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Title II — Technical corrections related to partnership audit rules

H.R. 6439 · 114th Congress · Dec 6, 2016 · Lineage

II Technical corrections related to partnership audit rules

Sec. 201 Scope of adjustments subject to partnership audit rules

(a)
In general— Section 6241(2) is amended to read as follows:

“(2) Partnership adjustment

“(A) In general—The term “partnership adjustment” means any adjustment to a partnership-related item.

“(B) Partnership-related item—The term “partnership-related item” means—

“(i) 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 any item or amount relating to any transaction with, basis in, or liability of, the partnership) which is relevant (determined without regard to this subchapter) in determining the tax liability of any person under chapter 1, and

“(ii) any partner’s distributive share of any item or amount described in clause (i).”

(b)
Coordination with other chapters— Section 6241 is amended by adding at the end the following new paragraph:

“(9) Coordination with other chapters—This subchapter shall not apply with respect to any tax imposed (or any amount required to be deducted or withheld) under chapter 2, 2A, 3, or 4, except that any partnership adjustment determined under this subchapter 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.”

(c)
Conforming amendments—
(1)
Section 6211(c) is amended to read as follows:

“(c) Coordination with subchapter C—In determining the amount of any deficiency for purposes of this subchapter, adjustments to partnership-related items shall be made only as provided in subchapter C.”

(2)
Section 6221(a) is amended to read as follows:

“(a) In general—Any adjustment to a partnership-related item shall be determined, and 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 shall be determined, at the partnership level, except to the extent otherwise provided in this subchapter.”

(3)
Section 6222(a) is amended to read as follows:

“(a) In general—A partner shall, on the partner’s return, treat any partnership-related item in a manner which is consistent with the treatment of such item on the partnership return.”

(4)
Section 6226(a)(2) is amended by striking “any adjustment to income, gain, loss, deduction, or credit” and inserting “any adjustment to a partnership-related item”.
(5)
Section 6227(a) is amended by striking “items of income, gain, loss, deduction, or credit of the partnership” and inserting “partnership-related items”.
(6)
Section 6231(a)(1) is amended by striking “any item of income, gain, loss, deduction, or credit of a partnership for a partnership taxable year” and inserting “any partnership-related item for any partnership taxable year”.
(7)
Section 6234(c) is amended by striking “all items of income, gain, loss, deduction, or credit of the partnership” and inserting “all partnership-related items”.

Sec. 202 Determination of imputed underpayments

(a)
In general— Section 6225(b) is amended to read as follows:

“(b) Determination of imputed underpayments—For purposes of this subchapter—

“(1) In general—Except as otherwise provided in this section, any imputed underpayment with respect to any reviewed year shall be determined by the Secretary by—

“(A) appropriately netting all partnership adjustments with respect to such reviewed year, and

“(B) applying the highest rate of tax in effect for the reviewed year under section 1 or 11.

“(2) Adjustments to distributive shares of partners not netted—In the case of any adjustment which 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.

“(3) Adjustments separately netted by category—For purposes of paragraph (1)(A), 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 this title.

“(4) Limitation on adjustments that may be taken into account—If any adjustment would (but for this paragraph)—

“(A) result in a decrease in the amount of the imputed underpayment, and

“(B) could be subject to any additional limitation under the provisions of this title (or not allowed, in whole or in part, against ordinary income) if such adjustment were taken into account by any person,”

(b)
Conforming amendments—
(1)
Section 6225(a) is amended to read as follows:

“(a) In general—In the case of any adjustments by the Secretary to any partnership-related items with respect to any reviewed year of a partnership—

“(1) if such adjustments result in an imputed underpayment, the partnership shall pay an amount equal to such imputed underpayment in the adjustment year as provided in section 6232, and

“(2) if such adjustments do not result in an imputed underpayment, such adjustments shall be taken into account by the partnership in the adjustment year.”

(2)
Section 6225(c) is amended by adding at the end the following new paragraph:

“(9) Modification of adjustments not resulting in an imputed underpayment—The Secretary shall establish procedures under which the adjustments described in subsection (a)(2) may be modified in such manner as the Secretary determines appropriate.”

