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ABe%erBBAUniversityofChicagoFederalTaxConference
November12,2016
1
Moderator:DavidSchnabel,DavisPolk&WardwellLLPPresenters:
ToddGluth,CooleyLLP
DianaWollman,Cleary,Go%lieb,Steen&HamiltonLLP
Commentators:
BillWilkins,InternalRevenueServiceChiefCounsel
MichaelHirschfeld,CornellLawSchool
Whywehavegatheredheretoday• Goal:UsingtheBBAframework,developanauditandcollecLon
regimeforpartnershipsthatseekstomaximizetwobasic(butambiLous)goals:– Determinethecorrectamountoftaxinaworldwheresomerelevantfacts
mayexistatthepartnershiplevel,otherrelevantfactsmayexistatthepartnerlevel(or,inthecaseofapartnerthatisamemberofaconsolidatedgroup,theconsolidatedgrouplevel),andsLllotherfactsmayexistatthelevelofoneormoreupper-Lerpartnerships.
– ProvidetheIRSwithaneffecLvemechanismtoassessandcollectthatamountoftax.
• Whatwedid:– ReviewedtherichhistoryofpartnershipauditproposalsfromTEFRA
throughBBA.LegislaLveproposalstocollect“partnershipshorWalls”/“imputedunderpayments”fromthepartnershipdatebackto1987.
– DevelopedaproposalthatbuildsonthearchitectureoftheBBAasaplaWormfortoday’sdiscussion.WeareseekingyourreacLonandinput.2
Caveats• ThisProposalismeanttobeaworkingdra_thatwillbenefitfromour
discussiontoday.
• WearewellawarethattheProposalisnotperfectbutwealsocauLonthatwethinkthereisnoperfectsoluLon.
• WethinkthatsomefairnessconcernsareaddressedbygivingtaxpayersadvancenoLceoftherulestheywillbefacingandthusopportunitytocontractualprotectthemselves.– TaxpayerswhocontracttobeinapartnershipcancontractforprotecLons.
• WearenotfocusingtodayonwhichaspectsofthisproposalcouldbeimplementedunderthecurrentstatuteandwhichwouldrequirelegislaLvechanges.
3
TEFRARulesSummary
• Partnership-LevelProceedings.Partnershipitemsaddressedinunifiedpartnership-leveladministraLveandjudicialproceedings.
• TMP.IRSinteractswithTMP(whomustbeageneralpartner).
• No7ce,Par7cipa7on&Se;lement.IRCgivespartnersrightstobenoLfiedofaudit,parLcipate,anddissentfromse%lement.
• AdjustmentsFlowThroughtoPartners.Partnership-leveladjustmentspassedthroughtoreviewed-yearpartners;everyone’sreviewed-yearreturngetstoCorrectReturnPosiLon.
• Collec7onfromPartners.IRScomputesamounteveryoneowesandthenmustcollectfromreviewed-yearpartners.
• StatuteofLimita7ons.IRShas3yearsfrompartnership’sfilingdate,whichcanpotenLallybeextendedbyTMP(evenastopartner-level“affecteditems”).
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TEFRAHadManyProblems• Iden7fica7on&MonitoringofPartners.IdenLfyingand
monitoringpartnerstoprovidenoLce,confirmflowthroughofadjustments,andassessandcollecttax(ordeliverrefunds)canbedaunLng,parLcularlyinwidely-heldpartnerships,Leredpartnerships,andpartnershipswithintereststhatfrequentlychange.
• PartnerPar7cipa7on.CumbersomeintervenLonofnumerouspartnersinproceedings,andwidespreadrightstoiniLateproceedings.ProceduralprotecLonsforpartnerscomplicateauditsandinviteliLgaLon.
• ObstaclestoSe;lement.IRSgenerallyneedsagreementofeverypartnertose%le.
• PartnerRefundClaimsforCorollaryAdjustments.Deficienciesinoneyearfrequentlygiverisetorefundclaimsinlateryears.
• Mul7plicityofSmallPartnerAdjustments.CostsofcollecLngsmallamountsfrom(ordeliveringrefundsto)manypartnerscanbeprohibiLve,eveniftheamountissignificantintheaggregate.
