[Federal Register Volume 82, Number 242 (Tuesday, December 19, 2017)]
[Proposed Rules]
[Pages 60144-60167]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-27071]



[[Page 60144]]

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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 301

[REG-120232-17; REG-120233-17]
RIN 1545-BO03; RIN 1545-BO04


Centralized Partnership Audit Regime: Rules for Election Under 
Sections 6226 and 6227, Including Rules for Tiered Partnership 
Structures, and Administrative and Procedural Provisions

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed regulations implementing 
section 1101 of the Bipartisan Budget Act of 2015 (BBA), which was 
enacted into law on November 2, 2015. Section 1101 of the BBA repeals 
the current rules governing partnership audits and replaces them with a 
new centralized partnership audit regime that, in general, assesses and 
collects tax at the partnership level. These proposed regulations 
provide rules addressing how pass-through partners take into account 
adjustments under the alternative to payment of the imputed 
underpayment described in section 6226 and under rules similar to 
section 6226 when a partnership files an administrative adjustment 
request under section 6227. To make corresponding changes, these 
proposed regulations amend portions of the previously proposed 
regulations under sections 6226 and 6227. Additionally, these proposed 
regulations provide rules regarding assessment and collection, 
penalties and interest, and period of limitations under the new 
centralized partnership audit regime. The proposed regulations also 
address the rules for seeking judicial review of partnership 
adjustments.

DATES: Written or electronic comments and requests for a public hearing 
must be received by March 19, 2018.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-120232-17; REG-
120233-17), room 5207, Internal Revenue Service, P.O. Box 7604, Ben 
Franklin Station, Washington, DC 20044. Submissions may be hand 
delivered Monday through Friday between the hours of 8:00 a.m. and 4:00 
p.m. to CC:PA:LPD:PR (REG-120232-17; REG-120233-17), Courier's Desk, 
Internal Revenue Service, 1111 Constitution Avenue NW, Washington, DC 
20224, or sent electronically via the Federal eRulemaking Portal at 
www.regulations.gov (IRS REG-120232-17; REG-120233-17).

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations 
under sections 6225, 6231, and 6234 of the Internal Revenue Code, Joy 
E. Gerdy-Zogby of the Office of Associate Chief Counsel (Procedure and 
Administration), (202) 317-6834; concerning the proposed regulations 
under sections 6227, 6232, and 6233, Steven L. Karon of the Office of 
Associate Chief Counsel (Procedure and Administration), (202) 317-6834; 
concerning the proposed regulations under sections 6226 and 6235, 
Jennifer M. Black of the Office of Associate Chief Counsel (Procedure 
and Administration), (202) 317-6834; concerning the submission of 
comments and a request for a public hearing, Regina Johnson, (202) 317-
6901 (not toll-free numbers).

SUPPLEMENTARY INFORMATION: 

Background

    This document contains proposed amendments to the Procedure and 
Administration Regulations (26 CFR part 301) under Subpart--Tax 
Treatment of Partnership Items regarding how pass-through partners (as 
defined in proposed Sec.  301.6241-1(a)(5)) take into account 
adjustments under the alternative to payment of the imputed 
underpayment described in section 6226 under the new centralized 
partnership audit regime and under rules similar to section 6226 when a 
partnership files an administrative adjustment request (AAR) under 
section 6227. This document also contains proposed regulations 
regarding assessment and collection, penalties and interest, periods of 
limitations, and judicial review under the new centralized partnership 
audit regime. The new regime was enacted into law by section 1101 of 
the BBA, Public Law 114-74, as amended by the Protecting Americans from 
Tax Hikes Act of 2015, Public Law 114-113, div. Q. The provisions of 
section 1101 of the BBA are generally effective for partnership taxable 
years beginning after December 31, 2017. See the temporary regulations 
(TD 9780, 81 FR 51795) and the notice of proposed rulemaking (REG-
105005-16, 81 FR 51835) published in the Federal Register on August 5, 
2016, regarding the election into the centralized partnership audit 
regime for taxable years beginning after November 2, 2015 and before 
January 1, 2018.
    On June 14, 2017, a notice of proposed rulemaking (REG-136118-15) 
was published in the Federal Register (82 FR 27334) (June 14 NPRM) 
implementing the new centralized partnership audit regime. The June 14 
NPRM contained rules regarding the scope and election out of the new 
regime, consistent treatment by partners, the partnership 
representative, partnership adjustments made by the IRS and 
determination of the amount of the partnership's liability (referred to 
as the imputed underpayment), AARs, and the election for partners to 
take the partnership adjustments into account (sections 6221 through 
6227 and section 6241 of the Internal Revenue Code (Code)). The rules 
regarding how pass-through partners take into account adjustments under 
the alternative to payment of the imputed underpayment described in 
section 6226 and under rules similar to section 6226 under section 6227 
were reserved in the June 14 NPRM. This document contains those 
proposed rules and also re-proposes certain rules under section 6226, 
including the imposition and computation of penalties that relate to 
partnership adjustments. This document also contains proposed 
regulations that supplement the June 14 NPRM by implementing the 
administrative and procedural provisions of the new centralized 
partnership audit regime (sections 6231 through 6235). For proposed 
rules regarding international provisions under the centralized 
partnership audit regime, see (REG-119337-17) published in the Federal 
Register on November 30, 2017 (82 FR 56765) (November 30 NPRM).

1. Pass-Through Partners and the Section 6226 Push Out Election

    Under section 6225, a partnership subject to the centralized 
partnership audit regime is generally required to pay an imputed 
underpayment with respect to adjustments to the partnership's items of 
income, gain, loss, deduction, or credit, and any partner's 
distributive share thereof. However, a partnership may elect under 
section 6226 to have its partners for the year under audit (the 
reviewed year partners) take the adjustments into account.
    Proposed Sec.  301.6226-1 (June 14 NPRM) provides rules relating to 
the election under section 6226 by a partnership to have its partners 
take into account the partnership adjustments in lieu of paying the 
imputed underpayment determined under section 6225 (the push out 
election). Proposed Sec. Sec.  301.6226-2 and 301.6226-3 (June 14 NPRM) 
provide rules for statements the partnership must send to its partners 
for the reviewed year (as defined in proposed Sec.  301.6241-1(a)(8) 
(June 14 NPRM)) and the computation and payment of the partners' 
liabilities

[[Page 60145]]

as a result of taking into account the adjustments. Under proposed 
Sec.  301.6226-1(b)(2) (June 14 NPRM), if a partnership makes the 
election under section 6226 to push out the adjustments, the 
partnership is not required to pay the imputed underpayment but is 
instead required to furnish statements to ``each partner of the 
partnership for the reviewed year.'' Those reviewed year partners are 
then required to take the adjustments into account as provided under 
section 6226(b).
    The June 14 NPRM provides guidance on how a direct partner that is 
not a pass-through partner (generally defined under proposed Sec.  
301.6241-1(a)(5) (June 14 NPRM) as a partnership, an S corporation, 
certain trusts, and a decedent's estate) takes the adjustments into 
account under section 6226(b).
    The June 14 NPRM reserved, however, on the issue of how the 
adjustments are taken into account in the case of tiered partnership 
structures by partners that are pass-through partners. The preamble to 
the June 14 NPRM noted that the Treasury Department and the IRS were 
considering an approach under section 6226 for tiered partnerships to 
``push'' the adjustments beyond the first tier partners that would be 
the subject of other proposed regulations to be published in the near 
future. These are those proposed regulations.
    In the June 14 NPRM, the Treasury Department and the IRS sought 
comments on how the IRS might administer the requirements of section 
6226 in tiered structures, including comments on reducing noncompliance 
and collection risk in tiered structures, while at the same time 
reducing costs of effective tax administration. The Treasury Department 
and the IRS received numerous comments addressing the push out election 
for tiered structures which uniformly requested that pass-through 
partners be allowed to push out the adjustments under section 6226 
beyond the first tier and through to the ultimate taxpaying partners or 
owners.
    Partnerships, as such, are not subject to tax under chapter 1 of 
the Code with respect to items of income, gain, loss, deduction, and 
credit. Rather, these items of the partnership are allocated to its 
partners who then take them into account based on the partners' tax 
characteristics, including entity classification. The June 14 NPRM 
describes generally how adjustments to items of income, gain, loss, 
deduction, or credit made with respect to a partnership subject to the 
TEFRA partnership procedures flow through to the partnership's direct 
and indirect partners for assessment and collection of the resulting 
tax. Under certain circumstances, the assessment and collection of such 
tax required the IRS to follow deficiency procedures after the 
partnership-level proceeding. The enactment of the centralized 
partnership audit regime changed this paradigm by introducing the 
imputed underpayment, an entity-level liability, that is calculated 
based on the adjustments to a partnership's items of income, gain, 
loss, deduction, or credit, and that is assessed and collected at the 
partnership level, rather than being assessed and collected from the 
ultimate partners.
    Section 6226 provides an alternative to the entity-level imputed 
underpayment, allowing a partnership to elect under section 6226(a) to 
push the adjustments out to its partners. In lieu of the partnership 
paying the imputed underpayment, section 6226(a) provides that when a 
push out election is made the reviewed year partners ``shall take such 
adjustments into account'' as provided in section 6226(b). The language 
of section 6226(b), however, does not distinguish between partners that 
are subject to chapter 1 income taxes (for example, individuals and C 
corporations) and pass-through partners (for example, partnerships and 
S corporations), which are generally not subject to such taxes. 
Accordingly, the precise question of how a pass-through partner takes 
into account the adjustments when a partnership elects to push out the 
adjustments to its partners is not addressed by section 6226(b).
    As discussed in the preamble to the June 14 NPRM, section 6226(b) 
could be interpreted to treat direct pass-through partners like 
individuals, allowing the IRS to collect the resulting tax from those 
direct pass-through partners without allowing them to push out the 
adjustments past the first tier. See June 14 NPRM, 82 FR at 27364 
(citing Joint Comm. on Taxation, JCS-1-16, General Explanations of Tax 
Legislation Enacted in 2015, 70 (2016) (JCS-1-16)). Alternatively, 
section 6226(b) could be interpreted to allow a pass-through partner to 
take adjustments into account by passing the adjustments along to its 
reviewed year partners through the tiers until reaching an ultimate 
tax-paying owner. See June 14 NPRM, 82 FR at 27364-65. Technical 
corrections to the centralized partnership audit regime introduced in 
the last Congress, but not enacted, would have allowed pass-through 
partners to take adjustments into account under section 6226(b) by 
either paying an entity-level imputed underpayment or passing the 
adjustments along to their reviewed year partners. See June 14 NPRM, 82 
FR at 27365 (citing the Tax Technical Corrections Act of 2016, H.R. 
6439, 114th Cong. (2016)).
    After considering all of the comments, the Treasury Department and 
the IRS have determined that adjustments pushed out to partners 
pursuant to an election under section 6226 should be permitted to be 
pushed out through the tiers to the ultimate tax-paying owners. 
Accordingly, these proposed regulations provide rules for pushing the 
adjustments through tiers of partners that are pass-through partners. 
Under proposed Sec.  301.6241-1(a)(5) (June 14 NPRM), a ``pass-through 
partner'' means a partnership (regardless of whether the partnership 
made a valid election under section 6221(b) to elect out of the 
centralized partnership audit regime), an S corporation, certain 
trusts, and a decedent's estate.
    As discussed more fully in the Explanation of Provisions section of 
this preamble, the proposed regulations provide rules for pushing the 
adjustments beyond the first tier. Under these rules, each pass-through 
partner in an ownership chain is given a choice to either push the 
adjustments to its partners, shareholders, or beneficiaries or pay tax 
with respect to the adjustments. This optionality is consistent with 
the framework of the centralized partnership audit regime where the 
partnership under audit, or the partnership initiating its own 
adjustments in an AAR, has the choice of either paying a tax amount 
with respect to the adjustments or pushing the adjustments out to its 
partners. It also provides maximum flexibility for each pass-through 
partner in the chain to determine the best course for that partner 
based on its own facts and circumstances.
    The proposed regulations also provide a compliance mechanism to 
ensure that the section 6226 election does not negatively impact tax 
administration. As discussed in the June 14 NPRM, the centralized 
partnership audit regime is designed to improve the IRS's ability not 
only to audit partnerships, including large, tiered partnerships, but 
also to efficiently collect the tax due as a result of the audit. The 
centralized partnership audit regime has two main collection 
mechanisms. First, section 6225 creates a default entity-level imputed 
underpayment that the partnership must pay. Second, as an alternative 
to payment of the imputed underpayment by the partnership under section 
6225, section 6226 allows the partnership to move the collection point

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from the partnership to its partners for the reviewed year. If a 
partnership complies with section 6226, the imputed underpayment 
determined under section 6225 is extinguished. Section 6226(a). Section 
6226 does not, however, extinguish the tax obligation with respect to 
the adjustments underlying the imputed underpayment. Instead, the 
partnership's partners for the reviewed year must also satisfy the 
requirements of section 6226 with respect to the adjustments. Once the 
partnership allocates the adjustments to each reviewed year partner and 
sends the required statements under section 6226(a), the partners are 
required to take the adjustments into account and, in the case of 
partners that are not pass-through partners, pay the resulting tax 
through self-reporting. Section 6226(b). Thus, section 6226 moves 
assessment and collection from the partnership subject to the 
administrative proceeding to its partners.
    Because section 6226 is a collection provision, the IRS must be 
able to collect any tax due as a result of the adjustments made at the 
partnership level, even if those adjustments are pushed out through 
multiple tiers of pass-through partners. Therefore, under a regime 
where the partnership is allowed to push adjustments through the tiers, 
there must be a feature that ensures compliance by each pass-through 
partner in the chain of ownership. Without such a feature, non-
compliant entities in the tiers, and the current partners who control 
those entities, could frustrate collection of the tax due as a result 
of the partnership audit, and the section 6226 election would become a 
means for avoidance of tax due with respect to adjustments determined 
in the audit, undermining the centralized partnership audit regime 
enacted under the BBA.
    Therefore, these proposed regulations provide a mechanism to 
address pass-through partners in the tiers that fail to comply with the 
requirement to either push the adjustments out to their owners or pay 
the tax resulting from the adjustments allocable to that partner. That 
mechanism is to collect the tax due from the non-compliant pass-through 
partner. This balances the ability for the tiered structure to push out 
the partnership adjustments to the partnership's ultimate reviewed year 
partners while ensuring collection under section 6226.
    In cases where the pass-through partner chooses (or, in the case of 
non-compliance, is required) to pay, the proposed regulations rely on 
existing rules to determine how an entity that generally does not pay 
chapter 1 tax would determine the amount due if that entity were to 
take the adjustments into account. Under these proposed rules, the 
pass-through partner calculates an amount in the same manner as the 
imputed underpayment under section 6225 is computed with respect to the 
partnership under audit, with some refinements, as described in more 
detail in the Explanation of Provisions section of this preamble, to 
reflect the fact that the adjustments are taken into account pursuant 
to a section 6226 election.

2. Pass-Through Partners and Administrative Adjustment Requests

    The June 14 NPRM also reserved on how pass-through partners in a 
partnership that files an AAR take the adjustments into account under 
``rules similar to the rules of section 6226.'' As discussed more fully 
in the Explanation of Provisions section of this preamble, these 
proposed regulations provide for rules similar to the regulations under 
section 6226, with some minor changes to reflect the fact that an AAR 
permits taxpayers to receive refunds of any tax overpaid and to reflect 
that an AAR occurs outside of an examination.

3. Penalties in the Case of a Section 6226 Push Out Election

    In the June 14 NPRM, the proposed regulations provide that defenses 
to any penalties, additions to tax, or additional amounts must be 
raised by the partnership during the partnership-level proceeding under 
the centralized partnership audit regime, regardless of whether the 
defense relates to facts and circumstances of the partnership or any 
other person, including a partner in the partnership. Additionally, 
those proposed regulations provide that penalties are calculated at the 
partnership level, even if the partnership makes an election under 
section 6226. As described more fully in the Explanation of Provisions 
section of this preamble, those rules are not consistent with the 
penalty rules proposed in these proposed regulations and, therefore, 
the rules proposed in the June 14 NPRM are being revised accordingly.

4. Section 6226 Push Out Election and the Safe Harbor Amount

    In the June 14 NPRM, the proposed regulations under section 6226 
provide a safe harbor amount and interest safe harbor amount that 
partners can pay in lieu of computing the tax and interest the partner 
owes as a result of taking the adjustments into account in the year 
under audit and determining the effect of this computation on tax 
attributes in subsequent years. These safe harbor amounts were intended 
to reduce the burden of the complex calculation of the tax and interest 
due for the reviewed year and the intervening years. These rules were 
crafted in light of the proposed regulations under section 6226 in the 
June 14 NPRM, which did not yet provide rules for pushing the 
adjustments out through multiple tiers of pass-through partners. During 
the process of developing the rules to permit push out through multiple 
tiers of pass-through partners, it became apparent that the safe harbor 
rules no longer reduced burden. In fact, incorporating the safe harbor 
rules into the rules for pushing through the tiers became more complex 
and cumbersome than if the safe harbor amounts did not exist. In 
particular, the safe harbor amounts increased the reporting burden on a 
pass-through partner that elected to push the adjustments to its 
partners without a meaningful reduction in burden on the recipient 
partners. Accordingly, for these reasons, the proposed regulations 
regarding the safe harbor amount and the interest safe harbor amount 
have been amended to remove these provisions.

