[Federal Register Volume 81, Number 151 (Friday, August 5, 2016)]
[Rules and Regulations]
[Pages 51795-51798]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-18638]



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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 301

[TD 9780]
RIN 1545-BN34


Election Into the Partnership Audit Regime Under the Bipartisan 
Budget Act of 2015

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Temporary regulations.

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SUMMARY: This document contains temporary regulations pursuant to 
section 1101(g)(4) of the Bipartisan Budget Act of 2015 regarding an 
election to apply the new partnership audit regime enacted by that act 
to certain returns of a partnership. The regulations provide the time, 
form, and manner for making this election. The regulations affect any 
partnership that wishes to elect to have the new partnership audit 
regime apply to its returns filed for certain taxable years beginning 
before January 1, 2018.

DATES: 
    Effective date: These regulations are effective August 5, 2016.
    Applicability Date: For dates of applicability, see Sec.  301.9100-
22T(e) and (f).

FOR FURTHER INFORMATION CONTACT: Jenni M. Black at (202) 317-6834 (not 
a toll-free number).

SUPPLEMENTARY INFORMATION: 

Background

    This document contains amendments to the Procedure and 
Administration Regulations (26 CFR part 301) to provide rules for the 
time, form, and manner of making the election under section 1101(g)(4) 
of the Bipartisan Budget Act of 2015, Public Law 114-74 (BBA) with 
respect to returns filed for partnership taxable years beginning after 
November 2, 2015 and before January 1, 2018.
    The BBA was enacted on November 2, 2015, and was amended by the 
Protecting Americans from Tax Hikes Act of 2015, Public Law 114-113, 
div. Q (PATH Act) on December 18, 2015. Section 1101(a) of the BBA 
removes subchapter C of chapter 63 of the Internal Revenue Code (Code) 
effective for partnership taxable years beginning after December 31, 
2017. Subchapter C of chapter 63 contains the unified partnership audit 
and litigation rules that were enacted as part of the Tax Equity and 
Fiscal Responsibility Act of 1982, Public Law 97-248 (TEFRA). These 
partnership audit and litigation rules are commonly referred to as the 
TEFRA partnership procedures.
    Section 1101(b) of the BBA also removes subchapter D of chapter 63 
of the Code (containing audit rules for electing large partnerships) 
and part IV of subchapter K of chapter 1 of the Code (prescribing the 
income tax treatment for electing large partnerships), effective for 
partnership taxable years beginning after December 31, 2017.
    Section 1101(c) of the BBA replaces the rules to be removed by 
sections 1101(a) and (b) with a new partnership audit regime. Section 
1101(c) adds a new subchapter C to chapter 63 of the Code, including 
amended Code sections 6221-6241. The BBA also makes related and 
conforming amendments to other provisions of the Code.
    On December 18, 2015, President Obama signed into law the PATH Act. 
Section 411 of the PATH Act corrects and clarifies certain amendments 
made by the BBA. The amendments under the PATH Act are effective as if 
included in section 1101 of the BBA, and therefore, subject to the 
effective dates in section 1101(g) of the BBA.

