Partnership audits and adjustments

(a)

Repeal of TEFRA partnership audit rules

(1)

In general

Chapter 63 of the Internal Revenue Code of 1986 is amended by striking subchapter C.(2)

Clerical amendment

The table of subchapters for chapter 63 of such Code is amended by striking the item relating to subchapter C. (b)

Repeal of electing large partnership rules

(1)

In general

Subchapter K of chapter 1 of the Internal Revenue Code of 1986 is amended by striking part IV. (2)

Assessment rules relating to electing large partnerships

Chapter 63 of such Code is amended by striking subchapter D.(3)

Clerical amendments

(A)The table of parts for subchapter K of chapter 1 of such Code is amended by striking the item relating to part IV. (B)The table of subchapters for chapter 63 of such Code is amended by striking the item relating to subchapter D.(4)

Effective date

The amendments made by this subsection shall apply to returns filed after December 31, 2014. (c)

Partnership audit reform

(1)

In general

Chapter 63 of the Internal Revenue Code of 1986, as amended by this section, is amended by inserting after subchapter B the following new subchapter:

Treatment of partnerships

Part I—In general

Part II—Partnership adjustments

Part III—Procedure

Part IV—Definitions and special rules

In general

Sec. 6221. Determination at partnership level.

Sec. 6222. Partner’s return must be consistent with partnership return.

Sec. 6223. Designation of partnership representative.

6221.

Determination at partnership level

(a)

In general

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 audited, 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 pursuant to this subchapter. (b)

Election out for certain partnerships with 100 or fewer partners

This subchapter shall not apply with respect to any partnership for any taxable year if— (1)the partnership elects the application of this subsection for such taxable year, (2)the partnership has 100 or fewer partners on the last day of such taxable year, (3)each of the partners of such partnership is an individual, a C corporation (other than a real estate investment trust or a regulated investment company), any foreign entity that would be treated as a C corporation were it domestic, or an estate of a deceased partner, (4)the election— (A)is made with a timely filed return for such taxable year, and (B)includes (in the manner prescribed by the Secretary) a disclosure of the name and taxpayer identification number of each partner of such partnership, and (5)the partnership notifies each such partner of such election in the manner prescribed by the Secretary.

For purposes of paragraph (4)(B), the Secretary may provide for alternative identification of any foreign partners.

6222.

Partner’s return must be consistent with partnership return

(a)

In general

A partner of any partnership shall, on the partner’s return, treat each item of income, gain, loss, deduction, or credit attributable to such partnership in a manner which is consistent with the treatment of such income, gain, loss, deduction, or credit 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 underpayment were on account of a mathematical or clerical 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)

Addition to tax for failure To comply with section

For addition to tax in the case of partner’s disregard of the requirements of this section, see part II of subchapter A of chapter 68.

6223.

Partners bound by actions of partnership

(a)

Designation of partner

Each partnership shall designate (in the manner prescribed by the Secretary) a partner (or other person) as the partnership representative who shall have the sole authority to act on behalf of the partnership under this subchapter. In any case in which such a designation is not in effect, the Secretary may select any partner as the partnership representative. (b)

Binding effect

A partnership and all partners of such partnership shall be bound— (1)by actions taken under this subchapter by the partnership, and (2)by any decision in a proceeding brought under this subchapter.

Partnership adjustments

Sec. 6225. Partnership adjustment by Secretary.

Sec. 6226. Administrative adjustment request by partnership.

6225.

Partnership adjustment by Secretary

(a)

In general

In the case of any adjustment by the Secretary in the amount of any item of income, gain, loss, deduction, or credit of a partnership, or any partner’s distributive share thereof— (1)the partnership shall pay any imputed underpayment with respect to such adjustment in the adjustment year as provided in section 6232, and (2)any imputed overpayment shall be taken into account by the partnership in the adjustment year as a reduction in non-separately stated income or an increase in non-separately stated loss (whichever is appropriate) under section 702(a)(8). (b)

Determination of imputed underpayments and overpayments

For purposes of this subchapter— (1)

In general

Except as provided in subsection (c), any imputed underpayment or imputed overpayment with respect to any partnership adjustment for any reviewed year shall be determined— (A)by netting all adjustments of items of income, gain, loss, or deduction and multiplying such net amount by the highest rate of tax in effect for the reviewed year under section 1 or 11, (B)by treating any net increase or decrease in loss under subparagraph (A) as a decrease or increase, respectively, in income, and (C)by taking into account any adjustments to items of credit as an increase or decrease, as the case may be, in the amount determined under subparagraph (A). (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 under paragraph (1) by disregarding— (A)any decrease in any item of income or gain, and (B)any increase in any item of deduction, loss, or credit. (c)

Modification of imputed underpayments

(1)

Method in general

The Secretary shall establish procedures under which the imputed underpayment amount may be modified consistent with the requirements of this subsection. (2)

Amended returns of partners

Such procedures shall provide that if— (A)one or more partners file returns for the taxable year of the partners which includes the end of the reviewed year of the partnership, (B)such returns take into account all adjustments under subsection (a) properly allocable to such partners (and for any other taxable year with respect to which any tax attribute is affected by reason of such adjustments), and (C)payment of any tax due is included with such return,

then the imputed underpayment amount shall be determined without regard to the portion of the adjustments so taken into account.