5. Administrative and Procedural Provisions Under the Centralized 
Partnership Audit Regime

    Section 6231(a) provides that the Secretary shall mail to the 
partnership and the partnership representative (1) notice of any 
administrative proceeding (NAP) 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 (NOPPA) resulting from such proceeding; and (3) 
notice of any final partnership adjustment (FPA) resulting from such 
proceeding. These three notices also apply to any proceeding with 
respect to an AAR filed by a partnership. Section 6231(a) further 
provides that any FPA shall be mailed no earlier than 270 days after 
the date on which the notice of the proposed partnership adjustment is 
mailed and such notices are sufficient if mailed to the last known 
address of the partnership representative or the partnership, even if 
the partnership has terminated its existence.
    Section 6225(a)(1) provides that 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, the partnership shall pay any imputed underpayment with 
respect to such

[[Page 60147]]

adjustment in the adjustment year (as defined in proposed Sec.  
301.6241-1(a)(1) (June 14 NPRM)) as provided in section 6232.
    Section 6232(a) provides that any imputed underpayment shall be 
assessed and collected in the same manner as if it were a tax imposed 
for the adjustment year by subtitle A of the Code, except that in the 
case of an AAR to which section 6227(b)(1) applies, the underpayment 
shall be paid when the AAR is filed.
    Section 6232(b) provides that except as otherwise provided in 
chapter 63 of the Code, 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 an FPA was 
mailed and (2) if a petition for readjustment is filed under section 
6234 with respect to such notice, the decision of the court has become 
final. A 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 this restriction on the making of any 
partnership adjustment. Section 6232(d)(2).
    Section 6232(c) provides that notwithstanding section 7421(a) 
(regarding prohibition on suits to restrain assessment or collection), 
any action that violates section 6232(b) may be enjoined in the proper 
court, including the Tax Court. The Tax Court shall have no 
jurisdiction to enjoin any action under subsection 6232(c) unless a 
timely petition for readjustment has been filed under section 6234. If 
a timely petition has been filed, the Tax Court has jurisdiction only 
with respect to the adjustments that are the subject of such petition.
    Section 6232(d) provides exceptions to the restrictions on making 
partnership adjustments. Section 6232(d)(1)(A) provides the general 
rule that if a partnership is notified that, on account of a 
mathematical or clerical error appearing on the partnership return, an 
adjustment to an item is required, rules similar to the rules of 
paragraphs (1) and (2) of section 6213(b) (relating to assessments on 
account of mathematical or clerical errors and abatement of such 
assessments) shall apply to such adjustments. Section 6232(d)(1)(B) 
provides a special rule that 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) (requiring that a 
partner, on its return, treat items attributable to a partnership in a 
manner that is consistent with the treatment of such item on the 
partnership return) with respect to its interest in such other 
partnership shall be treated as an adjustment referred to in section 
6232(d)(1)(A) except that paragraph (2) of section 6213(b) (providing 
the ability to request an abatement of an assessment on account of a 
mathematical or clerical error) shall not apply to such adjustment.
    Section 6232(e) provides that if no proceeding under section 6234 
is begun with respect to any FPA during the 90-day period described in 
section 6232(b), the amount for which the partnership is liable under 
section 6225 shall not exceed the amount determined in accordance with 
such FPA.
    Section 6233 provides rules related to interest and penalties with 
respect to imputed underpayments. Except to the extent provided in 
section 6226(c) (providing rules for penalties and interest where the 
partnership elects under section 6226 the alternative to payment of the 
imputed underpayment), the interest computed with respect to any 
partnership adjustment for a reviewed year is the interest that would 
be determined under chapter 67 of the Code 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 of interest determined 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. Section 
6233(a)(1) and (2).
    Except to the extent provided in section 6226(c), the partnership 
shall be liable for any penalty, addition to tax, or additional amount 
imposed with respect to any partnership adjustment for a reviewed year. 
Any such penalty, addition to tax, or additional amount will be 
determined at the partnership level as if the partnership had been an 
individual subject to tax under chapter 1 of subtitle A of the Code for 
the reviewed year and the imputed underpayment were an actual 
underpayment (or understatement) for such year. Section 6233(a)(1) and 
(3).
    Section 6233(a)(2) provides that interest with respect to a 
partnership adjustment for a reviewed year shall also take into account 
adjustments required by reason of such partnership adjustment for 
partnership taxable years after the reviewed year and before the 
adjustment year. The meaning of this provision is not clear because 
unless multiple years are audited, there may be no adjustments required 
for taxable years other than the reviewed year. Because of this, the 
proposed regulations do not address this language from the statute. The 
IRS and the Treasury Department request comments about when and how 
this language in section 6233(a)(2) may have effect.
    In the case of any failure to pay an imputed underpayment on the 
date prescribed therefor, the partnership shall be liable for interest 
determined by treating the imputed underpayment as an underpayment of 
tax imposed in the adjustment year. Section 6233(b)(1) and (2). In the 
case of any failure to pay an imputed underpayment on the date 
prescribed therefor, the partnership shall be liable for penalties, 
additions to tax, or additional amounts determined by applying section 
6651(a)(2) to such failure to pay and by treating the imputed 
underpayment as an underpayment of tax for purposes of part II of 
subchapter A of chapter 68 of the Code (relating to accuracy-related 
and fraud penalties). Section 6233(b)(1) and (3).
    Section 6234(a) provides that within 90 days after the date on 
which an FPA is mailed under section 6231 with respect to any 
partnership taxable year, the partnership may file a petition for 
readjustment for such taxable year with the Tax Court, the district 
court of the United States for the district in which the partnership's 
principal place of business is located, or the Court of Federal Claims. 
A petition for readjustment under section 6234 may be filed in a 
district court of the United States or the Court of Federal Claims 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 FPA. Section 
6234(b)(1). The court may by order provide that the jurisdictional 
requirements of section 6234(b)(1) have been 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. Any such 
amount deposited shall not, while deposited, be treated as a payment of 
tax for purposes of the Code (other than chapter 67 of the Code 
regarding interest). Section 6234(b)(2).
    Under section 6234(c), a court with which a petition has been filed 
in accordance with section 6234 has jurisdiction to determine all items 
of income, gain, loss, deduction, or credit of the partnership for the 
partnership

[[Page 60148]]

taxable year to which the notice of final partnership adjustment 
relates as well as 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 
subchapter C of chapter 63 of the Code. Any determination by a court 
under section 6234 will have the force and effect of a decision of the 
Tax Court or a final judgment or decree of the district court or the 
Court of Federal Claims, 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. Section 6234(d). 
Section 6234(e) provides that if an action brought under section 6234 
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 FPA is correct, and an appropriate 
order shall be entered in the records of the court.
    Section 6235 provides the period of limitations on making 
adjustments under the centralized partnership audit regime. Under 
section 6235(a), the general rule is that no adjustment for any 
partnership taxable year may be made after the later of three dates. 
The first date is the date that is three years after the latest of (a) 
the date on which the partnership return for such taxable year was 
filed, (b) the return due date for the taxable year, or (c) the date on 
which the partnership filed an AAR under section 6227 with respect to 
such year. The second date is, in the case of any modification of the 
imputed underpayment under section 6225(c), the date that is 270 days 
(plus the number of days of any extension consented to by the Secretary 
under section 6225(c)(7)) after the date on which everything required 
to be submitted for purposes of modification is so submitted. The third 
date is, in the case of any NOPPA issued under section 6231(a)(2), the 
date that is 330 days (plus the number of days of any extension 
consented to by the Secretary under section 6225(c)(7)) after the date 
of such notice. Pursuant to section 6235(b), the period described in 
section 6235(a) (including an extension period under section 6235(b)) 
may be extended by agreement entered into by the Secretary and the 
partnership before the expiration of such period.
    Section 6235(c) provides special rules in the case of fraud and 
other situations. In the case of a false or fraudulent partnership 
return with intent to evade tax or in the case of a failure by a 
partnership to file a return for a taxable year, an adjustment may be 
made at any time. Section 6235(c)(1) and (3). If any partnership omits 
from gross income an amount properly includable in gross income and 
such amount is described in section 6501(e)(1)(A) (describing 
situations where more than 25 percent of gross income has been omitted 
and situations where more than $5,000 of gross income attributable to 
one or more assets to which information is required to be reported 
under section 6038D has been omitted), the period under section 6235(a) 
is applied by substituting ``six'' years for ``three'' years. Section 
6235(c)(2). For purposes of section 6235, a return executed by the 
Secretary under section 6020(b) (concerning returns executed by the 
Secretary where a person fails to file a return required by the Code or 
regulations) on behalf of a partnership shall not be treated as a 
return of the partnership. Section 6235(c)(4).
    If an FPA with respect to any taxable year is mailed under section 
6231, the period of limitations on making adjustments under section 
6235(a) shall be suspended for the 90-day period during which an action 
may be brought under section 6234 (and, if a petition is filed under 
section 6234 with respect to such FPA, until the decision of the court 
becomes final) and for one year thereafter. Section 6235(d).

Explanation of Provisions

1. Pass-Through Partners and the Section 6226 Push Out Election

    Proposed Sec.  301.6226-3(e)(1) provides that if a pass-through 
partner is furnished a statement described in proposed Sec.  301.6226-2 
(June 14 NPRM) (including a statement described in proposed Sec.  
301.6226-3(e)(3)(i)), the pass-through partner must take into account 
the adjustments reflected on that statement by either furnishing 
statements to its partners that held an interest in the pass-through 
partner at any time during the taxable year to which the adjustments 
relate or by paying an amount calculated like an imputed underpayment 
on the adjustments reflected in the statement plus any applicable 
penalties and interest. As provided in proposed Sec.  301.6226-
3(e)(3)(i) and (iv), any statements furnished under these provisions 
are treated as statements described in proposed Sec.  301.6226-2 (June 
14 NPRM), and any pass-through partner receiving a statement under 
proposed Sec.  301.6226-3(e)(3)(i) must also take the adjustments 
reflected on the statement into account by furnishing statements to its 
partners or paying an amount calculated like an imputed underpayment. 
Thus, there is an iterative application of the rules under proposed 
Sec.  301.6226-3(e) for tiered partnership structures allowing the 
adjustments to be passed along through the tiers to the ultimate non-
pass-through partners who then must take the adjustments into account 
under proposed Sec.  301.6226-3(a) and (b) (June 14 NPRM).
    Under proposed Sec.  301.6226-3(e)(2), if a pass-through partner 
fails to timely take into account the adjustments in accordance with 
proposed Sec.  301.6226-3(e)(3) or (e)(4), the pass-through partner 
must take into account the adjustments by paying an amount calculated 
like an imputed underpayment plus any applicable penalties and 
interest, in accordance with the rules provided under proposed Sec.  
301.6226-3(e)(4). As discussed in the Background section of this 
preamble, this rule is necessary to prevent tiered structures from 
electing to push out the adjustments to inappropriately shift the 
burden of collecting the tax due back to the IRS and to avoid paying 
the tax owed after completion of a partnership audit. Such behavior 
would frustrate the orderly administration of the election under 
section 6226 and the collection efforts of the IRS. Without imposing an 
entity-level liability against those pass-through entities that fail to 
pay or push out, there would be a disincentive to take any action upon 
receipt of a push out statement causing the push out election to become 
a potential vehicle for non-compliance and abuse. Such a result 
undermines the efficiencies and increased collections intended by 
enactment of the centralized partnership audit regime.
    The additional burden placed on the IRS of locating the partners of 
pass-through partners, determining the proper allocation of 
adjustments, and assessing the resulting tax, if any, would frustrate 
tax administration in the same manner as the TEFRA partnership 
procedures, which were administratively untenable. The rule that 
requires a pass-through partner to pay an amount calculated like an 
imputed underpayment if it fails to take the adjustments into account 
significantly alleviates administrative burden, comports with an 
iterative application of section 6226, and furthers the purpose of the 
statute by eliminating the ability for a partner to increase costs and 
inefficiencies of tax administration by failing to comply with the 
statute.
    Proposed Sec.  301.6226-3(e)(3) provides the rules for a pass-
through partner to take into account the adjustments in the statements 
furnished to it under proposed Sec.  301.6226-2 (June 14 NPRM)

[[Page 60149]]

by furnishing statements to its own partners. Under proposed Sec.  
301.6226-3(e)(3)(i), a pass-through partner takes the adjustments into 
account by furnishing statements to each person who was a partner in 
the pass-through partner at any time during the taxable year of the 
pass-through partner to which the adjustments in the statement relate 
(the ``affected partner''). The statements furnished to the affected 
partners must include all of the information prescribed by proposed 
Sec.  301.6226-3(e)(3)(iii), and the pass-through partner must file the 
statements with the IRS, along with a transmittal that includes a 
summary of the statements and any other information required by forms, 
instructions, and other guidance. Additionally, the rules applicable to 
statements furnished under proposed Sec.  301.6226-2 (June 14 NPRM) are 
generally applicable to statements furnished under proposed Sec.  
301.6226-3(e)(3)(i). For example, the rules regarding the address used 
for the statements mailed to affected partners (proposed Sec.  
301.6226-2(b)(2) (June 14 NPRM)) and the correction of statements 
(proposed Sec.  301.6226-2(d) (June 14 NPRM)) apply to statements 
furnished under proposed Sec.  301.6226-3(e)(3)(i). However, there are 
different rules regarding the time for filing and furnishing the 
statements under proposed Sec.  301.6226-3(e)(3)(i), the content of 
those statements, and how partners of the pass-through partner take the 
adjustments into account because the partner of the pass-through 
partner is not receiving the statement directly from the source 
partnership.
    Under proposed Sec.  301.6226-3(e)(3)(ii), statements must be 
furnished no later than the extended due date for the return for the 
adjustment year of the partnership that made the election under 
proposed Sec.  301.6226-1 (June 14 NPRM). For purposes of determining 
the due date for the statements, the extended due date for the return 
for the adjustment year of the partnership that made the election under 
proposed Sec.  301.6226-1 (June 14 NPRM) is the extended due date under 
section 6081, regardless of whether the partnership that made the 
election under proposed Sec.  301.6226-1 (June 14 NPRM) is required to 
file a return for the adjustment year and regardless of whether an 
extension was actually requested. For example, if the adjustment year 
of the partnership that made the election under proposed Sec.  
301.6226-1 (June 14 NPRM) ended on December 31, 2020, the pass-through 
partner would be required to furnish statements to its affected 
partners no later than September 15, 2021, the due date, including 
extensions, of a partnership return for a taxable year ending December 
31, 2020. If a pass-through partner fails to issue statements by the 
due date under proposed Sec.  301.6226-3(e)(3)(ii), the pass-through 
partner has failed to take into account the adjustments as described in 
proposed Sec.  301.6226-3(e)(3).
    The statements furnished to the affected partners must contain all 
of the information described in proposed Sec.  301.6226-3(e)(3)(iii) 
and any other information required by the forms, instructions, or other 
guidance prescribed by the IRS. This information is necessary for an 
affected partner to take into account the adjustments reflected in the 
statement furnished to the partner under these provisions in the 
correct year, to identify the source of the adjustments, and for any 
affected partner that is also a pass-through partner to be able to take 
into account the adjustments under these provisions by the applicable 
due dates.
    Proposed Sec.  301.6226-3(e)(3)(iv) provides that the statements 
furnished to the affected partners in accordance with proposed Sec.  
301.6226-3(e)(3) are treated as if they were statements furnished under 
proposed Sec.  301.6226-2 (June 14 NPRM). Accordingly, an affected 
partner must take into account the adjustments as if the affected 
partner were a reviewed year partner. Under certain circumstances, the 
statements furnished to the affected partners may not be furnished 
until after the unextended due date of the affected partners' returns 
for the reporting year. To account for this situation, proposed Sec.  
301.6226-3(e)(3)(iv) provides that the IRS will not impose any 
additions to tax under section 6651 related to any additional reporting 
year tax if the affected partner reports and pays any additional 
reporting year tax within 30 days of the due date for furnishing the 
statements to the affected partners under proposed Sec.  301.6226-
3(e)(3)(ii).
    Finally, proposed Sec.  301.6226-3(e)(3)(v) provides special rules 
for adjustments subject to withholding under chapters 3 and 4 of the 
Code. Consistent with the regulations proposed in the November 30 NPRM 
(regarding certain international tax rules under the centralized 
partnership audit regime), under proposed Sec.  301.6226-3(e)(3)(v), if 
a pass-through partner takes the adjustments into account by furnishing 
statements under proposed Sec.  301.6226-3(e)(3), the pass-through 
partner must comply with proposed Sec.  301.6226-2(h)(3) (November 30 
NPRM) (providing rules for the payment of tax under chapters 3 and 4 
when adjustments are pushed out), and an affected partner must comply 
with proposed Sec.  301.6226-3(f) (November 30 NPRM) (providing rules 
for partners subject to withholding under chapters 3 and 4) as if the 
pass-through partner were the partnership that made the election under 
proposed Sec.  301.6226-1 (June 14 NPRM) and the affected partner were 
the reviewed year partner.
    Proposed Sec.  301.6226-3(e)(4) provides rules for pass-through 
partners that take into account the adjustments reflected in a 
statement furnished under proposed Sec.  301.6226-2 (June 14 NPRM) by 
making a payment. Under proposed Sec.  301.6226-3(e)(4), a pass-through 
partner takes the adjustments into account by paying an amount computed 
like an imputed underpayment under section 6225 and any penalties and 
interest and by providing to the IRS the information required by forms, 
instructions, or other guidance.
    Under proposed Sec.  301.6226-3(e)(4)(ii), all amounts required to 
be paid by a pass-through partner must be paid no later than the 
extended due date for the return for the adjustment year of the 
partnership that made the election under proposed Sec.  301.6226-1 
(June 14 NPRM). The due date for paying the amounts required under 
proposed Sec.  301.6226-3(e)(4)(i) is the same as the due date for 
furnishings statements to partners under proposed 301.6226-
3(e)(3)(iii). If a pass-through partner fails to pay and submit the 
required information by the due date, the pass-through partner has 
failed to take into account the adjustments as described in proposed 
Sec.  301.6226-3(e)(4).
    Proposed Sec.  301.6226-3(e)(4)(iii) provides that the amount 
required to be paid by the pass-through partner is calculated in the 
same manner as an imputed underpayment under section 6225 and proposed 
Sec.  301.6225-1 (June 14 NPRM) as if the adjustments reflected on the 
statement furnished to the pass-through partner were partnership 
adjustments for the first affected year. The pass-through partner must 
calculate a payment amount for the first affected year as well as a 
payment amount for any intervening year by treating the pass-through 
partner's share of partnership tax attributes for each intervening year 
as partnership adjustments for that intervening year. In addition, the 
pass-through partner can take into account modifications approved by 
the IRS during the audit of the partnership that made the election 
under proposed Sec.  301.6226-1 (June 14 NPRM) and reflected on the 
statement when determining the payment amount. This will result in a 
payment amount that

[[Page 60150]]

more closely approximates the tax that would have been due by the 
partners of the pass-through partner had the adjustments been reported 
correctly on the reviewed year return. For instance, if the IRS 
approved a modification for an indirect partner (as defined in proposed 
Sec.  301.6241-1(a)(4) (June NPRM)) that is a tax-exempt entity, the 
payment amount computed like an imputed underpayment would be 
calculated by excluding the adjustments attributable to that tax-exempt 
indirect partner.
    Proposed Sec.  301.6226-2(e) (June 14 NPRM) provides that the only 
modifications that must be included on statements are modifications 
based on an amended return filed or a closing agreement entered into by 
the reviewed year partner. Proposed Sec.  301.6226-2(e)(5) (June 14 
NPRM) is amended. Newly proposed Sec.  301.6226-2(e)(5) expands this 
rule to require that all modifications approved with respect to the 
reviewed year partner (including any indirect partner that holds its 
interest in the partnership making the push out election through that 
reviewed year partner) be included on the statement. This proposed rule 
was changed to facilitate the calculation of the payment amount under 
the rules for push out to pass-through partners under proposed Sec.  
301.6226-3(e)(4)(iii). To further effectuate this change, proposed 
Sec.  301.6226-2(f)(2) (June 14 NPRM) is also amended in this notice of 
proposed rulemaking.
    A pass-through partner that takes the adjustments into account in 
accordance with proposed Sec.  301.6226-3(e)(4) must also calculate and 
pay any applicable penalties, additions to tax, and additional amounts. 
The statement furnished to the pass-through partner must provide 
information about any penalties applicable to the adjustments allocated 
to that partner. The pass-through partner calculates the penalties, 
additions to tax, or additional amounts as if the payment amount 
required under proposed Sec.  301.6226-3(e)(4)(i)(A) were an imputed 
underpayment due in the first affected year or any intervening year, as 
applicable. The pass-through partner must also pay any interest in 
accordance with proposed Sec.  301.6226-3(d) (June 14 NPRM) as if the 
amount required under proposed Sec.  301.6226-3(e)(4)(i)(A) were due in 
the first affected year or any intervening year, as applicable.
    In calculating the payment amount as if it were an imputed 
underpayment, there could be adjustments that would not result in an 
imputed underpayment (as defined in proposed Sec.  301.6225-1(c)(2) 
(June 14 NPRM)). In these cases, the pass-through partner takes into 
account the adjustments that do not result in an imputed underpayment 
in a manner similar to the rule in proposed Sec.  301.6225-3 (June 14 
NPRM), but in the taxable year of the partnership that includes the 
date the partnership makes a payment under proposed Sec.  301.6226-
3(e)(4)(i), or if the partnership has no liability when taking the 
adjustments into account under proposed Sec.  301.6226-3(e)(4), in the 
taxable year that includes the date the partnership is furnished the 
statement.
    Proposed Sec.  301.6226-3(e)(4)(vi) provides rules for coordination 
with chapters 3 and 4 of the Code. If a pass-through partner pays an 
amount as described in proposed Sec.  301.6226-3(e)(4)(i), proposed 
Sec.  301.6225-1(a)(4) (November 30 NPRM) applies to the pass-through 
partner as if the pass-through partner were the partnership that made 
the election under proposed Sec.  301.6226-1 (June 14 NPRM). 
Accordingly, payment of the amount by the pass-through partner means 
the pass-through partner is treated as having paid the amount required 
to be withheld with respect to those adjustments under chapters 3 and 4 
for purposes of applying Sec. Sec.  1.1463-1 and 1.1474-4.
    Proposed Sec.  301.6226-3(e)(5) clarifies that for purposes of the 
rules applicable to pass-through partners, S corporations, certain 
trusts, and estates are treated as a partnership, and their 
shareholders and beneficiaries are treated as partners. Imposing an 
amount calculated like an imputed underpayment on all non-compliant 
pass-through partners is consistent with the iterative application of 
section 6226 and ensures that the collection burden of a section 6226 
election is not inappropriately shifted to the IRS. Accordingly, the 
rules of proposed Sec.  301.6226-3(e) generally apply equally to all 
pass-through partners, whether they are partnerships, S corporations, 
certain type of trusts, or estates.
    The term ``pass-through partner'' as defined in proposed Sec.  
301.6241-1(a)(5) (June 14 NPRM), includes entities that are subject to 
chapter 1 tax under certain circumstances. For example, certain S 
corporations are liable for the built-in gains tax under section 1374. 
Trusts and estates may also be required to take certain items into 
account at the entity level and pay tax under certain circumstances, 
but in other circumstances trusts and estates do not take items into 
account at the entity level. Instead, the items flow through to their 
beneficiaries. To account for this, proposed Sec.  301.6226-3(e)(6) 
provides a specific rule to address how these types of entities take 
into account the adjustments. Under proposed Sec.  301.6226-3(e)(6), a 
pass-through partner must calculate any additional reporting year tax 
under proposed Sec.  301.6226-3(b) (June 14 NPRM) in the same manner as 
any other non-pass-through partner. Additionally, if the pass-through 
partner would be required under chapter 1 to pay tax on only a portion 
of the adjustments (or a portion of a single adjustment) and flow some 
or all of the remaining adjustments to its owners or beneficiaries, the 
proposed regulations accommodate this situation by requiring the pass-
through partner to furnish statements to its partners reflecting the 
adjustments that are properly taken into account by the pass-through 
partner's owners. For instance, if a trust is a pass-through partner 
and could be subject to tax under chapter 1 with respect to a 
partnership adjustment, the trust must calculate and pay its additional 
reporting year tax as if it were a non-pass through partner. In 
addition, if it would also be required under ordinary trust reporting 
rules to report adjustments to its beneficiaries as a result of taking 
the adjustments into account, the trust must report those adjustments 
to its beneficiaries who also must take the adjustments into account 
under proposed Sec.  301.6226-3 (June 14 NPRM). Finally, proposed Sec.  
301.6226-3(e)(6) clarifies that if a pass-through partner that is 
subject to tax under chapter 1 fails to comply with the provisions of 
proposed Sec.  301.6226-3(e)(6), the rules of proposed Sec.  301.6226-
3(e)(2) apply, and the pass-through partner will be required to take 
into account the adjustments under proposed Sec.  301.6226-3(e)(4).
    Proposed Sec.  301.6226-3(j) clarifies that in the case of a 
disregarded entity or a trust that is a wholly-owned trust (if the 
trust reports the owner's information to payors under Sec.  1.671-
4(b)(2)(i)(A)), the owner of the disregarded entity or the trust must 
take into account the partnership adjustments. For instance, in the 
case of a disregarded entity wholly-owned by a C corporation, the C 
corporation must take into account the adjustments reflected on a 
statement furnished to the disregarded entity under proposed Sec.  
301.6226-2 (June 14 NPRM). Accordingly, a partner that is a disregarded 
entity or wholly-owned trust is disregarded for purposes of taking the 
adjustments into account under proposed Sec.  301.6226-3(j).
    In addition to proposing Sec.  301.6226-3(e), this notice of 
proposed rulemaking also adds examples in proposed Sec.  301.6226-3(g) 
to illustrate the concepts of proposed Sec.  301.6226-3(e).

