HIGHLIGHTSOF THIS ISSUEThese synopses are intended only as aids to the reader inidentifying the subject matter covered. They may not berelied upon as authoritative interpretations.

ADMINISTRATIVE and INCOME TAX

Announcement 2017–08, page 9.This document contains corrections to Revenue Procedure2017–40, as published on Monday, June 26, 2017 (I.R.B.2017–26, 1339). In particular, this announcement corrects thefollowing administrative item.Correction 1: In Section 8.2.1 Effect on Other Documents, theRevenue Procedure reference incorrectly appears as 2015–55, 2015–49, I.R.B. 788. The correct reference is RevenueProcedure 2016–34, 2016–26, I.R.B 1072.

ADMINISTRATIVE

Reg 136118–15, page 9.This document contains proposed regulations implementingthe centralized partnership audit regime enacted by the Bipar-tisan Budget Act of 2015 (BBA). These proposed regulationsprovide rules for partnerships subject to the new regime,including procedures for electing out of the centralized part-nership audit regime, filing administrative adjustment requests,and the determination of amounts owed by the partnership orits partners attributable to adjustments that arise out of anexamination of a partnership. The proposed regulations alsoaddress the scope of the centralized partnership audit regimeand provide definitions and special rules that govern its appli-cation, including the designation of a partnership representa-tive. The proposed regulations affect partnerships for taxableyears beginning after December 31, 2017 and any partner-ships that elect application of the centralized partnership auditregime pursuant to §301.9100–22T for taxable years begin-ning after November 2, 2015 and before January 1, 2018.

Finding Lists begin on page ii.

Bulletin No. 2017–28July 10, 2017

The IRS MissionProvide America’s taxpayers top-quality service by helpingthem understand and meet their tax responsibilities and en-force the law with integrity and fairness to all.

IntroductionThe Internal Revenue Bulletin is the authoritative instrument ofthe Commissioner of Internal Revenue for announcing officialrulings and procedures of the Internal Revenue Service and forpublishing Treasury Decisions, Executive Orders, Tax Conven-tions, legislation, court decisions, and other items of generalinterest. It is published weekly.

It is the policy of the Service to publish in the Bulletin allsubstantive rulings necessary to promote a uniform applicationof the tax laws, including all rulings that supersede, revoke,modify, or amend any of those previously published in theBulletin. All published rulings apply retroactively unless other-wise indicated. Procedures relating solely to matters of internalmanagement are not published; however, statements of inter-nal practices and procedures that affect the rights and dutiesof taxpayers are published.

Revenue rulings represent the conclusions of the Service onthe application of the law to the pivotal facts stated in therevenue ruling. In those based on positions taken in rulings totaxpayers or technical advice to Service field offices, identify-ing details and information of a confidential nature are deletedto prevent unwarranted invasions of privacy and to comply withstatutory requirements.

Rulings and procedures reported in the Bulletin do not have theforce and effect of Treasury Department Regulations, but theymay be used as precedents. Unpublished rulings will not berelied on, used, or cited as precedents by Service personnel inthe disposition of other cases. In applying published rulings andprocedures, the effect of subsequent legislation, regulations,court decisions, rulings, and procedures must be considered,and Service personnel and others concerned are cautioned

against reaching the same conclusions in other cases unlessthe facts and circumstances are substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.This part includes rulings and decisions based on provisions ofthe Internal Revenue Code of 1986.

Part II.—Treaties and Tax Legislation.This part is divided into two subparts as follows: Subpart A, TaxConventions and Other Related Items, and Subpart B, Legisla-tion and Related Committee Reports.

Part III.—Administrative, Procedural, and Miscellaneous.To the extent practicable, pertinent cross references to thesesubjects are contained in the other Parts and Subparts. Alsoincluded in this part are Bank Secrecy Act Administrative Rul-ings. Bank Secrecy Act Administrative Rulings are issued bythe Department of the Treasury’s Office of the Assistant Sec-retary (Enforcement).

Part IV.—Items of General Interest.This part includes notices of proposed rulemakings, disbar-ment and suspension lists, and announcements.

The last Bulletin for each month includes a cumulative index forthe matters published during the preceding months. Thesemonthly indexes are cumulated on a semiannual basis, and arepublished in the last Bulletin of each semiannual period.

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.

July 10, 2017 Bulletin No. 2017–28

Part IV. Items of General InterestCorrection to RevenueProcedure 2017–40, I.R.B.2017–26

Announcement 2017–08

This document contains corrections toRevenue Procedure 2017–40, as pub-lished on Monday, June 26, 2017 (I.R.B.2017–26, 1339). In particular, this an-nouncement corrects the following admin-istrative item.

Correction 1:In Section 8.2.1 Effect on Other Doc-

uments, the Revenue Procedure referenceincorrectly appears as 2015–55, 2015–49,I.R.B. 788. The correct reference is Rev-enue Procedure 2016–34, 2016–26, I.R.B1072.

Notice of proposedrulemaking, notice ofpublic hearing, andwithdrawal of notice ofproposed rulemaking.

Centralized PartnershipAudit Regime

REG–136118–15

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Notice of proposed rulemak-ing, notice of public hearing, and with-drawal of notice of proposed rulemaking.

SUMMARY: This document containsproposed regulations regarding imple-mentation of section 1101 of the Biparti-san Budget Act of 2015 (BBA), whichwas enacted into law on November 2,2015. Section 1101 of the BBA repealsthe current rules governing partnershipaudits and replaces them with a new cen-tralized partnership audit regime that, ingeneral, assesses and collects tax at thepartnership level. These proposed regula-tions provide rules for partnerships sub-ject to the new regime, including proce-dures for electing out of the centralizedpartnership audit regime, filing adminis-

trative adjustment requests, and the de-termination of amounts owed by thepartnership or its partners attributable toadjustments that arise out of an exami-nation of a partnership. The proposedregulations also address the scope of thecentralized partnership audit regime andprovide definitions and special rules thatgovern its application, including thedesignation of a partnership representa-tive. The proposed regulations affect part-nerships for taxable years beginning afterDecember 31, 2017 and any partnershipsthat elect application of the centralized part-nership audit regime pursuant to§ 301.9100–22T for taxable years begin-ning after November 2, 2015 and beforeJanuary 1, 2018. This document also pro-vides notice of a public hearing on theseproposed regulations. This document alsowithdraws the notice of proposed rulemak-ing published in the Federal Register onFebruary 13, 2009 (74 FR 7205), regardingthe conversion of partnership items relatedto listed transactions.

DATES: Written or electronic commentsmust be received by August 14, 2017.Outlines of topics to be discussed at thepublic hearing scheduled for September18, 2017, at 10 A.M. must be received byAugust 14, 2017.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG–136118–15), room5207, Internal Revenue Service, P.O. Box7604, Ben Franklin Station, Washington,DC 20044. Submissions may be hand deliv-ered Monday through Friday between thehours of 8:00 a.m. and 4:00 p.m. to CC:PA:LPD:PR (REG–136118–15), Courier’sDesk, Internal Revenue Service, 1111 Con-stitution Avenue, NW., Washington, DC20224. Alternatively, taxpayers may submitcomments electronically via the FederaleRulemaking Portal at www.regulations.gov(IRS REG–136118–15).

FOR FURTHER INFORMATION CON-TACT: Concerning the proposed regula-tions, Jennifer Black of the Office of As-sociate Chief Counsel (Procedure and Ad-ministration), (202) 317-6834; concerningthe submission of comments and requestsfor a public hearing, Regina Johnson,(202) 317-6901 (not toll-free numbers).

Background

This document contains proposed reg-ulations to amend the Procedure and Ad-ministration Regulations (26 CFR Part301) under Subpart – Tax Treatment ofPartnership Items to implement the cen-tralized partnership audit regime enactedby section 1101 of the BBA, Pub. L. No.114–74.

1. In General

The BBA was enacted on November 2,2015, and was amended by the ProtectingAmericans from Tax Hikes Act of 2015,Public Law 114–113, div. Q (PATH Act)on December 18, 2015. Section 1101(a) ofthe BBA removes subchapter C of chapter63 of the Internal Revenue Code (Code)effective for partnership taxable years be-ginning after December 31, 2017. Subchap-ter C of chapter 63 contains the unifiedpartnership audit and litigation rules thatwere enacted as part of the Tax Equity andFiscal Responsibility Act of 1982, PublicLaw 97–248 (TEFRA). These partnershipaudit and litigation rules are commonly re-ferred to as the TEFRA partnership proce-dures or simply TEFRA.

Section 1101(b) of the BBA also re-moves subchapter D of chapter 63 of theCode (subchapter D) and part IV of sub-chapter K of chapter 1 of the Code (partIV of subchapter K), rules applicable toelecting large partnerships, effective forpartnership taxable years beginning afterDecember 31, 2017. Subchapter D con-tains the audit rules for electing large part-nerships, and part IV of subchapter Kprescribes the income tax treatment forsuch partnerships.

Section 1101(c) of the BBA replacesthe rules to be removed by section 1101(a)and (b) with a centralized partnership au-dit regime. Section 1101(c) adds a newsubchapter C to chapter 63, consisting ofsections 6221 through 6241 of the Code.The BBA also makes related and con-forming amendments to other provisionsof the Code.

Pursuant to section 1101(g)(1) of theBBA, the amendments made by section1101, which repeal the TEFRA partner-ship procedures and the rules applicable to

Bulletin No. 2017–28 July 10, 20179

electing large partnerships and which cre-ate the centralized partnership audit re-gime, generally apply to returns filed forpartnership taxable years beginning afterDecember 31, 2017. Section 1101(g)(2)provides that, in the case of an adminis-trative adjustment request under section6227 as amended by the BBA, the amend-ments made by section 1101 apply to re-quests with respect to returns filed forpartnership taxable years beginning afterDecember 31, 2017. Similarly, section1101(g)(3) provides that, in the case of anelection to use the alternative to paymentof the imputed underpayment by the part-nership under section 6226 as amended bythe BBA, the amendments made by sec-tion 1101 apply to elections with respectto returns filed for partnership taxableyears beginning after December 31, 2017.

Section 1101(g)(4) provides that apartnership may elect (at such time and insuch form and manner as the Secretarymay prescribe) for the amendments madeunder section 1101 (other than the elec-tion out of the centralized partnership au-dit regime under section 6221(b) as addedby the BBA) to apply to any return of apartnership filed for partnership taxableyears beginning after November 2, 2015(the date of the enactment of the BBA)and before January 1, 2018.

On December 18, 2015, PresidentObama signed into law the PATH Act.Section 411 of the PATH Act corrects andclarifies certain amendments made by theBBA. The amendments under the PATHAct are effective as if included in section1101 of the BBA, and therefore, subject tothe effective dates in section 1101(g) ofthe BBA.

On August 5, 2016, the Treasury De-partment and the IRS published temporaryregulations (TD 9780, 81 FR 51795) and anotice of proposed rulemaking (REG–105005–16, 81 FR 51835) in the FederalRegister. The temporary regulations setforth in § 301.9100–22T provide the time,form, and manner for a partnership tomake an election pursuant to section1101(g)(4) of the BBA to have the cen-tralized partnership audit regime apply toany of its partnership returns filed for apartnership taxable year beginning afterNovember 2, 2015 and before January 1,2018. Section 301.9100–22T(a) providesthe general rule that a partnership may

elect at the time and in such form andmanner as described in § 301.9100–22Tfor amendments made by section 1101 ofthe BBA, except section 6221(b) added bythe BBA, to apply to any return of thepartnership filed for an eligible taxableyear (as defined in § 301.9100–22T(d)).

On December 6, 2016, Congress intro-duced the Tax Technical Corrections Actof 2016 (H.R. 6439, S. 3506) (Tax Tech-nical Corrections Act) which containswhat are described as technical correc-tions to the centralized partnership auditregime and other corrections to the Bipar-tisan Budget Act of 2015. The Tax Tech-nical Corrections Act addresses a numberof the provisions of the centralized part-nership audit regime enacted as part ofBBA. The Tax Technical Corrections Act,however, was not enacted by Congress.

2. Specific Provisions

A. Scope of the centralized partnershipaudit regime

Section 6221(a), as added by the BBA,provides the scope of items that are sub-ject to adjustment under the centralizedpartnership audit regime. That sectionprovides that any adjustment to items ofincome, gain, loss, deduction, or credit ofa partnership for a partnership taxableyear (and any partner’s distributive sharethereof) shall be determined, and any taxattributable thereto shall be assessed andcollected, at the partnership level. The ap-plicability of any penalty, addition to tax, oradditional amount which relates to an ad-justment to any such item or share shall alsobe determined at the partnership level.

Prior to the enactment of TEFRA, anyadjustment to an item attributable to apartner’s interest in a partnership requiredthe IRS to open an examination for eachpartner and follow deficiency proceduresto adjust items from a partnership anddetermine the resulting tax. Separate pro-ceedings for each partner often resulted ininconsistent treatment of various partnerswith respect to the same items from apartnership. In some cases, inconsistentresults occurred in the partner-level exam-inations themselves. In other cases, not allpartners allocated the same items from thepartnership were subject to an IRS exam-ination because, for instance, the period of

limitations on assessment had expired forsome, but not all, partners. In addition,each partner could challenge the IRS ad-justment in separate partner-level pro-ceedings in different litigation forums andappellate venues, resulting in differentoutcomes with respect to the same part-nership item. Over time, the size and com-plexity of partnerships increased, multi-plying the disparate treatment of partnerswith respect to the same items from apartnership and increasing the burden onthe IRS in examining and assessing taxrelated to partnership issues at the partnerlevel.

In 1982, in response to these difficulties,Congress enacted the TEFRA partnershipprocedures to establish unified rules to allowthe IRS to make adjustments to “partnershipitems” at the partnership level in one pro-ceeding. Partnership items are those itemsthat are more appropriately determined atthe partnership level than at the partnerlevel, as provided by regulation. Section6231(a)(3) (prior to amendment by theBBA). The regulations under section 6231(prior to amendment by the BBA) definepartnership items by listing the items thatare more appropriately adjusted at the part-nership level within the framework of TE-FRA. § 301.6231(a)(3)–1. Items on a part-ner return that are not partnership items arenot subject to adjustment at the partnershiplevel by the IRS under TEFRA, but ratherare adjusted with respect to each partner atthe partner level in a proceeding outside ofthe TEFRA regime (generally, under defi-ciency procedures).

Once a TEFRA proceeding is final, theIRS makes corresponding computationaladjustments to each partner’s return to re-flect the proper treatment of partnershipitems. Section 6230(a)(1) (prior to amend-ment by the BBA). A computational adjust-ment may include adjustments to “affecteditems” of the partner. § 301.6231(a)(6)–1.An “affected item” is any item on a part-ner’s return that is affected by a partnershipitem. Section 6231(a)(5) (prior to amend-ment by the BBA). When making a compu-tational adjustment, if partner-level factualdeterminations are necessary to properly de-termine the tax, the IRS is required to followthe deficiency procedures at the partnerlevel. Section 6230(a)(2)(A)(i) (prior toamendment by the BBA). Any item on thepartner’s return that is neither a partnership

July 10, 2017 Bulletin No. 2017–2810

item nor an affected item is not subject toTEFRA and must be adjusted in a separatedeficiency proceeding. See, e.g., Bedrosianv. Commissioner, 144 T.C. 152, 159 (2015);see also section 6230(a)(2)(B) (prior toamendment by the BBA), Desmet v. Com-missioner, 581 F.3d 297, 302 (6th Cir.2009).

The TEFRA partnership proceduresautomatically exempt certain partnershipswith ten or fewer direct partners. Section6231(a)(1)(B) (prior to amendment by theBBA). For those small partnerships, theIRS must follow deficiency procedures foreach partner, which requires the IRS toadjust items from the partnership on eachpartner’s return and to assess the resultingtax subject to the deficiency procedures ina separate proceeding at the partner level.

Since the enactment of TEFRA, thenumber and complexity of partnershipshave continued to increase. The number oflarge partnerships, in particular, has in-creased dramatically. In 1997, Congressrecognized some of the difficulties facingthe IRS under TEFRA when auditingcomplex, large partnership structures andin response enacted a streamlined, electiveaudit regime for certain large partnerships(ELP regime). Sections 6240 through6255 (prior to amendment by the BBA).The ELP regime allowed certain partner-ships with 100 or more partners to electthe application of simplified reportingrules and a centralized audit regime withfeatures similar to the regime enacted un-der the BBA. The ELP regime was a leg-islative response to the recognition that:

“[a]udit procedures for large part-nerships are inefficient and morecomplex than those for other largeentities. The IRS must assess anydeficiency arising from a partner-ship audit against a large number ofpartners, many of whom cannot eas-ily be located and some of whomare no longer partners. In addition,audit procedures are cumbersomeand can be complicated further bythe intervention of partners actingindividually.”

Joint Comm. on Taxation, JCS–23–97,General Explanation of Tax LegislationEnacted in 1997, 363 (1997).

Since 1997, the number and complex-ity of partnerships has continued to in-crease, reflecting a shift in how businessentities are structured - toward partner-

ships and away from C corporations. TheELP regime attempted to address some ofthe difficulties the IRS faced auditinglarge partnerships under TEFRA; how-ever, the ELP regime is elective and onlya handful of partnerships elected applica-tion of the ELP regime.

In 2013, Congress requested that theGovernment Accountability Office (GAO)investigate partnerships and the IRS’s auditrate of partnerships. The GAO report con-cluded that from 2002 to 2011 ”the numberof large partnerships with 100 or more directand indirect partners as well as $100 millionor more in assets more than tripled to10,099—an increase of 257 percent.” U.S.Gov’t Accountability Office, GAO–14–732, Large Partnerships: With GrowingNumber of Partnerships, IRS Needs to Im-prove Audit Efficiency, 13 (2014) (GAO–14–732). And yet, as the number of largepartnerships increased, the number of part-nership audits did not keep pace. Comparedto the audit rate for large corporations,which was 27.1 percent in 2012, the auditrate for large partnerships was much lowerat 0.8 percent. (Large partnership is definedfor purposes of the GAO report as a part-nership with 100 or more direct and indirectpartners and $100 million or more in assets.)GAO–14–732, cover page, summary.

When the IRS completes an examina-tion of a large partnership under TEFRA,the IRS must pass the audit adjustments topartnership items on to the ultimate part-ners, a complex and time-consumingprocess. This requires the IRS to link po-tentially thousands of partner returns, in-cluding through tiers of partners that arethemselves partnerships, to determine theproper share of the adjustments for eachultimate partner flowing from adjustmentsto partnership items. This process is “pa-per and labor intensive. When hundreds ofpartners’ returns have to be adjusted, thecosts involved limit the number of audits IRScan conduct.” GAO–14–732, cover page,summary. In the meantime, while the IRS isdetermining these linkages, the period of lim-itations for the IRS to assess tax with respect toeach partner continues to run.

Specifically, the GAO reported thatwithout “legislative action, the IRS’s abil-ity [to effectively audit]” partnershipswould not improve. GAO–14–732, coverpage, summary. At the time of the 2014GAO report, Congress and the Adminis-

tration had put forth legislative proposalsthat “would allow IRS to collect tax at thepartnership level instead of having to passit through to the taxable partners.” GAO–14–732 at 31.

In 2015, Congress enacted the BBA toreplace the TEFRA partnership proce-dures and the ELP regime with the cen-tralized partnership audit regime, whichcontained many aspects of the legislativeproposals referenced in the GAO report.The centralized partnership audit regime,when fully effective for partnership tax-able years beginning after December 31,2017, will be the exclusive method bywhich the IRS may audit a partnership inone unified proceeding. For those partner-ships that will be subject to the centralizedpartnership audit regime that were previ-ously exempt from TEFRA (for example,a partnership with no more than 10 part-ners, none of which is a pass-through en-tity), the centralized partnership audit re-gime replaces the separate partner-leveldeficiency proceedings as the sole methodfor auditing the partnership unless an eli-gible partnership elects out of the central-ized regime.

The centralized partnership audit regimeenacted in the BBA addresses many of theshortcomings of TEFRA identified by theGAO and practitioners. For instance, “un-like prior law, distinctions between partner-ship items and affected items are no longermade” in the centralized partnership auditregime. Joint Comm. on Taxation, JCS–1–16, General Explanations of Tax LegislationEnacted in 2015, 57 (2016) (JCS–1–16).Instead, section 6221(a) provides that thecentralized partnership audit regime appliesto any adjustment to items of income, gain,loss, deduction, or credit of a partnership fora partnership taxable year and any partner’sdistributive share thereof.

Under TEFRA, the statute broadly de-fines a partnership item as any item moreappropriately determined at the partner-ship level. Section 6231(a)(3) (prior toamendment by the BBA). In keeping withthe statute, the regulations under TEFRAbroadly define the term partnership itemto include all items of income, gain, de-duction, loss, or credit, as well as otherrelated items such as expenditures, taxpreferences, exempt income, partnershipliabilities, guaranteed payments, certainbasis adjustments, character and the per-

Bulletin No. 2017–28 July 10, 201711

centage of partnership interests, and itemsarising from the determination at the part-nership level of partnership assets, invest-ments, transactions and operations, suchas investment tax credits and at risk rules.See generally § 301.6231(a)(3)–1.

Nothing in the text or legislative his-tory of the BBA, or the events leading toenactment of the new regime, indicatesthat Congress’s use of the phrase “income,gain, deduction, loss, or credit” in section6221(a) was intended to adopt a morelimited set of items to be adjusted at thepartnership level than the items includedin the broad definition of partnershipitems under the TEFRA regulations. Itwould be illogical to conclude that Con-gress intended to limit the scope of whatthe IRS could adjust at the partnershiplevel under an expanded centralized part-nership audit regime. Such a narrow inter-pretation could mean that rather than in-crease the ability of the IRS to audit largepartnerships in one unified proceeding,BBA would significantly increase the num-ber of issues affecting partnerships that theIRS would be required to audit at the partnerlevel, meaning that in large partnershipswith thousands of partners, the IRS wouldhave to audit issues related to the samepartnership multiple times, for each partner,rather than just once at the partnership level.Given the GAO’s criticism in GAO–14–732 of the low partnership audit rate, it doesnot follow that Congress enacted a newpartnership audit regime that weakens theIRS’s ability to conduct audits at the part-nership level and forces the IRS to openadditional partner-level proceedings to re-audit the same partnership.

The centralized partnership audit re-gime purposefully avoids the terms part-nership items, affected items, computa-tional adjustments, and nonpartnershipitems that caused so much litigation underTEFRA and does so by adopting the sin-gle phrase “income, gain, deduction, loss,or credit” as the scope of the regime.Removing the distinctions between thedifferent types of items and adjustmentswas an effort to streamline the examina-tion and judicial process to allow central-ized collection of the correct amount oftax had the partnership and the partnersreported items from the partnership cor-rectly. The centralized partnership auditregime limits the burden on the IRS in

both the examination of partnerships andthe judicial process – changes that weredesigned to increase the ability of the IRSto audit large partnerships. IRS receivedcomments in response to Notice 2016–23,2016–13 I.R.B. 490, that agreed that theuse of the term “income, gain, deduction,loss, or credit” in the centralized partner-ship audit regime was an attempt to re-duce the challenges the IRS faced underTEFRA and does not limit the scope ofitems subject to audit, assessment, andcollection at the partnership level.

Under the centralized partnership auditregime, the IRS is no longer required todetermine each partner’s share of the adjust-ments made to partnership items followedby a separate computational adjustment foreach partner to assess the correct tax due asa result of the partnership audit. Instead,under the default rules of section 6225, thepartnership is liable for an imputed under-payment based on the adjustments made atthe partnership level. The imputed under-payment calculation may, for some partner-ships, overstate the amount of tax due hadthe partnership and partners reported thepartnership adjustments properly. To correctpotential overstatements, the centralizedpartnership audit regime includes modifica-tion procedures and provides additional dis-cretionary authority for the IRS to furthermodify imputed underpayments to carry outthe function of the modification provision.The Joint Committee on Taxation observedthat the intent of the modification provisionis to “determine the amount of tax due asclosely as possible to the tax due if thepartnership and partners had correctly re-ported and paid while at the same time toimplement the most efficient and promptassessment and collection of tax attributableto the income of the partnership and part-ners.” JCS–1–16 at 65–66.

To reach the correct amount of tax, theIRS makes one set of adjustments at thepartnership level and allows the partner-ship, through modification, to adjust the im-puted underpayment amount down to thecorrect amount of tax. To determine theamount of an imputed underpayment thatreflects “tax due as closely as possible tothe tax due if the partnership and partnershad correctly reported and paid,” thebreadth of what the IRS must be able toadjust at the partnership level must be at

least as broad as the different type of adjust-ments made under TEFRA.

Furthermore, under the modificationprovisions, the partnership (and its part-ners if they may amend their returns)takes on the burden of further refining theadjustments to reflect the correct amountof tax. Where all partners amend theirreturns taking all of the adjustments intoaccount, the IRS, the partnership and itspartners have effectively mirrored the re-sult of a TEFRA audit, including the finalpartner-level computational adjustments.This can only be possible if the scope ofwhat the IRS may adjust at the partnershiplevel is sufficiently broad.

As such, the proposed regulations takean expansive view of the scope of the cen-tralized partnership audit regime to cover allitems and information related to or derivedfrom the partnership. Accordingly, underproposed § 301.6221(a)–1 all items requiredto be shown or reflected on the partnership’sreturn and information in the partnership’sbooks and records related to a determinationof such items, as well as factors that affectthe determination of items of income, gain,loss, deduction, or credit, are subject to de-termination and adjustment at the partner-ship level under the centralized partnershipaudit regime.

B. Election out of the centralizedpartnership audit regime

In general, the centralized partnershipaudit regime applies to all partnershipswith partnership taxable years beginningafter December 31, 2017 for any partner-ship (domestic or foreign) required to filea return under section 6031. Section6241(1). Section 6221(b), as added by theBBA, allows eligible partnerships to electout of the centralized partnership auditregime. The fact that all partnerships arecovered by the centralized partnership au-dit regime unless they elect out distin-guishes the centralized partnership auditregime from the TEFRA partnership pro-cedures. Under TEFRA, only partnershipswith more than 10 partners and partner-ships with at least one partner that is not aU.S. individual, a C corporation, or anestate of a deceased partner are automat-ically covered by the regime. Section6231(a)(1)(B) (prior to amendment by theBBA). However, partnerships not auto-

July 10, 2017 Bulletin No. 2017–2812

matically subject to TEFRA can make anaffirmative election into TEFRA. Section6231(a)(1)(B)(ii) (prior to amendment bythe BBA).

Partnerships that elect out of the cen-tralized partnership audit regime are sub-ject to the pre-TEFRA audit proceduresunder which the IRS must separately as-sess tax with respect to each partner underthe deficiency procedures under subchap-ter B of chapter 63. As described in sec-tion 2.A. of the Background section of thispreamble, enactment of TEFRA was areaction to the complexity and burden ofthe pre-TEFRA deficiency procedures inthe case of partnerships; however, sinceTEFRA was enacted, the IRS and taxpay-ers have identified numerous issues withthat regime. The centralized partnershipaudit regime is intended to simplifyTEFRA’s burdensome processes and toincrease the IRS’s ability to examine part-nerships, particularly large and tiered part-nerships, and to make the process of as-sessing tax resulting from those auditsmore efficient. The limited opt-out natureof the centralized partnership audit regime,which requires the partnership to take affir-mative action to elect out of the regime,increases the likelihood that a partnershipwill be subject to the more streamlined ad-justment, assessment, and collection proce-dures of the centralized partnership auditregime, thereby increasing the number ofpartnerships the IRS is able to examine un-der the centralized partnership audit regime.Limiting the number of partnerships that canelect out of the centralized partnership auditregime to those entities specifically permit-ted under the statute is necessary to carryout this goal.

There are two conditions that must bemet for a partnership to be eligible to electout of the centralized partnership auditregime. First, a partnership must have 100or fewer partners. Under the statute, apartnership has 100 or fewer partnerswhen it is required to furnish 100 or fewerstatements under section 6031(b), cur-rently Schedule K-1, Partner’s Share ofIncome, Deductions, Credits, etc. (Sched-ules K-1), for the taxable year. Section6221(b)(1)(B). For partnerships that havean S corporation as a partner (S corpora-tion partner), special rules under section6221(b)(2)(A) apply for purposes of de-termining the number of Schedules K-1

furnished by the partnership. Under thatrule, the number of statements required tobe furnished by the S corporation partnerto its own shareholders under section6037(b) for the taxable year, currentlySchedule K-1, Shareholder’s Share of In-come, Deductions, Credits, etc., are takeninto account to determine the number ofstatements furnished by the partnershipfor purposes of section 6221(b)(1)(B).Section 6221(b)(2)(A)(ii).

Second, a partnership must only haveeligible partners. Under the statute, eligiblepartners are individuals, C corporations, for-eign entities that would be treated as C cor-porations if they were domestic, S corpora-tions, and estates of deceased partners.Section 6221(b)(1)(C). Under section6221(b)(1)(D)(i), a partnership may electout of the centralized partnership audit re-gime only on a timely filed return for ataxable year (including extensions).

A partnership must include, in the man-ner prescribed by the Secretary, a disclosureof the name and taxpayer identificationnumber (TIN) of each partner of the part-nership. Section 6221(b)(1)(D)(ii). In thecase of an election out by a partnership withan S corporation partner, the election alsomust include, in the manner prescribed bythe Secretary, a disclosure of the name andTIN of each person to whom an S corpora-tion partner is required to furnish a state-ment for the taxable year of the S corpora-tion ending with or within the partnershiptaxable year that is subject to the election.Section 6221(b)(2)(A)(i). A partnershipmust notify each partner of the election inthe manner prescribed by the Secretary.Section 6221(b)(1)(E).

Section 6221(b)(2)(B) permits theSecretary to prescribe alternative iden-tification procedures for foreign part-ners. The Secretary may by regulationor other guidance prescribe rules similarto the rules applicable to S corporationswith respect to any partners not de-scribed in section 6221(b)(1)(C). Sec-tion 6221(b)(2)(C).

C. Consistent treatment

i. Consistent Treatment Under TEFRA

TEFRA includes a requirement that apartner treat items from the partnershipconsistent with the partnership’s treatment

of such items on the partnership’s return.Section 6222 (prior to amendment by theBBA). TEFRA permits the partner to no-tify the IRS of inconsistent treatment of anitem by the partner on the partner’s returnand avoid having a computational adjust-ment made to the inconsistently treateditem without the IRS first completing aproceeding at the partnership level. TheIRS could either accept the partner’s in-consistent treatment of the item, open upan audit of the partnership to address theitem at the partnership level, or open upaudit of the partner to address the incon-sistent item. If the IRS examined the part-nership or the partner, all items for thattaxable year would be subject to the ex-amination.

Section 6222, as amended by the BBA,includes a similar requirement of consis-tency and rules for notification of theinconsistency, but the consequences offailing to treat items consistently are dif-ferent. Under TEFRA, the consequence offiling inconsistently is that the IRS is notrequired to conduct a partnership-levelproceeding before making computationaladjustments at the partner level and as-sessing any deficiency attributable to theadjustment of an item to make it consis-tent with the partnership return. Section6222 now states that any underpayment oftax by a partner resulting from a failure totreat an item consistently shall be assessedand collected as if the underpayment wereon account of a mathematical or clericalerror appearing on the partner’s return,permitting the IRS to immediately assessand collect such tax.

ii. Statutory Provision

Section 6222(a) requires a partner totreat on the partner’s return each item ofincome, gain, loss, deduction or credit at-tributable to a partnership subject to sub-chapter C of chapter 63 in a manner that isconsistent with the treatment of such itemon the partnership return. If the partnerfails to comply with the requirements ofsection 6222(a), any underpayment of taxresulting from that failure may be as-sessed and collected as if such underpay-ment were on account of a mathematicalor clerical error appearing on the partner’sreturn. Section 6222(b). The proceduresunder section 6213(b)(2), which permit a

Bulletin No. 2017–28 July 10, 201713

taxpayer to request an abatement of amathematical or clerical error assessment,do not apply in these situations. Section6222(b).

Section 6222(c) provides an exceptionfor situations in which a partner notifiesthe IRS of the inconsistent treatment onthe partner’s return. Under section6222(c)(1), if the partnership has filed areturn and the partner’s treatment of anitem on the partner’s return is (or may be)inconsistent with the treatment of thatitem on the partnership return, the provi-sions of section 6222(a) (requiring consis-tent treatment) and (b) (allowing matherror treatment to adjust inconsistentitems) will not apply to that item if thepartner files with the Secretary a state-ment identifying the inconsistency. Sec-tion 6222(c)(1)(A)(i). The exceptionalso applies if the partnership has notfiled a return, and the partner files astatement identifying the inconsistency.Section 6222(c)(1)(A)(ii).

In cases where a partner receives incor-rect information in a statement furnishedby a partnership, section 6222(c)(2) pro-vides that the partner is treated as havingnotified the IRS of an inconsistency if thepartner satisfactorily demonstrates to theSecretary that the treatment of the item onthe partner’s return is consistent with thetreatment of the item on the statementfurnished to that partner by the partner-ship, and the partner elects to have thisprovision apply. Under section 6222(d),any final decision with respect to an in-consistent position identified under sec-tion 6222(c) in a proceeding to which thepartnership is not a party is not binding onthe partnership.

D. Partnership representative andpartners bound by actions of thepartnership

Section 6223 provides that each part-nership shall designate in the manner pre-scribed by the Secretary a partner or otherperson with a substantial presence in theUnited States as the partnership represen-tative who shall have the sole authority toact on behalf of the partnership. Section6223(a). In any case in which such desig-nation is not in effect, the statute providesthat the Secretary may select any personas the partnership representative. Section

6223(a). A partnership and all partners ofsuch partnership are bound by actionstaken under subchapter C of chapter 63 bythe partnership and by any final decisionin a proceeding brought under subchapterC of chapter 63 with respect to the part-nership. Section 6223(b).

Section 6223 and the concept of thepartnership representative replace the taxmatters partner (TMP) framework that ex-ists under the TEFRA partnership proce-dures. Under TEFRA, a partnership is re-quired to designate a TMP who acts as aliaison between the partnership and theIRS. That TMP must be a general partnerand may be an individual or an entity.

The requirements placed on the desig-nation of the TMP under TEFRA make itdifficult in many cases to identify a qual-ified TMP. First, only general partners ofthe partnership may be the TMP. Becausethe TMP has to be a partner, the partner-ship cannot designate a non-partner, suchas a non-partner manager, even if thatperson is in the best position to understandand have available the partnership’s booksand records. In some cases, the TMP hasto be a particular partner, such as thepartner with the highest profits interest,who may not be knowledgeable about thepartnership’s taxes. See, for example,§ 301.6231(a)(7)–1(m)(2).

Even if a qualified TMP is identified,the IRS may be unable to contact the TMPbecause the TMP is out of the country orsimply unreachable. Furthermore, in thecase of a TMP that is an entity rather thanan individual, the IRS must identify andtrack down an individual who can act forthe entity. As a result, under TEFRA, part-nerships and the IRS may spend a signif-icant amount of time determining whethera person designated is even eligible toserve as the TMP before the IRS canproceed with a partnership examination.

Additionally, while the TMP has theauthority to bind the partnership, it cannotbind other partners in the partnership. Apartner who is not the TMP also has rightsduring an examination, including certainnotification rights and the right to partic-ipate in the proceeding. The rights of thepartners to intervene in the examinationand to contradict the actions taken by theTMP cause confusion during examina-tions and increase the administrative bur-den on the IRS.

In contrast, the centralized partnershipaudit regime introduces the concept of thepartnership representative, which is in-tended to address the shortcomings of theTMP as the representative of the partner-ship under TEFRA. First, unlike the TMPwho must be a partner, a partnership rep-resentative can be any person, including anon-partner. This allows the partnership toselect the person best situated to representthe partnership. The only limitation is thatthe partnership representative must have asubstantial presence in the United States.This requirement is intended to ensurethat the person selected to represent thepartnership will be available to the IRS inthe United States when the IRS seeks tocommunicate or meet with the represen-tative. Like TEFRA, the centralized part-nership audit regime does not prescribewhether a partnership representative maybe an entity or an individual.

Second, unlike the TMP who couldact for the partnership but whose actionsdid not bind other partners and could becontradicted by those partners, section6223(b) provides that the partnershiprepresentative has the sole authority tobind the partnership, and all partnersand the partnership are bound by theactions of the partnership representativeand any final decision in a proceedingbrought under subchapter C of chapter63. The centralized partnership audit re-gime does not include a statutory rightto notice of, or to participate in, thepartnership-level proceeding for anyperson other than the partnership andthe partnership representative.

E. Imputed underpayment andmodification of imputed underpayment

Section 6225 as amended by the BBAaddresses partnership adjustments madeby the IRS under the centralized partner-ship audit regime and the determination ofany resulting imputed underpayment. Sec-tion 6225(a)(1) provides that in the case ofany adjustment by the Secretary in theamount of any item of income, gain, loss,deduction, or credit of the partnership, orany partner’s distributive share thereof,the partnership shall pay any imputed un-derpayment with respect to such adjust-ment in the adjustment year as provided insection 6232. Any adjustment that does

July 10, 2017 Bulletin No. 2017–2814

not result in an imputed underpaymentmust be taken into account by the partner-ship in the adjustment year. Section6225(a)(2). Except for an adjustment to anitem of credit, which is taken into account asa separately stated item, an adjustment notresulting in an imputed underpayment mustbe taken into account as a reduction in non-separately stated income or as an increase innon-separately stated loss (whichever is ap-propriate) in accordance with section702(a)(8). Section 6225(a)(2)(A)–(B).

An imputed underpayment with re-spect to a partnership adjustment for thepartnership’s reviewed year is determinedin accordance with section 6225(b). Underthat section, adjustments to similar itemsof income, gain, loss, or deduction arenetted with each other, treating any netincrease or decrease in loss as a decreaseor increase, respectively, in income. Sec-tion 6225(b)(1)(A)–(B). The net amount isthen multiplied by the highest rate of taxin effect for the reviewed year under sec-tion 1 (individual rates) or section 11 (cor-porate rates). Section 6225(b)(1)(A). Theproduct is then increased or decreased, asthe case may be, by any adjustments toitems of credit. Section 6225(c).

Section 6225(b)(2) provides that in thecase of an adjustment that reallocates thedistributive share of an item from onepartner to another, such adjustment shallbe taken into account when determiningthe imputed underpayment by disregard-ing any decrease in any item of income orgain and any increase in an item of deduc-tion, loss, or credit.

Under section 6225(c), a partnershipmay modify an imputed underpayment un-der procedures established by the Secretary.Anything required to be submitted to theSecretary under the procedures for modifi-cation of the imputed underpayment mustbe submitted within 270 days following thedate the notice of proposed partnership ad-justment (NOPPA) is mailed under section6231 by the IRS, unless that period is ex-tended with the consent of the Secretary.Section 6225(c)(7). Any modification of theimputed underpayment amount shall bemade only upon approval of the requestedmodification by the Secretary. Section6225(c)(8).

Under section 6225(c)(2), modificationprocedures shall provide that if one ormore partners files amended returns (not-

withstanding section 6511) for the taxableyear of the partners that includes the endof the reviewed year of the partnership,such returns take into account all adjust-ments made by the Secretary that areproperly allocable to such partners (andfor any other taxable year with respect towhich a tax attribute is affected by reasonof the adjustments made by the Secretary),and payment of any tax due is includedwith the amended returns, the imputedunderpayment shall be determined with-out regard to the portion of the adjust-ments taken into account in the amendedreturns. In the case of any adjustment thatreallocates the distributive share of anyitem from one partner to another, a mod-ification described in section 6225(c)(2)shall apply only if amended returns arefiled by all partners affected by such ad-justment.

Under section 6225(c)(3), modificationprocedures shall provide for determiningthe imputed underpayment without regardto the portion thereof that the partnershipdemonstrates is allocable to a partner thatwould not owe tax by reason of its statusas a tax-exempt entity (as defined in sec-tion 168(h)(2)).

Under section 6225(c)(4), modificationprocedures shall provide for taking intoaccount a rate of tax lower than the rate oftax described in section 6225(b)(1)(A)(that is, the highest rate under section 1 orsection 11) with respect to any portion ofan imputed underpayment that the part-nership demonstrates is allocable to apartner that is a C corporation or, in thecase of a capital gain or qualified divi-dend, is an individual. In no event shallthe lower rate determined under section6225(c)(4) be lower than the highest ratein effect for the reviewed year with re-spect to the type of income and taxpayer(that is, a C corporation or an individual).For the purposes of the lower rate forcapital gains and qualified dividends, an Scorporation shall be treated as an individ-ual. Section 6225(c)(4)(A). The portion ofan imputed underpayment to which thelower rate applies with respect to a partnershall be determined by reference to thepartner’s distributive share of the items towhich the imputed underpayment relates.Section 6225(c)(4)(B)(i). If an imputedunderpayment is attributable to the adjust-ment of more than one item, and any

partner’s distributive share of such items isnot the same with respect to all such items,the portion of the imputed underpayment towhich the lower rate applies with respectto a partner shall be determined by referenceto the amount which would have been thepartner’s distributive share of net gain orloss if the partnership had sold all of itsassets at their fair market value as of theclose of the reviewed year of the partner-ship. Section 6225(c)(4)(B)(ii).

Section 6225(c)(5) provides that, in thecase of a publicly traded partnership (asdefined in section 469(k)(2)), the modifi-cation procedures shall provide for deter-mining the imputed underpayment withoutregard to the portion thereof that the part-nership demonstrates is attributable to a netdecrease in a specified passive activity lossthat is allocable to a specified partner andfor the partnership to take such net decreaseinto account as an adjustment in the adjust-ment year with respect to the specified part-ners to which such net decrease relates. Sec-tion 6225(c)(5)(A). For purposes of section6225(c)(5), the term “specified passive ac-tivity loss” means, with respect to any spec-ified partner of such publicly the passiveactivity loss of such partner traded partner-ship, the lesser of which is separately deter-mined with respect to such partnership un-der section 469(k) with respect to suchpartner’s taxable year in which or withwhich the reviewed year of such partnershipends, or such passive activity loss so deter-mined with respect to such partner’s taxableyear in which or with which the adjustmentyear of such partnership ends. Section6225(c)(5)(B). For purposes of section6225(c)(5), the term “specified partner”means any person if such person with re-spect to each taxable year of such personwhich is during the period beginning withthe taxable year of such person in which orwith which the reviewed year of such pub-licly traded partnership ends and endingwith the taxable year of such person inwhich or with which the adjustment year ofsuch publicly traded partnership ends is (1)a partner of such publicly traded partner-ship; (2) is described in section 469(a)(2);and (3) has a specified passive activity losswith respect to such publicly traded partner-ship. Section 6225(c)(5)(C).

Section 6225(c)(6) provides that theSecretary may by regulations or guidanceprovide for additional procedures to mod-

Bulletin No. 2017–28 July 10, 201715

ify imputed underpayment amounts on thebasis of such other factors as the Secretarydetermines are necessary or appropriate tocarry out the purposes of section 6225(c).

F. Election for the alternative topayment of the imputed underpayment

Section 6226 provides an alternative tothe general rule under section 6225(a)(1)that the partnership must pay the imputedunderpayment. Under section 6226, thepartnership may elect to have its reviewedyear partners take into account the adjust-ments made by the IRS and pay any taxdue as a result of those adjustments. Inthis case, the reviewed year partners mustpay any tax resulting from taking intoaccount the adjustments and the partner-ship is not required to pay the imputedunderpayment.

In order to elect application of section6226, a partnership must take two stepswith respect to an imputed underpayment.First, the partnership must make an elec-tion in the manner provided by the Secre-tary no later than 45 days after the date theFPA is mailed by the IRS under section6231. Section 6226(a)(1). Second, thepartnership must furnish, at such time andin such manner as provided by the Secre-tary, a statement of each partner’s share ofany adjustment as determined in the FPAto its reviewed year partners. Section6226(a)(2). If the partnership takes thesetwo steps in the time and manner pre-scribed by the statute and by the Secre-tary, section 6225 does not apply withrespect to the imputed underpayment, andeach partner must take its share of theadjustments into account as provided insection 6226(b). Section 6226(a) (flushlanguage). An election under section 6226is revocable only with the consent of theSecretary. Id.

