1074
shall be treated, for purposes of section 53, as an
adjustment or item of tax preference not specified in
section 53(d)(1)(B)(ii).
‘‘(6) GENERAL CREDITS.—A partner’s distribu-
tive share of the amount referred to in paragraph
(6) of subsection (a) shall be taken into account as
a current year business credit.
‘‘(d) OPERATING RULES.—For purposes of this sec-
tion—
‘‘(1) PASSIVE
LOSS
LIMITATION
ACTIVITY.—
The term ‘passive loss limitation activity’ means—
‘‘(A) any activity which involves the con-
duct of a trade or business, and
‘‘(B) any rental activity.
For purposes of the preceding sentence, the term
‘trade or business’ includes any activity treated as a
trade or business under paragraph (5) or (6) of sec-
tion 469(c).
‘‘(2) TAX-EXEMPT INTEREST.—The term ‘tax-
exempt interest’ means interest excludable from
gross income under section 103.
‘‘(3) APPLICABLE NET AMT ADJUSTMENT.—
‘‘(A) IN
GENERAL.—The applicable net
AMT adjustment is—
1075
‘‘(i) with respect to taxpayers other
than corporations, the net adjustment de-
termined by using the adjustments applica-
ble to individuals, and
‘‘(ii) with respect to corporations, the
net adjustment determined by using the
adjustments applicable to corporations.
‘‘(B) NET ADJUSTMENT.—The term ‘net
adjustment’ means the net adjustment in the
items attributable to passive loss activities or
other activities (as the case may be) which
would result if such items were determined with
the adjustments of sections 56, 57, and 58.
‘‘(4) TREATMENT
OF
CERTAIN
SEPARATELY
STATED ITEMS.—
‘‘(A) EXCLUSION
FOR
CERTAIN
PUR-
POSES.—In determining the amounts referred
to in paragraphs (1) and (2) of subsection (a),
any net capital gain or net capital loss (as the
case may be), and any item referred to in sub-
section (a)(11), shall be excluded.
‘‘(B) ALLOCATION RULES.—The net cap-
ital gain shall be treated—
‘‘(i) as allocable to passive loss limita-
tion activities to the extent the net capital
1076
gain does not exceed the net capital gain
determined by only taking into account
gains and losses from sales and exchanges
of property used in connection with such
activities, and
‘‘(ii) as allocable to other activities to
the extent such gain exceeds the amount
allocated under clause (i).
A similar rule shall apply for purposes of allo-
cating any net capital loss.
‘‘(C) NET CAPITAL LOSS.—The term ‘net
capital loss’ means the excess of the losses from
sales or exchanges of capital assets over the
gains from sales or exchange of capital assets.
‘‘(5) GENERAL
CREDITS.—The term ‘general
credits’ means any credit other than the low-income
housing credit, the rehabilitation credit, the foreign
tax credit, and the credit allowable under section 29.
‘‘(6) FOREIGN INCOME TAXES.—The term ‘for-
eign income taxes’ means taxes described in section
901 which are paid or accrued to foreign countries
and to possessions of the United States.
‘‘(e) SPECIAL RULE
FOR UNRELATED BUSINESS
TAX.—In the case of a partner which is an organization
subject to tax under section 511, such partner’s distribu-
1077
tive share of any items shall be taken into account sepa-
rately to the extent necessary to comply with the provi-
sions of section 512(c)(1).
‘‘(f) SPECIAL RULES FOR APPLYING PASSIVE LOSS
LIMITATIONS.—If any person holds an interest in a large
partnership other than as a limited partner—
‘‘(1) paragraph (2) of subsection (c) shall not
apply to such partner, and
‘‘(2) such partner’s distributive share of the
partnership items allocable to passive loss limitation
activities shall be taken into account separately to
the extent necessary to comply with the provisions of
section 469.
The preceding sentence shall not apply to any items alloca-
ble to an interest held as a limited partner.
‘‘SEC. 773. COMPUTATIONS AT PARTNERSHIP LEVEL.
‘‘(a) GENERAL RULE.—
‘‘(1) TAXABLE INCOME.—The taxable income of
a large partnership shall be computed in the same
manner as in the case of an individual except that—
‘‘(A) the items described in section 772(a)
shall be separately stated, and
‘‘(B) the modifications of subsection (b)
shall apply.
1078
‘‘(2) ELECTIONS.—All elections affecting the
computation of the taxable income of a large part-
nership or the computation of any credit of a large
partnership shall be made by the partnership; except
that the election under section 901, and any election
under section 108, shall be made by each partner
separately.
‘‘(3) LIMITATIONS, ETC.—
‘‘(A) IN GENERAL.—Except as provided in
subparagraph (B), all limitations and other pro-
visions affecting the computation of the taxable
income of a large partnership or the computa-
tion of any credit of a large partnership shall
be applied at the partnership level (and not at
the partner level).
‘‘(B) CERTAIN LIMITATIONS APPLIED AT
PARTNER
LEVEL.—The following provisions
shall be applied at the partner level (and not at
the partnership level):
‘‘(i) Section 68 (relating to overall
limitation on itemized deductions).
‘‘(ii) Sections 49 and 465 (relating to
at risk limitations).
‘‘(iii) Section 469 (relating to limita-
tion on passive activity losses and credits).
1079
‘‘(iv) Any other provision specified in
regulations.
‘‘(4) COORDINATION
WITH
OTHER
PROVI-
SIONS.—Paragraphs (2) and (3) shall apply notwith-
standing any other provision of this chapter other
than this part.
‘‘(b) MODIFICATIONS TO DETERMINATION OF TAX-
ABLE INCOME.—In determining the taxable income of a
large partnership—
‘‘(1) CERTAIN DEDUCTIONS NOT ALLOWED.—
The following deductions shall not be allowed:
‘‘(A) The deduction for personal exemp-
tions provided in section 151.
‘‘(B) The net operating loss deduction pro-
vided in section 172.
‘‘(C) The additional itemized deductions
for individuals provided in part VII of sub-
chapter B (other than section 212 thereof).
‘‘(2) CHARITABLE DEDUCTIONS.—In determin-
ing the amount allowable under section 170, the lim-
itation of section 170(b)(2) shall apply.
‘‘(3) COORDINATION WITH SECTION 67.—In lieu
of applying section 67, 70 percent of the amount of
the miscellaneous itemized deductions shall be dis-
allowed.
1080
‘‘(c) SPECIAL RULES FOR INCOME FROM DISCHARGE
OF INDEBTEDNESS.—If a large partnership has income
from the discharge of any indebtedness—
‘‘(1) such income shall be excluded in determin-
ing the amounts referred to in section 772(a), and
‘‘(2) in determining the income tax of any part-
ner of such partnership—
‘‘(A) such income shall be treated as an
item required to be separately taken into ac-
count under section 772(a), and
‘‘(B) the provisions of section 108 shall be
applied without regard to this part.
‘‘SEC. 774. OTHER MODIFICATIONS.
‘‘(a) TREATMENT OF CERTAIN OPTIONAL ADJUST-
MENTS, ETC.—In the case of a large partnership—
‘‘(1) computations under section 773 shall be
made without regard to any adjustment under sec-
tion 743(b) or 108(b), but
‘‘(2) a partner’s distributive share of any
amount referred to in section 772(a) shall be appro-
priately adjusted to take into account any adjust-
ment under section 743(b) or 108(b) with respect to
such partner.
‘‘(b) CREDIT RECAPTURE DETERMINED AT PART-
NERSHIP LEVEL.—
1081
‘‘(1) IN GENERAL.—In the case of a large part-
nership—
‘‘(A) any credit recapture shall be taken
into account by the partnership, and
‘‘(B) the amount of such recapture shall be
determined as if the credit with respect to
which the recapture is made had been fully uti-
lized to reduce tax.
‘‘(2) METHOD OF TAKING RECAPTURE INTO AC-
COUNT.—A large partnership shall take into account
a credit recapture by reducing the amount of the ap-
propriate current year credit to the extent thereof,
and if such recapture exceeds the amount of such
current year credit, the partnership shall be liable to
pay such excess.
‘‘(3) DISPOSITIONS NOT TO TRIGGER RECAP-
TURE.—No credit recapture shall be required by rea-
son of any transfer of an interest in a large partner-
ship.