1. Overview of the New Partnership Audit Regime

    Section 6221(a) as added by the BBA provides that, in general, any 
adjustment to 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 determined, and any tax 
attributable thereto shall be assessed and collected, at the 
partnership level. The applicability of any penalty, addition to tax, 
or additional amount which relates to an adjustment to any such item or 
share shall also be determined at the partnership level. Section 
6221(b) as added by the BBA provides rules for partnerships that are 
required to furnish 100 or fewer Schedules K-1, Partner's Share of 
Income, Deductions, Credits, etc., to elect out of this new regime. 
Generally, a partnership may elect out of the new regime only if each 
of its partners is an individual, corporation (including certain types 
of foreign entities), or estate. Special rules apply for purposes of 
determining the number of partners in the case of a partner that is an 
S corporation. Section 6221(b)(2)(C) provides that the Secretary by 
regulation or other guidance may prescribe rules for purposes of the 
100-or-fewer-Schedule K-1 requirement similar to the rules for S 
corporations with respect to any partner that is not an individual, 
corporation, or estate.
    Section 6223 as amended by the BBA provides that the partnership 
shall designate, in the manner prescribed by the Secretary, a partner 
or other person with a substantial presence in the United States as the 
partnership representative who shall have the sole authority to act on 
behalf of the partnership under subchapter C of chapter 63 of the Code, 
as amended by the BBA. In any case in which such a designation is not 
in effect, the Secretary may select any person as the partnership 
representative. A partnership and all partners of such partnership 
shall be bound by actions taken under subchapter C by the partnership 
and by any final decision in a proceeding brought under subchapter C 
with respect to the partnership.
    Section 6225 as amended by the BBA generally addresses partnership 
adjustments made by the IRS and the calculation of any resulting 
imputed underpayment. Section 6225(a) generally provides that the 
amount of any imputed underpayment resulting from an adjustment must be 
paid by the partnership. Section 6225(b) describes how an imputed 
underpayment is determined, and section 6225(c) describes modifications 
that, if approved by the IRS, may reduce the amount of an imputed 
underpayment. The PATH Act added to section 6225(c) a special rule 
addressing certain passive losses of publicly traded partnerships.
    Section 6226 as amended by the BBA provides an exception to the 
general rule under section 6225(a)(1) that the partnership must pay the 
imputed underpayment. Under section 6226, the partnership may elect to 
have the reviewed year partners take into account the adjustments made 
by the IRS and pay any tax due as a result of those adjustments. In 
this case, the partnership is not required to pay the imputed 
underpayment. Section 6225(d)(1) defines the reviewed year to mean the 
partnership taxable year to which the item(s) being adjusted relates.
    Under section 6227 as amended by the BBA, the partnership may 
request an administrative adjustment, which is taken into account in 
the partnership taxable year the administrative adjustment request 
(AAR) is made. The partnership generally has three years from the date 
of filing the return to make an AAR for that year, but may not make an 
AAR for a partnership taxable year after the IRS has mailed the 
partnership a notice of an administrative proceeding initiated with 
respect to the taxable year.
    Section 6231 as amended by the BBA describes notices of proceedings 
and adjustments, including certain time

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frames for mailing the notices and the authority to rescind any notice 
of adjustment with the partnership's consent. Section 6232(a) as 
amended by the BBA provides that any imputed underpayment is assessed 
and collected in the same manner as if it were a tax imposed for the 
adjustment year by subtitle A, except that in the case of an AAR that 
reports an underpayment that the partnership elects to pay, the 
underpayment shall be paid when the request is filed.
    Section 6234 as amended by the BBA generally provides that a 
partnership may seek judicial review of the adjustments within 90 days 
of the date the notice of final partnership adjustment is mailed. 
Section 6235 as amended by the BBA provides the period of limitations 
on making adjustments.
    Section 6241 as amended by the BBA provides definitions and special 
rules, including rules addressing bankruptcy and treatment when a 
partnership ceases to exist. In particular, section 6241(4) as amended 
by the BBA provides that no deduction is allowed under subtitle A for 
any payment required to be made by a partnership under the new 
partnership audit regime.

2. Effective Dates

    Pursuant to section 1101(g)(1) of the BBA, the amendments made by 
section 1101, which repeal the TEFRA partnership procedures and the 
rules applicable to electing large partnerships and which create the 
new partnership audit regime, generally apply to returns filed for 
partnership taxable years beginning after December 31, 2017. Section 
1101(g)(2) of the BBA provides that, in the case of an AAR under 
section 6227 as amended by the BBA, the amendments made by section 1101 
apply to requests with respect to returns filed for partnership taxable 
years beginning after December 31, 2017. Similarly, section 1101(g)(3) 
of the BBA provides that, in the case of an election to use the 
alternative to payment of the imputed underpayment by the partnership 
under section 6226 as amended by the BBA, the amendments made by 
section 1101 apply to elections with respect to returns filed for 
partnership taxable years beginning after December 31, 2017.
    Section 1101(g)(4) of the BBA provides that a partnership may elect 
(at such time and in such form and manner as the Secretary may 
prescribe) for the amendments made under section 1101 (other than the 
election out of the new partnership audit regime under section 6221(b) 
as added by the BBA) to apply to any of its partnership returns filed 
for partnership taxable years beginning after November 2, 2015 (the 
date of the enactment of the BBA) and before January 1, 2018.