Section 6226(b) describes how the ad-justments subject to the section 6226 elec-tion are taken into account by the re-viewed year partners. Under section6226(b)(1), each partner’s tax imposed bychapter 1 of subtitle A of the Code (chap-ter 1 tax) is increased by the aggregate ofthe adjustment amounts as determined un-der section 6226(b)(2). This increase inchapter 1 tax is reported on the return forthe partner’s taxable year that includes thedate the statement described under section

6226(a) is furnished to the partner by thepartnership (reporting year).

The adjustment amounts determinedunder section 6226(b)(2) fall into twocategories. In the case of the taxableyear of the partner that includes the endof the partnership’s reviewed year (firstaffected year), the adjustment amount isthe amount by which the partner’s chap-ter 1 tax would increase for the partner’sfirst affected year if the partner’s shareof the adjustments were taken into ac-count in that year. Section 6226(b)(2)(A). In the case of any taxable yearafter the first affected year, and beforethe reporting year (that is, the interven-ing years), the adjustment amount is theamount by which the partner’s chapter 1tax would increase by reason of the ad-justment to tax attributes determined un-der section 6226(b)(3) in each of the inter-vening years. Section 6226(b)(2)(B). Theadjustment amounts determined under sec-tion 6226(b)(2)(A) and (B) are added to-gether to determine the aggregate of theadjustment amounts for purposes of deter-mining the increase to the partner’s chapter1 tax in accordance with section 6226(b)(1).

Section 6226(b)(3) provides two rulesregarding adjustments to tax attributesthat would have been affected if the part-ner’s share of adjustments were taken intoaccount in the first affected year. First, inthe case of an intervening year, any taxattribute must be appropriately adjustedfor purposes of determining the adjust-ment amount for that intervening year inaccordance with section 6226(b)(2)(B).Section 6226(b)(3)(A). Second, in thecase of any subsequent taxable year (thatis, a year, including the reporting year,that is subsequent to the intervening yearsreferenced in 6226(b)(3)(A)), any tax at-tribute must be appropriately adjusted.Section 6226(b)(3)(B).

Section 6226(c) provides rules for thetreatment of penalties and interest deter-mined under section 6221 at the partner-ship level when an election is made undersection 6226. Notwithstanding the provi-sions of section 6226(a) and (b) (regard-ing the requirements for making an elec-tion and how partners take into accountadjustments), any penalties, additions totax, or additional amounts are determinedunder section 6221 at the partnershiplevel, and the reviewed year partners of

the partnership are liable for any suchpenalty, addition to tax, or additionalamount. Section 6226(c)(1).

In contrast, section 6226(c)(2) providesthat interest is determined at the partnerlevel. Section 6226(c)(2)(A). Interest iscalculated from the due date of the partner’sreturn for the taxable year to which theincrease in tax is attributable taking intoaccount any increases attributable to achange in tax attributes for an interveningyear as determined under section 6226(b)(2). Section 6226(c)(2)(B). The interest iscomputed at the underpayment rate undersection 6621(a)(2), substituting five percent-age points for three percentage points forpurposes of section 6621(a)(2)(B) (the sumof the federal short-term rate plus five per-centage points instead of three percentagepoints).

G. Administrative adjustment requests

Section 6227 provides a mechanismfor a partnership to file an administrativeadjustment request (AAR) to correct er-rors on a partnership return for a prioryear. A partnership may file a request foradministrative adjustment in the amountof one or more items of income, gain, loss,deduction, or credit of the partnership forany partnership taxable year. Section6227(a). Any adjustment requested in anAAR is taken into account for the partner-ship taxable year in which the AAR ismade. Section 6227(b). Under section6227, only a partnership may file an AAR.Therefore, a partner who is not also thepartnership representative acting on be-half of the partnership may not file anAAR.

Under section 6227(c), a partnershiphas three years from the later of the filingof the partnership return or the due date ofthe partnership return (excluding exten-sions) to file an AAR for that taxable year.However, a partnership may not file anAAR for a partnership taxable year afterthe IRS has mailed a notice of an admin-istrative proceeding under section 6231with respect to that taxable year.

Under section 6227(b), if an adjust-ment results in an imputed underpayment,the adjustment may be determined andtaken into account in one of two ways.The partnership may determine andtake the adjustment into account for the

July 10, 2017 Bulletin No. 2017–2816

partnership taxable year in which theAAR is filed under rules similar to therules under section 6225, relating to pay-ment of the imputed underpayment by thepartnership, except that the provisions un-der section 6225 pertaining to modifica-tion of the imputed underpayment basedon amended returns by partners, the timefor submitting information to the Secre-tary for purposes of modification, and ap-proval by the Secretary of any modifica-tion do not apply. Section 6227(b)(1).Alternatively, the partnership and the part-ners may determine and take the adjust-ment into account under rules similar tothe rules under section 6226 relating to thealternative to the partnership payment ofthe imputed underpayment, except that theadditional 2 percentage points of interestimposed under section 6226 does not ap-ply. Section 6227(b)(2).

In the case of an adjustment that wouldnot result in an imputed underpayment,section 6227(b) requires that the partner-ship and the reviewed year partners mustdetermine and take the adjustment intoaccount under rules similar to the rulesunder section 6226 with appropriate ad-justments. This provision ensures that thepartners for the year to which the adjust-ments relate benefit from any refund thatmay result from such adjustments.

H. Definitions and special rules

i. Definitions

Section 6241(1) defines the term “part-nership” for purposes of subchapter C ofchapter 63 as any partnership required tofile a return under section 6031(a). Section6241(2) defines the term “partnership ad-justment” as any adjustment in the amountof any item of income, gain, loss, deduc-tion, or credit of a partnership, or anypartner’s distributive share thereof. Sec-tion 6241(3) defines the term “return duedate” as the due date prescribed for filingthe partnership return for such taxableyear (determined without regard to exten-sions).

Section 6225(d)(1) defines the term“reviewed year” as the partnership taxableyear to which the item being adjusted re-lates. Section 6225(d)(2) defines the term“adjustment year” to mean, in the case ofan adjustment pursuant to the decision of

a court in a proceeding brought undersection 6234, the taxable year in whichsuch decision becomes final; in the case ofan administrative adjustment request un-der section 6227, the taxable year inwhich such administrative adjustment re-quest is made; and, in any other case, thetaxable year in which a notice of the finalpartnership adjustment (FPA) is mailedunder section 6231.

ii. Bankruptcy

Section 6241(6)(A) provides that, in acase under Title 11 of the United StatesCode (Title 11 case), the running of anyperiod of limitations provided in subchapterC of chapter 63 for making a partnershipadjustment (or provided in section 6501 or6502 for the assessment or collection of anyimputed underpayment determined undersubchapter C of chapter 63) is suspended forthe period during which the Secretary isprohibited by reason of the Title 11 casefrom making the partnership adjustment orassessing or collecting any amounts due un-der subchapter C of chapter 63. Section6241(6)(A)(i) provides that in the case ofthe period of limitations for making adjust-ments or making an assessment, the suspen-sion period includes an additional 60 days.Section 6241(6)(A)(ii) provides that in thecase of the period of limitations on collec-tion, the suspension period includes an ad-ditional six months.

Section 6241(6)(A) provides that a rulesimilar to the rule of section 6213(f)(2)applies for purposes of section 6232(b),the limitation on assessments under sub-chapter C of chapter 63. Section 6213(f)clarifies that the limitation on assessmentunder section 6213(a) with respect to de-ficiencies does not prohibit the Secretaryfrom filing of a proof of claim in a bank-ruptcy case. Thus, the limitation on as-sessment under section 6232(b) similarlydoes not prohibit the filing of a proof ofclaim in bankruptcy.

Under section 6241(6)(B), the runningof the 90-day period to file a petition forreadjustment under section 6234 is sus-pended during the period during which thepartnership is prohibited by reason of abankruptcy case from filing the petitionfor readjustment and for an additional 60days.

iii. Other Rules

Section 6241(4) provides that any pay-ments required to be made under subchap-ter C of chapter 63 are nondeductible un-der subtitle A.

Section 6241(5) provides the generalrule that, for purposes of section 6234(regarding judicial review of partnershipadjustments), a principal place of businesslocated outside the United States is treatedas located in the District of Columbia.

Section 6241(7) provides that, where apartnership ceases to exist before a part-nership adjustment under subchapter C ofchapter 63 takes effect, the partnershipadjustment shall be taken into account bythe former partners of the partnership pur-suant to regulations prescribed by the Sec-retary.

Section 6241(8) provides that, to theextent provided by regulations, the provi-sions of subchapter C of chapter 63 shallextend to the taxable year of an entity forwhich a partnership return is filed by theentity (even if it is determined that theentity is not a partnership or that there isno entity for such taxable year), to theitems of such entity, and to any personholding an interest in such entity.

I. Withdrawal of proposed regulationsunder section 6231(c)

On February 13, 2009, a notice of pro-posed rulemaking (REG–138326–07) re-garding the conversion of partnershipitems related to listed transactions waspublished in the Federal Register (74 FR7205). The proposed regulations were is-sued under section 6231(c) (prior toamendment by the BBA), which permittedthe IRS to issue regulations that addressspecial enforcement areas, that is, areaswhere the application of the TEFRA part-nership procedures would interfere withthe effective and efficient enforcement ofthe internal revenue laws. Written or elec-tronic comments responding to the noticeof proposed rulemaking were received,but no public hearing was requested orheld. After consideration of all the com-ments, the Treasury Department and theIRS have decided to withdraw the pro-posed regulations.

Bulletin No. 2017–28 July 10, 201717

Explanation of Provisions

1. Scope of the Centralized PartnershipAudit Regime

Proposed § 301.6221(a)–1(a) providesthat all adjustments and items relating to apartnership are determined at the partner-ship level under the centralized partner-ship audit regime. Accordingly, theproposed regulations provide that the cen-tralized partnership audit regime coversany adjustment to items of income, gain,loss, deduction, or credit of a partnershipand any partner’s distributive share ofthose adjusted items. Further, the pro-posed regulations provide that any chapter1 tax resulting from an adjustment toitems under the centralized partnershipaudit regime is assessed and collected atthe partnership level. Under the proposedregulations, the applicability of any pen-alty, addition to tax, or additional amountwhich relates to an adjustment to any suchitem or share is also determined at thepartnership level.

Proposed § 301.6221(a)–1(b)(1) de-fines the phrase “income, gain, loss,deduction, or credit” for purposes ofthe centralized partnership audit regimebroadly so that the phrase includes: thecharacter, timing, source, and amount ofitems; the character, timing, and source ofthe partnership’s activities; contributionsto and distributions from the partner-ship; the partnership’s basis in its assetsand the value of those assets; the amountand character of partnership liabilities;the separate category (for purposes ofthe foreign tax credit limitation), timing,and amount of the partnership’s credit-able foreign tax expenditures; electionsmade by the partnership; items relatedto transactions between a partnershipand any partner (including disguisedsales and guaranteed payments); anyitems related to terminations of a part-nership; and partners’ capital accounts.Proposed § 301.6221(a)–1(b)(2) definesthe phrase “a partner’s distributiveshare” to include any partner’s share ofany item determined at the partnershiplevel; the nature and amount of the part-ner’s interest in the partnership; whetherany special allocations apply to anypartner; the character and timing of anyitem or activity required to be taken into

account by the partner which is relatedto any item adjusted at the partnershiplevel under subchapter C of chapter 63;and any amount required to be takeninto account by the partner if the part-nership makes an election under section6226.

Proposed § 301.6221(a)–1(b)(3) de-fines the term “tax” for purposes of§ 301.6221(a)–1 to mean tax imposed bychapter 1 of subtitle A of the Code. Ac-cordingly, for purposes of assessment andcollection at the partnership level, taxesimposed by other chapters of the Code arenot included in the term “tax.” Thosetaxes that are not covered by the central-ized partnership audit regime includetaxes imposed by chapter 2 (Tax on Self-Employment Income), chapter 2A (Un-earned Income Medicare Contribution),chapter 3 (Withholding of Tax on Nonres-ident Aliens and Foreign Corporations),chapter 4 (Taxes to Enforce Reporting onCertain Foreign Accounts), and chapter 6(Consolidated Returns). In addition, taxesimposed by other subtitles of the Code,such as subtitle C (Employment Taxes),are not included within the scope of thecentralized partnership audit regime. Ac-cordingly, the IRS may separately exam-ine the partnership or its partners outsidethe centralized partnership audit regimefor purposes of determining and assessingthese types of taxes.

In some circumstances, adjustmentsmade under the centralized partnershipaudit regime may have an effect on thedetermination of taxes imposed by provi-sions of the Code outside of chapter 1. Forexample, if it is determined in a proceed-ing under the centralized partnership auditregime that a partnership has additionalunreported ordinary income, that determi-nation could form the basis for a separatedetermination that one or more of the part-ners in that partnership owe additionalself-employment tax under chapter 2 ofthe Code. Additionally, as clarified in pro-posed § 301.6221(a)–1(d), determinationsregarding items covered by the centralizedpartnership audit regime may be reliedupon by the IRS when making determina-tions of taxes not covered by chapter 1 tothe extent they are relevant in makingsuch determinations. For instance, if theIRS determines as part of the centralizedpartnership audit regime that an individual

who is treated as a partner in the partner-ship has received additional unreportedordinary income from the partnership, theIRS is not precluded from separately ex-amining the partnership or that individualfor purposes of determining whether thatindividual is an employee and not a part-ner of the partnership for purposes of im-posing subtitle C employment taxes withregard to that income or examining theindividual for purposes of determiningwhether the individual owes additionalself-employment tax on the income. Anysuch determinations made in a separateexamination outside the centralized part-nership audit regime will be solely forpurposes of the taxes not covered by chap-ter 1, will not constitute determinationsfor purposes of chapter 1, and will notconstitute an administrative proceedingwith respect to the partnership for pur-poses of subchapter C of chapter 63. TheIRS may use all procedures available,such as obtaining the books and records ofthe partnership, to make determinations ofitems covered by the centralized partner-ship audit regime solely for purposes oftaxes not covered by chapter 1. Any de-terminations for taxes other than chapter 1taxes are not covered by the centralizedpartnership audit regime under subchapterC of chapter 63.

Proposed § 301.6221(a)–1(a) providesthat the applicability of any penalty, addi-tion to tax, or additional amount that re-lates to an adjustment under subchapter Cof chapter 63 is determined at the partner-ship level. Proposed § 301.6221(a)–1(c)provides that any defenses to any penalty,addition to tax, or additional amount un-der subchapter C of chapter 63 may onlybe raised or considered in a partnershipproceeding initiated under subchapter Cof chapter 63. The partnership representa-tive (as defined in section 6223 and theregulations thereunder) is the sole repre-sentative of the partnership. Accordingly,only the partnership representative mayraise defenses to penalties, additions totax, or additional amounts, including thepartnership’s defenses and defenses thatrelate to any partner. For example, if thepartnership believes it has a viable reason-able cause defense, the partnership repre-sentative must raise this defense as part ofthe partnership proceeding. Any defense,whether it relies on facts and circumstances

July 10, 2017 Bulletin No. 2017–2818

relating to the partnership or one or morepartners or any other person, that is notraised by the partnership before a final de-termination under subchapter C of chapter63 is waived and will not be considered ifraised by any other person, including a part-ner that receives a section 6226 statement asa result of the partnership making an elec-tion under section 6226.

2. Election Out of the CentralizedPartnership Audit Regime

A. Eligibility to make the election

Proposed § 301.6221(b)–1(b) providesthat only an eligible partnership may electout of the centralized partnership auditregime. Under that section, a partnershipis an eligible partnership if it has 100 orfewer partners during the year and, if at alltimes during the taxable year, all partnersare eligible partners, as defined in pro-posed § 301.6221(b)–1(b)(3).

i. 100 or Fewer Partners

Under proposed § 301.6221(b)–1(b)(2), a partnership has 100 or fewer part-ners during the year if it is required tofurnish 100 or fewer statements under sec-tion 6031(b) during the taxable year forwhich the partnership makes the election.When determining whether a partnershipis required to furnish 100 or fewer state-ments under section 6031(b) during thetaxable year, only statements required tobe furnished by the partnership under sec-tion 6031(b) for the taxable year are takeninto account, regardless of the number ofstatements actually furnished by the part-nership. Accordingly, if contrary to theinstructions to the Schedule K-1 the part-nership furnishes more statements thanare required under section 6031(b), anystatements that are not required to be is-sued under section 6031(b) are not takeninto account. For instance, if contrary tothe instructions to the Schedule K-1 apartnership furnishes two Schedules K-1to a partner (one for the partner’s generalinterest in the partnership and one for thepartner’s limited interest in the partnership),the partnership is treated as furnishing onlyone Schedule K-1 for purposes of proposed§ 301.6221(b)–1(b)(2) because the partner-

ship is only required to furnish one state-ment to that partner under section 6031(b).

The proposed regulations include a spe-cial rule for partnerships that have S corpo-ration partners. As described in proposed§ 301.6221(b)–1(b)(2)(ii), any statementsrequired to be furnished by the S corpora-tion partner under section 6037(b) for thetaxable year of the S corporation endingwith or within the partnership’s taxable yearare taken into account for purposes of de-termining whether the partnership is re-quired to furnish 100 or fewer statements forthe taxable year. For instance, if an S cor-poration with 50 shareholders is a partner ina partnership, in addition to the statementthe partnership is required to furnish to the Scorporation, the 50 statements that the Scorporation is required to furnish to itsshareholders under section 6037(b) aretaken into account for purposes of determin-ing whether the partnership is required toissue 100 or fewer statements. As illustratedin Example 5 of proposed § 301.6221(b)–1(b)(2)(iii), the special rule under proposed§ 301.6221(b)–1(b)(2)(ii) does not apply topartners that are not S corporations.

Pursuant to section 6221(b), the de-termination of whether the partnershiphas 100 or fewer partners is made bycounting the number of statements re-quired to be furnished under section6031(b). Under TEFRA, section 6231(a)(1)(B) (prior to amendment by the BBA)specifically states that a husband and wifewere treated as a single partner for purposesof determining whether the partnership had10 or fewer partners (the TEFRA small part-nership exception). Section 6221(b) con-tains no similar language. Accordingly, theprinciples of section 6031(b), which do nottreat a husband and wife as a single partner,apply for purposes of determining whetherthe partnership has 100 or fewer partners.Examples 1 and 2 in proposed § 301.6221(b)–1(b)(2)(iii) illustrate this point.

ii. Eligible Partners

Proposed § 301.6221(b)–1(b)(3)(i) de-fines the term “eligible partner” as anyperson who is an individual, C corpora-tion, eligible foreign entity, S corporation,or an estate of a deceased partner. Underthis proposed rule, a C corporation is anentity defined in section 1361(a)(2), in-cluding a regulated investment company

(RIC) under section 851 and a real estateinvestment trust (REIT) under section856. The Treasury Department and the IRSintend to continue to treat an organizationthat is determined to be, or claims to be,exempt from tax under section 501(a) and isclassified as a corporation under section7701(a)(3) as a C corporation for purposesof proposed § 301.6221(b)–1(b)(3), consis-tent with Revenue Ruling 2003–69, 2003–1C.B. 1118 (treating tax-exempt corporationsas C corporations for purposes of theTEFRA small partnership exception). Thistreatment does not extend to an organizationthat is determined to be, or claims to be,exempt from tax under section 501(a) that isnot classified as a corporation under section7701(a)(3) as a C corporation, such as trusts.

An “eligible foreign entity” is definedin proposed § 301.6221(b)–1(b)(3)(iii) asany foreign entity that is classified as a perse corporation under § 301.7701–2(b)(1),(3)–(8), is classified by default as an as-sociation taxable as a corporation under§ 301.7701–3(b)(2)(i)(B), or is classifiedas an association taxable as a corporationin accordance with an election under theprovisions of § 301.7701–3(c).

Proposed § 301.6221(b)–1(b)(3)(ii)clarifies that the term “eligible partner”does not include partnerships, trusts, for-eign entities that are not eligible foreignentities, disregarded entities, nominees,other similar persons that hold an intereston behalf of another person, and estatesthat are not estates of a deceased partner.

A number of comments received inresponse to Notice 2016–23 suggestedthat the Treasury Department and the IRSshould exercise the regulatory authorityprovided in section 6221(b)(2)(C) to ex-pand the types of entities that are eligiblepartners for purposes of the election out.Specifically, commenters requested thatentities such as disregarded entities, trusts,partnerships, and partners who use nomi-nees should be considered eligible part-ners for purposes of the election out rules.The commenters also suggest that theremay be certain partnership structures thatcould be efficiently examined at the ulti-mate taxpayer level even if a partner is notone of the eligible partners listed in sec-tion 6221(b). The Treasury Departmentand the IRS considered these comments,but have declined in these proposed reg-ulations to exercise the authority under

Bulletin No. 2017–28 July 10, 201719

section 6221(b)(2)(C) to expand the typesof entities that are eligible partners forpurposes of the election out rules or tocreate separate election out provisions forspecific partnership structures. When apartnership elects out of the centralizedpartnership audit regime, the IRS mustexamine and assess tax with respect toeach ultimate partner under the deficiencyprocedures under subchapter B of chapter63. Enactment of TEFRA was a reactionto the complexity and burden of thesedeficiency procedures with respect to part-nerships. The increasing number and com-plexity of partnerships since TEFRA wasenacted revealed that the TEFRA proce-dures were inadequate for the IRS to ef-fectively audit partnerships. The central-ized partnership audit regime is intendedto enhance the IRS’s ability to examinepartnerships, particularly large and highlytiered partnerships. If the proposed regu-lations broaden the scope of the electionout provisions to include additional typesof partners or partnership structures, theIRS will face additional administrativeburden in examining those structures andpartners under the deficiency rules. Com-ments on any potential expansion of theelection out rules are particularly helpfulif they address the additional burdens anysuch expansion would impose on the IRSand not just the decreased burden on tax-payers resulting from the suggestedchange.

B. Making the election out

Proposed § 301.6221(b)–1(c) providesthe time, form, and manner for the partner-ship to make an election out of the central-ized partnership audit regime, and unless allof these requirements are satisfied an elec-tion will not be valid. The requirementsunder proposed § 301.6221(b)–1(c) are de-scribed below.

First, under proposed § 301.6221(b)–1(c)(1), a partnership may make the elec-tion only on a timely filed partnershipreturn (including extensions) (that is,Form 1065, U.S. Return of PartnershipIncome) for the partnership taxable year towhich the election relates. Therefore, apartnership may not make the election ona return that is filed after the due date(including extensions) for the taxableyear. An election out made by a partner-

ship may only be revoked with the con-sent of the IRS. Proposed § 301.6221(b)–1(c)(1).

In response to Notice 2016–23, somecommenters requested that the electionout rules should not penalize a partnershipthat does not timely file a return. Section6221(b) specifically prescribes that theelection must be made on a timely filedreturn. Accordingly, the proposed regula-tions conform with the statute and requirethe election under section 6221(b) to bemade on a timely filed return.

Second, proposed § 301.6221(b)–1(c)(2) provides that a partnership mustdisclose to the IRS the names, correctTINs, and federal tax classifications of allpartners of the partnership and, if there isan S corporation partner, the names, cor-rect TINs, and federal tax classificationsof all persons to whom an S corporationpartner is required to furnish statementsduring the S corporation partner’s taxableyear ending with or within the partner-ship’s taxable year at issue, and any otherinformation regarding those partners (andshareholders) as required by the IRS informs and instructions. The Treasury De-partment and the IRS recognize that sec-tion 6221(b)(2)(B) grants authority to theSecretary to provide for alternative iden-tification of any foreign partners. How-ever, in most cases, partners (includingforeign partners) in partnerships that file aForm 1065, U.S. Return of PartnershipIncome, are required to have taxpayeridentification numbers, and, as a result,alternative identification procedures forforeign partners may be unnecessary. TheTreasury Department and the IRS requestcomments describing situations in which aforeign partner in a partnership subject tothe centralized partnership audit regimemay not otherwise be required to have ataxpayer identification number except forpurposes of making an election out undersection 6221(b), as well as recommenda-tions for alternative identification proce-dures that could be used in such cases.

Finally, proposed § 301.6221(b)–1(c)(3) provides that a partnership thatelects out of the centralized partnershipaudit regime must notify each of its part-ners that the partnership made the elec-tion. This notification must be madewithin 30 days of making the election.The proposed regulations do not mandate

the form of the notice that the partnershipmust provide to its partners. Accordingly,the notice may be in writing, electronic, orother form chosen by the partnership.

Proposed § 301.6221(b)–1(d) clarifiesthat any election out of the centralizedpartnership audit regime by an eligiblepartnership that is a partnership-partner(as defined in proposed § 301.6241–1(a)(7)) has no effect on the application ofthe centralized partnership audit regime tothat partnership-partner in its capacity as apartner in another partnership. The Trea-sury Department and the IRS intend thisprovision to make clear that the effect ofadjustments on a partnership-partner that isa partner in a partnership that is subject tothe centralized partnership audit regime aredetermined under the centralized partner-ship audit regime even if that partnership-partner has made a valid election under sec-tion 6221(b). The examples in proposed§ 301.6221(b)–1(d)(2) illustrate these prin-ciples.

Proposed § 301.6221(b)–1(e) providesthat, if a partnership makes an electionunder this section, the IRS may rely onthat election for all purposes unless anduntil the IRS determines that the electionis invalid. The Treasury Department andthe IRS intend proposed § 301.6221–1(e)to provide certainty to partnerships andthe IRS because whether an election out isvalid will determine whether the IRS mustconduct a proceeding with respect to thepartnership under the centralized partner-ship audit regime or whether the IRS willfollow deficiency procedures with respectto the direct or indirect partners of thepartnership to examine items that, absent avalid election, would be subject to thecentralized partnership audit regime. Pro-posed § 301.6221–1(e) provides that anelection that is not fully compliant with allthe applicable rules, including an electionby a partnership not eligible to make theelection, may still be relied upon by thepartnership unless challenged by the IRS,and the IRS may also rely upon an elec-tion in determining whether a partnershipis subject to the centralized partnershipaudit regime. As a result, it will be clear topartnerships, direct and indirect partners,and the IRS which examination and ad-justment regime should apply to the itemsotherwise subject to the centralized part-nership audit regime.

July 10, 2017 Bulletin No. 2017–2820

C. Effect of election out

As discussed in the Background, thecentralized partnership audit regime is de-signed to make it easier for the IRS toexamine partnerships and collect any re-sulting underpayments through one cen-tralized proceeding. For partnerships thatelect out, the IRS will be required to opendeficiency proceedings at the partner levelto adjust items associated with the part-nership, resolve issues, and assess andcollect any tax that may result from theadjustments. Each partner-level defi-ciency proceeding is subject to its ownstatute of limitations and venue, whichoften results in separate partner-by-partner determinations with respect to thesame item. Nevertheless, the IRS intendsto increase the number of partnership au-dits for both partnerships that are subjectto the centralized partnership audit regimeand partnerships that have elected out ofthe partnership audit regime.

In addition, to ensure that the electionout rules are not used solely to frustrateIRS compliance efforts, the IRS intends tocarefully review a partnership’s decisionto elect out of the centralized partnershipaudit regime. This review will include an-alyzing whether the partnership has cor-rectly identified all of its partners for fed-eral income tax purposes notwithstandingwho the partnership reports as its partners.For instance, the IRS will be reviewingthe partnership’s partners to confirm thatthe partners are not nominees or agentsfor the beneficial owner.

In addition, the IRS intends to carefullyscrutinize whether two or more partner-ships that have elected out should be re-cast under existing judicial doctrines andgeneral federal tax principles as havingformed one or more constructive or defacto partnerships for federal income taxpurposes. The types of arrangements thatthe IRS will carefully review includethose where the profits or losses of part-ners are determined in whole or in part bythe profits or losses of partners in anotherpartnership, and those that purport to besomething other than a partnership, suchas the co-ownership of property. If it isdetermined that two or more partnershipsthat have elected out of the centralizedpartnership audit regime have formed aconstructive or de facto partnership for a

particular partnership taxable year and arerecast as such by the IRS, that construc-tive or de facto partnership will be subjectto the centralized partnership audit regimebecause that constructive or de facto part-nership will not have filed a partnershipreturn and, therefore, will not have made atimely election out as required under sec-tion 6221(b)(1)(D)(i) and these proposedregulations. The constructive or de factopartnership may also have more than 100partners or an ineligible partner, making itineligible to elect out.

3. Partner’s Return Must Be Consistentwith Partnership Return

A. Requirement of consistency

Proposed § 301.6222–1(a)(1) providesthat a partner’s treatment of each item ofincome, gain, loss, deduction, or creditattributable to a partnership must be con-sistent with the treatment of those itemson the partnership return, including treat-ment with respect to the amount, timing,and characterization of those items. Addi-tionally, proposed § 301.6222–1(a)(1)clarifies that the determination of whethera partner treats an item consistently withthe partnership return is determined withreference to the treatment of that item onthe partnership return filed with the IRS,and not with reference to any schedule orother information provided or furnishedby the partnership to the partner, for ex-ample, a schedule K-1 furnished to thepartner by the partnership, unless the elec-tion under proposed § 301.6222–1(d), re-garding incorrect statements or informa-tion, applies.

Proposed § 301.6222–1(a)(2) providesthat a partnership-partner is subject to sec-tion 6222 and the regulations thereunderregardless of whether the partnership-partner has made an election out of thecentralized partnership audit regime undersection 6221(b). Proposed § 301.6222–1(a)(3) provides that a partner’s return isconsidered automatically inconsistent ifthe partnership does not file a return, un-less the partner notifies the IRS of thisinconsistency in accordance with pro-posed § 301.6222–1(c).

For purposes of these proposed regula-tions, the term “treatment of items on apartnership return” is defined under pro-

posed § 301.6222–1(a)(4) to take into ac-count treatment of all items reported bythe partnership, regardless of the form thatthe reporting of the partnership return po-sition with respect to that item takes (thatis, regardless of whether the return posi-tion with respect to an item is reflected onan original return or reflected on a state-ment issued as a result of a partnership-initiated adjustment or an IRS-initiatedadjustment). Accordingly, the term treat-ment of items on a partnership return in-cludes not only the treatment of an itemon the partnership’s return filed with theIRS under section 6031(a), but also in-cludes any amendment or supplement tosuch return, such as an administrative ad-justment request filed under section 6227and the regulations thereunder, as well asthe treatment of an item on any statement,schedule or list, and any amendment orsupplement thereto, filed by the partner-ship with the IRS, including statementsfiled pursuant to section 6226. Proposed§ 301.6222–1(a)(5) provides examples il-lustrating the rules requiring consistent re-porting by partners.

B. Mathematical or clerical erroradjustments

Section 6222(b) provides that when apartner fails to treat items attributable to apartnership consistently with the treat-ment of those items on the partnershipreturn, the IRS may assess and collect anyunderpayment of tax that results from thatinconsistency as if it were on account of amathematical or clerical error appearingon the partner’s return; however the abil-ity to request an abatement of the assess-ment under section 6213(b)(2) does notapply. Section 6213(b) provides the gen-eral rules for assessments of amounts oftax arising out of mathematical or clericalerrors. In general, section 6213(b)(1), per-mits the IRS to immediately assess andcollect tax that arises on account of amathematical or clerical error appearingon a taxpayer’s return, notwithstandingthe general restrictions on assessment andcollection of deficiencies under section6213(a). Section 6213(b)(2) gives the tax-payer 60 days to request an abatement ofthat assessment.

Section 6222(b) specifically states thatthe IRS may assess an underpayment of

Bulletin No. 2017–28 July 10, 201721

tax as if it were on account of a mathe-matical or clerical error on the partner’sreturn. Section 6222(b), however, doesnot define the term underpayment forthese purposes, and the term underpay-ment is not defined elsewhere under sub-chapter C of chapter 63. The term under-payment is defined in section 6664(a);however, that definition is expressly lim-ited to part I of subchapter A of chapter 68of the Code. Section 6213(b)(1), whichdiscusses assessments arising out of math-ematical or clerical errors, refers to theamount of tax due in excess of that shownon the return on account of the error.Because section 6222(b) refers explicitlyto mathematical or clerical error andother provisions under 6213(b), proposed§ 301.6222–1(a) provides that the under-payment of tax described under 6222(b) isthe amount of tax due that results fromadjusting the item on the partner’s returnto make the treatment of the item consis-tent with the treatment of such item on thepartnership return.

Accordingly, proposed § 301.6222–1(b) provides that the IRS may assess andcollect any underpayment of tax that re-sults from adjusting a partner’s inconsis-tently reported item to conform that itemwith the treatment on the partnership re-turn as if the resulting underpayment oftax were on account of a mathematical orclerical error appearing on the partner’sreturn. A partner may not request anabatement of that assessment. See pro-posed § 301.6222–1(b)(2).

In instances where the partner is itself apartnership, section 6232(d)(1)(B) pro-vides for the use of rules similar to therules of section 6213(b). Accordingly,proposed § 301.6222–1(b) states that ifthe partner is itself a partnership, any ad-justment on account of such partnership’sfailure to treat an item consistently will betreated as an adjustment on account of amathematical or clerical error. Also, inaccordance with section 6232(d)(2), pro-posed § 301.6222–1(b) states that the pro-cedures under section 6213(b)(2) for re-questing abatements do not apply.

C. Notice of inconsistency

Proposed § 301.6222–1(c) states thatthe provisions of proposed § 301.6222–1(a) (consistent reporting requirement)

and proposed § 301.6222–1(b) (math errortreatment) do not apply to items that thepartner properly identifies as being treatedinconsistently with the partnership return.In order to properly identify an item, theproposed regulations provide that the part-ner must attach a statement identifying theinconsistency to the partner’s return onwhich the item is treated inconsistently.Proposed § 301.6222–1(c)(1).

Proposed § 301.6222–1(c)(2) coordi-nates the rules regarding notice of inconsis-tent treatment under proposed § 301.6222–1(c)(1) with situations where a partner isbound to the treatment of an item undersection 6223 as result of actions taken by thepartnership under subchapter C of chapter63 or by any final decision in a proceedingbrought under subchapter C of chapter 63with respect to the partnership. For instance,as noted in the proposed regulations undersection 6226, the election under section6226 and the filing and furnishing of state-ments under that section are actions of thepartnership under section 6223. See pro-posed § 301.6226–1(d). Because the partneris bound by the treatment of an item re-flected in a statement filed by the partner-ship under section 6226, the partner is pre-cluded from treating that item inconsistentlyunder section 6222. The fact that the partnerfiles a notice of inconsistent treatment doesnot change the fact that the partner is boundby the treatment of the items in the section6226 statement. Any other result would un-dermine the purpose of section 6223, whichprovides certainty and finality with respectto actions taken by the partnership duringthe centralized partnership audit regime.Accordingly proposed § 301.6222–1(c)(2)provides that if a partner’s treatment of theitem is not consistent with the treatment towhich the partner is bound under section6223 with respect to such item, such as thepartnership treatment of items in an admin-istrative adjustment request or in a section6226 statement, the provisions of proposed§ 301.6222–1(a) (consistent reporting re-quirement) and proposed § 301.6222–1(b)(math error treatment) apply to that item,and any underpayment of tax resulting fromthe failure to treat the item consistently withthe treatment to which the partner is boundmay be assessed and collected in the samemanner as if such underpayment were onaccount of a mathematical or clerical error.

Situations may arise in which a partnertreats several items inconsistently fromhow the partnership treated those sameitems, but the partner notifies the IRS onlyof some, but not all, of the inconsistencies.Proposed § 301.6222–1(c)(3) clarifies thatthe exception to the consistent reportingrequirement and math error treatment ap-plies only to the inconsistent positions thatare specifically identified to the IRS in aproper notification.

Under section 6223(b), a final decisionin an administrative or judicial proceedingwith respect to a partnership under thecentralized partnership audit regime isbinding on the partnership and all partnersof the partnership. In contrast, under sec-tion 6222(d), a final determination in anadministrative or judicial proceeding withrespect to a partner’s identified inconsis-tent position is not binding on the partner-ship if the partnership is not a party to theproceeding. Accordingly, section 6222(d)provides that the IRS may conduct a pro-ceeding with respect to the partner, that is,a proceeding that does not involve thepartnership, where the partner notified theIRS of an inconsistent position under6222(c). Section 6222(d) does not, how-ever, preclude the IRS from conducting aproceeding with respect to the partnership.

In some cases, the IRS may determinethat conducting a partnership proceedingunder the centralized partnership audit re-gime under subchapter C of chapter 63 isappropriate, for instance when the IRS dis-agrees with both the partner’s and the part-nership’s treatment of the item or whenmultiple partners treat an item inconsistentlyfrom the treatment by the partnership. Inother cases, the IRS may determine that apartner proceeding, which generally wouldbe under deficiency procedures in subchap-ter B of chapter 63, is appropriate, for in-stance when the IRS determines that thepartner’s inconsistent treatment is incorrect.Accordingly, proposed § 301.6222–1(c)(4)(i) clarifies that in the case of an identi-fied inconsistency, the IRS may conductboth a proceeding with respect to the partner(a proceeding in which the partnershipwould not be involved) and a proceedingwith respect to the partnership. Proposed§ 301.6222–1(c)(4)(ii) provides that any fi-nal decision with respect to an inconsistentposition identified in a notice to the IRSunder section 6222(c) in a proceeding to

July 10, 2017 Bulletin No. 2017–2822

which the partnership is not a party is notbinding on the partnership.

Proposed § 301.6222–1(c)(4)(ii) alsoprovides that if the IRS conducts a sepa-rate proceeding with respect to a partner,the IRS is not required to conform itemson the partner’s return to make thoseitems consistent with the treatment of theitems on the partnership return. Rather, ifthe IRS disagrees with the partner’s treat-ment of an inconsistent item, the IRS mayadjust the item to conform to the propertreatment of such item under federal taxlaw. Proposed § 301.6222–1(c)(5) pro-vides examples illustrating the provisionsunder proposed § 301.6222–1(c).

Proposed § 301.6222–1(d) providesthat a partner has provided notice to theIRS of an inconsistency if the partnertreats an item consistently with incorrectinformation that the partnership furnishedto the partner and makes an election toallow such treatment. The proposed regu-lations provide that the partner makes theelection after being notified by the IRS ofan adjustment due to treatment of an itemon the partner’s return inconsistent withthe treatment of that item on the partner-ship’s return. As part of the election, theproposed regulations require the partner todemonstrate that the treatment of the itemon the partner’s return is consistent withthe treatment of that item on the incorrectschedule or information furnished to thepartner by the partnership. Proposed§ 301.6222–1(d)(2) provides that thiselection must be made within 60 daysfrom the date of the notice informing thepartner of the inconsistent treatment. Theelection must be clearly identified as anelection under section 6222(c)(2)(B),signed by the partner making the elec-tion, and must be accompanied by cop-ies of the schedule or other informationfurnished to the partner by the partner-ship as well as the notice mailed by theIRS informing the partner of the con-forming adjustment. If it is not clear thatthe partner’s treatment of the item on thepartner’s return is consistent with the infor-mation provided by the partnership, theelection must include an explanation of howthe partner’s treatment is consistent. Pro-posed § 301.6222–1(d)(3) provides exam-ples illustrating the provisions under pro-posed § 301.6222–1(d).

One comment in response to Notice2016–23 suggested that when a partnernotifies the IRS of an inconsistency,the notification of inconsistent treatmentshould be included with the partner’s re-turn for the tax year in which the partnertook the inconsistent position, rather thancreate a separate notification process. TheTreasury Department and the IRS agreewith this comment. Accordingly, the pro-posed regulations require a partner to at-tach a notification of inconsistent treat-ment to the partner’s return on which theitem is treated inconsistently. A separatenotification process is necessary, how-ever, when a partner receives an incorrectstatement, schedule, or other informationfrom the partnership because the partnergenerally will not know about the incon-sistency.

4. Partnership Representative

Proposed § 301.6223–1 providesrules requiring a partnership to desig-nate a partnership representative (pro-posed § 301.6223–1(a)), rules describ-ing the eligibility requirements for apartnership representative (proposed§ 301.6223–1(b)), rules describing des-ignation of the partnership representa-tive (proposed § 301.6223–1(c)–(f)),and rules describing the termination of adesignation of a partnership representa-tive (proposed § 301.6223–1(d)–(f)).

A. Eligibility to serve as the partnershiprepresentative

Proposed § 301.6223–1(b)(1) providesthat a partnership may designate any per-son as defined in section 7701(a)(1), in-cluding an entity, that meets the require-ments of proposed § 301.6223–1(b)(2),(b)(3), and (b)(4), to be the partnershiprepresentative. The partnership represen-tative must have a substantial presence inthe United States and must have the ca-pacity to act. If an entity is designated asthe partnership representative, the partner-ship must identify and appoint an individ-ual to act on the entity’s behalf. The ap-pointed individual must also have asubstantial presence in the United Statesand the capacity to act. Accordingly, pro-vided the person is otherwise eligible, thepartnership may appoint a partner or a

non-partner, including the partnership’smanagement company, as the partnershiprepresentative.

Proposed § 301.6223–1(b)(2) providesthat the partnership representative musthave a substantial presence in the UnitedStates. Proposed § 301.6223–1(b)(2)(i)provides that a person has a substantialpresence in the United States for the pur-poses of section 6223 if three criteria aremet. First, the person must be able to meetin person with the IRS in the United Statesat a reasonable time and place as is nec-essary and appropriate as determined bythe IRS. Second, the partnership represen-tative must have a street address in theUnited States and a telephone numberwith a United States area code where thepartnership representative can be reachedby United States mail and telephone dur-ing normal business hours in the UnitedStates. Third, the partnership representa-tive must have a U.S. TIN.

The proposed regulations do not use thesubstantial presence test as described in sec-tion 7701(b)(3) (substantial presence test)because the purpose of the substantial pres-ence test is to determine whether an alienindividual should be treated as a residentalien for U.S. tax purposes. In contrast, thepurpose of requiring that the partnershiprepresentative have a substantial presence inthe United States is to ensure ease ofcommunication so the audit process canproceed smoothly. As a result, proposed§ 301.6223–1(b)(2) does not adopt the sub-stantial presence test in section 7701(b)(3).

Communication between the IRS andthe partnership representative is funda-mental to an efficient administrative pro-ceeding, both for the IRS and the partner-ship. As a result, if the partnershipdesignates an entity as the partnership rep-resentative (an entity partnership repre-sentative), proposed § 301.6223–1(b)(3)requires the partnership to appoint an in-dividual (designated individual) as thesole individual to act on behalf of theentity partnership representative. Likethe partnership representative itself, thedesignated individual must meet the sub-stantial presence requirements of pro-posed § 301.6223–1(b)(2). If the partner-ship does not appoint a designatedindividual, the IRS may determine thepartnership representative designation is

Bulletin No. 2017–28 July 10, 201723

not in effect. See proposed § 301.6223–1(f).

In addition, a person must have thecapacity to act as the partnership represen-tative or the designated individual. Pro-posed § 301.6223–1(b)(4) describes spe-cific events that cause a person to lose thecapacity to act and includes a catch-allprovision for unforeseen circumstances inwhich the IRS reasonably determines thatthe partnership representative or desig-nated individual may no longer have thecapacity to act.

The proposed regulations provide thata person designated by the partnership asthe partnership representative is deemedto satisfy the substantial presence require-ments and have capacity to act unless anduntil the IRS determines the person isineligible. See proposed § 301.6223–1(b)(1). If a partnership representativenever met, or no longer meets, the require-ments of proposed § 301.6223–1(b), thedesignation of the partnership representa-tive is valid and remains in effect until thepartnership, the partnership representa-tive, or the IRS takes an affirmative actionto terminate that designation. This canhappen in one of three ways. The partner-ship representative may resign pursuant toproposed § 301.6223–1(d), the partner-ship may revoke the designation pursuantto proposed § 301.6223–1(e), or the IRSmay determine a designation is not in ef-fect under proposed § 301.6223–1(f). Un-til one of those events occurs, the desig-nation is valid and remains in effect. Forthe validity of actions taken by the part-nership representative during the periodwhen the designation was in effect, seeproposed § 301.6223–2(b).