[[Page 60151]]

2. Adjustments Requested in an Administrative Adjustment Request Taken 
Into Account by a Pass-Through Partner

    These proposed regulations also provide rules for pass-through 
partners to take into account adjustments requested in an AAR if the 
partnership elects to have its partners take into account the 
adjustments (or if the partnership is required to have its partners 
take into account the adjustments). The proposed regulations generally 
follow the rules in proposed Sec.  301.6226-3(e), with modifications to 
accommodate the rules applicable to AARs.

3. Penalties, Additions to Tax, and Additional Amounts in the Case of 
Section 6226 Push Out Election

    Proposed Sec.  301.6226-3(i) provides the rules for the calculation 
of penalties, additions to tax, and additional amounts by the partner 
when a partnership has made an election under section 6226. The 
applicability of any penalties, additions to tax, and additional 
amounts with respect to a partnership adjustment are determined at the 
partnership level in accordance with section 6221(a). Under proposed 
Sec.  301.6226-3(i)(2), when each partner takes the adjustments into 
account under section 6226 and proposed Sec.  301.6226-3 (June 14 
NPRM), the partner must compute any penalties, additions to tax, or 
additional amounts applying any applicable rules or thresholds based on 
the particular facts and circumstances of that partner as if each 
correction amount were an underpayment or understatement for the first 
affected year (or intervening year, if applicable). Changes were made 
to other provisions in the June 14 NPRM to conform to the addition of 
proposed Sec.  301.6226-3(i).
    Proposed Sec.  301.6226-3(i)(3) provides that a partner may assert 
a defense against a penalty based on a defense that is personal to the 
partner (partner-level defense), such as reasonable cause or good 
faith, by first paying the tax and penalty due and then filing a claim 
for refund that asserts the partner's specific penalty defense.
    Proposed Sec.  301.6226-2(e)(7) (June 14 NPRM) is amended in this 
notice of proposed rulemaking. Under proposed Sec.  301.6226-2(e)(7) 
(as modified in these proposed regulations), instead of providing the 
reviewed year partner's share of any penalties, additions to tax, or 
additional amounts on the statement furnished to the reviewed year 
partner under proposed Sec.  301.6226-2 (June 14 NPRM), the partnership 
provides the applicability of any penalty, additions to tax, or 
additional amounts and the adjustments to which those penalties, 
additions to tax, or additional amounts relate. Under this proposed 
rule, the partnership furnishes the reviewed year partner the reviewed 
year partner's share of the adjustments to which the penalties, 
additions to tax, and additional amounts relate and other information 
such as the applicable rate of any penalty and the Code section under 
which the penalty, addition to tax, or additional amount was imposed.
    Proposed Sec.  301.6226-3(b)(4) (June 14 NPRM) is amended by 
removing the last sentence from the June 14 NPRM, which read ``A 
deficiency dividend deduction under this paragraph (b)(4) and section 
860(a) has no effect on a QIE's liability for any penalties reflected 
in a statement described in Sec.  301.6226-2(a).'' This change reflects 
that, under proposed Sec.  301.6226-3(i), a partner who is furnished a 
statement under proposed Sec.  301.6226-2 (June 14 NPRM) is not 
furnished its share of the penalty amount determined at the partnership 
level but instead must calculate the penalty utilizing the normal 
penalty rules applicable under the Code.
    Proposed Sec.  301.6226-3(a) (June 14 NPRM) is amended below. The 
amended Sec.  301.6226-3(a) changes the requirement that reviewed year 
partners pay the reviewed year partner's share of any penalties, 
additions to tax, or additional amounts, to a requirement that the 
reviewed year partner must calculate and pay any penalties, additions 
to tax, or additional amounts as determined under proposed Sec.  
301.6226-3(i). In addition, proposed Sec.  301.6226-3(d)(3) (June 14 
NPRM) regarding interest on penalties is amended below. Amended Sec.  
301.6226-3(d)(3) conforms to the addition of proposed Sec.  301.6226-
3(i) by providing that the reviewed year partner calculates and pays 
interest on any penalties, additions to tax, or additional amounts 
calculated by the partner instead of on the share of penalties, 
additions to tax, or additional amounts reflected in the statement 
furnished to the partner.
    Finally, Example 1 in proposed Sec.  301.6226-3(g) (June 14 NPRM) 
and Example 6 in proposed Sec.  301.6226-3(g) (November 30 NPRM) are 
amended below with changes that conform to proposed Sec.  301.6226-
3(i).

4. Changes to the June 14 NPRM to Reflect the Removal of the Safe 
Harbor

    As described in the Background section of this preamble, these 
proposed regulations amended proposed Sec.  301.6226-2(g) (June 14 
NPRM) and proposed Sec.  301.6226-3(c) and (d)(2) (June 14 NPRM) which 
concern the calculation of, and the election to pay, the safe harbor 
amount and interest safe harbor amount. In addition, these proposed 
regulations make conforming changes to the proposed rules in the June 
14 NPRM to reflect the removal of the safe harbor amount and interest 
safe harbor amount. Proposed Sec. Sec.  301.6226-1(d), 301.6226-3(a), 
and 301.6227-3(b)(1) (June 14 NPRM) are amended below. Finally, 
Examples 1, 2, 3, 4, and 5 in proposed Sec.  301.6226-3(g) (June 14 
NPRM) and Example 6 in proposed Sec.  301.6226-3(g) (November 30 NPRM) 
are amended to reflect the removal of the safe harbor and interest safe 
harbor. See Examples 1, 2, 3, 4, 5 and 6 of proposed Sec.  301.6226-
3(g).

5. Notices of Proceedings and Adjustments

    Proposed Sec.  301.6231-1 provides rules with respect to the NAP 
described in section 6231(a)(1), the NOPPA described in section 
6231(a)(2), and the FPA described in section 6231(a)(3). Under proposed 
Sec.  301.6231-1(c), such notices are sufficient if mailed to the last 
known address of the partnership and the partnership representative. An 
FPA may not be mailed earlier than 270 days after the date on which the 
NOPPA was mailed. Proposed Sec.  301.6231-1(b)(2) permits a partnership 
to waive this restriction to allow the IRS to mail the FPA before the 
expiration of the 270-day period.
    Nothing in the centralized partnership audit regime limits the 
period for IRS to propose adjustments, and section 6231 does not 
restrict when a NOPPA may be mailed by the IRS. However, a reasonable 
time limit within which partnership adjustments must be proposed under 
the centralized partnership audit regime will provide certainty to 
partnerships and the IRS. Partnerships will know when a taxable year is 
no longer subject to audit, and the IRS will be better able to allocate 
resources for examinations under the centralized partnership audit 
regime. Accordingly, proposed Sec.  301.6231-1(b)(1) imposes a time 
limit on when adjustments may be proposed for a particular taxable year 
by providing that a NOPPA may not be mailed after the expiration of the 
period described in section 6235(a)(1), including any extensions of 
that period and after applying any of the special rules in section 
6235(c) (providing additional time for situations where no return is 
filed, fraud, etc.). Once a NOPPA is mailed, the time period for 
mailing the FPA in order to make a final partnership adjustment is 
generally governed by section 6235(a)(2) or (3).

[[Page 60152]]

    Proposed Sec.  301.6231-1(f) and (g) provide rules for withdrawal 
of a NAP or a NOPPA and rescission of an FPA. Section 6231(c) provides 
that rescission of ``any notice of a partnership adjustment'' requires 
consent of the partnership. Because the NAP merely notifies the 
partnership of the initiation of an examination and the NOPPA only 
proposes an adjustment, neither of these notices is a notice of a 
partnership adjustment for purposes of the consent requirement in 
section 6231(c). Accordingly, proposed Sec.  301.6231-1(g) requires 
consent of the partnership before rescission of an FPA, but proposed 
Sec.  301.6231-1(f) does not require consent of the partnership before 
withdrawing a NAP or a NOPPA.
    In the November 30 NPRM, the Treasury Department and the IRS 
discussed the coordination of the special rules in section 905(c) 
(relating to certain adjustments to foreign tax credits) with the 
centralized partnership audit regime. The Treasury Department and the 
IRS specifically requested comments regarding whether the AAR process 
can be utilized for purposes of satisfying the notification 
requirements of section 905(c) with respect to foreign tax 
redeterminations relating to a foreign tax reported by a partnership as 
a creditable foreign tax expenditure. If the AAR process can be used, 
section 905(c) would possibly represent an exception to the normal 
timing rules discussed in the Explanation of Provisions section of this 
preamble, just as it represents a departure from the ordinary timing 
rules in circumstances outside the scope of the centralized partnership 
audit regime. If the AAR process can be adopted for section 905(c) 
purposes, these proposed regulations may be modified in separate 
guidance to account for that process.

6. Assessment, Collection, and Payment of Imputed Underpayments

    Proposed Sec.  301.6232-1(a) restates the rule in section 6232(a) 
that any imputed underpayment determined under the centralized 
partnership audit regime must be assessed and collected as if the 
imputed underpayment were a tax imposed by subtitle A of the Code for 
the adjustment year. However, proposed Sec.  301.6232-1(a) also 
clarifies that because the centralized partnership audit regime under 
subchapter C of chapter 63 applies, the deficiency procedures under 
subchapter B of chapter 63 do not apply to an assessment of an imputed 
underpayment. Section 6232(b) and proposed Sec.  301.6232-1(c) 
explicitly provide the limitations on assessments under the centralized 
partnership audit regime. Generally, an imputed underpayment determined 
by the IRS may be assessed only after the IRS sends an FPA, and the 
partnership has a chance to seek judicial review.
    Proposed Sec.  301.6232-1(d)(1) describes exceptions to the 
restrictions on assessment, including the rules for assessment of 
amounts attributable to partnership adjustments on account of 
mathematical or clerical errors or where a partnership-partner (as 
defined in proposed Sec.  301.6241-1(a)(7) (June 14 NPRM)) is treated 
as if it had a mathematical or clerical error on its return because it 
failed to treat items consistently with the partnership's treatment of 
the items pursuant to section 6222(a). Any resulting assessment of an 
imputed underpayment attributable to that adjustment is not subject to 
the limitations under section 6232(b) and proposed Sec.  301.6232-1(c), 
and therefore may be assessed without the issuance of an FPA.
    Under proposed Sec.  301.6232-1(d)(1)(ii)(A), the partnership 
generally has 60 days to request abatement of the assessment 
attributable to the mathematical or clerical error, and the IRS must 
abate the assessment. Consistent with section 6232(d), under proposed 
Sec.  301.6232-1(d)(1)(ii)(B), this rule does not apply if the 
assessment is attributable to an adjustment of an inconsistent item on 
a partnership-partner's return. However, the IRS intends to develop 
pre-assessment processes to provide the partnership-partner with an 
opportunity to correct the inconsistency by filing an AAR under section 
6227 or, in situations where the partnership-partner has made an 
election under section 6221(b), an amended partnership return. 
Therefore, proposed Sec.  301.6232-1(d)(1)(ii)(B) provides that prior 
to assessment a partnership-partner that has failed to comply with 
section 6222(a) may correct the inconsistency by filing an AAR under 
section 6227 or an amended partnership return, as appropriate. 
Additionally, proposed Sec.  301.6232-1(d)(1)(ii)(B) authorizes a 
partnership-partner that has elected out of the centralized partnership 
audit regime under section 6221(b) to furnish amended statements to its 
partners. This rule provides the consent required by section 6031(b), 
which prohibits a partnership from amending information required to be 
furnished by the partnership to its partners after the due date of the 
return, except as provided by the IRS.
    Proposed Sec.  301.6232-1(d)(1)(iii) addresses the situation in 
which a partnership-partner that elected out of the centralized 
partnership audit regime pursuant to section 6221(b) for the reviewed 
year has failed to comply with section 6222(a). Under proposed Sec.  
301.6232-1(d)(1)(iii), any tax resulting from an adjustment due to such 
partnership-partner's failure to comply with section 6222(a) may be 
assessed against the partners (or indirect partners) of the 
partnership-partner. The tax may be assessed in the same manner as if 
the tax were on account of a mathematical or clerical error appearing 
on the partner's or indirect partner's return. In accordance with 
section 6232(d)(1)(B), the procedures under section 6213(b)(2) for 
requesting abatement of such an assessment will not apply.

7. Interest and Penalties Related to Imputed Underpayments

A. Interest and Penalties Determined From the Reviewed Year
    Proposed Sec.  301.6233(a)-1(a) provides that except to the extent 
provided in section 6226(c) and the regulations thereunder, in the case 
of a partnership adjustment for a reviewed year of the partnership, a 
partnership is liable for interest as computed under proposed Sec.  
301.6233(a)-1(b) and for any penalty, addition to tax, or additional 
amount as determined in proposed Sec.  301.6233(a)-1(c).
    Proposed Sec.  301.6233(a)-1(b) provides that interest with respect 
to an imputed underpayment is the interest that would be imposed under 
chapter 67 of the Code if the imputed underpayment were treated as an 
underpayment of tax for the reviewed year. Proposed Sec.  301.6233(a)-
1(b) further provides that interest on such imputed underpayment begins 
on the day after the due date of the partnership return for the 
reviewed year and ends on the earlier of the date prescribed for 
payment (as described in proposed Sec.  301.6232-1(b)), the return due 
date of the partnership return for the adjustment year, or the date the 
imputed underpayment is fully paid by the partnership.
    Proposed Sec.  301.6233(a)-1(c)(1) provides that the penalties, 
additions to tax, or additional amounts determined with respect to a 
partnership adjustment are those penalties, additions to tax, or 
additional amounts that would be imposed under part II of subchapter A 
of chapter 68 of the Code by treating the imputed underpayment as an 
underpayment (or understatement) of tax for the reviewed year and by 
treating the partnership as if it had been an individual subject to tax 
imposed by chapter 1 of subtitle A of the Code for the reviewed year.

[[Page 60153]]

    Proposed Sec.  301.6233(a)-1(c)(2) coordinates the rules for 
determining penalties related to imputed underpayments with the 
accuracy-related and fraud penalties under sections 6662, 6662A, and 
6663. Proposed Sec.  301.6233(a)-1(c)(2)(ii) provides rules to 
determine the portion of an imputed underpayment subject to penalties 
when there is at least one adjustment with respect to which no penalty 
has been imposed and at least one with respect to which a penalty has 
been imposed, or where there are at least two adjustments with respect 
to which penalties have been imposed and the penalties have been 
imposed at different rates. The rules under proposed Sec.  301.6233(a)-
1(c)(2)(ii) extend the existing ordering rules under Sec.  1.6664-3 to 
partnerships subject to the centralized partnership audit regime.
    Proposed Sec.  301.6233(a)-1(c)(2)(ii)(B) provides that when 
computing the portion of the imputed underpayment subject to penalties 
under sections 6662, 6662A, and 6663, partnership adjustments that did 
not result in the imputed underpayment are not taken into account. To 
determine the portion of the imputed underpayment subject to a penalty, 
partnership adjustments are first grouped together according to whether 
the adjustments are subject to penalty and if so, by rate of penalty. 
Negative adjustments as defined in proposed Sec.  301.6233(a)-
1(c)(2)(ii)(C) are included in these groupings according to the 
allocation rule in proposed Sec.  301.6233(a)-1(c)(2)(ii)(D) and are 
netted against the positive adjustments within each grouping to the 
extent provided in proposed Sec.  301.6233(a)-1(c)(2)(ii)(E). After 
grouping the partnership adjustments, each non-credit adjustment within 
a grouping is multiplied by the rate that applied to such adjustment 
when determining the imputed underpayment. After the appropriate rate 
is applied to each adjustment, the results within a grouping are 
totaled. The total within each grouping is then adjusted to account for 
any credit adjustments. The result is the portion of the imputed 
underpayment that is subject to the penalty rate corresponding to the 
grouping.
    Proposed Sec.  301.6233(a)-1(c)(2)(ii)(F) through (iv) provide 
clarifying rules for applying the penalties for fraud under section 
6663, reportable transaction understatements under section 6662A, and 
substantial understatements of tax under section 6662(d) to imputed 
underpayments determined under the centralized partnership audit 
regime.
    Proposed Sec.  301.6233(a)-1(c)(2)(v) provides rules for 
application of the reasonable cause and good faith exception to the 
penalties under sections 6662, 6662A, and 6663. See sections 6664(c) 
and (d). Proposed Sec.  301.6233(a)-1(c)(2)(v) provides that for these 
purposes the partnership is treated as the taxpayer and, therefore, the 
facts and circumstances taken into account in determining whether the 
partnership has established reasonable cause and good faith are those 
facts and circumstances applicable to the partnership. This may include 
facts and circumstances with respect to partners or other individuals 
acting on behalf of the partnership. In addition, proposed Sec.  
301.6233(a)-1(c)(2)(v) provides that any partner-level defense, for 
example a reasonable cause defense that is based on the personal 
circumstances of the partner, will not be considered in a partnership-
level proceeding except in accordance with the amended return and 
closing agreement modification procedures set forth in the regulations 
under section 6225(c) and proposed Sec.  301.6225-2 (June 14 NPRM).
B. Interest and Penalties From the Adjustment Year
    Proposed Sec.  301.6233(b)-1(a) provides rules that apply when a 
partnership fails to pay an imputed underpayment by the date prescribed 
for such payment. In the case of such a failure, proposed Sec.  
301.6233(b)-1(a) provides that the partnership is liable for interest, 
as well as any penalties, additions to tax, and additional amounts as 
determined under proposed Sec.  301.6233(b)-1(b) and (c). Proposed 
Sec.  301.6233(b)-1(b) clarifies that these rules apply to the portion 
of an imputed underpayment resulting from partnership adjustments 
determined by the IRS under section 6225(a)(1) that is unpaid after the 
date prescribed for payment under proposed Sec.  301.6232-1(b) (the 
date stated in a notice and demand) and to the portion of an imputed 
underpayment resulting from adjustments requested by the partnership in 
an AAR under section 6227 that is unpaid after the date the AAR is 
filed.

