[Federal Register Volume 64, Number 218 (Friday, November 12, 1999)]
[Rules and Regulations]
[Pages 61502-61504]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-29087]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 301

[TD 8843]
RIN 1545-AW14


Partnership Returns Required on Magnetic Media

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations relating to the 
requirements for filing partnership returns on magnetic media. These 
regulations reflect changes to the law made by the Taxpayer Relief Act 
of 1997. These regulations affect partnerships with more than 100 
partners.

DATES: Effective Date: These regulations are effective January 1, 2000.
    Applicability Date: These regulations apply to partnership returns 
for taxable years ending on or after December 31, 2000. However, the 
regulations will not apply to electing large partnership returns under 
section 775 or partnership returns with foreign addresses for taxable 
years ending before January 1, 2001.

FOR FURTHER INFORMATION CONTACT: Bridget E. Finkenaur, (202) 622-4940 
(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    This document contains amendments to the Regulations on Procedure 
and Administration (26 CFR part 301) relating to filing partnership 
returns on magnetic media under section 6011(e)(2). In addition, this 
document contains conforming amendments to the Regulations on Procedure 
and Administration (26 CFR part 301) relating to information reporting 
penalties under section 6721.
    A notice of proposed rulemaking (REG-102023-98) was published in 
the Federal Register (63 FR 56878) on October 23, 1998. The public 
hearing scheduled for January 13, 1999, was canceled in the Federal 
Register (64 FR 1148) on January 8, 1998. No public hearing was 
requested or held. Two written comments were received. After 
consideration of the comments, the proposed regulations are adopted as 
modified by this Treasury decision. The comments are discussed below.

Explanation of Revisions and Summary of Comments

    Both commentators requested that the IRS and the Treasury 
Department postpone the effective date of the regulations. The 
commentators were concerned that, given the various manners and formats 
that nominees use to submit partner information to publicly traded 
partnerships, these partnerships would be unable to create computer 
programs that would reformat the partner information in time to file 
their 1999 tax returns on magnetic media. In addition, partnerships 
required to file their returns on magnetic media beginning in 2000 will 
be focusing their computer resources on ensuring that their computer 
systems are year 2000 compliant. The commentators suggested that the 
effective date of the regulations be postponed to take into account 
these programming considerations.

[[Page 61503]]

    In considering these comments, the IRS and the Treasury Department 
have decided to postpone the general effective date of the regulations 
for one year. This will allow partnerships additional time to develop 
systems that accommodate IRS processing requirements and integrate 
third party information while not interfering with efforts to ensure 
year 2000 compliance. Therefore, the final regulations are generally 
effective for taxable years ending on or after December 31, 2000. 
However, the effective date for electing large partnerships and 
partnerships using foreign addresses on their Series 1065 forms remains 
the same as the proposed regulations. Accordingly, electing large 
partnerships and partnerships using foreign addresses will not be 
required to file their returns on magnetic media for taxable years 
ending before January 1, 2001.
    Although the general effective date of the regulations has been 
postponed, on March 15, 2000, the IRS will begin accepting partnership 
returns for taxable years ending on or after December 31, 1999, on 
magnetic media. The magnetic media filing of partnership returns for 
taxable years ending before December 31, 2000, is voluntary; 
partnerships will not be penalized for submitting a partnership return 
on paper for taxable years ending before this date. However, 
partnerships with the capability of submitting their partnership tax 
returns on magnetic media are encouraged to do so.
    Partnerships with 100 or fewer partners also may voluntarily submit 
partnership returns on magnetic media beginning on March 15, 2000. 
These regulations do not require partnerships with 100 or fewer 
partners to file their returns on magnetic media; therefore, such 
partnerships will not be penalized for their failure to do so. In 
addition, partnerships with 100 or fewer partners participating in the 
magnetic media filing program may discontinue their participation at 
any time.
    One commentator suggested that the IRS and the Treasury Department 
publish regulations under section 6031(c) to require nominees holding 
partnership interests to submit partner information to partnerships in 
the same manner and format that the IRS requires partnerships to file 
their returns under Sec. 301.6011-3 of the regulations. However, by 
postponing the effective date, it is anticipated that partnerships and 
nominees will have adequate time to establish satisfactory guidelines 
for sharing information. Accordingly, this comment has not been adopted 
by the final regulations.
    Finally, one commentator asked whether fiscal year and short year 
returns will be required to be filed on magnetic media by the general 
effective date. Again, because the IRS and the Treasury Department have 
postponed the general effective date for one year, it is anticipated 
that partnerships will be able to meet the systems requirements set 
forth in IRS revenue procedures and other published guidance by the 
effective date. However, due to issues relating to creation of the 
system for accepting returns on magnetic media, the IRS will not be 
able to accept fiscal and short year returns prior to the general 
effective date. Therefore, partnerships that use a fiscal year and 
partnerships that must file a short year return may not voluntarily 
file their returns on magnetic media before January 1, 2001.
    As indicated in the preamble to the proposed regulations, although 
the regulations define magnetic media broadly, the Service currently 
plans, in prescribed procedures for participation in the mandatory 
magnetic media filing program, to require partnerships with more than 
100 partners to file their partnership returns electronically.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866. 
Therefore, a regulatory assessment is not required. It also has been 
determined that section 553(b) of the Administrative Procedure Act (5 
U.S.C. chapter 5) does not apply to these regulations, and because 
these regulations do not impose a collection of information on small 
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not 
apply. Pursuant to section 7805(f) of the Internal Revenue Code, the 
notice of proposed rulemaking that preceded these regulations was 
submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on its impact on small business.
    Drafting Information: The principal author of these 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 regulations.

List of Subjects in 26 CFR Part 301

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

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR part 301 is amended as follows:

PART 301--PROCEDURE AND ADMINISTRATION

    Paragraph 1. The authority citation for part 301 is amended by 
adding an entry in numerical order to read in part as follows:

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

Section 301.6011-3 also issued under 26 U.S.C. 6011; * * *
    Par. 2. 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.
    (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

[[Page 61504]]

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 2000:

    Example 1. Partnership P had five general partners and 90 
limited partners on January 1, 2000. On March 15, 2000, 10 more 
limited partners acquired an interest in P. On September 29, 2000, 
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, 2000, P had the same five general partners 
and 90 limited partners it had on January 1, 2000. P had a total of 
105 partners over the course of partnership taxable year 2000. 
Therefore, P must file its 2000 partnership return on magnetic 
media.
    Example 2. Partnership Q is a general partnership that had 95 
partners on January 1, 2000. On March 15, 2000, 10 partners sold 
their individual partnership interests to corporation D, which was 
not previously a partner in Q. On September 29, 2000, 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, 
2000, 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 2000 partnership return 
on magnetic media.
    Example 3. Partnership G is a general partnership with 100 
partners on January 1, 2000. There are no new partners added to G in 
2000. 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 2000 
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, 2000. 
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. 3. 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. * * *
* * * * *
    Approved: October 29, 1999.
Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
Jonathan Talisman,
Acting Assistant Secretary of the Treasury.
[FR Doc. 99-29087 Filed 11-10-99; 8:45 am]
BILLING CODE 4830-01-U