B. Designating the partnershiprepresentative

Proposed § 301.6223–1(c) describesthe manner in which a partnership desig-nates the partnership representative. Apartnership must designate the partnershiprepresentative on the partnership’s returnfiled for the partnership taxable year. Apartnership must designate a partnershiprepresentative separately for each taxableyear. A designation for one taxable year isnot effective for any other taxable year. Adesignation for a partnership taxableyear remains in effect until the designa-

tion is terminated under proposed§ 301.6223–1(d) (resignation), proposed§ 301.6223–1(e) (revocation), or pro-posed § 301.6223–1(f) (determinationthat the designation is not in effect).

Under the TEFRA partnership proce-dures, a TMP may be designated, includ-ing through a resignation or revocation, atany time after the filing of the initial part-nership return by submitting a new desig-nation to the IRS. The IRS processes eachof these subsequent designations regard-less of whether the partnership is exam-ined, creating unnecessary work for theIRS because very often the TMP is notrequired to take any action on behalf ofthe partnership or the partners.

The partnership representative rulesare intended to be an improvement overthe TMP rules. As a result, the partnershiprepresentative rules have been crafted toavoid the resource drain created by pro-cessing unnecessary resignations, revoca-tions, and subsequent designations ofTMPs. Accordingly, the proposed regula-tions provide that a partnership represen-tative designation may not be changed(either by resignation or revocation) untilthe IRS issues a notice of administrativeproceeding to the partnership, exceptwhen the partnership files a valid admin-istrative adjustment request (AAR) in ac-cordance with section 6227 and proposed§ 301.6227–1.

The proposed regulations provide thatthe partnership or the partnership repre-sentative may change the initial designa-tion of the partnership representative si-multaneously with filing an AAR, but theform used for filing an AAR may not beused solely for the purpose of changingthe partnership representative. The Trea-sury Department and the IRS understandthat there may be other circumstances thatwarrant allowing a partnership or partner-ship representative to change the partner-ship representative designation and re-quest comments regarding such othercircumstances.

Specifically, proposed § 301.6223–1(d) allows a partnership representative toresign by notifying the partnership and theIRS in writing. The partnership represen-tative may not resign prior to the issuanceof a notice of administrative proceeding(except in conjunction with the filing of anAAR), but the partnership representative

may resign at any time after the issuanceof the notice of an administrative proceed-ing. The partnership representative may re-sign regardless of whether that person wasdesignated by the partnership or the IRS.The resigning partnership representativemay, but is not required to, designate a suc-cessor partnership representative. If the re-signing partnership representative does notdesignate a successor, the IRS will deter-mine that the designation is not in effectunder proposed § 301.6223–1(f) and pro-vide the partnership with an opportunity todesignate a new partnership representative.If the partnership fails to designate a newpartnership representative, the IRS will des-ignate a new partnership representative pur-suant to proposed § 301.6223–1(f)(5). Aresignation is effective 30 days after thedate the notice of resignation is sent tothe IRS. See proposed § 301.6223–1(d)(1). Similar rules apply to desig-nated individuals, allowing the desig-nated individual to resign and appoint asuccessor. See proposed § 301.6223–1(d)(3).

Proposed § 301.6223–1(e) describesthe rules which allow the partnership torevoke the partnership representative des-ignation and designate a successor. Thisrevocation provision is an exception to thegeneral rule that the partnership represen-tative has the sole authority to act onbehalf of the partnership. In general, achange in the partnership representative ordesignated individual should only occurwhen the partnership representative re-signs and appoints a successor under pro-posed § 301.6223–1(d). However, theremay be circumstances where the part-nership would like to change the desig-nation, and the partnership representa-tive or designated individual will notresign. Proposed § 301.6223–1(e) pro-vides flexibility to the partnership inthese circumstances, allowing the part-nership, through its partners, to revoke aprior designation.

In the case of a revocation, the partner-ship must notify the IRS in writing andmust also notify the partnership represen-tative whose designation is being revokedof the revocation. Like resignations underproposed § 301.6223–1(d), the partner-ship may not revoke the partnership rep-resentative designation prior to the issu-ance of a notice of an administrative

July 10, 2017 Bulletin No. 2017–2824

proceeding except in conjunction with thefiling of a valid AAR. A revocation iseffective 30 days after the date the noticeof revocation is sent to the IRS. See pro-posed § 301.6223–1(e)(1). Upon the re-ceipt of a valid revocation, the IRS willnotify the partnership and any partnershiprepresentative whose designation is beingrevoked of the acceptance of the revoca-tion.

Proposed § 301.6223–1(e)(3) providesthe rules for who may sign a revocation.In general, the partnership representativeis the sole representative of the partner-ship. The revocation provision provides alimited exception to this rule and allows,solely for purposes of revocation, otherpartners to act on behalf of the partner-ship. Under the proposed regulations, ageneral partner as shown on the partner-ship return at the close of the taxable yearfor which the partnership representativewas designated must sign the revocation.If no general partner has the capacity toact on behalf of the partnership (asdescribed in proposed § 301.6223–1(b)(4)(i)–(v)), proposed § 301.6223–1(e)(3)(i) provides that any reviewed yearpartner in the partnership may signthe revocation. Proposed § 301.6223–1(e)(3)(ii) provides definitions with re-spect to limited liability companies(LLCs) and rules for which members ofan LLC may sign a revocation. For pur-poses of which partners may sign a revo-cation, member-managers are treated asgeneral partners, and other members aretreated as a partner other than a generalpartner. If there is no member-manager,the proposed regulations provide that eachmember is treated as a member-managerfor purposes of this section.

Additionally, proposed § 301.6223–1(e) provides that any revocation mustinclude a statement signed under penaltiesof perjury that the partner signing the re-vocation is authorized by the partnershipto revoke the designation and has pro-vided a copy of the revocation to the part-nership and partnership representative.

The combination of requiring the part-ner making the revocation to attest underpenalties of perjury that the partner is au-thorized to act for the partnership andrequiring the partner to notify the partner-ship and partnership representative helpsensure that any partnership representative

revocation is consistent with the wishes ofthe partnership. The notification that therevocation has been accepted that the part-nership and the partnership representativereceive from the IRS provides further no-tice to the partnership and allows for thepartnership to take action against unau-thorized revocations and designations.

There may be circumstances in whichmore than one general partner in the part-nership makes a revocation within a shortperiod of time. In that circumstance, theIRS may not be able to readily determinethe identity of the proper partnership rep-resentative. To allow the IRS to identifythe correct partnership representative, pro-posed § 301.6223–1(e)(5) provides if theIRS receives multiple revocations or sub-sequent designations within a 90-day pe-riod, the IRS may determine that a desig-nation is not in effect due to multiplerevocations and follow the procedures un-der proposed § 301.6223–1(f) to designatea new partnership representative. Theserules do not require that the IRS designatea person designated in any of the revoca-tions received. If the IRS designates apartnership representative under proposed§ 301.6223–1(f), proposed § 301.6223–1(e)(4) provides that the partnership mustreceive the IRS’s permission to later re-voke the designation.

C. Determination that a designation isnot in effect

Proposed § 301.6223–1(f) provides therules regarding how the IRS makes a de-termination that a designation of a part-nership representative is not in effect, aswell as how the IRS will designate a part-nership representative if a designation isnot in effect.

Proposed § 301.6223–1(f) providesthat when the IRS determines a designa-tion is not in effect, the IRS will notify thepartnership and the last partnership repre-sentative, if there was one, of the IRS’sdetermination. The designation is termi-nated as of the day the IRS notifies thepartnership that no designation is in effect.Proposed § 301.6223–1(f)(4) providesthat except in cases where the partnershipdesignation is not in effect because therewere multiple revocations, the partnershipwill have 30 days to designate a successorpartnership representative before the IRS

will designate a new partnership represen-tative. If the IRS has already receivedmultiple revocations from different part-ners and determined it is unable to ascer-tain which partnership representative thepartnership wants to designate, proposed§ 301.6223–1(f)(4) provides that the IRSwill notify the partnership that the desig-nation is not in effect and designate a newpartnership representative pursuant to pro-posed § 301.6223–1(f)(5) without provid-ing the partnership with an opportunity todesignate a partnership representative.This rule avoids creating further confu-sion between the partnership and the IRS,which would delay the designation andthe administrative proceeding.

D. Designation of the partnershiprepresentative by the IRS

Proposed § 301.6223–1(f)(1) providesthat if there is no designation of a partner-ship representative in effect, the IRS mayselect any person to serve as partnershiprepresentative. There is no distinction be-tween the authority of a partnership rep-resentative designated by the partnershipand one selected by the IRS. For thatreason, the proposed regulations refer tothe IRS’s selection of a partnership repre-sentative as a designation.

Under proposed § 301.6223–1(f)(5),the IRS will notify the partnership of itsdesignation by providing the partnershipwith the name, address, and telephonenumber of the new partnership represen-tative. Under proposed § 301.6223–1(f)(5) the designation by the IRS of anew partnership representative is effectiveon the day the IRS mails the notificationto the partnership of the designation. Pro-posed § 301.6223–1(f)(5) also requires theIRS to mail a copy of the notification tothe new partnership representative.

Proposed § 301.6223–1(f)(5)(ii) pro-vides that the IRS may designate any per-son as the partnership representative. Indesignating a person as the partnershiprepresentative, the IRS will considerwhether the person is a partner in thepartnership, either in the reviewed year orat the time the designation is made. Inaddition, the IRS may consider the otherremaining factors listed in proposed§ 301.6223–1(f)(5)(ii).

Bulletin No. 2017–28 July 10, 201725

Once the IRS has designated a partner-ship representative, the partnership maynot revoke that designation withoutthe consent of the IRS. See proposed§ 301.6223–1(f)(3)(iii). The examples un-der proposed § 301.6223–1(f)(6) illustratethe operation of the rules described above.

E. Authority of the partnershiprepresentative

Proposed § 301.6223–2 describes thebinding nature of actions taken by the part-nership representative on behalf of the part-nership under subchapter C of chapter 63and of the partnership with respect to itspartners. Under proposed § 301.6223–2, thepartnership and all partners are bound by theactions of the partnership and the partner-ship representative and by any final decisionin a proceeding brought under subchapter Cof chapter 63. The partnership representa-tive binds the partnership and its partners bythe partnership representative’s actions, in-cluding: agreeing to settlements, agreeing toa notice of final partnership adjustment,making an election under section 6226, andagreeing to an extension of the period foradjustments under section 6235. In addition,all persons whose tax liability is determined,in whole or in part, by taking into account,directly or indirectly (such as indirect part-ners), adjustments to any item within thescope of the centralized partnership auditregime under section 6221(a), by the IRS ina notice of final partnership adjustment in aproceeding brought under subchapter C ofchapter 63, or in a final decision of a courtunder subchapter C of chapter 63 are simi-larly bound. This binding authority extendsto all partners, including those partners whohave elected out of the centralized partner-ship audit regime under section 6221(b).

Proposed § 301.6223–2(c)(1) providesthat the partnership representative has thesole authority to act on behalf of the part-nership in any examination or other pro-ceeding under subchapter C of chapter 63.Similarly, proposed § 301.6223–2(c)(2)(ii) provides that a designated individualhas the sole authority to act on behalf ofthe partnership representative and thepartnership. Except for a partner thatis also the partnership representativeor a designated individual, proposed§ 301.6223–2(c)(1) provides that part-ners may not participate in or contest the

results of an examination or otherproceeding involving a partnershipwithout permission of the IRS. Proposed§ 301.6223–2(c)(1) also provides thatno other person, regardless of whetherthat person’s tax liability is affected bythe actions of the partnership, may par-ticipate in the partnership proceedingunder subchapter C of chapter 63.

Proposed § 301.6223–2(c)(1) statesthat the broad authority of the partnershiprepresentative may not be limited by statelaw, partnership agreement, or any otherdocument or agreement. Any action takenby the partnership representative with re-spect to the centralized partnership auditregime under the Code and federal taxregulations is valid and binding on thepartnership for purposes of tax law re-gardless of any other provision of statelaw, partnership agreement, or any otherdocument or agreement.

Proposed § 301.6223–2(c)(2)(i) providesthat the partnership representative, by virtueof being designated, has the authority tobind the partnership for purposes of the cen-tralized partnership audit regime. Similarly,under proposed § 301.6223–2(c)(2)(ii), thedesignated individual’s authority to bind thepartnership representative and the partner-ship is derived by virtue of the appointmentof that designated individual.

The examples under proposed § 301.6223–2(d) illustrate the operation of the rules de-scribed above.

F. Notice 2016–23 comments regardingthe partnership representative

A number of comments made specificsuggestions about whom the IRS shoulddesignate as the partnership representativewhen no partnership representative desig-nation is in effect. The suggestions rangedfrom designating the partner with the larg-est profits interest or the greatest percent-age ownership interest to designating anypartner that can sign the partnership re-turn. Commenters suggested that partnerswith small investments, nominal profitsinterests, or other minor roles in the part-nership would not be suitable to ade-quately represent the partnership duringan administrative proceeding. The pro-posed regulations, however, establishrules to provide more flexibility for theIRS to designate a partnership representa-

tive to avoid some of the shortcomings ofTEFRA, including the complexity anddifficulty of locating a qualified TMP.

Accordingly, the proposed regulationsallow the IRS to designate any personafter first considering partners from thereviewed year or at the time the designa-tion is made, but it also provides severalfactors that the IRS may consider in de-termining whom to select. This rule bal-ances the needs of the government and thepartnership.

Other suggestions included requiringthat the IRS select a partnership represen-tative that has authority to bind the part-nership under state law. The proposed reg-ulations do not limit whom the IRS maydesignate based on state law. The soleauthority to bind the partnership for allpurposes is derived from the Code andapplies for purposes of the internal reve-nue laws. Therefore, proposed regulationsare drafted so that federal, rather than statelaw, controls with respect to the rules re-garding the partnership representative forpurposes of the centralized partnership au-dit regime.

Some commenters requested that therebe no restrictions on whom the partner-ship can designate as the partnership rep-resentative other than the requirement ofsubstantial presence in the United States.These suggestions included allowing enti-ties, even entities with no employees, tobe appointed as the partnership represen-tative. The proposed regulations adoptthese suggestions by allowing the partner-ship to designate any person, including anentity, to be the partnership representativeprovided, in the case of an entity desig-nated as partnership representative, thepartnership also identify a designated in-dividual to act on behalf of the entitypartnership representative. The proposedregulations require that both an entitypartnership representative and the desig-nated individual have substantial presencein the United States. Provided an entitywith no employees otherwise meets therequirements of proposed § 301.6223–1,the proposed regulations would allow thatentity to be the partnership representative.

Some commenters suggested that theproposed rules require the partnership rep-resentative to provide notice to all part-ners of significant developments in an ad-ministrative proceeding and to allow

July 10, 2017 Bulletin No. 2017–2826

partners other than the partnership repre-sentative to participate in the administra-tive proceeding. The proposed regulationsdo not adopt these suggestions. The cen-tralized partnership audit statutory regimedoes not include any notice requirements,which relieves both the IRS and the TMPof the cumbersome TEFRA notice re-quirements. Whether and how the partner-ship representative communicates withthe partners in the partnership is best leftto the partnership to determine. Likewise,it is more efficient for the IRS to interactsolely with the partnership representativeduring an administrative proceeding.

5. Imputed Underpayment andModification of Imputed Underpayment

A. General rules regarding the imputedunderpayment

Proposed § 301.6225–1(a) provides thegeneral rule that if a partnership adjust-ment results in an imputed underpayment,the partnership must pay the imputedunderpayment in the adjustment year.As described in proposed § 301.6225–1(a)(3), the partnership adjustments andany imputed underpayment resulting fromsuch adjustments are set forth in aNOPPA mailed to the partnership andpartnership representative. The partner-ship may request modification with re-spect to an imputed underpayment setforth in the NOPPA under the proceduresdescribed in proposed § 301.6225–2.

The IRS and taxpayers both have aninterest in resolving the issues raised bythe IRS under the centralized partnershipaudit regime in the most efficient manner.An administrative proceeding under thecentralized partnership audit regime isconducted under the same principles ap-plicable to examinations generally. For in-stance, after providing the partnership andpartnership representative with a notice ofadministrative proceeding, consistent withIRS general examination procedures, theIRS will endeavor to work with the part-nership representative to set a schedule forinformation document requests (IDRs)and partnership responses to the IDRs. Ingeneral, the IRS informs the partnershiprepresentative about potential items andtransactions that raise issues and provides

information about adjustments that will beincluded in the NOPPA.

As part of this process, the IRS mayagree to review certain information priorto the issuance of the NOPPA in an effortto resolve issues in an expedited fashionand eliminate the need to make certainadjustments. In addition, the modificationprocess may move faster if relevant infor-mation is provided to the IRS employeesconducting the administrative proceedingprior to issuance of the NOPPA. How-ever, once the NOPPA is issued, themodification procedures under proposed§ 301.6225–2 are the partnership’s onlyformal route to request changes to an im-puted underpayment set forth in theNOPPA.

Proposed § 301.6225–1(a)(2) providesthat unless the IRS determines otherwise,all applicable preferences, restrictions,limitations, and conventions will be takeninto account as if the adjusted item wasoriginally taken into account by the part-nership or the partners in the manner mostbeneficial to the partnership or partners.Therefore, the IRS calculates an imputedunderpayment by taking into account theapplicable internal revenue laws, includ-ing provisions that may limit or restrictthe ability of a partner to reduce income ortake advantage of tax benefits flowingfrom the partnership. For instance, if theadjustment is a reduction of qualified re-search expenses, the IRS may determinethe amount of the adjustment as if allpartners claimed a credit with respect totheir allocable portion of such expensesunder section 41, rather than a deductionunder section 174. To the extent supportedby the facts, the partnership may take stepsthrough the modification procedures setforth in proposed § 301.6225–2 to providethe IRS with information about specificpartners and how those partners took itemsfrom the partnership into account.

The modification process, discussed laterin this preamble, is the method for the part-nership to request that the IRS modify animputed underpayment to more closely re-flect the tax consequences that would haveresulted if the partners had taken the ad-justed items into account correctly on theiroriginal returns for the year that includes thereviewed year of the partnership.

B. Calculation of the imputedunderpayment

Proposed § 301.6225–1(c) providesrules for the calculation of an imputedunderpayment. Proposed § 301.6225–1(c)(1) provides that the imputed under-payment is calculated by multiplying thetotal netted partnership adjustment by thehighest rate of federal income tax in effectfor the reviewed year (as defined in pro-posed § 301.6241–1(a)(8)) under section 1or 11. The product of that amount is thenincreased or decreased by any adjustmentmade to the partnership’s credits. If theresult of this summation is a net positiveadjustment, the resulting amount is theimputed underpayment, and, if it resultsin a net non-positive amount, the resultis an adjustment that does not result inan imputed underpayment. See proposed§ 301.6225–1(c)(2).

Proposed § 301.6225–1(c)(3) definesthe total netted partnership adjustment forpurposes of calculating the imputed un-derpayment in proposed § 301.6225–1(c)(1) as the sum of all net positive ad-justments in the residual grouping asdetermined in accordance with paragraph(d)(2)(v) of this section, plus the sum of allnet positive adjustments in the reallocationgrouping as determined in accordance withparagraph (d)(2)(ii) of this section.

i. Grouping and Netting of Adjustments

Under proposed § 301.6225–1(d), ad-justments are grouped together, whichprovides a framework for the netting ofadjustments appropriately. Within eachgrouping, adjusted items may be furtherdivided into subgroupings depending ontheir character or to account for prefer-ences, sources, categories, limitations, orother restrictions under Title 26 (for ex-ample, adjustments to short-term capitalgain will generally be in a different sub-grouping from adjustments to long-termcapital gain). See proposed § 301.6225–1(d)(1). The groupings and subgroupingsprovide the IRS with the ability to netadjustments according to applicable limi-tations and restrictions, but the TreasuryDepartment and the IRS seek commentson any specific items that may requirespecial rules or special subgroupings.

Bulletin No. 2017–28 July 10, 201727

Proposed § 301.6225–1(d)(2)(i) pro-vides that there are three types of group-ings, and that the adjustments are dividedin order into those groupings. First, ad-justments that reallocate items amongthe partners (reallocation grouping) aregrouped together. Second, adjustments tothe partnership’s credits (credit grouping)are grouped together. Third, all remainingadjustments (residual grouping) aregrouped together according to the charac-ter, preferences, restrictions, and otherlimitations of the item adjusted. Withineach grouping, there might be more thanone subgrouping based on a partner-ship’s particular adjustments. For in-stance, within the residual grouping,there might be an ordinary subgroupingas well as a capital subgrouping. Adjust-ments that generally affect, or that areaffected by, the application of any rulesrelated to preferences, limitations, re-strictions, or conventions, will generallybe taken into account within their ownrespective grouping or subgrouping.

Proposed § 301.6225–1(d)(2)(ii) de-scribes the reallocation grouping. Any ad-justment that reallocates an item from oneor more partners to one or more otherpartners is treated as two adjustments. Thefirst adjustment is a decrease in theamount of the items allocated by the part-nership on its return to one or more part-ners. The second adjustment is an increasein the amount of the items allocated by theIRS to the other partner(s). Each adjust-ment is grouped in its own reallocationsubgrouping to prevent the two adjust-ments from netting to zero. After applica-tion of the netting rules under proposed§ 301.6225–1(d)(3), any net non-positiveadjustment is disregarded in the calcula-tion of the imputed underpayment underproposed § 301.6225–1(d)(3)(ii)(A). Anadjustment that results in a net non-positive adjustment is an adjustmentthat does not result in an imputed un-derpayment because the reallocation ofan item among partners is one of thecircumstances described in proposed§ 301.6225–1(c)(2).

The credit grouping described in pro-posed § 301.6225–1(d)(2)(iii) includes alladjustments to items that the partnershipclaimed or could have claimed as a crediton the partnership’s return. The TreasuryDepartment and the IRS seek comments

on whether additional rules should be pro-posed regarding how the credits aregrouped together, or whether such creditsshould be applied in a particular order,similar to the order required for generalbusiness credits as reported on Form3800, General Business Credit.

A paragraph is reserved in proposed§ 301.6225–1(d)(2)(iv) for special rulesrelating to the treatment of certain credit-able expenditures. This paragraph is re-served to provide rules applicable withrespect to adjustments to items that are, orcould be, reported by the partnership asexpenditures that may be treated as acredit when taken into account by a part-ner. The Treasury Department and the IRSalso seek comments on the appropriatetreatment of items reported by the partner-ship as expenditures that may be treated asa credit when taken into account by apartner.

The third grouping is the residualgrouping, which is described in proposed§ 301.6225–1(d)(2)(v). The residualgrouping includes all other adjustments,which are grouped according to character(for instance, ordinary or capital) andother limitations under the Code. The ad-justments of a particular partnership maywarrant further subgroupings for otheritems (for instance, long-term capital ver-sus short-term capital). An adjustment thatrecharacterizes the character of an item istreated as two separate adjustments, oneadjustment decreasing the amount of theitem as reported by the partnership and asecond adjustment increasing the amountof the item as recharacterized by the IRS.Each adjustment is grouped separatelywith similar items.

Proposed § 301.6225–1(d)(3) describesthe rules for netting items after separatingthe items into their groupings and sub-groupings. First, proposed § 301.6225–2(d)(3)(i) provides that the IRS will netitems within the same grouping or sub-grouping. For instance, all ordinary ad-justments (assuming no other restrictionsunder the Code) are netted against eachother, regardless of whether such adjust-ments were part of related transactions orwhether they were increases or decreasesto income, but none of the ordinary ad-justments are netted against the adjust-ments in the capital subgrouping. Adjust-ments in the capital subgrouping are

netted against each other within that sub-grouping. Adjustments from one taxableyear may not be netted against adjust-ments from another taxable year, even ifthey would otherwise be part of the samesubgrouping. See proposed § 301.62251–1(c)(4).

Once adjustments within each sub-grouping have been netted, each groupingor subgrouping will have either a net pos-itive adjustment (as defined in proposed§ 301.6225–1(d)(3)(ii)(B)) or a net non-positive adjustment (as defined in pro-posed § 301.6225–1(d)(3)(ii)(C)). Anynetted amount that is a net non-positiveadjustment in the reallocation grouping orthe residual grouping is an adjustment thatdoes not result in an imputed underpay-ment under proposed § 301.6225–1(c)(2),and the rules described in proposed§ 301.6225–3 apply regarding the treat-ment of the partnership adjustments thatwere netted giving rise to that net non-positive adjustment. Any such net non-positive adjustment is disregarded forthe remaining purpose of calculating theimputed underpayment. See proposed§ 301.6225–1(c)(2) (which lists this net-ting step as another circumstance inwhich net non-positive adjustments areadjustments that do not result in an im-puted underpayment) and § 301.6225–1(d)(3)(ii)(A).

The exception to this rule under pro-posed § 301.6225–1(d)(3)(ii)(A) (regard-ing disregarding net non-positive adjust-ments) is with respect to the creditgrouping because adjustments to creditsare applied to the total netted partnershipadjustment after the rate is applied as de-scribed in proposed § 301.6225–1(c)(1). Ifthe net credits reduce the amount calcu-lated under proposed § 301.6225–1(c)(1)to zero or less than zero, the partnershipadjustments resulting in the total nettedpartnership adjustment and the adjust-ments to credits taken into account in cal-culating the zero or less than zero amountare all partnership adjustments that do notresult in an imputed underpayment underproposed § 301.6225–1(c)(2).

Proposed § 301.6225–1(d)(3)(iii) de-scribes how adjustments are treated withineach particular grouping or subgrouping(other than the credit grouping) for pur-poses of netting. Increased gain is treatedas increased income, decreased gain is

July 10, 2017 Bulletin No. 2017–2828

treated as decreased income, increasedloss is treated as decreased income, anddecreased loss is treated as increased in-come. The credit grouping is excludedfrom this treatment because any adjust-ment to a credit does not result in anincrease or decrease of income but ratherin an adjustment to the amount of taxowed after the tax rate is applied underproposed § 301.6225–1(c)(1).

ii. Multiple Imputed Underpayments

Proposed § 301.6225–1(e) providesrules for multiple imputed underpay-ments. Each administrative proceedingthat ends with the determination by theIRS of an imputed underpayment will re-sult in a general imputed underpayment.The IRS may determine, in its discretion,a specific imputed underpayment on thebasis of certain adjustments allocated toone partner or a group of partners basedon the items or adjustments having thesame or similar characteristics, based onthe group of partners sharing similar char-acteristics, or based on the partners havingparticipated in the same or similar trans-actions. There may be multiple specific im-puted underpayments depending on theadjustments. For instance, some transactionsmay not involve all partners, and there maybe a reason to place certain adjustmentsor even entire groupings into a specific im-puted underpayment (described in proposed§ 301.6225–1(e)(2)(iii)), while other adjust-ments remain in a general imputed underpay-ment (described in proposed § 301.6225–1(e)(2)(ii)).

For example, if a partnership intends toelect the alternative to payment of an im-puted underpayment under section 6226and the regulations thereunder, and, basedon the appropriate allocable shares, a par-ticular adjustment should be allocated toone partner or group of partners, the IRScould separate that adjustment into a sep-arate imputed underpayment, called a spe-cific imputed underpayment. The partner-ship could then elect to apply the rulesunder section 6226 to the specific imputedunderpayment for which a single partneror group of partners would be responsibleand the partnership could pay the generalimputed underpayment at the partnershiplevel.

The option to create multiple imputedunderpayments provides flexibility for thepartnership, the partners, and the IRS toaddress fact-specific issues that may ariseas part of the administrative proceeding atthe partnership level. If the partnershipwould like to change the number or com-position of the imputed underpaymentsthat are listed on the NOPPA, the partner-ship may request modification under pro-posed § 301.6225–2(d)(6).

The examples in proposed § 301.6225–1(f) demonstrate the rules of this section.

C. Modification of an imputedunderpayment

Proposed § 301.6225–2(a) provides gen-eral rules for modification of an imputedunderpayment. A partnership that has re-ceived a NOPPA may request modificationof a proposed imputed underpayment. Theeffect of modification on the proposedimputed underpayment is described in pro-posed § 301.6225–2(b). Only the partner-ship representative may request modifica-tion of an imputed underpayment.

With respect to adjustments that do notresult in an imputed underpayment, mod-ification is only permissible if the partner-ship also has an imputed underpaymentthat is eligible to be modified under pro-posed § 301.6225–2. Section 6225(c)refers to modification of the imputed un-derpayment and does not address modifi-cation with respect to adjustments that donot result in an imputed underpayment.Section 6225(c)(2)(B), however, requiresa partner whose allocable share of a real-location adjustment does not result in animputed underpayment to file an amendedreturn and take into account the partner’sshare in order for the partnership to re-ceive modification of the imputed under-payment. As a result, section 6225clearly contemplates the possibility ofrequesting modification with respect toan adjustment that does not result in animputed underpayment. Accordingly,proposed § 301.6225–2(a) allows forsuch modifications provided the partner-ship has an imputed underpayment thatis set forth in the NOPPA. If the NOPPAdoes not set forth an imputed underpay-ment, the partnership may not request amodification with respect to adjustments

that do not result in an imputed under-payment under proposed § 301.6225–2.

i. Effect of Modification

Proposed § 301.6225–2(b) provides therules describing the effect of modificationon the calculation of the imputed under-payment. Some modifications may resultin excluding certain adjustments, or por-tions thereof, from the calculation of theimputed underpayment, such as modifica-tion under proposed § 301.6225–2(d)(2),(d)(3), (d)(5), (d)(7), (d)(8), and, if appli-cable, (d)(9). When the IRS approvesone of those types of modification, theportion of the partnership adjustment at-tributable to that partner (or indirectpartner) is removed from the calculationof the netted grouping amounts underproposed § 301.6225–1, resulting in areduction of the total netted partnershipadjustments underlying the calculationof the imputed underpayment. This re-duction in the total netted partnershipadjustments does not, however, affectthe amount of the partnership adjust-ment itself, only whether the adjustmentis included in the calculation of the im-puted underpayment. For instance, as-sume the IRS makes an adjustment byincreasing the valuation of an asset from$100 to $1100 (a $1000 adjustment).One partner files an amended return totake into account that partner’s 50 per-cent share of the adjustment. The resultis that only $500 worth of adjustmentsare included in the imputed underpay-ment calculation. The value of the assetremains $1100 as determined by theIRS, and the adjustment remains $1000,notwithstanding the amended return thatis filed by the partner.

Proposed § 301.6225–2(b)(3) providesthat modification with respect to a part-nership with partners for which rate mod-ification under section 6225(c)(4) and pro-posed § 301.6225–2(d)(4) is approvedaffects the taxable rate applied to thetotal netted partnership adjustment anddoes not affect the extent to which part-nership adjustments factor into the cal-culation of the imputed underpayment.This rule may also apply in appropriatecircumstances to modifications underproposed § 301.6225–2(d)(8) and pro-posed § 301.6225–2(d)(9). Proposed

Bulletin No. 2017–28 July 10, 201729

§ 301.6225–2(b)(3) provides the methodfor calculating the partnership’s “rate-modified netted partnership adjustment” andimputed underpayment when rate modifica-tion under proposed § 301.6225–2(d)(4) isapproved.

A specific rule applies to rate modifi-cation with respect to special allocationsthat requires each partner’s distributiveshare to be determined based on theamount of net gain or loss to the partnerthat would result if the partnership hadsold all of its assets at their fair marketvalue as of the close of the reviewedyear of the partnership. See proposed§ 301.6225–2(b)(3)(iv). If a partnershiprequests more than one type of modifica-tion, proposed § 301.6225–2(b)(1) pro-vides an ordering rule that states that ratemodification is applied after the othertypes of modification specified in pro-posed § 301.6225–2(d).

Proposed § 301.6225–2(b)(4) providesthat the IRS may prescribe other guidanceregarding the effect of other modificationsreferenced in proposed § 301.6225–2(d)(9), and the Treasury Department andthe IRS seek comments on other appropri-ate modifications and their effect on thecalculation of an imputed underpayment.In particular, the Treasury Departmentand the IRS request comments on modi-fications that may be considered appropri-ate where a partner is a foreign person andthus may be subject to gross basis taxationunder section 871(a) or 881(a), or where apartner, indirect partner, or the partnershipis entitled to a modified rate under theCode or as a resident of a country that hasin effect an income tax treaty with theUnited States.

ii. Time, Form, and Manner forRequesting Modification

Proposed § 301.6225–2(c) providestime, form, and manner rules for when apartnership may request modification.Modification must be requested in theform and manner prescribed by the IRSwithin the 270-day period describedin proposed § 301.6225–2(c)(3)(i). TheTreasury Department and the IRS requestcomments on the coordination of theserules with the mutual agreement proce-dures available under income tax treatiesthat a partnership, partner, or indirect part-

ner may invoke in order to determine el-igibility for treaty benefits that may affectthe calculation of the imputed underpay-ment.

Proposed § 301.6225–2(c)(1) providesthat a determination with respect to amodification request does not preclude theIRS under section 7605(b) from initiatingan administrative proceeding with respectto a partner, even if the IRS approvesmodification based on the partner’s ac-tions or status. The IRS may rely on thefacts provided to the IRS by the partner-ship representative to determine whether amodification request is proper and is notrequired to conduct an examination of thepartners that form the basis of any modi-fication request. Any determination by theIRS with respect to a modification requestis a determination as part of the adminis-trative proceeding with respect to the part-nership. The IRS may approve modifica-tion based on an adjustment in anamended return filed for modification pur-poses and also examine the amended re-turn in a separate proceeding with respectto that partner.

Similarly, if the IRS approves a modi-fication based on the tax-exempt status ofa partner, the IRS is not precluded fromexamining whether the partner was in facttax-exempt for the same year in a separateproceeding. A review of or request for anyinformation or documents provided aspart of modification does not constitute anexamination, inspection, or administrativeproceeding with respect to any personother than the partnership. Accordingly,even in the case of an election under sec-tion 6226, and where certain modifica-tions may affect what adjustments a part-ner take into account under proposed§ 301.6226–3, nothing in these proposedregulations prohibits the IRS from exam-ining that partner’s return and re-determining items that were affected by apreviously approved modification.

A partnership requesting modificationmust substantiate the facts supporting arequest for modification to the satisfactionof the IRS. The particular documents andother information that may be required arebased on the type of modification re-quested. The IRS may, in forms, instruc-tions, or other guidance, require particulardocuments or other information to sub-stantiate a particular type of modification

or impose other information-reporting orrecordkeeping requirements on partner-ships requesting modification.

For all requests, the partnership repre-sentative must furnish to the IRS uponrequest, a detailed description of the struc-ture, allocations, ownership, and owner-ship changes of the partnership, its part-ners, and, if relevant, any indirect partnersfor each taxable year relevant to the re-quest, as well as all partnership agree-ments (including side agreements) foreach relevant taxable year with respect toeach modification request. In the case of amodification requested by the partnershipwith respect to an indirect partner, the IRSmay require certain information related tothe pass-through partner(s) through whichthe indirect partner holds its interest in thepartnership subject to the administrativeproceeding. For instance, in the case ofamended return modification by an indi-rect partner, the IRS may require the part-nership to provide any information neces-sary to determine whether the indirectpartner has taken the correct amount ofthe adjustments into account. Such infor-mation may include information similar toamended returns for any partnership-partner through which the adjustments areflowed before being taken into account bythe indirect partner. The IRS will denymodification if a partnership fails timelyto provide information the IRS determinesis necessary to support and substantiate arequest for modification.

Proposed § 301.6225–2(c)(3)(ii) pro-vides that the partnership may request anextension of the 270-day period describedin proposed § 301.6225–2(c)(3)(i), andproposed § 301.6225–2(c)(3)(iii) providesthat the 270-day period described in pro-posed § 301.6225–2(c)(3)(i) closes earlywhen the partnership representative andthe IRS agree, in writing, to waive the270-day delay between the mailing of theNOPPA and when the IRS may first issuean FPA described in section 6231(a)(flush language). The waiver of the 270-day period would prevent the partnershipfrom providing modification-related infor-mation after the date the waiver was exe-cuted, and it would also allow the IRS toissue an FPA earlier than normal. Thismay be desirable for a partnership if thepartnership does not intend to seek mod-ification, but the partnership does want to

July 10, 2017 Bulletin No. 2017–2830

litigate the adjustments or make an elec-tion under section 6226. This could alsooccur in conjunction with the partner-ship’s waiver of the requirement that theIRS issue an FPA before making a part-nership adjustment, for example, if thepartnership agrees to the adjustments. Pro-posed § 301.6225–2(c)(4) describes themethod by which the IRS will approvemodification requests.

D. Types of modification

Proposed § 301.6225–2(d) providesseven enumerated types of modificationsthe IRS will consider if requested by thepartnership. Additionally, the IRS mayconsider alternative forms of modificationunder proposed § 301.6225–2(d)(9).Unless otherwise stated in proposed§ 301.6225–2(d), a partnership may re-quest any or all of the types of modifica-tion described in that paragraph. See pro-posed § 301.6225–2(d)(1).

i. Amended Returns

A partnership may request modifica-tion of an imputed underpayment if a re-viewed year partner (or indirect partner)of a partnership files one or moreamended returns that take into account apartnership adjustment or a portion of apartnership adjustment. See proposed§ 301.6225–2(d)(2)(i). The reviewed yearpartner (or indirect partner) filing theamended return(s) must take into accountthe appropriate adjustments (or portionthereof) and also address the effects ofsuch adjustments on any tax attributes (asdefined in proposed § 301.6241–1(a)(10))that must be adjusted because the partner-ship adjustments were taken into account.For the partnership to receive modifica-tion as a result of a partner’s amendedreturns, the partner must file amended re-turns for all years with respect to whichany tax attribute is affected by reason ofthe partnership adjustment(s) taken intoaccount and include any payment due.The Treasury Department and the IRSseek comments on how best to streamlinethis process for ease of administering theamended return modification process.

The partners’ amended returns must befiled with the IRS in accordance with theapplicable forms and instructions pre-

scribed by the IRS, and the partnershiprepresentative must provide affidavitsfrom each partner for which modificationis sought that the partner did in fact fileamended returns and make appropriatepayments. See proposed § 301.6225–2(d)(2)(iii). Any payment due as a resultof adjustments taken into account on anamended return is due at the time thepartner’s amended return is filed. See pro-posed § 301.6225–2(d)(2)(ii).

Any partner that files an amended re-turn for modification purposes and is re-quired to make a payment of any kindwith that amended return must do so priorto the expiration of the period of limita-tions under section 6501 for the modifica-tion year(s). See proposed § 301.6225–3(d)(2)(v). Section 6225(c)(2) provides thatpartners may file amended returns “notwith-standing section 6511,” and consequently, apartner may file an amended return thatseeks a refund (such as in the case of areallocation of a distributive share as de-scribed in proposed § 301.6225–2(d)(2)(vi))at any time. A request for refund filed as partof an amended return filed for modificationpurposes outside the period set forth in 6511may only request a refund for adjustmentsrelated to the partnership proceeding andrelevant correlative adjustments. A partnermay not request a refund through theamended return modification proceduresoutside the period set forth in section 6511for adjustments that are not a direct result ofthe partnership adjustments determined inthe partnership-level proceeding. See pro-posed § 301.6225–2(d)(2)(v)(B).

If, however, the IRS must make anassessment to collect a payment due withrespect to an amended return filed duringmodification, the partner’s period of lim-itations under section 6501 must not haveexpired at the time the amended return isfiled. Nothing in the proposed regulationsprevents partners from signing an exten-sion of the period of limitations for part-nership adjustments at the time the IRSinitiates the partnership administrativeproceeding or at any other time prior tothe expiration of the period of limitationsunder section 6501. The IRS recognizesthat securing such extensions may not bepossible in all cases, but doing so may bean option for certain partners and partner-ships. Alternatively, there may be othermodification alternatives for a partner

whose assessment period under section6501 with respect to the modificationyears (as defined in proposed § 301.6225–2(d)(2)(iv)) has expired. A partner may,for example, be able to enter into a closingagreement that allows for treatment simi-lar to an amended return and to make apayment on behalf of the partnership’sliability in recognition of what the partnerwould have filed and paid if the partner’sassessment period had not already ex-pired.

In general, there is no requirement thatall reviewed year partners of a partnershipfile amended returns for the partnership torequest amended return modification.However, in the case of a reallocationadjustment, in general, in order for theIRS to approve the modification, all part-ners affected by the reallocation adjust-ment must file amended returns related tothe reallocation adjustment. See proposed§ 301.6225–2(d)(2)(vi). In certain cases, apartnership may be able to demonstratethat a partner subject to a reallocationadjustment has taken into account thatpartner’s relevant adjustment via someother type of modification that may notrequire an amended return. For instance, ifone partner is a tax-exempt entity forwhich the partnership may request modi-fication based on that partner’s tax-exempt status (as described in proposed§ 301.6225–2(d)(3)), and that partner issubject to a reallocation adjustment, itmay be unnecessary for the tax-exemptpartner to file an amended return in orderfor the partnership to request modificationin accordance with the requirements ofproposed § 301.6225–2(d)(2)(vi). Suchdeterminations will depend on the factsand circumstances related to the particularmodification and are within the discretionof the IRS.

The Treasury Department and theIRS propose a specific rule that ad-dresses pass-through partners in pro-posed § 301.6225–2(d)(2)(vii). A pass-through partner (as defined in proposed§ 301.6241–1(a)(5)) may, for modifica-tion purposes only, file an amended re-turn and take into account its allocableshare of the adjustments. A pass-through partner that does so must pay anamount calculated in the same manneras the safe harbor amount under pro-posed § 301.6226 –2(g) on the pass-

Bulletin No. 2017–28 July 10, 201731

through partner’s share of the partner-ship adjustment except that, forpurposes of calculating the paymentamount, instead of using the tax rateunder section 6225(b)(1)(A), the tax rateis the rate determined by substituting thetotal net income of the pass-throughpartner for the taxable year (as adjusted)for taxable income in section 1(c) of theCode (determined without regard to sec-tion 1(h)).

An amended return filed by a pass-through partner without a payment (whenrequired based on the adjustments) willnot result in modification for the partner-ship. See proposed § 301.6225–2(d)(2)(vii). An amended return filed by apass-through partner is not an administra-tive adjustment request as defined in sec-tion 6227 and the regulations thereunder,but rather is a stand-alone document thatis filed solely for modification purposes.

Regardless of the number of pass-through partners or tiers involved in apartnership structure, all amended returnsfiled by a pass-through partner and itsowners must be filed with the IRS and anytax, penalties, additions to tax, and interestdue with respect to such amended returnsmust be paid within the 270-day modifi-cation period described in proposed§ 301.6225–2(c)(3)(i). Modification is al-lowed to the extent amended returns arefiled and any necessary payments aremade within the 270-day time period.

Because amended return modificationrequires a partner to fully take into ac-count all adjustments allocable to thatpartner, a partnership may not request ad-ditional modification with respect to apartner who files and takes into accountadjustments on an amended return. Seeproposed § 301.6225–2(d)(2)(i). This re-striction exists because a partner that filesan amended return has fully accounted forthe adjustment and allowing, for example,a further rate reduction would produce adouble benefit at the partnership level.

If a partner files an amended return formodification purposes which leads to areduction in the imputed underpaymentbased on the IRS’s approval of that mod-ification request, the partner waives itsability to file further amended returns forthe modification years with respect toitems related to the partnership adjust-ments and the imputed underpayment un-

less the partner receives permission fromthe IRS to do so. See proposed§ 301.6225–2(d)(2)(vii)(B). The intent ofthis provision is to prevent a partnerfrom filing an amended return for mod-ification purposes, paying some addi-tional amount due and then, after thepartnership receives modification, filinganother amended return claiming a re-fund for the same amount on which thepartnership relied as part of its modifi-cation request.