‘‘(4) CREDIT
RECAPTURE.—For purposes of
this subsection, the term ‘credit recapture’ means
any increase in tax under section 42(j) or 50(a).
‘‘(c) PARTNERSHIP NOT TERMINATED BY REASON
OF CHANGE IN OWNERSHIP.—Subparagraph (B) of sec-
tion 708(b)(1) shall not apply to a large partnership.
1082
‘‘(d) PARTNERSHIP ENTITLED TO CERTAIN CRED-
ITS.—The following shall be allowed to a large partnership
and shall not be taken into account by the partners of
such partnership:
‘‘(1) The credit provided by section 34.
‘‘(2) Any credit or refund under section
852(b)(3)(D).
‘‘(e) TREATMENT OF REMIC RESIDUALS.—For pur-
poses of applying section 860E(e)(6) to any large partner-
ship—
‘‘(1) all interests in such partnership shall be
treated as held by disqualified organizations,
‘‘(2) in lieu of applying subparagraph (C) of
section 860E(e)(6), the amount subject to tax under
section 860E(e)(6) shall be excluded from the gross
income of such partnership, and
‘‘(3) subparagraph (D) of section 860E(e)(6)
shall not apply.
‘‘(f) SPECIAL RULES FOR APPLYING CERTAIN IN-
STALLMENT SALE RULES.—In the case of a large partner-
ship—
‘‘(1) the provisions of sections 453(l)(3) and
453A shall be applied at the partnership level, and
‘‘(2) in determining the amount of interest pay-
able under such sections, such partnership shall be
1083
treated as subject to tax under this chapter at the
highest rate of tax in effect under section 1 or 11.
‘‘SEC. 775. LARGE PARTNERSHIP DEFINED.
‘‘(a) GENERAL RULE.—For purposes of this part—
‘‘(1) IN GENERAL.—Except as otherwise pro-
vided in this section or section 776, the term ‘large
partnership’ means, with respect to any partnership
taxable year, any partnership if the number of per-
sons who were partners in such partnership in any
preceding partnership taxable year beginning after
December 31, 1995, equaled or exceeded 250. To
the extent provided in regulations, a partnership
shall cease to be treated as a large partnership for
any partnership taxable year if in such taxable year
fewer than 100 persons were partners in such part-
nership.
‘‘(2) ELECTION FOR PARTNERSHIPS WITH AT
LEAST 100 PARTNERS.—If a partnership makes an
election under this paragraph, paragraph (1) shall
be applied by substituting ‘100’ for ‘250’. Such an
election shall apply to the taxable year for which
made and all subsequent taxable years unless re-
voked with the consent of the Secretary.
‘‘(b) SPECIAL RULES FOR CERTAIN SERVICE PART-
NERSHIPS.—
1084
‘‘(1) CERTAIN PARTNERS NOT COUNTED.—For
purposes of this section, the term ‘partner’ does not
include any individual performing substantial serv-
ices in connection with the activities of the partner-
ship and holding an interest in such partnership, or
an individual who formerly performed substantial
services in connection with such activities and who
held an interest in such partnership at the time the
individual performed such services.
‘‘(2) EXCLUSION.—For purposes of this part,
the term ‘large partnership’ does not include any
partnership if substantially all the partners of such
partnership—
‘‘(A) are individuals performing substantial
services in connection with the activities of such
partnership or are personal service corporations
(as defined in section 269A(b)) the owner-em-
ployees (as defined in section 269A(b)) of which
perform such substantial services,
‘‘(B) are retired partners who had per-
formed such substantial services, or
‘‘(C) are spouses of partners who are per-
forming (or had previously performed) such
substantial services.
1085
‘‘(3) SPECIAL RULE FOR LOWER TIER PART-
NERSHIPS.—For purposes of this subsection, the ac-
tivities of a partnership shall include the activities of
any other partnership in which the partnership owns
directly an interest in the capital and profits of at
least 80 percent.
‘‘(c) EXCLUSION OF COMMODITY POOLS.—For pur-
poses of this part, the term ‘large partnership’ does not
include any partnership the principal activity of which is
the buying and selling of commodities (not described in
section 1221(1)), or options, futures, or forwards with re-
spect to such commodities.
‘‘(d) SECRETARY MAY RELY ON TREATMENT ON RE-
TURN.—If, on the partnership return of any partnership,
such partnership is treated as a large partnership, such
treatment shall be binding on such partnership and all
partners of such partnership but not on the Secretary.
‘‘SEC. 776. SPECIAL RULES FOR PARTNERSHIPS HOLDING
OIL AND GAS PROPERTIES.
‘‘(a) EXCEPTION FOR PARTNERSHIPS HOLDING SIG-
NIFICANT OIL AND GAS PROPERTIES.—
‘‘(1) IN GENERAL.—For purposes of this part,
the term ‘large partnership’ shall not include any
partnership if the average percentage of assets (by
value) held by such partnership during the taxable
1086
year which are oil or gas properties is at least 25
percent. For purposes of the preceding sentence, any
interest held by a partnership in another partnership
shall be disregarded, except that the partnership
shall be treated as holding its proportionate share of
the assets of such other partnership.
‘‘(2) ELECTION
TO
WAIVE
EXCEPTION.—Any
partnership may elect to have paragraph (1) not
apply. Such an election shall apply to the partner-
ship taxable year for which made and all subsequent
partnership taxable years unless revoked with the
consent of the Secretary.
‘‘(b) SPECIAL RULES WHERE PART APPLIES.—
‘‘(1) COMPUTATION
OF
PERCENTAGE
DEPLE-
TION.—In the case of a large partnership, except as
provided in paragraph (2)—
‘‘(A) the allowance for depletion under sec-
tion 611 with respect to any partnership oil or
gas property shall be computed at the partner-
ship level without regard to any provision of
section 613A requiring such allowance to be
computed separately by each partner,
‘‘(B) such allowance shall be determined
without regard to the provisions of section
613A(c) limiting the amount of production for
1088
‘‘(ii) any other person if such person’s
average daily production of domestic crude
oil and natural gas for such person’s tax-
able year in which such partnership tax-
able year ends exceeds 500 barrels.
‘‘(C) AVERAGE DAILY PRODUCTION.—For
purposes of subparagraph (B), a person’s aver-
age daily production of domestic crude oil and
natural gas for any taxable year shall be com-
puted as provided in section 613A(c)(2)—
‘‘(i) by taking into account all produc-
tion of domestic crude oil and natural gas
(including such person’s proportionate
share of any production of a partnership),
‘‘(ii) by treating 6,000 cubic feet of
natural gas as a barrel of crude oil, and
‘‘(iii) by treating as 1 person all per-
sons treated as 1 taxpayer under section
613A(c)(8) or among whom allocations are
required under such section.
‘‘SEC. 777. REGULATIONS.
‘‘The Secretary shall prescribe such regulations as
may be appropriate to carry out the purposes of this
part.’’
1089
(b) CLERICAL AMENDMENT.—The table of parts for
subchapter K of chapter 1 is amended by adding at the
end the following new item:
‘‘Part IV. Special rules for large partnerships.’’
SEC. 14302. SIMPLIFIED AUDIT PROCEDURES FOR LARGE
PARTNERSHIPS.
(a) GENERAL RULE.—Chapter 63 is amended by
adding at the end the following new subchapter:
‘‘Subchapter D—Treatment of Large
Partnerships
‘‘Part I. Treatment of partnership items and adjustments.
‘‘Part II. Partnership level adjustments.
‘‘Part III. Definitions and special rules.
‘‘PART I—TREATMENT OF PARTNERSHIP ITEMS
AND ADJUSTMENTS
‘‘Sec. 6240. Application of subchapter.
‘‘Sec. 6241. Partner’s return must be consistent with partnership
return.
‘‘Sec. 6242. Procedures for taking partnership adjustments into
account.
‘‘SEC. 6240. APPLICATION OF SUBCHAPTER.
‘‘(a) GENERAL RULE.—This subchapter shall only
apply to large partnerships and partners in such partner-
ships.
‘‘(b) COORDINATION WITH OTHER PARTNERSHIP
AUDIT PROCEDURES.—
‘‘(1) IN GENERAL.—Subchapter C of this chap-
ter shall not apply to any large partnership other
1090
than in its capacity as a partner in another partner-
ship which is not a large partnership.
