foreign Persons, that Partnership 

should have withheld $30 instead of $15 on 

the $100 of royalty income allocable to A 

because Partnership failed to obtain 

documentation from A establishing a valid 

treaty claim for a reduced rate of 

withholding. The tax imposed on Partnership 

for its failure to withhold on that income, 

however, is not a tax imposed by chapter 1. 

Rather, it is a tax imposed by chapter 3, 

which is not a partnership-related item under 

§ 301.6241–6. 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 

§§ 1.1441–1(b)(1) and 1.1441–5(b)(2)(i)(A) of 

this chapter. In 2020, in an examination of 

Partnership’s Form 1042, the IRS determines 

that Partnership earned but failed to report 

the $100 of U.S. source dividend income in 

2018. The adjustment to increase 

Partnership’s dividend income by $100 is an 

adjustment to a partnership-related item. The 

tax imposed on Partnership for its failure to 

withhold on that income, however, is not a 

tax imposed by chapter 1; rather, it is a tax 

imposed by chapter 3. Pursuant to 

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

attributable to adjustments to partnershiprelated items is assessed under subchapter C 

of chapter 63. Therefore, because the tax 

imposed with respect to the adjustment is a 

chapter 3 tax, under paragraph (a)(1) of this 

section, the IRS may determine, assess, and 

collect chapter 3 tax attributable to an 

adjustment to a partnership-related item 

without conducting a proceeding under 

subchapter C of chapter 63. Accordingly, the 

IRS may determine the chapter 3 tax in the 

examination of Partnership’s Form 1042 by 

adjusting Partnership’s withholding tax 

liability by an additional $15 for failing to 

withhold on the $50 of dividend income 

allocable to A. However, the IRS must initiate 

an administrative proceeding under 

subchapter C of chapter 63 to make any 

adjustments for purposes of chapter 1 

attributable to the income. If the IRS 

subsequently initiates an administrative 

proceeding under subchapter C of chapter 63 

and makes an adjustment to the same item 

of income, the portion of the dividend 

income allocable to A will be disregarded in 

the calculation of the total netted partnership 

adjustment to the extent that the chapter 3 

tax has been collected with respect to such 

income. See § 301.6225–1(b)(3). 

(b) Coordination with chapters 3 and 

4—(1) In general. In the case of any tax 

imposed under chapter 3 or chapter 4 

that is determined with respect to a 

partnership adjustment determined 

under subchapter C of chapter 63 for 

purposes of chapter 1, such tax is 

determined with respect to the reviewed 

year (as defined in § 301.6241–1(a)(8)) 

and is imposed (or required to be 

deducted and withheld) with respect to 

the adjustment year (as defined in 

§ 301.6241–1(a)(1)). 

(2) Definitions. The following 

definitions apply for purposes of this 

paragraph (b) and the regulations under 

subchapter C of chapter 63. 

(i) Amount subject to withholding. 

The term amount subject to withholding 

means an amount subject to 

withholding (as defined in § 1.1441–2(a) 

of this chapter), a withholdable payment 

(as defined in § 1.1473–1(a) of this 

chapter), or the allocable share of 

effectively connected taxable income (as 

computed under § 1.1446–2(b) of this 

chapter). 

(ii) Chapter 3. The term chapter 3 

means sections 1441 through 1464 of 

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 § 301.6225–1(b)) and the total 

netted partnership adjustment (as 

calculated under § 301.6225–1(b)(2)) 

includes a partnership adjustment to an 

amount subject to withholding, the 

partnership is treated as having paid (at 

the time that the imputed 

underpayment is paid) the amount 

required to be withheld with respect to 

that partnership adjustment under 

chapter 3 or chapter 4 for purposes of 

applying §§ 1.1463–1 and 1.1474–4 of 

this chapter. See § 301.6225–1(b)(3) for 

the coordination rule that applies for 

calculating an imputed underpayment 

when an adjustment is made to an 

amount subject to withholding for 

which tax has been collected under 

chapter 3 or chapter 4. 

(4) Partnership makes an election 

under section 6226 with respect to an 

imputed underpayment—(i) In general. 

A partnership that makes an election 

under § 301.6226–1 with respect to an 

imputed underpayment must pay the 

amount of tax required to be withheld 

under chapter 3 or chapter 4 on the 

amount of any adjustment set forth in 


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the statement described in § 301.6226– 

2(a) to the extent that it is an adjustment 

to an amount subject to withholding, 

and the IRS has not already collected 

tax attributable to the adjustment under 

chapter 3 or chapter 4. The partnership 

must pay the amount due under this 

paragraph (b)(4)(i) on or before the due 

date of the partnership return for the 

adjustment year (without regard to 

extension), and must make the payment 

in the manner prescribed by the IRS in 

forms, instructions, and other guidance. 

For the rules governing partners subject 

to the taxes imposed by chapters 3 and 

4 when the partner receives a statement 

under § 301.6226–2, see § 301.6226–3(f). 

See § 301.6226–3(e)(3)(v) for the 

application of the rules of this 

paragraph (b)(4) to pass-through 

partners (as defined in § 301.6241– 

1(a)(5)). 

(ii) Reduced rate of tax. A partnership 

may reduce the amount of tax it is 

required to pay under paragraph (b)(4)(i) 

of this section to the extent that it can 

associate valid documentation from a 

reviewed year partner pursuant to the 

regulations under chapter 3 or chapter 

4 (other than pursuant to § 1.1446–6 of 

this chapter) with the portion of the 

adjustment that would have been 

subject to a reduced rate of tax in the 

reviewed year. For this purpose, the 

partnership may rely on documentation 

that the partnership possesses that is 

valid with respect to the reviewed year 

(determined without regard to the 

expiration after the reviewed year of any 

validity period prescribed in § 1.1441– 

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

§ 1.1471–3(c)(6)(ii) of this chapter), or 

new documentation that the partnership 

obtains from the reviewed year partner 

that includes a signed affidavit stating 

that the information and representations 

associated with the documentation are 

accurate with respect to the reviewed 

year. 

(iii) Reporting requirements. A 

partnership required to pay tax under 

paragraph (b)(4)(i) of this section must 

file the appropriate return and issue 

information returns as required by 

regulations under chapter 3 or chapter 

4. For return and information return 

requirements, see § 1.1446–3(d)(1)(iii); 

§ 1.1461–1(b), (c); § 1.1474–1(c), (d) of 

this chapter. The partnership must file 

the return and issue information returns 

for the year that includes the date on 

which the partnership pays the tax 

required to be withheld under 

paragraph (b)(4)(i) of this section. The 

partnership must report the information 

on the return and information returns in 

the manner prescribed by the IRS in 

forms, instructions, and other guidance. 

(iv) Partners subject to withholding. A 

reviewed year partner that is subject to 

withholding under paragraph (b)(4)(i) of 

this section must follow the rules under 

§ 301.6226–3(f). 

(c) Applicability date—(1) In general. 

Except as provided in paragraph (c)(2) 

of this section, this section applies to 

partnership taxable years beginning 

after December 31, 2017. 

(2) Election under § 301.9100–22 in 

effect. This section applies to any 

partnership taxable year beginning after 

November 2, 2015 and before January 1, 

2018 for which a valid election under 

§ 301.9100–22 is in effect. 

■ Par. 32. Section 301.6241–8 is added 

to read as follows:. 

§ 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 


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