In addition, partners filing amended re-turns under section 6225 do so as part ofthe proceeding under subchapter C ofchapter 63, which means that they arebound by the partnership representative’sactions pursuant to section 6223. If thepartnership representative agrees to an im-puted underpayment that was modifieddue to a partner filing an amended return,the partner is bound to that modificationthrough section 6223 and may not changethe partner’s position related to the part-nership adjustments that were taken intoaccount in a way that is inconsistent withthe partnership representative’s actions.Nonetheless, the IRS understands that sit-uations may arise in which a partner needsto file a further amended return for anunrelated reason, and the partner may re-quest permission from the IRS to do so ifnecessary. The Treasury Department andthe IRS seek comments on the most effi-cient ways that taxpayers may request per-mission from the IRS to file a subsequentamended return.

In addition, a partner can only file anamended return with respect to itemsstemming from a partnership under theprocedures set forth in subchapter C ofchapter 63, that is, the amended returnmodification procedures. See proposed§ 301.6225–2(d)(2)(vii)(A).

ii. Tax-exempt Partners

A partnership may request modifica-tion based on the status of its tax-exemptpartners. If the IRS approves that modifi-cation, the imputed underpayment is cal-culated without regard to the portion ofthe partnership adjustment that is alloca-ble to the tax-exempt partner and withrespect to which the partner would not besubject to tax for the reviewed year byreason of its status as a tax-exempt entity.

The modification request is based on thetax-exempt status of the partner during thereviewed year. See proposed § 301.6225–2(d)(3)(i).

For the purposes of modification, sec-tion 6225(c)(3) provides that a tax-exemptentity is defined pursuant to section168(h)(2). Proposed § 301.6225–2(d)(3)(ii) further provides that status as a tax-exempt entity for purposes of modifica-tion is determined in accordance with thedefinitions provided under section 168(h)(2)(A), (C), and (D) without reference tosection 168(h)(2)(B) and (E). Section168(h)(2)(B) and (E) do not define cate-gories of entities that are treated as tax-exempt entities, but rather impose limitson the extent to which certain propertyleased to tax-exempt entities is entitled tospecial treatment as “tax-exempt useproperty” with respect to depreciation de-ductions available to a lessor. As such,those provisions are inapplicable to thedetermination of tax-exempt status forpurposes of the modification process.

Some tax-exempt entities may receiveincome for which they are subject to tax.For example, section 511 imposes a tax onunrelated business taxable income re-ceived by certain tax-exempt entities. Ad-ditionally, section 871, section 881, andsection 882 impose tax on certain incomereceived by foreign persons. A partnershipmay request modification based on an ad-justment allocable to a tax-exempt partneronly to the extent that the partnershipdemonstrates to the satisfaction of the IRSthat the tax-exempt partner would nothave been subject to tax with respect tothe adjustment allocable to the partnerfor the reviewed year. See proposed§ 301.6225–2(d)(3)(iii).

A partnership’s decision either to re-quest or not to request modification in thecourse of an audit under these proposedregulations may raise issues concerningwhether and to what extent any benefitthat might result from its request or failureto request modification could be consid-ered to have been provided to any personin lieu of to a tax-exempt partner (whethera current or former partner, and at any“tier” of the partnership). For example,such a transfer of benefit may raise issuesfor one or more partners with respect to:(1) the status of a tax-exempt partner be-cause of private inurement or private ben-

July 10, 2017 Bulletin No. 2017–2832

efit under section 501(c); (2) excise taxesunder chapter 42 of subtitle D of the Codeor under sections 4975, 4976, or 4980; or(3) requirements under title I of the Em-ployee Retirement Income Security Act of1974, Public Law No. 93–406 (88 Stat.829 (1974)) as amended (ERISA), such asthe fiduciary responsibility rules underpart 4 thereof. Some of these issues maybe addressed by including appropriateprovisions in the partnership agreement.However, the Treasury Department andthe IRS request comments from the publicon whether guidance is needed to addressthese potential issues and, if so, on possi-ble ways to resolve such issues. Any suchcomments related to title I of ERISA willbe shared with the Department of Labor.

iii. Rate Modification

Section 6225(c)(4) provides the oppor-tunity for a partnership to request to mod-ify an imputed underpayment by changingthe tax rate applied to the portion of thetotal netted partnership adjustment alloca-ble to a C corporation or an individualwith respect to capital gains and qualifieddividends. If the partnership has partnersthat are C corporations or individuals, thepartnership may request that a lower rateapply to those portions, but that lower ratewill be the highest rate in effect withrespect to the type of income and partnerfor whom modification is requested. Seeproposed § 301.6225–2(d)(4).

iv. Certain Passive Losses of PubliclyTraded Partnerships (PTPs)

Section 6225(c)(5) provides an oppor-tunity for publicly traded partnerships (asdefined in section 469(k)(2)) to request tomodify an imputed underpayment in thecase of a net decrease in a specified pas-sive activity loss for specified partners.Proposed § 301.6225–2(d)(5)(ii) definesspecified passive activity losses, and pro-posed § 301.6225–2(d)(5)(iii) definesspecified partners. This modification isavailable both to partnerships that arepublicly traded partnerships and with re-spect to partners (and indirect partners)that are publicly traded partnerships. Thepartnership requesting modification mustreport to all specified partners that thepartnership has adjusted the amount of

their suspended passive loss carryovers atthe end of the adjustment year by theamount of any passive losses applied inconnection with such modifications. Thereduction in suspended passive loss carry-overs is binding on the specified partnerspursuant to section 6223 and the regula-tions thereunder. The Treasury Depart-ment and the IRS seek comments on howthe requirement to notify partners canmost efficiently be accomplished.

v. Other Forms of Modification underSection 6225(c)(6)

Section 6225(c)(6) provides that theIRS may prescribe additional types ofmodification through regulations. In theseproposed regulations, the IRS is proposingthree specific additional methods of mod-ification and one general provision for ad-ditional types of modification to be con-sidered at a later time.

Proposed § 301.6225–2(d)(6) allows apartnership to request modification of thenumber and composition of imputed un-derpayments. This provision specificallyallows modifications of the process de-scribed in proposed § 301.6225–1(e), inwhich a specific imputed underpaymentmay be appropriate. The IRS is not obli-gated to implement this modification if itdetermines it is appropriate to reflect thepartnership adjustments in imputed under-payments in a manner different than re-quested by the partnership. For instance,the IRS may determine it is appropriate todeny the calculation of a specific imputedunderpayment by the partnership if, as aresult of the specific imputed underpaymentcalculation, there is an increase in number ofthe partnership adjustments that net to a netnon-positive amount, causing them to bedisregarded and treated as adjustments thatdo not result in an imputed underpayment,which would shift the net losses away fromthe partnership and the reviewed year and tothe adjustment year.

A special modification has been al-lowed in proposed § 301.6225–2(d)(7) forpartners that are qualified investment en-tities described in section 860. These en-tities may distribute deficiency dividendsafter the NOPPA has been issued, and, ifthe entities do so in compliance with sec-tion 860 and the regulations thereunder,the IRS will treat the amount allowed as a

deficiency dividend deduction under sec-tion 860(a) as having been taken into ac-count by a partner in a manner similar toan amended return modification. One con-cern regarding this form of modification isthat a NOPPA proposes an imputed un-derpayment, but it is not a final amount, inthat the partnership may still challenge theamount in the IRS Office of Appeals or incourt, but, once a deficiency dividend isdistributed and claim therefore is filed, thequalified investment entities have no op-portunity to change their position if thepartnership obtains a favorable result at alater date. Given this lack of finality, theTreasury Department and the IRS seekcomments on whether this provision ade-quately allows qualified investment enti-ties to use the modification process.

Finally, the IRS may take into accountany closing agreements entered into bypartners pursuant to section 7121 and willallow appropriate modification based onthe contents of that closing agreement.See proposed § 301.6225–2(d)(8). Thistype of modification may provide someflexibility for taxpayers for which otherforms of modification may prove burden-some or difficult. In certain cases, however,closing agreements may not be appropriatefor partners seeking to modify an imputedunderpayment because the finality of a clos-ing agreement may limit a partnership’sability to challenge the underlying adjust-ments in the IRS Office of Appeals or incourt.

In addition to the enumerated typesof modification described in proposed§ 301.6225–2(d)(2) through (8), the IRSmay, in its discretion, consider alternativetypes of modification not specifically dis-cussed in proposed § 301.6225–2(d); thedocumentation necessary to substantiatesuch modifications may be set forth informs, instructions, or other guidance pre-scribed by the Department of Treasury orthe IRS. See proposed § 301.6225–2(d)(9). The IRS may issue further guid-ance to establish procedures related to ad-ditional alternative forms of modification.As with all forms of modification, thepartnership must demonstrate that an al-ternative modification is accurate and ap-propriate.

The examples in proposed § 301.6225–2(e) demonstrate the rules of § 301.6225–2.

Bulletin No. 2017–28 July 10, 201733

E. Treatment of adjustments that do notresult in an imputed underpayment

Proposed § 301.6225–1(c)(2) sets forththe three circumstances in which partner-ship adjustments do not result in an im-puted underpayment. Under that para-graph, a partnership adjustment does notresult in an imputed underpayment: (1) ifthe adjustment relates to a distributiveshare reallocation that is disregarded un-der proposed § 301.6225–1(d)(2)(ii), (2) ifafter grouping and netting the adjust-ments, the result is a net non-positive ad-justment under proposed § 301.6225–1(d)(3)(ii), or (3) if the calculation underproposed § 301.6225–1(c)(1) of this sec-tion results in an amount that is zero orless than zero.

Proposed § 301.6225–3 sets forth therules for the treatment of adjustments thatdo not result in an imputed underpayment.In general, such an adjustment is taken intoaccount by the partnership in the adjustmentyear as a reduction in non-separately statedincome or as an increase in non-separatelystated loss depending on whether the adjust-ment is to an item of income or loss. One ofthe exceptions to this rule is for separatelystated items under section 702. Proposed§ 301.6225–3(b)(2) provides that if an ad-justment is to an item that is required to beseparately stated under section 702, the ad-justment shall be taken into account by thepartnership on its adjustment year return asan adjustment to such separately stated item.Proposed § 301.6225–3(b)(3) provides thatan adjustment to a credit is also taken intoaccount as a separately stated item. How-ever, if a section 6226 election is made withrespect to an imputed underpayment, theserules do not apply to adjustments that aredisregarded in computing the imputed un-derpayment with respect to which the sec-tion 6226 election was made. Such adjust-ments are taken into account by thereviewed year partners under section 6226.

i. Allocation of Adjustments That DoNot Result in an Imputed Underpayment

Generally, the proposed regulations aresilent with respect to the allocation ofadjustments that do not result in an im-puted underpayment, leaving their alloca-tion to the partnership agreement. Section301.6225–3(b)(3) proposes rules, how-

ever, governing those allocations, or lackthereof, in limited circumstances.

An adjustment that does not result inan imputed underpayment pursuant to§ 301.6225–1(c)(2)(i) is allocated to thoseadjustment year partners who are the re-viewed year partners with respect towhom the amount was reallocated. Thisrule is intended to prevent the allocationof such an item back to the partner fromwhom it was reallocated in connectionwith the audit. If the reviewed year part-ners with respect to whom the amount wasreallocated are not adjustment year part-ners, then such adjustment is allocated tothe adjustment year partners who are thesuccessors to those reviewed year partnersor, if no successors are identifiable or donot exist, among adjustment year partnersaccording to the adjustment year partners’distributive shares.

If as part of the modification processunder § 301.6225–2, a partner takes intoaccount an adjustment that would otherwisenot result in an imputed underpayment, theadjustment is not allocated to any partner forthe adjustment year because the reviewedyear partner has already taken its share ofthe adjustment into account. See proposed§ 301.6225–3(b)(5). Allocating such an ad-justment in the adjustment year would resultin double counting.

In addition, if proposed § 301.6226–3applies with respect to an adjustment thatdoes not result in an imputed underpayment,proposed § 301.6225–3 does not apply tothat adjustment, and the adjustments aretaken into account under the rules governingsection 6226. See proposed § 301.6225–3(b)(6). Finally, the rules of subchapter Kapply with respect to adjustments taken intoaccount under § 301.6225–3. See proposed§ 301.6225–3(c).

F. Notice 2016–23 comments related tosection 6225

As discussed above, section 6225 gen-erally requires that adjustments be takeninto account for purposes of computingthe imputed underpayment, except thatadjustments that do not result in an im-puted underpayment are taken into ac-count in the adjustment year. Section6241(4) prescribes the treatment of theimputed underpayment as a nondeductiblepayment by the partnership, but is other-

wise silent regarding the effect of the ad-justments themselves on the partnership,the reviewed year partners, or the adjust-ment year partners. In response to Notice2016–23, 2016–12 I.R.B. 490, comment-ers requested that the effect of partnershipadjustments on basis be addressed inthe regulations. One commenter recom-mended that regulations provide that apartnership that pays an imputed under-payment attributable to an adjustment toan item of income, gain, loss, or deduc-tion, allocate that item in the adjustmentyear to the adjustment year partners treat-ing such items as items of income, gain,loss, or deduction as non-taxable or de-ductible under sections 705(a)(1)(B) or(2)(B). The commenter explained that ad-justments to basis and capital accounts arenecessary to ensure that inside and outsidebasis remain congruent and to ensure thatincome, gain, loss, and deduction are nottaxed twice. The Treasury Departmentand the IRS intend to adopt the approachthe commenter recommended and to pro-vide additional rules providing for adjust-ments to the inside basis and book valueof any partnership property if the partner-ship adjustment is a change to an item ofgain, loss, amortization or depreciation(i.e., the change is basis derivative). Ad-justment items taken into account on anamended return in connection with a mod-ification to an imputed underpaymentshould not be allocated in the adjustmentyear. The proposed regulations reserve aplace for these rules.

The commenter that recommended thata partnership allocate adjustment items inthe adjustment year to the adjustment yearpartners as items described in sections705(a)(1)(B) or (2)(B) also recommendedthat the allocations should be made inaccordance with the partnership agree-ment and subject to the existing “substan-tial economic effect” requirements undersection 704. The Treasury Departmentand the IRS request comments onwhether, instead, it would be appropriateto allocate partnership adjustments thatresult in an imputed underpayment (mean-ing they are not taken into account by thepartnership in the adjustment year undersection 6225(a)(2)) only to adjustmentyear partners that are allocated part of thesection 705(a)(2)(B) expense related tothe partnership’s payment of the imputed

July 10, 2017 Bulletin No. 2017–2834

underpayment. The Treasury Departmentand the IRS also request comments onwhether partnership adjustments arisingfrom a reviewed year allocation that isreallocated from one partner to anotherpartner require special rules restrictingtheir allocations in the adjustment year tothe partners from and to whom the itemwas reallocated and how to address suc-cessor partners or situations where the re-viewed year partner has received a liqui-dating distribution and is no longer apartner.

Another commenter suggested that theIRS should have to provide evidence of anet underpayment of tax prior to makingan adjustment because in some cases thetax may simply have been paid by thewrong partner (for example, with a real-location adjustment). This suggestion iscontrary to the compliance function of theIRS, and therefore, the IRS has declinedto propose such a rule. The suggestion isalso contrary to the statutory frameworkof the centralized partnership audit regimegenerally, and the rules for determiningthe imputed underpayment specifically.Section 6225(b)(2) specifically providesrules for how the IRS should make real-location adjustments, which appear to becontrary to the commenter’s suggestion.

Another commenter asked for safe-guards similar to the mitigation provisionsto prevent an overpayment of tax. Theproposed regulations do not specificallyaddress the mitigation provisions alreadyin place under the Code, but there is noth-ing in the proposed regulations related tothe centralized partnership audit regimethat would prevent a partner or the part-nership from pursuing mitigation, if ap-propriate. Therefore, no change in the mit-igation procedures is necessary.

Commenters requested that the IRS ad-dress credit recapture situations and howthose items are affected by the centralizedpartnership audit regime. The proposed reg-ulations do not specifically address thoseissues. However, proposed § 301.6225–1(a)(2) provides that the calculation of theimputed underpayment will take into ac-count all applicable preferences, restrictions,limitations, and conventions under theCode. Therefore, the proposed regulationsprovide flexibility to permit the IRS, duringthe examination, to account for credit recap-ture. The Treasury Department and IRS re-

quest additional comments on how creditsshould be managed within the framework ofthe proposed regulations.

One commenter discussed severalways to account for adjustments to cred-itable foreign tax expenditures (CFTEs)under the BBA. One recommended ap-proach was to account for a decrease toCFTEs as a decrease to credits, whiletreating an increase to CFTEs as an ad-justment that is disregarded for purposesof the imputed underpayment (to accountfor limitations and other considerations).Under this recommendation, an increasein CFTEs that is disregarded for purposeof calculating the imputed underpaymentwould be reported as a separately stateditem in the adjustment year. The com-menter noted that taxpayers would havethe option to achieve an accurate resultthrough the modification process. Thisrecommendation is generally consistentwith the broader approach taken in theproposed regulations; however, the Trea-sury Department and the IRS are reserv-ing on the treatment of CFTEs and otheradjustments affecting the amount of for-eign tax credit that might be allowable topartners. The comments received did notprovide a detailed recommendation withrespect the treatment of other adjustmentsrelating to the foreign tax credit calcula-tion, and the Treasury Department andIRS request comments on how adjust-ments affecting foreign tax credit calcula-tions should be taken into account withinthe framework of the centralized partner-ship audit regime, including possible waysto account for adjustments to itemssourced or calculated at the partner level,such as interest expense and deemed paidcredits.

Commenters asked that the tax attri-butes of adjustment year partners be takeninto account when determining modifica-tion. This suggestion was not adopted fora number of reasons. First, section6225(d) and proposed § 301.6241–1(a)(1)provide that the adjustment year is notdetermined until the adjustments are final.The partnership must seek modificationprior to when the adjustment year is de-termined, potentially more than a calendaryear before and even longer if the partner-ship seeks judicial review of the FPA.Because the adjustment year has not yetbeen determined at the time modification

must be requested, there would be no wayfor the IRS or the partnership to knowwho the adjustment year partners shouldbe.

Further, the text of section 6225 indi-cates that reviewed year partners are theappropriate partners with respect to whichmodification may be requested. For in-stance, the amended return modificationprovision under section 6225(c)(2)(A)(i)explicitly requires a partner to file anamended return for the partner’s taxableyear which includes the end of the re-viewed year of the partnership. When fil-ing that amended return, the partner musttake the adjustments “properly allocableto such partners” in the reviewed year intoaccount. Section 6225(c)(2)(A)(ii). Itwould be nonsensical for an adjustmentyear partner that was not also a reviewedyear partner to file an amended return forthe reviewed year taking any amount intoaccount. Similarly, section 6225(b)(1)(A)provides that the imputed underpaymentis calculated based on the highest tax ratein effect for the reviewed year, and ratemodification under section 6225(c)(4)(A)relates specifically to a reduction in therates in effect for the reviewed year byallowing for application of the rate of taxlower than the rate described in subsection(b)(1)(A), that is, the reviewed year rates.Finally, with respect to rate modificationsunder the rule for special allocations insection 6225(c)(4)(B)(ii), by statute, therate modification is based specifically on apartner’s distributive share of net gainsand losses if the partnership had sold all ofits assets at the close of the reviewed year.Such a rule cannot be applied to an ad-justment year partner that was not also areviewed year partner. In light of the stat-utory references to the reviewed year, itwould be incongruous to key certain mod-ifications off of the reviewed year partnersand others off of adjustment year partners.

In addition, the partnership can controlwho its current year partners are and couldadmit partners to the partnership for thesole purpose of improving the results of amodification, even attempting to inappro-priately eliminate the imputed underpay-ment. As a result, modification generallymust take into changes to tax that resultfrom the reviewed year partner taking thepartnership adjustments into account. Fi-nally, modification applies to reviewed

Bulletin No. 2017–28 July 10, 201735

year partners because their attributes arethe most relevant to determining theproper amount of taxes and other liabili-ties owed by the partnership and its part-ners with respect to partnership adjust-ments related to the reviewed year.Adjustment year partners’ tax attributesare generally relevant to what is reportedon the adjustment year return, not to thereviewed year exam.

Commenters requested clarification asto how modification would apply if onlysome of the partners filed amended re-turns. Section 6225(c)(2)(B) requires thatall affected partners file amended returnsonly in the case of an adjustment involv-ing the reallocation of distributive sharesamong partners. Proposed § 301.6225–2(b) provides the rules for how modifica-tion adjustments are taken into account incalculating the modified imputed under-payment, and proposed § 301.6225–2(d)(2) provides specific rules related toamended return modification. Other thanin the case of a reallocation adjustment,these rules allow some partners to fileamended returns without requiring that allpartners file amended returns. A partner-ship will be granted amended return mod-ification to the degree that the partners (orindirect partners) in a partnership partici-pate in the amended return modificationprocess.

Even in the case of a reallocation ad-justment, if the partners can demonstratethe affected partners’ adjustments werefully taken into account through someother form of modification, the IRS maydetermine that that requirement was metwithout all partners’ filing amended re-turns because the partners have met thespirit of the statute’s requirements (that is,taking into account adjustments at thepartner level). With the exception of thereallocation adjustment rule, if some part-ners choose to participate in amended re-turn modification, the partnership will re-ceive modification for those partners’amended returns. The partnership will notreceive modification for partners thatchoose not to file amended returns unlessthose partners satisfy another modificationprovision as demonstrated by the partner-ship.

Commenters requested clarification re-garding whether a partner may file anamended return if the statute of limitations

on assessment was closed for the year thepartnership return was filed or to allowpartners to file limited amended returnsrelated to closed years. Proposed§ 301.6225–2(d)(2)(v) prevents partnersfrom filing amended returns for modifica-tion purposes that require payment of taxafter the period of limitations on assess-ment under section 6501 is closed. Al-though section 6225(c)(2) provides thatamended returns may be filed “notwith-standing section 6511,” the statute pro-vides no such exception for the statute oflimitations under section 6501. As a re-sult, there are limits on which partnerswill be permitted to file an amended returnunder the modification procedures. Part-ners that are precluded from filingamended returns due to an expired section6501 period may be eligible for otherforms of modification, such as closingagreement modification under proposed§ 301.6225–2(d)(8), or partners and thepartnership may choose to make other ar-rangements where the partner pays theimputed underpayment on behalf of thepartnership outside of the modificationprocedures.

Commenters requested that partners beable to modify at various tiers within apartnership’s ownership structure (that is,modification of indirect partners). Thissuggestion has been adopted. For exam-ple, see the amended return modificationunder proposed § 301.6225–2(d)(2)(vii),which provides a special rule for pass-through partners. Under these rules, if themodification provisions are satisfied withrespect to indirect partners, partnershipsmay seek modification with respect to thepartners as well as the indirect partners.

Another commenter asked for an addi-tional 270 days after the issuance of thenotice of final partnership adjustment,during which the partners could fileamended returns. Section 6225(c) pro-vides that the information required formodification purposes must be providedto the IRS within 270 days of the issuanceof the NOPPA unless the IRS consents toan extension. The proposed regulationsclosely follow these rules. Accordingly, arequest for an extension of the 270-dayperiod will be considered by the IRS on acase by case basis. See proposed§ 301.6225–2(c)(3).

Commenters requested that partners beallowed to certify that they have filedamended returns so that the partners donot have to provide their amended returninformation directly to the partnership orthe partnership representative. This sug-gestion was incorporated in proposed§ 301.6225–2(d)(2)(iii). Under this sec-tion, partners must file their returns inaccordance with forms and instructionsfor filing amended returns for modifica-tion purposes, and the partnership repre-sentative must provide certifications fromthose partners to the IRS employee con-ducting the administrative proceeding.

Commenters requested that the IRS al-low the partners to pay any taxes duerelated to their amended returns either atthe time the amended returns are filed orthrough any available IRS administrativecollection process. The Treasury Depart-ment and the IRS declined to propose thisrule at this time. The IRS seeks commentsas to how the IRS might allow more flex-ibility for taxpayers with respect to pay-ment, while at the same time ensuring thatpartners in partnerships that requestamended return modification are commit-ted to taking into account the adjustmentsrelevant to their amended returns.

Commenters requested that an alterna-tive modification be available to partnersthat involved a summary or schedule ofadjustments that reflect what would hap-pen if an amended return were filed, ratherthan requiring the partners to file amendedreturns. The IRS will take into accountclosing agreements entered into as part-ners to the degree they affect the imputedunderpayment, and partners could use thismodification option to accomplish thegoal of avoiding amended returns. TheTreasury Department and the IRS requestcomments on additional possible optionsfor modification that would simplify theamended return process as well as theprocess for other types of modification.

Commenters requested that the IRSpermit modifications for taxes alreadypaid, for example, on a partner’s reviewedyear return filed inconsistently with thepartnership’s reviewed year return. Thissuggestion was not adopted, but the IRSwill allow modification with respect toclosing agreements entered into by part-ners and other modification options. Seeproposed § 301.6225–2(d). Other com-

July 10, 2017 Bulletin No. 2017–2836

menters requested that the IRS allow qual-ified investment entities to use the defi-ciency dividend procedures under section860 in modification. The proposed regu-lations adopt this suggestion. See pro-posed § 301.6225–2(d)(7).

6. Election for the Alternative toPayment of the Imputed Underpayment

Proposed § 301.6226–1(a) providesthat a partnership may elect under section6226 to “push out” adjustments to its re-viewed year partners rather than payingthe imputed underpayment determinedunder section 6225. If a partnership makesa valid election in accordance with pro-posed § 301.6226–1, the partnership is nolonger liable for the imputed underpay-ment. A partnership may make an electionunder this section with respect to one ormore imputed underpayments identified inan FPA. For example, where the FPAincludes a general imputed underpaymentand one or more specific imputed under-payments, the partnership may make anelection under this section with respect toany or all of the imputed underpayments.

Proposed § 301.6226–1(b)(1) providesthat if a partnership makes a valid electionin accordance with proposed § 301.6226–1,the reviewed year partners of the partnershipare liable for tax, penalties, additions to tax,and additional amounts, as well interest onsuch amounts, after taking into account theirshare of the partnership adjustments deter-mined in the FPA. Any modifications ap-proved by the IRS under proposed§ 301.6225–2 are also reported to the re-viewed year partners. In addition, under pro-posed § 301.6226–1(b)(2), adjustments thatdo not result in an imputed underpaymentdescribed in § 301.6225–1(c)(2)(i) and (ii)are not taken into account by the partnershipin the adjustment year and instead are in-cluded in the reviewed year partners’ shareof the partnership adjustments reported tothe reviewed year partners of the partner-ship.

Under proposed § 301.6226–1(c), anelection under section 6226 is not validunless the partnership complies with allthe provisions for making the election un-der proposed § 301.6226–1 and the pro-visions under proposed § 301.6226–2 re-quiring the partnership to furnishstatements to the reviewed year partners

and file those statements electronicallywith the IRS. An election under proposed§ 301.6226–1 may only be revoked withthe consent of the IRS.

Proposed § 301.6226–1(c)(2) providesthat if the IRS determines that an electionunder section 6226 is invalid, the IRS willnotify the partnership and the partnershiprepresentative (within 30 days of the de-termination) that the election is invalidand provide the reason why the election isinvalid. Proposed § 301.6226–1(c)(2)provides that a final determination that theelection is invalid means that the partner-ship is liable for any imputed underpay-ment to which the election related, as wellas any penalties and interest with respectto the imputed underpayment determinedunder section 6233. An election underproposed § 301.6226–1 is valid until theIRS determines the election is invalid.

A. Making the election under section6226

Under proposed § 301.6226–1(c)(3), apartnership may only make an election un-der section 6226 within 45 days of the datethe FPA was mailed by the IRS. The timefor filing the election may not be extended.The election must be signed by the partner-ship representative and filed with the IRS inaccordance with forms, instructions, andother guidance. Proposed § 301.6226–1(c)(4)(i). Proposed § 301.6226–1(c)(4)(ii)provides that the election must include thename, address, and correct taxpayer identi-fication number (TIN) of the partnership,the taxable year to which the election re-lates, the imputed underpayment(s) to whichthe election applies (if there is more thanone imputed underpayment in the FPA),each reviewed year partner’s name, address,and correct TIN, and any other informationrequired under forms, instructions, and otherguidance. A copy of the FPA to which theelection relates must also be attached to theelection.

As stated in proposed § 301.6226–1(d), an election under section 6226,which includes filing and furnishingthe statements described in proposed§ 301.6226–2, is an action taken by thepartnership under section 6223 and theregulations thereunder. Accordingly, allreviewed year partners are bound by theelection and each reviewed year partner

must take the adjustments on the state-ment into account in accordance withsection 6226(b) and report and pay ad-ditional chapter 1 tax (if any) pursuantto proposed § 301.6226 –3. Therefore, areviewed year partner may not treatitems reflected on a statement describedin proposed § 301.6226 –2 inconsis-tently with how those items are treatedon the statement that the partnershipfiles with the IRS. See proposed§ 301.6222–1(c)(2) (regarding items thetreatment of which a partner is bound tounder section 6223).

The Treasury Department and the IRSrequest comments from the public onwhether guidance is needed on how toaddress potential issues arising with re-spect to tax-exempt entities as a result ofan election under section 6226 and, if so,on possible ways to resolve such issues.For instance, if a tax exempt entity’s shareof the amounts under section 6226 is in-vestment income, issues may arise regard-ing how a section 6226 election mightaffect the entity’s public support calcula-tion (if the entity is a publicly-supportedorganization) or the applicable net invest-ment income tax (if the entity is a privatefoundation).

B. Filing statements with the IRS andfurnishing statements to reviewed yearpartners

Proposed § 301.6226–2(a) providesthat a partnership making an election un-der section 6226 must furnish statementsto the reviewed year partners with respectto the partner’s share of the adjustmentsand file those statements with the IRS inthe time, form, and manner prescribed byproposed § 301.6226–2(b) and (c). Pro-posed § 301.6226–2(a) further providesthat the statements furnished to the re-viewed year partners under section 6226are in addition to, and must be filed andfurnished separate from, any other state-ments required to be filed with the IRSand furnished to the partners for the tax-able year, including any Schedules K-1,Partner’s Share of Income, Deductions,Credits, etc.. Therefore, the partnershipmay not include the partnership adjust-ments that are to be taken into account bythe reviewed year partners under section6226 in any Schedule K-1 required to be

Bulletin No. 2017–28 July 10, 201737

furnished to the partner under section6031(b). Similarly, the partnership mustfurnish separate statements for each re-viewed year at issue and cannot combinemultiple reviewed years (if any) into asingle statement.

Under proposed § 301.6226–2(b), thestatements must be furnished to the re-viewed year partners no later than 60 daysafter the date the partnership adjustmentsbecome finally determined. The partner-ship adjustments become finally deter-mined upon the later of the expiration ofthe time to file a petition under section6234 or, if a petition is filed under section6234, the date when the court’s decisionbecomes final. Accordingly, if an FPA ismailed on June 30, 2020, and no petitionis filed by the partnership, the partnershipadjustments reflected in the FPA becomefinally determined on September 28, 2020(at the conclusion of the 90-day petitionperiod under section 6234). An exampleunder proposed § 301.6226–2(b)(3) illus-trates these rules.

Under proposed § 301.6226–2(b)(2), apartnership must furnish the statement toeach reviewed year partner in accordancewith the forms, instructions, or other guid-ance prescribed by the IRS. If the state-ments are mailed, it must mail the state-ments to each reviewed year partner usingthe current or last address for that partnerthat is known to the partnership. If a state-ment is returned to the partnership as un-deliverable, a partnership must exercisereasonable due diligence to identify a cor-rect address for the reviewed year partnerto which the statement relates. Examplesunder proposed § 301.6226–2(b)(3)illustrate this rule. Under proposed§ 301.6226–2(c), the partnership mustelectronically file the statements with theIRS, along with a transmittal that includesa summary of the statements and anyother information required in the formsand instructions, by the date the partner-ship is required to furnish the statementsto the reviewed year partners.

Under proposed § 301.6226–2(d), if apartnership discovers an error on a state-ment filed with the IRS, the partnershipmust correct the error within 60 days ofthe due date for furnishing the statementsto partners and filing the statements withthe IRS, as described in proposed§ 301.6226–2(b) and (c). Under proposed

§ 301.6226–2(d)(2)(ii), if a partnershipdiscovers an error after this 60-day period,the partnership may only correct the state-ments with the permission of the IRS inaccordance with the forms, instructions,or other guidance prescribed by the IRS. Ifthe IRS discovers an error in the state-ments, the IRS may require the partner-ship to correct the errors. If a partnershipfails to correct an error as required by theIRS, the IRS may treat this as a failure toproperly furnish statements to partnersand file the statements with the IRS, andthus, allow the IRS to determine that theelection under proposed § 301.6226–1 isinvalid with the result that the partnershipis liable for the imputed underpayment towhich the election related. A partnershipcorrects an error in a statement by elec-tronically filing the corrected statementwith the IRS and furnishing the correctedstatement to the affected reviewed yearpartner in accordance with the forms, in-structions, and other guidance prescribedby the IRS. The adjustments contained ona corrected statement are taken into ac-count by the reviewed year partner in ac-cordance with proposed § 301.6226–3 forthe reporting year (as defined in proposed§ 301.6226–3(a)). Proposed § 301.6226–2(d)(4). Because reviewed year partnerscannot file inconsistently with any state-ments furnished by the partnership underproposed § 301.6226–2 (see proposed§ 301.6226–1(d)), this provision providesa partner a period during which the part-ner may notify the partnership of any er-rors in a statement and have the partner-ship furnish a corrected statement to thepartner and file the corrected statementwith the IRS.

i. Contents of the Statements

The statements described in proposed§ 301.6226–2 must include the name andcorrect TIN of the reviewed year partner;the current or last address of the reviewedyear partner that is known to the partner-ship; the reviewed year partner’s share ofitems originally reported to the partner(taking into account any adjustmentsmade under section 6227); the reviewedyear partner’s share of the partnership ad-justments and any penalties, additions totax, or additional amounts; modificationsattributable to the reviewed year partner;

the reviewed year partner’s share of anyamounts attributable to adjustments to thepartnership’s tax attributes in any inter-vening year (as defined in proposed§ 301.6226–3) resulting from the partner-ship adjustments allocable to the partner;the reviewed year partner’s safe harboramount and interest safe harbor amount (ifapplicable), as determined in accordancewith proposed § 301.6226–2(g); the datethe statement is furnished to the partner;the partnership taxable year to which theadjustments relate; and any other informa-tion required by the forms, instructions, orother guidance prescribed by the IRS. Pro-posed § 301.6226–2(e).

ii. Partner’s Share of Adjustments andOther Amounts

Under proposed § 301.6226–2(f), a re-viewed year partner’s share of the adjust-ments that must be taken into account bythe reviewed year partner must be re-ported to the reviewed year partner in thesame manner as originally reported on thereturn filed by the partnership for the re-viewed year. If the adjusted item was notreflected in the partnership’s reviewedyear return, the adjustment must be re-ported in accordance with the rules thatapply with respect to partnership alloca-tions, including under the partnershipagreement. However, if the adjustments,as finally determined, are allocated to aspecific partner or in a specific manner,the partner’s share of the adjustment mustfollow how the adjustment is allocatedin that final determination. Proposed§ 301.6226–2(f)(1). In all cases, adjust-ments taken into account on any amendedreturns or closing agreements that are ap-proved during the modification processunder proposed § 301.6225–2(d)(2) andthat are disregarded in determining theimputed underpayment are ignored forpurposes of determining the reviewedyear partners’ share of the adjustments.However, these modifications are listedseparately on the statements provided tothe reviewed year partners. Althoughmodifications are ignored for purposes ofreporting the adjustments to the reviewedyear partners, any reviewed year partnerthat took an adjustment into account andpaid tax through an amended return orclosing agreement as part of modification

July 10, 2017 Bulletin No. 2017–2838

with respect to that adjustment will not betaxed a second time with respect to thatadjustment. This is true for two reasons.First, the partnership will inform the part-ner of any such adjustment in the state-ment furnished to that partner, per pro-posed § 301.6226–2(e). Therefore, thepartner will know upon receipt of a state-ment that certain adjustments were takeninto account by the partner and that thoseadjustments were disregarded in deter-mining the imputed underpayment. Sec-ond, when computing the partner’s taxthat stems from such an adjustment (asdescribed in proposed § 301.6226–3), thepartner will account for the adjustment aspart of that process, and the computationof the tax will reflect that the partner hadalready paid tax with respect to that ad-justment during the modification phase ofthe audit. An example in proposed§ 301.6226–3(g) illustrates this concept.

Any penalties, additions to tax, or ad-ditional amounts are reported to the re-viewed year partners in the same propor-tion as each partner’s share of theadjustments to which the penalties relate,unless the penalty, addition to tax, oradditional amount is specifically allo-cated to a specific partner(s) or in aspecific manner by a final court decisionor in the FPA, if no petition is filed.Proposed § 301.6226 –2(f)(2). Accord-ingly, if a penalty is determined withrespect to a specific item or items, thatpenalty is reported to the reviewed yearpartners in the same manner as the ad-justments to that specific item or items,unless otherwise provided in the FPA ora final court decision, for instance in asituation where there are partner-specific defenses to a penalty deter-mined at the partnership level. If a pen-alty, addition to tax, or additionalamount does not relate to a specific ad-justment, each reviewed year partner’sshare of the penalty, addition to tax, oradditional amount is determined in ac-cordance with how such items wouldhave been allocated under rules that ap-ply with respect to partnership alloca-tions, including under the partnershipagreement, unless it is allocated to aspecific partner in a specific manner in afinal determination of the adjustments,in which case it is allocated in accor-dance with the final determination.

C. Computation of the tax resulting fromtaking adjustments into account

Under proposed § 301.6226–3, a re-viewed year partner that is furnished astatement under proposed § 301.6226–2is required to pay any additional chapter 1tax (additional reporting year tax) for thepartner’s taxable year which includesthe date the statement was furnished to thepartner in accordance with proposed§ 301.6226–2 (the reporting year) thatresults from taking into account the ad-justments reflected in the statement. Theadditional reporting year tax is either theaggregate of the adjustment amounts, asdetermined in proposed § 301.6226–3(b),or, if an election is made under proposed§ 301.6226–3(c), a safe harbor amount.

In addition to being liable for the ad-ditional reporting year tax, the reviewedyear partner of a partnership that makes anelection under section 6226 must also pay,for the reporting year, the partner’s shareof any penalties, additions to tax, or addi-tional amounts reflected in the statement,and any interest on such amounts. Interestis determined in accordance with pro-posed § 301.6226–3(d).

i. Calculating the Aggregate of theAdjustment Amounts

Under proposed § 301.6226–3(b), theaggregate of the adjustment amounts isthe aggregate of the correction amountsdetermined under proposed § 301.6226–3(b). There are two correction amounts forthese purposes – one for the partner’s tax-able year which includes the reviewedyear of the partnership (first affected year)and a second correction amount for thepartner’s taxable years after the first af-fected year and before the reporting year(intervening years). These correctionamounts cannot be less than zero, and anyamount below zero after applying therules in proposed § 301.6226–3(b) doesnot reduce any correction amount, any taxin the reporting year, or any other amount.

Under proposed § 301.6226 –3(b)(2),the correction amount for the first af-fected year is the amount by which thereviewed year partner’s chapter 1 taxwould increase for the first affected yearby taking into account the adjustmentsreflected in the statement provided to

the reviewed year partner under pro-posed § 301.6226 –2. The correctionamount for the first affected year is cal-culated by first determining the amountof chapter 1 tax that would have beenimposed for the first affected year if theitems as adjusted in the statement hadbeen correctly reported in the first af-fected year. From that amount is sub-tracted the sum of the amount of chapter1 tax shown by the partner on the returnfor the first affected year (which in-cludes amounts shown on an amendedreturn for such year, including anamended return filed under section6225(c)(2) by the reviewed year partner)plus any amounts not shown but previ-ously assessed (or collected without as-sessment) less any rebates made (as de-fined in § 1.6664 –2(e)). In other words,the correction amount is equal to A mi-nus (B plus C minus D). A is the amountof chapter 1 tax that would have beenimposed had the items as adjusted beenproperly reported on the return for thefirst affected year. B is the amountshown as chapter 1 tax on the returnfor the first affected year (includingamended returns filed under section6225(c)(2) by a reviewed year partner).C represents any amounts not so shownpreviously assessed (or collected with-out assessment). D is the amount ofrebates made. For purposes of applyingthis definition, an amount previously as-sessed includes an amount that was pre-viously assessed as a result of the part-ner taking into account adjustmentsunder section 6226(b) pursuant to anelection made by a partnership otherthan the partnership making the currentelection.

Under proposed § 301.6226–3(b)(3),the aggregate correction amount for allintervening years is the sum of the correc-tion amounts for each intervening year.Determining the correction amount foreach intervening year is a year-by-yeardetermination. The correction amount foreach intervening year is the amount bywhich the reviewed year partner’s chapter1 tax would increase by taking into ac-count any adjustments to any tax attri-butes. The correction amount for eachintervening year is calculated by deter-mining the amount of chapter 1 tax thatwould have been imposed for the inter-

Bulletin No. 2017–28 July 10, 201739

vening year if any tax attribute for theintervening year had been adjusted aftertaking into account the partner’s share ofthe adjustments for the first affected year(and if any tax attribute for the interveningyear had been adjusted after taking intoaccount any adjustments to tax attributesin any prior intervening year(s)). Fromthat amount is subtracted the sum of theamount of chapter 1 tax shown by thepartner on the return for the interveningyear (which includes amounts shown onan amended return for such year, includ-ing an amended return filed under section6225(c)(2) by the reviewed year partner)plus any amounts not shown but previ-ously assessed (or collected without as-sessment) less any rebates made (as de-fined in § 1.6664–2(e)).

For instance, if a partner had a net oper-ating loss on his original return for the firstaffected year that was carried forward intothe intervening years, the net operating loss(a tax attribute as defined in proposed§ 301.6241–1(a)(10)) in the first interveningyear after the first affected year is reducedby any portion of the net operating lossutilized to offset the adjustments in the firstaffected year. This reduction may not onlyaffect the first intervening year after the firstaffected year, but if not fully absorbed inthat intervening year, it may have a cascad-ing effect through the intervening years asthe intervening years are adjusted to reflectthe adjustment to the net operating loss car-ryforward.

A number of comments received inresponse to Notice 2016–23 suggestedthat the Treasury Department and the IRSshould permit calculation of the additionalreporting year tax to account for any de-creases in chapter 1 tax that may haveresulted in the first affected year or anyintervening year after taking into accountthe partner’s share of the partnership ad-justments. However, section 6226(b) spe-cifically describes the correction amountsas amounts by which a partner’s chapter 1tax would increase for each respectiveyear. Section 6226(b)(2)(A) and (B). Ac-cordingly, the proposed regulations reflectthe statute and do not permit any de-creases in chapter 1 tax that would resultfor the first affected year or for any inter-vening year to factor into the calculationof the additional reporting year tax.

ii. Election to Pay the Safe HarborAmount

Under proposed § 301.6226–3(c), apartner that is furnished a statement de-scribed in proposed § 301.6226–2 mayelect under this section to pay the safeharbor amount (or the interest safe harboramount, in the case of certain individuals)shown on the statement in lieu of theadditional reporting year tax. The electionis made on the partner’s return for thereporting year. If a partner is furnishedmultiple statements described in proposed§ 301.6226–2, the partner may elect topay the safe harbor amount from some orall of the statements. For instance, if theIRS examined two partnership taxableyears in the same administrative proceed-ing, and an election under section 6226was made with respect to all imputed un-derpayments for both years, the partner-ship would be required to furnish separatestatements to its reviewed year partnersand to calculate separate safe harboramounts for each year. A reviewed yearpartner could elect to pay the safe harboramount for one taxable year, but not theother taxable year. If a partner elects topay the safe harbor amount, the partnermust report the safe harbor amount on thepartner’s timely-filed return (excludingextensions) for the partner’s reportingyear. If the partner fails to do so, thepartner may not utilize the safe harboramount, but instead must compute the ad-ditional reporting year tax under proposed§ 301.6226–3(b) as if no election underproposed § 301.6226–3(c) had beenmade.