‘‘(2) TREATMENT WHERE PARTNER IN OTHER
PARTNERSHIP.—If a large partnership is a partner
in another partnership which is not a large partner-
ship—
‘‘(A) subchapter C of this chapter shall
apply to items of such large partnership which
are partnership items with respect to such other
partnership, but
‘‘(B) any adjustment under such sub-
chapter C shall be taken into account in the
manner provided by section 6242.
‘‘SEC. 6241. PARTNER’S RETURN MUST BE CONSISTENT
WITH PARTNERSHIP RETURN.
‘‘(a) GENERAL RULE.—A partner of any large part-
nership shall, on the partner’s return, treat each partner-
ship item attributable to such partnership in a manner
which is consistent with the treatment of such partnership
item on the partnership return.
‘‘(b) UNDERPAYMENT
DUE
TO
INCONSISTENT
TREATMENT
ASSESSED
AS
MATH
ERROR.—Any
underpayment of tax by a partner by reason of failing to
comply with the requirements of subsection (a) shall be
assessed and collected in the same manner as if such
1091
underpayment were on account of a mathematical or cleri-
cal error appearing on the partner’s return. Paragraph (2)
of section 6213(b) shall not apply to any assessment of
an underpayment referred to in the preceding sentence.
‘‘(c) ADJUSTMENTS NOT TO AFFECT PRIOR YEAR
OF PARTNERS.—
‘‘(1) IN GENERAL.—Except as provided in para-
graph (2), subsections (a) and (b) shall apply with-
out regard to any adjustment to the partnership
item under part II.
‘‘(2) CERTAIN
CHANGES
IN
DISTRIBUTIVE
SHARE TAKEN INTO ACCOUNT BY PARTNER.—
‘‘(A) IN
GENERAL.—To the extent that
any adjustment under part II involves a change
under section 704 in a partner’s distributive
share of the amount of any partnership item
shown on the partnership return, such adjust-
ment shall be taken into account in applying
this title to such partner for the partner’s tax-
able year for which such item was required to
be taken into account.
‘‘(B) COORDINATION
WITH
DEFICIENCY
PROCEDURES.—
‘‘(i) IN
GENERAL.—Subchapter B
shall not apply to the assessment or collec-
1092
tion of any underpayment of tax attrib-
utable to an adjustment referred to in sub-
paragraph (A).
‘‘(ii) 
ADJUSTMENT
NOT
PRE-
CLUDED.—Notwithstanding any other law
or rule of law, nothing in subchapter B (or
in any proceeding under subchapter B)
shall preclude the assessment or collection
of any underpayment of tax (or the allow-
ance of any credit or refund of any over-
payment of tax) attributable to an adjust-
ment referred to in subparagraph (A) and
such assessment or collection or allowance
(or any notice thereof) shall not preclude
any notice, proceeding, or determination
under subchapter B.
‘‘(C) PERIOD OF LIMITATIONS.—The pe-
riod for—
‘‘(i) assessing any underpayment of
tax, or
‘‘(ii) filing a claim for credit or refund
of any overpayment of tax,
attributable to an adjustment referred to in
subparagraph (A) shall not expire before the
close of the period prescribed by section 6248
1093
for making adjustments with respect to the
partnership taxable year involved.
‘‘(D) TIERED STRUCTURES.—If the part-
ner referred to in subparagraph (A) is another
partnership or an S corporation, the rules of
this paragraph shall also apply to persons hold-
ing interests in such partnership or S corpora-
tion (as the case may be); except that, if such
partner is a large partnership, the adjustment
referred to in subparagraph (A) shall be taken
into account in the manner provided by section
6242.
‘‘(d) ADDITION TO TAX FOR FAILURE TO COMPLY
WITH SECTION.—
‘‘For addition to tax in case of partner’s disregard
of requirements of this section, see part II of sub-
chapter A of chapter 68.
‘‘SEC. 6242. PROCEDURES FOR TAKING PARTNERSHIP AD-
JUSTMENTS INTO ACCOUNT.
‘‘(a) ADJUSTMENTS FLOW THROUGH TO PARTNERS
FOR YEAR IN WHICH ADJUSTMENT TAKES EFFECT.—
‘‘(1) IN GENERAL.—If any partnership adjust-
ment with respect to any partnership item takes ef-
fect (within the meaning of subsection (d)(2)) during
any partnership taxable year and if an election
under paragraph (2) does not apply to such adjust-
ment, such adjustment shall be taken into account
1094
in determining the amount of such item for the part-
nership taxable year in which such adjustment takes
effect. In applying this title to any person who is
(directly or indirectly) a partner in such partnership
during such partnership taxable year, such adjust-
ment shall be treated as an item actually arising
during such taxable year.
‘‘(2) 
PARTNERSHIP
LIABLE
IN
CERTAIN
CASES.—If—
‘‘(A) a partnership elects under this para-
graph to not take an adjustment into account
under paragraph (1),
‘‘(B) a partnership does not make such an
election but in filing its return for any partner-
ship taxable year fails to take fully into account
any partnership adjustment as required under
paragraph (1), or
‘‘(C) any partnership adjustment involves a
reduction in a credit which exceeds the
amount of such credit determined for the
partnership taxable year in which the adjust-
ment takes effect,
the partnership shall pay to the Secretary an
amount determined by applying the rules of sub-
section (b)(4) to the adjustments not so taken into
1095
account and any excess referred to in subparagraph
(C). A partnership may make an election under sub-
paragraph (A) only if such partnership meets such
requirements as the Secretary may prescribe to as-
sure payment of such amount.
‘‘(3) OFFSETTING ADJUSTMENTS TAKEN INTO
ACCOUNT.—If a partnership adjustment requires an-
other adjustment in a taxable year after the ad-
justed year and before the partnership taxable year
in which such partnership adjustment takes effect,
such other adjustment shall be taken into account
under this subsection for the partnership taxable
year in which such partnership adjustment takes ef-
fect.
‘‘(4) COORDINATION WITH PART II.—Amounts
taken into account under this subsection for any
partnership taxable year shall continue to be treated
as adjustments for the adjusted year for purposes of
determining whether such amounts may be read-
justed under part II.
‘‘(b) PARTNERSHIP LIABLE
FOR INTEREST
AND
PENALTIES.—
‘‘(1) IN
GENERAL.—If a partnership adjust-
ment takes effect during any partnership taxable
year and such adjustment results in an imputed
1096
underpayment for the adjusted year, the partner-
ship—
‘‘(A) shall pay to the Secretary interest
computed under paragraph (2), and
‘‘(B) shall be liable for any penalty, addi-
tion to tax, or additional amount as provided in
paragraph (3).
‘‘(2) DETERMINATION OF AMOUNT OF INTER-
EST.—The interest computed under this paragraph
with respect to any partnership adjustment is the in-
terest which would be determined under chapter
67—
‘‘(A) on the imputed underpayment deter-
mined under paragraph (4) with respect to such
adjustment,
‘‘(B) for the period beginning on the day
after the return due date for the adjusted year
and ending on the return due date for the part-
nership taxable year in which such adjustment
takes effect (or, if earlier, in the case of any ad-
justment to which subsection (a)(2) applies, the
date on which the payment under subsection
(a)(2) is made).
Proper adjustments in the amount determined under
the preceding sentence shall be made for adjust-
1097
ments required for partnership taxable years after
the adjusted year and before the year in which the
partnership adjustment takes effect by reason of
such partnership adjustment.
‘‘(3) PENALTIES.—A partnership shall be liable
for any penalty, addition to tax, or additional
amount for which it would have been liable if such
partnership had been an individual subject to tax
under chapter 1 for the adjusted year and the im-
puted underpayment determined under paragraph
(4) were an actual underpayment (or understate-
ment) for such year.
‘‘(4) IMPUTED UNDERPAYMENT.—For purposes
of this subsection, the imputed underpayment deter-
mined under this paragraph with respect to any
partnership adjustment is the underpayment (if any)
which would result—
‘‘(A) by netting all adjustments to items of
income, gain, loss, or deduction and by treating
any net increase in income as an underpayment
equal to the amount of such net increase multi-
plied by the highest rate of tax in effect under
section 1 or 11 for the adjusted year, and
1098
‘‘(B) by taking adjustments to credits into
account as increases or decreases (whichever is
appropriate) in the amount of tax.