8. Judicial Review of Partnership Adjustments

    Proposed Sec.  301.6234-1 provides rules relating to judicial 
review of partnership adjustments. Proposed Sec.  301.6234-1(b) and (c) 
describe the jurisdictional deposit requirement for partnerships that 
wish to bring an action in a United States district court or the Court 
of Federal Claims and explain how the jurisdictional deposit is treated 
for purposes of the Code. Under proposed Sec.  301.6234-1(c), although 
the deposit is not generally treated as a payment of tax, the deposit 
will stop additional interest from accruing under section 6233(a) on 
the imputed underpayment. In addition, interest will be allowed and 
paid in accordance with section 6611. The Treasury Department and the 
IRS request comments on when interest under section 6611 should begin 
to run in this context.
    In response to Notice 2016-23, 2016-13 I.R.B. 490 (March 28, 2016), 
which requested comments on the new centralized audit regime, one 
commenter requested that the IRS clarify that only a dismissal on the 
merits and with prejudice be considered a dismissal within the meaning 
of section 6234(e). This comment was not adopted. Section 6234 
explicitly provides that any decision of the court dismissing the 
action ``shall be considered as [the court's] decision that the [FPA] 
is correct.'' The only exception provided in section 6234 is in the 
case of a dismissal by reason of the rescission of an FPA under section 
6231(c). See also JCS-1-16, at 75 (stating that ``a decision to dismiss 
the proceeding (other than a dismissal because the [FPA] was rescinded 
under section 6231(c)), is a judgment on the merits upholding the final 
partnership adjustments''). Accordingly, proposed Sec.  301.6234-1(e) 
reflects the language in section 6234(e) without the limitation 
suggested in the comment.

9. Period of Limitations on Making Adjustments

    Proposed Sec.  301.6235-1 reflects the rules in section 6235 
regarding the period within which the IRS must mail an FPA to make a 
partnership adjustment for a partnership taxable year. Under these 
rules, an FPA generally must be mailed before the later of: (1) Three 
years from the later of the date the partnership return is filed or 
due, or the date an AAR with respect to the year is filed (see proposed 
Sec.  301.6235-1(a)(1)); (2) 270 days after the date everything 
required for a modification is submitted plus any extension of time 
granted by the IRS with respect to a request for modification under 
section 6225(c)(7) (see proposed Sec.  301.6235-1(b)); or (3) 330 days 
after the date of the NOPPA plus any extension of time granted by the 
IRS with respect to a request for modification under section 6225(c)(7) 
(see proposed Sec.  301.6235-1(c)). The 3-year period described under 
proposed Sec.  301.6235-1(a)(1) (plus any extensions of the period 
under proposed Sec.  301.6235-1(d) and taking into account any special 
rules under section 6235(c)) is also the time period within which the

[[Page 60154]]

IRS must mail a NOPPA. See proposed Sec.  301.6231-1(b)(1).
    The proposed regulations do not currently incorporate any rules 
outside of subchapter C of chapter 63 of the Code that might extend 
this period. As discussed in the Explanation of Provisions section of 
this preamble and in the November 30 NPRM, if the AAR process can be 
used to coordinate sections 905(c) and the adjustment rules under the 
centralized partnership audit regime, the proposed regulations may need 
to be modified to account for redeterminations under section 905(c). 
The Treasury Department and the IRS request comments on whether 
additional guidance would be helpful with respect to any other specific 
provision, outside of subchapter C of chapter 63 of the Code, which 
might extend the adjustment period under the centralized partnership 
audit regime.
    Once a NOPPA is mailed, proposed Sec.  301.6235-1(c) provides that 
the IRS will have at least 330 days from the date of the NOPPA to make 
a partnership adjustment regardless of whether the partnership requests 
modification of the imputed underpayment.
    If the partnership requests modification of an imputed 
underpayment, proposed Sec.  301.6235-1(b) provides that the IRS will 
have at least 270 days from the date on which everything required to be 
submitted pursuant to section 6225(c) is so submitted to the IRS to 
make a partnership adjustment. Proposed Sec.  301.6235-1(b)(2) provides 
that, for purposes of section 6235(a)(2), the date on which everything 
required to be submitted pursuant to section 6225(c) is so submitted to 
the IRS is the earlier of: (1) The date on which the time for 
submitting the modification request and information (as described in 
proposed Sec.  301.6225-2(c)(3)(i) (June 14 NPRM)) ends (including 
extensions); or (2) the date on which the partnership and the IRS agree 
to waive the 270-day period under proposed Sec.  301.6231-1(b)(2)(ii) 
(June 14 NPRM) before an FPA can be mailed. Therefore, once a NOPPA has 
been mailed, the IRS will have 330 days from the date the NOPPA is 
mailed to make a partnership adjustment and in general may have up to 
540 days (270 days in the modification period and 270 days from the end 
of the modification period) from the date the NOPPA is mailed if there 
are no extensions or waivers executed by the taxpayer.
    Proposed Sec.  301.6235-1(d) provides that any of the periods 
described in proposed Sec.  301.6235-1(a), (b), and (c) may be extended 
by an agreement, in writing, entered into by the partnership and the 
IRS before the expiration of such period. A partnership and the IRS may 
also agree to extend a period of time that has already been extended 
under proposed Sec.  301.6235-1(d).

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. Because the proposed regulations would 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 Code, this notice of proposed 
rulemaking has been submitted to the Chief Counsel for Advocacy of the 
Small Business Administration for comment on its impact on small 
business.

Statement of Availability of IRS Documents

    IRS Revenue Procedures, Revenue Rulings, Notices and other guidance 
cited in this preamble are published in the Internal Revenue Bulletin 
(or Cumulative Bulletin) and are available from the Superintendent of 
Documents, U.S. Government Publishing Office, Washington, DC 20402, or 
by visiting the IRS website at www.irs.gov.

Comments and Requests for Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any electronic and written comments that 
are submitted timely to the IRS as prescribed in this preamble under 
the ADDRESSES heading. The Treasury Department and the IRS request 
comments on all aspects of the proposed rules. All comments will be 
available at www.regulations.gov or upon request. A public hearing will 
be scheduled if requested in writing by any person that timely submits 
written comments. If a public hearing is scheduled, then notice of the 
date, time, and place for the public hearing will be published in the 
Federal Register.

Drafting Information

    The principal authors of these proposed regulations are Jennifer M. 
Black, Joy E. Gerdy-Zogby, Brittany Harrison, and Steven L. Karon 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

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

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 301 is proposed to be amended as follows:

PART 301--PROCEDURE AND ADMINISTRATION

0
Paragraph 1. The authority citation for part 301 continues to be read 
in part as follows:

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


Sec.  301.6221(a)-1   [Amended]

0
Par. 2. Section 301.6221(a)-1, as proposed to be amended at 82 FR 27334 
(June 14, 2017), is further amended by removing and reserving paragraph 
(c).
0
Par. 3. Section 301.6225-2, as proposed to be amended at 82 FR 27334 
(June 14, 2017), is further amended by adding paragraph (d)(2)(viii) to 
read as follows:


Sec.  301.6225-2   Modification of imputed underpayment.

* * * * *
    (d) * * *
    (2) * * *
    (viii) Penalties. The applicability of any penalties, additions to 
tax, or additional amounts that relate to a partnership adjustment is 
determined at the partnership level in accordance with section 6221(a). 
However, the amount of penalties, additions to tax, and additional 
amounts a reviewed year partner (or indirect partner) must pay under 
paragraph (d)(2)(ii) of this section for the first affected year (as 
defined in Sec.  301.6226-3(b)(2)) and for any modification year (as 
described in paragraph (d)(2)(iv) of this section) is based on the 
underpayment or understatement of tax, if any, that results from taking 
into account the adjustments in the first affected year or the 
modification year, as applicable. For instance, if after taking into 
account the adjustments, the partner would not have an underpayment, or 
has an understatement that falls below the applicable threshold for the 
imposition of a penalty, in the first affected year or any modification 
year, no penalty would be due from that partner for such year. A 
partner's claim that there is reasonable cause under section 6664(c) 
(or other partner-level defense as described in Sec.  301.6226-3(i)(3)) 
for an underpayment or understatement described in this paragraph 
(d)(2)(viii) may be submitted with an amended

[[Page 60155]]

return filed under paragraph (d)(2) of this section, but only if the 
partner pays all tax, penalties, and interest due in accordance with 
paragraph (d)(2)(ii) of this section.
* * * * *
0
Par. 4. Section 301.6226-1, as proposed to be amended at 82 FR 27334 
(June 14, 2017), is further amended by revising paragraph (d) to read 
as follows:


Sec.  301.6226-1   Election for an alternative to the payment of the 
imputed underpayment.

* * * * *
    (d) Binding nature of statements. The election under this section, 
which includes filing and furnishing statements described in Sec.  
301.6226-2, are actions of the partnership under section 6223 and the 
regulations thereunder and, unless determined otherwise by the IRS, the 
partner's share of the adjustments and the applicability of any 
penalties, additions to tax, and additional amounts as set forth in the 
statement are binding on the partner pursuant to section 6223. 
Accordingly, a partner may not treat items reflected on a statement 
described in Sec.  301.6226-2 on the partner's return inconsistently 
with how those items are treated on the statement that is filed with 
the IRS. See Sec.  301.6222-1(c)(2) (regarding items the treatment of 
which a partner is bound to under section 6223).
* * * * *
0
Par. 5. Section 301.6226-2, as proposed to be amended at 82 FR 27334 
(June 14, 2017), is further amended by:
0
a. Revising paragraphs (e)(5) and (7).
0
b. Removing and reserving paragraph (e)(8).
0
c. Revising paragraph (f)(2).
0
d. Removing paragraph (f)(3).
0
e. Removing and reserving paragraph (g).
    The revisions read as follows:


Sec.  301.6226-2   Statements furnished to partners and filed with the 
IRS.

* * * * *
    (e) * * *
    (5) Modifications approved by the IRS with respect to the reviewed 
year partner (or with respect to any indirect partner (as defined in 
Sec.  301.6241-1(a)(4)) that holds its interest in the partnership 
through its interest in the reviewed year partner);
* * * * *
    (7) The applicability of any penalty, addition to tax, or 
additional amount determined at the partnership level that relates to 
any adjustments allocable to the reviewed year partner and the 
adjustments to which the penalty, addition to tax, or additional amount 
relates, the section of the Internal Revenue Code under which each 
penalty, addition to tax, or additional amount is imposed, and the 
applicable rate of each penalty, addition to tax, or additional amount 
determined at the partnership level;
* * * * *
    (f) * * *
    (2) Treatment of modifications disregarded. Any modifications 
approved by the IRS with respect to the reviewed year partner (or with 
respect to any indirect partner (as defined in Sec.  301.6241-1(a)(4)) 
that holds its interest in the partnership through its interest in the 
reviewed year partner) under Sec.  301.6225-2 are disregarded for 
purposes of determining each partner's share of the adjustments under 
paragraph (f)(1) of this section.
* * * * *
0
Par. 6. Section 301.6226-3, as proposed to be amended at 82 FR 27334 
(June 14, 2017), is further amended by:
0
a. Revising paragraphs (a) and (b)(4).
0
b. Removing and reserving paragraphs (c) and (d)(2).
0
c. Revising paragraphs (d)(3), (e), and (g).
0
d. Adding paragraphs (i) and (j).
    The revisions and additions read as follows:


Sec.  301.6226-3   Adjustments Taken Into Account by Partners.

    (a) Tax imposed by chapter 1 increased by additional reporting year 
tax. The tax imposed by chapter 1 of subtitle A of the Internal Revenue 
Code (chapter 1 tax) for each reviewed year partner (as defined in 
Sec.  301.6241-1(a)(9)) for the taxable year that includes the date a 
statement was furnished in accordance with Sec.  301.6226-2 (the 
reporting year) is increased by the additional reporting year tax. The 
additional reporting year tax is the aggregate of the adjustment 
amounts (determined in accordance with paragraph (b) of this section). 
In addition to being liable for the additional reporting year tax, a 
reviewed year partner must also calculate and pay for the reporting 
year any penalties, additions to tax, and additional amounts (as 
determined under paragraph (i) of this section). Finally, a reviewed 
year partner must also calculate and pay for the reporting year any 
interest (as determined under paragraph (d) of this section).
    (b) * * *
    (4) Coordination of sections 860 and 6226. If a qualified 
investment entity (QIE) within the meaning of section 860(b) receives a 
statement described in Sec.  301.6226-2(a) and correctly makes a 
determination within the meaning of section 860(e)(4) that one or more 
of the adjustments reflected in the statement is an adjustment within 
the meaning of section 860(d) with respect to that QIE for a taxable 
year, the QIE may distribute deficiency dividends within the meaning of 
section 860(f) for that taxable year and avail itself of the deficiency 
dividend procedures set forth in section 860. If the QIE utilizes the 
deficiency dividend procedures with respect to adjustments in a 
statement described in Sec.  301.6226-2(a), the QIE may claim a 
deduction for deficiency dividends against the adjustments furnished to 
the QIE in the statement in calculating any correction amounts under 
paragraphs (b)(2) and (3) of this section, and interest on such 
correction amounts under paragraph (d) of this section, to the extent 
that the QIE makes deficiency dividend distributions under section 
860(f) and complies with all requirements of section 860 and the 
regulations thereunder.
* * * * *
    (d) * * *
    (3) Interest on penalties. Interest on any penalties, additions to 
tax, or additional amounts determined under paragraph (i) of this 
section is calculated at the rate set forth in paragraph (d)(4) of this 
section from the due date (without extension) of the reviewed year 
partner's return for the first affected year (as defined in paragraph 
(b)(2) of this section) until the amount is paid.
* * * * *
    (e) Pass-through partners--(1) In general. Expect as provided in 
paragraph (e)(6) of this section, if a pass-through partner (as defined 
in Sec.  301.6241-1(a)(5)) is furnished a statement described in Sec.  
301.6226-2 (including a statement described in paragraph (e)(3)(i) of 
this section) with respect to adjustments of a partnership that made an 
election under Sec.  301.6226-1, the pass-through partner must take 
into account the adjustments reflected on that statement in accordance 
with either paragraph (e)(3) or (4) of this section.
    (2) Failure to take into account adjustments. If any pass-through 
partner fails to take into account the adjustments reflected on a 
statement described in Sec.  301.6226-2 in accordance with paragraph 
(e)(3), (4), or (6) of this section, the pass-through partner must pay 
an amount that is calculated like an imputed underpayment, as well as 
any penalties, additions to tax, additional amounts, and interest with 
respect to such adjustments as described under paragraph (e)(4) of this 
section.
    (3) Furnishing statements to partners--(i) In general. A pass-
through partner described in paragraph (e)(1) of

[[Page 60156]]

this section takes into account the adjustments under paragraph (e)(3) 
of this section by furnishing a statement that includes the items 
required by paragraph (e)(3)(iii) of this section to the partners that 
held an interest in the pass-through partner at any time during the 
taxable year of the pass-through partner to which the adjustments in 
the statement furnished to the pass-through partner relate (affected 
partner). The statements described in this paragraph (e)(3)(i) must be 
filed with the IRS, along with a transmittal that includes a summary of 
all statements filed under this paragraph (e)(3)(i), and such other 
information as required in forms, instructions, and other guidance, by 
the due date prescribed in paragraph (e)(3)(ii) of this section. Except 
as otherwise provided in paragraphs (e)(3)(ii), (iii), and (v) of this 
section, the rules applicable to statements described in Sec.  
301.6226-2 are applicable to statements described in this paragraph 
(e)(3)(i).
    (ii) Time for filing and furnishing the statements. The pass-
through partner must file with the IRS and furnish to its affected 
partners the statements described in paragraph (e)(3)(i) of this 
section no later than the extended due date for the return for the 
adjustment year (as defined in Sec.  301.6241-1(a)(1)) of the 
partnership that made the election under Sec.  301.6226-1. For purposes 
of the preceding sentence, the extended due date is the extended due 
date under section 6081 regardless of whether the partnership that made 
the election under Sec.  301.6226-1 is required to file a return for 
the adjustment year or timely files a request for an extension under 
section 6081 and the regulations thereunder.
    (iii) Contents of statements. Each statement described in paragraph 
(e)(3)(i) of this section must include the following information--
    (A) The name and correct taxpayer identification number (TIN) of 
the partnership that made the election under Sec.  301.6226-1 with 
respect to the adjustments reflected on the statements described in 
paragraph (e)(3)(i) of this section;
    (B) The adjustment year of the partnership described in paragraph 
(e)(3)(iii)(A) of this section;
    (C) The extended due date for the return for the adjustment year of 
the partnership described in paragraph (e)(3)(iii)(A) of this section 
(as described in paragraph (e)(3)(ii) of this section);
    (D) The date on which the partnership described in paragraph 
(e)(3)(iii)(A) of this section furnished its statements required under 
Sec.  301.6226-2(b);
    (E) The name and correct TIN of the partnership that furnished the 
statement to the pass-through partner if different from the partnership 
described in paragraph (e)(3)(iii)(A) of this section;
    (F) The name and correct TIN of the pass-through partner;
    (G) The pass-through partner's taxable year to which the 
adjustments reflected on the statements described in paragraph 
(e)(3)(i) of this section relates;
    (H) The name and correct TIN of the affected partner to whom the 
statement is being furnished;
    (I) The current or last address of the affected partner that is 
known to the pass-through partner;
    (J) The affected partner's share of items as originally reported to 
such partner under section 6031(b) and, if applicable, section 6227, 
for the taxable year to which the adjustments reflected on the 
statement furnished to the pass-through partner relate;
    (K) The affected partner's share of partnership adjustments 
determined under Sec.  301.6226-2(f)(1) as if the affected partner were 
the reviewed year partner and the partnership were the pass-through 
partner;
    (L) Modifications approved by the IRS with respect to the affected 
partner or an indirect partner (as defined in Sec.  301.6241-1(a)(4)) 
that holds its interest in the partnership that made the election under 
Sec.  301.6226-1 through the affected partner;
    (M) The affected partner's share of any amounts attributable to 
adjustments to tax attributes (as defined in Sec.  301.6241-1(a)(10)) 
for any intervening year (as defined in paragraph (b)(3) of this 
section) resulting from the adjustments in the reviewed year with 
respect to the partnership described in paragraph (e)(3)(iii)(A) of 
this section;
    (N) The applicability of any penalties, additions to tax, or 
additional amounts that relate to any adjustments allocable to the 
affected partner (as determined under Sec.  301.6226-2(f)(3)) and the 
adjustments allocated to the affected partner to which such penalties, 
additions to tax, or additional amounts relate, the section of the 
Internal Revenue Code under which each penalty, addition to tax, or 
additional amount is imposed, and the applicable rate of each penalty, 
addition to tax, or additional amount; and
    (O) Any other information required by forms, instructions, and 
other guidance prescribed by the IRS.
    (iv) Affected partner must take into account the adjustments. A 
statement furnished to an affected partner in accordance with paragraph 
(e)(3) of this section is treated as if it were a statement described 
in Sec.  301.6226-2. An affected partner that is a pass-through partner 
must take into account its share of the adjustments reflected on such a 
statement in accordance with paragraph (e) of this section. An affected 
partner that is not a pass-through partner must take into account its 
share of the adjustments reflected on such a statement in accordance 
with this section by treating references to ``reviewed year partner'' 
as ``affected partner''. For purposes of this paragraph (e)(3)(iv), an 
affected partner that is not a pass-through partner takes into account 
the adjustments in accordance with this section by determining its 
reporting year based on the date upon which the partnership that made 
the election under Sec.  301.6226-1 furnished its statements to its 
reviewed year partners (as described in paragraph (a) of this section). 
No addition to tax under section 6651 related to any additional 
reporting year tax will be imposed if an affected partner that is not a 
pass-through partner reports and pays the additional reporting year tax 
within 30 days of the extended due date for the return for the 
adjustment year of the partnership that made the election under Sec.  
301.6226-1 (as described in paragraph (e)(3)(ii) of this section).
    (v) Adjustments subject to chapters 3 and 4 of the Internal Revenue 
Code. If a pass-through partner furnishes statements to its affected 
partners in accordance with paragraph (e)(3) of this section, the pass-
through partner must comply with the requirements of Sec.  301.6226-
2(h)(3), and an affected partner must comply with the requirements of 
paragraph (f) of this section. For purposes of applying both Sec.  
301.6226-2(h)(3) and paragraph (f) of this section, as appropriate, 
references to the ``partnership'' should be replaced with references to 
the ``pass-through partner''; references to the ``reviewed year 
partner'' should be replaced with references to the ``affected 
partner''; references to the statement required under paragraph (a) of 
this section and its due date should be replaced with references to the 
statement required under paragraph (e)(3)(i) of this section and its 
due date described in paragraph (e)(3)(ii) of this section; and 
references to the ``reporting year'' should be read in accordance with 
paragraph (e)(3)(iv) of this section.
    (4) Pass-through partner makes a payment--(i) In general. A pass-
through partner that is furnished a statement described in Sec.  
301.6226-2 takes into account the adjustments reflected on that 
statement under paragraph (e)(4) of this section when the pass-through 
partner--