Proposed § 301.6226–2(g) providesrules for the partnership to compute the safeharbor amount and the interest safe harboramount, which cannot be less than zero, forinclusion in the section 6226 statement fur-nished to each reviewed year partner andfiled with the IRS. For purposes of calculat-ing the safe harbor amount, all of the allo-cation rules of proposed § 301.6226–2(f)apply. Under proposed § 301.6226 –2(g),the safe harbor amount for each re-viewed year is calculated in the samemanner as the imputed underpaymentunder proposed § 301.6225–1 exceptthat the adjustments allocated to thepartner on the statement (including anyamounts attributable to adjustments to

partnership tax attributes) are used in-stead of the adjustments that are takeninto account for purposes of determiningthe imputed underpayment under pro-posed § 301.6225–1. With one excep-tion, any approved modifications of theimputed underpayment, including a ratemodification under section 6225(c)(4),has no effect on the determination of thesafe harbor amount for any partner.

The one exception is where a reviewedyear partner filed an amended return, orentered into a closing agreement, duringthe modification phase under section6225(c)(2), and as a result, the imputedunderpayment, to which an election underthis section relates, was determined with-out regard to the adjustments taken intoaccount on the amended return or in theclosing agreement. In that case, such ad-justments are not taken into account indetermining that partner’s safe harboramount.

In addition to the safe harbor amount, apartnership must calculate an interest safeharbor amount for partners who are indi-viduals and who have a calendar year tax-able year. The interest safe harbor amountis calculated at the rate set forth in pro-posed § 301.6226–3(d)(4) from the duedate (without extension) of the individualreviewed year partner’s return for the firstaffected year until the due date (withoutextension) of the individual reviewed yearpartner’s return for the reporting year.

A separate safe harbor amount (andinterest safe harbor amount, if applicable)is calculated for each separate statementfurnished to the partner under proposed§ 301.6226–2. For example, if there aremultiple reviewed years, the partnerwould receive a separate statement foreach reviewed year, and there would be aseparate safe harbor calculation andamount for each statement.

The purpose of the safe harbor amount(and the interest safe harbor amount) is toprovide a simplified method for the re-viewed year partner to take into accountthe reviewed year partner’s share of theadjustments with respect to the partner-ship’s reviewed year. Determining whatthe reviewed year partner’s increase inchapter 1 tax would be in the partner’sfirst affected year if the adjustments weretaken into account in that year, the in-crease in chapter 1 tax that would have

July 10, 2017 Bulletin No. 2017–2840

occurred as a result of any adjustment tothe tax attributes for each interveningyear, and interest due for the first affectedyear and each intervening year could bevery complex. In addition, because thestatute only permits adjustments to in-crease, but not decrease, chapter 1 tax forany taxable year, adjustments taken intoaccount under section 6226(b) do not fullyreflect the tax consequences of treating theitems correctly in the reviewed year.While the safe harbor amount also doesnot reflect the tax consequences of treat-ing the items correctly in the reviewedyear any better than the method prescribedby the statute, it is a reasonable alternativeto approximate the tax that would havebeen due. In some cases, many years mayhave lapsed between the first affected yearand the last intervening year, further com-plicating the calculation. Accordingly,while determination of the aggregate ofthe correction amounts provides a closebut imperfect approximation of the part-ner’s tax that would have been due if thepartnership return was correct in the re-viewed year, some partners may decidethat the complexity and cost of doing thecalculations necessary to determine theaggregate of the correction amounts is notworth the effort given that the aggregateof the correction amounts may not be ex-actly what the tax due would have been ifthe partnership return was correct in thereviewed year.

Under the proposed regulations, thesafe harbor amount is computed so thatpartners filing amended returns under sec-tion 6225(c)(2) or entering into closingagreements are not paying tax twice onthe same adjustment. In addition, the safeharbor amount is determined by multiply-ing the net adjustments against the highesttax rate under section 6225(b)(1)(A). Useof a fixed rate rather than requiring thereviewed year partner to determine therate in the first affected year and the in-tervening years allows the partnership tocompute the safe harbor amount for thereviewed year partner, further reducingburden on the reviewed year partner.

The election under section 6226 is apartnership election and the partners arebound by the election. See section6223(b); proposed § 301.6226–1(d). Al-though reviewed year partners can avoidthe computation under section 6226(b) by

filing an amended return (or entering intoa closing agreement) and paying the taxand interest due in accordance with sec-tion 6225(c)(2) during the modificationphase of the audit, not all partners arewilling or able to amend their returns forthe relevant year. Therefore, the TreasuryDepartment and the IRS believe that it isimportant to allow partners an option topay a simplified safe harbor amount inlieu of computing the correction amountsdescribed under proposed § 301.6226–3(b) and a simplified interest safe harboramount for certain individuals in lieu ofcomputing the interest on the safe harboramount under proposed § 301.6226–3(d)(2).

Any reviewed year partner may elect topay the safe harbor amount, including re-viewed year partners that are partnership-partners or S corporation partners.

iii. Interest

Reviewed year partners are also liablefor interest on any correction amount forthe first affected year and any interveningyears under proposed § 301.6226–3(d)(1).If the partner elects to pay the safe harboramount, a reviewed year partner that is anindividual may also elect to pay the inter-est safe harbor amount. For all other part-ners and individuals that do not elect thesafe harbor amount, interest applies underproposed § 301.6226–3(d)(2). Interest onthe correction amounts and the safe harboramount is determined at the partner level.Under proposed § 301.6226–3(d)(4), therate of interest is calculated using the un-derpayment rate under section 6621(a)(2),except that when determining that rate,five percentage points are used instead ofthree percentage points, with the resultthat the underpayment rate for purposes ofsection 6226 is the federal short-term rateplus five percentage points.

Under proposed § 301.6226–3(d)(1), areviewed year partner is liable for intereston any correction amount from the firstaffected year and any intervening yearsfrom the due date of the return (withoutextension) for the applicable tax year (thatis, the year to which the additional tax isattributable) until the correction amount ispaid. For purposes of calculating interest,the safe harbor amount and any penalties,additions to tax, or additional amounts are

attributable to adjustments taken into ac-count for the first affected year. Therefore,proposed § 301.6226–3(d)(2) and (3) pro-vide that the reviewed year partner is lia-ble for interest on the safe harbor amountand any penalties, additions to tax, or ad-ditional amounts from the due date of thereturn for the corresponding first affectedyear (without extension) until the re-viewed year partner pays such amounts.

D. Qualified investment entities (QIEs):Regulated investment companies (RICs)and real estate investment trusts (REITs)

The proposed regulations under section6226 coordinate the rules under the cen-tralized partnership audit regime with thedeficiency dividend procedures under sec-tion 860 for partners that are RICs andREITs. In general, section 860 allowsRICs and REITs to be relieved from thepayment of a deficiency in (or to receive acredit or refund of) certain taxes includ-ing, among certain others, taxes imposedby sections 852(b)(1) and (3), 857(b)(1) or(3), and, if the entity fails the distributionrequirements of section 852(a)(1)(A) or857(a)(1), as applicable, the corporate in-come tax imposed by section 11(a) or1201(a). The procedure provided by sec-tion 860 is to allow an additional deduc-tion for “deficiency dividends” within themeaning of section 860(f) that meets therequirements of section 860 in computingthe deduction for dividends paid for thetaxable year for which a “determination”within the meaning of section 860(e) ismade. Under proposed § 301.6226–2(h),if a statement described in proposed§ 301.6226–2 is furnished to a reviewedyear partner that is a RIC or REIT, theRIC or REIT may take into account theadjustments reflected in the statement thatalso are “adjustments” within the meaningof section 860(d) by using the deficiencydividend procedures set forth in section860, subject to the limitations described inproposed § 301.6226–3(b)(4). Accord-ingly, a REIT or a RIC may utilize thedeficiency dividend procedures under sec-tion 860 if the REIT or RIC receives astatement from a partnership under pro-posed § 301.6226–2 that includes adjust-ments within the meaning of section860(d).

Bulletin No. 2017–28 July 10, 201741

Section 301.6226 –3(b)(4) of the pro-posed regulations coordinates rules forthe deficiency dividend procedures setforth in section 860 with the rules fordetermining the additional reportingyear tax under § 301.6226 –3(b) withrespect to any adjustments shown on astatement furnished to a RIC or REITunder proposed § 301.6226 –2. Underthese rules, if the statement described inproposed § 301.6226 –2 results in anyadjustment (within the meaning of sec-tion 860(d)) to a RIC or REIT for thefirst affected year or any interveningyear, the RIC or REIT may make adetermination under section 860(e)(4)and Rev. Proc. 2009 –28, 2009 –1 C.B.1011, and avail itself of the deficiencydividend procedures set forth in section860 and the regulations thereunder. Ifthe RIC or REIT utilizes the deficiencydividend procedures with respect to ad-justments in a statement described inproposed § 301.6226 –2, the RIC orREIT may claim a deduction for defi-ciency dividends against the adjust-ments furnished to the RIC or REIT (tothe extent they qualify as adjustmentsunder section 860(d)) in calculating anycorrection amounts for the first affectedyear and any intervening year to theextent that the RIC or REIT makes de-ficiency dividend distributions undersection 860(f) and complies with all re-quirements of section 860 and the regu-lations thereunder.

Also, if a RIC or REIT claims a defi-ciency dividends deduction, interest underproposed § 301.6226–3(d) is only calcu-lated on any correction amount deter-mined after deducting any deficiency div-idend deduction from the adjustmentstaken into account by the RIC or REIT.Nothing in proposed § 301.6226–3(b)(4)affects a RIC’s or REIT’s liability for anyinterest on the deficiency dividend distri-bution under section 860(c)(1). Therefore,a RIC or a REIT will be liable for interestunder section 860(c)(1) as to any defi-ciency dividend distribution as well asinterest on any correction amount as de-termined under proposed § 301.6226–3(d). Because the deficiency dividend dis-tribution is deductible in calculating thecorrection amounts, in no event will a RICor REIT pay both interest under section

860(c)(1) and section 6226 as to the sameamount.

Finally, as clarified in proposed§ 301.6226–3(b)(4), a deficiency dividenddeduction used in calculating any correc-tion amount has no effect on a RIC orREIT’s liability for any penalties reflectedin the statement furnished to the RIC orREIT under proposed § 301.6226–2.

E. Foreign partners and certain U.S.partners

The proposed regulations reserve onrules that would apply when statementsdescribed in proposed § 301.6226–2 areprovided to foreign partners, includingforeign entities, or certain domestic part-ners. In general, certain amounts receivedby a partnership that are allocable to aforeign partner may be subject to with-holding under chapter 3 of subtitle A ofthe Code (chapter 3), and certain amountsallocable to a foreign or domestic partnermay be subject to withholding underchapter 4 of subtitle A of the Code (chap-ter 4). To the extent that amounts arewithheld by the partnership or other with-holding agent under chapter 3 or 4, andremitted to the IRS, such amounts arecreditable by the foreign partner or do-mestic partner to offset the chapter 1 taxthat the partner otherwise would owe inthe absence of the withholding. The pur-pose of chapter 3 withholding is to ensurecompliance by foreign persons with re-spect to income subject to tax under chap-ter 1, by requiring the partnership (orother withholding agent) to withhold andremit the tax that would normally be paidby the foreign person on payments or in-come allocated to the foreign person. Thepurpose of chapter 4 withholding is toensure that information reporting aboutU.S. persons that use certain offshore fi-nancial accounts or passive foreign enti-ties is available to the IRS to enhance taxcompliance. The withholding imposed un-der chapter 4 may be imposed on certainforeign financial institutions, accountholders of a financial account, or passivenon-financial foreign entities with sub-stantial U.S. owners, to incentivize theinformation required under chapter 4 to bereported and available to the IRS.

It is the view of the Treasury Depart-ment and the IRS that, consistent with the

purposes of chapters 3 and 4, if adjust-ments in a statement described in pro-posed § 301.6226–2 represent additionalincome allocable to a foreign or domesticpartner that was not accounted for in thereviewed year, and the partnership electsunder section 6226 to have the partnerstake into account the adjustments, suchincome should be subject to the rules inchapters 3 and 4 in the adjustment year tothe same extent that such amounts wouldhave been if they had been properly ac-counted for by the partnership in the re-viewed year. Accordingly, the TreasuryDepartment and the IRS intend to issueregulations that coordinate the applicationof the rules under chapters 3 and 4 toincome allocable to a foreign partner ordomestic partner where a partnershipelects the application of section 6226.Comments are requested on how to effi-ciently coordinate the election under sec-tion 6226 with the withholding rules un-der chapters 3 and 4, while taking intoaccount the objectives and purposes ofBBA to improve the IRS’s ability to ef-fectively audit partnerships. In particular,the Treasury Department and the IRS re-quest comments on: (1) how the partner-ship should satisfy its reporting obliga-tions under chapters 3 and 4 in thereporting year with respect to income al-locable to a foreign partner or domesticpartner; (2) whether the partnership shouldbe required to obtain new documentationfrom partners to support a lower withhold-ing rate or whether the partnership should beable to rely on documentation obtained withrespect to the reviewed year; and (3) howthe rules under chapters 3 and 4 shouldapply when a statement described in pro-posed § 301.6226–2 includes additional in-come allocable to a foreign partner that is anintermediary or flow-through entity.

Additionally, the Treasury Departmentand the IRS also intend to issue regula-tions to address situations where a directpartner in the partnership is a foreign en-tity, such as a trust or corporation, thatmay not be liable for U.S. federal incometax with respect to one or more adjust-ments, but an owner of the direct partneris, or could be liable for tax with respect tosuch amount. For example, if a direct part-ner in the audited partnership is a con-trolled foreign corporation, the foreigncorporation as a direct partner may not

July 10, 2017 Bulletin No. 2017–2842

have a U.S. tax liability with respect to agiven adjustment; however, the adjust-ment may impact the tax liability of itsU.S. shareholder(s). The tax effects on theU.S. shareholder(s) may arise in the ad-justment year, an intervening year, orsome subsequent year, depending on thespecific facts and circumstances. Com-ments are requested on how the reportingobligations concerning foreign entitiesshould be modified to ensure that state-ments issued under section 6226 aretimely reflected on the returns of the U.S.owners of such entities.

F. Section 6226 election and section6234 petition for readjustment

Section 6226(a) provides that the elec-tion under that section must be madewithin 45 days of the date the FPA ismailed. Section 6234(a) provides that thepartnership may petition for readjustmentwithin 90 days of the date the FPA ismailed. The proposed regulations coordi-nate these rules so that an election can bemade during the time frame provided un-der section 6226 without cutting off thepartnership’s right to challenge the adjust-ments in court within the time frame pro-vided for in section 6234.

As clarified under proposed § 301.6226–1(e), an election under proposed§ 301.6226 –1 does not affect the part-nership’s ability to file a petition undersection 6234 to challenge adjustmentsdetermined in an FPA. The proposedregulations do this by providing thatwhile the election under section 6226must be filed within 45 days of the datethe FPA is mailed, the filing and furnish-ing of the statements, is not required until 60days after the adjustments are finally deter-mined. Proposed § 301.6226–2(b). Underproposed § 301.6226–2(b), the partnershipadjustments become finally determinedupon the later of the expiration of the time tofile a petition under section 6234 or, if apetition is filed under section 6234, the datewhen the court’s decision becomes final.Accordingly, a partnership can make anelection under section 6226, petition for re-adjustment, and then file and furnish state-ments once the adjustments are finally de-termined. If, after going to court, apartnership that filed the election within the45-day period determines that it no longer

wishes to have section 6226 apply, the part-nership can request IRS consent to revokethe election.

G. Pass-through partners

A number of comments received inresponse to Notice 2016 –23 suggestedthat a pass-through partner who receivesa statement described in proposed§ 301.6226 –2 should be able to flowthrough the adjustments to its ownersinstead of paying tax on the adjustmentsat the first tier. Under this approach, theadjustments would flow through thetiers until a partner that is not a pass-through partner receives the adjustment.The proposed regulations reserve on thisissue.

Under section 6226(a)(2), if a partner-ship elects the alternative to the paymentof the imputed underpayment, the partner-ship is required to furnish statements to“each partner of the partnership for thereviewed year.” Under section 6226(b), areviewed year partner’s tax imposed bychapter 1 for the reporting year is in-creased by the aggregate of the correctionamounts for the first affected year and anyintervening years. Section 7701(a)(2) de-fines “partner” as a member in a partner-ship (that is, a direct partner). Accord-ingly, if a partnership makes an electionunder section 6226, section 6226(b) re-quires the partnership’s direct partnersfrom the reviewed year to take into ac-count the adjustments. Neither section7701(a)(2) nor section 6226 makes anydistinction in this respect between thosedirect partners that are themselves pass-through entities, and direct partners thatare not pass-through entities, such as in-dividuals and C corporations.

Section 6226 is prescriptive regardingthe election to push out the partnershipadjustments resulting from a centralizedpartnership audit proceeding rather thanpaying the imputed underpayment. First,the partnership subject to the proceedingmust make the election no later than 45days after the FPA is mailed to the part-nership, and the partnership must furnishand file statements reflecting the reviewedyear partners’ shares of the adjustments.Section 6226(a)(1) and (2). Second, sec-tion 6226(b) provides that each directpartner’s chapter 1 tax for the taxable year

including the date the statement is fur-nished (reporting year) is increased by anamount that represents the tax that shouldhave been paid by the partner if in thereviewed year the items adjusted werecorrectly reported on the partnership’s re-turn and taken into account by the directpartner.

In the case of a partnership that is itselfa partner, the General Explanation of TaxLegislation Enacted for 2015 (Bluebook)explained that the partnership-partner“pays the tax attributable to adjustmentswith respect to the [first affected year] andthe intervening years, calculated as if itwere an individual . . . for the taxable year. . . .” JCS–1–16 at 70. To account for thefact that partnerships are not liable forchapter 1 tax, the Bluebook provides that,“a partnership that receives a statementfrom the audited partnership is treatedsimilarly to an individual who receives astatement from the audited partnership.”Id. (omitting footnote providing “[s]ection703, which states that ‘the taxable incomeof a partnership shall be computed in thesame manner as in the case of an individ-ual . . . .’”). In consideration of the factthat direct partnership-partners must paythe tax, the Bluebook further states thatthe audited partnership, the partnership re-ceiving the statement under section 6226,and that partnership’s partners “may haveentered into indemnification agreementsunder the partnership agreement with re-spect to the risk of tax liability of re-viewed year partners being borne eco-nomically by partners in the year thatincludes the date of the statement. Be-cause the payment of tax by a partnershipunder the centralized system is nonde-ductible, payments under an indemnifica-tion or similar agreement with respect tothe tax are nondeductible.” Id.

In December 2016, both the House ofRepresentatives and the Senate introducedbipartisan technical corrections that wouldresolve this issue by providing that a part-ner that is a partnership or S corporationmay elect to either pay an imputed under-payment under rules similar to section6225 or flow the adjustments through thetiers. See Tax Technical Corrections Actof 2016 (H.R. 6439, 114th Cong. (2016));Tax Technical Corrections Act of 2016 (S.3506, 114th Cong. (2016)).

Bulletin No. 2017–28 July 10, 201743

The Technical Corrections Act’s ap-proach to allow a partnership or S corpo-ration to flow adjustments through thetiers presents significant administrativeconcerns. First and foremost, allowingsuch entities to flow through the tiers willresult in complexities, challenges, and in-efficiencies similar to what occurred un-der TEFRA. Under TEFRA, following theconclusion of an administrative or judicialproceeding, the IRS was expected to workthrough the various tiers and calculate,assess, and collect the tax at the ultimatepartner level. Allowing partners underBBA to flow adjustments through the tierspresents similar, if not greater, burdenssince multiple returns are implicated, fromthe reviewed year through the adjustmentyear and all intervening years, in verify-ing, assessing and collecting the tax, in-terest and penalties. The IRS would haveto undertake this labor intensive processof tracking, validating, and reconcilingadjustments and payments through count-less tiers. Indeed, as the GAO noted in itsmost recent report on large partnershipsand TEFRA, almost two-thirds of largepartnerships in 2011 had more than 1,000direct and indirect partners, and hundredsof large partnerships had more than100,000 direct and indirect partners.

Another significant concern is thatBBA presents a bifurcated process wherethe tax is determined and later assessedand collected through a self-reporting pro-cess by the partners. The process of flow-ing adjustments to the reviewed year part-ners occurs after the audit/litigation isconcluded. The assessment process underBBA, whereby the partners are required tocalculate the tax, interest, and penaltiesand report them on their next filed return,presents a challenge because of the pas-sage of time. Even compliant taxpayers,who receive statements in the middle ofthe tax year may not understand their sig-nificance, and may not know exactly howto utilize this information. This would ne-cessitate additional compliance resourcesby the IRS to check the adjustment yearreporting to verify that the adjustmentswere indeed correctly reported by everytier and by all direct and indirect partners.

The costs involved in administeringthese processes will limit the overall num-ber of audits that can be undertaken,which in turn will limit the IRS’s ability to

meaningfully address tax noncompliancefor this segment of taxpayers, as well aslimit the overall revenue collection fromthese entities, including, for example, aspartners die, dissolve, become insolvent,or are not able to be located due to thepassage of time.

In light of these administrative con-cerns and the need for public comment onmore immediately relevant aspects ofthese regulations, the proposed regula-tions reserve this issue. See proposed§ 301.6226–2(e). However, the TreasuryDepartment and the IRS are consideringan approach under section 6226 for tieredpartnerships for pushing the adjustmentsbeyond the first tier partners that will bethe subject of other proposed regulationsto be published in the near future. TheTreasury Department and the IRS seekcomments on how the IRS might admin-ister the requirements of section 6226 intiered structures, including comments onthe information tracking and other infor-mation sharing from the partnership underexamination with respect to its direct andindirect partners to the IRS that are nec-essary for the IRS to monitor whetheradjustments are properly flowed throughthe tiers and to determine that the propertaxpayers take into account the correctamount of adjustments and report the cor-rect amount of any resulting tax, interest,and penalties. The Treasury Departmentand the IRS are also specifically interestedin comments on reducing noncomplianceand collection risk in tiered structures,while at the same time limiting the admin-istrative costs of the IRS.

In addition, the Treasury Departmentand the IRS are interested in comments asto how to treat under section 6226 a directpartner in the partnership that is an estateor trust, or a foreign entity, such as a trustor corporation that may not be liable forU.S. federal income tax with respect toone or more adjustments, but an owner ofthe direct partner is, or could be, liable fortax with respect to such amount. For in-stance, if a direct partner in the auditedpartnership is a controlled foreign corpo-ration, the foreign corporation as a directpartner may not have a U.S. tax liabilitywith respect to a given adjustment; how-ever, the adjustment may impact the taxliability of its U.S. shareholder(s). The taxeffects on the U.S. shareholder(s) may

arise in the first affected year, an interven-ing year, or some subsequent year, de-pending on the specific facts and circum-stances. The Treasury Department and theIRS request comments on how the safeharbor amount should be computed withrespect to such foreign partners.

H. Adjustments to partners’ outsidebases and capital accounts and apartnership’s basis and book value inproperty

As discussed previously in this pream-ble, section 6226(b)(3) requires that anytax attribute which would have been af-fected if the partnership adjustments weretaken into account for the reviewed year,be appropriately adjusted for purposes ofcomputing the amount by which the taximposed under chapter 1 would increasefor any intervening year. As with section6225, however, section 6226 does not ex-plicitly provide that tax attributes affectedby reason of a partnership adjustmentshould be adjusted for all purposes, andnot just for purposes of taking the adjust-ments into account to calculate the addi-tional reporting year tax, and that the ad-justments to tax those attributes shouldcontinue to have effect after the adjust-ment year.

As in the case of a partnership that didnot elect the application of section 6226with respect to an imputed underpayment,the Treasury Department and the IRShave determined that it is appropriate toadjust the adjustment year partners’ out-side bases and capital accounts and a part-nership’s basis and book value in propertywhen one of those tax attributes is af-fected by reason of a partnership adjust-ment. However, given that the tax im-posed under section 6226 includes theamount by which the tax imposed underchapter 1 would increase for any interven-ing year, a different approach is appropri-ate.

The purpose of the partnership adjust-ments is to create a new, accurate startingpoint for later taxable years; therefore, it isnecessary to adjust the adjustment yearpartners’ outside bases and capital ac-counts despite the fact that it is the re-viewed year partners who pay additionaltax under section 6226. Providing me-chanical rules to govern the adjustments

July 10, 2017 Bulletin No. 2017–2844

to adjustment year partners’ outside basesand capital accounts and a partnership’sbasis and book value in property raise amyriad of technical issues on which theTreasury Department and the IRS requestcomments. As a result, the proposed reg-ulations reserve a place for rules regardingadjustments to a partner’s outside basis orcapital account and a partnership’s basisor book value in property when a partner-ship elects the application of section 6226with respect to an imputed underpayment.

The Treasury Department and the IRShave determined that, in the adjustmentyear, adjustment year partners’ outsidebases and capital accounts and a partner-ship’s basis and book value in propertyshould be adjusted to what they wouldhave been if the adjustments were made inthe reviewed year to reviewed year part-ners and property and then modified totake into account all intervening eventsconsidered in computing the amount bywhich the tax imposed under chapter 1would increase for any intervening year—for example, amortization or depreciationof property. In some cases, the reviewedyear partner may not be an adjustmentyear partner, or the partnership might, inan intervening year, have disposed ofproperty to which an adjustment relates.Accordingly, rules will also need to pro-vide how adjustments to adjustment yearpartners’ outside bases and capital ac-counts and a partnership’s basis and bookvalue in property are made when therehave been: (1) sales of property, (2) dis-tributions of property to partners, (3) con-tributions of property to corporations orlower-tier partnerships, (4) other nonrec-ognition transfers of property, (5) sales ofpartnership interests, (6) transfers of partner-ship interests in nonrecognition transactions,and (7) contributions to the partnership. Inaddition, the Treasury Department and theIRS are considering whether partnershipsshould be required to recompute basis ad-justments under sections 734 and 743 thatresulted from distributions or transfers inintervening years to take into account ad-justments to partners’ outside bases and apartnership’s basis in property. The Trea-sury Department and the IRS are also con-sidering whether and how an adjustmentshould be made to the basis of propertydistributed in an intervening year when anadjustment to the partnership’s basis in that

property or an adjustment to the recipientpartner’s outside basis would otherwisehave been appropriate.

It seems appropriate that any outsidebasis and capital account adjustments thatneed to be made are made with respect tothe adjustment year partners who are thereviewed year partners who received astatement of the partner’s share of anyadjustment to income, gain, loss, deduc-tion or credit. The Treasury Departmentand the IRS believe that if a reviewed yearpartner transfers its partnership interest inan intervening year, it is appropriate forthe transferee adjustment year partner’scapital account and outside basis to beadjusted in the adjustment year. Whetherthe interest was transferred in a recogni-tion transaction or a nonrecognition trans-action, however, is relevant to the amountof the adjustment to the transferee’s out-side basis, but not capital account, be-cause the transferee in either case suc-ceeds to the capital account of thetransferor, however, in a recognitiontransaction, the transferee would havetaken a cost basis in the interest upon atransfer in which gain was recognized.The Treasury Department and the IRS re-quest comments regarding whether andhow to adjust the outside bases and capitalaccounts of adjustment year partners if thereviewed year partner whose basis andcapital account should have been adjustedis no longer a partner as a result of aliquidating distribution and thus no otherpartner has succeeded to the liquidatingpartner’s capital account.

Finally, comments are requested onhow, or if, these regulations should ad-dress partnerships that do not maintaincapital accounts.

7. Administrative Adjustment Requests

A. Procedures for filing anadministrative adjustment request

Proposed § 301.6227–1(a) describesthe general rules for filing an administra-tive adjustment request (AAR). In accor-dance with section 6227(a), proposed§ 301.6227–1(a) provides that a partner-ship may file an AAR with respect to oneor more items of income, gain, loss, de-duction, or credit of the partnership andany partner’s distributive share thereof for

any partnership taxable year as deter-mined under section 6221 and the regula-tions thereunder. Proposed § 301.6227–1(a) requires a partnership to determinewhether the adjustments requested in theAAR result in an imputed underpaymentin accordance with proposed § 301.6227–2(a) for the reviewed year, that is, the tax-able year to which the adjustments relate(see proposed § 301.6241–1(a)(8)). If therequested adjustments result in an imputedunderpayment, proposed § 301.6227–1(a)provides that the partnership takes the ad-justments into account under proposed§ 301.6227–2(b), which requires the part-nership to pay the imputed underpaymentunless the partnership makes an election un-der proposed § 301.6227–2(c). If the part-nership makes an election under proposed§ 301.6227–2(c), the reviewed year partnerstake the adjustments into account in accor-dance with proposed § 301.6227–3, whichprovides rules similar to section 6226. Un-der proposed § 301.6227–1(a), if the adjust-ments do not result in an imputed underpay-ment, the reviewed year partners must takethe adjustments into account under the rulesof proposed § 301.6227–3.

Proposed § 301.6227–1(a) clarifies thatonly a partnership may file an AAR andthat a partner may not file an AAR unlessthe partner is doing so in his or her capac-ity as partnership representative for thepartnership. Additionally, in certaincases, a partner that is itself a partner-ship subject to subchapter C of chapter63 (that is, the partnership has notelected out of the centralized partner-ship regime under section 6221(b))may file an AAR in response to the filingof an AAR by the partnership of whichit is a partner. See proposed § 301.6227–3(c) for the rules regarding certainpartnership-partners filing AARs. In ad-dition, proposed § 301.6227–1(a) clari-fies that a partnership may not file anAAR solely to provide the partnershipan opportunity to change a designationof the partnership representative.

Proposed § 301.6227–1(b) providesthat an AAR may only be filed by a part-nership with respect to any partnershiptaxable year for which a partnership returnhas been filed. In general, a partnershipmay not file an AAR with respect to apartnership taxable year more than threeyears after the later of the date the part-

Bulletin No. 2017–28 July 10, 201745

nership return for such partnership taxableyear was filed or the last day for filingsuch partnership return determined with-out regard to extensions. In addition, theproposed regulations provide that an AARmay not be filed with respect to a partner-ship taxable year after a notice of admin-istrative proceeding with respect to suchtaxable year has been mailed by the IRSunder section 6231.

The proposed regulations reserve onrules to coordinate the rules under section6227 with the requirements in section905(c) when the AAR includes an adjust-ment to the amount of creditable foreigntax incurred by the partnership. Com-ments are requested on how a partner-ship can fulfill the requirements of sec-tion 905(c), including those rulesrelating to the assessment and collectionof interest on certain refunds of credit-able foreign taxes, while taking into ac-count the objectives and purposes of thecentralized partnership audit regime toimprove the IRS’s ability to effectivelyaudit partnerships.

Proposed § 301.6227–1(c)(1) providesthat an AAR must be filed in accordancewith the forms, instructions, and otherguidance prescribed by the IRS and mustinclude any required statements, forms,and schedules. An AAR must be signedunder penalties of perjury by the partner-ship representative. This requirement isconsistent with section 6223 which statesthat the partnership representative has thesole authority to act on behalf of the part-nership under subchapter C of chapter 63.See proposed § 301.6223–2.

Under proposed § 301.6227–1(c)(2), avalid AAR must include the adjustmentsrequested; any required statements de-scribed in proposed § 301.6227–1(e), in-cluding any transmittal with respect tosuch statements as prescribed in forms,instructions, and other guidance; and anyother information prescribed by the IRS informs, instructions, or other guidance.Proposed § 301.6227–1(d) provides thatwhere reviewed year partners are requiredto take into account adjustments requestedin an AAR, the partnership must furnish acopy of the statement filed with the IRS tothe reviewed year partner to whom thestatement relates. If the partnership mailsthe statement, it must be mailed to thecurrent or last address of the reviewed

year partner that is known to the partner-ship. The copy of the statement must befurnished to the reviewed year partner onthe date the partnership files the AARwith the IRS.

Proposed § 301.6227–1(c) describesthe statements that must be issued toreviewed year partners in the case of anelection under proposed § 301.6227–2(c) or an AAR not resulting in an im-puted underpayment under proposed§ 301.6227–2(d). Each statement mustinclude the name and correct TIN of thereviewed year partner; the current or lastaddress of the partner that is known tothe partnership; the reviewed year part-ner’s share of items originally reportedto the partner (taking into account anyadjustments made pursuant to a priorAAR filed under section 6227); the re-viewed year partner’s share of the ad-justments requested in the AAR (asdescribed in proposed § 301.6227–1(c)(2)); the date the statement is fur-nished to the partner; the partnership tax-able year to which the adjustments relate(the reviewed year); and any other informa-tion required by the forms, instructions, orother guidance prescribed by the IRS. Pro-posed § 301.6227–1(e).

Proposed § 301.6227–1(e)(2) describesthe reviewed year partners’ share of theadjustments requested in an AAR for pur-poses of the statements described in pro-posed § 301.6227–1(e)(1). Under pro-posed § 301.6227–1(e)(2), except when aspecific partner’s share of an item is re-flected on an AAR in a specific manner inaccordance with the provisions of thepartnership agreement and in accordancewith the principles of section 704(b), eachreviewed year partner’s share of an adjust-ment must be determined and reported tothe reviewed year partner in the samemanner as the item to which the adjust-ment relates was originally determinedand reported on the partnership return forthe reviewed year. If the item to whichthe adjustment relates was not reflectedon the partnership’s reviewed year re-turn, the reviewed year partners’ respec-tive shares of the adjustment must bedetermined and reported to the reviewedyear partners in accordance with themanner in which the allocation of theitems to which the adjustment relateswould have been made under the part-

nership agreement and subject to theprinciples of section 704(b) in the re-viewed year. If the adjustments, as re-quested in the AAR, allocate items to aspecific partner or in a specific manner,the statement must reflect the adjust-ment as allocated in accordance with theAAR.

Proposed § 301.6227–1(f) providesthat the filing of an AAR under proposed§ 301.6227–1(b) and the filing and furnish-ing of statements as described in proposed§ 301.6227–1(c) and proposed § 301.6227–1(d) are actions taken by the partnershipunder section 6223 and the regulationsthereunder. Section 6223 states that a part-nership and all partners of such partnershipshall be bound by actions taken by the part-nership under subchapter C of chapter 63.Accordingly, proposed § 301.6227–1(f)provides that, unless otherwise determinedby the IRS, a partner’s share of the adjust-ments requested in an AAR as reflectedon a statement described in proposed§ 301.6227–1(e) are binding on the partner.Under proposed § 301.6227–1(f), a partnermust treat the adjustments on the partner’sreturn consistently with how the adjust-ments are treated on the statement that thepartnership files with the IRS. See proposed§ 301.6222–1(c)(2) (regarding items thetreatment of which a partner is bound tounder section 6223).

Proposed § 301.6227–1(g) providesthat the IRS may, within the period pro-vided under section 6235, conduct a pro-ceeding with respect to the partnership forthe taxable year to which the AAR relatesand adjust items subject to subchapter Cof chapter 63, including the items adjustedin the AAR. In the case of an AAR, theService may make adjustments with re-spect to the partnership taxable year towhich the AAR pertains within threeyears from the date the AAR is filed.Proposed § 301.6227–1(g) provides thatthe IRS may re-determine adjustments re-quested in an AAR, including modifica-tions applied by the partnership to theimputed underpayment. If the partnershipadjustments determined by the IRS in-crease any imputed underpayment, the ad-ditional amount is assessed in the samemanner and subject to the same restric-tions as any other imputed underpayment.See section 6232.

July 10, 2017 Bulletin No. 2017–2846

B. Adjustments requested in an AARtaken into account by the partnership

Proposed § 301.6227–2 describeshow adjustments requested in an AARare determined and taken into accountby a partnership. Proposed § 301.6227–2(a)(1) provides the rules for determin-ing whether an imputed underpaymentresults from adjustments requested in anAAR by referring to the proposed§ 301.6225–1.

Under proposed § 301.6227–2(a)(2), inthe case of an AAR, a partnership mayreduce the imputed underpayment as aresult of certain modifications permittedunder proposed § 301.6225–2. Thosemodifications are modifications that relateto tax-exempt partners, rate modification,modification related to certain passivelosses of publicly traded partnerships,modification applicable to qualified in-vestment entities described in section 860,and other modifications to the extentpermitted under future IRS guidance. Themodifications described in proposed§ 301.6227–2 are the only modifications apartnership can use in an AAR context.Other types of modification, such as mod-ifications under proposed § 301.6225–2with respect to amended returns and clos-ing agreements are not available in thecase of an AAR.

In addition, proposed § 301.6227–2(a)(2)(i) provides that a partnership doesnot need to seek IRS approval prior tomodifying an imputed underpayment thatresults from adjustments requested in anAAR. However, proposed § 301.6227–2(a)(2)(ii) provides that modifications tothe imputed underpayment resultingfrom adjustments requested in an AARcan be taken into account by thepartnership only if the AAR that is filedincludes notification to the IRS of themodification, a description of the effectof the modification on the imputed un-derpayment, an explanation of thebasis for such modification, and all nec-essary documentation to support thepartnership’s entitlement to such modi-fication. These rules differ from themodification procedures under section6225, where the imputed underpaymentis not modified prior to approval by theIRS.

C. Adjustments resulting in an imputedunderpayment

i. Partnership Pays the ImputedUnderpayment

Proposed § 301.6227–2(b)(1) providesthat when the adjustments requested in anAAR result in an imputed underpayment,the partnership must pay the imputed un-derpayment (as reduced by modificationsmeeting the requirements of proposed§ 301.6227–2(a)(2)(ii)) at the time thepartnership files the AAR, unless thepartnership makes the election under pro-posed § 301.6227–2(c) to have its re-viewed year partners take such adjust-ments into account. The partnership’spayment of the imputed underpayment istreated as a nondeductible expenditure un-der section 705(a)(2)(B) in accordancewith proposed § 301.6241–4.

Proposed § 301.6227–2(b)(2) providesthe rules for determining penalties andinterest with respect to an imputed under-payment resulting from adjustments re-quested in the AAR. As provided in pro-posed § 301.6227–2(b)(2), the IRS mayimpose any penalty, addition to tax, andadditional amount with respect to such animputed underpayment in accordancewith section 6233(a)(3). In the case of anyfailure to pay an imputed underpayment atthe time an AAR is filed, the IRS mayimpose any penalty, addition to tax, andadditional amount in accordance with sec-tion 6233(b)(3). Interest on an imputedunderpayment is determined under chap-ter 67 for the period beginning on the dateafter the due date of the partnership returnfor the reviewed year (determined withoutregard to extension) and ending on theearlier of the date payment of the imputedunderpayment is made with the AAR, orthe due date of the partnership returnfor the adjustment year. See section6233(a)(2). In the case of any failure topay an imputed underpayment beforethe due date of the partnership return forthe adjustment year, any interest is de-termined in accordance with section6233(b)(2).

The Treasury Department and the IRSintend in future guidance to cross refer-ence proposed § 301.6225–4 for rules re-garding adjustments to partners’ outsidebases and capital accounts and a partner-

ship’s basis and book value in propertywhen the adjustments requested in anAAR result in an imputed underpaymentand the partnership does not elect underproposed § 301.6227–2(c) to have its re-viewed year partners take such adjust-ments into account.

ii. Election to Have the Reviewed YearPartners Take the Adjustments intoAccount

Proposed § 301.6227–2(c) providesthat a partnership may elect to have itsreviewed year partners take into accountadjustments requested in an AAR thatresult in an imputed underpayment inlieu of the partnership paying that im-puted underpayment. If the partnershipmakes a valid election under proposed§ 301.6227–2(c), the partnership is nolonger required to pay the imputed un-derpayment resulting from the adjust-ments requested in the AAR. Rather,each reviewed year partner must takeinto account its share of such adjust-ments in accordance with proposed§ 301.6227–3. For these purposes, anymodification requested under proposed§ 301.6227–2(a)(2) is disregarded, andall adjustments requested in the AARare taken into account by each reviewedyear partner in accordance with pro-posed § 301.6227–3.

D. Adjustments requested in an AAR notresulting in an imputed underpayment

When the adjustments requested in anAAR do not result in an imputed under-payment, the reviewed year partners musttake into account their shares of such ad-justments in accordance with proposed§ 301.6227–3. Proposed § 301.6227–2(d)provides that in that situation the partner-ship must furnish statements to the re-viewed year partners and file a copy ofthose statements with the IRS in accor-dance with proposed § 301.6227–1.

E. Rules for reviewed year partners totake adjustments into account

Reviewed year partners take adjust-ments requested in an AAR filed by thepartnership into account in two circum-stances: (1) the adjustments requested inthe AAR result in an imputed underpay-

Bulletin No. 2017–28 July 10, 201747

ment and the partnership elects under pro-posed § 301.6227–2(c) to have its re-viewed year partners take the adjustmentsinto account, or (2) the adjustments re-quested in the AAR do not result in animputed underpayment as described in§ 301.6227–2(d). Proposed § 301.6227–3describes how reviewed year partners takeinto account adjustments requested in anAAR.

i. Rules Under Section 6226 Apply WithCertain Changes

Generally, under proposed § 301.6227–3, areviewed year partner who receives a state-ment described in proposed § 301.6227–1(e) must treat that statement as if it wereprovided under section 6226(a)(2). Underproposed § 301.6227–3(b), the reviewedyear partner must pay any amount oftax, penalties, additions to tax, additionalamounts, and interest that results from tak-ing into account such adjustments in accor-dance with proposed § 301.6226–3, exceptthat, the rules under proposed § 301.6226–3(c) (allowing the reviewed year partner toelect to pay a safe harbor amount), proposed§ 301.6226–3(d)(2) (regarding interest onthe safe harbor amount), and proposed§ 301.6226–3(d)(4) (regarding the in-creased rate of interest) do not apply. Com-ments are requested regarding whether theelection to pay a safe harbor amount underproposed § 301.6226–3(c) should be avail-able in the case of a partner that must takeinto account adjustments requested in anAAR under proposed § 301.6227–3.

Furthermore, proposed § 301.6227–3(b)(1) provides that the restriction in pro-posed § 301.6226–3(b)(1) that the correc-tion amount for the first affected year andany intervening year cannot be less thanzero does not apply in the case of takinginto account adjustments requested by thepartnership in an AAR. The reason for thisis two-fold. First, unlike an adjustmentrequest under section 6227, which is avoluntary request for adjustment initiatedby the partnership, the rules under sec-tions 6225 and 6226 are designed to ad-dress adjustments that are determined bythe IRS after it initiated a proceeding withrespect to of the partnership. In caseswhere the partnership is requesting adjust-ments that will reduce a partner’s tax lia-bility, such adjustment request mirrors the

voluntary compliance of a partnershipself-reporting amounts on its original re-turn, which may include losses resultingin refunds for partners. For this reason,partners taking adjustments into accountshould similarly be able to claim refundswhen applicable. In cases where adjust-ments in an AAR would increase tax due,such voluntary compliance by partner-ships should be encouraged and only al-lowing unfavorable effects from such ad-justments would discourage partnershipvoluntary compliance.

Second, section 6226(b)(2) specificallyprovides that only increases in tax aretaken into account by the reviewed yearpartners. In contrast, section 6227 doesnot similarly limit adjustments taken intoaccount by the reviewed year partners;although section 6227 explicitly providesthat adjustments requested in an AAR thatdo not result in an imputed underpaymentmay only be taken into account by thereviewed year partners under rules similarto the rules of 6226 with appropriate ad-justments to those rules. The lack of aspecific restriction in section 6227 on tak-ing into account decreases to tax in thefirst affected year and intervening years,combined with section 6227’s require-ment that adjustments that do not result inan imputed underpayment must be takeninto account by the reviewed year partners(the partners who originally overpaid taxdue) indicates that in the AAR contextboth favorable and unfavorable adjust-ments should be given effect when takeninto account by the reviewed year part-ners. Therefore, it is appropriate in theAAR context to remove the restriction inproposed § 301.6226–3(b)(1) that the cor-rection amount for the first affected yearand any intervening year as described inthat section cannot be less than zero.

