Treasury and the IRS released proposed regulations (REG-136118-15) providing detail into the administration of the new centralized partnership audit regime enacted as part of the Bipartisan Budget Act (BBA) of 2015, which replaces the partnership audit rules of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA).
The BBA is effective for partnerships' taxable years beginning after Dec. 31, 2017, although previously issued temporary regulations offer certain partnerships the ability to opt in to this new collection regime early. The BBA presents a profound shift not only for partnerships themselves, but also for many C corporations, tax-exempt entities, S corporations and trusts that are partners in partnerships. The rules are designed to shift the burden for actually assessing and collecting tax after a partnership-level adjustment from the IRS to the partnership and partners. Partnerships will need to consider changes to their partnership and operating agreements to respond to the BBA, especially considering the proposed regulations, which tend to place greater import on the relationship between the partners and the partnership representative than between the IRS and the partnership.
These long-awaited proposed rules, however, were immediately withdrawn as part of the new Trump administration's initial freeze on regulatory activity, and it remains to be seen when and if the Treasury Department will complete its review of these regulations and allow them to be published in the Federal Register. In the interim, taxpayers should be aware that the proposed regulations serve as the basis for any regulatory guidance under the BBA, which by law will become effective at the beginning of 2018.
In addition, the proposed regulations also make mention of the introduced, but not yet enacted, Tax Technical Corrections Act of 2016, which contains modifications to the BBA. That legislation would make both minor and major changes to the BBA, including allowing pass-through partners the ability to make subsequent "push outs" to their partners. The proposed regulations acknowledge this proposed legislative change and describe it as presenting "significant administrative concerns."
The 277-page proposed regulations address certain important questions raised by practitioners after the BBA was signed into law in 2015. (View previous coverage here.) Generally, the proposed regulations take a broad approach to the government's ability to make adjustments at the partnership level. The proposed regulations also provide guidance on how a partnership may designate a partnership representative.
The partnership representative under the BBA holds far greater authority than the tax matters partner (TMP) under TEFRA. The partnership and partners are bound by the decisions of the partnership representative, who, unlike the TMP, may be any person, including a nonpartner. The only limitation on a partnership representative is that the person must have a substantial presence in the United States, so that the IRS may be able to communicate or meet with the representative.
The proposed regulations also clarify which partnerships may elect out of the BBA audit regime. Unlike under TEFRA, where certain small partnerships were exempt from the TEFRA audit rules but were permitted to elect in, the BBA takes a reverse approach by requiring those partnerships that may be excluded from the BBA to affirmatively elect out of the BBA. Under both TEFRA and the BBA, all partnerships are subject to the audit rules unless they are a small partnership. A small partnership under the BBA is defined as a partnership with 100 or fewer eligible partners. The proposed regulations provide guidance on what constitutes an eligible partner and specifically excludes from that definition partners that are disregarded entities.
Grant Thornton intends to issue more detailed guidance on the BBA in the future.
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