Sec. 203 Alternative procedure to filing amended returns for purposes of modifying imputed underpayment

(a)
In general— Section 6225(c)(2) is amended to read as follows:

“(2) Procedures for partners to take adjustments into account

“(A) Amended returns of partners—Such procedures shall provide that if—

“(i) one or more partners file returns for the taxable year of the partners which includes the end of the reviewed year of the partnership (and for any taxable year with respect to which any tax attribute is affected by reason of any adjustment referred to in clause (ii)),

“(ii) such returns take into account all adjustments under subsection (a) properly allocable to such partners (and the effect of such adjustments on any tax attributes), and

“(iii) payment of any tax due is included with such returns,

“(B) Alternative procedure to filing amended returns—Such procedures shall provide that, with respect to any partner referred to in subparagraph (A), the requirements of subparagraph (A) shall be treated as satisfied with respect to adjustments properly allocable to such partner if, in lieu of filing the returns described in such subparagraph—

“(i) the amounts described in subparagraph (A)(iii) are paid by the partner,

“(ii) the adjustments to the tax attributes of such partner referred to in subparagraph (A)(ii) are binding with respect to all subsequent taxable years of the partner, and

“(iii) such partner provides, in the form and manner specified by the Secretary (including, if the Secretary so specifies, in the same form as on an amended return), such information as the Secretary may require to carry out this subparagraph.

“(C) Reallocation of distributive share—In the case of any adjustment which reallocates the distributive share of any item from one partner to another, this paragraph shall apply with respect to any such partner only if the requirements of subparagraph (A) or (B) are satisfied with respect to all partners affected by such adjustment.

“(D) Application of statute of limitations—Sections 6501 and 6511 shall not apply with respect to any return filed for purposes of subparagraph (A)(i) or any amount paid under subparagraph (A)(iii) or (B)(i), but only with respect to adjustments referred to in subparagraph (A)(ii).

“(E) Application to tiered partnerships—In the case of any partnership any partner of which is a partnership, except as otherwise provided by the Secretary, subparagraph (B) shall apply with respect to any partner in the chain of ownership of such partnerships. For purposes of applying the preceding sentence, an S corporation and its shareholders shall be treated in the same manner as a partnership and its partners.”

(b)
Conforming amendment— Section 6201(a)(1) is amended by inserting “(or payments under section 6225(c)(2)(B)(i))” after “returns or lists”.

Sec. 204 Treatment of passthrough partners in tiered structures

(a)
In general— Section 6226(b) is amended by adding at the end the following new paragraph:

“(4) Treatment of partnerships in tiered structures

“(A) In general—If a partner which receives a statement under subsection (a)(2) is a partnership or an S corporation, such partner shall, with respect to the partner’s share of the adjustment—

“(i) file with the Secretary a partnership adjustment tracking report which includes such information as the Secretary may require, and

“(ii) either—

“(I) pay the imputed underpayment under rules similar to the rules of section 6225 (other than paragraphs (2)(A), (6), (7), and (9) of subsection (c) thereof), or

“(II) furnish statements under rules similar to the rules of subsection (a)(2).

“(B) Due date—For purposes of subparagraph (A), with respect to a partner’s share of the adjustment, the partnership adjustment tracking report shall be filed, and the imputed underpayment shall be paid or statements shall be furnished, not later than the due date for the return for the taxable year of the audited partnership which includes the date the final determination was made with respect to such partnership.

“(C) Partnership payment of tax not permitted if elected out of subchapter—In the case of a partnership which has elected the application of section 6221(b) with respect to the taxable year of the partnership which includes the end of the reviewed year of the audited partnership, this paragraph shall apply notwithstanding such election, except that subparagraph (A) shall be applied without regard to clause (ii)(I) thereof.

“(D) Audited partnership—For purposes of this paragraph, the term “audited partnership” means, with respect to any partner described in subparagraph (A), the partnership in the chain of ownership originally electing the application of this section.”

(b)
Conforming amendments—
(1)
Section 6226(b)(1) is amended by striking “Each partner’s” and inserting “Except as provided in paragraph (4), each partner’s”.
(2)
Section 6226(c)(2) is amended by inserting “or which is described in subsection (b)(4)(A)(ii)(I),” after “is elected,”.

Sec. 205 Treatment of failure of partnership To pay imputed underpayment

Section 6232 is amended by adding at the end the following new subsection:

“(f) Failure To pay imputed underpayment

“(1) In general—If any amount of any imputed underpayment to which section 6225 applies or which is described in section 6226(b)(4)(A)(ii)(I) (or any interest or penalties with respect to any such amount) 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—

“(A) section 6621(a)(2)(B) shall be applied by substituting “5 percentage points” for “3 percentage points” with respect to such amount, and

“(B) the Secretary may assess upon each partner of the partnership (determined as of the close of the adjustment year) a tax equal to such partner’s proportionate share of such amount (including any such interest or penalties, determined after application of subparagraph (A)).