Result:IRSauditsfewlargepartnerships,mostresultinnochangetothepartnership’sreturn,andtheaggregatechangesaresmall. 6
BBABasics• EnactedNovember2015(minortechnicalcorrecLonsin
December2015).– ReplacesTEFRAandELP.
• Appliestopartnershipreturnsfiledfor2018andlateryears.– Partnershipswithlessthan100partners,allindividualsorcorporaLons,
mayelectout.
• Auditisconductedatpartnershiplevel– IndividualpartnershavenostatutoryrighttoreceivenoLce,
parLcipate,ordisagreewithresult.– SinglerepresentaLve,whoneednotbeapartner,interfaceswithIRS.
• Whenauditconcludes,IRScomputesan“imputed
underpayment”thatthepartnershipowestoIRS. – RoughlyequalsunderstatementofincomemulLpliedLmeshighesttax
rateineffectfor“reviewedyear”.– CollecLonfrompartnershipavoidsneedtotrackthroughLersof
partnershipstoulLmatetop-Lerpartners.
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3MethodstoReduceAmountPartnershipOwestoIRS
1. 6225(c)(2)AmendedReturns:Oneormorepartnersmayelecttofileanamendedreturn(CRP)forreviewedyear.– reducesImputedUnderpaymentthepartnershipowes.
2. 6225(c)(3)/(c)(4)Reduc?on:PartnershipmaytrytoprovetoIRSExamthat“highestrateoftax”isnotappropriateratebaseduponcharacterisLcsofpartners.– reducesImputedUnderpaymentthepartnershipowes.
3. 6226Push-Out:partnershipsends6226noLcetoallreviewed-yearpartnerstellingthemtheymustcomputeCRPandpayIRSdirectly.– partnershipenLrelyoffthehook. 8
ConcernsraisedaboutBBA• Unfair,unfair,unfair.• ConflictswithSubKandothersubstanLvetaxrules– IncludingimposingenLty-leveltaxandtaxingincomeallocabletotax-exempts
• IRScanovercollect,collectfromwrongpersons,anddoubletaxsomepartners.
• Tieredstructuresareespeciallydisadvantagedandfairnesscannotbeachieved.
• IRScanundercollectandhavenomeansofredress
• PartnershiprepresentaLvehastoomuchpower• Well-advisedtaxpayerswillpaylessthantheyshouldand
poorly-advisedtaxpayerswillpaymorethantheyshould.9
Terminology• “sourcepartnership”:partnershipthatisaudited.
• “adjustmentyear”:yearauditconcludes.
• “reviewedyear”:yearthatwasaudited.
• “ImputedUnderpayment”:amountpartnershipowes.
• “6226”/“PushOut”:partnership’selecLontopushpaymentobligaLonouttoreviewed-yearpartners.
• CorrectReturnPosiLon(“CRP”):whatreviewed-yearpartnerswouldhaveowed,andtheirfuture-filedreturnswouldshow,ifreviewed-year1065(andsubsequentreturns)hadbeenconsistentwithauditresults.
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BigPictureGuidelinesforProposal• StartwiththeBBA,includingpartnershipliabilityconcept.• But,partnershipsandpartnersshouldbeabletogettoCRPif
they(notIRS)arewillingtobeartheadministraLveburdensandcollecLonrisksofdoingso.– ImpossibletodetermineCRPforallpartnersatpartnershiplevelwithout
partnerscomingintoshowtheiraffecteditems.
– Burdenshouldbeonpartnershipsandpartners,nottheIRS,tosecurecooperaLonofunwillingpartnerstogettoCRP.
– AllowpartnerwhocomesintodealdirectlywithIRS,notgothroughPR.
• OurProposaldoesthisby1. StarLngwithpartnershipliability,
2. AllowingpartnerswhowanttogettoCRP(andpaythattoIRSdirectly)todoso(viaPushIn),
3. Reducingthepartnership’sremainingliability,butleavingpartnershipliableforamountnotpaidbyPush-Inpartners.
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BBABasicFrameworkRetained• IRSauditspartnershipatpartnershiplevel.– One“PartnershipRepresentaLve”representspartnershipinauditandanycourtproceedings.• PRdoesnotneedtobeapartner.