Explanation of Provisions

    This Treasury decision adopts temporary regulations set forth in 
Sec.  301.9100-22T to provide the time, form, and manner for a 
partnership to make an election pursuant to section 1101(g)(4) of the 
BBA to have the new partnership audit regime apply to any of its 
partnership returns filed for a partnership taxable year beginning 
after November 2, 2015 and before January 1, 2018. Section 301.9100-
22T(a) provides the general rule that a partnership may elect at the 
time and in such form and manner as described in Sec.  301.9100-22T for 
amendments made by section 1101 of the BBA, except section 6221(b) 
added by the BBA, to apply to any return of the partnership filed for 
an eligible taxable year (as defined in Sec.  301.9100-22T(d)). 
Accordingly, a partnership that elects to apply the new partnership 
audit regime to a partnership return filed for an eligible taxable year 
may not elect out of the new rules under the small partnership 
exception under section 6221(b) as added by BBA, with respect to that 
return.
    Section 301.9100-22T(a) further provides that an election made not 
in accordance with these temporary regulations is not valid, and an 
election, once made, may only be revoked with consent of the IRS. An 
election is also not valid if it frustrates the purposes of section 
1101 of the BBA, which include the collection of any imputed 
underpayment that may be due by the partnership under section 6225(a) 
as amended by the BBA. In addition, partnerships may not request an 
extension of time for making an election described in Sec.  301.9100-
22T under Sec.  301.9100-3.
    Section 301.9100-22T(d)(1) generally provides that for purposes of 
the temporary regulations, an eligible taxable year is any partnership 
taxable year beginning after November 2, 2015 and before January 1, 
2018. Section 301.9100-22T(d)(2) provides exceptions to the definition 
of an eligible taxable year to avoid proceedings under both the TEFRA 
partnership procedures and the new partnership audit regime for the 
same partnership taxable year. To avoid these multiple proceedings, an 
election under these temporary regulations does not apply if the 
partnership has taken the affirmative step to apply the TEFRA 
partnership procedures with respect to the partnership return for that 
taxable year. This occurs when the tax matters partner has filed a 
request for an administrative adjustment for the partnership taxable 
year under section 6227(c) of the TEFRA partnership procedures with 
respect to a partnership taxable year. Similarly, an election under 
these temporary regulations also does not apply if a partnership that 
is not subject to the TEFRA partnership procedures has filed an amended 
return of partnership income for the partnership taxable year.
    Under the general rule in Sec.  301.9100-22T(b), an election to 
have the new partnership audit regime apply must be made when the IRS 
first notifies the partnership in writing that a partnership return for 
an eligible taxable year has been selected for examination (a ``notice 
of selection for examination''). Section 301.9100-22T(b)(1) provides 
that a partnership that wishes to make an election must do so within 30 
days of the date of the notice of selection for examination. The notice 
of selection for examination referred to in Sec.  301.9100-22T(b) is a 
notice that precedes the notice of an administrative proceeding 
required under section 6231(a) as amended by the BBA. Section 301.9100-
22T(b) provides that the IRS will not issue a notice of an 
administrative proceeding, which cuts off the partnership's time for 
filing an AAR under section 6227 as amended by the BBA, for at least 30 
days after it receives a valid election filed in accordance with Sec.  
301.9100-22T(b). During the period of at least 30 days after the IRS 
receives a valid election and before the IRS mails the notice of an 
administrative proceeding, the partnership may file an AAR under 
section 6227 as amended by the BBA.
    Section 301.9100-22T(b)(2) provides that an election must be in 
writing and include a statement that the partnership is electing to 
have the partnership audit regime enacted by the BBA apply to the 
partnership return identified in the IRS notification of selection for 
examination. The partnership must write ``Election under Section 
1101(g)(4)'' at the top of the statement. The statement must be 
provided to the individual identified in the notice of selection for 
examination as the IRS contact for the examination. In addition, the 
statement must be dated and signed by the tax matters partner, as 
defined under section 6231(a)(7) of the TEFRA partnership procedures 
and the applicable regulations, or an individual who has the authority 
to sign the partnership return for the taxable year under examination 
under section 6063 of the Code, the regulations thereunder, and 
applicable forms and instructions. The statement must include the name,