[[Page 60157]]

    (A) Pays an amount computed under paragraph (e)(4)(iii) of this 
section;
    (B) Pays any penalties, additions to tax, and additional amounts 
and interest computed under paragraph (e)(4)(iv) of this section; and
    (C) Provides the IRS with information related to such payment as 
required by forms, instructions, and other guidance.
    (ii) Time of payment. A pass-through partner must report and pay 
the amounts described in paragraphs (e)(4)(i)(A) and (B) of this 
section in accordance with forms, instructions, and other guidance no 
later than the extended due date for the return for the adjustment year 
of the partnership that made the election under Sec.  301.6226-1. For 
purposes of the preceding sentence, the extended due date is the 
extended due date under section 6081 regardless of whether the 
partnership that made the election under Sec.  301.6226-1 is required 
to file a return for the adjustment year or timely filed a request for 
an extension under section 6081 and the regulations thereunder.
    (iii) Computation of payment amount. The payment required under 
paragraph (e)(4)(i)(A) of this section is computed in the same manner 
as an imputed underpayment is calculated under section 6225 and Sec.  
301.6225-1 by treating the adjustments reflected on the statement 
furnished to the pass-through partner under Sec.  301.6226-2 as 
partnership adjustments (as defined in Sec.  301.6241-1(a)(6)) for the 
first affected year. Separate calculations must also be made for each 
intervening year by treating the pass-through partner's share of 
partnership tax attributes for each intervening year as partnership 
adjustments for that intervening year. The sum of the amounts 
calculated for the first affected year and each intervening year under 
this paragraph (e)(4)(iii) is the payment required under paragraph 
(e)(4)(i)(A) of this section. Any modification approved by the IRS 
under Sec.  301.6225-2 with respect to the pass-through partner 
(including any modifications with respect to an indirect partner that 
holds its interest in the partnership that made the election under 
Sec.  301.6226-1 through its interest in the pass-through partner) 
reflected on the statement furnished to the pass-through partner under 
Sec.  301.6226-2 (or paragraph (e)(3) of this section) is taken into 
account in calculating the amounts under this paragraph (e)(4)(iii).
    (iv) Penalties and interest--(A) Penalties. A pass-through partner 
must compute and pay any applicable penalties, additions to tax, and 
additional amounts on the amounts calculated under paragraph 
(e)(4)(iii) of this section as if such amounts were actual imputed 
underpayments for the pass-through partner's first affected year or any 
intervening year, as applicable. See Sec.  301.6233-1(c).
    (B) Interest. A pass-through partner must pay interest on the 
amounts calculated under paragraph (e)(4)(iii) of this section in 
accordance with paragraph (d) of this section as if such amounts were 
amounts due for the first affected year or any intervening year, as 
applicable.
    (v) Adjustments that do not result in an imputed underpayment. 
Adjustments taken into account under paragraph (e)(4) of this section 
that would not result in an imputed underpayment (as defined in Sec.  
301.6225-1(c)(2)) if the amounts calculated under paragraph (e)(4)(iii) 
of this section were actual imputed underpayments are taken into 
account by the pass-through partner in accordance with Sec.  301.6225-3 
in the taxable year of the pass-through partner that includes the date 
the payment required under paragraph (e)(4)(i)(A) of this section is 
made or, if no payment is required under paragraph (e)(4)(i)(A) of this 
section, the date the statement described in Sec.  301.6226-2 (or 
paragraph (e)(3)(i) of this section) is furnished to the pass-through 
partner.
    (vi) Coordination with chapters 3 and 4 of the Code. If a pass-
through partner pays an amount computed under paragraph (e)(4)(iii) of 
this section, Sec.  301.6225-1(a)(4) applies to the pass-through 
partner by substituting ``pass-through partner'' for ``partnership'' 
where Sec.  301.6225-1(a)(4) refers to the partnership that made the 
election under Sec.  301.6226-1.
    (5) Treatment of pass-through partners that are not partnerships--
(i) S corporations. For purposes of paragraph (e) of this section, an S 
corporation is treated as a partnership and its shareholders are 
treated as partners.
    (ii) Trusts and estates. Except as provided in paragraph (j) of 
this section, for purposes of paragraph (e) of this section, a trust 
and its beneficiaries, and an estate and its beneficiaries are treated 
in the same manner as a partnership and its partners.
    (6) Pass-through partners subject to chapter 1 tax. A pass-through 
partner that is subject to tax under chapter 1 of the Code for the 
first affected year or any intervening year on the adjustments (or a 
portion of the adjustments) reflected on the statement furnished to 
such partner under Sec.  301.6226-2 (or paragraph (e)(3) of this 
section) takes the adjustments into account under this paragraph (e)(6) 
when the pass-through partner calculates and pays the additional 
reporting year tax as determined under paragraph (b) of this section 
and furnishes statements to its partners in accordance with paragraph 
(e)(3) of this section. Notwithstanding the prior sentence, a pass-
through partner is only required to include on a statement under 
paragraph (e)(3) of this section the adjustments that would be required 
to be included on statements furnished to owners or beneficiaries under 
sections 6037 and 6034A, as applicable, if the pass-through partner had 
correctly reported the items for the year to which the adjustments 
relate. If the pass-through partner fails to comply with the 
requirements of this paragraph (e)(6), the provisions of paragraph 
(e)(2) of this section apply.
* * * * *
    (g) Examples. The following examples illustrate the rules of this 
section. For purposes of these examples, each partnership is subject to 
subchapter C of chapter 63 of the Code, each partnership and partner 
has a calendar year taxable year, no modifications are requested by any 
partnership under Sec.  301.6225-2 (unless otherwise stated), no 
penalties, additions to tax, or additional amounts are determined at 
the partnership level (unless otherwise stated), all persons are U.S. 
persons (unless otherwise stated), and the highest rate of income tax 
in effect for all taxpayers is 40 percent for all relevant periods.

    Example 1. On its partnership return for the 2020 tax year, 
Partnership reported ordinary income of $1,000 and charitable 
contributions of $400. On June 1, 2023, the IRS mails a notice of 
final partnership adjustment (FPA) to Partnership for Partnership's 
2020 year disallowing the charitable contribution in its entirety 
and determining that a 20 percent accuracy-related penalty under 
section 6662(b) applies to the disallowance of the charitable 
contribution. Partnership makes a timely election under section 6226 
in accordance with Sec.  301.6226-1 with respect to the imputed 
underpayment in the FPA for Partnership's 2020 year and files a 
timely petition in the Tax Court challenging the partnership 
adjustments. The Tax Court determines that Partnership is not 
entitled to any of the claimed $400 in charitable contributions and 
upholds the applicability of the penalty. The decision regarding 
Partnership's 2020 tax year becomes final on December 15, 2025. 
Pursuant to Sec.  301.6226-2(b), the partnership adjustments are 
finally determined on December 15, 2025. On February 2, 2026, 
Partnership files the statements described under Sec.  301.6226-2 
with the IRS and furnishes to partner A, an individual who was a 
partner in Partnership during 2020, a statement described in Sec.  
301.6226-2. A had a 25 percent interest in Partnership during all of 
2020 and was allocated 25 percent of all items from Partnership for 
that year. The statement shows A's share of ordinary income reported 
on Partnership's return for the reviewed year

[[Page 60158]]

of $250 and A's share of the charitable contribution reported on 
Partnership's return for the reviewed year of $100. The statement 
also shows no adjustment to A's share of ordinary income, but does 
show an adjustment to A's share of the charitable contribution, a 
reduction of $100 resulting in $0 charitable contribution allocated 
to A from Partnership for 2020. In addition, the statement reports 
that a 20 percent accuracy-related penalty under section 6662(b) 
applies. A must pay the additional reporting year tax as determined 
in accordance with paragraph (b) of this section, in addition to A's 
penalties and interest. A computes his additional reporting year tax 
as follows. First, A determines the correction amount for the first 
affected year (the 2020 taxable year) by taking into account A's 
share of the partnership adjustment (<100> reduction in charitable 
contribution) for the 2020 taxable year. A determines the amount by 
which his chapter 1 tax for 2020 would have increased if the $100 
adjustment to the charitable contribution from Partnership were 
taken into account for that year. There is no adjustment to tax 
attributes in A's intervening years as a result of the adjustment to 
the charitable contribution for 2020. Therefore, A's aggregate of 
the adjustment amounts is the correction amount for 2020, A's first 
affected year. In addition to the aggregate of the adjustment 
amounts being added to the chapter 1 tax that A owes for 2026, the 
reporting year, A must calculate a 20 percent accuracy-related 
penalty on A's underpayment attributable to the $100 adjustment to 
the charitable contribution, as well as interest on the correction 
amount for the first affected year and the penalty determined in 
accordance with paragraph (d) of this section. Interest on the 
correction amount for the first affected tax year runs from April 
15, 2021, the due date of A's 2020 return (the first affected tax 
year) until A pays this amount. In addition, interest runs on the 
penalty from April 15, 2021, the due date of A's 2020 return for the 
first affected year until A pays this amount. On his 2026 income tax 
return, A must report the additional reporting year tax determined 
in accordance with paragraph (b) of this section, which is the 
correction amount for 2020, plus the accuracy-related penalty 
determined in accordance with paragraph (i) of this section, and 
interest determined in accordance with paragraph (d) of this section 
on the correction amount for 2020 and the penalty.
    Example 2. On its partnership return for the 2020 tax year, 
Partnership reported an ordinary loss of $500 million. On June 1, 
2023, the IRS mails an FPA to Partnership for the 2020 taxable year 
determining that $300 million of the $500 million in ordinary loss 
should be recharacterized as a long-term capital loss. Partnership 
has no long-term capital gain for its 2020 tax year. The FPA for 
Partnership's 2020 tax year reflects an adjustment of an increase in 
ordinary income of $300 million (as a result of the disallowance of 
the recharacterization of $300 million from ordinary loss to long-
term capital loss) and an imputed underpayment related to that 
adjustment, as well as an adjustment of an additional $300 million 
in long-term capital loss for 2020 which does not result in an 
imputed underpayment pursuant to under Sec.  301.6225-1(c)(2)(ii). 
Partnership makes a timely election under section 6226 in accordance 
with Sec.  301.6226-1 with respect to the imputed underpayment in 
the FPA and does not file a petition for readjustment under section 
6234. Accordingly, under Sec.  301.6226-1(b)(2) and Sec.  301.6225-
3(b)(6), the adjustment year partners (as defined in Sec.  301.6241-
1(a)(2)) do not take into account the $300 million long-term capital 
loss that does not result in an imputed underpayment. Rather, the 
reviewed year partners will take into account the $300 million long-
term capital loss. The time to file a petition expires on August 30, 
2023. Pursuant to Sec.  301.6226-2(b), the partnership adjustments 
become finally determined on August 30, 2023. On September 30, 2023, 
Partnership files with the IRS statements described in Sec.  
301.6226-2 and furnishes statements to all of its reviewed year 
partners in accordance with Sec.  301.6226-2. One partner of 
Partnership in 2020, B (an individual), had a 25 percent interest in 
Partnership during all of 2020 and was allocated 25 percent of all 
items from Partnership for that year. The statement filed with the 
IRS and furnished to B shows B's allocable share of the ordinary 
loss reported on Partnership's return for the 2020 taxable year as 
$125 million. The statement also shows an adjustment to B's 
allocable share of the ordinary loss in the amount of <$75 million>, 
resulting in a corrected ordinary loss allocated to B of $50 million 
for taxable year 2020 ($125 million originally allocated to B less 
$75 million which is B's share of the adjustment to the ordinary 
loss). In addition, the statement shows an increase to B's share of 
long-term capital loss in the amount of $75 million (B's share of 
the adjustment that did not result in the imputed underpayment with 
respect to Partnership). B must pay the additional reporting year 
tax as determined in accordance with paragraph (b) of this section. 
B computes his additional reporting year tax as follows. First, B 
determines the correction amount for the first affected year (the 
2020 taxable year) by taking into account B's share of the 
partnership adjustments (a $75 million reduction in ordinary loss 
and an increase of $75 million in long-term capital loss) for the 
2020 taxable year. B determines the amount by which his chapter 1 
tax for 2020 would have increased if the $75 million adjustment to 
ordinary loss and the $75 million adjustment to long-term capital 
loss from Partnership were taken into account for that year. Second, 
B determines if there is any increase in chapter 1 tax for any 
intervening year as a result of the adjustment to the ordinary and 
capital losses for 2020. B's aggregate of the adjustment amounts is 
the correction amount for 2020, B's first affected year plus any 
correction amounts for any intervening years. B is also liable for 
any interest on the correction amount for the first affected year 
and for any intervening year as determined in accordance with 
paragraph (d) of this section.
    Example 3. On its partnership return for the 2020 tax year, 
Partnership, a domestic partnership, reported U.S. source dividend 
income of $2,000. On June 1, 2023, the IRS mails an FPA to 
Partnership for Partnership's 2020 year increasing the amount of 
U.S. source dividend income to $4,000 and determining that a 20 
percent accuracy-related penalty under section 6662(b) applies to 
the increase in U.S. source dividend income. Partnership makes a 
timely election under section 6226 in accordance with Sec.  
301.6226-1 with respect to the imputed underpayment in the FPA for 
Partnership's 2020 year and does not file a petition for 
readjustment under section 6234. The time to file a petition expires 
on August 30, 2023. Pursuant to Sec.  301.6226-2(b), the partnership 
adjustments become finally determined on August 30, 2023. On 
September 30, 2023, Partnership files the statements described under 
Sec.  301.6226-2 with the IRS and furnishes to partner C, a 
nonresident alien individual who was a partner in Partnership during 
2020 (and remains a partner in Partnership in 2023), a statement 
described in Sec.  301.6226-2. C had a 50 percent interest in 
Partnership during all of 2020 and was allocated 50 percent of all 
items from Partnership for that year. The statement shows C's share 
of U.S. source dividend income reported on Partnership's return for 
the reviewed year of $1,000 and an adjustment to U.S. source 
dividend income of $1,000. In addition, the statement reports that a 
20 percent accuracy-related penalty under section 6662(b) applies. 
Under Sec.  301.6226-2(h)(3)(i), because the additional $1,000 in 
U.S. source dividend income allocated to C is an amount subject to 
withholding (as defined in Sec.  301.6226-2(h)(3)(i)), Partnership 
must pay the amount of tax required to be withheld on the 
adjustment. See Sec. Sec.  1.1441-1(b)(1) and 1.1441-5(b)(2)(i)(A) 
of this chapter. Under Sec.  301.6226-2(h)(3)(ii), Partnership may 
reduce the amount of withholding tax it must pay because it has 
valid documentation from 2020 that establishes that C was entitled 
to a reduced rate of withholding in 2020 on U.S. source dividend 
income of 10 percent pursuant to a treaty. Partnership withholds 
$100 of tax from C's distributive share, remits the tax to the IRS, 
and files the necessary return and information returns required by 
Sec.  1.1461-1 of this chapter. On his 2023 return, C must report 
the additional reporting year tax determined in accordance with 
paragraph (b) of this section, the accuracy-related penalty 
determined in accordance with paragraph (i) of this section, and 
interest determined in accordance with paragraph (d) of this section 
on the correction amount for the first affected year, the correction 
amount for any intervening year, and the penalty. Under paragraph 
(f) of this section, C may claim the $100 withholding tax paid by 
Partnership pursuant to Sec.  301.6226-2(h)(3)(i) as a credit under 
section 33 against C's income tax liability on his 2023 return.
    Example 4. On its partnership return for the 2020 tax year, 
Partnership reported ordinary income of $100 million and a long-term 
capital gain of $40 million. Partnership had four equal partners 
during the 2020 tax year: E, F, G, and H, all of whom were 
individuals. On its partnership return for the 2020 tax year, the 
entire long-term capital gain was allocated to partner E and the 
ordinary income was allocated to all partners based on their equal 
(25 percent) interest in

[[Page 60159]]