For purposes of the preceding sentence, any net de-
crease in a loss shall be treated as an increase in in-
come and a similar rule shall apply to a net increase
in a loss.
‘‘(c) ADMINISTRATIVE PROVISIONS.—
‘‘(1) IN GENERAL.—Any payment required by
subsection (a)(2) or (b)(1)(A)—
‘‘(A) shall be assessed and collected in the
same manner as if it were a tax imposed by
subtitle C, and
‘‘(B) shall be paid on or before the return
due date for the partnership taxable year in
which the partnership adjustment takes effect.
‘‘(2) INTEREST.—For purposes of determining
interest, any payment required by subsection (a)(2)
or (b)(1)(A) shall be treated as an underpayment
of tax.
‘‘(3) PENALTIES.—
‘‘(A) IN
GENERAL.—In the case of any
failure by any partnership to pay on the date
prescribed therefor any amount required by
subsection (a)(2) or (b)(1)(A), there is hereby
1099
imposed on such partnership a penalty of 10
percent of the underpayment. For purposes of
the 
preceding 
sentence, 
the 
term
‘underpayment’ means the excess of any pay-
ment required under this section over the
amount (if any) paid on or before the date pre-
scribed therefor.
‘‘(B) ACCURACY-RELATED
AND
FRAUD
PENALTIES MADE APPLICABLE.—For purposes
of part II of subchapter A of chapter 68, any
payment required by subsection (a)(2) shall be
treated as an underpayment of tax.
‘‘(d) DEFINITIONS AND SPECIAL RULES.—For pur-
poses of this section—
‘‘(1) PARTNERSHIP
ADJUSTMENT.—The term
‘partnership adjustment’ means any adjustment in
the amount of any partnership item of a large part-
nership.
‘‘(2) WHEN ADJUSTMENT TAKES EFFECT.—A
partnership adjustment takes effect—
‘‘(A) in the case of an adjustment pursu-
ant to the decision of a court in a proceeding
brought under part II, when such decision be-
comes final,
1100
‘‘(B) in the case of an adjustment pursu-
ant to any administrative adjustment request
under section 6251, when such adjustment is
allowed by the Secretary, or
‘‘(C) in any other case, when such adjust-
ment is made.
‘‘(3) ADJUSTED
YEAR.—The term ‘adjusted
year’ means the partnership taxable year to which
the item being adjusted relates.
‘‘(4) RETURN
DUE
DATE.—The term ‘return
due date’ means, with respect to any taxable year,
the date prescribed for filing the partnership return
for such taxable year (determined without regard to
extensions).
‘‘(5) ADJUSTMENTS
INVOLVING
CHANGES
IN
CHARACTER.—Under regulations, appropriate ad-
justments in the application of this section shall be
made for purposes of taking into account partner-
ship adjustments which involve a change in the char-
acter of any item of income, gain, loss, or deduction.
‘‘(e) PAYMENTS NONDEDUCTIBLE.—No deduction
shall be allowed under subtitle A for any payment required
to be made by a large partnership under this section.
‘‘PART II—PARTNERSHIP LEVEL ADJUSTMENTS
‘‘Subpart A. Adjustments by Secretary.
‘‘Subpart B. Claims for adjustments by partnership.
1101
‘‘Subpart A—Adjustments by Secretary
‘‘Sec. 6245. Secretarial authority.
‘‘Sec. 6246. Restrictions on partnership adjustments.
‘‘Sec. 6247. Judicial review of partnership adjustment.
‘‘Sec. 6248. Period of limitations for making adjustments.
‘‘SEC. 6245. SECRETARIAL AUTHORITY.
‘‘(a) GENERAL RULE.—The Secretary is authorized
and directed to make adjustments at the partnership level
in any partnership item to the extent necessary to have
such item be treated in the manner required.
‘‘(b) NOTICE OF PARTNERSHIP ADJUSTMENT.—
‘‘(1) IN GENERAL.—If the Secretary determines
that a partnership adjustment is required, the Sec-
retary is authorized to send notice of such adjust-
ment to the partnership by certified mail or reg-
istered mail. Such notice shall be sufficient if mailed
to the partnership at its last known address even if
the partnership has terminated its existence.
‘‘(2) FURTHER NOTICES RESTRICTED.—If the
Secretary mails a notice of a partnership adjustment
to any partnership for any partnership taxable year
and the partnership files a petition under section
6247 with respect to such notice, in the absence of
a showing of fraud, malfeasance, or misrepresenta-
tion of a material fact, the Secretary shall not mail
another such notice to such partnership with respect
to such taxable year.
1102
‘‘(3) AUTHORITY
TO
RESCIND
NOTICE
WITH
PARTNERSHIP CONSENT.—The Secretary may, with
the consent of the partnership, rescind any notice of
a partnership adjustment mailed to such partner-
ship. Any notice so rescinded shall not be treated as
a notice of a partnership adjustment, for purposes of
this section, section 6246, and section 6247, and the
taxpayer shall have no right to bring a proceeding
under section 6247 with respect to such notice.
Nothing in this subsection shall affect any suspen-
sion of the running of any period of limitations dur-
ing any period during which the rescinded notice
was outstanding.
‘‘SEC. 6246. RESTRICTIONS ON PARTNERSHIP ADJUST-
MENTS.
‘‘(a) GENERAL RULE.—Except as otherwise provided
in this chapter, no adjustment to any partnership item
may be made (and no levy or proceeding in any court for
the collection of any amount resulting from such adjust-
ment may be made, begun or prosecuted) before—
‘‘(1) the close of the 90th day after the day on
which a notice of a partnership adjustment was
mailed to the partnership, and
1103
‘‘(2) if a petition is filed under section 6247
with respect to such notice, the decision of the court
has become final.
‘‘(b) PREMATURE ACTION MAY BE ENJOINED.—
Notwithstanding section 7421(a), any action which vio-
lates subsection (a) may be enjoined in the proper court,
including the Tax Court. The Tax Court shall have no ju-
risdiction to enjoin any action under this subsection unless
a timely petition has been filed under section 6247 and
then only in respect of the adjustments that are the sub-
ject of such petition.
‘‘(c) EXCEPTIONS
TO RESTRICTIONS
ON ADJUST-
MENTS.—
‘‘(1) ADJUSTMENTS ARISING OUT OF MATH OR
CLERICAL ERRORS.—
‘‘(A) IN GENERAL.—If the partnership is
notified that, on account of a mathematical or
clerical error appearing on the partnership re-
turn, an adjustment to a partnership item is re-
quired, rules similar to the rules of paragraphs
(1) and (2) of section 6213(b) shall apply to
such adjustment.
‘‘(B) SPECIAL RULE.—If a large partner-
ship is a partner in another large partnership,
any adjustment on account of such partner-
1104
ship’s failure to comply with the requirements
of section 6241(a) with respect to its interest in
such other partnership shall be treated as an
adjustment referred to in subparagraph (A), ex-
cept that paragraph (2) of section 6213(b) shall
not apply to such adjustment.
‘‘(2) 
PARTNERSHIP
MAY
WAIVE
RESTRIC-
TIONS.—The partnership shall at any time (whether
or not a notice of partnership adjustment has been
issued) have the right, by a signed notice in writing
filed with the Secretary, to waive the restrictions
provided in subsection (a) on the making of any
partnership adjustment.
‘‘(d) LIMIT WHERE NO PROCEEDING BEGUN.—If no
proceeding under section 6247 is begun with respect to
any notice of a partnership adjustment during the 90-day
period described in subsection (a), the amount for which
the partnership is liable under section 6242 (and any in-
crease in any partner’s liability for tax under chapter 1
by reason of any adjustment under section 6242(a)) shall
not exceed the amount determined in accordance with such
notice.
1105
‘‘SEC. 6247. JUDICIAL REVIEW OF PARTNERSHIP ADJUST-
MENT.
‘‘(a) GENERAL RULE.—Within 90 days after the date
on which a notice of a partnership adjustment is mailed
to the partnership with respect to any partnership taxable
year, the partnership may file a petition for a readjust-
ment of the partnership items for such taxable year 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 Claims Court.