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taxpayer identification number, address, and telephone number of the 
individual who signs the statement, as well as the partnership's name, 
taxpayer identification number, and tax year to which the statement 
applies. The statement must include representations that the 
partnership is not insolvent and does not reasonably anticipate 
becoming insolvent, the partnership is not currently and does not 
reasonably anticipate becoming subject to a bankruptcy petition under 
title 11 of the United States Code, and the partnership has sufficient 
assets, and reasonably anticipates having sufficient assets, to pay the 
potential imputed underpayment that may be determined during the 
partnership examination. The statement must also include a 
representation, signed under penalties of perjury, that the individual 
signing the statement is duly authorized to make the election under 
Sec.  301.9100-22T(b) and that, to the best of the individual's 
knowledge and belief, the statement is true, correct, and complete.
    A partnership electing into the new partnership audit regime under 
the BBA will also be required to designate the partnership 
representative, as defined in section 6223 as amended by the BBA, and 
provide the partnership representative's name, taxpayer identification 
number, address and daytime telephone number, and any other information 
as required in future guidance regarding the partnership 
representative. The Treasury Department and the IRS expect to issue 
additional guidance regarding designation of a partnership 
representative, including who is eligible to be a partnership 
representative, under section 6223 as amended by the BBA.
    Section 301.9100-22T(c) provides an exception to the general rule 
in Sec.  301.9100-22T(b) that a partnership may only elect into the new 
partnership audit regime after first receiving a notice of selection 
for examination. This exception provides that a partnership that has 
not received a notice of selection for examination described in Sec.  
301.9100-22T(b) may make an election to have the new partnership audit 
regime apply to a partnership return for an eligible taxable year if 
the partnership wishes to file an AAR under section 6227 as amended by 
the BBA. Once an election is made under Sec.  301.9100-22T(c), all 
aspects of the new partnership audit regime, except section 6221(b) as 
added by the BBA, apply to the return filed for the eligible taxable 
year subject to the election. As with an election under Sec.  301.9100-
22T(b), an election under Sec.  301.9100-22T(c) may not be revoked 
without consent of the IRS.
    An election under Sec.  301.9100-22T(c) must be made only in the 
manner prescribed by the IRS in accordance with the forms and 
instructions and other guidance issued by the IRS. In no case may an 
election under Sec.  301.9100-22T(c) be made earlier than January 1, 
2018. Consequently, an AAR under section 6227 as amended by the BBA may 
not be filed before January 1, 2018 (except by partnerships that have 
been issued a notice of selection for examination pursuant to the 
procedures discussed above). An AAR filed before that date (other than 
an AAR filed by a partnership that made a valid election under Sec.  
301.9100-22T(b)) will be treated as an AAR by the partnership under 
section 6227 of the TEFRA partnership procedures, or as an amended 
return of partnership income for partnerships not subject to the TEFRA 
partnership procedures, and will prevent the partnership taxable year 
for which the request, or return, is filed from being an eligible 
taxable year. See Sec.  301.9100-22T(d)(2). The Treasury Department and 
the IRS intend to issue guidance regarding AARs under section 6227 as 
amended by the BBA before January 1, 2018.