Partnership. The IRS initiates an administrative proceeding with 
respect to Partnership's 2020 taxable year and determines that the 
long-term capital gain should have been allocated equally to all 
four partners and that Partnership should have recognized an 
additional $10 million in ordinary income. On June 1, 2023, the IRS 
mails an FPA to Partnership reflecting the reallocation of the $40 
million long-term capital gain so that F, G, and H each have $10 
million increase in long-term capital gain and E has a $30 million 
reduction in long-term capital gain for 2020. In addition, the FPA 
reflects the partnership adjustment increasing ordinary income by 
$10 million. The FPA reflects a general imputed underpayment with 
respect to the increase in ordinary income and a specific imputed 
underpayment with respect to the increase in long-term capital gain 
allocated to F, G, and H. In addition, the FPA reflects a $30 
million partnership adjustment that does not result in an imputed 
underpayment, that is, the reduction of $30 million in long-term 
capital gain with respect to E. Partnership makes a timely election 
under section 6226 in accordance with Sec.  301.6226-1 with respect 
to the specific imputed underpayment relating to the reallocation of 
long-term capital gain. Partnership does not file a petition for 
readjustment under section 6234. The time to file a petition expires 
on August 30, 2023. Pursuant to Sec.  301.6226-2(b), the partnership 
adjustments become finally determined on August 30, 2023. 
Partnership timely pays and reports the general imputed underpayment 
relating to the partnership adjustment to ordinary income. On 
September 30, 2023, Partnership files with the IRS statements 
described in Sec.  301.6226-2 and furnishes statements to its 
partners reflecting their share of the partnership adjustments as 
finally determined in the FPA that relate to the specific imputed 
underpayment, that is, the reallocation of long-term capital gain. 
The statements for F, G, and H each reflect a partnership adjustment 
of an additional $10 million of long-term capital gain for 2020. The 
statement for E reflects a partnership adjustment of a reduction of 
$30 million of long-term capital gain for 2020. All partners must 
pay the additional reporting year tax as determined in accordance 
with paragraph (b) of this section in the partners' reporting year, 
which is 2023. They compute their additional reporting year tax as 
follows. First, they determine the correction amount for the first 
affected year (the 2020 taxable year) by taking into account their 
share of the partnership adjustments for the 2020 taxable year. They 
each determine the amount by which their chapter 1 tax for 2020 
would have increased if the adjustment to long-term capital gain 
from Partnership were taken into account for that year. Second, they 
determine if there is any increase in chapter 1 tax for any 
intervening year as a result of the adjustment to the long-term 
capital gain for 2020. Their aggregate of the adjustment amounts is 
the correction amount for 2020, their first affected year plus any 
correction amounts for any intervening years. They are also liable 
for any interest on the correction amount for the first affected 
year and for any intervening year as determined in accordance with 
paragraph (d) of this section. In accordance with paragraph (b) of 
this section, the correction amounts may not be less than zero. 
Accordingly, E's additional reporting year tax is zero because E 
only has a reduction in capital gain which would not result in an 
increase in chapter 1 tax.
    Example 5. On its partnership return for the 2020 taxable year, 
Partnership reported a long-term capital loss of $5 million. During 
an administrative proceeding with respect to Partnership's 2020 
taxable year, the IRS mails a notice of proposed partnership 
adjustment (NOPPA) in which it proposes to disallow $2 million of 
the reported $5 million long-term capital loss. F, a C corporation 
partner with a 50 percent interest in Partnership, received 50 
percent of all long-term capital losses for 2020. As part of the 
modification process described in Sec.  301.6225-2(d)(2), F files an 
amended return for 2020 taking into account F's share of the 
partnership adjustment ($1 million reduction in long-term capital 
loss) and pays the tax owed for 2020, including interest. Also as 
part of the modification process, F also files amended returns for 
2021 and 2022 and paid additional tax (and interest) for these years 
because the reduction in long-term capital loss for 2020 affected 
the tax due from F for 2021 and 2022. See Sec.  301.6225-
2(d)(2)(iv). The reduction of the long-term capital loss in 2020 did 
not affect any other taxable year of F. The IRS approves the 
modification with respect to F and on June 1, 2023, mails an FPA to 
Partnership for Partnership's 2020 year reflecting the partnership 
adjustment reducing the long-term capital loss in the amount of $2 
million. The FPA also reflects the modification to the imputed 
underpayment based on the amended returns filed by F taking into 
account F's share of the reduction in the long-term capital loss. 
Partnership makes a timely election under section 6226 in accordance 
with Sec.  301.6226-1 with respect to the imputed underpayment in 
the FPA for Partnership's 2020 year and files a timely petition in 
the Tax Court challenging the partnership adjustments. The Tax Court 
upholds the determinations in the FPA and the decision regarding 
Partnership's 2020 tax year becomes final on December 15, 2025. 
Pursuant to Sec.  301.6226-2(b), the partnership adjustments are 
finally determined on December 15, 2025. On February 1, 2026, 
Partnership files the statements described under Sec.  301.6226-2 
with the IRS and furnishes to its partners statements reflecting 
their shares of the partnership adjustment. The statement issued to 
F reflects F's share of the partnership adjustment for Partnership's 
2020 taxable year as finally determined by the Tax Court. The 
statement shows F's share of the long-term capital loss adjustment 
for the reviewed year of $1 million and the $1 million reduction in 
long-term capital losses taken into account by F as part of the 
amended return modification. Accordingly, in accordance with 
paragraph (b) of this section, when F computes its correction 
amounts for the first affected year (the 2020 taxable year) and the 
intervening years (the 2021 through 2026 taxable years), F computes 
any additional chapter 1 tax for those years using the returns for 
the 2020, 2021, and 2022 taxable years as amended during the 
modification process.
    Example 6. Partnership has two equal partners for the 2020 tax 
year: I (an individual) and J (a partnership). For the 2020 tax 
year, J has two equal partners--K and L--both individuals. On June 
1, 2023, the IRS mails a notice of final partnership adjustment 
(FPA) to Partnership for Partnership's 2020 year increasing 
Partnership's ordinary income by $500,000 and asserting an imputed 
underpayment of $200,000. Partnership makes a timely election under 
section 6226 in accordance with Sec.  301.6226-1 with respect to the 
imputed underpayment in the FPA for Partnership's 2020 year and does 
not file a petition for readjustment under section 6234. The time to 
file a petition expires on August 30, 2023. Pursuant to Sec.  
301.6226-1(b), the partnership adjustments become finally determined 
on August 30, 2023. Therefore, Partnership's adjustment year is 
2023, the due date of the adjustment year return is March 15, 2024, 
and if requested, the extended due date for the adjustment year 
return is September 16, 2024. On October 12, 2023, Partnership 
timely files with the IRS statements described in Sec.  301.6226-2 
and timely furnishes statements to its partners reflecting their 
share of the partnership adjustments as finally determined in the 
FPA. The statements to I and J each reflect a partnership adjustment 
of $250,000 of ordinary income. I takes its share of the adjustments 
reflected on the statements furnished by Partnership into account on 
I's return for the 2023 tax year in accordance with paragraph (b) of 
this section. On April 1, 2024, J takes the adjustments into account 
under paragraph (e)(3) of this section by timely filing the 
information required by that section with the IRS and furnishing 
statements to K and L reflecting each partner's share of the 
adjustments reflected on the statements Partnership furnished to J. 
K and L must take their share of adjustments reflected on the 
statements furnished by J into account on their returns for the 2023 
tax year in accordance with paragraph (b) of this section by 
treating themselves as reviewed year partners for purposes of that 
paragraph.
    Example 7. On its partnership return for the 2020 tax year, 
Partnership reported that it placed Asset, which had a depreciable 
basis of $210,000, into service in 2020 and depreciated Asset over 5 
years, using the straight-line method. Accordingly, Partnership 
claimed depreciation of $42,000 in each year related to Asset. 
Partnership has two equal partners for the 2020 tax year: M (a 
partnership) and N (an S corporation). For the 2020 tax year, N has 
one shareholder, O, who is an individual. On June 1, 2023, the IRS 
mails an FPA to Partnership for Partnership's 2020 year. In the FPA, 
the IRS determines that Asset should have been depreciated over 7 
years instead of 5 years and adjusts the depreciation for the 2020 
tax year to $30,000 instead of $42,000 resulting in a $12,000 
adjustment. This adjustment results in an imputed underpayment of 
$4,800. Partnership makes a timely election under section 6226 in 
accordance with Sec.  301.6226-1 with respect to the imputed 
underpayment in the FPA for Partnership's 2020 year and does not 
file a petition for readjustment under section 6234. The time to

[[Page 60160]]

file a petition expires on August 30, 2023. Pursuant to Sec.  
301.6226-1(b), the partnership adjustments become finally determined 
on August 30, 2023. On October 12, 2023, Partnership timely files 
with the IRS statements described in Sec.  301.6226-2 and furnishes 
statements to its partners reflecting their share of the partnership 
adjustments as finally determined in the FPA. The statements to M 
and N reflect a partnership adjustment of $6,000 of ordinary income 
for the 2020 tax year as well as a $6,000 increase in ordinary 
income for each of the 2021 and 2022 tax years relating to the 
change to the depreciable life of Asset. On February 1, 2024, N 
takes the adjustments into account under paragraph (e)(3) of this 
section by issuing a statement to O reflecting her share of the 
adjustments reported to N on the statement it received from 
Partnership. Although not due until September 15, 2024 (the extended 
due date of the adjustment year return of Partnership), on March 22, 
2024, M takes the adjustments into account under paragraph (e)(4) of 
this section by paying an amount calculated like an imputed 
underpayment equal to $7,200 (($6,000 for 2020 + $6,000 for 2021 + 
$6,000 for 2022) x 40 percent) on the adjustments reflected on the 
statement it received from Partnership including M's share of the 
partnership tax attributes plus interest on the amount calculated in 
accordance with paragraph (e)(4)(iv)(B) of this section. On her 2023 
return, O takes the adjustments into account under this section. 
Therefore, O reports and pays the additional reporting year tax 
determined in accordance with paragraph (b) of this section, which 
is the correction amount for 2020 plus the correction amount for 
2021 (related to the adjustment to tax attributes) plus the 
correction amount for 2022 (related to the adjustment to tax 
attributes), and pays interest determined in accordance with 
paragraph (d) of this section on the correction amounts for each of 
those years.
    Example 8. On its partnership return for the 2020 tax year, 
Partnership reported $1 million of ordinary loss. Partnership has 
two equal partners for the 2020 tax year: P and Q, both S 
corporations. For the 2020 tax year, P had one shareholder, R, an 
individual. For the 2020 tax year, Q had two shareholders, S and T, 
both individuals. On June 1, 2023, the IRS mails a notice of final 
partnership adjustment (FPA) to Partnership for Partnership's 2020 
year determining $500,000 of the $1 million of ordinary loss should 
be recharacterized as $500,000 of long-term capital loss and 
$500,000 of the ordinary loss should be disallowed. The FPA asserts 
an imputed underpayment of $400,000 ($1 million x 40 percent) on the 
$1 million reduction to ordinary loss and reflecting an adjustment 
that does not result in an imputed underpayment of a $500,000 
capital loss. Partnership makes a timely election under section 6226 
in accordance with Sec.  301.6226-1 with respect to the imputed 
underpayment in the FPA for Partnership's 2020 year and does not 
file a petition for readjustment under section 6234. The time to 
file a petition expires on August 30, 2023. Pursuant to Sec.  
301.6226-1(b), the partnership adjustments become finally determined 
on August 30, 2023. On October 12, 2023, Partnership timely files 
with the IRS statements described in Sec.  301.6226-2 and furnishes 
statements to its partners reflecting their share of the partnership 
adjustments as finally determined in the FPA. The statements to P 
and Q each reflect a partnership adjustment of $500,000 increase in 
ordinary income and an increase in capital loss of $250,000 in 
accordance with Sec.  301.6225-3(b)(6). P takes the adjustments into 
account under paragraph (e)(3) of this section by timely furnishing 
a statement to R. Q takes the adjustments into account under 
paragraph (e)(4) of this section by paying an amount calculated like 
an imputed underpayment under paragraph (e)(4)(iii) of this section, 
as well as interest determined under paragraph (e)(4)(iv)(B) of this 
section on the amount. After applying the rules set forth in Sec.  
301.6225-1 regarding the netting and grouping of adjustments, Q 
calculates an amount of $200,000 which is equal to the residual 
grouping of $500,000 multiplied by 40 percent. The residual grouping 
contains the $500,000 attributable to the adjustment to ordinary 
income. Q also has one adjustment that does not result in an imputed 
underpayment--the $250,000 increase to capital loss. On its 2023 
return, Q reports and allocates the $250,000 capital loss to its 
shareholders for its 2023 taxable year as a capital loss as provided 
in Sec.  301.6225-3. Q must report and pay the amounts due under 
paragraph (e)(4) of section no later than September 15, 2024, the 
extended due date of Partnership's return for the 2023 year, which 
is the adjustment year.
    Example 9. On its partnership return for the 2020 tax year, 
Partnership reported a $1 million long-term capital gain on the sale 
of Stock. Partnership has two equal partners for the 2020 tax year: 
U (an individual) and V (a partnership). For the 2020 tax year, V 
has two equal partners: W (an individual) and X (a partnership). For 
the 2020 tax year, X has two equal partners: Y and Z, both of which 
are C corporations. On June 1, 2023, the IRS mails a NOPPA to 
Partnership for Partnership's 2020 year proposing a $500,000 
increase in the long-term capital gain from the sale of Stock and an 
imputed underpayment of $200,000 ($500,000 x 40 percent). On July 
17, 2023, Partnership timely submits a request to modify the rate 
used in calculating the imputed underpayment under Sec.  301.6225-
2(d)(4). Partnership submits sufficient information demonstrating 
that $375,000 of the $500,000 adjustment is allocable to individuals 
(50 percent of the $500,000 adjustment allocable to U and 25 percent 
of the $500,000 adjustment allocable to W) and the remaining 
$125,000 is allocable to C corporations (the indirect partners Y and 
Z). The IRS approves the modification and the imputed underpayment 
is reduced to $118,750 (($375,000 x 20 percent) + ($125,000 x 35 
percent)). See Sec.  301.6225-2(b)(3). On February 28, 2024, the IRS 
mails an FPA to Partnership for Partnership's 2020 year determining 
a $500,000 increase in the long-term capital gain on the sale of 
Stock and asserting an imputed underpayment of $118,750 after the 
approved modifications. Partnership makes a timely election under 
section 6226 in accordance with Sec.  301.6226-1 with respect to the 
imputed underpayment in the FPA for Partnership's 2020 year and does 
not file a petition for readjustment under section 6234. The time to 
file a petition expires on May 28, 2024. Pursuant to Sec.  301.6226-
1(b), the partnership adjustments become finally determined on May 
28, 2024. On July 26, 2024, Partnership timely files with the IRS 
statements described in Sec.  301.6226-2 and furnishes statements to 
its partners reflecting their share of the partnership adjustments 
as finally determined in the FPA. The statements to U and V each 
reflect a partnership adjustment of a $250,000 increase in long-term 
capital gain. V takes the adjustments into account under paragraph 
(e)(4) of this section by paying an amount calculated like an 
imputed underpayment under paragraph (e)(4)(iii) of this section, as 
well as interest determined under paragraph (e)(4)(iv)(B) of this 
section on the amount. On February 3, 2025, V takes the adjustments 
into account under paragraph (e)(4) of this section by paying an 
amount equal to $68,750 (($125,000 x 35 percent for the adjustments 
allocable to X) + ($125,000 x 20 percent for the adjustments 
allocable to W)) which includes the rate modifications approved by 
the IRS with respect to Y and Z. V must also pay any interest on the 
amount as determined in accordance with paragraph (e)(4)(iv)(B) of 
this section. V must report and pay the amounts due under paragraph 
(e)(4) of this section no later than September 15, 2025, the 
extended due date of Partnership's return for the 2024 year, which 
is the adjustment year.
* * * * *
    (i) Penalties--(1) In general. In the case of a partnership that 
makes an election under section 6226, the applicability of penalties, 
additions to tax, and additional amounts that relate to a partnership 
adjustment are determined at the partnership level in accordance with 
section 6221(a). The partnership's reviewed year partners are liable 
for such penalties, additions to tax, and additional amounts as 
determined under paragraph (i)(2) of this section.
    (2) Determining the amount of each reviewed year partner's 
penalties. To determine a reviewed year partner's penalties, additions 
to tax, and additional amounts for the reporting year, each reviewed 
year partner computes the penalty, addition to tax, or additional 
amount imposed with respect to the correction amount (or portion 
thereof) calculated under paragraph (b) of this section for the first 
affected year or intervening year, as applicable. The reviewed year 
partner calculates the penalty, addition to tax, or additional amount 
as if the correction amount were an underpayment or understatement for 
the first affected year or intervening year, as applicable. If after 
taking into account the adjustments in accordance

[[Page 60161]]

with this section, the reviewed year partner would not have an 
underpayment, or has an understatement that falls below the applicable 
threshold for the imposition of a penalty, no penalty would be due from 
that reviewed year partner for the reporting year under this paragraph 
(i)(2). For penalties in the case of a pass-through partner that makes 
a payment under paragraph (e)(4) of this section, see paragraph 
(e)(4)(iv) of this section.
    (3) Partner-level defenses to penalties. A partner claiming that a 
penalty, addition to tax, or additional amount that relates to an 
adjustment reflected on a statement described in Sec.  301.6226-2 (or 
paragraph (e)(3)(i) of this section) would not be due because of a 
partner-level defense must first pay the penalty and file a claim for 
refund. Partner-level defenses are limited to those that are personal 
to the partner (for example, a reasonable cause and good faith defense 
under section 6664(c) that is based on the facts and circumstances 
applicable to the partner).
    (j) Treatment of disregarded entities and wholly-owned trusts. In 
the case of a reviewed year partner that is an entity described in 
Sec.  301.7701-2(c)(2)(i) or a trust that is wholly owned by only one 
person, whether the grantor or another person, and where the trust 
reports the owner's information to payors under Sec.  1.671-
4(b)(2)(i)(A) of this chapter and that is furnished a statement 
described in Sec.  301.6226-2 (or paragraph (e)(3)(i) of this section), 
the owner of the disregarded entity or wholly-owned trust must take 
into account the adjustments reflected on that statement in accordance 
with this section as if the owner were the reviewed year partner.
0
Par. 7. Section 301.6227-3, as proposed to be amended at 82 FR 27334 
(June 14, 2017), is further amended by revising paragraphs (b)(1) and 
(c) to read as follows:


Sec.  301.6227-3   Adjustments requested in an administrative 
adjustment request taken into account by reviewed year partners.

* * * * *
    (b) * * *
    (1) In general. A reviewed year partner that is furnished a 
statement described in paragraph (a) of this section must treat the 
statement as if it were issued under section 6226(a)(2) and, on or 
before the due date for the reporting year must pay the additional 
reporting year tax (as defined in Sec.  301.6226-3(a)), if any, 
determined after taking into account that partner's share of the 
adjustments requested in the AAR in accordance with Sec.  301.6226-3. 
For purposes of paragraph (b) of this section, the rule under Sec.  
301.6226-3(d)(4) (regarding the increased rate of interest) does not 
apply and the last sentence in Sec.  301.6226-3(b)(1) (regarding the 
prohibition on correction amounts being less than zero) is disregarded. 
Nothing in this section entitles any partner to a refund of tax imposed 
by chapter 1 of subtitle A of the Internal Revenue Code (chapter 1 tax) 
to which such partner is not entitled. For instance, a partnership-
partner (as defined in Sec.  301.6241-1(a)(7)) may not claim a refund 
with respect to its share of any adjustment.
* * * * *
    (c) Reviewed year partners that are pass-through partners--(1) In 
general. Except as provided in paragraphs (c)(2) and (3) of this 
section, if a statement described in paragraph (a) of this section 
(including a statement described in this paragraph (c)(1)) is furnished 
to a pass-through partner (as defined in Sec.  301.6241-1(a)(5)), the 
pass-through partner must take into account the adjustments reflected 
on that statement in accordance with Sec.  301.6226-3(e) by treating 
the partnership that filed the AAR as the partnership that made an 
election under Sec.  301.6226-1. For purposes of this paragraph (c)(1), 
the statement furnished to the pass-through partner by the partnership 
filing the AAR is treated as if it were a statement issued under 
section 6226(a)(2) and described in Sec.  301.6226-2.
    (2) Adjustments that do not result in an imputed underpayment. If 
the adjustments requested in an AAR do not result in an imputed 
underpayment (as described in Sec.  301.6227-2(d)), Sec.  301.6226-
3(e)(2) does not apply, and the pass-through partner must take into 
account the adjustments reflected on the statement described in 
paragraph (a) or (c)(1) of this section in accordance with Sec.  
301.6226-3(e)(3).
    (3) Contents of statements. Each statement described in paragraph 
(c)(1) of this section must include the following information--
    (i) The name and correct taxpayer identification number (TIN) of 
the partnership that filed the AAR with respect to the adjustments 
reflected on the statements described in paragraph (c)(1) of this 
section;
    (ii) The adjustment year of the partnership described in paragraph 
(c)(3)(i) of this section;
    (iii) The extended due date for the return for the adjustment year 
of the partnership described in paragraph (c)(3)(i) of this section (as 
described in Sec.  301.6226-3(e)(3)(ii));
    (iv) The date on which the partnership described in paragraph 
(c)(3)(i) of this section furnished its statements required under Sec.  
301.6227-2(d);
    (v) The name and correct TIN of the partnership that furnished the 
statement to the pass-through partner if different from the partnership 
described in paragraph (c)(3)(i) of this section;
    (vi) The name and correct TIN of the pass-through partner;
    (vii) The pass-through partner's taxable year to which the 
adjustments set forth in the statement described in paragraph (c)(1) of 
this section relate;
    (viii) The name and correct TIN of the affected partner (as defined 
in Sec.  301.6226-3(e)(3)(i)) to whom the statement is being furnished;
    (ix) The current or last address of the affected partner that is 
known to the pass-through partner;
    (x) The affected partner's share of items as originally reported to 
such partner under section 6031(b) and, if applicable, section 6227, 
for the taxable year to which the adjustments reflected on the 
statement furnished to the pass-through partner relate;
    (xi) The affected partner's share of partnership adjustments 
determined under Sec.  301.6227-2(e)(2) as if the affected partner were 
the reviewed year partner and the partnership were the pass-through 
partner; and
    (xii) Any other information required by forms, instructions, and 
other guidance prescribed by the IRS.
    (4) Partners of the pass-through partner must take into account the 
adjustments. For purposes of paragraph (c) of this section, when taking 
into account the adjustments as described in Sec.  301.6226-
3(e)(3)(iv), the rules under Sec.  301.6226-3(d)(4) (regarding the 
increased rate of interest) do not apply, and the last sentence in 
Sec.  301.6226-3(b)(1) (regarding the prohibition on correction amounts 
being less than zero) is disregarded. Therefore, an affected partner 
may reduce chapter 1 tax for the reporting year by the amount 
determined in accordance with Sec.  301.6226-3.
* * * * *
0
Par. 8. Section 301.6231-1 is added to read as follows:


Sec.  301.6231-1   Notice of proceedings and adjustments.