Proposed § 301.6227–3(b)(2) allowsthe reviewed year partner to claim a re-fund where the partnership incorrectly al-located items from the partnership in thereviewed year and provides that when apartner (other than a pass-through partner)takes into account adjustments requestedin an AAR, and those adjustments resultin a decrease in tax, the partner may usethat decrease to reduce the partner’s chap-ter 1 tax for the taxable year which in-cludes the date the statement was fur-nished to the partner (reporting year), and

may make a claim for refund of any over-payment that results. The reduction istreated in a manner similar to a refundablecredit under section 6401(b). Nothing un-der the proposed rules, however, will en-title a pass-through partner to a refund towhich the pass-through partner would nototherwise be entitled under the Code. Pro-posed § 301.6227–3(b)(3) provide exam-ples to illustrate the operation of theserules.

The Treasury Department and the IRSintend in future guidance to cross refer-ence proposed § 301.6226–4 for rulesregarding adjustments to partners’ outsidebases and capital accounts and a partner-ship’s basis and book value in propertywhen reviewed year partners take adjust-ments requested in an AAR filed by thepartnership into account.

ii. Pass-through Partners

Proposed § 301.6227–3(c) is reservedto provide rules for pass-through partners(as defined in proposed § 301.6241–1(a)(5)) to take into account adjustmentsrequested in an AAR. Section 6227 pro-vides that adjustments requested in anAAR that result in an imputed underpay-ment may be taken into account by thepartnership and partners under rules sim-ilar to the rules of section 6226. In thecase of an adjustment that does not resultin an imputed underpayment, rules similarto the rules of section 6226 shall applywith appropriate adjustments. Rules undersection 6226 pertaining to pass-throughpartners have been reserved under pro-posed § 301.6226–3(e). Accordingly, theproposed regulations under section 6227also reserve on rules with respect to pass-through partners until the rules under sec-tion 6226 regarding such partners are es-tablished.

8. Definitions and Special Rules

A. Terms defining partnership years andtypes of partners

Proposed § 301.6241–1(a) containsdefinitions for purposes of subchapter Cof chapter 63 and these proposed regula-tions. Proposed § 301.6241–1(a)(8) de-fines the term “reviewed year” to meanthe partnership taxable year to which the

July 10, 2017 Bulletin No. 2017–2848

adjustments relate. Proposed § 301.6241–1(a)(9) defines the term “reviewed yearpartner” to mean any person who held aninterest in a partnership at any time duringthe reviewed year. Proposed § 301.6241–1(a)(1) defines the term “adjustment year”to mean the partnership taxable year inwhich a decision of a court becomes final (ifa petition is filed under section 6234), anAAR is made, or, in any other case, when anFPA is mailed (or if the partnershipwaives its right to an FPA, the year thewaiver is executed by the IRS). Proposed§ 301.6241–1(a)(2) defines an “adjustmentyear partner” to mean any person who heldan interest in a partnership at any time dur-ing the adjustment year of the partnership.

Proposed § 301.6241–1(a)(5) definesthe term “pass-through partner” to mean apass-through entity that holds an interestin a partnership. A pass-through entity is apartnership (including a foreign entity thatis classified as a partnership under§ 301.7701–3(b)(2)(i)(A) or (c)), an S cor-poration, a trust, (other than a trust de-scribed in the next sentence), and a dece-dent’s estate. The term “pass-throughpartner” does not include disregarded en-tities described in § 301.7701–2(c)(2)(i)or a trust that is wholly owned by only oneperson, whether the grantor or anotherperson, and the trust reports the owner’sinformation to payors under § 1.671–4(b)(2)(i)(A). In addition, the term “pass-through partner” does not include entitiessuch as a registered investment companyunder section 851 or a real estate invest-ment trust under section 856.

Proposed § 301.6241–1(a)(7) definesthe term “partnership-partner” to mean apartnership that holds an interest in a part-nership. A partnership-partner is a type ofpass-through partner as defined in pro-posed § 301.6241–1(a)(5).

Proposed § 301.6241–1(a)(4) defines an“indirect partner” as any person who has aninterest in the partnership through their in-terest in one or more pass-through partners.For example, a shareholder in an S corpo-ration that is a partner in a partnership is anindirect partner of that partnership.

B. Partnership adjustment, imputedunderpayment, and tax attribute

Under proposed § 301.6241–1(a)(6),the term “partnership adjustment” means

any adjustment to the amount of any itemof income, gain, loss, deduction, or creditas defined in proposed § 301.6221(a)–1(b)(1), or any partner’s distributive sharethereof, as described under proposed§ 301.6221(a)–1(b)(2).

Proposed § 301.6241–1(a)(3) definesthe term “imputed underpayment” as anyamount determined in accordance withproposed § 301.6225–1.

For purposes of subchapter C of chap-ter 63, proposed § 301.6241–1(a)(10) de-fines the term “tax attribute”. Under thisdefinition, a tax attribute is anything thatcan affect, with respect to a partnership orpartner, the amount or timing of an item ofincome, gain, loss, deduction or credit asdefined in proposed § 301.6221(a)–1(b)(1) or that can affect the amount of taxdue in any taxable year. Examples of taxattributes include, but are not limited to,basis and holding period, as well as thecharacter of items of income, gain, loss,deduction, or credit and carryovers andcarrybacks of such items.

C. Bankruptcy

Under proposed § 301.6241–2(a)(1), ifa partnership is a debtor in a Title 11bankruptcy case, the running of any pe-riod of limitations under section 6235 formaking a partnership adjustment, and un-der sections 6501 and 6502 for assessmentor collection of any imputed underpay-ment, is suspended during the period thebankruptcy case prohibits the IRS frommaking the adjustment, assessment, orcollection. The suspension runs until theprohibition ends, plus 60 days in the caseof an adjustment or assessment, or sixmonths in the case of collection.

While proposed § 301.6241–2(a)(1)follows the language in section 6241(6) tosuspend the adjustment, assessment, andcollection periods when those actions areprohibited by a bankruptcy case, theBankruptcy Code does not prohibit two ofthose actions – adjustment or assessment.No provision of the automatic stay in sec-tion 362(a) of Title 11 prevents tax auditsor the issuance of an FPA, the mechanismfor adjustment, and the making of a taxassessment is expressly allowed undersection 362(b)(9) of Title 11 notwith-standing the general stay against tax as-sessments in section 362(a)(6) of Title 11.

Proposed § 301.6241–2(a)(2) clarifiesthat the filing of a proof of claim or re-quest for payment and the taking of otheractions in the partnership’s bankruptcycase do not violate the restrictions in sec-tion 6232(b) prohibiting assessment orcollection during the 90-day period to pe-tition for judicial review under section6234 and, if a petition is filed, before thecourt’s decision becomes final.

Under proposed § 301.6241–2(a)(3),the period to petition for judicial review issuspended while the bankruptcy case pre-vents the partnership from filing a petitionunder section 6234, and for 60 days there-after.

Proposed § 301.6241–2(a)(4) clarifiesthat bankruptcy law does not prohibit au-dits, mailing of notices under section6231, demands for unfiled returns, assess-ments or notice or demand for payment ofassessments.

D. Partnerships that cease to exist

Proposed § 301.6241–3 follows section6241(7) and provides that if the IRS de-termines that any partnership (including apartnership-partner) ceases to exist beforea partnership adjustment under subchapterC of chapter 63 takes effect, the partner-ship adjustment is taken into account bythe former partners of the partnership.

Under proposed § 301.6241–3(c), apartnership adjustment takes effect whenall amounts due under subchapter C ofchapter 63 resulting from the partnershipadjustment are fully paid by the partner-ship. Therefore, if a partnership does notpay the amounts owed, the partnershipadjustment resulting in the imputed under-payment or other amount due has nottaken effect. As a result, former partnersof a partnership may be required to takeinto account partnership adjustments if apartnership does not pay an imputed un-derpayment (and any applicable interest,penalties, additions to tax, or additionalamounts) under section 6225 or section6227. Additionally, former partners of apartnership-partner may be required totake into account partnership adjustmentsif a partnership-partner does not pay anyamount due (including any applicable in-terest, penalties, additions to tax, or addi-tional amounts) under section 6226 or sec-tion 6227 as a result of receiving a

Bulletin No. 2017–28 July 10, 201749

statement from a partnership in which it isa partner under proposed § 301.6226–2 orproposed § 301.6227–2.

As provided in proposed § 301.6241–3(a)(3), the provisions of proposed§ 301.6241–3 do not apply to partner-ships that have a valid election in effectunder section 6221(b) and the regula-tions thereunder. Accordingly, the for-mer partners of a partnership that haselected out of the centralized partner-ship audit regime are not required totake partnership adjustments into ac-count under proposed § 301.6241–3.

Under proposed § 301.6241–3(b)(1),the IRS may, in its discretion, determinethat a partnership ceases to exist. Only theIRS may determine that a partnership hasceased to exist. No other person, includingthe partnership, the partnership represen-tative, nor any partner, current or former,has the ability to make this determinationfor purposes of invoking the provisions ofsection 6241(7) and the proposed regula-tions. The IRS is not required to make adetermination that a partnership ceases toexist even if the definition in proposed§ 301.6241–3(b)(2) applies with respect tosuch partnership. If the IRS determinesthat any partnership has ceased to exist forpurposes of these rules, the IRS will notifythe partnership and the former partners, inwriting, at their last known address,within 30 days of the determination. If theIRS determines that a partnership (orpartnership-partner) has ceased to exist,the partnership is no longer liable for anyremaining amounts owed resulting from apartnership adjustment that is required tobe taken into account by a former partner.Proposed § 301.6241–3(a)(2).

Proposed § 301.6241–3(b)(2) defines theterm “cease to exist” for purposes of section6241(7). Under proposed § 301.6241–3(b)(2), a partnership ceases to exist if thepartnership terminates within the meaningof section 708(b)(1)(A) or does not have theability to pay, in full, any amount that thepartnership owes under subchapter C ofchapter 63. See JCS–1–16 at 80 (noting thata partnership ceases to exist if it terminatesunder section 708(b)(1)(A), as well as whenthe partnership “has no significant income,revenue, assets, or activities at the time thepartnership adjustment takes effect”). Apartnership does not have the ability to payif the IRS determines that the account with

respect to the partnership is not collectiblebased on the information that the IRS has atthe time of the determination. In makingthat determination, the IRS will rely on ex-isting guidance regarding when a taxpayeraccount is not collectible and is not requiredto develop additional facts that are notknown to the IRS at the time the decision ismade.

Proposed § 301.6241(b)(2)(i) providesthat the IRS will not determine that apartnership has ceased to exist solely be-cause: (i) a partnership has technicallyterminated under section 708(b)(1)(B);(ii) the partnership had made a valid elec-tion under section 6226 and the regula-tions thereunder with respect to anyimputed underpayment; or (iii) the part-nership has not paid any amount the part-nership is liable for under subchapter C ofchapter 63. If a partnership terminates un-der section 708(b)(1)(A), the partnershipceases to exist on the last day of the part-nership’s final taxable year. If a partner-ship does not have the ability to pay, thepartnership ceases to exist on the date thatthe IRS makes a determination under pro-posed § 301.6241–3(b)(2)(i) that the part-nership ceases to exist. Proposed§ 301.6241–3(b)(2)(ii).

Proposed § 301.6241–3 only applies ifthe IRS has determined that a partnershiphas ceased to exist before a partnershipadjustment determined in a partnership-level proceeding under the centralizedpartnership audit regime takes effect. Asdescribed in proposed § 301.6241–3(c),for purposes of this section, a partnershipadjustment takes effect when all amountsdue under subchapter C of chapter 63 re-sulting from the partnership adjustmentare fully paid by the partnership. How-ever, in no event may the IRS determinethat a partnership ceases to exist with re-spect to a partnership adjustment after theexpiration of the period of limitations oncollection applicable to the amount dueresulting from such adjustment. Proposed§ 301.6241–3(b)(2)(iii). In the event that apartnership pays some, but not all, of anyamount due resulting from a partnershipadjustment before a partnership ceases toexist, the former partners of the partner-ship that has ceased to exist are not re-quired to take into account the portion ofthe partnership adjustments with respectto which any amounts have been paid by

the partnership. Proposed § 301.6241–3(c)(2). In cases of partial payment, thenotification that the IRS has determinedthat the partnership has ceased to existwill include information regarding theportion of the partnership adjustments thatare attributable to any remaining balanceowed by the partnership that must betaken into account by the former partners.

If the IRS determines that a partnershipceases to exist, the partnership adjust-ments are taken into account by the for-mer partners of the partnership. Underproposed § 301.6241–3(d)(1)(i), the term“former partners” means the adjustmentyear partners of a partnership that hasceased to exist . If any adjustment yearpartner is a partnership-partner that theIRS has determined has ceased to exist,the partners of the partnership-partner forthe partnership-partner’s taxable year thatincludes the end of the adjustment year ofthe partnership that has ceased to exist arethe former partners for purposes of thissection. Proposed § 301.6241–3(d)(1)(ii).If there are no adjustment year partners ofa partnership, including where there areno partners of a partnership-partner, (forinstance, because the partnership ceasedto exist before the adjustment year), theterm “former partners” means the partnersof the partnership (or partnership-partner)during the last taxable year for which apartnership return was filed under section6031(b). Proposed § 301.6241–3(d)(2).

Under proposed § 301.6241–3(e), theformer partners of a partnership that hasceased to exist take the partnership adjust-ment into account as if the partnership hadmade an election under section 6226 andthe regulations thereunder. A former part-ner must take into account the formerpartner’s share of a partnership adjust-ment reflected in the statement providedto the former partner in accordance withproposed § 301.6226–3.

If a partnership is notified by the IRSthat it has ceased to exist, the partnershipmust furnish statements to its former part-ners reflecting the former partner’s shareof the partnership adjustments required tobe taken into account, and file the state-ments with the IRS, no later than 30days after the date of the notice from theIRS in which the IRS determines thatthe partnership ceases to exist. Proposed§ 301.6241–3(e)(2)(ii). The statements

July 10, 2017 Bulletin No. 2017–2850

must conform to the requirements underproposed § 301.6226 –2 except thatthe adjustments are taken into accountby the former partners rather than thereviewed year partners. Proposed§ 301.6241–3(e)(2)(i). If the statementsare not timely furnished to the formerpartners, the IRS may furnish statementsto the former partners to inform thosepartners of their share of the adjust-ments. Proposed § 301.6241–3(e)(3). Ifthe IRS furnishes the statements to theformer partners, the IRS will notify theformer partner in writing of such part-ner’s share of the partnership adjust-ment based on the information reason-ably available to the IRS at the timesuch notification is provided. A notifi-cation issued by the IRS is treated thesame as a statement required to be fur-nished and filed under proposed§ 301.6241–3(e)(2).

Proposed § 301.6241–3(f) provides ex-amples that illustrate the provisions of thissection.

E. Nondeductible payments

Proposed § 301.6241–4 provides gener-ally that the payment of any amount undersubchapter C of chapter 63 is nondeductible,and must be treated as an expenditure de-scribed in section 705(a)(2)(B) (that is, notdeductible and not properly chargeable to acapital account). Accordingly, a payment bya partnership of any amount required to bepaid under subchapter C of chapter 63, in-cluding any imputed underpayment, anyamount under proposed § 301.6226–3 (re-garding reviewed year partners taking intoaccount partnership adjustments), and anyinterest, penalties, additions to tax, or addi-tional amounts with respect to such amountsis treated as an expenditure described insection 705(a)(2)(B).

F. Extension to entities filing partnershipreturns

Proposed § 301.6241–5 extends theprovisions of the centralized partnershipaudit regime to a taxable year for whichany entity files a partnership return (Form1065, U.S. Return of Partnership Income),even if it is determined that the entityfiling the return is not a partnership (pro-posed § 301.6241–5(a)) or even that no

entity existed (proposed § 301.6241–5(b)). Under proposed § 301.6241–5(a), ifan entity files a partnership return for ataxable year, the provisions of subchapterC of chapter 63 (and the regulations there-under) apply to that entity, its items (andany partner’s distributive share of thoseitems), and any person holding an interestin that entity at any time during the tax-able year for which the partnership returnwas filed.

Proposed § 301.6241–5(c) providesexceptions to the general rules in pro-posed § 301.6241–5(a). Under proposed§ 301.6241–5(c)(1), the provisions of sub-chapter C of chapter 63 do not apply totaxable years for which a valid electionunder section 6221(b) to elect out of thecentralized partnership audit regime is ineffect. Under proposed § 301.6241–5(c)(2), the provisions of subchapter C ofchapter 63 do not apply to taxable yearsfor which a partnership return is filedsolely to make an election described insection 761(a) (election out of subchapterK of chapter 1 for certain unincorporatedorganizations).

Special Analyses

Certain IRS regulations, including thisone, are exempt from the requirements ofExecutive Order 12866, as supplementedand reaffirmed by Executive Order 13563.Therefore, a regulatory impact assessmentis not required. However, pursuant to Ex-ecutive Order 13789, the Treasury Depart-ment is currently reviewing the scope andimplementation of the existing exemptionfor certain tax regulations from the reviewprocess set forth in Executive Order12866. Because the proposed regulationswould not impose a collection of informa-tion on small entities, the RegulatoryFlexibility Act (5 U.S.C. chapter 6) doesnot apply.

Pursuant to section 7805(f) of theCode, this notice of proposed rulemakinghas been submitted to the Chief Counselfor Advocacy of the Small Business Ad-ministration for comment on its impact onsmall business.

Statement of Availability of IRSDocuments

IRS Revenue Procedures, RevenueRulings, Notices and other guidance cited

in this preamble are published in the In-ternal Revenue Bulletin (or CumulativeBulletin) and are available from the Su-perintendent of Documents, U.S. Govern-ment Publishing Office, Washington, DC20402, or by visiting the IRS website atwww.irs.gov.

Comments

Before these proposed regulations areadopted as final regulations, considerationwill be given to any electronic and writtencomments that are submitted timely to theIRS as prescribed in this preamble underthe ADDRESSES heading. The TreasuryDepartment and the IRS request com-ments on all aspects of the proposed reg-ulations. All comments submitted will bemade available at www.regulations.gov orupon request.

A public hearing has been scheduledfor September 18, 2017, beginning at10:00 AM in the IRS Auditorium, InternalRevenue Building, 1111 Constitution Av-enue, N.W., Washington, D.C. Due tobuilding security procedures, visitorsmust enter at the Constitution Avenue en-trance. All visitors must present photoidentification to enter the building. Be-cause of access restrictions, visitors willnot be admitted beyond the immediateentrance area more than 30 minutes beforethe hearing starts. For information abouthaving your name placed on the buildingaccess list to attend the hearing, see theFOR FURTHER INFORMATION CON-TACT section of this preamble.

The rules of 26 CFR 601.601(a)(3) ap-ply to the hearing. Persons who wish topresent oral comments at the hearing mustsubmit written or electronic commentsand an outline of the topics to be dis-cussed and the time to be devoted to eachtopic by August 14, 2017. A period of 10minutes will be allocated to each personfor making comments.

An agenda showing the scheduling ofthe speakers will be prepared after thedeadline for receiving outlines has passed.Copies of the agenda will be available freeof charge at the hearing.

Drafting Information

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

Bulletin No. 2017–28 July 10, 201751

of the Office of the Associate Chief Coun-sel (Procedure and Administration). How-ever, other personnel from the TreasuryDepartment and the IRS participated intheir development.

List of Subjects in 26 CFR Part 301

Employment taxes, Estate taxes, Ex-cise taxes, Gift taxes, Income taxes, Pen-alties, Reporting and recordkeeping re-quirements.

Withdrawal of Notice of ProposedRulemaking

Accordingly, under the authority of 26U.S.C. 7805, the notice of proposed rule-making (REG–138326–07) that was pub-lished in the Federal Register on Friday,February 13, 2009 (74 FR 7205) is with-drawn.

Proposed Amendments to theRegulations

Accordingly, 26 CFR part 301 is pro-posed to be amended as follows:

PART 301—PROCEDURE ANDADMINISTRATION

Paragraph 1. The authority citation forpart 301 continues to read in part as fol-lows:

Authority: 26 U.S.C. 7805 * * *Par. 2. Section 301.6221(a)–1 is added

to read as follows:

§ 301.6221(a)–1 Scope of thepartnership procedures undersubchapter C of chapter 63 of theInternal Revenue Code.

(a) In general. Any adjustment to itemsof income, gain, loss, deduction, or credit(as defined in paragraph (b)(1) of this sec-tion) of a partnership for a partnershiptaxable year and any partner’s distributiveshare (as defined in paragraph (b)(2) ofthis section) thereof is determined, anytax attributable thereto is assessed andcollected, and the applicability of anypenalty, addition to tax, or additionalamount that relates to an adjustment toany such item or share is determined atthe partnership level under subchapter Cof chapter 63 of the Internal RevenueCode (subchapter C of chapter 63). See§ 301.6222–1 for rules relating to assess-

ment and collection in a proceeding in-volving inconsistent reporting pursuant tosection 6222. See § 301.6225–2 for ruleswith respect to an amended return inthe case of modification under section6225(c)(2). See § 301.6226–3 for rules incases where an election under section6226 is made.

(b) Definitions. Solely for purposes ofparagraph (a) of this section the followingterms have the meaning described in thisparagraph (b).

(1) Items of income, gain, loss, deduc-tion, or credit–(i) In general. The phraseitems of income, gain, loss, deduction, orcredit means all items and informationrequired to be shown, or reflected, on areturn of the partnership under section6031, the regulations thereunder, andthe forms and instructions prescribedby the Internal Revenue Service (IRS)for the partnership’s taxable year, andany information in the partnership’sbooks and records for the taxable year.This phrase includes–

(A) the character, timing, source, andamount of the partnership’s income, gain,loss, deductions, and credits, includingwhether an item is deductible, tax-exempt,or a tax-preference item;

(B) the character, timing, and source ofthe partnership’s activities, includingwhether the partnership’s activities arepassive or active;

(C) contributions to, and distributionsfrom, the partnership, including the value,amount, and character of those contribu-tions and distributions (for example, forpurposes of sections 704(c), 721(b),721(c), 737, and 751(b));

(D) the partnership’s basis in its assets,the character and type of the assets, andthe value (or revaluation such as under§ 1.704–1(b)(2)(iv)(f) or (s) of this chap-ter) of the assets; including any effect thecharacter or value of the partnership’s as-sets has on the sale or exchange of aninterest in the partnership (for example,for purposes of section 751(a));

(E) the amount and character of part-nership liabilities, including whether a li-ability is recourse or nonrecourse and anychanges to those liabilities from the pre-ceding tax year;

(F) the separate category, timing, andamount of the partnership’s creditable

foreign tax expenditures described in§ 1.704 –1(b)(4)(viii)(b) of this chapter;

(G) any elections made by the partner-ship and the consequences or effects ofthose elections, including a section 754election, any election referenced in sec-tion 703(b), a section 761 election, andan election under sections 6221(b) or6226(a);

(H) items related to transactions be-tween a partnership and any person in-cluding disguised sales, guaranteed pay-ments, section 704(c) allocations, andtransactions to which section 707 applies;

(I) any item resulting from a partnershipterminating under section 708(b)(1)(A), in-cluding as a result of a transaction underRev. Rul. 99–6 (1999–1 C.B. 432) (see§ 601.601(d)(2) of this chapter);

(J) items and any effects from a tech-nical termination under section 708(b)(1)(B); and

(K) partner capital accounts, includingthe release of a partner from a deficitrestoration obligation.

(ii) Factors that affect the determina-tion of items of income, gain, loss, deduc-tion, or credit. Any factors that must betaken into account to determine or allocatethe tax treatment of items adjusted undersubchapter C of chapter 63 (in accordancewith paragraph (b)(1) of this section) aredetermined at the partnership level. Suchfactors include—

(A) the legal and factual determina-tions that underlie the determination ofitems of income, gain, loss, deduction, orcredit;

(B) the partnership’s accounting prac-tices and methods;

(C) whether any person is a partner inthe partnership;

(D) whether a partnership exists for taxpurposes, including whether multiplepartnerships should be treated as a singlepartnership;

(E) whether any items or transactionsof the partnership, the adjustments towhich are determined under subchapter Cof chapter 63, lack economic substance orshould otherwise be disregarded, col-lapsed, recharacterized, or attributed toother persons (for example, under thestep transaction doctrine), includingwhether the partnership is a sham orshould otherwise be disregarded for taxpurposes (including under § 1.701–2 of

July 10, 2017 Bulletin No. 2017–2852

this chapter and any applicable judicialdoctrines);

(F) the period of limitations on makingadjustments under subchapter C of chap-ter 63;

(G) the period of limitations on theassessment of amounts attributable to ad-justments determined under subchapter Cof chapter 63, except for the period oflimitations under section 6501 with regardto assessments of tax attributable to ad-justments taken into account by partnersas a result of an election under section6226;

(H) partners’ outside bases, but only tothe extent the partners’ outside bases re-late to an adjustment determined undersubchapter C of chapter 63; and

(I) any determinations necessary to cal-culate the imputed underpayment (as de-fined in § 301.6241–1(a)(3)) under section6225, including whether items adjustedunder subchapter C of chapter 63 are lim-ited (or subject to limitations) under theInternal Revenue Code (or a treaty), andthe facts and circumstances specific to anypartner(s) that might affect the calculationof an imputed underpayment or modifica-tion requested by the partnership with re-spect to an imputed underpayment.

(2) Partner’s distributive share. Thephrase partner’s distributive share in-cludes—

(i) the partner’s share of items adjustedunder subchapter C of chapter 63, includ-ing the type of partnership interest(s) thepartner holds and the percentage interestof a partner in the partnership;

(ii) the allocation of any item deter-mined under subchapter C of chapter 63;

(iii) any special allocations applicableto any partner;

(iv) the character, source, and timing ofany item or activity required to be takeninto account by the partner which is re-lated to any item adjusted under subchap-ter C of chapter 63; and

(v) any amount required to be takeninto account by any person under section6226.

(3) Tax. For purposes of section6221(a), the term tax means tax imposedby chapter 1 of subtitle A of the InternalRevenue Code.

(c) Penalty defenses—(1) In general.Any defense to any penalty, addition totax, or additional amount must be raised

by the partnership in a partnership-levelproceeding under subchapter C of chapter63, regardless of whether the defense re-lates to facts and circumstances relating toa person other than the partnership. Afterthe adjustments determined in a partner-ship proceeding under subchapter C ofchapter 63 become final, no defense to anypenalty determined may be raised or takeninto account in determining the applicablepenalties, additions to tax, or additionalamounts under subchapter C of chapter 63with respect to any person.

(2) Examples. The following examplesillustrate the rules of this paragraph (c).

Example 1. The IRS initiates an administrativeproceeding with respect to Partnership’s taxable yearunder subchapter C of chapter 63. During the pro-ceeding, the IRS mails to Partnership a notice ofproposed partnership adjustment under section 6231that imposes a section 6662 accuracy-related penaltywith respect to an imputed underpayment on thegrounds that the imputed underpayment is attribut-able to negligence or disregard of rules or regula-tions. Partnership believes that the actions of A, apartner in the partnership for the taxable year subjectto the administrative proceeding, demonstrate that Ahad reasonable cause and acted in good faith withrespect to how A reported on A’s Federal income taxreturn the items that were adjusted and gave rise tothe imputed underpayment subject to the penalty.Partnership provides this information to the IRS dur-ing the administrative proceeding in response to thenotice of proposed partnership adjustment. The IRSwill take this penalty defense into account whendetermining whether the portion of the penalty thatrelates to the adjustments attributable to A applies atthe partnership level.

Example 2. Same facts as in Example 1 of thisparagraph (c)(2), except Partnership does not pro-vide A’s information to the IRS during the adminis-trative proceeding. The IRS mails Partnership a no-tice of final partnership adjustment (FPA) undersection 6231. Partnership does not challenge theFPA in court. Partnership makes a timely electionunder section 6226 (regarding the alternative to pay-ment of the imputed underpayment) and furnisheseach reviewed year partner (as defined in§ 301.6241–1(a)(9)) a statement including the re-viewed year partner’s share of the section 6662accuracy-related penalty determined in the FPA. Intaking the section 6662 accuracy-related penalty intoaccount, A raises with the IRS a reasonable causedefense based on A’s actions, asserting that A hadreasonable cause and acted in good faith. Because alldefenses against a penalty imposed under subchapterC of chapter 63 may only be raised by Partnership, Amay not raise a defense to his share of the section6662 penalty determined under section 6226. There-fore, the IRS will not take the penalty defense intoaccount.

(d) Coordination with other chaptersof the Internal Revenue Code. Nothing insubchapter C of chapter 63 and the regu-lations thereunder precludes the IRS from

making any adjustment to an item de-scribed in paragraph (b) of this section forpurposes of determining taxes imposed byother provisions of the Internal RevenueCode (that is, taxes not imposed by chap-ter 1 of subtitle A).

(e) Applicability date—(1) In general.Except as provided in paragraph (e)(2) ofthis section, this section applies to part-nership taxable years beginning after De-cember 31, 2017.

(2) Election under § 301.9100–22T ineffect. This section applies to any partner-ship taxable year beginning after Novem-ber 2, 2015 and before January 1, 2018 forwhich a valid election under § 301.9100–22T is in effect.

Par. 3. Section 301.6221(b)–1 is addedto read as follows:

§ 301.6221(b)–1 Election out for certainpartnerships with 100 or fewer partners.

(a) In general. The provisions of sub-chapter C of chapter 63 of the InternalRevenue Code (subchapter C of chapter63) do not apply for any partnership tax-able year for which an eligible partnershipunder paragraph (b) of this section makesa valid election in accordance with para-graph (c) of this section. For rules regard-ing deficiency procedures, see subchapterB of chapter 63 of the Internal RevenueCode and §§ 301.6211–1 through301.6215–1.

(b) Eligible partnership—(1) In gen-eral. Only an eligible partnership maymake an election under this section. Apartnership is an eligible partnership forpurposes of this section if—

(i) the partnership has 100 or fewerpartners as determined in accordance withparagraph (b)(2) of this section, and

(ii) each statement the partnership isrequired to furnish under section 6031(b)for the partnership taxable year is fur-nished to a partner that was an eligiblepartner (as defined in paragraph (b)(3) ofthis section) for the partnership’s entiretaxable year.

(2) 100 or fewer partners—(i) In gen-eral. Except as provided in paragraph(b)(2)(ii) of this section, a partnership has100 or fewer partners if the partnership isrequired to furnish 100 or fewer state-ments under section 6031(b) for the tax-able year.

Bulletin No. 2017–28 July 10, 201753

(ii) Special rule for S corporations. Forpurposes of this paragraph (b)(2), a part-nership with a partner that is an S corpo-ration (as defined in section 1361(a)(1))must take into account each statement re-quired to be furnished by the S corpora-tion to its shareholders under section6037(b) for the taxable year of the S cor-poration ending with or within the part-nership’s taxable year.

(iii) Examples. The following exam-ples illustrate the provisions of this para-graph (b)(2). For purposes of these exam-ples, each partnership is required to file areturn under section 6031(a):

Example 1. During its 2020 partnership taxableyear, Partnership has four partners each owning aninterest in Partnership. Two of the partners areSpouse 1 and Spouse 2 who are married to eachother during all of 2020. Spouse 1 and Spouse 2 eachown a separate interest in Partnership. The two otherpartners are unmarried individuals. Under section6031(b), Partnership is required to furnish a separatestatement (that is, Schedule K-1 (Form 1065), Part-ner’s Share of Income, Deductions, Credits, etc.) toeach individual partner, including separate state-ments to Spouse 1 and Spouse 2. Therefore, forpurposes of paragraph (b)(2) of this section, Partner-ship has four partners during its 2020 taxable year.

Example 2. The facts are the same as in Example1 of this paragraph (b)(2)(iii), except Spouse 2 doesnot separately own an interest in Partnership during2020 and Spouse 1 and Spouse 2 live in a commu-nity property state. Spouse 1 and Spouse 2 have livedin the community property state for the entire taxableyear and at all times since they were married. Spouse1 acquired Spouse 1’s interest in Partnership whilemarried to Spouse 2. Because Spouse 2’s communityproperty interest in Spouse 1’s partnership interest isnot taken into account for purposes of determiningthe number of statements Partnership is required tofurnish under section 6031(b), Partnership is re-quired to furnish a statement to Spouse 1, but not toSpouse 2. Therefore, for purposes of paragraph(b)(2) of this section, Partnership has three partnersduring its 2020 taxable year.

Example 3. At the beginning of 2020, Partner-ship, which has a taxable year ending December 31,2020, has three partners - individuals A, B, and C.Each individual owns an interest in Partnership. OnJune 30, 2020, Individual A dies, and A’s interest inPartnership becomes an asset of A’s estate. A’sestate owns the interest for the remainder of 2020.On September 1, 2020, B sells his interest in Part-nership to Individual D, who holds the interest forthe remainder of the year. Under section 6031(b),Partnership is required to furnish five statements forits 2020 taxable year – one each to Individual A, theestate of Individual A, Individual B, Individual D,and Individual C. Therefore, for purposes of para-graph (b)(2) of this section, Partnership has fivepartners during its 2020 taxable year.

Example 4. During its 2020 taxable year, Part-nership has 51 partners - 50 partners who are indi-viduals and S, an S corporation. S and Partnership

are both calendar year taxpayers. S has 50 sharehold-ers during the 2020 taxable year. Under section6031(b), Partnership is required to furnish 51 state-ments for the 2020 taxable year – one to S and oneto each of Partnership’s 50 partners who are individ-uals. Under section 6037(b), S is required to furnisha statement (that is, Schedule K-1 (Form 1120-S),Shareholder’s Share of Income, Deductions, Credits,etc.) to each of its 50 shareholders. Under paragraph(b)(2)(ii) of this section, the number of statementsrequired to be furnished by S under section 6037(b),which is 50, is taken into account to determinewhether partnership has 100 or fewer partners. Ac-cordingly, for purposes of paragraph (b)(2) of thissection, Partnership has a total of 101 partners (51statements furnished by Partnership to its partnersplus 50 statements furnished by S to its shareholders)and is therefore not an eligible partnership underparagraph (b)(1) of this section. Because Partnershipis not an eligible partnership, it cannot make theelection under paragraph (a) of this section.

Example 5. During its 2020 taxable year, Part-nership has two partners, A, an individual, and E, anestate of a deceased partner. E has 10 beneficiaries.Under section 6031(b), Partnership is required tofurnish two statements, one to A and one to E. Anystatements that E may be required to furnish to itsbeneficiaries are not taken into account for purposesof paragraph (b)(2) of this section. Therefore, Part-nership has two partners under paragraph (b)(2) ofthis section.

(3) Eligible Partners—(i) In general.For purposes of paragraph (b)(1)(ii) ofthis section, the term eligible partnermeans a partner that is an individual, a Ccorporation (as defined by section 1361(a)(2)), an eligible foreign entity described inparagraph (b)(3)(iii) of this section, an Scorporation, or an estate of a deceasedpartner. An S corporation is an eligiblepartner regardless of whether one or moreshareholders of the S corporation are notan eligible partner.

(ii) Partners that are not eligible part-ners. A partner is not an eligible partnerunder paragraph (b)(3)(i) of this section ifthe partner is —

(A) a partnership,(B) a trust,(C) a foreign entity that is not an eli-

gible foreign entity described in paragraph(b)(3)(iii) of this section,

(D) a disregarded entity described in§ 301.7701–2(c)(2)(i),

(E) a nominee or other similar personthat holds an interest on behalf of anotherperson, or

(F) an estate of an individual other thana deceased partner.

(iii) Eligible foreign entity. For pur-poses of this paragraph (b)(3), a foreignentity is an eligible partner if the foreign

entity would be treated as a C corporationif it were a domestic entity. For purposesof the preceding sentence, a foreign entitywould be treated as a C corporation if itwere a domestic entity if the entity isclassified as a per se corporation under§ 301.7701–2(b)(1), (3), (4), (5), (6), (7),or (8), is classified by default as an asso-ciation taxable as a corporation under§ 301.7701–3(b)(2)(i)(B), or is classifiedas an association taxable as a corporationin accordance with an election under theprovisions of § 301.7701–3(c).

(iv) Examples. The following examplesillustrate the rules of this paragraph (b)(3).For purposes of these examples, each part-nership is required to file a return undersection 6031(a):

Example 1. During the 2020 taxable year, Part-nership has four equal partners. Two partners areindividuals. One partner is a C corporation. Thefourth partner, D, is a partnership. Because D is apartnership, D is not an eligible partner under para-graph (b)(3)(i) of this section. Accordingly, Partner-ship is not an eligible partnership under paragraph(b)(1) of this section and, therefore, cannot make theelection under paragraph (a) of this section for its2020 taxable year.

Example 2. During its 2020 taxable year, Part-nership has four equal partners. Two partners areindividuals. One partner is a C corporation. Thefourth partner, S, is an S corporation. S has tenshareholders. One of S’s shareholders is a disre-garded entity and one is a qualified small businesstrust. S is an eligible partner under paragraph(b)(3)(i) of this section even though S’s shareholderswould not be considered eligible partners if thoseshareholders held direct interests in Partnership. See§ 301.6221(b)–1(b)(3)(i). Accordingly, Partnershipmeets the requirements under paragraph (b)(3) ofthis section for its 2020 taxable year.

Example 3. During its 2020 taxable year, Part-nership has two equal partners, A, an individual, andC, a disregarded entity, wholly owned by B, anindividual. C is not an eligible partner under para-graph (b)(3)(i) of this section. Accordingly, Partner-ship is not an eligible partnership under paragraph(b)(1)(ii) of this section and, therefore, is ineligibleto make the election under paragraph (a) of thissection for its 2020 taxable year.

(c) Election—(1) In general. An elec-tion under this section must be made onthe eligible partnership’s timely filed re-turn, including extensions, for the taxableyear to which the election applies andinclude all information required by theInternal Revenue Service (IRS) in forms,instructions, or other guidance. An elec-tion is not valid unless the partnershipdiscloses to the IRS all of the informationrequired under paragraph (c)(2) of thissection about all partners and, in the case

July 10, 2017 Bulletin No. 2017–2854

of a partner that is an S corporation, theshareholders of such S corporation. Anelection once made may not be revokedwithout the consent of the IRS.

(2) Disclosure of partner informationto the IRS. A partnership making an elec-tion under this section must disclose to theIRS information about each person thatwas a partner at any time during the tax-able year of the partnership to which theelection applies, including each partner’sname, correct U.S. taxpayer identificationnumber (TIN), and Federal tax classifica-tion, an affirmative statement that the part-ner is an eligible partner under paragraph(b)(3) of this section, and any other infor-mation required by the IRS in forms, in-structions, or other guidance. If a partneris an S corporation, the partnership mustalso disclose to the IRS the name, correctTIN, and Federal tax classification of eachshareholder of the S corporation as well asany other information required by the IRSin forms, instructions, or other guidance.

(3) Partner notification. A partnershipthat makes an election under this sectionmust notify each of its partners of theelection within 30 days of making theelection.

(d) Election made by a partnership thatis a partner–(1) In general. The fact that apartnership has made an election underthis section does not affect whether theprovisions of subchapter C of chapter 63apply to any other partnership, including apartnership in which the partnership mak-ing the election is a partner. Accordingly,the provisions of subchapter C of chapter63 that apply to partners in a partnershipthat has not made an election under thissection apply, to the extent provided in theregulations under subchapter C of chapter63, to partners that are themselves part-nerships that have made an election underthis section in their capacity as partners inthe other partnership.

(2) Examples. The following examplesillustrate the rules of paragraph (d)(1) ofthis section. For purposes of these exam-ples, each partnership is required to file areturn under section 6031(a):

Example 1. During its 2020 taxable year, Part-nership, a calendar year taxpayer, has two partners.One partner, A, is also a calendar year partnership. Afiles a valid election out of the centralized partner-ship audit regime with its timely filed partnershipreturn for its 2020 taxable year. Notwithstanding A’svalid election out of the centralized partnership audit

regime, A is subject to the same rules as any partnerin a partnership subject to the rules under subchapterC of chapter 63, including the consistency require-ments of section 6222 and the regulations thereun-der.

Example 2. The IRS mails to Partnership, a cal-endar year taxpayer, a notice of final partnershipadjustment under section 6231 with respect to Part-nership’s 2020 taxable year. Partnership timelyelects the alternative to payment of imputed under-payment under section 6226 and the regulationsthereunder. One of Partnership’s partners is A, acalendar year partnership. A made a valid electionout of the centralized partnership audit regime withits timely filed partnership return for its 2020 taxableyear. Partnership must provide A with a statementunder section 6226 containing A’s share of the ad-justments for Partnership’s 2020 taxable year. A issubject to the same rules as any partner in a partner-ship subject to the rules under subchapter C of chap-ter 63.

(e) Effect of an election—(1) In gen-eral. An election made under this section isan action taken under subchapter C of chap-ter 63 by the partnership for purposes ofsection 6223. Accordingly, the partnershipand all partners are bound by an election ofthe partnership under this section unless theIRS determines that the election is invalid.See § 301.6223–2 for the binding nature ofactions taken by a partnership under sub-chapter C of chapter 63.

(2) IRS determination that election isinvalid. If the IRS determines that an elec-tion under this section for a partnershiptaxable year is invalid, the IRS will notifythe partnership in writing and the provi-sions of subchapter C of chapter 63 willapply to that partnership taxable year.

(f) Applicability date. These regula-tions are applicable to partnership taxableyears beginning after December 31, 2017.

Par. 4. Section 301.6222–1 is added toread as follows:

§ 301.6222–1 Partner’s return must beconsistent with partnership return.

(a) Consistent treatment of items—(1)In general. The treatment on a partner’sreturn of each item of income, gain, loss,deduction, or credit (as defined in§ 301.6221(a)–1(b)(1)) attributable to apartnership must be consistent with thetreatment of those items on the partner-ship return in all respects, including theamount, timing, and characterization ofthose items. A partner has not satisfied therequirement of this paragraph (a) if thetreatment of the item on the partner’s re-turn is consistent with how the item was

treated on a schedule or other informationfurnished to the partner by the partnershipbut inconsistent with the treatment of theitem on the partnership return actuallyfiled. For rules relating to the election tobe treated as having reported the inconsis-tency where the partner treats an itemconsistently with an incorrect schedule orother information furnished by the part-nership, see paragraph (d) of this section.

(2) Partner that is a partnership. Therules of this section apply to a partnership-partner (as defined in § 301.6241–1(a)(7))regardless of whether the partnership-partner has made an election under section6221(b) to elect out of the provisions ofsubchapter C of chapter 63 of the InternalRevenue Code (subchapter C of chapter63). Accordingly, unless the requirementsof paragraph (c) of this section are satis-fied, a partnership-partner must treat itemsattributable to a partnership in which it isa partner consistent with the treatment ofsuch items on the partnership return filedby the partnership in which it is a partner.

(3) Partnership does not file a return.A partner’s treatment of items attributableto a partnership that does not file a returnis per se inconsistent, unless the partnerfiles a notice of inconsistent treatment un-der paragraph (c) of this section.

(4) Treatment of items on a partnershipreturn. For purposes of this section, thetreatment of an item on a partnership re-turn includes—

(i) the treatment of an item on the part-nership’s return of partnership incomefiled with the IRS under section 6031, andany amendment or supplement thereto, in-cluding an administrative adjustment re-quest (AAR) filed pursuant to section6227 and the regulations thereunder; and

(ii) the treatment of an item on anystatement, schedule or list, and anyamendment or supplement thereto, filedby the partnership with the Internal Rev-enue Service (IRS), including any state-ments filed pursuant to section 6226 andthe regulations thereunder.

(5) Examples. The following examplesillustrate the rules of this paragraph (a).For purposes of these examples, each part-nership is subject to the provisions of sub-chapter C of chapter 63, and each partner-ship and its partners are calendar yeartaxpayers, unless otherwise stated.