(3)

Reallocation of distributive share

In the case of any adjustment which reallocates the distributive share of any item from one partner to another, paragraph (2) shall apply only if returns are filed by all partners affected by such adjustment. (4)

Year and day for submission to Secretary

Anything required to be submitted pursuant to paragraph (1) shall be submitted to the Secretary not later than the close the 180-day period beginning on the date on which the notice of a proposed partnership adjustment is mailed under section 6231 unless such period is extended with the consent of the Secretary. (5)

Decision of Secretary

Any modification of the imputed underpayment amount under this subsection shall be made only upon approval of such modification by the Secretary. (d)

Definitions and special rule

For purposes of this subchapter— (1)

Reviewed year

The term reviewed year means the partnership taxable year to which the item being adjusted relates. (2)

Adjustment year

The term adjustment year means the partnership taxable year in 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 6226, such administrative adjustment request is made, or (C)in any other case, notice of the final partnership adjustment is mailed under section 6231.

6226.

Administrative adjustment request by partnership

(a)

In general

A partnership may file a request for an administrative adjustment in the amount of any item of income, gain, loss, deduction, or credit of the partnership for any partnership taxable year, but only to the extent such adjustment results in an imputed underpayment. (b)

Adjustment

Any adjustment under subsection (a) shall be determined and taken into account by the partnership under rules similar to the rules of section 6225 (other than subsection (c) thereof) for the partnership taxable year in which the administrative adjustment request is made. (c)

Period of limitations

A partnership may not file such a request— (1)more than 3 years after the later of— (A)the date on which the partnership return for such year is filed, or (B)the last day for filing the partnership return for such year (determined without regard to extensions), and (2)after any notice of an administrative proceeding with respect to the taxable year is mailed under section 6231.

III

Procedure

Sec. 6231. Notice of proceedings and adjustment.

Sec. 6232. Assessment, collection, and payment.

Sec. 6233. Penalties and interest.

Sec. 6234. Judicial review of partnership adjustment.

Sec. 6235. Period of limitations on making adjustments.

6231.

Notice of proceedings and adjustment

(a)

In general

The Secretary shall mail to the partnership and the partnership representative— (1)notice of any administrative proceeding initiated at the partnership level with respect to an adjustment of any item of income, gain, loss, deduction, or credit of a partnership for a partnership taxable year, or any partner’s distributive share thereof, (2)notice of any proposed partnership adjustment resulting from such proceeding, and (3)notice of any final partnership adjustment resulting from such proceeding.

Any notice of a final partnership adjustment shall not be mailed earlier than 180 days after the date on which the notice of the proposed partnership adjustment is mailed. 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 first sentence shall apply to any proceeding with respect to an administrative adjustment request filed by a partnership under section 6226.

(b)

Further notices restricted

If the Secretary mails a notice of a final partnership adjustment to any partnership for any partnership taxable year and the partnership files a petition under section 6234 with respect to such notice, in the absence of a showing of fraud, malfeasance, or misrepresentation of a material fact, the Secretary shall not mail another such notice to such partnership with respect to such taxable year. (c)

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 partnership. Any notice so rescinded shall not be treated as a notice of a partnership adjustment for purposes of this subchapter, and the taxpayer shall have no right to bring a proceeding under section 6234 with respect to such notice.

6232.

Assessment, collection, and payment

(a)

In general

Any imputed underpayment— (1)shall be assessed and collected in the same manner as if it were a tax imposed for the adjustment year by subtitle A, and (2)shall be paid on or before the return due date for the adjustment year. (b)

Limitation on assessment

Except as otherwise provided in this chapter, no assessment of a deficiency may be made (and no levy or proceeding in any court for the collection of any amount resulting from such adjustment may be made, begun or prosecuted) before— (1)the close of the 90th day after the day on which a notice of a final partnership adjustment was mailed, and (2)if a petition is filed under section 6234 with respect to such notice, the decision of the court has become final. (c)

Premature action may be enjoined

Notwithstanding section 7421(a), any action which violates subsection (b) may be enjoined in the proper court, including the Tax Court. The Tax Court shall have no jurisdiction to enjoin any action under this subsection unless a timely petition has been filed under section 6234 and then only in respect of the adjustments that are the subject of such petition. (d)