    (a) Notices to which this section applies. In the case of any 
administrative proceeding under subchapter C of chapter 63 of the 
Internal Revenue Code (subchapter C of chapter 63), including an 
administrative proceeding with respect to an administrative adjustment 
request (AAR) filed by a partnership under section 6227, the following 
notices must be mailed to the partnership and the

[[Page 60162]]

partnership representative (as described in section 6223 and Sec.  
301.6223-1)--
    (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 (as defined in Sec.  301.6221(a)-
1(b)(1)) of a partnership for a partnership taxable year, or any 
partner's distributive share (as described in Sec.  301.6221(a)-
1(b)(2)) thereof, under subchapter C of chapter 63 (notice of 
administrative proceeding (NAP));
    (2) Notice of any proposed partnership adjustment resulting from an 
administrative proceeding under subchapter C of chapter 63 (notice of 
proposed partnership adjustment (NOPPA)); and
    (3) Notice of any final partnership adjustment resulting from an 
administrative proceeding under subchapter C of chapter 63 (notice of 
final partnership adjustment (FPA)).
    (b) Time for mailing notices--(1) Notice of proposed partnership 
adjustment. A NOPPA is timely if it is mailed before the expiration of 
the period for making adjustments under section 6235(a)(1) (including 
any extensions under section 6235(b) and any special rules under 
section 6235(c)).
    (2) Notice of final partnership adjustment. An FPA may not be 
mailed earlier than 270 days after the date on which the NOPPA is 
mailed unless the partnership agrees, in writing, with the Internal 
Revenue Service (IRS) to waive the 270-day period. See Sec.  301.6225-
2(c)(3)(iii) for the effect of a waiver under this paragraph (b)(2) on 
the 270-period for requesting a modification under section 6225(c). See 
Sec.  301.6232-1(d)(2) for the rules regarding a waiver of the 
limitations on assessment under Sec.  301.6232-1(c).
    (c) Last known address. A notice described in paragraph (a) of this 
section is sufficient if mailed to the last known address of the 
partnership representative and the partnership (even if the partnership 
or partnership representative has terminated its existence).
    (d) Notice mailed to partnership representative--(1) In general. A 
notice described in paragraph (a) of this section will be treated as 
mailed to the partnership representative if the notice is mailed to the 
partnership representative that is reflected in the IRS records as of 
the date the letter is mailed.
    (2) No partnership representative in effect. In any case in which 
no partnership representative designation is in effect in accordance 
with Sec.  301.6223-1(f)(2), a notice described in paragraph (a) of 
this section mailed to ``PARTNERSHIP REPRESENTATIVE'' at the last known 
address of the partnership satisfies the requirements of section 
6231(a).
    (e) Restrictions on additional FPAs after petition filed. The IRS 
may mail more than one FPA to any partnership for any partnership 
taxable year. However, except in the case of fraud, malfeasance, or 
misrepresentation of a material fact, the IRS may not mail an FPA to a 
partnership with respect to a partnership taxable year after the 
partnership has filed a timely petition for readjustment under section 
6234 with respect to an FPA issued with respect to such partnership 
taxable year.
    (f) Withdrawal of NAP or NOPPA. The IRS may, without consent of the 
partnership, withdraw any NAP or NOPPA. A NAP or NOPPA that has been 
withdrawn by the IRS has no effect for purposes of subchapter C of 
chapter 63. For instance, if the IRS withdraws a NAP with respect to a 
partnership taxable year, the prohibition under section 6227(c) on 
filing an AAR after the mailing of a NAP no longer applies with respect 
to such taxable year.
    (g) Rescission of FPA. The IRS may, with the consent of the 
partnership, rescind any FPA. An FPA that is rescinded is not an FPA 
for purposes of subchapter C of chapter 63, and the partnership cannot 
bring a proceeding under section 6234 with respect to such FPA.
    (h) Applicability date--(1) In general. Except as provided in 
paragraph (h)(2) of this section, this section applies to partnership 
taxable years beginning after December 31, 2017.
    (2) Election under Sec.  301.9100-22T in effect. This section 
applies to any partnership taxable year beginning after November 2, 
2015 and before January 1, 2018 for which a valid election under Sec.  
301.9100-22T is in effect.
0
Par. 9. Section 301.6232-1 is added to read as follows:


Sec.  301.6232-1   Assessment, collection, and payment of imputed 
underpayment.

    (a) In general. An imputed underpayment determined under subchapter 
C of chapter 63 of the Internal Revenue Code (Code) is assessed and 
collected in the same manner as if the imputed underpayment were a tax 
imposed by subtitle A of the Code for the adjustment year (as defined 
in Sec.  301.6241-1(a)(1)) except that the deficiency procedures under 
subchapter B of chapter 63 of the Code do not apply to an assessment of 
an imputed underpayment. Accordingly, no notice under section 6212 is 
required for, and the restrictions under section 6213 do not apply to, 
the assessment of any imputed underpayment. See paragraph (c) of this 
section for limitations on assessment and paragraph (d) of this section 
for exceptions to restrictions on adjustments.
    (b) Payment of the imputed underpayment. Upon receipt of notice and 
demand from the Internal Revenue Service (IRS), an imputed underpayment 
must be paid by the partnership at the place and time stated in the 
notice. In the case of an adjustment requested in an administrative 
adjustment request (AAR) under section 6227(b)(1) that is taken into 
account by the partnership under Sec.  301.6227-2(b), payment of the 
imputed underpayment is due on the date the AAR is filed. The IRS may 
assess the amount of the imputed underpayment reflected on the AAR on 
the date the AAR is filed. For interest with respect to an imputed 
underpayment, see Sec.  301.6233(a)-1(b).
    (c) Limitation on assessment. Except as otherwise provided by this 
section, no assessment of an imputed underpayment may be made (and no 
levy or proceeding in any court for the collection of an imputed 
underpayment 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 (FPA) was mailed under section 6231(a)(3); 
and
    (2) If a petition for readjustment is filed under section 6234 with 
respect to such FPA, the decision of the court has become final.
    (d) Exceptions to restrictions on adjustments and assessments--(1) 
Adjustments treated as mathematical or clerical errors--(i) In general. 
A notice to a partnership that, on account of a mathematical or 
clerical error appearing on the partnership return or as a result of a 
failure by a partnership-partner (as defined in Sec.  301.6241-1(a)(7)) 
to comply with section 6222(a), the IRS has adjusted or will adjust 
items of income, gain, loss, deduction, or credit (as defined in Sec.  
301.6221(a)-1(b)(1)) to correct the error or to make the items 
consistent under section 6222(a) and has assessed or will assess any 
imputed underpayment (determined in accordance with Sec.  301.6225-1) 
resulting from the adjustment is not considered an FPA under section 
6231(a)(3). A petition for readjustment under section 6234 may not be 
filed with respect to such notice. The limitations under section 
6232(b) and paragraph (c) of this section do not apply to an assessment 
under this paragraph (d)(1)(i). For the definition of mathematical or 
clerical error generally, see section 6213(g)(2). For application of 
mathematical or

[[Page 60163]]

clerical error in the case of inconsistent treatment by a partner that 
fails to give notice, see Sec.  301.6222-1(b).
    (ii) Request for abatement--(A) In general. Except as provided in 
paragraph (d)(1)(ii)(B) of this section, a partnership that is mailed a 
notice described in paragraph (d)(1)(i) of this section may file with 
the IRS, within 60 days after the date of such notice, a request for 
abatement of any assessment of an imputed underpayment specified in 
such notice. Upon receipt of the request, the IRS must abate the 
assessment. Any subsequent assessment of an imputed underpayment with 
respect to which abatement was made is subject to the provisions of 
subchapter C of chapter 63 of the Code, including the limitations under 
paragraph (c) of this section.
    (B) Adjustments with respect to inconsistent treatment by a 
partnership-partner. If an adjustment that is the subject of a notice 
described in paragraph (d)(1)(i) of this section is due to the failure 
of a partnership-partner to comply with section 6222(a), paragraph 
(d)(1)(ii)(A) of this section does not apply, and abatement of any 
assessment specified in such notice is not available. However, prior to 
assessment, a partnership-partner that has failed to comply with 
section 6222(a) may correct the inconsistency by filing an 
administrative adjustment request under section 6227 or filing an 
amended partnership return and furnishing amended statements, as 
appropriate.
    (iii) Partnerships that have an election under section 6221(b) in 
effect. In the case of a partnership-partner that has an election under 
section 6221(b) in effect for the reviewed year (as defined in Sec.  
301.6241-1(a)(8)), any tax resulting from an adjustment due to the 
partnership-partner's failure to comply with section 6222(a) may be 
assessed with respect to the reviewed year partners (as defined in 
Sec.  301.6241-1(a)(9)) of the partnership-partner (or indirect 
partners of the partnership-partner, as defined in Sec.  301.6241-
1(a)(4)). Such tax may be assessed in the same manner as if the tax 
were on account of a mathematical or clerical error appearing on the 
reviewed year partner's or indirect partner's return, except that the 
procedures under section 6213(b)(2) for requesting an abatement of such 
assessment do not apply.
    (2) Partnership may waive limitations. A partnership may at any 
time by a signed notice in writing filed with the IRS waive the 
limitations under paragraph (c) of this section (whether or not an FPA 
has been mailed under section 6231(a)(3) by the IRS at the time of the 
waiver).
    (e) Limit on amount of imputed underpayment where no proceeding is 
begun. If no proceeding under section 6234 is begun with respect to an 
FPA mailed under section 6231(a)(3) before the close of the 90th day 
after the day on which such FPA was mailed, the amount for which the 
partnership is liable under section 6225 with respect to such FPA 
cannot exceed the amount determined in such FPA.
    (f) Applicability date--(1) In general. Except as provided in 
paragraph (f)(2) of this section, this section applies to partnership 
taxable years beginning after December 31, 2017.
    (2) Election under Sec.  301.9100-22T in effect. This section 
applies to any partnership taxable year beginning after November 2, 
2015 and before January 1, 2018 for which a valid election under Sec.  
301.9100-22T is in effect.
0
Par. 10. Section 301.6233(a)-1 is added to read as follows:


Sec.  301.6233(a)-1   Interest and penalties determined from reviewed 
year.

    (a) Interest and penalties with respect to the reviewed year. 
Except to the extent provided in section 6226(c) and the regulations 
thereunder, in the case of a partnership adjustment (as defined in 
Sec.  301.6241-1(a)(6)) for a reviewed year (as defined in Sec.  
301.6241-1(a)(8)), a partnership is liable for--
    (1) Interest computed in accordance with paragraph (b) of this 
section; and
    (2) Any penalty, addition to tax, or additional amount as provided 
under paragraph (c) of this section.
    (b) Computation of interest with respect to partnership adjustments 
for the reviewed year. The interest imposed on an imputed underpayment 
resulting from partnership adjustments for the reviewed year is the 
interest that would be imposed under chapter 67 of the Internal Revenue 
Code (Code) if the imputed underpayment were treated as an underpayment 
of tax for the reviewed year. The interest imposed on an imputed 
underpayment under this paragraph (b)(1) begins on the day after the 
due date of the partnership return (without regard to extension) for 
the reviewed year and ends on the earlier of--
    (1) The date prescribed for payment (as described in Sec.  
301.6232-1(b));
    (2) The due date of the partnership return (without regard to 
extension) for the adjustment year (as defined in Sec.  301.6241-
1(a)(1)); or
    (3) The date the imputed underpayment is fully paid.
    (c) Penalties with respect to partnership adjustments for the 
reviewed year--(1) In general. In accordance with section 6221(a), the 
applicability of any penalties, additions to tax, and additional 
amounts that relate to a partnership adjustment for the reviewed year 
is determined at the partnership level as if the partnership had been 
an individual subject to tax imposed by chapter 1 of subtitle A of the 
Code for the reviewed year, and the imputed underpayment were an actual 
underpayment of tax or understatement for such year. Nothing in this 
paragraph (c)(1) affects the application of any penalty, addition to 
tax, or additional amount that may apply to the partnership or to any 
reviewed year partner (as defined in Sec.  301.6241-1(a)(9)) or to any 
indirect partner (as defined in Sec.  301.6241-1(a)(4)) that is 
unrelated to a partnership adjustment under subchapter C of chapter 63 
of the Code.
    (2) Coordination with accuracy-related and fraud penalty 
provisions--(i) In general. In the case of penalties imposed under 
section 6662, section 6662A, and section 6663 with respect to 
partnership adjustments in accordance with paragraph (c)(1) of this 
section, the rules described in paragraphs (c)(2)(ii), (iii), (iv), and 
(v) of this section apply.
    (ii) Determining the portion of the imputed underpayment to which a 
penalty applies--(A) In general. In the case of penalties imposed under 
section 6662, section 6662A, and section 6663, paragraph (c)(2)(ii) of 
this section applies if--
    (1) There is at least one adjustment with respect to which no 
penalty has been imposed and at least one adjustment with respect to 
which a penalty has been imposed; or
    (2) There are at least two adjustments with respect to which 
penalties have been imposed and the penalties have different rates.
    (B) Calculating the portion of the imputed underpayment to which 
the penalty applies. In computing the portion of an imputed 
underpayment to which a penalty applies, adjustments that do not result 
in the imputed underpayment (as described in Sec.  301.6225-1(c)(2)) 
are not taken into account. The portion of an imputed underpayment to 
which a penalty applies is calculated as follows--
    (1) All the partnership adjustments that resulted in the imputed 
underpayment are grouped together according to whether they are 
adjustments with respect to which a penalty has been imposed and, if 
so, according to rate of penalty. Negative adjustments as defined in 
paragraph (c)(2)(ii)(C) of this section are grouped

[[Page 60164]]

in accordance with paragraphs (c)(2)(ii)(D) and (E) of this section.
    (2) Within each grouping described in paragraph (c)(2)(ii)(B)(1) of 
this section, multiply the portion of each non-credit partnership 
adjustment by the rate that applied to such portion when calculating 
the imputed underpayment. See Sec. Sec.  301.6225-1(c)(1)(i); 301.6225-
2(b)(3)(iii)(B), (d)(4).
    (3) Within each grouping, add the amounts that were calculated 
under paragraph (c)(2)(ii)(B)(2) of this section.
    (4) Within each grouping, increase or decrease the amounts that 
were calculated under paragraph (c)(2)(ii)(B)(3) of this section by any 
credit adjustments.
    (C) Negative adjustments. An adjustment that resulted in the 
imputed underpayment that is an increase in an item of loss, deduction, 
or credit or a decrease to an item of income or gain is a negative 
adjustment.
    (D) Grouping of negative adjustments. Negative adjustments are 
grouped under paragraph (c)(2)(ii)(B)(1) of this section in the 
following order--
    (1) Partnership adjustments with respect to which no penalties have 
been imposed;
    (2) Adjustments with respect to which a penalty has been imposed at 
a 20 percent rate;
    (3) Adjustments with respect to which a penalty has been imposed at 
a 30 percent rate;
    (4) Adjustments with respect to which a penalty has been imposed at 
a 40 percent rate;
    (5) Adjustments with respect to which a penalty has been imposed at 
a 75 percent rate.
    (E) Negative adjustments that reduce a grouping to zero. If when 
allocating the negative adjustments under paragraph (c)(2)(ii)(D) of 
this section, the amount calculated in paragraph (c)(2)(ii)(B) of this 
section for a particular grouping equals zero, any remaining negative 
adjustments (or portion thereof) that would otherwise reduce the amount 
to less than zero are allocated to the next grouping in sequential 
order under paragraph (c)(2)(ii)(D) of this section.
    (F) Fraud penalties under section 6663. If any portion of an 
imputed underpayment is determined by the IRS to be attributable to 
fraud, the entire imputed underpayment is treated as attributable to 
fraud. This paragraph (c)(2)(ii)(F) does not apply to any portion of 
the imputed underpayment the partnership establishes by a preponderance 
of the evidence is not attributable to fraud.
    (iii) Substantial understatement penalty under section 6662(d)--(A) 
In general. For purposes of application of the penalty under section 
6662(d) (substantial understatement of income tax), the imputed 
underpayment is treated as an understatement under section 6662(d)(2). 
To determine whether an imputed underpayment treated as an 
understatement under this paragraph (c)(3)(iii)(A) is a substantial 
understatement under section 6662(d)(1), the rules of section 
6662(d)(1)(A) apply by treating the amount described in paragraph 
(c)(3)(iii)(B) of this section as the tax required to be shown on the 
return for the taxable year under section 6662(d)(1)(A)(i).
    (B) Amount of tax required to be shown on the return. The amount 
described in this paragraph (c)(3)(iii)(B) is the tax that would result 
by treating the net ordinary business income or loss of the partnership 
for the reviewed year, reflecting any partnership adjustments as 
finally determined, as taxable income described in section 1(c) 
(determined without regard to section 1(h)).
    (iv) Reportable transaction understatement under section 6662A. For 
purposes of application of the penalty under section 6662A (reportable 
transaction understatement penalty), the portion of an imputed 
underpayment attributable to an item described under section 
6662A(b)(2) is treated as a reportable transaction understatement under 
section 6662A(b).
    (v) Reasonable cause and good faith. For purposes of determining 
whether a partnership satisfies the reasonable cause and good faith 
exception under section 6664(c) or (d) with respect to a penalty under 
section 6662, section 6662A, or section 6663, the partnership is 
treated as the taxpayer. See Sec.  1.6664-4 of this chapter. 
Accordingly, the facts and circumstances taken into account to 
determine whether the partnership has established reasonable cause and 
good faith are the facts and circumstances applicable to the 
partnership. A partner-level defense (as described in Sec.  301.6226-
3(i)(3)) may not be raised in a proceeding of the partnership except as 
provided under the modification procedures set forth in Sec.  301.6225-
2(d)(2) (amended returns) or in Sec.  301.6225-2(d)(8) (partner closing 
agreements).
    (3) Examples. The following examples illustrate the rules of 
paragraph (c) of this section. For purposes of these examples, each 
partnership has a calendar taxable year, and the highest tax rate in 
effect for all taxpayers is 40 percent for all relevant periods.