Bulletin No. 2017–28 July 10, 201755

Example 1. B is a partner in Partnership during2018 and 2019. Both B and Partnership are calendaryear taxpayers. In December 2018, Partnership re-ceives an advance payment for services to be per-formed in 2019 and reports this amount as income onits partnership return for 2018. B includes its distrib-utive share of income from the advance payment onB’s income tax return for 2019 and not on B’sincome tax return for 2018. B did not file a notice ofinconsistent treatment with respect to the advancedpayment. B’s treatment of the income attributable toPartnership is inconsistent with the treatment of thatitem by Partnership on its partnership return.

Example 2. C is a partner in Partnership during2018. Partnership incurred start-up costs before itwas actively engaged in its business. Partnershipcapitalized these costs on its 2018 partnership return.C deducted his distributive share of the start-up costson C’s 2018 income tax return. C’s treatment of thestart-up costs is inconsistent with the treatment ofthat item by Partnership on its partnership return.

Example 3. D is a partner in Partnership during2018. Partnership reports a loss of $100,000 on itspartnership return for 2018. On the 2018 ScheduleK-1 attached to the partnership return, Partnershipreports $5,000 as D’s distributive share of that loss.On the 2018 Schedule K-1 furnished to D, however,Partnership reports $15,000 as D’s distributive shareof the loss. D reports the $15,000 loss on D’s 2018income tax return. D has not satisfied the require-ments of paragraph (a) of this section because Dreported D’s distributive share of the loss in a man-ner that is inconsistent with how D’s distributiveshare of the loss was reported on the 2018 partner-ship return actually filed. See, however, paragraph(d) of this section for the election to be treated ashaving reported the inconsistency where the partnertreats an item consistently with an incorrect sched-ule.

Example 4. D was a partner in Partnership during2018. Partnership reports a loss of $100,000 on itspartnership return for 2018. In 2020, Partnershipfiles an AAR under section 6227 reporting that theamount of the loss on its 2018 partnership return is$90,000, rather than $100,000 as originally reported.Pursuant to section 6227 and the regulations there-under, Partnership elects to have its partners take theadjustment into account, and furnishes D a statementshowing D’s share of the reduced loss for 2018. Dfails to take his share of the reduced loss for 2018into account in accordance with section 6227 and theregulations thereunder. D has not satisfied the re-quirements of paragraph (a) of this section becauseD has not taken into account his share of the loss ina manner consistent with how Partnership treatedsuch items on the partnership return actually filed.

Example 5. E was a partner in Partnership during2018. In 2021, Partnership receives a notice of finalpartnership adjustment in an administrative proceed-ing under subchapter C of chapter 63 with respect toPartnership’s 2018 taxable year. Partnership prop-erly elects the application of section 6226 and fur-nishes to E a statement of E’s share of adjustmentswith respect to Partnership’s 2018 taxable year. Efails to take his share of the adjustments into accountin accordance with section 6226 and the regulationsthereunder. E has not satisfied the requirements ofparagraph (a) of this section because E has not taken

into account his share of adjustments with respect toPartnership’s 2018 taxable year in a manner consis-tent with how Partnership treated such items on thepartnership return actually filed.

Example 6. In 2018, E is a partner in Partnership.E is a partnership-partner with a 2018 taxable yearthat ends on the same day as Partnership’s 2018taxable year. E has filed a valid election under sec-tion 6221(b) in effect with respect to E’s 2018 part-nership taxable year. Notwithstanding E’s electionunder section 6221(b) for its 2018 taxable year, E issubject to section 6222 for taxable year 2018. E musttreat, on its 2018 partnership return, any items at-tributable to E’s interest in Partnership in a mannerthat is consistent with the treatment of those items onthe 2018 partnership return actually filed by Partner-ship.

(b) Effect of inconsistent treatment—(1) Determination of underpayment of taxresulting from inconsistent treatment. If apartner fails to satisfy the requirementsof paragraph (a) of this section, unless thepartner provides notice in accordance withparagraph (c) of this section, the IRS mayadjust the inconsistently reported item onthe partner’s return to make it consistentwith the treatment of such item on thepartnership return and determine the un-derpayment of tax that results from thatadjustment. For purposes of this section,the underpayment of tax is the amount bywhich the correct tax, as determined bymaking the partner’s return consistentwith the partnership return, exceeds thetax shown on the partner’s return.

(2) Assessment and collection of tax.The IRS may assess and collect any un-derpayment of tax resulting from an ad-justment described in paragraph (b)(1) ofthis section in the same manner as if theunderpayment of tax was on account of amathematical or clerical error appearingon the partner’s return, except that theprocedures under section 6213(b)(2) forrequesting abatement of an assessment donot apply.

(3) Effect when partner is a partner-ship. If the partner is itself a partnership (apartnership-partner), any adjustment onaccount of such partnership-partner’s fail-ure to satisfy the requirements of para-graph (a) of this section will be treated asan adjustment on account of a mathemat-ical or clerical error under section6213(b), except that the procedures undersection 6213(b)(2) for requesting abate-ment of an assessment do not apply. Seesection 6232(d)(1)(B).

(4) Examples. The following examplesillustrate the rules of this paragraph (b).

Example 1. D, an individual, is a partner inPartnership. D and Partnership are both calendaryear taxpayers and Partnership does not have anelection under section 6221(b) in effect for its 2018taxable year. On its partnership return for taxableyear 2018, Partnership reports $100,000 in ordinaryincome. On the Schedule K-1 attached to the part-nership return, as well as on the Schedule K-1 fur-nished to D, Partnership reports $15,000 as D’sdistributive share of the $100,000 in ordinary in-come. D reports only $5,000 of the $15,000 of or-dinary income on his 2018 income tax return. TheIRS may determine the amount of tax that resultsfrom adjusting the ordinary income attributable toD’s interest in Partnership reported on D’s 2018income tax return from $5,000 to $15,000 and assessthat resulting underpayment in tax as if it was onaccount of a mathematical or clerical error appearingon D’s return. D may not request an abatement ofthat assessment under section 6213(b).

Example 2. F was a partner in Partnership during2018. In 2021, Partnership receives a notice of finalpartnership adjustment in an administrative proceed-ing under subchapter C of chapter 63 with respect toPartnership’s 2018 taxable year. Partnership prop-erly elects the application of section 6226 and fileswith the IRS a statement of F’s share of adjustmentswith respect to Partnership’s 2018 taxable year. Ffails to report one adjustment, F’s share of a decreasein the amount of losses for 2018, on F’s return asrequired by section 6226 and the regulations there-under. The IRS may determine the amount of tax thatresults from adjusting the decrease in the amount oflosses on F’s return to be consistent with the amountincluded on the section 6226 statement filed with theIRS and may assess the resulting underpayment intax as if it was on account of a mathematical orclerical error appearing on F’s return. F may notrequest an abatement of that assessment under sec-tion 6213(b).

(c) Notification to the IRS when itemsattributable to a partnership are treated in-consistently—(1) In general. Paragraphs (a)and (b) of this section (regarding the consis-tent treatment of items and the effect ofinconsistent treatment) do not apply to itemsidentified as inconsistent (or that may beinconsistent) in a statement that the partnerprovides to the IRS according to the forms,instructions, and other guidance prescribedby the IRS. Instead, the procedures in para-graph (c)(3) of this section apply. A state-ment does not identify an inconsistency forpurposes of this paragraph (c) unless it isattached to the partner’s return on which theitem is treated inconsistently.

(2) Coordination with section 6223.Paragraph (c)(1) of this section is not ap-plicable to an item the treatment of whichis binding on the partner because of ac-tions taken by the partnership under sub-chapter C of chapter 63 or because of afinal decision in a proceeding with respectto the partnership under subchapter C of

July 10, 2017 Bulletin No. 2017–2856

chapter 63. Accordingly, the provisions ofparagraph (c)(1) of this section do notapply with respect to the partner’s treat-ment of an item reflected on an AARunder section 6227 or a statement undersection 6226 filed by the partnership withthe IRS to which the partner is boundunder section 6223. Therefore, if the part-ner’s treatment of the item reflected on anAAR or statement described in section6226 is not consistent with the treatmentof the partnership to which the partner isbound under section 6223, the provisionsof section 6222(c) and paragraph (c)(1) ofthis section do not apply with respect tothat item, and any resulting underpaymentmay be assessed and collected in accor-dance with paragraph (b)(2) of this sec-tion.

(3) Partner protected only to extent ofnotification. A partner who reports theinconsistent treatment of an item is notsubject to paragraphs (a) and (b) of thissection only with respect to those itemsidentified in the statement described inparagraph (c)(1) of this section. Thus, if apartner notifying the IRS with respect toone item does not report the inconsistenttreatment of another item, the IRS maydetermine the amount of tax that resultsfrom adjusting the unidentified, inconsis-tently reported item on the partner’s returnto make it consistent with the treatment ofthe item on the partnership return, andassess the resulting underpayment of taxin accordance with paragraph (b)(2) ofthis section.

(4) Adjustment after notification—(i)In general. If a partner notifies the IRS ofthe inconsistent treatment of an item inaccordance with paragraph (c)(1) of thissection, and the IRS disagrees with theinconsistent treatment, the IRS may adjustthe identified, inconsistently reported itemin a proceeding with respect to the partner.Nothing in this paragraph (c)(4)(i) pre-cludes the IRS from also conducting aproceeding with respect to the partnership.

(ii) Adjustments in partner proceeding.In a proceeding with respect to a partnerdescribed in paragraph (c)(4)(i) of thissection, the IRS may adjust any identified,inconsistently reported item to make theitem consistent with the treatment of thatitem on the partnership return or deter-mine that the correct treatment of suchitem differs from the treatment on the

partnership return and instead adjust theitem to reflect the correct treatment, not-withstanding the treatment of that item onthe partnership return. The IRS may alsoadjust any item on the partner’s return,including items that are not attributable tothe partnership. Any final decision withrespect to an inconsistent position in aproceeding to which the partnership is nota party is not binding on the partnership.

(5) Examples. The following examplesillustrate the rules of this paragraph (c).For purposes of these examples, each part-nership is subject to the provisions of sub-chapter C of chapter 63, and each partner-ship and partner is a calendar yeartaxpayer, unless otherwise stated.

Example 1. B is a partner in Partnership during2018. B treats a deduction and a capital gain attrib-utable to Partnership on B’s 2018 income tax returnin a manner that is inconsistent with the treatment ofthose items by Partnership on its 2018 partnershipreturn. B reports the inconsistent treatment of thededuction in accordance with paragraph (c)(1) of thissection, but not the inconsistent treatment of thegain. Because B did not notify the IRS of the incon-sistent treatment of the gain in accordance with para-graph (c)(1) of this section, the IRS may determinethe amount of tax that results from adjusting the gainreported on B’s 2018 income tax return in order tomake the treatment of that gain consistent with howthe gain was treated on Partnership’s partnershipreturn. Pursuant to paragraph (c)(3) of this section,the IRS may assess and collect the underpayment oftax resulting from the adjustment to the gain as if itwas on account of a mathematical or clerical errorappearing on B’s return.

Example 2. On its 2018 partnership return, Part-nership treats partner E’s distributive share of ordi-nary loss attributable to Partnership as $8,000. E,however, claims an ordinary loss of $9,000 as attrib-utable to Partnership on its 2018 income tax returnand notifies the IRS of the inconsistent treatment inaccordance with paragraph (c)(1) of this section. Asa result of the notice of inconsistent treatment, theIRS conducts a separate proceeding under subchap-ter B of chapter 63 of the Internal Revenue Codewith respect to E’s 2018 income tax return, a pro-ceeding to which Partnership is not a party. Duringthe proceeding, the IRS determines that the properamount of E’s distributive share of the ordinary lossfrom Partnership is $3,000. During the same pro-ceeding, the IRS also determines that E overstated acharitable contribution deduction in the amount of$2,500 on its 2018 income tax return. The determi-nation of the adjustment of E’s share of ordinary lossis not binding on Partnership. The charitable contri-bution deduction is not attributable to Partnership orto another partnership subject to the provisions ofsubchapter C of chapter 63. The IRS may determinethe amount of tax that results from adjusting the$9,000 ordinary loss deduction to $3,000 and fromadjusting the charitable contribution deduction. Pur-suant to paragraph (c)(4)(ii) of this section, the IRSis not limited to only adjusting the ordinary loss of

$9,000, as originally reported on E’s partner return,to $8,000, as originally reported by Partnership on itspartnership return, nor is the IRS prohibited fromadjusting the charitable contribution deduction in theproceeding with respect to E.

(d) Partner receiving incorrect infor-mation—(1) In general. A partner istreated as having complied with section6222(c)(1)(B) and paragraph (c)(1) of thissection with respect to an item attributableto a partnership if the partner –

(i) Demonstrates that the treatment ofthe item on the partner’s return is consis-tent with the treatment of that item on thestatement, schedule, or other form pre-scribed by the IRS and furnished to thepartner by the partnership, and

(ii) The partner makes an election inaccordance with paragraph (d)(2) of thissection.

(2) Time and manner of making elec-tion—(i) In general. An election underparagraph (d) of this section must be filedin writing with the IRS office set forth inthe notice that notified the partner of theinconsistency no later than 60 days afterthe date of such notice.

(ii) Contents of election. The electiondescribed in paragraph (d)(2)(i) of thissection must be—

(A) Clearly identified as an electionunder section 6222(c)(2)(B);

(B) Signed by the partner making theelection;

(C) Accompanied by a copy of thestatement, schedule, or other form fur-nished to the partner by the partnershipand a copy of the IRS notice that notifiedthe partner of the inconsistency; and

(D) Include any other information re-quired in forms, instructions, or otherguidance prescribed by the IRS.

(iii) Treatment of item is unclear. Gen-erally, the requirement described in para-graph (d)(2)(ii)(C) of this section will besatisfied by attaching a copy of the state-ment, schedule, or other form furnished tothe partner by the partnership to the elec-tion (in addition to a copy of the IRSnotice that notified the partner of the in-consistency). However, if it is not clearfrom the statement, schedule, or otherform furnished by the partnership that thepartner’s treatment of such item on thepartner’s return is consistent, the electionmust also include an explanation of howthe treatment of such item on the state-ment, schedule, or other form furnished

Bulletin No. 2017–28 July 10, 201757

by the partnership is consistent with thetreatment of the item on the partner’s re-turn, including with respect to the charac-terization, timing, and amount of suchitem.

(3) Example. The following exampleillustrates the rules of this paragraph (d).For purposes of this example, the partner-ship is subject to subchapter C of chapter63 and the partnership and its partners arecalendar year taxpayers.

Example. E is a partner in Partnership for 2018.On its 2018 partnership return, Partnership reportsthat E’s distributive share of ordinary income attrib-utable to Partnership is $1,000. Partnership furnishesto E a Schedule K-1 for 2018 showing $500 as E’sdistributive share of ordinary income. E reports $500of ordinary income attributable to Partnership on its2018 income tax return consistent with the ScheduleK-1 furnished to E. The IRS notifies E that E’streatment of the ordinary income attributable to Part-nership on its 2018 income tax return is inconsistentwith how Partnership treated the ordinary incomeallocated to E on its 2018 partnership return. Within60 days of receiving the notice from the IRS of theinconsistency, E files an election with the IRS inaccordance with paragraph (d)(2) of this section.Because E made a valid election under section6222(c)(2)(B) and paragraph (d)(1) of this section, Eis treated as having notified the IRS of the inconsis-tency with respect to the ordinary income attribut-able to Partnership under paragraph (c)(1) of thissection.

(e) Applicability date—(1) In general.Except as provided in paragraph (e)(2) ofthis section, this section applies to part-nership taxable years beginning after De-cember 31, 2017.

(2) Election under § 301.9100–22T ineffect. This section applies to any partner-ship taxable year beginning after Novem-ber 2, 2015 and before January 1, 2018 forwhich a valid election under § 301.9100–22T is in effect.

Par. 5. Section 301.6223–1 is added toread as follows:

§ 301.6223–1 Partnershiprepresentative.

(a) Each partnership must have a part-nership representative. A partnership sub-ject to subchapter C of chapter 63 of theInternal Revenue Code (subchapter C ofchapter 63) for a partnership taxable yearmust designate a partnership representa-tive for the partnership taxable year inaccordance with this section. There maybe only one designated partnership repre-sentative for a partnership taxable year atany time. The designation of a partnership

representative for a partnership taxableyear under this section remains in effectuntil the date on which the designation ofthe partnership representative is termi-nated by valid resignation (as described inparagraph (d) of this section), valid revo-cation (as described in paragraph (e) ofthis section), or a determination by theInternal Revenue Service (IRS) that thedesignation is not in effect (as describedin paragraph (f) of this section). A desig-nation of a partnership representative for apartnership taxable year under paragraphs(d), (e), or (f) of this section supersedes allprior designations of a partnership repre-sentative for that year. A partnership rep-resentative must update the partnershiprepresentative’s contact information whensuch information changes as required byforms, instructions, or other guidance pre-scribed by the IRS. See § 301.6223–2(a)and (b) with regard to the binding effect ofactions taken by the partnership represen-tative. See § 301.6223–2(c) with regard tothe sole authority of the partnership rep-resentative to act on behalf of the partner-ship. See paragraph (f) of this section forrules regarding designation of a partner-ship representative by the IRS.

(b) Eligibility to serve as a partnershiprepresentative—(1) In general. Any per-son (as defined in section 7701(a)(1)) thatmeets the requirements of paragraphs(b)(2) and (3) of this section, as applica-ble, is eligible to serve as a partnershiprepresentative. A partnership representa-tive who no longer has the capacity to act(as described in paragraph (b)(4) of thissection) is ineligible to serve as a partner-ship representative. A person designatedunder this section as partnership represen-tative is deemed to be eligible to serve asthe partnership representative unless anduntil the IRS determines that the person isineligible.

(2) Substantial presence in the UnitedStates. A person must have substantialpresence in the United States to be thepartnership representative. A person hassubstantial presence in the United Statesfor the purposes of this section if—

(i) The person is available to meet inperson with the IRS in the United States ata reasonable time and place, as is neces-sary and appropriate, as determined by theIRS;

(ii) The person has a street address thatis in the United States and a telephonenumber with a United States area codewhere the person can be reached duringnormal business hours; and

(iii) The person has a United Statestaxpayer identification number.

(3) Eligibility of an entity to be a part-nership representative—(i) In general. Aperson who is not an individual may be apartnership representative only if an indi-vidual who meets the requirements ofparagraphs (b)(2) and (4) of this section isappointed by the partnership as the soleindividual through whom the partnershiprepresentative will act for all purposes un-der subchapter C of chapter 63. A partner-ship representative meeting the require-ments of this paragraph (b)(3) is an entitypartnership representative and the indi-vidual through whom such entity partner-ship representative acts is the designatedindividual. Designated individual statusautomatically terminates on the date thatdesignation of the entity partnership rep-resentative for which the designated indi-vidual was appointed is no longer in ef-fect.

(ii) Appointment of a designated indi-vidual. A designated individual is ap-pointed at the time of the designation ofthe entity partnership representative in themanner prescribed by the IRS in forms,instructions, and other guidance. Accord-ingly, if the entity partnership representa-tive is designated on the partnership returnfor the taxable year in accordance withparagraph (c)(2) of this section, the des-ignated individual must be appointed atthat time. Similarly, if the entity partner-ship representative is designated underparagraph (d) of this section (regardingresignation and successor designation of apartnership representative) or paragraph(e) of this section (regarding revocationand subsequent designation after revoca-tion of a partnership representative), thedesignated individual must be appointedat that time. If the partnership fails toappoint a designated individual, the IRSmay determine that the entity partnershiprepresentative designation is not in effectunder paragraph (f) of this section.

(4) Capacity to act. For the purposes ofthis section, a person does not have thecapacity to act, and is therefore ineligibleto serve as a partnership representative or

July 10, 2017 Bulletin No. 2017–2858

designated individual, as applicable, un-der this paragraph (b), in the event of—

(i) Death;(ii) A court order adjudicating that the

person does not have the capacity to man-age his or her person or estate;

(iii) A court order enjoining the personfrom acting on behalf of the partnership orthe entity partnership representative;

(iv) Incarceration;(v) Liquidation or dissolution under

state law in the case of an entity partner-ship representative; or

(vi) Any similar situation where theIRS reasonably determines the personmay no longer have the capacity to act.

(c) Designation of partnership repre-sentative by the partnership—(1) In gen-eral. The partnership must designate apartnership representative separately foreach taxable year. The designation of apartnership representative for one taxableyear is effective only for the taxable yearfor which it is made.

(2) Designation. Except in the case ofdesignation of a partnership representativeafter an event described in paragraph (d)of this section (regarding resignation),paragraph (e) of this section (regardingrevocation by the partnership), or para-graph (f) of this section (regarding desig-nation made by the IRS), or as prescribedin forms, instructions, and other guidance,designation of a partnership representativemust be made on the partnership return forthe partnership taxable year to which thedesignation applies and must include allof the information required by forms, in-structions, and other guidance, includinginformation about the designated individ-ual if the provisions of paragraph (b)(3) ofthis section apply. The designation of thepartnership representative (and the ap-pointment of the designated individual, ifapplicable) is effective on the date that thepartnership return is filed.

(3) Example. The following exampleillustrates the rules of this paragraph (c).

Example. Partnership properly designates A asits partnership representative for taxable year 2018on its 2018 partnership return. Partnership designatesB as its partnership representative for taxable year2021 on its 2021 partnership return. In 2022, the IRSmails Partnership a notice of administrative proceed-ing under section 6231 with respect to Partnership’s2018 taxable year. A is the partnership representativefor the 2018 partnership taxable year, notwithstand-ing the designation of B as partnership representativefor the 2021 partnership taxable year.

(d) Resignation of the partnership rep-resentative—(1) In general. A partnershiprepresentative may resign by notifying thepartnership and the IRS in writing of theresignation. The notification to the IRS,submitted in accordance with applicableforms and instructions prescribed by theIRS, may include a designation of a suc-cessor partnership representative for thepartnership taxable year for which desig-nation of the resigning partnership repre-sentative was in effect. A resignation anddesignation of the successor partnershiprepresentative, if applicable, is effective30 days from the date on which the IRSreceives the written notification. If the re-signing partnership representative desig-nates a successor, the IRS will notify thepartnership, the resigning partnership rep-resentative, and the newly designatedpartnership representative when the IRSreceives the written notification. If the re-signing partnership representative doesnot designate a successor, the IRS willdetermine there is no designation in effectin accordance with paragraph (f) of thissection, and the partnership will have theopportunity to designate a successor part-nership representative, or the IRS willdesignate a successor, as described inparagraph (f)(1) of this section. Failure tosatisfy the requirements of this paragraph(d) is treated as if no resignation has oc-curred and the partnership representativedesignation remains in effect until the des-ignation is terminated either by valid res-ignation (as described in this paragraph(d)), a valid revocation of the designationby the partnership (as described in para-graph (e) of this section), or a determina-tion by the IRS that the designation is notin effect (as described in paragraph (f) ofthis section).

(2) Time for resignation. A partnershiprepresentative may resign simultaneouslywith the filing of a valid administrativeadjustment request (AAR) in accordancewith section 6227 and the regulationsthereunder for a partnership taxable year,after receipt of a notice of administrativeproceeding for the partnership taxableyear, or at such other time as prescribedby the IRS in other guidance. If a partner-ship representative resigns in connectionwith the filing of an AAR, the partnershiprepresentative must designate a successorpartnership representative. A partnership

may not use the form prescribed by theIRS for filing an AAR solely for the pur-poses of allowing the partnership repre-sentative to resign.

(3) Special rule for resignation of des-ignated individual. A designated individ-ual may resign by notifying the partner-ship, partnership representative, and theIRS in writing of the resignation subject tothe time of resignation restrictions de-scribed in paragraph (b)(2) of this sectionas if the designated individual were a part-nership representative. The notification tothe IRS, submitted in accordance with ap-plicable forms and instructions prescribedby the IRS, may, but is not required to,include an appointment of a successordesignated individual for the partnershiptaxable year for which the designated in-dividual was appointed. The resignation(and appointment of the successor desig-nated individual, if applicable) is effective30 days from the date on which the IRSreceives the written notification. If the re-signing designated individual appoints asuccessor, the IRS will notify the partner-ship, the partnership representative, theresigning designated individual, and anynewly appointed designated individualwhen the IRS receives the written notifi-cation. If the resigning designated individ-ual does not appoint a successor, the IRSwill determine there is no designation ineffect in accordance with paragraph (f) ofthis section, and the partnership will havethe opportunity to designate a partnershiprepresentative, including the appointmentof a designated individual, or the IRS willdesignate a partnership representative, asdescribed in paragraph (f)(1) of this sec-tion.

(e) Revocation of designation–(1) Ingeneral. The partnership may revoke thedesignation of the partnership representa-tive for a partnership taxable year by no-tifying the partnership representative andthe IRS in writing. The notification to theIRS, submitted in accordance with appli-cable forms and instructions prescribed bythe IRS, must satisfy the requirements ofparagraph (e)(3)(iii) of this section andmust include designation of a successorpartnership representative for the partner-ship taxable year for which designation ofthe partnership representative was in ef-fect. The revocation and designation of anew partnership representative is effective

Bulletin No. 2017–28 July 10, 201759

30 days from the date on which the IRSreceives the written notification. The IRSwill notify the partnership and any part-nership representative whose designationis being revoked when the IRS receives arevocation made in accordance with para-graph (e)(2) of this section. Failure tosatisfy the requirements of this section istreated as if no revocation has occurredand the partnership representative desig-nation remains in effect until the designa-tion is terminated either by valid resigna-tion (as described in paragraph (d) of thissection), valid revocation of the designa-tion by the partnership (as described inthis paragraph (e)), or a determination bythe IRS that the designation is not in effect(as described in paragraph (f) of this sec-tion).

(2) Time for revocation—(i) Revoca-tion during an administrative proceeding.Except as provided in paragraph (e)(2)(ii)of this section or in other guidance pre-scribed by the IRS, a partnership may notrevoke the designation of the partnershiprepresentative before the IRS mails a no-tice of administrative proceeding pursuantto section 6231 and the regulations there-under. Upon receipt of a notice of admin-istrative proceeding, the partnership mayrevoke the partnership representative des-ignation.

(ii) Revocation with an AAR. The part-nership may revoke a designation of apartnership representative for the taxableyear when the partnership files a validAAR in accordance with section 6227 andthe regulations thereunder for a partner-ship taxable year. The revocation of thepartnership representative and the desig-nation of the new partnership representa-tive is effective 30 days from the date thepartnership files a valid AAR. A partner-ship may not use the form prescribed bythe IRS for filing an AAR solely for thepurpose of revoking the designation of apartnership representative.

(3) Partners who may sign revocation–(i) General partner and certain partnersin limited circumstances. A revocationmust be signed by a person who was ageneral partner at the close of the taxableyear for which the partnership representa-tive designation is in effect as shown onthe partnership return for that taxableyear. A partner in the partnership duringthe taxable year who was not a general

partner eligible to sign the revocation maysign the revocation only if, at the time therevocation is signed, each general partnereligible to sign the revocation is no longera partner or no longer has the capacity toact (as described under paragraphs(b)(4)(i) through (v) of this section as ifthe general partner was a partnership rep-resentative or designated individual). Seeparagraph (e)(3)(ii) of this section for therules applicable to limited liability com-panies.

(ii) Limited liability companies—(A)In general. Solely for the purposes of ap-plying this paragraph (e)(3) to a limitedliability company (LLC) (as defined inparagraph (e)(3)(ii)(B)(1) of this section),a member-manager of an LLC is treatedas a general partner, and a member of anLLC who is not a member-manager istreated as a partner other than a generalpartner.

(B) Definitions. For purposes of thisparagraph (e)(3)(ii), the following termshave the following meaning:

(1) LLC. An LLC means an organiza-tion formed under a state or foreign lawthat allows the limitation of the liability ofall members for the organization’s debtsand other obligations within the meaningof § 301.7701–3(b)(2)(ii) and that is clas-sified as a partnership for Federal tax pur-poses.

(2) Member. A member means any per-son who owns an interest in an LLC.

(3) Member-manager. A member-manager means a member of an LLCwho, alone or together with others, isvested with the continuing exclusive au-thority to make the management decisionsnecessary to conduct the business forwhich the organization was formed. Gen-erally, an LLC statute may permit theLLC to choose management by one ormore managers (whether or not members)or by all of the members. If there are noelected or designated member-managersof the LLC, each member will be treatedas a member-manager for purposes of thisparagraph (e)(3)(ii)(B)(3).

(iii) Form of the revocation. The noti-fication of revocation described in para-graph (e)(1) of this section must includethe items described in this paragraph(e)(3)(iii). A notification of revocation de-scribed in paragraph (e)(1) of this section

that does not include each of the followingitems is not a valid revocation:

(A) A certification under penalties ofperjury that the person signing the form—

(1) Is a partner described in paragraph(e)(3)(i) of this section (or in the case ofan LLC, a person described in paragraph(e)(3)(ii) of this section) authorized by thepartnership to revoke the designation ofthe partnership representative; and

(2) Has provided a copy of the revoca-tion to the partnership and to the partner-ship representative whose designation isbeing revoked;

(B) A statement that the person signingthe form is revoking the designation of thepartnership representative; and

(C) A subsequent designation of a part-nership representative in accordance withforms and instructions prescribed by theIRS.

(4) Partnership representative desig-nated by the IRS. If a partnership repre-sentative is designated by the IRS pursu-ant to paragraph (f)(5) of this section, thepartnership may only revoke that designa-tion with the permission of the IRS.

(5) Multiple revocations. If within a90-day period the IRS receives more thanone revocation of a designation of a part-nership representative for the same part-nership taxable year signed by differentpersons, the IRS may determine that adesignation is not in effect under para-graph (f) of this section.

(6) Examples. The following exampleillustrates the rules of this paragraph (e).

Example 1. Partnership properly designates B aspartnership representative for its 2018 taxable yearon its 2018 partnership return. In 2020, Partnershipmails written notification to the IRS to revoke des-ignation of B as its partnership representative forPartnership’s 2018 taxable year. The revocation isnot made in connection with an AAR for Partner-ship’s 2018 taxable year, and the IRS has not mailedPartnership a notice of administrative proceedingunder section 6231 with respect to Partnership’s2018 taxable year. Because the revocation was notmade during a time permitted under paragraph (e)(2)of this section, the revocation is not effective and Bremains the partnership representative for Partner-ship’s 2018 taxable year.

Example 2. During an administrative proceedingwith respect to Partnership’s 2018 taxable year, Part-nership provides IRS with written notification torevoke its designation of B as its partnership repre-sentative for the 2018 taxable year. The writtennotification does not include a designation of a newpartnership representative for Partnership’s 2018taxable year. Because the revocation does not in-clude a designation of a new partnership representa-

July 10, 2017 Bulletin No. 2017–2860

tive as required under paragraph (e)(1) of this sec-tion, the revocation is not effective and B remainsthe partnership representative for Partnership’s 2018taxable year.

(f) Designation of the partnership rep-resentative by the IRS–(1) In general. Ifthe IRS determines that a designation of apartnership representative is not in effectfor a partnership taxable year in accor-dance with paragraph (f)(2) of this sec-tion, the IRS will notify the partnershipand the most recent partnership represen-tative for that partnership taxable year thata partnership designation is not in effectand provide the partnership with the op-portunity to designate a successor partner-ship representative that is eligible underparagraph (b) of this section. The deter-mination that a designation is not in effectis effective on the date the IRS mails thenotification. Except as described in para-graph (f)(4) of this section, the partnershipmay designate a successor partnership rep-resentative within 30 days of the date ofnotification. If the partnership does not des-ignate a successor within 30 days from thedate of notification, the IRS will designate apartnership representative in accordancewith paragraph (f)(5) of this section. A part-nership representative designation made inaccordance with paragraphs (c), (d), (e), or(f) of this section remains in effect until theIRS determines the designation is not ineffect.

(2) IRS determination that partnershiprepresentative designation not in effect.The IRS may determine that the partner-ship representative designation is not ineffect in the case of multiple revocationsas described in paragraph (e)(5) of thissection or if the IRS determines that –

(i) the partnership failed to make avalid designation under paragraph (c) ofthis section;

(ii) the partnership representative orthe designated individual does not havesubstantial presence (as described in para-graph (b)(2) of this section, as applicable)or does not have capacity to act (as de-scribed in paragraph (b)(4) of this sec-tion);

(iii) the partnership failed to appoint adesignated individual (as described inparagraph (b)(3) of this section, as appli-cable); or

(iv) no successor designation or ap-pointment was made in the case of a res-ignation without a designation or appoint-

ment of a successor as described inparagraphs (d)(1) and (3) of this section.

(3) Form of successor partnership rep-resentative designation. The partnershipmust designate the successor partnershiprepresentative in accordance with applica-ble forms and instructions prescribed bythe IRS. If the partnership fails to provideall information required under the formsand instructions, the partnership will havefailed to designate a successor partnershiprepresentative.

(4) No opportunity for designation bythe partnership in the case of multiplerevocations. In the event that the IRS de-termines a partnership representative des-ignation is not in effect due to multiplerevocations as described in paragraph(e)(5) of this section, the partnership willnot be given an opportunity to designatethe successor partnership representativeprior to the designation by the IRS asdescribed in paragraph (f)(5) of this sec-tion.

(5) Designation by the IRS–(i) In gen-eral. The IRS designates a partnershiprepresentative by notifying the partnershipof the name, address, and telephone num-ber of the new partnership representative.The designation of a partnership represen-tative by the IRS is effective on the dateon which the IRS mails the notice of thedesignation to the partnership. The IRSwill also mail a copy of the notice to thenew partnership representative.

(ii) Factors considered when partner-ship representative designated by the IRS.The IRS may designate any person to bethe partnership representative. In additionto other relevant factors, the IRS will con-sider whether there is a suitable partner ofthe partnership, either from the reviewedyear (as defined in § 301.6241–1(a)(8)) orat the time the partnership representativedesignation is made. The IRS may con-sider the following factors when designat-ing a person as the partnership represen-tative:

(A) The views of the partners having amajority interest in the partnership regard-ing the designation;

(B) The general knowledge of the per-son in tax matters and the administrativeoperation of the partnership;

(C) The person’s access to the booksand records of the partnership;

(D) Whether the person is a UnitedStates person (within the meaning of sec-tion 7701(a)(30)).

(6) Examples. The following examplesillustrate the rules of this paragraph (f).

Example 1. The IRS determines that Partnershiphas designated a partnership representative that doesnot have substantial presence in the United States asdefined in paragraph (b)(2) of this section. The IRSmay determine that the designation is not in effectand designate a new partnership representative afterfollowing the procedures in paragraph (f) of thissection.

Example 2. Partnership designates as its partner-ship representative a corporation but fails to appointa designated individual to act on behalf of the cor-poration as required under paragraph (b)(3) of thissection. The IRS may determine that the partnershiprepresentative designation is not in effect and maydesignate a new partnership representative after fol-lowing the procedures in paragraph (f) of this sec-tion.

Example 3. The partnership representative re-signs pursuant to paragraph (d) of this section with-out designating a new partnership representative.The IRS mails Partnership a notification informingPartnership that no designation is in effect and thatthe IRS plans to designate a new partnership repre-sentative. Partnership fails to respond within 30 daysof the IRS’s notification. The IRS will designate apartnership representative pursuant to paragraph (f)of this section.

Example 4. Partnership designated on its partner-ship return a partnership representative, PR1. AfterPartnership received a notice of administrative pro-ceeding, general partner, GP1, signs and submits tothe IRS the form described in paragraph (e)(3) of thissection requesting the revocation of the current part-nership representative PR1 and the designation of asuccessor partnership representative, PR2. Sixtydays later, general partner, GP2, signs and submits aform described in paragraph (e)(3) of this sectionrequesting the revocation of the newly appointedPR2 and the designation of PR3 as the new partner-ship representative. The IRS may accept GP2’s re-vocation and subsequent designation of PR3 or, be-cause GP2’s revocation was within 90 days of GP1’srevocation, the IRS may determine, pursuant to para-graphs (e)(5) and (f)(2) of this section that there is nodesignation in effect due to multiple revocations.The IRS may then designate a new partnership rep-resentative pursuant to paragraph (f) of this sectionwithout allowing the partnership an opportunity foradditional, possibly conflicting, designations.

(g) Reliance on forms required by thissection. The IRS may rely on any form orother document filed or submitted underthis section as evidence of the designation,resignation, or revocation on such formand as evidence of the date on which suchform was filed or submitted relating to adesignation, resignation, or revocation.

(h) Effective date—(1) In general. Ex-cept as provided in paragraph (h)(2) ofthis section, this section applies to part-

Bulletin No. 2017–28 July 10, 201761

nership taxable years beginning after De-cember 31, 2017.

(2) Election under § 301.9100–22T ineffect. This section applies to any partner-ship taxable years beginning after Novem-ber 2, 2015 and before January 1, 2018 forwhich a valid election under § 301.9100–22T is in effect.

Par. 6. Section 301.6223–2 is added toread as follows:

§ 301.6223–2 Binding effect of actionsof the partnership and partnershiprepresentative.

(a) Binding nature of actions by part-nership and final decision in a partnershipproceeding. The actions of the partnershipand the partnership representative takenunder subchapter C of chapter 63 of theInternal Revenue Code (subchapter C ofchapter 63) and any final decision in aproceeding brought under subchapter C ofchapter 63 with respect to the partnershipbind the partnership, all partners of thepartnership (including partnership-partners as defined in § 301.6241–1(a)(7)that have a valid election under section6221(b) in effect for any taxable year thatoverlaps with the taxable year of the part-nership), and any other person whose taxliability is determined in whole or in partby taking into account directly or indi-rectly adjustments determined under sub-chapter C of chapter 63 (for example,indirect partners as defined in § 301.6241–1(a)(4)). For instance, a settlement agree-ment entered into by the partnership rep-resentative on behalf of the partnership, anotice of final partnership adjustment withrespect to the partnership that is not con-tested by the partnership or the partner-ship representative, or the final decision ofthe court with respect to the partnership ifthe notice of final partnership adjustmentis contested, binds all persons described inthe preceding sentence.

(b) Actions by the partnership repre-sentative before termination of designa-tion. The termination of the designation ofthe partnership representative under§ 301.6223–1 does not affect the validityof any action taken by that partnershiprepresentative during the period prior totermination when the designation was ineffect. For example, if a partnership rep-resentative properly designated under

§ 301.6223–1 consented to an extensionof the period for adjustments under sec-tion 6235(b), that extension remains valideven after termination of the designationof that partnership representative.

(c) Partnership representative has thesole authority to act on behalf of the part-nership–(1) In general. The partnershiprepresentative has the sole authority to acton behalf of the partnership for all pur-poses under subchapter C of chapter 63. Inthe case of an entity partnership represen-tative, the designated individual has thesole authority to act on behalf of the part-nership representative and the partnership.Except for a partner that is the partnershiprepresentative or the designated individ-ual, no partner, or any other person, mayparticipate in an examination or other pro-ceeding involving the partnership undersubchapter C of chapter 63 without thepermission of the IRS. No state law, part-nership agreement, or other document oragreement may limit the authority of thepartnership representative or the desig-nated individual as described in section6223 and this section.

(2) Designation provides authority tobind the partnership—(i) Partnershiprepresentative. A partnership representa-tive, by virtue of being designated undersection 6223 and § 301.6223–1, has theauthority to bind the partnership for allpurposes under subchapter C of chapter63.

(ii) Designated individual. A designatedindividual described under § 301.6223–1(b)(3)(i) by virtue of being appointed aspart of the designation of the partnershiprepresentative under § 301.6223–1, has thesole authority to bind the partnership repre-sentative and the partnership for all pur-poses under subchapter C of chapter 63.

(d) Examples. The following examplesillustrate the rules of this section.

Example 1. Partnership designates a partnershiprepresentative, PR, on its partnership return for 2020.PR is a partner in Partnership. The partnership agree-ment for Partnership includes a clause that requiresPR to consult with an identified management groupof partners in Partnership before taking any actionwith respect to an administrative proceeding beforethe IRS. The IRS initiates an administrative proceed-ing with respect to Partnership’s 2020 taxable year.During the course of the administrative proceeding,PR consents to an extension of the period for adjust-ments under section 6235(b) allowing additionaltime for the IRS to mail a final notice of partnershipadjustment. PR failed to consult with the manage-

ment group of partners prior to agreeing to thisextension of time. PR’s consent provided to the IRSto extend the time period is valid and binding onPartnership because, pursuant to section 6223, PR, asthe designated partnership representative, has au-thority to bind Partnership and all its partners.

Example 2. Partnership designates a partnershiprepresentative, PR, on its partnership return for 2020.PR is not a partner in Partnership. During an admin-istrative proceeding with respect to Partnership’s2020 taxable year, PR agrees to certain IRS adjust-ments and within 45 days after the issuance of thenotice of final partnership adjustment (FPA), electsthe alternative to payment of the imputed underpay-ment under section 6226 and the regulations there-under. Certain partners in Partnership challenge theactions taken by PR during the administrative pro-ceeding and the validity of the section 6226 state-ments furnished to those partners, alleging that PRwas never authorized to act on behalf of Partnershipunder state law or the partnership agreement. Be-cause PR was designated by Partnership as the part-nership representative, under section 6223 and thissection, PR was authorized to act on behalf of Part-nership for all purposes under subchapter C of chap-ter 63, and the IRS may rely on that designation asconclusive evidence of PR’s authority to act on be-half of Partnership.

Example 3. Partnership designates an entity part-nership representative, EPR, and appoints an indi-vidual A, as the designated individual, on its part-nership return for 2020. EPR is a C corporation. A isunaffiliated with EPR and is not an officer, director,or employee of EPR. During an administrative pro-ceeding with respect to Partnership’s 2020 taxableyear, A, acting for EPR, agrees to an extension of theperiod for adjustments under section 6235(b). TheIRS mails an FPA within the extended period foradjustments as agreed to by EPR, but after the ex-piration of the period had no agreement been enteredinto. Partnership challenges the FPA as untimely,alleging that A was not authorized under state law toact on behalf of EPR and thus the extension agree-ment was invalid. Because A was appointed by thepartnership as the designated individual to act onbehalf of EPR, A was authorized to act on behalf ofEPR for all purposes under subchapter C of chapter63, and the IRS may rely on that identification asconclusive evidence of A’s authority to act on behalfof EPR and Partnership.

Example 4. The partnership representative, PR,consents to an extension of the period for adjustmentunder section 6235(b) for Partnership for the part-nership taxable year. After signing the consent, PRresigns as partnership representative in accordancewith § 301.6223–1. The extension of the periodunder section 6235(b) remains valid even after PRresigns.

Example 5. Partnership designates a partnershiprepresentative who is unable to meet with the IRS inperson in the United States as required by § 301.6223–1(b). Although the partnership representative does nothave substantial presence in the United States withinthe meaning of § 301.6223–1(b)(2), until a terminationoccurs under § 301.6223–1(d) or (e) or the IRS deter-mines the partnership representative is ineligible under§ 301.6223–1(b) and terminates the designation under§ 301.6223–1(f), the partnership representative desig-

July 10, 2017 Bulletin No. 2017–2862

nation remains in effect, and Partnership and all itspartners are bound by the actions of the partnershiprepresentative.

(e) Applicability date—(1) In general.Except as provided in paragraph (e)(2) ofthis section, this section applies to part-nership taxable years beginning after De-cember 31, 2017.

(2) Election under § 301.9100–22T ineffect. This section applies to any partner-ship taxable years beginning after Novem-ber 2, 2015 and before January 1, 2018 forwhich a valid election under § 301.9100–22T is in effect.

Par. 7. Section 301.6225–1 is added toread as follows:

§ 301.6225–1 Partnership Adjustment bythe Internal Revenue Service.

