December 21, 2018
The IRS has released an advance version of Notice 2019-06 announcing that the IRS and Treasury Department intend to issue proposed regulations to provide that:
Read Notice 2019-06 [PDF 41 KB]
Overview of future regulations
Notice 2019-06 provides that the to-be-issued proposed regulations under section 6241(11)(B)(vi) concern two matters that have been determined to present special enforcement considerations.
The future regulations will allow the IRS to “effectively and efficiently focus on a single partner or a small group of partners with respect to a limited set of partnership-related items without unduly burdening the partnership and avoiding procedural concerns about the appropriate level at which such items must be examined.”
The future regulations will provide that the IRS may determine that the centralized partnership audit regime does not apply to adjustments to partnership-related items when the following conditions are met: (1) the examination being conducted is of a person other than the partnership; (2) a partnership-related item must be adjusted, or a determination regarding a partnership-related item must be made, as part of an adjustment to a non-partnership-related item of the person whose return is being examined; and (3) the treatment of the partnership-related item on the return of the partnership under section 6031(b) or in the partnership’s books and records was based in whole or in part on information provided by, or under the control of, the person whose return is being examined.
The future regulations will provide that this situation presents special enforcement considerations because partnership structures with QSubs as partners “could have far more than 100 ultimate partners, including many thousands, and still potentially elect out of the centralized partnership audit regime.” As noted in the IRS notice, allowing such a large partnership to elect out of the centralized partnership audit regime “would give rise to significant enforcement concerns for the IRS and frustrate the efficiencies introduced by the centralized partnership regime.” Thus, the future regulations will provide that section 6221(b) generally does not apply to a partnership with a QSub as a partner—but the regulations will also provide that if a partnership meets certain requirements, the partnership may make an election under section 6221(b).
The future regulations will apply a rule similar to the rules for S corporations under section 6221(b)(2)(A), and will also provide that for purposes of determining whether a partnership has 100 or fewer partners for the tax year for purposes of the election under section 6221(b), the partnership must include: (1) the statement the partnership is required to furnish to the QSub partner under section 6031(b); and (2) each statement the S corporation that holds 100% of the stock of the QSub partner is required to furnish to its shareholders under section 6037(b).
The IRS notice states that the intention is for the proposed and final regulations to be issued before 18 months after enactment of the Technical Corrections Act of 2018, and for the regulations to apply to all partnership tax years beginning after December 31, 2017. If this 18-month deadline is not met, the intention is for the regulations to be applicable to partnership tax years beginning after December 31, 2017, and ending after December 20, 2018 (the date when the IRS notice was released).
Comments are requested, and must be received by February 22, 2019.