Special Analyses

    Certain IRS regulations, including this one, are exempt from the 
requirements of Executive Order 12866, as supplemented and reaffirmed 
by Executive Order 13563. Therefore, a regulatory impact assessment is 
not required. It has also been determined that section 553(b) of the 
Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to 
this regulation. These temporary regulations are published pursuant to 
section 7805(b)(2) of the Code to provide the time, form, and manner 
for a partnership to make an election pursuant to section 1101(g)(4) of 
the BBA to have the new partnership audit regime apply to any of its 
returns filed for a partnership taxable year beginning after November 
2, 2015 and before January 1, 2018. Without this necessary guidance, a 
partnership would not be able to make a valid election pursuant to 
section 1101(g)(4) of the BBA. For the applicability of the Regulatory 
Flexibility Act (5 U.S.C. chapter 6), please refer to the Special 
Analyses section of the cross-reference notice of proposed rulemaking 
published in the Proposed Rules section of this issue of the Federal 
Register. Pursuant to section 7805(f) of the Code, these regulations 
were 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 temporary regulations is Jenni M. 
Black of the Office of the Associate Chief Counsel (Procedure and 
Administration). However, other personnel from the Treasury Department 
and the IRS participated in their development.

List of Subjects in 26 CFR Part 301

    Income taxes, Penalties, Reporting and recordkeeping requirements.

Amendments to the Regulations

    Accordingly, 26 CFR part 301 is amended as follows:

PART 301--PROCEDURE AND ADMINISTRATION

0
Paragraph 1. 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 301.9100-22T is also issued under section 1101(g)(4) of 
Public Law 114-74.
* * * * *


0
Par. 2. Section 301.9100-22T is added to read as follows:


Sec.  301.9100-22T  Time, form, and manner of making the election under 
section 1101(g)(4) of the Bipartisan Budget Act of 2015 for returns 
filed for partnership taxable years beginning after November 2, 2015 
and before January 1, 2018 (temporary).

    (a) Election. Pursuant to section 1101(g)(4) of the Bipartisan 
Budget Act of 2015, Public Law 114-74 (BBA), a partnership may elect at 
the time and in such form and manner as described in this section for 
amendments made by section 1101 of the BBA, except section 6221(b) as 
added by the BBA, to apply to any return of the partnership filed for 
an eligible taxable year as defined in paragraph (d) of this section. 
An election is valid only if made in accordance with this section. Once 
made, an election may only be revoked with the consent of the Internal 
Revenue Service (IRS). An election is not valid if it frustrates the 
purposes of section 1101 of the BBA. A partnership may not request an 
extension of time under Sec.  301.9100-3 for an election described in 
this section.
    (b) Election on notification by the IRS--(1) Time for making the 
election. Except as described in paragraph (c) of this section, an 
election under this section must be made within 30 days of the date of 
notification to a partnership,