– AdjustmentsdeterminedthroughExam/Appealsusualprocedures.
• Atendofaudit,anImputedUnderpaymentiscomputedandthisisini@allytheamountthesourcepartnershipowestotheIRS.– ButthisImputedUnderpaymentcanbereduced(eventozero)withPushInbypartners. 13
WhatpartnershipiniLallyowescanbereducedviaPushIn
• Push-InregimecombineselementsoftheBBA’s3differentmethodsofreducingthepartnership’sliability:– 1.6225(c)(2)amendedreturnsbyreviewed-yearpartners,– 2.6225(c)(3)/(c)(4)reducLonsbaseduponreviewed-yearpartner’sstatus,– 3.6226push-outbypartnership.
• Anyreviewed-yearpartnercanPushIntothepartnershipproceedingandgettoCRPforthatpartner.
• OncethePush-Inpartnerhaspaid,theadjustmentitemsallocabletothatpartnerareremovedfromthecalculaLonoftheImputedUnderpaymentthatthepartnershipmustpaytoIRS.
• Partnerships(andtransfereepartners)willlikelyseektocontractuallyobligatereviewed-yearpartnerstoPushIn.
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HowPush-InWorks• Push-InpartnerdealsdirectlywithIRSExam
– Sameteamthatauditspartnership,orseparateteamwithexperLseinsubjectma%erorfamiliaritywiththePush-Inpartner(andcoordinateswithteamforauditedpartnership).
• ProvidesinformaLonsufficienttoestablishCRP– CRP=theamountoftaxesthePush-Inpartnerwouldoweforreviewedyearandall
yearsbetweenreviewedyearandcurrentyeariftheauditadjustmentshadbeenreflectedinthatpartner’sreviewedyearreturn.• Takesintoaccountallchangesintaxa%ributesthatwouldhaveoccurredatboth
partnershipandpartnerlevel(includingpartner-level“affecteditems”).• Takesintoaccountbothincreasesanddecreasesintaxes.• Becausethemechanicsdonotrelyonamendedreturns,PushIndoesnotafford
partnersanotherbiteatunrelateditemsinclosedreturns,itdoesnotrequirethemtorecerLfythecorrectnessofunrelateditemsinpreviouslyfiledreturns,anditmayavoidtheneedtoamendstateandlocalreturns.
• Push-InpartnerpaysthenetaddiLonaltaxesduetoIRSExam.
• AllfuturereturnsforPush-InpartnerpreparedasifCRPiswhatreallyhappened.– Includingpartnershipoutsidebasis,whichgoingforwardreflectsauditadjustments. 15
PartnershipmustpaytheremainingImputedUnderpayment
• A_erallthePush-Inpartnershavese%ledupwiththeIRS,anyremainingImputedUnderpaymentmustbepaidtotheIRSbythepartnership.
• Capitalaccountandoutsidebasisconsequencesofpartnership’spaymentoftheremainingImputedUnderpayment:– PaymentoftheImputedUnderpaymentisanondeducLble
partnershipexpense(fromBBA)• Allocatedamongadjustment-yearpartnersinaccordancewithhowtheybearthe
actualeconomiccost.
– ItemsunderlyingtheImputedUnderpayment• Allocatedamongadjustment-yearpartnersforpurposesofdeterminingtheir
capitalaccountsandoutsidebasestomatchhowtheyboreImputedUnderpaymentexpense.
– ItemsunderlyingtheImputedUnderpaymentdonotflowintopartners’taxreturns,however,andthepartnerscannotgetacreditforthepartnership’spaymentoftheImputedUnderpayment.
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Tieredpartnerships:samerules– Partners’characterisLcscannotbeusedtoreducesource
partnership’sImputedUnderpaymentabsentPushInfromulLmatetop-Lerpartners.
– Apartnerofthesourcepartnershipthatisitselfapartnership
mayPushInandpayitsshareofthesourcepartnership’sImputedUnderpaymentatthehighestrateoftax.– PushInbyanupper-Lerpartnershipshi_saporLonoftheImputed
Underpaymentfromthelower-Lerpartnershiptotheupper-Lerpartnership,butdoesnotreducetheaggregateImputedUnderpayment.