“(2) Proportionate share—For purposes of paragraph (1), a partner’s proportionate share is such percentage as the Secretary may determine on the basis of such partner’s distributive share of items under section 702. The Secretary shall make determinations under the preceding sentence such that the aggregate proportionate shares so determined total 100 percent.

“(3) Coordination with partnership liability—The liability of the partnership for any amount with respect to which a partner is made liable under paragraph (1) shall be reduced upon payment by the partner of such amount. Paragraph (1)(B) shall not apply with respect to any amount after the date on which such amount is paid by the partnership.

“(4) S corporations—For purposes of this subsection, an S corporation and its shareholders shall be treated in the same manner as a partnership and its partners.

“(5) Rules related to assessment and collection

“(A) Deficiency procedures not applicable—Subchapter B shall not apply to any assessment or collection under this paragraph.

“(B) Limitation on assessment—Except as otherwise provided in this chapter, no assessment may be made with respect to any partner with respect to an amount under paragraph (1) (and no levy or proceeding in any court for the collection of such amount may begin) after the date which is 2 years after the date on which the Secretary provides notice and demand to the partnership with respect to such amount.”

Sec. 206 Other technical corrections related to partnership audit rules

(a)
Limitation on amendment of statements furnished to partners not applicable to partnerships electing out of partnership audit rules— Section 6031(b) is amended by striking the last sentence and inserting the following:

“(1) in the case of a partnership which has elected the application of section 6221(b) for the taxable year,

“(2) as provided in the procedures under section 6225(c),

“(3) with respect to statements under section 6226, or

“(4) as otherwise provided by the Secretary.”

(b)
Administrative adjustment request and partnership adjustment tracking report not treated as amended return for purposes of modification of imputed underpayments— Section 6225(c)(2), as amended by the preceding provisions of this Act, is amended by adding at the end the following new subparagraph:

“(F) Adjustments not treated as amended return—An administrative adjustment request under section 6227 and a partnership adjustment tracking report under section 6226(b)(4)(A) shall not be treated as a return for purposes of this paragraph.”

(c)
Clarification of final determination with respect to partnership adjustment—
(1)
In general— Section 6226(a)(2) is amended by striking “in the notice of final partnership adjustment” and inserting “by reference to the final determination with respect to such adjustment”.
(2)
Final determination— Section 6225(d) is amended by adding at the end the following new paragraph:

“(3) Final determination—The final determination is made with respect to an adjustment on the date on which—

“(A) in the case of an adjustment pursuant to the decision of a court in a proceeding brought under section 6234, such decision becomes final,

“(B) in the case of an administrative adjustment request under section 6227, such administrative adjustment request is filed, or

“(C) in any other case, 90 days after the date on which the notice of the final partnership adjustment is mailed under section 6231.”

(3)
Conforming amendments—
(A)
Section 6225(d)(2) is amended by striking “in which—” and all that follows and inserting “in which the final determination is made with respect to the adjustment.”.
(B)
Section 6227(b) is amended by striking “is made” both places it appears and inserting “is filed”.
(d)
Clarification of assessment authority— Section 6226(a) is amended by inserting “(and no assessment of tax, levy, or proceeding in any court for the collection of such underpayment shall be made against such partnership)” after “section 6225 shall not apply with respect to such underpayment”.
(e)
Treatment of partnership adjustments that result in decrease in tax in case of election To push out adjustments— Section 6226(b) is amended—
(1)
by striking “increased” in paragraph (1) and inserting “adjusted”,
(2)
by striking “adjustment amounts” each place it appears in paragraphs (1) and (2) and inserting “correction amounts”,
(3)
by striking “increase” each place it appears in subparagraphs (A) and (B) of paragraph (2) and inserting “increase or decrease”,
(4)
by striking “plus” at the end of paragraph (2)(A) and inserting “and”, and
(5)
by striking “Adjustment amounts” in the heading of paragraph (2) and inserting “Correction amounts”.
(f)
Time limitation for notice of proposed adjustment—
(1)
In general— Section 6231 is amended by redesignating subsections (b) and (c) as subsections (c) and (d), respectively, and by inserting after subsection (a) the following new subsection:

“(b) Timing of notices

“(1) Notice of proposed partnership adjustment—Any notice of a proposed partnership adjustment shall not be mailed later than the date determined under section 6235 (determined without regard to paragraphs (2) and (3) of subsection (a) thereof).

“(2) Notice of final partnership adjustment

“(A) In general—Except to the extent that the partnership elects to waive the application of this subparagraph, any notice of a final partnership adjustment shall not be mailed earlier than 270 days after the date on which the notice of the proposed partnership adjustment is mailed.