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in writing, that a return of the partnership for an eligible taxable 
year has been selected for examination (a notice of selection for 
examination).
    (2) Form and manner of making the election--(i) In general. The 
partnership makes an election under this section by providing a written 
statement with the words ``Election under Section 1101(g)(4)'' written 
at the top that satisfies the requirements of paragraph (b)(2) of this 
section to the individual identified in the notice of selection for 
examination as the IRS contact regarding the examination.
    (ii) Statement requirements. A statement making an election under 
this section must be in writing and be dated and signed by the tax 
matters partner, as defined under section 6231(a)(7) (prior to 
amendment by the BBA), and the applicable regulations, or an individual 
who has the authority to sign the partnership return for the taxable 
year under examination under section 6063, the regulations thereunder, 
and applicable forms and instructions. The fact that an individual 
dates and signs the statement making the election described in this 
paragraph (b) shall be prima facie evidence that the individual is 
authorized to make the election on behalf of the partnership. A 
statement making an election must include--
    (A) The partnership's name, taxpayer identification number, and the 
partnership taxable year for which the election described in this 
paragraph (b) is being made;
    (B) The name, taxpayer identification number, address, and daytime 
telephone number of the individual who signs the statement;
    (C) Language indicating that the partnership is electing 
application of section 1101(c) of the BBA for the partnership return 
for the eligible taxable year identified in the notice of selection for 
examination;
    (D) The information required to properly designate the partnership 
representative as defined by section 6223 as amended by the BBA, which 
must include the name, taxpayer identification number, address, and 
daytime telephone number of the partnership representative and any 
additional information required by applicable regulations, forms and 
instructions, and other guidance issued by the IRS;
    (E) The following representations--
    (1) The partnership is not insolvent and does not reasonably 
anticipate becoming insolvent before resolution of any adjustment with 
respect to the partnership taxable year for which the election 
described in this paragraph (b) is being made;
    (2) The partnership has not filed, and does not reasonably 
anticipate filing, voluntarily a petition for relief under title 11 of 
the United States Code;
    (3) The partnership is not subject to, and does not reasonably 
anticipate becoming subject to, an involuntary petition for relief 
under title 11 of the United States Code; and
    (4) The partnership has sufficient assets, and reasonably 
anticipates having sufficient assets, to pay a potential imputed 
underpayment with respect to the partnership taxable year that may be 
determined under subchapter C of chapter 63 of the Internal Revenue 
Code as amended by the BBA; and
    (F) A representation, signed under penalties of perjury, that the 
individual signing the statement is duly authorized to make the 
election described in this paragraph (b) and that, to the best of the 
individual's knowledge and belief, all of the information contained in 
the statement is true, correct, and complete.
    (iii) Notice of Administrative Proceeding. Upon receipt of the 
election described in this paragraph (b), the IRS will promptly mail a 
notice of administrative proceeding to the partnership and the 
partnership representative, as required under section 6231(a)(1) as 
amended by the BBA. Notwithstanding the preceding sentence, the IRS 
will not mail the notice of administrative proceeding before the date 
that is 30 days after receipt of the election described in paragraph 
(b) of this section.
    (c) Election for the purpose of filing an administrative adjustment 
request (AAR) under section 6227 as amended by the BBA--(1) In general. 
A partnership that has not been issued a notice of selection for 
examination as described in paragraph (b)(1) of this section may make 
an election with respect to a partnership return for an eligible 
taxable year for the purpose of filing an AAR under section 6227 as 
amended by the BBA. Once an election under this paragraph (c) is made, 
all of the amendments made by section 1101 of the BBA, except section 
6221(b) as added by the BBA, apply with respect to the partnership 
taxable year for which such election is made.
    (2) Time for making the election. No election under this paragraph 
(c) may be made before January 1, 2018.
    (3) Form and manner of making an election. An election under this 
paragraph (c) must be made in the manner prescribed by the IRS for that 
purpose in accordance with applicable regulations, forms and 
instructions, and other guidance issued by the IRS.
    (4) Effect of filing an AAR before January 1, 2018. Except in the 
case of an election made in accordance with paragraph (b) of this 
section, an AAR filed on behalf of a partnership before January 1, 
2018, is deemed for purposes of paragraph (d)(2) of this section, to be 
an AAR filed under section 6227(c) (prior to amendment by the BBA) or 
an amended return of partnership income, as applicable.
    (d) Eligible taxable year--(1) In general. For purposes of this 
section, the term eligible taxable year means any partnership taxable 
year beginning after November 2, 2015 and before January 1, 2018, 
except as provided in paragraph (d)(2) of this section.
    (2) Exception if AAR or amended return filed or deemed filed. 
Notwithstanding paragraph (d)(1) of this section, a partnership taxable 
year is not an eligible taxable year for purposes of this section if 
for the partnership taxable year--
    (i) The tax matters partner has filed an AAR under section 6227(c) 
(prior to amendment by the BBA),
    (ii) The partnership is deemed to have filed an AAR under section 
6227(c) (prior to the amendment by the BBA) in accordance with 
paragraph (c)(4) of this section, or
    (iii) An amended return of partnership income has been filed or has 
been deemed to be filed under paragraph (c)(4) of this section.
    (e) Applicability date. These regulations are applicable to returns 
filed for partnership taxable years beginning after November 2, 2015 
and before January 1, 2018.
    (f) Expiration date. This section will expire on August 5, 2019.

John M. Dalrymple,
Deputy Commissioner for Services and Enforcement.
    Approved: July 6, 2016.
Mark J. Mazur,
Assistant Secretary for Tax Policy.
[FR Doc. 2016-18638 Filed 8-4-16; 8:45 am]
BILLING CODE 4830-01-P