– TheonlywaytoreducetheaggregateImputedUnderpaymentisPushInbytheulLmatetop-Lerpartners.– PushInbytheulLmatetop-LerpartnersrequiresPushInbyeachintervening
partnershiptoestablishthattheallocaLonsateachLerleadinguptotheulLmatepartnerarecorrect,andthatfuture-filedreturnsoftheinterveningpartnershipsappropriatelyreflectthecumulaLveimpactoftheadjustments.
– PaymentofImputedUnderpaymentandreflecLonofrelatedunderlyingauditadjustmentsincapitalaccountsandbasisfloatupthroughtheLers.
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WhataboutaPush-InpartnerwhowouldbeenLtledtoarefund?
• Examples:– reallocaLons– otheradjustmentsthatincreasededucLons/decreaseincome
– viaimpactonaffecteditemsatpartnerlevel
• AllowPush-Inpartnertoreceiverefundbutonlya_erIRShasreceivedpaymentofenLreImputedUnderpayment(a_erreducLonforPush-Inpartnerswhopaid).
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PushIncomparedtoPushOut• Similarto6226Push-OutelecLon.
• DifferenceisthatPush-InhappensaspartofExamandoccursbeforepartnershipisabsolvedofobligaLontopay.
• Partnershipisoffthehookonlya_er,andtotheextent,thePush-Inpartnershavethemselvespaid.
• FromperspecLveofreviewed-yearpartners,PushInshouldbebe%er.– Notallpartnersneedtodoit.– Decreasesintaxesandrefundstakenintoaccount.– OccurslivewithExamteamsomaybemoreefficientthanfiling
informaLonwithadjustment-yearreturn.
• PartnershipsmustsecurecooperaLonfromtheirreviewed-yearpartners,andtotheextenttheyfailtodosothepartnershipisliablefortheremainingImputedUnderpayment.
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IRSabilitytopursueapartnerdirectly• Whattodoaboutpartnership-leveldeterminaLonsthatcannotbe
reflectedinanImputedUnderpaymentbecausetheaddiLonaltaxableincomeisrecognizedonlyatthepartnerlevel?– Examples:disguisedsale,distribuLoninexcessofoutsidebasis,existenceofa
UStradeorbusinessthatmayimpactapartner’snon-partnershipitems,recaptureoccurringatpartner-levelasaresultofapartnershipitem.
• IRScannotseekpaymentfrompartnershipinthesecasesbecausetheseitemsdonotgointocomputaLonofImputedUnderpayment.
• IRSmusthaverighttopursuepartnerdirectly– Eachpartner’sSOLwouldbetolledinrespectofsuchitemsduringBBAaudit.– IRSwouldneedtocommencepartner-levelproceedingtoassessandcollect.
• Open:wouldpartnership-leveldeterminaLonbebindingonpartner?Ifyes,shouldpartnerhaveanyrighttobenoLfiedoforparLcipateinpartnership-levelaudit?
• Note:ifthispartnerPushedIn,wouldneedtodisclosetheseitemsandtheywouldbetakenintoaccountindeterminingthepartner’sCRPandthusamountowedunderPush-In.
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InsufficientAssets&OtherNon-PaymentSituaLons
• Ifpartnershiphasinsufficientassets(orotherwisedoesnotpayremainingImputedUnderpayment),IRSmayproceedagainstpresentandformerpartnersintheorderandprioritysetoutinthenextslide.
– Ineachcase,IRSissuesnoLceanddemandandif,a_erprescribednumberofdays,paymentisnotreceived,IRSmayproceedtonextLer.
– IRSalsoretainsitsotheravailableremedies,including6901andfraudulentconveyancelaws.
• Warning:thenextslideiscontroversial.21
CollecLonwhenpartnershipdoesn’tpay
– First,fromthe“clawback”partners:• AnypersonwhowasapartneratanyLmeonora_erdatepartnership
receivednoLcefromtheIRSofaudit(includingtax-exempts).• Butonlyuptovalueofnetdistribu@onsreceivedfrompartnershipby
thatpersonduringthatperiod.• Notlimitedbyreferencetoaclawbackpartner’sshareofpartnership
capitalorprofits(orthetaxclawbackpartnerwouldoweifadjustmentwereallocatedtothatclawbackpartner).