‘‘(b) JURISDICTIONAL REQUIREMENT FOR BRINGING
ACTION IN DISTRICT COURT OR CLAIMS COURT.—
‘‘(1) IN
GENERAL.—A readjustment petition
under this section may be filed in a district court of
the United States or the Claims Court only if the
partnership filing the petition deposits with the Sec-
retary, on or before the date the petition is filed, the
amount for which the partnership would be liable
under section 6242(b) (as of the date of the filing
of the petition) if the partnership items were ad-
justed as provided by the notice of partnership ad-
justment. The court may by order provide that the
jurisdictional requirements of this paragraph are
satisfied where there has been a good faith attempt
1106
to satisfy such requirement and any shortfall of the
amount required to be deposited is timely corrected.
‘‘(2) INTEREST PAYABLE.—Any amount depos-
ited under paragraph (1), while deposited, shall not
be treated as a payment of tax for purposes of this
title (other than chapter 67).
‘‘(c) SCOPE OF JUDICIAL REVIEW.—A court with
which a petition is filed in accordance with this section
shall have jurisdiction to determine all partnership items
of the partnership for the partnership taxable year to
which the notice of partnership adjustment relates and the
proper allocation of such items among the partners (and
the applicability of any penalty, addition to tax, or addi-
tional amount for which the partnership may be liable
under section 6242(b)).
‘‘(d) DETERMINATION
OF COURT REVIEWABLE.—
Any determination by a court under this section shall have
the force and effect of a decision of the Tax Court or a
final judgment or decree of the district court or the Claims
Court, as the case may be, and shall be reviewable as such.
The date of any such determination shall be treated as
being the date of the court’s order entering the decision.
‘‘(e) EFFECT OF DECISION DISMISSING ACTION.—If
an action brought under this section is dismissed other
than by reason of a rescission under section 6245(b)(3),
1107
the decision of the court dismissing the action shall be con-
sidered as its decision that the notice of partnership ad-
justment is correct, and an appropriate order shall be en-
tered in the records of the court.
‘‘SEC. 6248. PERIOD OF LIMITATIONS FOR MAKING ADJUST-
MENTS.
‘‘(a) GENERAL RULE.—Except as otherwise provided
in this section, no adjustment under this subpart to any
partnership item for any partnership taxable year may be
made after the date which is 3 years after the later of—
‘‘(1) the date on which the partnership return
for such taxable year was filed, or
‘‘(2) the last day for filing such return for such
year (determined without regard to extensions).
‘‘(b) EXTENSION BY AGREEMENT.—The period de-
scribed in subsection (a) (including an extension period
under this subsection) may be extended by an agreement
entered into by the Secretary and the partnership before
the expiration of such period.
‘‘(c) SPECIAL RULE IN CASE OF FRAUD, ETC.—
‘‘(1) FALSE RETURN.—In the case of a false or
fraudulent partnership return with intent to evade
tax, the adjustment may be made at any time.
‘‘(2) SUBSTANTIAL OMISSION OF INCOME.—If
any partnership omits from gross income an amount
1108
properly includible therein which is in excess of 25
percent of the amount of gross income stated in its
return, subsection (a) shall be applied by substitut-
ing ‘6 years’ for ‘3 years’.
‘‘(3) NO RETURN.—In the case of a failure by
a partnership to file a return for any taxable year,
the adjustment may be made at any time.
‘‘(4) RETURN FILED BY SECRETARY.—For pur-
poses of this section, a return executed by the Sec-
retary under subsection (b) of section 6020 on be-
half of the partnership shall not be treated as a re-
turn of the partnership.
‘‘(d) SUSPENSION WHEN SECRETARY MAILS NOTICE
OF ADJUSTMENT.—If notice of a partnership adjustment
with respect to any taxable year is mailed to the partner-
ship, the running of the period specified in subsection (a)
(as modified by the other provisions of this section) shall
be suspended—
‘‘(1) for the period during which an action may
be brought under section 6247 (and, if a petition is
filed under section 6247 with respect to such notice,
until the decision of the court becomes final), and
‘‘(2) for 1 year thereafter.
‘‘Subpart B—Claims for Adjustments by Partnership
‘‘Sec. 6251. Administrative adjustment requests.
‘‘Sec. 6252. Judicial review where administrative adjustment re-
quest is not allowed in full.
1109
‘‘SEC. 6251. ADMINISTRATIVE ADJUSTMENT REQUESTS.
‘‘(a) GENERAL RULE.—A partnership may file a re-
quest for an administrative adjustment of partnership
items for any partnership taxable year at any time which
is—
‘‘(1) within 3 years after the later of—
‘‘(A) the date on which the partnership re-
turn for such year is filed, or
‘‘(B) the last day for filing the partnership
return for such year (determined without re-
gard to extensions), and
‘‘(2) before the mailing to the partnership of a
notice of a partnership adjustment with respect to
such taxable year.
‘‘(b) SECRETARIAL ACTION.—If a partnership files
an administrative adjustment request under subsection
(a), the Secretary may allow any part of the requested
adjustments.
‘‘(c) SPECIAL RULE IN CASE OF EXTENSION UNDER
SECTION
6248.—If the period described in section
6248(a) is extended pursuant to an agreement under sec-
tion 6248(b), the period prescribed by subsection (a)(1)
shall not expire before the date 6 months after the expira-
tion of the extension under section 6248(b).
1110
‘‘SEC. 6252. JUDICIAL REVIEW WHERE ADMINISTRATIVE AD-
JUSTMENT REQUEST IS NOT ALLOWED IN
FULL.
‘‘(a) IN GENERAL.—If any part of an administrative
adjustment request filed under section 6251 is not allowed
by the Secretary, the partnership may file a petition for
an adjustment with respect to the partnership items to
which such part of the request relates with—
‘‘(1) the Tax Court,
‘‘(2) the district court of the United States for
the district in which the principal place of business
of the partnership is located, or
‘‘(3) the Claims Court.
‘‘(b) PERIOD FOR FILING PETITION.—A petition may
be filed under subsection (a) with respect to partnership
items for a partnership taxable year only—
‘‘(1) after the expiration of 6 months from the
date of filing of the request under section 6251, and
‘‘(2) before the date which is 2 years after the
date of such request.
The 2-year period set forth in paragraph (2) shall be ex-
tended for such period as may be agreed upon in writing
by the partnership and the Secretary.
‘‘(c) COORDINATION WITH SUBPART A.—
‘‘(1) NOTICE
OF
PARTNERSHIP
ADJUSTMENT
BEFORE FILING OF PETITION.—No petition may be
1111
filed under this section after the Secretary mails to
the partnership a notice of a partnership adjustment
for the partnership taxable year to which the request
under section 6251 relates.
‘‘(2) NOTICE
OF
PARTNERSHIP
ADJUSTMENT
AFTER
FILING
BUT
BEFORE
HEARING
OF
PETI-
TION.—If the Secretary mails to the partnership a
notice of a partnership adjustment for the partner-
ship taxable year to which the request under section
6251 relates after the filing of a petition under this
subsection but before the hearing of such petition,
such petition shall be treated as an action brought
under section 6247 with respect to such notice, ex-
cept that subsection (b) of section 6247 shall not
apply.
‘‘(3) NOTICE MUST BE BEFORE EXPIRATION OF
STATUTE OF LIMITATIONS.—A notice of a partner-
ship adjustment for the partnership taxable year
shall be taken into account under paragraphs (1)
and (2) only if such notice is mailed before the expi-
ration of the period prescribed by section 6248 for
making adjustments to partnership items for such
taxable year.
‘‘(d) SCOPE OF JUDICIAL REVIEW.—Except in the
case described in paragraph (2) of subsection (c), a court
1112
with which a petition is filed in accordance with this sec-
tion shall have jurisdiction to determine only those part-
nership items to which the part of the request under sec-
tion 6251 not allowed by the Secretary relates and those
items with respect to which the Secretary asserts adjust-
ments as offsets to the adjustments requested by the part-
nership.
‘‘(e) DETERMINATION
OF COURT REVIEWABLE.—
Any determination by a court under this subsection shall
have the force and effect of a decision of the Tax Court
or a final judgment or decree of the district court or the
Claims Court, as the case may be, and shall be reviewable
as such. The date of any such determination shall be
treated as being the date of the court’s order entering the
decision.
‘‘PART III—DEFINITIONS AND SPECIAL RULES
‘‘Sec. 6255. Definitions and special rules.
‘‘SEC. 6255. DEFINITIONS AND SPECIAL RULES.