“(B) Statute of limitations on adjustment—For the period of limitations on making adjustments, see section 6235.”

(2)
Conforming amendment— Section 6231(a) is amended by striking “Any notice of a final partnership adjustment” and all that follows through “Such notices” and inserting “Any notice of a final partnership adjustment”.
(g)
Deposit To suspend interest on imputed underpayment— Section 6233 is amended by adding at the end the following new subsection:

“(c) Deposit To suspend interest—For rules allowing deposits to suspend running of interest on potential underpayments, see section 6603.”

(h)
Treatment of special enforcement matters— Section 6241, as amended by the preceding provisions of this Act, is amended by adding at the end the following new paragraph:

“(10) Treatment of special enforcement matters

“(A) In general—In the case of partnership-related items which involve special enforcement matters, the Secretary may prescribe regulations pursuant to which—

“(i) this subchapter (or any portion thereof) does not apply to such items, and

“(ii) such items are subject to such special rules (including rules related to assessment and collection) as the Secretary determines to be necessary for the effective and efficient enforcement of this title.

“(B) Special enforcement matters—For purposes of subparagraph (A), the term “special enforcement matters” means—

“(i) failure to comply with the requirements of section 6226(b)(4)(A)(ii),

“(ii) 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),

“(iii) criminal investigations,

“(iv) indirect methods of proof of income,

“(v) foreign partnerships, and

“(vi) other matters that the Secretary determines by regulation present special enforcement considerations.”

(i)
Penalties related to administrative adjustment requests and partnership adjustment tracking reports—
(1)
Failure to pay— Section 6651 is amended by redesignating subsection (i) as subsection (j) and by inserting after subsection (h) the following new subsection:

“(i) Application to imputed underpayment—For purposes of this section, any failure to comply with section 6226(b)(4)(A)(ii) shall be treated as a failure to pay the amount described in subclause (I) thereof and such amount shall be treated for purposes of this section as an amount shown as tax on a return specified in subsection (a)(1).”

(2)
Failure to file partnership adjustment tracking report— Section 6698(a) is amended—
(A)
in the matter preceding paragraph (1) by inserting “, or a partnership adjustment tracking report under section 6226(b)(4)(A),” after “under section 6031”,
(B)
in paragraph (1) by inserting “, or such report,” after “such return”, and
(C)
in paragraph (2)—
(i)
by inserting “or a report” after “a return”, and
(ii)
by inserting “or 6226(b)(4)(A), respectively” before the comma at the end.
(3)
Tax return preparer related penalties— Section 6696(e)(1) is amended by inserting “, any administrative adjustment request under section 6227, and any partnership adjustment tracking report under section 6226(b)(4)(A)” before the period at the end.
(4)
Frivolous tax submissions— Section 6702 is amended by adding at the end the following new subsection:

“(f) Partnership adjustments—An administrative adjustment request under section 6227 and a partnership adjustment tracking report under section 6226(b)(4)(A) shall be treated as a return for purposes of this section.”

(j)
Adjusted Schedule K–1 treated as payee statement— Section 6724(d)(2) is amended by striking “or” at the end of subparagraph (HH), by striking the period at the end of subparagraph (II) and inserting “, or”, and by inserting after subparagraph (II) the following new subparagraph:

“(JJ) section 6226(a)(2) (relating to statements relating to alternative to payment of imputed underpayment by partnership) or under any other provision of this title which provides for the application of rules similar to such section.”

(k)
Clerical corrections—
(1)
Section 6232(d)(1)(A) is amended by striking “a item” and inserting “an item”.
(2)
Section 6232(e) is amended by striking “thereof”.
(3)
Section 6235(a) is amended by striking “subpart” and inserting “subchapter”.
(4)
Section 6235(a)(3) is amended by striking “section 6225(c)(7)” and inserting “section 6225(c)(7))”.
(5)
Section 6241(5) is amended by striking “sections 6234” and inserting “section 6234”.
(6)
The heading of the first part of subchapter C of chapter 63 is amended to read as follows:

“I In general”

(7)
The heading of the second part of subchapter C of chapter 63 is amended to read as follows:

“II Partnership adjustments”

(8)
The heading of the third part of subchapter C of chapter 63 is amended to read as follows:

“III Procedure”

(9)
The heading of the fourth part of subchapter C of chapter 63 is amended to read as follows:

“IV Definitions and special rules”

Sec. 207 Effective date

The amendments made by this title shall take effect as if included in section 1101 of the Bipartisan Budget Act of 2015.