• Notabouttheclawbackpartnerowingtax;aboutclawingback,intopartnership,distribuLonsofpartnershipassets.
• Second,fromreviewed-yearpartners(otherthanPush-Inpartners)– ButonlyfortheirproporLonatesharesoftheImputedUnderpayment
baseduponthereviewed-yearpartnershipagreement’sallocaLons.– Personwhowasbothareviewed-yearpartnerandaclawbackpartner
couldbesubjecttobothcollecLonregimes.
22
ShouldPushInbeinaddiLonto,orinlieuof,exisLngregimestomodifyImputedUnderpayment?
• Ideally:Replace6226enLrelywithasinglecomprehensivePush-Inregime• Foreachreviewed-yearpartnerwhoPushesIn,theresultsarethe
sameas6226.• ThedifferenceisPushInreducescollecLonrisksforIRS
• atendofaudit,anyamountnotpaidbyreviewed-yearpartnersmustbepaidbythepartnership
• IRSdoesnotneedtomonitorwhetherithascollectedthroughreviewed-yearpartners’next-filedtaxreturns
– MulLpleregimesdifficultforIRStoadministerandincreaseriskforfisc• AlsomoredifficultformanagersofpartnershipstobalanceconflicLnginterests,andcreatespotenLalforthebe%er-advisedand/ormoreinfluenLalpartnerstosteerthepartnershiptodecisionsthatbenefitthemattheexpenseofothers.
• Realis?cally:retain6226but• Revisesothatsourcepartnership(andpotenLallyanyintervening
partnerships)mustbackstopanyamountnotpaidbythetop-Lerreviewed-yearpartners.
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ElecLonOut• Retain100-partnerrule(fornow).
– GovernmentdataindicatesthiselecLonwilllikelybeavailabletoalargenumberof(albeitsmall)partnerships.
• ForelecLng-outpartnerships:– IRSmayauditatpartnership-level(likepre-TEFRA)
• ButassessmentandcollecLonrequirepartner-levelproceeding.
– ConsidersomeTEFRA/BBA-likefeatures• ConsistentreporLngabsentnoLcetotheIRS• SOLrules
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HowisImputedUnderpaymentcomputed?
• A_erauditadjustmentsarefinalized,IRScomputestheiniLalImputedUnderpaymentusingthefollowingrulesderivedfromthe6225ruleswithsomemodificaLons.
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HowarenegaLveitemsreflectedincompuLngImputedUnderpayment?
• PosiLveandnegaLveitemsforeachaudityeararene%edonlyiftheyareofthesamecharacterandsource.
• NegaLveitemsthatcouldbesubjecttolimitaLonontheiruseatthepartnerlevelarenotne%ed.– Detailsastowhatitemstheseareneedstobeworkedout.
• A_ernepngitemswithinaparLculargroup,netnegaLveitemsareignored.– E.g.,ifnetposiLveOIandnetCL,imputedunderpaymentincludesthenetOIbutignoresthenetCL.
• Reallocateddistributedsharesarenotne%ed– sameas6225(b)(2).
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HowarechangesincreditsreflectedincompuLngImputedUnderpayment?
• AddiLonalcredits– DecreaseImputedUnderpaymentonlyifalltherulesapplicabletothecredits(includingrecapture)applyatpartnershiplevel.
• ReducLonincredits(includingrecapture)– IncreaseImputedUnderpaymentdollar-for-dollar(evenifthecreditsreportedwouldhavebeensubjecttolimitaLonatthepartnerlevel).
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Whattaxrateisused?• TakethenetposiLveitemsofeachcharacterandmulLplythemLmesthehighestrateoftaxforanytypeoftaxpayerforincomeofthatcharacterforreviewedyear.– Individualratewouldincludetaxunder1401/1411.
• NoreducLonstothetaxratesusedbasedupona%ributesofpartners.– A%ributesofpartnersrelevantonlyviaPush-In.
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