[Federal Register Volume 63, Number 205 (Friday, October 23, 1998)]
[Proposed Rules]
[Pages 56878-56881]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-28264]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 301

[REG-102023-98]
RIN 1545-AW14


Partnership Returns Required on Magnetic Media

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

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SUMMARY: This document contains proposed regulations relating to the 
requirements for filing partnership returns on magnetic media under 
section 6011(e) of the Internal Revenue Code. The proposed regulations 
reflect changes to the law made by the Taxpayer Relief Act of 1997. The 
proposed regulations affect partnerships with more than 100 partners. 
This document also provides a notice of a public hearing on these 
proposed regulations.

DATES: Written comments must be received by January 21, 1999. Requests 
to speak (with outlines of oral comments) at the public hearing 
scheduled for January 13, 1999, must be received by December 23, 1998.

ADDRESSES: Send submissions to: CC:DOM:CORP:R (REG-102023-98), Room 
5228, Internal Revenue Service, POB 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand delivered Monday through 
Friday between the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R (REG-
102023-98), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue NW., Washington, DC. Alternatively, taxpayers may submit 
comments electronically via the Internet by selecting the ``Tax Regs'' 
option on the IRS Home Page, or by submitting comments directly to the 
IRS Internet site at htpp://www.irs.ustreas.gov/prod/tax__regs/
comments.html. The public hearing will be held in Room 2615, Internal 
Revenue Building, 1111 Constitution Avenue, NW., Washington, DC 20224.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Bridget E. Finkenaur, 202-622-4940;

[[Page 56879]]

concerning submissions of comments, the hearing, and/or to be placed on 
the building access list to attend the hearing, Mike Slaughter, 202-
622-7190 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

    This document contains proposed amendments to the Regulations on 
Procedure and Administration (26 CFR part 301) relating to the filing 
of partnership returns on magnetic media under section 6011(e)(2) of 
the Internal Revenue Code. Section 6011(e)(2) was amended by section 
1224 of the Taxpayer Relief Act of 1997, Public Law 105-34 (111 Stat. 
788 (1997)) (the Act), effective for taxable years ending on or after 
December 31, 1997. Section 6012(e) of the Internal Revenue Service 
Restructuring and Reform Act of 1998, Public Law 105-206 (112 Stat. 685 
(1998)), changes the effective date of section 1224 of the Act to 
taxable years beginning after December 31, 1997.
    Section 6011(e) authorizes the Secretary to prescribe regulations 
providing the standards for determining which returns must be filed on 
magnetic media or in other machine-readable form. Section 6011(e)(2)(A) 
provides that the regulations may not require any person to file 
returns on magnetic media unless the person is required to file at 
least 250 returns during the calendar year. However, the last sentence 
of section 6011(e)(2), which was added by section 1224 of the Act, 
provides that the Secretary must prescribe regulations requiring 
partnerships with more than 100 partners to file returns on magnetic 
media. In addition, section 6011(e)(2)(B) requires that the regulations 
take into account (among other relevant factors) the ability of the 
taxpayer to comply at reasonable cost with the requirements of the 
regulations.
    Currently, the IRS permits certain partnerships to file their 
partnership returns on magnetic media (including magnetic tape, floppy 
disk, and electronic filing) with the Internal Revenue Service Center 
in Andover, Massachusetts. Under this voluntary program, participants 
have the option of: (1) submitting the entire partnership tax return 
(including Form 1065, U.S. Partnership Return of Income, Schedules K-1, 
Partner's Share of Income, Credits, Deductions, etc., and all other 
related forms and schedules) on magnetic media, or (2) submitting only 
the Schedules K-1 on magnetic media and filing the rest of the 
partnership return on paper.
    In Notice 97-77 (1997-52 I.R.B. 18 (December 29, 1997)), the IRS 
notified taxpayers that the Act s amendment to section 6011(e)(2) is 
not self-executing. Rather, the IRS must first issue regulations that 
would require partnerships with more than 100 partners to file their 
partnership returns on magnetic media. Accordingly, partnerships were 
not required to file their 1997 partnership returns on magnetic media.