    Example 1. One adjustment with respect to which a penalty is 
imposed. In an administrative proceeding with respect to 
Partnership's 2018 partnership return, the IRS determines that 
Partnership understated ordinary income by $100. The $100 
understatement is due to negligence or disregard of rules or 
regulations under section 6662(c), and a 20-percent accuracy-related 
penalty applies under section 6662(a). The IRS also determines that 
Partnership understated long-term capital gain by $300, but no 
penalty applies with respect to that adjustment. Partnership does 
not request modification of the imputed underpayment under section 
6225 and does not raise any penalty defenses prior to issuance of 
the notice of final partnership adjustment (FPA). In the FPA, the 
IRS determines that the imputed underpayment is $160 (($100 + $300) 
x 40 percent). In determining the penalty, the $100 adjustment (to 
which the 20-percent penalty relates) is grouped separately from the 
$300 adjustment (to which no penalty applies). The portion of the 
imputed underpayment to which the 20-percent penalty applies is $40 
($100 x 40 percent), and the penalty is $8 ($40 x 20 percent).
    Example 2. More than one adjustment with respect to which the 
same rate of penalty is imposed. The facts are the same as in 
Example 1 of this paragraph (c)(3), except that the IRS determines 
that Partnership also overstated its credits by $10. The 
overstatement of credits is due to negligence or disregard of rules 
or regulations under section 6662(c), and a 20-percent accuracy-
related penalty applies under section 6662(a). Because the 
Partnership did not request modification, the imputed underpayment 
is $170 (($100 + $300) x 40 percent) + $10). In determining the 
penalty, the $10 credit adjustment and the $100 understatement of 
income, both of which are adjustments with respect to which the 20-
percent accuracy-related penalty is imposed, are grouped together. 
Accordingly, the portion of the imputed underpayment to which the 
20-percent accuracy-related penalty applies is $50 (($100 x 40 
percent) + $10), and the penalty is $10 ($50 x 20 percent).
    Example 3. Negative adjustment. The facts are the same as in 
Example 2 of this paragraph (c)(3), except that there is also an 
adjustment that reduces ordinary income by $50. In calculating the 
imputed underpayment under Sec.  301.6225-1, the $50 decrease to 
ordinary income is netted with the $100 increase in ordinary income. 
Therefore, the $50 decrease in ordinary income is an adjustment that 
resulted in the imputed underpayment and therefore a negative 
adjustment described in paragraph (c)(2)(ii)(C) of this section. 
Because Partnership did not request modification, the imputed 
underpayment is $150 (($100-$50) + $300) x 40 percent) + $10). To 
determine the portion of the imputed underpayment to which the 20-
percent accuracy-related penalty applies, the $50 reduction to 
ordinary income is grouped with the $300 adjustment to long-term 
capital gain (in accordance with paragraph (c)(2)(ii)(D) of this 
section). Accordingly, the portion of the imputed underpayment to 
which the 20-percent accuracy-related penalty applies is $50 (($100 
x 40 percent) + $10), and the penalty is $10 ($50 x 20 percent).

[[Page 60165]]

    Example 4. Two adjustments with respect to which penalties of 
different rates have been imposed. The facts are the same as in 
Example 3 of this paragraph (c)(3), except that the $300 adjustment 
to long-term capital gain is due to a gross valuation misstatement. 
A 40-percent accuracy-related penalty under section 6662(a) and (h) 
applies to the portion of the imputed underpayment attributable to 
the gross valuation misstatement. The imputed underpayment is $150 
(($100-$50) + $300) x 40 percent) + $10). Under paragraph 
(c)(2)(ii)(B) of this section, the adjustment to long-term capital 
gain (the adjustment to which the 40-percent penalty relates) and 
the adjustments to ordinary income and credits (the adjustments to 
which the 20-percent penalty relates) are grouped separately. In 
accordance with paragraph (c)(2)(ii)(D) of this section, because 
there are no partnership adjustments with respect to which no 
penalties have been imposed, the $50 reduction in ordinary income 
(the negative adjustment) is allocated to the grouping of 
adjustments with respect to which the 20-percent penalty is imposed. 
The amount described under paragraph (c)(2)(ii)(B) of this section 
with respect to the 20-percent penalty grouping is $30 (($100 x 40 
percent)-($50 x 40 percent) + 10). Therefore, the portion of the 
imputed underpayment to which the 20 percent accuracy-related 
penalty applies is $30 and the penalty is $6 ($30 x 20 percent). The 
portion of the imputed underpayment to which the 40-percent gross 
valuation misstatement penalty applies is $120 ($300 x 40 percent), 
and the penalty is $48 ($120 x 40 percent). The accuracy-related 
penalty under section 6662(a) is $54.
    Example 5. Modification with respect to tax-exempt partner. The 
IRS initiates an administrative proceeding with respect to 
Partnership's 2019 taxable year. Partnership has four equal partners 
during its 2019 taxable year: Two partners are partnerships, A and 
B; one partner is a tax-exempt entity, C; and the fourth partner is 
an individual, D. The IRS timely mails a notice of proposed 
partnership adjustment (NOPPA) to Partnership for its 2019 taxable 
year proposing a single partnership adjustment increasing 
Partnership's ordinary income by $400,000. The $400,000 increase in 
income is due to negligence or disregard of rules or regulations 
under section 6662(c). A 20-percent accuracy-related penalty under 
section 6662(a) and (c) applies to the portion of the imputed 
underpayment attributable to the negligence or disregard of the 
rules or regulations. In the NOPPA, the IRS determines an imputed 
underpayment of $160,000 ($400,000 x 40 percent); the portion of the 
imputed underpayment to which the 20-percent penalty applies is 
$32,000 ($160,000 x 20 percent). Partnership requests modification 
under Sec.  301.6225-2(d)(3) (regarding tax-exempt partners) with 
respect to the amount of additional income allocated to C, and the 
IRS approves the request. After modification of the imputed 
underpayment, the imputed underpayment is $120,000 (($400,000-
$100,000) x 40 percent), and the penalty is $24,000 ($120,000 x 20 
percent).
    Example 6. Amended return modification. The facts are the same 
as in Example 5 of this paragraph (c)(3), except in addition to the 
modification with respect to C's tax-exempt status, Partnership 
requests a modification under Sec.  301.6225-2(d)(2) (regarding 
amended returns) with respect to the $100,000 of additional income 
allocated to D. In accordance with the rules under Sec.  301.6225-
2(d)(2), D files an amended return for D's 2019 taxable year taking 
into account $100,000 of additional ordinary income. In addition, in 
accordance with Sec.  301.6225-2(d)(2)(viii), D takes into account 
on D's return the 20-percent accuracy-related penalty for negligence 
or disregard of rules or regulations that relates to the ordinary 
income adjustment. D's tax attributes for other taxable years are 
not affected. The IRS approves the modification. As a result, 
Partnership's total netted partnership adjustment under Sec.  
301.6225-1(c)(3) is $200,000 ($400,000 less $100,000 allocable to C 
and $100,000 taken into account by D). The imputed underpayment, 
after modification, is $80,000 ($200,000 x 40 percent), and the 
penalty is $16,000 ($80,000 x 20 percent).

    (d) Applicability date--(1) In general. Except as provided in 
paragraph (d)(2) of this section, this section applies to partnership 
taxable years beginning after December 31, 2017.
    (2) Election under Sec.  301.9100-22T in effect. This section 
applies to any partnership taxable year beginning after November 2, 
2015 and before January 1, 2018 for which a valid election under Sec.  
301.9100-22T is in effect.
0
Par. 11. Section 301.6233(b)-1 is added to read as follows:


Sec.  301.6233(b)-1   Interest and penalties with respect to the 
adjustment year return.

    (a) Interest and penalties with respect to failure to pay imputed 
underpayment on the date prescribed. In the case of any failure to pay 
an imputed underpayment on the date prescribed for such payment (as 
described in Sec.  301.6232-1(b)), a partnership is liable for--
    (1) Interest as determined under paragraph (c) of this section; and
    (2) Any penalty, addition to tax, or additional amount as 
determined under paragraph (d) of this section.
    (b) Imputed underpayments to which this section applies. This 
section applies to the portion of an imputed underpayment determined by 
the IRS under section 6225(a)(1), or an imputed underpayment resulting 
from adjustments requested by a partnership in an administrative 
adjustment request under section 6227, that is not paid by the date 
prescribed for payment under Sec.  301.6232-1(b).
    (c) Interest. Interest determined under this paragraph (c) is the 
interest that would be imposed under chapter 67 of the Internal Revenue 
Code (Code) by treating any unpaid amount of the imputed underpayment 
as an underpayment of tax imposed for the adjustment year (as defined 
in Sec.  301.6241-1(a)(1)). The interest under this paragraph (c) 
begins on the date prescribed for payment (as described in Sec.  
301.6232-1(b)) and ends on the date payment of the imputed underpayment 
is made.
    (d) Penalties. If a partnership fails to pay an imputed 
underpayment by the date prescribed for payment (as described in Sec.  
301.6232-1(b)), section 6651(a)(2) applies to such failure, and any 
unpaid amount of the imputed underpayment is treated as if it were an 
underpayment of tax for purposes of part II of subchapter A of chapter 
68 of the Code. For purposes of this section, the penalty under 
6651(a)(2) is applied by treating the unpaid amount of the imputed 
underpayment as the unpaid amount shown as tax on a return required 
under subchapter A of chapter 61 of the Code.
    (e) Applicability date--(1) In general. Except as provided in 
paragraph (e)(2) of this section, this section applies to partnership 
taxable years beginning after December 31, 2017.
    (2) Election under Sec.  301.9100-22T in effect. This section 
applies to any partnership taxable year beginning after November 2, 
2015 and before January 1, 2018 for which a valid election under Sec.  
301.9100-22T is in effect.
0
Par. 12. Section 301.6234-1 is added to read as follows:


Sec.  301.6234-1   Judicial review of partnership adjustment.

    (a) In general. Within 90 days after the date on which a notice of 
a final partnership adjustment (FPA) with respect to any partnership 
taxable year is mailed under section 6231(a)(3), a partnership may file 
a petition for a readjustment of any partnership adjustment (as defined 
in Sec.  301.6241-1(a)(6)) reflected in the FPA for such taxable year 
(without regard to whether an election under section 6226 has been made 
with respect to any imputed underpayment reflected in such FPA) 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 Court of Federal Claims.
    (b) Jurisdictional requirement for bringing action in district 
court or Court of Federal Claims. A petition for readjustment under 
this section with respect to any partnership adjustment may be filed in 
a district court of the United States or the Court of Federal Claims 
only if the partnership filing the petition deposits with the Internal

[[Page 60166]]

Revenue Service (IRS), on or before the date the petition is filed, the 
amount of any imputed underpayment resulting from the partnership 
adjustment.
    (c) Treatment of deposit as payment of tax. Any amount deposited in 
accordance with paragraph (b) of this section, while deposited, will 
not be treated as a payment of tax for purposes of the Internal Revenue 
Code (Code). Notwithstanding the preceding sentence, an amount 
deposited in accordance with paragraph (b) of this section will be 
treated as a payment of tax for purposes of chapter 67 of the Code 
(relating to interest). Interest will be allowed and paid in accordance 
with section 6611.
    (d) Effect of decision dismissing action. If an action brought 
under this section is dismissed other than by reason of a rescission of 
the FPA under section 6231(c) and Sec.  301.6231-1(g), the decision of 
the court dismissing the action is considered as its decision that the 
FPA is correct.
    (e) Amount deposited may be applied against assessment. If the 
limitations on assessment under section 6232(b) and Sec.  301.6232-1(c) 
no longer apply with respect to an imputed underpayment for which a 
deposit under paragraph (b) of this section was made, the IRS may apply 
the amount deposited against any such imputed underpayment that is 
assessed.
    (f) Applicability date--(1) In general. Except as provided in 
paragraph (f)(2) of this section, this section applies to partnership 
taxable years beginning after December 31, 2017.
    (2) Election under Sec.  301.9100-22T in effect. This section 
applies to any partnership taxable year beginning after November 2, 
2015 and before January 1, 2018 for which a valid election under Sec.  
301.9100-22T is in effect.
0
Par. 13. Section 301.6235-1 is added to read as follows:


Sec.  301.6235-1   Period of limitations on making adjustments.

    (a) In general. Except as provided in section 6235(c) and (d) and 
paragraph (b) of this section (regarding extensions), no partnership 
adjustment (as defined in Sec.  301.6241-1(a)(6)) for any partnership 
taxable year may be made after the later of the date that is--
    (1) 3 years after the latest of--
    (i) The date on which the partnership return for such taxable year 
was filed;
    (ii) The return due date (as defined in section 6241(3)) for the 
taxable year; or
    (iii) The date on which the partnership filed an administrative 
adjustment request with respect to such taxable year under section 
6227; or
    (2) The date described in paragraph (b) of this section with 
respect to a request for modification; or
    (3) The date described in paragraph (c) of this section with 
respect to a notice of proposed partnership adjustment.
    (b) Modification requested under section 6225(c)--(1) In general. 
For purposes of paragraph (a)(2) of this section, in the case of any 
request for modification of any imputed underpayment under section 
6225(c), the date by which the Internal Revenue Service (IRS) may make 
a partnership adjustment is the date that is 270 days (plus the number 
of days of an extension of the modification period (as described in 
Sec.  301.6225-2(c)(3)(i)) agreed to by the IRS under section 
6225(c)(7) and Sec.  301.6225-2(c)(3)(ii)) after the date on which 
everything required to be submitted to the IRS pursuant to section 
6225(c) is so submitted.
    (2) Date on which everything is required to be submitted--(i) In 
general. For purposes of paragraph (b)(1) of this section, the date on 
which everything required to be submitted to the IRS pursuant to 
section 6225(c) is so submitted is the earlier of--
    (A) The date the modification period ends (including extensions) as 
described in Sec.  301.6225-2(c)(3)(i) and (ii); or
    (B) The date the modification period expires as a result of a 
waiver of the prohibition on mailing a notice of final partnership 
adjustment (FPA) under Sec.  301.6231-1(b)(2). See Sec.  301.6225-
2(c)(3)(iii).
    (ii) Incomplete submission has no effect. A determination by the 
IRS that the information submitted as part of a request for 
modification is incomplete has no effect on the applicability of 
paragraph (b)(2) of this section.
    (c) Notice of proposed partnership adjustment. For purposes of 
paragraph (a)(3) of this section, the date by which the IRS may make a 
partnership adjustment is the date that is 330 days (plus the number of 
days of an extension of the modification period (as described in Sec.  
301.6225-2(c)(3)(i)) agreed to by the IRS under section 6225(c)(7) and 
Sec.  301.6225-2(c)(3)(ii)) after the date the last notice of proposed 
partnership adjustment (NOPPA) is mailed under section 6231(a)(2), 
regardless of whether modification is requested by the partnership 
under section 6225(c).
    (d) Extension by agreement. The periods described in paragraphs 
(a), (b), and (c) of this section (including any extension of those 
periods pursuant to this paragraph (d)) may be extended by an 
agreement, in writing, entered into by the partnership and the IRS 
before the expiration of such period.
    (e) Examples. The following examples illustrate the rules of this 
section. For purposes of these examples, each partnership has a 
calendar taxable year.

    Example 1. Partnership timely files its partnership return for 
the 2020 taxable year on March 1, 2021. On September 1, 2023, 
Partnership files an administrative adjustment request (AAR) under 
section 6227 with respect to its 2020 taxable year. As of September 
1, 2023, the IRS has not initiated an administrative proceeding 
under subchapter C of chapter 63 of the Internal Revenue Code with 
respect to Partnership's 2020 taxable year. Therefore, as of 
September 1, 2023, under paragraph (a)(1) of this section, the 
period for making partnership adjustments with respect to 
Partnership's 2020 taxable year expires on September 1, 2026.
    Example 2. Partnership timely files its partnership return for 
the 2020 taxable year on the due date, March 15, 2021. On February 
1, 2023, the IRS mails to Partnership and the partnership 
representative of Partnership (PR) a notice of administrative 
proceeding under section 6231(a)(1) with respect to Partnership's 
2020 taxable year. Assuming no AAR has been filed with respect to 
Partnership's 2020 taxable year and the IRS has not yet mailed a 
NOPPA under section 6231(a)(2) with respect to Partnership's 2020 
taxable year, the period for making partnership adjustments for 
Partnership's 2020 taxable year expires on the date determined under 
paragraph (a)(1) of this section, March 15, 2024.
    Example 3. The facts are the same as in Example 2 of this 
paragraph (e), except that on June 1, 2023, pursuant to Sec.  
301.6235-1(d), PR signs an agreement extending the period for making 
partnership adjustments under section 6235(a)(1) for Partnership's 
2020 taxable year to December 31, 2025. In addition, on June 2, 
2025, the IRS mails to Partnership and PR a timely NOPPA under 
section 6231(a)(2). Pursuant to Sec.  301.6225-2(c)(3)(i), the 
modification period expires on February 27, 2026 (270 days after 
June 2, 2025, the date the NOPPA is mailed), but PR does not submit 
a request for modification on or before this date. Under paragraph 
(c) of this section, the date for purposes of paragraph (a)(3) of 
this section is April 28, 2026, the date that is 330 days from the 
mailing of the NOPPA. Because April 28, 2026 is later than the date 
under paragraph (a)(1) of this section (December 31, 2025, as 
extended under paragraph (d) of this section), and because no 
modification was requested, paragraph (a)(2) of this section is not 
applicable, April 28, 2026 is the date on which the period for 
making partnership adjustments expires under section 6235.
    Example 4. The facts are the same as in Example 3 of this 
paragraph (e), except that PR notifies the IRS that Partnership will 
be requesting modification. On January 5, 2026, PR and the IRS agree 
to extend the modification period pursuant to section 6225(c)(7) and 
Sec.  301.6225-2(c)(3)(ii) for 45 days--from February 27, 2026 to 
April 13,

[[Page 60167]]

2026. PR submits the request for modification to the IRS on April 
13, 2026. Therefore, the date determined under paragraph (b) of this 
section is February 22, 2027, which is 270 days after the date 
everything required to be submitted was so submitted pursuant to 
paragraph (b)(2) of this section plus the additional 45-day 
extension of the modification period agreed to by PR and the IRS. 
Because February 22, 2027 is later than the date under paragraph 
(a)(1) of this section (December 31, 2025, as extended under 
paragraph (d) of this section) and the date under paragraph (a)(3) 
of this section (June 12, 2026, which is 330 days from the date the 
NOPPA was mailed plus the 45-day extension under section 
6225(c)(7)), February 22, 2027 is the date on which the period for 
making partnership adjustments expires under section 6235.
    Example 5. The facts are the same as in Example 4 of this 
paragraph (e), except that PR does not request an extension of the 
modification period. On February 1, 2026, PR submits a request for 
modification and PR, and the IRS agree in writing to waive the 
prohibition on mailing an FPA pursuant to Sec.  301.6231-1(b)(2). 
Pursuant to Sec.  301.6225-2(c)(3)(iii), the modification period 
expires as of February 1, 2026, rather than February 27, 2026. 
Accordingly, under paragraph (b)(2) of this section, the date on 
which everything required to be submitted pursuant to section 
6225(c) is so submitted is February 1, 2026, and the 270-day period 
described in paragraph (b)(1) of this section begins to run on that 
date. Therefore, the date for purposes of paragraph (a)(2) of this 
section is October 29, 2026, which is 270 days after February 1, 
2026, the date on which everything required to be submitted under 
section 6225(c) is so submitted. Because October 29, 2026 is later 
than the date under paragraph (a)(1) of this section (December 31, 
2025, as extended under paragraph (d) of this section) and the date 
under paragraph (a)(3) of this section (April 28, 2026), October 29, 
2026 is the date on which the period for making partnership 
adjustments expires under section 6235.
    Example 6. The facts are the same as in Example 5 of this 
paragraph (e), except PR completes its submission of information to 
support a request for modification on July 1, 2025, but does not 
execute a waiver pursuant to Sec.  301.6231-1(b)(2). Therefore, 
pursuant to paragraph (b)(2) of this section, February 26, 2026, the 
date the modification period expires, is the date on which 
everything required to be submitted pursuant to section 6225(c) is 
so submitted. As a result, the 270-day period described in paragraph 
(b)(1) of this section expires on November 23, 2026. Because 
November 23, 2026 is later than the date under paragraph (a)(1) of 
this section (December 31, 2025, as extended under paragraph (d) of 
this section) and the date under paragraph (a)(3) of this section 
(April 28, 2026), November 23, 2026 is the date on which the period 
for making partnership adjustments expires under section 6235.

    (f) Applicability date--(1) In general. Except as provided in 
paragraph (f)(2) of this section, this section applies to partnership 
taxable years beginning after December 31, 2017.
    (2) Election under Sec.  301.9100-22T in effect. This section 
applies to any partnership taxable year beginning after November 2, 
2015 and before January 1, 2018 for which a valid election under Sec.  
301.9100-22T is in effect.

Kirsten Wielobob,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2017-27071 Filed 12-15-17; 11:15 am]
 BILLING CODE 4830-01-P