Exceptions to restrictions on adjustments

(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 return, an adjustment to a partnership item is required, rules similar to the rules of paragraphs (1) and (2) of section 6213(b) shall apply to such adjustment. (B)

Special rule

If a partnership is a partner in another partnership, any adjustment on account of such partnership’s failure to comply with the requirements of section 6222(a) with respect to its interest in such other partnership shall be treated as an adjustment referred to in subparagraph (A), except that paragraph (2) of section 6213(b) shall not apply to such adjustment. (2)

Partnership may waive restrictions

The partnership may at any time (whether or not any notice of partnership adjustment has been issued), by a signed notice in writing filed with the Secretary, waive the restrictions provided in subsection (b) on the making of any partnership adjustment. (e)

Limit where no proceeding begun

If no proceeding under section 6234 is begun with respect to any notice of a final partnership adjustment during the 90-day period described in subsection (b) thereof, the amount for which the partnership is liable under section 6225 shall not exceed the amount determined in accordance with such notice.

6233.

Penalties and interest

(a)

Penalties and interest determined from reviewed year

(1)

In general

In the case of an imputed underpayment with respect to a partnership adjustment for a reviewed year, the partnership— (A)shall pay to the Secretary interest computed under paragraph (2), and (B)shall be liable for any penalty, addition to tax, or additional amount as provided in paragraph (3). (2)

Determination of amount of interest

The interest computed under this paragraph with respect to any partnership adjustment is the interest which would be determined under chapter 67— (A)on the imputed underpayment determined with respect to such adjustment, and (B)for the period beginning on the day after the return due date for the reviewed year and ending on the return due date for the adjustment year (or, if earlier, the date payment of the imputed underpayment is made).

Proper adjustments in the amount determined under the preceding sentence shall be made for adjustments required for partnership taxable years after the reviewed year and before the adjustment year 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 reviewed year and the imputed underpayment were an actual underpayment (or understatement) for such year. (b)

Interest and penalties with respect to adjustment year return

(1)

In general

In the case of any failure to pay an imputed underpayment on the date prescribed therefor, the partnership shall be liable— (A)for interest as determined under paragraph (2), and (B)for any penalty, addition to tax, or additional amount as determined under paragraph (3). (2)

Interest

Interest determined under this paragraph is the interest that would be determined by treating the imputed underpayment as an underpayment of tax imposed in the adjustment year. (3)

Penalties

Penalties, additions to tax, or additional amounts determined under this paragraph are the penalties, additions to tax, or additional amounts that would be determined— (A)by applying section 6651(a)(2) to such failure to pay, and (B)by treating the imputed underpayment as an underpayment of tax for purposes of part II of subchapter A of chapter 68.

6234.

Judicial review of partnership adjustment

(a)

In general

Within 90 days after the date on which a notice of a final partnership adjustment is mailed under section 6231 with respect to any partnership taxable year, the partnership may file a petition for a readjustment 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 Secretary, on or before the date the petition is filed, the amount of the imputed underpayment (as of the date of the filing of the petition) if the partnership adjustment was made as provided by the notice of final partnership adjustment. The court may by order provide that the jurisdictional requirements of this paragraph are satisfied where there has been a good faith attempt to satisfy such requirement and any shortfall of the amount required to be deposited is timely corrected. (2)

Interest payable

Any amount deposited 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 items of income, gain, loss, deduction, or credit of the partnership for the partnership taxable year to which the notice of final partnership adjustment relates, the proper allocation of such items among the partners, and the applicability of any penalty, addition to tax, or additional amount for which the partnership may be liable under this subchapter. (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 6231(c), the decision of the court dismissing the action shall be considered as its decision that the notice of final partnership adjustment is correct, and an appropriate order shall be entered in the records of the court.

6235.

Period of limitations on making adjustments

(a)

In general

Except as otherwise provided in this section, no adjustment under this subpart for any partnership taxable year may be made after the date which is 3 years after the latest of— (1)the date on which the partnership return for such taxable year was filed, (2)the return due date for the taxable year, or (3)the date on which the partnership filed an administrative adjustment request with respect to such year under section 6226. (b)

Extension by agreement

The period described 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 properly includible therein and such amount is described in section 6501(e)(1)(A), subsection (a) shall be applied by substituting 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 purposes of this section, a return executed by the Secretary under subsection (b) of section 6020 on behalf of the partnership shall not be treated as a return of the partnership. (d)

Suspension when Secretary mails notice of adjustment

If notice of a final partnership adjustment with respect to any taxable year is mailed under section 6231, 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 6234 (and, if a petition is filed under such section with respect to such notice, until the decision of the court becomes final), and (2)for 1 year thereafter.