Explanation of Provisions

In General

    The proposed regulations provide that partnerships with more than 
100 partners must file their partnership returns on magnetic media. The 
determination of whether a partnership has more than 100 partners is 
made by counting the number of partners the partnership had over the 
partnership's taxable year, regardless of whether a partner was a 
partner for the entire year or whether the partnership had over 100 
partners on any particular day in the year.
    The proposed regulations provide that a partnership return is a 
form in Series 1065 (including Form 1065, U.S. Partnership Return of 
Income, and Form 1065-B, U.S. Return of Income for Electing Large 
Partnerships), along with the corresponding Schedules K-1 and all other 
related forms and schedules that are required to be attached to the 
Series 1065 form.
    Magnetic media means any magnetic media permitted under applicable 
regulations, revenue procedures, or publications. The IRS will 
prescribe procedures for participation in the mandatory magnetic media 
filing program for partnerships with more than 100 partners. Included 
in those procedures will be methods for registering for the program and 
signing the partnership return. The procedures will be contained in 
applicable revenue procedures or publications.
    The term magnetic media generally includes magnetic tape, tape 
cartridge, and diskette, as well as other media (such as electronic 
filing). Consistent with the definition of magnetic media in other 
regulations, the proposed regulations define magnetic media broadly. 
However, under these regulations, the Service plans to require 
partnerships with more than 100 partners to file their partnership 
returns electronically. These requirements for electronic filing will 
be detailed in applicable revenue procedures or publications.
    The IRS and Treasury Department believe that requiring affected 
partnerships to file electronically will enhance the quality of IRS s 
customer service and will reduce the costs associated with maintaining 
the ability to accept forms in a variety of magnetic media. 
Furthermore, the IRS and Treasury Department believe that electronic 
filing has less burden on taxpayers than filing using other forms of 
magnetic media.
    Electronic filing reduces the normal processing time associated 
with paper returns in that there is minimal hands-on processing and, 
therefore, there are no paperwork delays. Faster processing means 
faster settling of accounts and better customer service. Electronic 
filing also reduces errors and increases security by reducing duplicate 
or erroneous returns. In addition, taxpayers receive prompt 
acknowledgment that their returns have been received and accepted by 
the Internal Revenue Service. Finally, electronic filing reduces the 
operating costs for taxpayers whose data already resides on a computer 
system. Overall, electronic filing of partnership returns should 
increase customer satisfaction and confidence in the filing process, 
and be more cost effective for partnerships.
    Although the IRS Service Center in Andover, Massachusetts currently 
accepts returns in the voluntary program on various forms of magnetic 
media, the systems at this facility are not year 2000 compliant and 
will not be in operation after 1999. Accordingly, in designing its new 
magnetic media systems to accept electronically filed returns only, the 
IRS anticipates that it will no longer be able to accept returns filed 
in the form currently used by some partnerships in the voluntary 
program.

Hardship Waiver

    The proposed regulations provide procedures for granting waivers of 
the magnetic media filing requirements for one or more years in cases 
of hardship. A determination of hardship will be based upon all of the 
facts and circumstances. Some factors that will be considered in 
granting waivers include the reasonableness of the incremental cost to 
the partnership of complying with the magnetic media filing 
requirements as well as temporary equipment breakdowns and destruction 
of magnetic media filing equipment.

Penalties

    The proposed regulations provide that if a partnership has more 
than 100 partners and is required to file a partnership return, but 
fails to file its Series 1065 form, accompanying Schedules K-1, and all 
other related forms and schedules in the manner required, the 
partnership is deemed to have failed to file correct information

[[Page 56880]]

returns for purposes of the information reporting penalty under section 
6721. Penalties for failure to file correct information returns would 
apply for each Schedule K-1 that is not filed using permissible 
magnetic media.

Proposed Effective Dates

    The IRS is currently focusing a significant portion of its 
resources on the Year 2000 date change. In addition, the IRS is 
developing new programs to accommodate the new Form 1065-B and 
partnership returns filed with a foreign address on the Series 1065 
form. Further, partnerships will have to update their processes and 
technology to implement the electronic filing requirements.
    Taking these factors into consideration, the proposed regulations 
would delay the effective date for filing partnership returns on 
magnetic media, and phase in the magnetic media filing of certain 
partnership returns. Thus, the proposed regulations would be generally 
effective for partnership returns for partnership taxable years ending 
on or after December 31, 1999. However, electing large partnerships 
under section 775 and partnerships using foreign addresses on their 
Series 1065 forms would not be required to file their partnership 
returns using magnetic media for taxable years ending before January 1, 
2001.

Special Analyses

    It is hereby certified that the regulations in this document will 
not have a significant economic impact on a substantial number of small 
entities. This certification is based on a determination that these 
regulations will impose no additional reporting or recordkeeping 
requirement and will prescribe only the method for filing partnership 
returns that are already required to be filed under section 6031. 
Accordingly, a Regulatory Flexibility Analysis under the Regulatory 
Flexibility Act (5 U.S.C. chapter 6) is not required.
    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in EO 12866. Therefore, 
a regulatory assessment is not required.
    Pursuant to section 7805(f) of the Internal Revenue Code, this 
notice of proposed rulemaking will be submitted to the Chief Counsel 
for Advocacy of the Small Business Administration for comment on its 
impact on small business.