‘‘(a) DEFINITIONS.—For purposes of this sub-
chapter—
‘‘(1) LARGE
PARTNERSHIP.—The term ‘large
partnership’ has the meaning given to such term by
section 775 without regard to section 776(a).
1113
‘‘(2) PARTNERSHIP ITEM.—The term ‘partner-
ship item’ has the meaning given to such term by
section 6231(a)(3).
‘‘(b) PARTNERS BOUND BY ACTIONS OF PARTNER-
SHIP, ETC.—
‘‘(1) DESIGNATION OF PARTNER.—Each large
partnership shall designate (in the manner pre-
scribed by the Secretary) a partner (or other person)
who shall have the sole authority to act on behalf of
such partnership under this subchapter. In any case
in which such a designation is not in effect, the Sec-
retary may select any partner as the partner with
such authority.
‘‘(2) BINDING
EFFECT.—A large partnership
and all partners of such partnership shall be
bound—
‘‘(A) by actions taken under this sub-
chapter by the partnership, and
‘‘(B) by any decision in a proceeding
brought under this subchapter.
‘‘(c) PARTNERSHIPS HAVING PRINCIPAL PLACE OF
BUSINESS OUTSIDE THE UNITED STATES.—For purposes
of sections 6247 and 6252, a principal place of business
located outside the United States shall be treated as lo-
cated in the District of Columbia.
1114
‘‘(d) TREATMENT WHERE PARTNERSHIP CEASES TO
EXIST.—If a partnership ceases to exist before a partner-
ship adjustment under this subchapter takes effect, such
adjustment shall be taken into account by the former part-
ners of such partnership under regulations prescribed by
the Secretary.
‘‘(e) DATE DECISION BECOMES FINAL.—For pur-
poses of this subchapter, the principles of section 7481(a)
shall be applied in determining the date on which a deci-
sion of a district court or the Claims Court becomes final.
‘‘(f) PARTNERSHIPS IN CASES UNDER TITLE 11 OF
THE UNITED STATES CODE.—The running of any period
of limitations provided in this subchapter on making a
partnership adjustment (or provided by section 6501 or
6502 on the assessment or collection of any amount re-
quired to be paid under section 6242) shall, in a case
under title 11 of the United States Code, be suspended
during the period during which the Secretary is prohibited
by reason of such case from making the adjustment (or
assessment or collection) and—
‘‘(1) for adjustment or assessment, 60 days
thereafter, and
‘‘(2) for collection, 6 months thereafter.
1115
‘‘(g) REGULATIONS.—The Secretary shall prescribe
such regulations as may be necessary to carry out the pro-
visions of this subchapter, including regulations—
‘‘(1) to prevent abuse through manipulation of
the provisions of this subchapter, and
‘‘(2) providing that this subchapter shall not
apply to any case described in section 6231(c)(1) (or
the regulations prescribed thereunder) where the ap-
plication of this subchapter to such a case would
interfere with the effective and efficient enforcement
of this title.
In any case to which this subchapter does not apply by
reason of paragraph (2), rules similar to the rules of sec-
tions 6229(f) and 6255(f) shall apply.’’
(b) CLERICAL AMENDMENT.—The table of sub-
chapters for chapter 63 is amended by adding at the end
the following new item:
‘‘SUBCHAPTER D. Treatment of large partnerships.’’
SEC. 14303. DUE DATE FOR FURNISHING INFORMATION TO
PARTNERS OF LARGE PARTNERSHIPS.
(a) GENERAL RULE.—Subsection (b) of section 6031
(relating to copies to partners) is amended by adding at
the end the following new sentence: ‘‘In the case of a large
partnership (as defined in sections 775 and 776(a)), such
information shall be furnished on or before the first March
15 following the close of such taxable year.’’
1116
(b) TREATMENT AS INFORMATION RETURN.—Sec-
tion 6724 is amended by adding at the end the following
new subsection:
‘‘(e) SPECIAL RULE FOR CERTAIN PARTNERSHIP RE-
TURNS.—If any partnership return under section 6031(a)
is required under section 6011(e) to be filed on magnetic
media or in other machine-readable form, for purposes of
this part, each schedule required to be included with such
return with respect to each partner shall be treated as a
separate information return.’’
SEC. 14304. RETURNS MAY BE REQUIRED ON MAGNETIC
MEDIA.
Paragraph (2) of section 6011(e) (relating to returns
on magnetic media) is amended by adding at the end the
following new sentence:
‘‘Notwithstanding the preceding sentence, the Sec-
retary shall require partnerships having more than
100 partners to file returns on magnetic media.’’
SEC. 14305. TREATMENT OF PARTNERSHIP ITEMS OF INDI-
VIDUAL RETIREMENT ACCOUNTS.
Subsection (b) of section 6012 is amended by adding
at the end the following new paragraph:
‘‘(6) IRA SHARE OF PARTNERSHIP INCOME.—
In the case of a trust which is exempt from taxation
under section 408(e), for purposes of this section,
1117
the trust’s distributive share of items of gross in-
come and gain of any partnership to which sub-
chapter C or D of chapter 63 applies shall be treat-
ed as equal to the trust’s distributive share of the
taxable income of such partnership.’’
SEC. 14306. EFFECTIVE DATE.
The amendments made by this part shall apply to
partnership taxable years beginning after December 31,
1995.
PART II—PROVISIONS RELATED TO CERTAIN
PARTNERSHIP PROCEEDINGS
SEC. 14311. TREATMENT OF PARTNERSHIP ITEMS IN DEFI-
CIENCY PROCEEDINGS.
(a) IN GENERAL.—Subchapter C of chapter 63 is
amended by adding at the end the following new section:
‘‘SEC. 
6234. 
DECLARATORY 
JUDGMENT 
RELATING 
TO
TREATMENT OF ITEMS OTHER THAN PART-
NERSHIP 
ITEMS 
WITH 
RESPECT 
TO 
AN
OVERSHELTERED RETURN.
‘‘(a) GENERAL RULE.—If—
‘‘(1) a taxpayer files an oversheltered return for
a taxable year,
‘‘(2) the Secretary makes a determination with
respect to the treatment of items (other than part-
1118
nership items) of such taxpayer for such taxable
year, and
‘‘(3) the adjustments resulting from such deter-
mination do not give rise to a deficiency (as defined
in section 6211) but would give rise to a deficiency
if there were no net loss from partnership items,
the Secretary is authorized to send a notice of adjustment
reflecting such determination to the taxpayer by certified
or registered mail.
‘‘(b) OVERSHELTERED RETURN.—For purposes of
this section, the term ‘oversheltered return’ means an in-
come tax return which—
‘‘(1) shows no taxable income for the taxable
year, and
‘‘(2) shows a net loss from partnership items.
‘‘(c) JUDICIAL REVIEW IN THE TAX COURT.—Within
90 days, or 150 days if the notice is addressed to a person
outside the United States, after the day on which the no-
tice of adjustment authorized in subsection (a) is mailed
to the taxpayer, the taxpayer may file a petition with the
Tax Court for redetermination of the adjustments. Upon
the filing of such a petition, the Tax Court shall have ju-
risdiction to make a declaration with respect to all items
(other than partnership items and affected items which
require partner level determinations as described in sec-
1119
tion 6230(a)(2)(A)(i)) for the taxable year to which the
notice of adjustment relates, in accordance with the prin-
ciples of section 6214(a). Any such declaration shall have
the force and effect of a decision of the Tax Court and
shall be reviewable as such.
‘‘(d) FAILURE TO FILE PETITION.—
‘‘(1) IN GENERAL.—Except as provided in para-
graph (2), if the taxpayer does not file a petition
with the Tax Court within the time prescribed in
subsection (c), the determination of the Secretary
set forth in the notice of adjustment that was mailed
to the taxpayer shall be deemed to be correct.
‘‘(2) EXCEPTION.—Paragraph (1) shall not
apply after the date that the taxpayer—
‘‘(A) files a petition with the Tax Court
within the time prescribed in subsection (c)
with respect to a subsequent notice of adjust-
ment relating to the same taxable year, or
‘‘(B) files a claim for refund of an overpay-
ment of tax under section 6511 for the taxable
year involved.