Definitions and special rules

Sec. 6241. Definitions and special rules.

6241.

Definitions and special rules

(a)

Definitions and special rules

For purposes of this subchapter— (1)

Partnership

The term partnership means any partnership required to file a return under section 6031(a). (2)

Partner

The term partner means— (A)a partner in the partnership, and (B)any other person whose income tax liability under subtitle A is determined in whole or in part by taking into account directly or indirectly income, gain, deduction, or loss of the partnership. (b)

Partnership adjustment

The term partnership adjustment means 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. (c)

Return due date

The term return due date means, with respect to the taxable year, the date prescribed for filing the partnership return for such taxable year (determined without regard to extensions). (d)

Joint and several liability

(1)

In general

The partnership and any partner of the partnership shall be jointly and severally liable for any imputed underpayment and any penalty, addition to tax, or additional amount attributable thereto. (2)

Period for assessment of partners

The period for assessment of an imputed underpayment with respect to a partner of a partnership shall not expire earlier than 3 years after the date on which an assessment of such imputed underpayment was made with respect to the partnership. (3)

Determining partners

A person shall be treated as partner of the partnership if such person is a partner of such partnership at any time during the reviewed or adjustment year. (e)

Payments nondeductible

No deduction shall be allowed under subtitle A for any payment required to be made by a partnership under this subchapter. (f)

Special rule for deductions, losses, and credits of foreign partnerships

Except to the extent otherwise provided in regulations, in the case of any partnership the partnership representative of which resides outside the United States or the books of which are maintained outside the United States, no deduction, loss, or credit shall be allowable to any partner unless section 6031 is complied with for the partnership’s taxable year in which such deduction, loss, or credit arose at such time as the Secretary prescribes by regulations. (g)

Partnerships having principal place of business outside United States

For purposes of sections 6234, a principal place of business located outside the United States shall be treated as located in the District of Columbia. (h)

Partnerships in cases under title 11 of United States Code

(1)

Suspension of period of limitations on making adjustment, assessment, or collection

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 imputed underpayment determined under this subchapter) 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— (A)for adjustment or assessment, 60 days thereafter, and (B)for collection, 6 months thereafter.

A rule similar to the rule of section 6213(f)(2) shall apply for purposes of section 6232(b).

(2)

Suspension of period of limitation for filing for judicial review

The running of the period specified in section 6234 shall, in a case under title 11 of the United States Code, be suspended during the period during which the partnership is prohibited by reason of such case from filing a petition under section 6234 and for 60 days thereafter.

(2)

Clerical amendment

The table of subchapters for chapter 63 of such Code is amended by inserting after the item relating to subchapter B the following new item:

Subchapter C. Treatment of partnerships

(d)

Conforming amendments

(1)Section 6422 of the Internal Revenue Code of 1986 is amended by striking paragraph (12). (2)Section 6501(n) of such Code is amended—(A)by striking paragraphs (2) and (3), and(B)by striking

Cross references

and all that follows through For period of limitations and inserting Cross reference.—For period of limitations. (3)Section 6503(a)(1) of such Code is amended by striking (or section 6229 and all that follows through of section 6230(a)). (4)Section 6504 of such Code is amended by striking paragraph (11). (5)Section 6511 of such Code is amended by striking subsection (g). (6)Section 6512(b)(3) of such Code is amended by striking the second sentence. (7)Section 6515 of such Code is amended by striking paragraph (6). (8)Section 6601(c) of such Code is amended by striking the last sentence. (9)Section 7421(a) of such Code is amended by striking 6225(b), 6246(b) and inserting 6232(c). (10)Section 7422 of such Code is amended by striking subsection (h). (11)Section 7459(c) of such Code is amended by striking section 6226 and all that follows through or 6252 and inserting section 6234. (12)Section 7482(b)(1) of such Code is amended— (A)by striking section 6226, 6228, 6247, or 6252 in subparagraph (E) and inserting section 6234, (B)by striking subparagraph (F), by striking or at the end of subparagraph (E) and inserting a period, and by inserting or at the end of subparagraph (D), and (C)by striking section 6226, 6228(a), or 6234(c) in the last sentence and inserting section 6234. (13)Section 7485(b) of such Code is amended by striking section 6226, 6228(a), 6247, or 6252 and inserting section 6234. (e)

Effective date

Except as provided in subsection (b)(4), the amendments made by this section shall apply to returns filed for partnership taxable years ending after December 31, 2014, except that a partnership may elect (at such time and in such form and manner as the Secretary of the Treasury may prescribe) for such amendments to apply to any return of the partnership filed for partnership taxable years ending after the date of the enactment of this Act and before January 1, 2015.