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Proposed Partnership Audit Regulations Reissued in Substantially Identical Form

On June 13, 2017, the U.S. Internal Revenue Service (“IRS”) and the Department of the Treasury (“Treasury”) re-released proposed regulations (REG 136118-15) that provide guidance on the new centralized partnership audit regime. The centralized partnership audit regime was enacted in November 2015 by Section 1101 of the Bipartisan Budget Act of 2015, P.L. 114-74, and amended in December 2015 by the Protecting Americans From Tax Hikes Act of 2015, P.L. 114-113 (altogether “the BBA rules”).

The BBA rules assess and collect tax at the partnership level, replacing the audit procedures that were enacted by the Tax Equity and Fiscal Responsibility Act of 1982 (“TEFRA”) and the electing large partnership rules. Under the TEFRA rules, audit adjustments related to partnership items were determined at the partnership level, but enforced at the partner level while adjustment related to partner-level items were determined and enforced at the partner level. On the other hand, the BBA rules provide that tax on any adjustment in a partnership audit that results in additional partnership income is assessed and collected at the partnership level. The partnership can elect under the BBA rules to “push out” the adjustment to its partners. The BBA rules replace the tax matters partners under TEFRA for a “partnership representative,” who will serve as the only point of contact between the partnership and the IRS. The new partnership audit rules apply to partnership tax years beginning after December 31, 2017. The new rules’ effective date is based on the partnership’s reporting year that is under audit regardless of when the audit itself is conducted. The BBA rules did not include significant details but it provided the Secretary of Treasury with deference as to how some provisions would be implemented; therefore taxpayers have been awaiting Treasury regulations.

During the final days of the Obama administration in January 2017, the IRS and the Treasury issued proposed regulations for the BBA rules. However, those proposed regulations were withdrawn after the incoming Trump administration issued an executive order on January 20, 2017, ordering all executive departments and agencies to freeze new and pending regulations.

As expected, the new proposed regulations issued in June 2017 are substantially identical to the withdrawn proposed regulations. The proposed regulations include guidance on the scope of the new partnership audit regime; procedural rules on electing out of the regime; the requirement that a partner’s treatment of items on its tax return must be consistent with the treatment of such items on the partnership’s return; details regarding the partnership representative; and details regarding the imputed underpayment, among other things. A public hearing on the proposed rules will be held in Washington, DC on September 18, 2017 at 10:00 AM.

© 2017 Proskauer Rose LLP.


About this Author

Anne Kim, taxable and tax-free mergers and acquisitions lawyer, Proskauer Rose

Anne Kim is a partner in the Tax Department. Anne’s practice focuses on advising public and private companies in both taxable and tax-free mergers and acquisitions, divestitures, cross-border transactions and formation of joint ventures. She also represents publicly traded partnerships and private equity funds in multiple acquisitions, dispositions and multi-tranche and junior capital financings.

Anne has been recognized for her work in tax by Chambers USA (2014). Prior to joining Proskauer, she practiced with Cravath, Swaine & Moore in New...

Arnold P May, Proskauer, Tax Litigation Lawyer, Private Investment Funds Attorney

Arnold P. May is a partner in the Tax Department and a member of the Private Investment Funds Group. His practice focuses on tax planning for private equity fund managers in connection with their fund-raising and internal organizational matters, as well as investment activities.

In addition, Arnold represents U.S. and non-U.S. investors in connection with their investments in venture capital funds, buyout funds, hedge funds and other investment partnerships. In this capacity, as well as in connection with advising private equity funds with respect to their investment activities, he regularly advises on international tax issues that arise in connection with investments in the U.S. by non-U.S. investors (including non-U.S. investors subject to special U.S. tax treatment, such as governmental pension plans and tax-exempt organizations), as well as investments outside of the U.S. by U.S. persons. Arnold also has significant experience structuring tax-free and taxable mergers and acquisitions (including cross-border transactions), equity compensation arrangements and innovative financing techniques for investments in tax transparent entities such as partnerships, limited liability companies and Subchapter S corporations.

Yomarie S Habenicht, Proskauer, Tax Legal Matters Lawyer, New York attorney

Yomarie Habenicht is an associate in the Tax Department. She works primarily on U.S. federal corporate, partnership and international tax matters, including mergers and acquisitions, domestic and cross-border financings, debt restructurings and securities issuances. She is also fluent in Spanish.

She earned her J.D. from Boston University, where she was an executive editor of the Review of Banking and Financial Law and co-president of the Latin American Law Students Association. She also earned her LLM in taxation from New York University.

Prior to joining Proskauer...