Comments and Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any comments that are submitted timely 
to the IRS. All comments will be available for public inspection and 
copying.
    A public hearing has been scheduled for Wednesday, January 13, 
1999, at 10 a.m. in Room 2615 of the Internal Revenue Building, 1111 
Constitution Avenue, NW., Washington, DC. Due to building security 
procedures, visitors must enter at the 10th Street entrance, located 
between Constitution and Pennsylvania Avenues, NW. In addition, all 
visitors must present photo identification to enter the building. 
Because of access restrictions, visitors will not be admitted beyond 
the immediate entrance area more than 15 minutes before the hearing 
starts. For information about having your name placed on the building 
access list to attend the hearing, see the FOR FURTHER INFORMATION 
CONTACT section of this preamble.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing.
    Persons that wish to present oral comments at the hearing must 
submit comments and an outline of the topics to be discussed and the 
time to be devoted to each topic by December 23, 1998.
    A period of 10 minutes will be allotted to each person for making 
comments.
    An agenda showing the scheduling of the speakers will be prepared 
after the deadline for receiving outlines has passed. Copies of the 
agenda will be available free of charge at the hearing.

Drafting Information

    The principal author of these proposed regulations is Bridget E. 
Finkenaur, Office of the Assistant Chief Counsel (Income Tax and 
Accounting). However, other personnel from the IRS and Treasury 
Department participated in the development of these proposed 
regulations.

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 301

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

Proposed Amendments to the Regulations

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

PART 1--INCOME TAXES

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

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

    Par. 2. Section 1.6031(a)-1 as proposed to be added at 63 FR 3679 
is amended by adding paragraph (e)(1)(iv) to read as follows:


Sec. 1.6031(a)-1  Return of partnership income.

* * * * *
    (e) * * *
    (1) * * *
    (iv) Returns filed on magnetic media. Notwithstanding the 
provisions of paragraphs (e)(1)(i) and (ii) of this section, the return 
of a partnership that is required to be filed on magnetic media under 
Sec. 301.6011-3 of this chapter must be filed at the Service Center 
indicated in relevant Internal Revenue Service revenue procedures, 
publications, forms, or instructions.
* * * * *

PART 301--PROCEDURE AND ADMINISTRATION

    Par. 4. The authority citation for part 301 is amended by adding an 
entry in numerical order to read as follows:

    Authority: 26 U.S.C. 7805 * * * Section 301.6011-3 also issued 
under 26 U.S.C. 6011; * * *

    Par. 5. Section 301.6011-3 is added to read as follows:


Sec. 301.6011-3  Required use of magnetic media for partnership 
returns.

    (a) Partnership returns required on magnetic media. If a 
partnership with more than 100 partners is required to file a 
partnership return pursuant to Sec. 1.6031(a)-1 of this chapter, the 
information required by the applicable forms and schedules must be 
filed on magnetic media, except as otherwise provided in paragraph (b) 
of this section. Returns filed on magnetic media must be made in 
accordance with applicable revenue procedures or publications. In 
prescribing revenue procedures or publications, the Commissioner may 
determine that partnerships will be required to use any one form of 
magnetic media filing. For example, the Commissioner may determine that 
partnerships with more than 100 partners must file their partnership 
returns electronically. In filing its return, a partnership must 
register to participate in the magnetic media filing program in the 
manner prescribed by the Internal Revenue Service in applicable revenue 
procedures or publications.

[[Page 56881]]