If a claim for refund is filed by the taxpayer, then
solely for purposes of determining (for the taxable
year involved) the amount of any computational ad-
justment in connection with a partnership proceed-
1120
ing under this subchapter (other than under this
section) or the amount of any deficiency attributable
to affected items in a proceeding under section
6230(a)(2), the items that are the subject of the no-
tice of adjustment shall be presumed to have been
correctly reported on the taxpayer’s return during
the pendency of the refund claim (and, if within the
time prescribed by section 6532 the taxpayer com-
mences a civil action for refund under section 7422,
until the decision in the refund action becomes
final).
‘‘(e) LIMITATIONS PERIOD.—
‘‘(1) IN GENERAL.—Any notice to a taxpayer
under subsection (a) shall be mailed before the expi-
ration of the period prescribed by section 6501 (re-
lating to the period of limitations on assessment).
‘‘(2) SUSPENSION WHEN SECRETARY MAILS NO-
TICE OF ADJUSTMENT.—If the Secretary mails a no-
tice of adjustment to the taxpayer for a taxable year,
the period of limitations on the making of assess-
ments shall be suspended for the period during
which the Secretary is prohibited from making the
assessment (and, in any event, if a proceeding in re-
spect of the notice of adjustment is placed on the
docket of the Tax Court, until the decision of the
1121
Tax Court becomes final), and for 60 days there-
after.
‘‘(3) RESTRICTIONS ON ASSESSMENT.—Except
as otherwise provided in section 6851, 6852, or
6861, no assessment of a deficiency with respect to
any tax imposed by subtitle A attributable to any
item (other than a partnership item or any item af-
fected by a partnership item) shall be made—
‘‘(A) until the expiration of the applicable
90-day or 150-day period set forth in sub-
section (c) for filing a petition with the Tax
Court, or
‘‘(B) if a petition has been filed with the
Tax Court, until the decision of the Tax Court
has become final.
‘‘(f) FURTHER
NOTICES
OF
ADJUSTMENT
RE-
STRICTED.—If the Secretary mails a notice of adjustment
to the taxpayer for a taxable year and the taxpayer files
a petition with the Tax Court within the time prescribed
in subsection (c), the Secretary may not mail another such
notice to the taxpayer with respect to the same taxable
year in the absence of a showing of fraud, malfeasance,
or misrepresentation of a material fact.
‘‘(g) COORDINATION WITH OTHER PROCEEDINGS
UNDER THIS SUBCHAPTER.—
1122
‘‘(1) IN GENERAL.—The treatment of any item
that has been determined pursuant to subsection (c)
or (d) shall be taken into account in determining the
amount of any computational adjustment that is
made in connection with a partnership proceeding
under this subchapter (other than under this sec-
tion), or the amount of any deficiency attributable to
affected items in a proceeding under section
6230(a)(2), for the taxable year involved. Notwith-
standing any other law or rule of law pertaining to
the period of limitations on the making of assess-
ments, for purposes of the preceding sentence, any
adjustment made in accordance with this section
shall be taken into account regardless of whether
any assessment has been made with respect to such
adjustment.
‘‘(2) SPECIAL
RULE
IN
CASE
OF
COMPUTA-
TIONAL ADJUSTMENT.—In the case of a computa-
tional adjustment that is made in connection with a
partnership proceeding under this subchapter (other
than under this section), the provisions of paragraph
(1) shall apply only if the computational adjustment
is made within the period prescribed by section 6229
for assessing any tax under subtitle A which is at-
1123
tributable to any partnership item or affected item
for the taxable year involved.
‘‘(3) CONVERSION
TO
DEFICIENCY
PROCEED-
ING.—If—
‘‘(A) after the notice referred to in sub-
section (a) is mailed to a taxpayer for a taxable
year but before the expiration of the period for
filing a petition with the Tax Court under sub-
section (c) (or, if a petition is filed with the Tax
Court, before the Tax Court makes a declara-
tion for that taxable year), the treatment of any
partnership item for the taxable year is finally
determined, or any such item ceases to be a
partnership item pursuant to section 6231(b),
and
‘‘(B) as a result of that final determination
or cessation, a deficiency can be determined
with respect to the items that are the subject
of the notice of adjustment,
the notice of adjustment shall be treated as a notice
of deficiency under section 6212 and any petition
filed in respect of the notice shall be treated as an
action brought under section 6213.
1124
‘‘(4) FINALLY DETERMINED.—For purposes of
this subsection, the treatment of partnership items
shall be treated as finally determined if—
‘‘(A) the Secretary enters into a settlement
agreement (within the meaning of section 6224)
with the taxpayer regarding such items,
‘‘(B) a notice of final partnership adminis-
trative adjustment has been issued and—
‘‘(i) no petition has been filed under
section 6226 and the time for doing so has
expired, or
‘‘(ii) a petition has been filed under
section 6226 and the decision of the court
has become final, or
‘‘(C) the period within which any tax at-
tributable to such items may be assessed
against the taxpayer has expired.
‘‘(h) SPECIAL RULES IF SECRETARY INCORRECTLY
DETERMINES APPLICABLE PROCEDURE.—
‘‘(1) SPECIAL
RULE
IF
SECRETARY
ERRO-
NEOUSLY MAILS NOTICE OF ADJUSTMENT.—If the
Secretary erroneously determines that subchapter B
does not apply to a taxable year of a taxpayer and
consistent with that determination timely mails a no-
tice of adjustment to the taxpayer pursuant to sub-
1125
section (a) of this section, the notice of adjustment
shall be treated as a notice of deficiency under sec-
tion 6212 and any petition that is filed in respect of
the notice shall be treated as an action brought
under section 6213.
‘‘(2) SPECIAL
RULE
IF
SECRETARY
ERRO-
NEOUSLY
MAILS
NOTICE
OF
DEFICIENCY.—If the
Secretary erroneously determines that subchapter B
applies to a taxable year of a taxpayer and consist-
ent with that determination timely mails a notice of
deficiency to the taxpayer pursuant to section 6212,
the notice of deficiency shall be treated as a notice
of adjustment under subsection (a) and any petition
that is filed in respect of the notice shall be treated
as an action brought under subsection (c).’’
(b) TREATMENT OF PARTNERSHIP ITEMS IN DEFI-
CIENCY
PROCEEDINGS.—Section 6211 (defining defi-
ciency) is amended by adding at the end the following new
subsection:
‘‘(c) COORDINATION WITH SUBCHAPTER C.—In de-
termining the amount of any deficiency for purposes of
this subchapter, adjustments to partnership items shall be
made only as provided in subchapter C.’’
1126
(c) CLERICAL AMENDMENT.—The table of sections
for subchapter C of chapter 63 is amended by adding at
the end the following new item:
‘‘Sec. 6234. Declaratory judgment relating to treatment of items
other than partnership items with respect to an
oversheltered return.’’
(d) EFFECTIVE DATE.—The amendments made by
this section shall apply to partnership taxable years ending
after the date of the enactment of this Act.
SEC. 14312. PARTNERSHIP RETURN TO BE DETERMINATIVE
OF AUDIT PROCEDURES TO BE FOLLOWED.
(a) IN GENERAL.—Section 6231 (relating to defini-
tions and special rules) is amended by adding at the end
the following new subsection:
‘‘(g) PARTNERSHIP RETURN TO BE DETERMINATIVE
OF WHETHER SUBCHAPTER APPLIES.—
‘‘(1) DETERMINATION THAT SUBCHAPTER AP-
PLIES.—If, on the basis of a partnership return for
a taxable year, the Secretary reasonably determines
that this subchapter applies to such partnership for
such year but such determination is erroneous, then
the provisions of this subchapter are hereby ex-
tended to such partnership (and its items) for such
taxable year and to partners of such partnership.
‘‘(2) DETERMINATION THAT SUBCHAPTER DOES
NOT APPLY.—If, on the basis of a partnership re-
turn for a taxable year, the Secretary reasonably de-
1127
termines that this subchapter does not apply to such
partnership for such year but such determination is
erroneous, then the provisions of this subchapter
shall not apply to such partnership (and its items)
for such taxable year or to partners of such partner-
ship.’’
(b) EFFECTIVE DATE.—The amendment made by
this section shall apply to partnership taxable years ending
after the date of the enactment of this Act.
SEC. 14313. PROVISIONS RELATING TO STATUTE OF LIMITA-
TIONS.