    (b) Waiver. The Commissioner may waive the requirements of this 
section if hardship is shown in a request for waiver filed in 
accordance with this paragraph (b). A determination of hardship will be 
based upon all of the facts and circumstances. One factor in 
determining hardship will be the reasonableness of the incremental cost 
to the partnership of complying with the magnetic media filing 
requirements. Other factors, such as equipment breakdowns or 
destruction of magnetic media filing equipment, also may be considered. 
A request for waiver must be made in accordance with applicable revenue 
procedures or publications. The waiver will specify the type of 
partnership return and the period to which it applies. The waiver will 
also be subject to such terms and conditions regarding the method of 
filing as may be prescribed by the Commissioner.
    (c) Failure to file. If a partnership fails to file a partnership 
return on magnetic media in the manner required and when required to do 
so by this section, the partnership will be deemed to have failed to 
file the return in the manner prescribed for purposes of the 
information return penalty under section 6721. See Sec. 301.6724-
1(c)(3) for rules regarding the waiver of penalties for undue economic 
hardship relating to filing returns on magnetic media.
    (d) Meaning of terms. The following definitions apply for purposes 
of this section:
    (1) Magnetic media. The term magnetic media means any magnetic 
media permitted under applicable regulations, revenue procedures, or 
publications. These generally include magnetic tape, tape cartridge, 
and diskette, as well as other media (such as electronic filing) 
specifically permitted under the applicable regulations, procedures, or 
publications.
    (2) Partnership. The term partnership means a partnership as 
defined in Sec. 1.761-1(a) of this chapter.
    (3) Partner. The term partner means a member of a partnership as 
defined in section 7701(a)(2).
    (4) Partnership return. The term partnership return means a form in 
Series 1065 (including Form 1065, U.S. Partnership Return of Income, 
and Form 1065-B, U.S. Return of Income for Electing Large 
Partnerships), along with the corresponding Schedules K-1 and all other 
related forms and schedules that are required to be attached to the 
Series 1065 form.
    (5) Partnerships with more than 100 partners. A partnership has 
more than 100 partners if, over the course of the partnership's taxable 
year, the partnership had more than 100 partners, regardless of whether 
a partner was a partner for the entire year or whether the partnership 
had over 100 partners on any particular day in the year. For purposes 
of this paragraph (d)(5), however, only those persons having a direct 
interest in the partnership must be considered partners for purposes of 
determining the number of partners during the partnership s taxable 
year.
    (e) Examples. The following examples illustrate the provisions of 
paragraph (d)(5) of this section. In the examples, the partnerships 
utilize the calendar year, and the taxable year in question is 1999:

    Example 1. Partnership P had five general partners and 90 
limited partners on January 1, 1999. On March 15, 1999, 10 more 
limited partners acquired an interest in P. On September 30, 1999, 
the 10 newest partners sold their individual partnership interests 
to C, a corporation which was one of the original 90 limited 
partners. On December 31, 1999, P had the same five general partners 
and 90 limited partners it had on January 1, 1999. P had a total of 
105 partners over the course of partnership taxable year 1999. 
Therefore, P must file its 1999 partnership return on magnetic 
media.
    Example 2. Partnership Q is a general partnership that had 95 
partners on January 1, 1999. On March 15, 1999, 10 partners sold 
their individual partnership interests to corporation D, which was 
not previously a partner in Q. On September 30, 1999, corporation D 
sold one-half of its partnership interest in equal shares to five 
individuals, who were not previously partners in Q. On December 31, 
1999, Q had a total of 91 partners, and on no date in the year did Q 
have more than 100 partners. Over the course of the year, however, Q 
had 101 partners. Therefore, Q must file its 1999 partnership return 
on magnetic media.
    Example 3. Partnership G is a general partnership with 100 
partners on January 1, 1999. There are no new partners added to G in 
1999. One of G's partners, A, is a partnership with 53 partners. A 
is one partner, regardless of the number of partners A has. 
Therefore, G has 100 partners and is not required to file its 1999 
partnership return on magnetic media.

    (f) Effective date. In general, this section applies to partnership 
returns for taxable years ending on or after December 31, 1999. 
However, electing large partnerships under section 775 and partnerships 
using foreign addresses on their Series 1065 forms are not required to 
file using magnetic media for taxable years ending before January 1, 
2001.
    Par. 6. Section 301.6031-1 is revised to read as follows:


Sec. 301.6031-1  Return of partnership income.

    For provisions relating to the requirement of returns of 
partnership income, see Sec. 1.6031(a)-1 of this chapter. For 
provisions relating to magnetic media filing of partnership returns, 
see Sec. 301.6011-3.
    Par. 7. Section 301.6721-1 is amended by removing the third, 
fourth, and fifth sentences of paragraph (a)(2)(ii) and adding four 
sentences in their place to read as follows:


Sec. 301.6721-1  Failure to file correct information returns.

    (a) * * *
    (2) * * *
    (ii) * * * However, no penalty is imposed under paragraph (a)(1) of 
this section solely by reason of any failure to comply with the 
requirements of section 6011(e)(2), except to the extent that such a 
failure occurs with respect to more than 250 information returns (the 
250-threshold requirement) or in the case of a partnership with more 
than 100 partners, more than 100 information returns (the 100-threshold 
requirement) (collectively, the threshold requirements). Each Schedule 
K-1 considered in applying the 100-threshold requirement will be 
treated as a separate information return. These threshold requirements 
apply separately to each type of information return required to be 
filed. Further, these threshold requirements apply separately to 
original and corrected returns. * * *
* * * * *
Michael P. Dolan,
Deputy Commissioner of Internal Revenue.
[FR Doc. 98-28264 Filed 10-22-98; 8:45 am]
BILLING CODE 4830-01-U