(a) SUSPENSION OF STATUTE WHERE UNTIMELY
PETITION FILED.—Paragraph (1) of section 6229(d) (re-
lating to suspension where Secretary makes administrative
adjustment) is amended by striking all that follows ‘‘sec-
tion 6226’’ and inserting the following: ‘‘(and, if a petition
is filed under section 6226 with respect to such adminis-
trative adjustment, until the decision of the court becomes
final), and’’.
(b) SUSPENSION OF STATUTE DURING BANKRUPTCY
PROCEEDING.—Section 6229 is amended by adding at the
end the following new subsection:
‘‘(h) SUSPENSION DURING PENDENCY
OF BANK-
RUPTCY PROCEEDING.—If a petition is filed naming a
partner as a debtor in a bankruptcy proceeding under title
1128
11 of the United States Code, the running of the period
of limitations provided in this section with respect to such
partner shall be suspended—
‘‘(1) for the period during which the Secretary
is prohibited by reason of such bankruptcy proceed-
ing from making an assessment, and
‘‘(2) for 60 days thereafter.’’
(c) TAX MATTERS PARTNER IN BANKRUPTCY.—Sec-
tion 6229(b) is amended by redesignating paragraph (2)
as paragraph (3) and by inserting after paragraph (1) the
following new paragraph:
‘‘(2) SPECIAL RULE WITH RESPECT TO DEBT-
ORS IN TITLE 11 CASES.—Notwithstanding any other
law or rule of law, if an agreement is entered into
under paragraph (1)(B) and the agreement is signed
by a person who would be the tax matters partner
but for the fact that, at the time that the agreement
is executed, the person is a debtor in a bankruptcy
proceeding under title 11 of the United States Code,
such agreement shall be binding on all partners in
the partnership unless the Secretary has been noti-
fied of the bankruptcy proceeding in accordance with
regulations prescribed by the Secretary.’’
(d) EFFECTIVE DATES.—
1129
(1) SUBSECTIONS (a) AND (b).—The amend-
ments made by subsections (a) and (b) shall apply
to partnership taxable years with respect to which
the period under section 6229 of the Internal Reve-
nue Code of 1986 for assessing tax has not expired
on or before the date of the enactment of this Act.
(2) SUBSECTION (c).—The amendment made
by subsection (c) shall apply to agreements entered
into after the date of the enactment of this Act.
SEC. 14314. EXPANSION OF SMALL PARTNERSHIP EXCEP-
TION.
(a) 
IN
GENERAL.—Clause 
(i) 
of 
section
6231(a)(1)(B) (relating to exception for small partner-
ships) is amended to read as follows:
‘‘(i) IN
GENERAL.—The term ‘part-
nership’ shall not include any partnership
having 10 or fewer partners each of whom
is an individual (other than a nonresident
alien), a C corporation, or an estate of a
deceased partner. For purposes of the pre-
ceding sentence, a husband and wife (and
their estates) shall be treated as 1 part-
ner.’’
1130
(b) EFFECTIVE DATE.—The amendment made by
this section shall apply to partnership taxable years ending
after the date of the enactment of this Act.
SEC. 14315. EXCLUSION OF PARTIAL SETTLEMENTS FROM
1-YEAR LIMITATION ON ASSESSMENT.
(a) IN GENERAL.—Subsection (f) of section 6229 (re-
lating to items becoming nonpartnership items) is amend-
ed—
(1) 
by 
striking 
‘‘(f) 
ITEMS
BECOMING
NONPARTNERSHIP ITEMS.—If’’ and inserting the
following:
‘‘(f) SPECIAL RULES.—
‘‘(1) 
ITEMS
BECOMING
NONPARTNERSHIP
ITEMS.—If’’,
(2) by moving the text of such subsection 2 ems
to the right, and
(3) by adding at the end the following new
paragraph:
‘‘(2) SPECIAL RULE FOR PARTIAL SETTLEMENT
AGREEMENTS.—If a partner enters into a settlement
agreement with the Secretary with respect to the
treatment of some of the partnership items in dis-
pute for a partnership taxable year but other part-
nership items for such year remain in dispute, the
period of limitations for assessing any tax attrib-
1131
utable to the settled items shall be determined as if
such agreement had not been entered into.’’
(b) EFFECTIVE DATE.—The amendment made by
this section shall apply to settlements entered into after
the date of the enactment of this Act.
SEC. 14316. EXTENSION OF TIME FOR FILING A REQUEST
FOR ADMINISTRATIVE ADJUSTMENT.
(a) IN GENERAL.—Section 6227 (relating to admin-
istrative adjustment requests) is amended by redesignat-
ing subsections (b) and (c) as subsections (c) and (d), re-
spectively, and by inserting after subsection (a) the follow-
ing new subsection:
‘‘(b) SPECIAL RULE IN CASE OF EXTENSION OF PE-
RIOD OF LIMITATIONS UNDER SECTION 6229.—The pe-
riod prescribed by subsection (a)(1) for filing of a request
for an administrative adjustment shall be extended—
‘‘(1) for the period within which an assessment
may be made pursuant to an agreement (or any ex-
tension thereof) under section 6229(b), and
‘‘(2) for 6 months thereafter.’’
(b) EFFECTIVE DATE.—The amendment made by
this section shall take effect as if included in the amend-
ments made by section 402 of the Tax Equity and Fiscal
Responsibility Act of 1982.
1132
SEC. 14317. AVAILABILITY OF INNOCENT SPOUSE RELIEF IN
CONTEXT OF PARTNERSHIP PROCEEDINGS.
(a) IN GENERAL.—Subsection (a) of section 6230 is
amended by adding at the end the following new para-
graph:
‘‘(3) SPECIAL RULE IN CASE OF ASSERTION BY
PARTNER’S
SPOUSE
OF
INNOCENT
SPOUSE
RE-
LIEF.—
‘‘(A) Notwithstanding section 6404(b), if
the spouse of a partner asserts that section
6013(e) applies with respect to a liability that
is attributable to any adjustment to a partner-
ship item, then such spouse may file with the
Secretary within 60 days after the notice of
computational adjustment is mailed to the
spouse a request for abatement of the assess-
ment specified in such notice. Upon receipt of
such request, the Secretary shall abate the as-
sessment. Any reassessment of the tax with re-
spect to which an abatement is made under this
subparagraph shall be subject to the deficiency
procedures prescribed by subchapter B. The pe-
riod for making any such reassessment shall
not expire before the expiration of 60 days after
the date of such abatement.
1133
‘‘(B) If the spouse files a petition with the
Tax Court pursuant to section 6213 with re-
spect to the request for abatement described in
subparagraph (A), the Tax Court shall only
have jurisdiction pursuant to this section to de-
termine whether the requirements of section
6013(e) have been satisfied. For purposes of
such determination, the treatment of partner-
ship items under the settlement, the final part-
nership administrative adjustment, or the deci-
sion of the court (whichever is appropriate) that
gave rise to the liability in question shall be
conclusive.
‘‘(C) Rules similar to the rules contained
in subparagraphs (B) and (C) of paragraph (2)
shall apply for purposes of this paragraph.’’
(b) CLAIMS FOR REFUND.—Subsection (c) of section
6230 is amended by adding at the end the following new
paragraph:
‘‘(5) RULES FOR SEEKING INNOCENT SPOUSE
RELIEF.—
‘‘(A) IN GENERAL.—The spouse of a part-
ner may file a claim for refund on the ground
that the Secretary failed to relieve the spouse
under section 6013(e) from a liability that is at-
1134
tributable to an adjustment to a partnership
item.
‘‘(B) TIME FOR FILING CLAIM.—Any claim
under subparagraph (A) shall be filed within 6
months after the day on which the Secretary
mails to the spouse the notice of computational
adjustment referred to in subsection (a)(3)(A).
‘‘(C) SUIT IF CLAIM NOT ALLOWED.—If
the claim under subparagraph (B) is not al-
lowed, the spouse may bring suit with respect
to the claim within the period specified in para-
graph (3).
‘‘(D) PRIOR DETERMINATIONS ARE BIND-
ING.—For purposes of any claim or suit under
this paragraph, the treatment of partnership
items under the settlement, the final partner-
ship administrative adjustment, or the decision
of the court (whichever is appropriate) that
gave rise to the liability in question shall be
conclusive.’’
(c) TECHNICAL AMENDMENTS.—
(1) Paragraph (1) of section 6230(a) is amend-
ed by striking ‘‘paragraph (2)’’ and inserting ‘‘para-
graph (2) or (3)’’.