(a) Imputed underpayment paid bypartnership in adjustment year—(1) Ingeneral. Any imputed underpayment (asdetermined in accordance with paragraph(c) of this section) with respect to anypartnership adjustment (as defined in§ 301.6241–1(a)(6)) for any partnershiptaxable year must be paid by the partner-ship in the same manner as if it were a taximposed for the adjustment year (as de-fined in § 301.6241–1(a)(1)). The noticeof final partnership adjustment under sec-tion 6231 will include the amount of anyimputed underpayment, as modified under§ 301.6225–2 if applicable, unless the part-nership waives its right to such notice undersection 6232(d)(2). For the alternative topayment of the imputed underpayment bythe partnership, see § 301.6226–1. For as-sessment, collection, and payment of an im-puted underpayment, see section 6232 andthe regulations thereunder. If a partnershippays an imputed underpayment (as deter-mined in accordance with paragraph (c) ofthis section), the partnership’s expenditurefor the imputed underpayment and the ad-justments that result in the imputed under-payment are taken into account by the part-nership in accordance with § 301.6241–4.For interest and penalties with respect to animputed underpayment, see section 6233.

(2) All preferences, limitations, restric-tions, and conventions apply. For purposesof determining the imputed underpayment,adjustments, netting of adjustments, and cal-culations or determinations of any amountsunder this section, unless the Internal Rev-enue Service (IRS) in its discretion deter-

mines otherwise, all applicable preferences,restrictions, limitations, and conventionswill be taken into account to disallow net-ting of adjustments, where applicable, or todisallow or limit, as applicable, any adjust-ment that potentially results in an increase ofloss, deduction or credit, or decrease of in-come or gain, and as if the adjusted itemwas originally taken into account by thepartnership or the partners, as applicable, inthe manner most beneficial to the partner-ship or partners. For instance, if the adjust-ment is a reduction of qualified researchexpenses, the amount of the imputed under-payment is determined as if all partnersclaimed a credit with respect to their alloca-ble portion of such expenses under section41, rather than a deduction under section174. See § 301.6225–2 for modifications ofthe imputed underpayment that may be re-quested by the partnership.

(3) Imputed underpayment set forth innotice of proposed partnership adjust-ment. An imputed underpayment set forthin a notice of proposed partnership adjust-ment (NOPPA) under section 6231 is de-termined under paragraph (c)(1) of thissection without regard to any modificationunder § 301.6225–2. Modifications under§ 301.6225–2, if allowed by the IRS, mayreduce the imputed underpayment deter-mined under paragraph (c)(1) of this sec-tion. Only the partnership adjustments setforth in a NOPPA are taken into accountfor purposes determining the imputed un-derpayment under this section and anymodification under § 301.6225–2.

(b) Treatment of an adjustment that doesnot result in an imputed underpayment. Anyadjustment that does not result in an im-puted underpayment (as described in para-graph (c)(2) of this section) is taken intoaccount by the partnership in the adjustmentyear in accordance with § 301.6225–3.

(c) Calculation of an imputed under-payment—(1) In general. In the case ofany partnership adjustment by the IRS, theimputed underpayment required to be paidby the partnership under paragraph (a) ofthis section is calculated by—

(i) Multiplying the total netted partner-ship adjustment (as determined underparagraph (c)(3) of this section) by thehighest rate of Federal income tax in ef-fect for the reviewed year (as defined in§ 301.6241–1(a)(8)) under section 1 or 11,and

(ii) Increasing or decreasing the prod-uct in paragraph (c)(1)(i) of this section bythe net increase or net decrease in creditsresulting from partnership adjustments (asdetermined under paragraph (d) of thissection).

(2) Partnership adjustments that do notresult in an imputed underpayment. Apartnership adjustment does not result inan imputed underpayment if—

(i) The adjustment relates to a distrib-utive share reallocation that is disregardedunder paragraph (d)(2)(ii) of this section;

(ii) After grouping and netting the ad-justments as described in paragraph (d) ofthis section, the result of netting anygrouping or subgrouping is a net non-positive adjustment (as described in para-graph (d)(3) of this section); or

(iii) The calculation under paragraph(c)(1) of this section results in an amountthat is zero or less than zero.

(3) Calculation of the total netted part-nership adjustment. For purposes of de-termining whether there is an imputed un-derpayment under paragraph (c)(1) of thissection, the total netted partnership ad-justment is—

(i) The sum of all net positive adjust-ments in the residual grouping as deter-mined in accordance with paragraph(d)(2)(v) of this section, plus

(ii) The sum of all net positive adjust-ments in the reallocation grouping as de-termined in accordance with paragraph(d)(2)(ii) of this section.

(4) No netting of adjustments betweentaxable years. Each imputed underpay-ment is calculated based on adjustmentssolely with respect to a single taxableyear. Adjustments from one taxable yearmay not be netted against adjustmentsfrom another taxable year.

(d) Grouping and netting of partner-ship adjustments—(1) In general. For pur-poses of calculating an imputed underpay-ment under paragraph (c) of this section,partnership adjustments are grouped ac-cording to paragraph (d)(2) of this sectionand the partnership adjustments compris-ing each grouping are netted in accor-dance with paragraph (d)(3) of this sec-tion. Within each grouping, partnershipadjustments are further grouped into sub-groupings based on preferences, limita-tions, restrictions, and conventions, suchas source, character, holding period, or

Bulletin No. 2017–28 July 10, 201763

restrictions under the Internal RevenueCode (Code) applicable to such items.

(2) Groupings—(i) In general. To cal-culate an imputed underpayment underparagraph (c) of this section, partnershipadjustments are grouped into categories inthe following order –

(A) First, each partnership adjustmentthat reallocates the distributive share of anitem forms its own grouping which istaken into account in accordance withparagraph (d)(2)(ii) of this section (reallo-cation grouping);

(B) Second, adjustments to credits aretaken into account in a grouping underparagraph (d)(2)(iii) of this section (creditgrouping);

(C) Third, adjustments to creditable ex-penditures are taken into account in agrouping under paragraph (d)(2)(iv) ofthis section (creditable expenditure group-ing); and

(D) Fourth, the remaining adjustmentsare taken into account in the residualgrouping under paragraph (d)(2)(v) of thissection (residual grouping).

(ii) Reallocation grouping. A partner-ship adjustment that reallocates the dis-tributive share of an item from one ormore partners to one or more other part-ners, or a partnership adjustment that al-locates an item to a particular partner orpartners, is taken into account in calculat-ing the imputed underpayment underparagraph (c) of this section by disregard-ing net decreases to items of income orgain and net increases to items of deduc-tion, loss, or credit. Each adjustment to anitem or to a distributive share of an itemthat allocates to or reallocates to and froma particular partner or partners is a sepa-rate subgrouping for purposes of the net-ting rules in paragraph (d)(3) of this sec-tion. For instance, if the reallocationadjustment reallocates an item of deduc-tion from one partner to another partner,the decrease in the deduction with respectto the first partner is in a separate sub-grouping from the increase in deductionwith respect to the second partner. If aparticular partner or group of partners hasmore than one adjustment allocable to itwithin the reallocation grouping, such ad-justments may be combined or further di-vided into additional subgroupings ac-cording to the principles of paragraphs(d)(1) and (d)(2)(v) of this section and

netted according to paragraph (d)(3) ofthis section. After subgroupings are nettedunder paragraph (d)(3) of this section, anynet non-positive adjustments (as definedin paragraph (d)(3)(ii)(C) of this section)are disregarded. Net non-positive adjust-ments disregarded under this paragraph(d)(2)(ii) are adjustments that do not resultin an imputed underpayment under para-graph (c)(2) of this section. Net positiveadjustments are included in the calcula-tion of the total netted partnership adjust-ment under paragraph (c)(3) of this sec-tion if the net positive adjustments wouldotherwise be a part of the residual group-ing described in paragraph (d)(2)(v) ofthis section. Net positive adjustments tocredits are included in the credit groupingdescribed in paragraph (d)(2)(iii) of thissection.

(iii) Credit grouping. The credit group-ing includes all adjustments to items thatare claimed or could be claimed by apartnership as a credit on the partnership’sreturn.

(iv) Creditable expenditure group-ing.—[Reserved]

(v) Residual grouping. Any partnershipadjustment not described in paragraph(d)(2)(ii), (d)(2)(iii), or (d)(2)(iv) of thissection is included in the residual group-ing described in this paragraph (d)(2)(v)and is further divided into subgroupingsaccording to any limitations or restrictionsimposed on the items to which the adjust-ment relates under the Code. Each sub-grouping in the residual grouping is cre-ated to account for limitations orrestrictions such as character or holdingperiod.

(3) Netting adjustments within eachgrouping or subgrouping—(i) In general.The partnership adjustments in a groupingor subgrouping described in paragraph(d)(2) of this section are netted togetherwithin each grouping or subgrouping todetermine whether there is a net positiveadjustment or a net non-positive adjust-ment (as defined in paragraph (d)(3)(ii)(B)and (C) of this section) for that groupingor subgrouping. Adjustments in onegrouping or subgrouping are not nettedagainst adjustments in any other groupingor subgrouping. For instance, under para-graph (d)(2) of this section, adjustments toordinary income and loss items aregrouped together separately from capital

gain and loss items. Therefore under thisparagraph (d)(3)(i), the items in the ordi-nary grouping are not netted against theitems in the capital grouping.

(ii) Only net positive adjustments takeninto account in calculating the total nettedpartnership adjustment—(A) In general.Only adjustments to items resulting in anet positive adjustment (as defined inparagraph (d)(3)(ii)(B) of this section) fora grouping or subgrouping are taken intoaccount in calculating the total nettedpartnership adjustment under paragraph(c)(3) of this section. A net non-positiveadjustment (as defined in paragraph(d)(3)(ii)(C) of this section) for a groupingor subgrouping is disregarded for pur-poses of calculating the total netted part-nership adjustment under paragraph (c)(3)of this section. The adjustments underly-ing a net non-positive adjustment that aredisregarded under this paragraph (d)(3)(ii)(A) are adjustments that do not result in animputed underpayment (as described inparagraph (c)(2) of this section).

(B) Net positive adjustment. A netpositive adjustment results if the netamount of adjustments within a group-ing or subgrouping under paragraph(d)(2) of this section (except with re-spect to the credit grouping described inparagraph (d)(2)(iii) of this section) isgreater than zero.

(C) Net non-positive adjustment. A netnon-positive adjustment is any net amountwithin a grouping or subgrouping de-scribed in paragraph (d)(2) of this section(except for the credit grouping under para-graph (d)(2)(iii) of this section) that is nota net positive adjustment (as defined inparagraph (d)(3)(ii)(B) of this section).

(iii) Treatment of adjustments whennetting. For purposes of netting adjust-ments within a grouping —

(A) An increase in gain is treated as anincrease in income;

(B) A decrease in gain is treated as adecrease in income;

(C) An increase in loss is treated as adecrease in income; and

(D) A decrease in a loss is treated as anincrease in income.

(e) Multiple imputed underpayments ina single administrative proceeding–(1) Ingeneral. The IRS, in its discretion, maydetermine that partnership adjustments forthe same partnership taxable year result in

July 10, 2017 Bulletin No. 2017–2864

more than one imputed underpayment.The determination of whether there ismore than one imputed underpayment forany partnership taxable year, and if so,which partnership adjustments are takeninto account to calculate any particularimputed underpayment is based on thenature of the partnership adjustments. See§ 301.6225–2(d)(6) for modification ofthe number and composition of imputedunderpayments.

(2) Types of imputed underpayments—(i) In general. There are two types of im-puted underpayments, a general imputedunderpayment (defined in paragraph(e)(2)(ii) of this section) and a specific im-puted underpayment (defined in paragraph(e)(2)(iii) of this section). Each type of im-puted underpayment is separately calculatedin accordance with the rules described inparagraphs (c) and (d) of this section.

(ii) General imputed underpayment.The general imputed underpayment is cal-culated based on all adjustments (otherthan adjustments that do not result in animputed underpayment under paragraph(c)(2) of this section) that are not takeninto account to determine a specific im-puted underpayment under paragraph(e)(2)(iii) of this section. There is only onegeneral imputed underpayment in any admin-istrative proceeding. If there is one imputedunderpayment in an administrative proceed-ing, it is a general imputed underpayment andmay take into account adjustments describedin paragraph (e)(2)(iii) of this section, if any.

(iii) Specific imputed underpayment. Aspecific imputed underpayment is an im-puted underpayment with respect to ad-justments to an item or items that wereallocated to one partner or a group ofpartners that had the same or similar char-acteristics or that participated in the sameor similar transaction. The IRS may des-ignate more than one specific imputed un-derpayment with respect to any partner-ship taxable year. For instance, in a singlepartnership taxable year there may be aspecific imputed underpayment with re-spect to adjustments related to a transac-tion affecting some, but not all, partners ofthe partnership (such as adjustments thatare specially allocated to certain partners)and a second specific imputed underpay-ment with respect to adjustments resultingfrom a reallocation of a distributive shareof income from one partner to another

partner. The IRS may, in its discretion,determine that partnership adjustmentsthat could be taken into account to calcu-late one or more specific imputed under-payments under this paragraph (e)(2)(iii)for a partnership taxable year are moreappropriately taken into account in deter-mining the general imputed underpaymentfor such taxable year. For instance, theIRS may determine that it is more appro-priate to calculate only the general im-puted underpayment if when calculatingthe specific imputed underpayment re-quested by the partnership, there is anincrease in the number of the partnershipadjustments that after netting result in netnon-positive adjustments and are disre-garded in calculating the specific imputedunderpayment.

(f) Examples. The following examplesillustrate the rules of this section. For pur-poses of these examples, each partnershipis subject to the provisions of subchapterC of chapter 63 of the Code, each partner-ship and its partners are calendar yeartaxpayers, all partners are U.S. persons(unless otherwise stated), the highest rateof income tax in effect for all taxpayers is40 percent for all relevant periods, and nopartnership requests modification under§ 301.6225–2.

Example 1. Partnership reports on its 2019 part-nership return $100 of ordinary income and an ordi-nary deduction of �$70�. The IRS initiates anadministrative proceeding with respect to Partner-ship’s 2019 taxable year and determines that ordi-nary income was $105 instead of $100 ($5 adjust-ment) and that the ordinary deduction was �$80�instead of �$70� (�$10� adjustment). Neitheritem is subject to special restrictions or limitations.Pursuant to paragraph (d) of this section, the adjust-ments are both in the residual grouping. The �$10�adjustment to the ordinary deduction is netted withthe $5 adjustment to ordinary income because theyare both ordinary in character and neither is subjectto restrictions or limitations. After netting these ad-justments, the total netted partnership adjustment is�$5�, which does not result in an imputed under-payment and therefore, the underlying adjustments(that is, the �$10� adjustment to the ordinary de-duction and the $5 adjustment to ordinary income)are taken into account by Partnership in the adjust-ment year in accordance with § 301.6225–3.

Example 2. Partnership reports on its 2019 part-nership return ordinary income of $300, long-termcapital gain of $125, long-term capital loss of�$75�, a depreciation deduction of �$100�, and atax credit that can be claimed by the partnership of$5. In an administrative proceeding with respect tothe partnership’s 2019 taxable year, the IRS deter-mines ordinary income of $500 ($200 adjustment),long-term capital gain of $200 ($75 adjustment),

long-term capital loss of �$25� ($50 adjustment) ,a depreciation deduction of �$70� ($30 adjust-ment), and a tax credit of $3 ($2 adjustment). Pur-suant to paragraph (d) of this section, the tax creditis in the credit grouping under paragraph (d)(2)(iii)of this section. The remaining adjustments are part ofthe residual grouping under paragraph (d)(2)(v) ofthis section. The adjustment to ordinary income andthe depreciation deduction are grouped together inan ordinary subgrouping within the residual group-ing and netted with each other because they are bothordinary in character and neither is subject to differ-ing restrictions or limitations. Pursuant to paragraph(d)(3)(iii) of this section, for purposes of netting, thedecrease in the depreciation deduction is treated asan increase in income of $30. Thus, $200 (adjust-ment to ordinary income) plus $30 (depreciationadjustment treated as increase in income) yields$230 of additional income in the ordinary subgroup-ing within the residual grouping. For similar reasons,the adjustments to long-term capital gain and long-term capital loss are grouped together in a long-termcapital subgrouping within the residual grouping andnetted with each other. For purposes of netting, thedecrease in capital loss is treated as an increase inincome of $50. Thus, $75 (long-term capital gainadjustment) plus $50 (long-term capital loss adjust-ment) yields $125 of additional income in the long-term capital subgrouping within the residual group-ing. With respect to the ordinary subgrouping, the$230 adjustment to ordinary income is a net positiveadjustment for that subgrouping and is added to the$125 of additional income in the long-term capitalsubgrouping, for a total netted partnership adjust-ment of $355. Under paragraph (c)(1)(i) of this sec-tion, the total netted partnership adjustment is multi-plied by 40 percent (highest tax rate in effect), whichresults in $142. Under paragraph (c)(1)(ii) of this sec-tion, the $142 is increased by the $2 credit adjustment,resulting in an imputed underpayment of $144.

Example 3. Partnership reported on its 2019 part-nership return long-term capital gain of $125 andlong-term capital loss of �$75�. In an administra-tive proceeding with respect to Partnership’s 2019taxable year, the IRS determines the long-term cap-ital gain should have been reported as ordinary in-come of $125, resulting in an increase in ordinaryincome of $125 ($125 adjustment) as well as adecrease of long-term capital gain of $125 (�$125�adjustment). Under paragraph (d)(2) of this section,these adjustments are part of the residual grouping,but are in a separate subgrouping because of theirdifferent character, that is, the increase in ordinaryincome is part of an ordinary subgrouping and thedecrease in long-term capital gain is part of a long-term capital subgrouping, both within the residualgrouping. There are no other adjustments for the2019 taxable year. The $125 decrease in long-termcapital gain is a net non-positive adjustment in thelong-term capital subgrouping and as a result is anadjustment that does not result in an imputed under-payment. The $125 increase in ordinary income re-sults in a net positive adjustment. Because the ordi-nary subgrouping is the only subgrouping resultingin a net positive adjustment, $125 is the total nettedpartnership adjustment. Under paragraph (c)(1)(i) ofthis section, $125 is multiplied by 40 percent result-ing in an imputed underpayment of $50.

Bulletin No. 2017–28 July 10, 201765

Example 4. Partnership reported a $100 deduc-tion for certain expenses on its 2019 partnershipreturn and a $100 deduction with respect to the sameexpenses on its 2020 partnership return. The IRSinitiates an administrative proceeding with respect toPartnership’s 2019 and 2020 taxable years and de-termines that Partnership improperly accelerated ac-crual of a portion of the expenses with respect to thededuction in 2019 that should have been taken intoaccount in 2020. Therefore, for taxable year 2019,the IRS determines that Partnership should havereported a deduction of $75 with respect to theexpenses ($25 adjustment) in 2019. However, for2020, the IRS determines that Partnership shouldhave reported a deduction of $125 with respect tothese expenses (�$25� adjustment). There are noother adjustments for the 2019 and 2020 partnershiptaxable years. Pursuant to paragraph (c)(4) of thissection, the adjustments for 2019 and 2020 are notnetted with each other. The 2019 adjustment of $25is multiplied by 40 percent resulting in an imputedunderpayment of $10 for Partnership’s 2019 taxableyear. The $25 increase in the deduction for 2020 isan adjustment that does not result in an imputedunderpayment. Therefore, there is no imputed under-payment for 2020.

Example 5. On its partnership return for the 2020taxable year, Partnership reported ordinary incomeof $100 million and a capital gain of $50 million.Partnership had four equal partners during the 2020tax year, all of whom were individuals. On its part-nership return for the 2020 tax year, the capital gainwas allocated to partner E and the ordinary incomewas allocated to all partners based on their interestsin Partnership. In an administrative proceeding withrespect to Partnership’s 2020 taxable year, the IRSdetermines that for 2020 the capital gain allocated toE should have been $75 million instead of $50million and that Partnership should have recognizedan additional $10 million in ordinary income. In theNOPPA mailed by the IRS, the IRS may determinepursuant to paragraph (e) of this section that there isa general imputed underpayment with respect to theincrease in ordinary income and a specific imputedunderpayment with respect to the increase in capitalgain specially allocated to E.

(g) Applicability date—(1) In general.Except as provided in paragraph (g)(2) ofthis section, this section applies to part-nership taxable years beginning after De-cember 31, 2017.

(2) Election under § 301.9100–22T ineffect. This section applies to any partner-ship taxable year beginning after Novem-ber 2, 2015 and before January 1, 2018 forwhich a valid election under § 301.9100–22T is in effect.

Par. 8. Section 301.6225–2 is added toread as follows:

§ 301.6225–2 Modification of ImputedUnderpayment.

(a) Partnership may request modifica-tion of an imputed underpayment. A part-

nership that has received a notice of pro-posed partnership adjustment (NOPPA)under section 6231 from the Internal Rev-enue Service (IRS) may request modifica-tion of a proposed imputed underpaymentset forth in the NOPPA in accordancewith this section and any forms, instruc-tions, and other guidance prescribed bythe IRS. The effect of modification on aproposed imputed underpayment is de-scribed in paragraph (b) of this section.Unless otherwise described in paragraph(d) of this section, a partnership may re-quest any type of modification of an im-puted underpayment described in para-graph (d) of this section in the time andmanner described set forth in paragraph(c) of this section. A request for modifi-cation with respect to a partnership adjust-ment (as defined in § 301.6241–1(a)(6))that does not result in an imputed under-payment (as described in § 301.6225–1(c)(2)(i) or (c)(2)(ii)) is only available ifthe partnership has a proposed imputed un-derpayment set forth in the NOPPA. Onlythe partnership representative may requestmodification of an imputed underpayment.See section 6223 and § 301.6223–2 for rulesregarding the binding authority of the part-nership representative.

(b) Effect of modification–(1) In gen-eral. A modification of an imputed under-payment under this section that is ap-proved by the IRS may result in anincrease or decrease in the amount of animputed underpayment set forth in theNOPPA under section 6231. A modifica-tion may increase or decrease an imputedunderpayment by affecting the extent towhich adjustments factor into the calcula-tion of the imputed underpayment (as de-scribed in paragraph (b)(2) of this sec-tion), by affecting the tax rate that isapplied in calculating the imputed under-payment (as described in paragraph (b)(3)of this section), and to the extent providedin forms, instructions, or other guidanceprescribed by the IRS (see paragraph(b)(4) of this section). If a partnershiprequests more than one modification,modifications that affect the extent towhich an adjustment factors into the cal-culation of the imputed underpayment un-der paragraph (b)(2) of this section aretaken into account before rate modifica-tions under paragraph (b)(3) of thissection are taken into account. A modifi-

cation under this section has no effect onthe amount of any partnership adjustmentdetermined under subchapter C of chapter63 of the Internal Revenue Code (sub-chapter C of chapter 63).

(2) Modifications that affect partner-ship adjustments for purposes of calculat-ing the imputed underpayment. Once ap-proved by the IRS, a modification underparagraph (d)(2) of this section (amendedreturns), paragraph (d)(3) of this section(tax exempt status), paragraph (d)(5) ofthis section (specified passive activitylosses), paragraph (d)(7) of this section(qualified investment entities), paragraph(d)(8) of this section (closing agreements),or, if applicable, paragraph (d)(9) of thissection (other modifications) affects theextent to which a partnership adjustmentfactors into the calculation of an imputedunderpayment. Any partnership adjustmentor portion of a partnership adjustment that istaken into account through one of the typesof modification described in this paragraph(b)(2) is excluded from the calculation ofthe total netted partnership adjustment (asdescribed in § 301.6225–1(c)(3)) if the ad-justment or portion of the adjustment is partof the reallocation grouping (as describedin § 301.6225–1(d)(2)(ii)) or the residualgrouping (as described in § 301.6225–1(d)(2)(v)). Similarly, any partnership ad-justment or portion of a partnership adjust-ment that is taken into account through oneof the types of modification described in thisparagraph (b)(2) is excluded from the creditgrouping (as described in § 301.6225–1(d)(2)(iii)) if the adjustment or portionthereof is part of the credit grouping.

(3) Modifications that affect the taxrate—(i) In general. Once approved bythe IRS, a modification under paragraph(d)(4) of this section (rate modification)reduces the tax rate applied in calculatingthe total netted partnership adjustment(as determined under § 301.6225–1(c)(3))with respect to an imputed underpayment.Rate modification does not affect the ex-tent to which partnership adjustments factorinto the calculation of the imputed under-payment. A modification under paragraph(d)(9) of this section (other modifications) istreated as a rate modification under para-graph (b)(3) of this section if such modifi-cation affects the rate applied with respect toany partnership adjustment or portion of apartnership adjustment that makes up the

July 10, 2017 Bulletin No. 2017–2866

total netted partnership adjustment with re-spect to an imputed underpayment.

(ii) Determination of the imputed un-derpayment in the case of rate modifica-tion. Except as described in paragraph(b)(3)(iv) of this section, the imputed un-derpayment in the case of rate modifica-tion under paragraph (d)(4) of this sectionis the sum of partnership adjustments notsubject to rate reduction under paragraph(d)(4) of this section (as described in thisparagraph (b)(3)(ii)), plus the rate-modifiednetted partnership adjustment determinedunder paragraph (b)(3)(iii) of this section,reduced or increased by any adjustments tocredits (taking into account any modifica-tions under this section). To determine thepartnership adjustments not subject to ratereduction under paragraph (d)(4) of this sec-tion, multiply the partnership adjustments inthe total netted partnership adjustment thatare not subject to rate modification underparagraph (d)(4) of this section (includingthe portion of any partnership adjustmentthat remains after applying paragraph(b)(3)(iii) of this section) by the highest taxrate (as described in § 301.6225–1(c)(1)(i)).

(iii) Calculation of rate-modified net-ted partnership adjustment in the case of arate modification. The rate-modified net-ted partnership adjustment is determinedas follows—

(A) For each partnership adjustment inthe total netted partnership adjustment thatis subject to an approved rate modificationunder paragraph (d)(4) of this section, de-termine each reviewed year partner’s (asdefined in § 301.6241–1(a)(9)) or indirectpartner’s (as defined in § 301.6241–1(a)(4))distributive share of the partnership adjust-ment subject to modification based on howeach adjustment subject to rate modifi-cation would be properly allocated tosuch partner in the reviewed year (asdefined in § 301.6241–1(a)(8)).

(B) Multiply the portion of each part-nership adjustment determined underparagraph (b)(3)(iii)(A) of this section bythe tax rate applicable to such portionunder paragraph (d)(4) of this section.

(C) Add all of the amounts calculatedunder paragraph (b)(3)(iii)(B) of this sec-tion with respect to each partnership ad-justment subject to an approved rate mod-ification under paragraph (d)(4).

(iv) Rate modification with respect tospecial allocations. If an imputed under-

payment results from adjustments with re-spect to more than one item and any re-viewed year partner (or indirect partner)for whom modification is approved underparagraph (d)(4) of this section has a dis-tributive share of such items that is not thesame with respect to all such items, theimputed underpayment as modified underparagraph (d)(4) of this section is deter-mined as described in paragraphs (b)(3)(ii)and (b)(3)(iii) of this section except thateach partner’s distributive share is deter-mined based on the amount of net gain orloss to the partner that would have resultedif the partnership had sold all of its assets attheir fair market value as of the close of thereviewed year appropriately adjusted to re-flect any modification with respect to anypartner (or indirect partner) that is approvedunder paragraphs (d)(2), (d)(3), (d)(5),(d)(6), (d)(7), (d)(8), and (d)(9) of this sec-tion. Upon request by the IRS, the partner-ship may be required to provide the part-ners’ capital account calculation through theend of the reviewed year, a calculation ofasset liquidation gain or loss, and any otherinformation necessary to determine whetherrate modification is appropriate, consistentwith the rules of paragraph (c)(2) of thissection.

(4) Other modifications. The effect ofother modifications described in para-graph (d)(9) of this section may be de-scribed in forms, instructions, or otherguidance prescribed by the IRS.

(c) Time, form, and manner for re-questing modification—(1) In general. Inaddition to the requirements described inparagraph (d) of this section, a request formodification under this section must besubmitted in accordance with the forms,instructions, and other guidance pre-scribed by the IRS and contain the infor-mation described in paragraph (c)(2) ofthis section. The partnership representa-tive must submit any request for modifi-cation and all relevant information (as de-scribed in paragraph (c)(2) of this sectionand as required by paragraph (d) of thissection) to the IRS within the time de-scribed in paragraph (c)(3) of this section.A request for modification, including arequest by the IRS for information relatedto a request for modification, and the de-termination by the IRS to approve or notapprove all or a portion of a request formodification, is part of the administrative

proceeding with respect to the partnershipunder subchapter C of chapter 63 and doesnot constitute an examination, inspection,or other administrative proceeding withrespect to any other person for purposes ofsection 7605(b).

(2) Partnership must substantiate factssupporting a request for modification—(i)In general. A partnership requesting mod-ification under this section must substan-tiate the facts supporting such a request tothe satisfaction of the IRS. The documentsand other information necessary to sub-stantiate a particular request for modifica-tion is based on the facts and circum-stances of each request, as well as the typeof modification requested under paragraph(d) of this section, and may include taxreturns, partnership operating documents,certifications in the form and manner re-quired with respect to the particular modifi-cation, and any other information necessaryto support the requested modification. TheIRS may, in forms, instructions, or otherguidance, set forth procedures with respectto information and documents supportingthe modification, including procedures torequire particular documents or other infor-mation to substantiate a particular type ofmodification, the manner for submittingdocuments and other information to the IRS,and recordkeeping requirements. The IRSwill deny a request for modification if apartnership fails timely to provide informa-tion the IRS determines is necessary to sub-stantiate a request for modification.

(ii) Information to be furnished for anymodification request. In the case of anymodification request, the partnership rep-resentative must furnish to the IRS a de-tailed description of the structure, alloca-tions, ownership, and ownership changes,its partners, and, if relevant, any indirectpartners for each taxable year relevant tothe request for modification, as well asthe partnership agreement as defined in§ 1.704–1(b)(2)(ii)(h) of this chapter foreach taxable year relevant to the modifi-cation request. In the case of any modifi-cation request with respect to an indirectpartner, the partnership representativemust provide to the IRS any informationthat the IRS may require relevant to anypass-through partner(s) (as defined in§ 301.6241–1(a)(5)) through which the in-direct partner holds its interest in the part-nership. For instance, if the partnership

Bulletin No. 2017–28 July 10, 201767

requests modification with respect to anamended return filed by an indirect part-ner pursuant to paragraph (d)(2) of thissection, the partnership representativemay be required to provide to the IRSinformation that would have been re-quired to have been filed by pass-throughpartners through which the indirect part-ner holds its interest in the partnership asif those pass-through partners had alsofiled their own amended returns.

(3) Time for submitting modificationrequest and information—(i) Modificationrequest. Unless an extension of time isgranted by the IRS, all information re-quired under this section with respect to arequest for modification must be submit-ted to the IRS in the form and mannerprescribed by the IRS on or before 270days after the date the NOPPA is mailed.

(ii) Extension of the 270-day period. Apartnership may request an extension,subject to consent by the IRS, of the270-day period described in paragraph(c)(3)(i) of this section.

(iii) Expiration of the 270-day periodby agreement. The 270-day period de-scribed in paragraph (c)(3)(ii) of this sec-tion expires as of the date the partnershiprepresentative and the IRS agree, in writ-ing, to waive the 270-day period after themailing of the NOPPA and before the IRSmay issue a notice of final partnershipadjustment. See section 6231(a) (flushlanguage).

(4) Approval of modification by theIRS. After the IRS makes a determinationas to whether a requested modification isaccurate and appropriate, the IRS will no-tify the partnership representative in writ-ing of the approval or denial, in whole orin part, of any request for modification.Notification of approval will be providedto the partnership representative only afterreceipt of all relevant information (includ-ing any supplemental information re-quired by the IRS) and all necessary pay-ments with respect to the particularmodification requested.

(d) Types of modification—(1) In gen-eral. Except as otherwise described in thissection, a partnership may request onetype of modification or more than onetype of modification described in para-graph (d) of this section.

(2) Amended returns by partners—(i)In general. A partnership may request a

modification of an imputed underpaymentbased on an amended return filed by areviewed year partner (or indirect partner)in accordance with paragraph (d)(2) ofthis section that takes into account all ofthe partnership adjustments properly allo-cable to such partner (or indirect partner).The partnership may not request an addi-tional modification of any imputed under-payment for a partnership taxable yearunder this section with respect to any part-ner (or indirect partner) that files anamended return under paragraph (d)(2) ofthis section or with respect to any partner-ship adjustment allocated to such partner.

(ii) Modification request based onamended return will not be approvedwithout full payment. A modification re-quest under paragraph (d)(2) of this sec-tion will not be approved unless the part-ner (or indirect partner) filing theamended return has paid all tax, penalties,additions to tax, and interest due as aresult of taking into account the adjust-ments in the first affected year (as definedin § 301.6226–(b)(2)) and all modifica-tion years (as described in paragraph(d)(2)(iv) of this section) before the expi-ration of the 270-day period described inparagraph (c)(3) of this section.

(iii) Form and manner for filingamended returns. A reviewed year partner(or indirect partner) must file all amendedreturns required for modification underparagraph (d)(2) of this section with theIRS. The IRS will not approve modifica-tion under paragraph (d)(2) of this sectionunless prior to the expiration of the 270-day period described in paragraph (c)(3)of this section, the partnership representa-tive provides to the IRS in the form andmanner prescribed by the IRS an affidavitfrom the partner (or indirect partner)signed under penalties of perjury by suchpartner that each amended return requiredto be filed under paragraph (d)(2) of thissection has been filed (including the dateon which such amended returns werefiled) and that the full amount of tax,penalties, additions to tax, additionalamounts, and interest was paid (includingthe date on which such amounts werepaid).

(iv) Modification approved only ifamended returns for all taxable years arefiled. Modification under paragraph (d)(2)of this section will not be approved by the

IRS unless a partner (or indirect partner)files an amended return for the first af-fected year and any modification year. Amodification year is any taxable year withrespect to which any tax attribute (as de-fined in § 301.6241–1(a)(10)) is affectedby reason of taking the partner’s allocableshare of all partnership adjustments intoaccount in the first affected year. A mod-ification year may be a taxable year beforeor after the first affected year, dependingon the effect on tax attributes of taking thepartner’s (or indirect partner’s) share ofthe partnership adjustments into accountin the first affected year.

(v) Period of limitations must beopen—(A) In general. Except as de-scribed in paragraph (d)(2)(v)(B) of thissection, the IRS will not accept modifica-tion under paragraph (d)(2) of this sectionwith respect to any amended return if theperiod of limitations on assessment undersection 6501 with respect to the partner’staxable year for which the amended returnis being filed has expired. For modifica-tion with respect to years for which apartner’s period of limitations on assess-ment under section 6501 has expired, see§ 301.6225–2(d)(8) (regarding closingagreements).

(B) Amended return claiming a refund.An amended return filed under paragraph(d)(2) of this section claiming a refundmay be filed after the expiration of periodof limitations under section 6511, pro-vided all partnership adjustments allo-cated to the partner (or indirect partner)filing the amended return are taken intoaccount on such amended return, the onlyitems reported on the amended return areitems attributable to such partnership ad-justments, and the partner files all requiredamended returns described in paragraph(d)(2)(iv) of this section.

(vi) Amended returns for partnershipadjustments that reallocate distributiveshares. Except as described in this para-graph (d)(2)(vi), in the case of a partner-ship adjustment that reallocates the dis-tributive share of any item from onepartner to another, a modification underparagraph (d)(2) of this section will beapproved only if all partners affected bysuch adjustment (affected partners) fileamended returns in accordance with para-graph (d)(2) of this section. The IRS maydetermine that the requirements of this

July 10, 2017 Bulletin No. 2017–2868

paragraph (d)(2)(vi) are satisfied if one ormore affected partners take into accounttheir allocable share of the adjustmentthrough other modifications approved bythe IRS. For instance, if, in the case wherean adjustment reallocates a loss from onepartner to another, one affected partnerfiles an amended return taking into ac-count the adjustment, and the other af-fected partner signs a closing agreementtaking into account the adjustment, theIRS may determine that the requirementsof this paragraph (d)(2)(vi) have been sat-isfied.

(vii) Amended returns in the caseof pass-through partners—(A) Pass-through partners may file amended re-turns. A pass-through partner (or indi-rect partner that is a pass-throughpartner), including a partnership-partner(as defined in § 301.6241–1(a)(7)) (orindirect partner that is a partnership-partner) that has a valid election undersection 6221(b) in effect for a partner-ship taxable year, may elect, solely forpurposes of modification under para-graph (d)(2) of this section, to take intoaccount its share of the partnershipadjustments and determine and payan amount calculated in the same man-ner as the safe harbor amount under§ 301.6226 –2(g) (except as described inparagraph (d)(2)(vii)(B) of this section).

(B) Tax rate. For purposes of calculatingthe payment amount for a pass-through part-ner under paragraph (d)(2)(vii)(A) of thissection, instead of using the tax rate undersection 6225(b)(1)(A), the tax rate is the ratedetermined by substituting the total net in-come of the pass-through partner for thetaxable year (as adjusted) for taxable in-come in section 1(c) (determined withoutregard to section 1(h)).

(C) Restrictions on upper-tier amendedreturns. If modification is approved withrespect to a pass-through partner (or indirectpartner that is a pass-through partner) thattakes its share of the partnership adjust-ments into account and pays any amountdue under paragraph (d)(2)(vii)(A) of thissection, the partnership may not requestmodification based on amended returns ofdirect and indirect partners of the pass-through partner (or indirect partner that is apass-through partner).

(vii) Limitations on amended returns—(A) In general. A partner (or indirect part-

ner) may not file an amended return withrespect to any items related to partnershipadjustments or an imputed underpaymentexcept as described in paragraph (d)(2) ofthis section.

(B) Further amended returns re-stricted. If a partner files an amended re-turn under paragraph (d)(2) of this section,such partner may not file a subsequentamended return without the permission ofthe IRS.

(3) Tax-exempt partners—(i) In gen-eral. A partnership may request modifica-tion of an imputed underpayment withrespect to partnership adjustments that thepartnership demonstrates to the satisfac-tion of the IRS are allocable to a reviewedyear partner (or indirect partner) thatwould not owe tax by reason of its statusas a tax-exempt entity (as defined in para-graph (d)(3)(ii) of this section) in the re-viewed year (tax-exempt partner).

(ii) Definition of tax-exempt entity. Forthe purposes of paragraph (d)(3) of thissection, the term tax-exempt entity meansa person or entity defined in section168(h)(2)(A), (C), or (D).

(iii) Modification limited to portion ofpartnership adjustments for which tax-exempt partner not subject to tax. Onlythe portion of the partnership adjustmentsproperly allocated to a tax-exempt partnerwith respect to which the partner wouldnot be subject to tax for the reviewed year(tax-exempt portion) may form the basisof a modification of the imputed under-payment under paragraph (d)(3) of thissection. A modification under paragraph(d)(3) of this section will not be approvedby the IRS unless the partnership providesdocumentation in accordance with para-graph (c)(2) of this section to support thetax-exempt partner’s status and the tax-exempt portion of the partnership adjust-ment allocable to the tax-exempt partner.

(4) Modification based on a rate of taxlower than the highest applicable tax rate.A partnership may request modificationbased on a lower rate of tax with respectto adjustments that are attributable to areviewed year partner (or indirect partner)that is a C corporation and adjustmentswith respect to capital gains or qualifieddividends that are attributable to a re-viewed year partner (or indirect partner)who is an individual. In no event may thelower rate determined under the preceding

sentence be less than the highest rate ineffect with respect to the type of incomeand taxpayer. For instance, with respect toadjustments that are attributable to a Ccorporation, the highest rate in effect forthe reviewed year with respect to all Ccorporations would apply to that adjust-ment, regardless of the rate that wouldapply to the C corporation based on theamount of that C corporation’s taxableincome. For the purposes of this para-graph (d)(4), an S corporation is treated asan individual.

(5) Certain passive losses of publiclytraded partnerships—(i) In general. In thecase of a publicly traded partnership (asdefined in section 469(k)(2)), the imputedunderpayment is determined without re-gard to the portion thereof that the part-nership demonstrates is attributable to anet decrease in a specified passive activityloss (as defined in paragraph (d)(5)(ii) ofthis section) which is allocable to a spec-ified partner (as defined in paragraph(d)(5)(iii) of this section). The modifica-tion described in this paragraph (d)(5)(i)applies equally with respect to a publiclytraded partnership that is subject to a pro-ceeding under subchapter C of chapter 63and where a portion of the imputed under-payment is attributable to a publicly tradedpartnership that is a partnership-partner(or indirect partner that is a partnership-partner).

(ii) Specified passive activity loss. Aspecified passive activity loss carryoveramount for any specified partner of a pub-licly traded partnership is the lesser of thesection 469(k) passive activity loss of thatpartner which is separately determinedwith respect to such partnership at the endof the partner’s taxable year in which orwith which the reviewed year of the part-nership ends (reviewed year loss) or at theend of the partner’s taxable year in whichor with which the adjustment year (asdefined in § 301.6241–1(a)(1)) of the part-nership ends, reduced to the extent anysuch partner has utilized any portion of itsreviewed year loss to offset income orgain relating to the ownership or disposi-tion of its interest in such publicly tradedpartnership during either the adjustmentyear or any intervening year (as defined in§ 301.6226–3(b)(3)).

(iii) Specified partner. A specified part-ner is a person that for each taxable year

Bulletin No. 2017–28 July 10, 201769

beginning with the partner’s taxable yearin which or with which the partnershipreviewed year ends through the partner’staxable year in which or with which thepartnership adjustment year ends satisfiesthe following three requirements—

(A) The person is a partner of a pub-licly traded partnership;

(B) The person is an individual, estate,trust, closely held C corporation, or per-sonal service corporation; and

(C) The person has a specified passiveactivity loss with respect to the publiclytraded partnership.

(iv) Partner notification requirement toreduce passive losses. If the IRS approvesa modification request under paragraph(d)(5) of this section, the partnership mustreport, in accordance with forms, instruc-tions, or other guidance prescribed by theIRS, to each specified partner the amountof that specified partner’s reduction of itssuspended passive loss carryovers at theend of the adjustment year to take intoaccount the amount of any passive lossesapplied in connection with such modifica-tion request. The reduction in suspendedpassive loss carryovers as reported to aspecified partner under this paragraph(d)(5)(iv) is a determination of the part-nership under subchapter C of chapter 63and is binding on the specified partnersunder section 6223 and the regulationsthereunder.

(6) Modification of the number andcomposition of imputed underpayments. Apartnership may request that the IRSinclude one or more partnership adjust-ments in one or more particular group-ings or subgroupings (as described in§ 301.6225–1(d)(2)) and may requestthat the IRS determine one or more spe-cific imputed underpayments based onsuch groupings. For example, a partner-ship may request under this paragraph(d)(6) that one or more partnership ad-justments taken into account to calculatean imputed underpayment be taken intoaccount to calculate a different imputedunderpayment.

(7) Partnerships with partners that are“qualified investment entities” describedin section 860–(i) In general. A partner-ship may request a modification of animputed underpayment based on the part-nership adjustments allocated to a re-viewed year partner (or indirect partner)

where the modification is based on defi-ciency dividends distributed as describedin section 860(f), by a partner that is aqualified investment entity (QIE) undersection 860(b), which includes both a reg-ulated investment company (RIC) and areal estate investment trust (REIT). Mod-ification is available only to the extent thatthe deficiency dividends take into accountadjustments described in § 301.6225–1that are also adjustments within the mean-ing of section 860(d)(1) or (d)(2) (which-ever applies).

(ii) Documentation of deficiency divi-dend. The partnership must provide doc-umentation in accordance with paragraph(c) of this section of the “determination”described in section 860(e). Under section860(e)(2), § 1.860–2(b)(1)(i) of this chap-ter, and paragraph (d)(8) of this section, aclosing agreement entered into by the QIEpartner pursuant to section 7121 and para-graph (d)(8) of this section is a determi-nation described in section 860(e), and thedate of the determination is the date inwhich the closing agreement is approvedby the IRS. In addition, under section860(e)(4), a determination also includesa Form 8927, Determination Under Sec-tion 860(e)(4) by a Qualified InvestmentEntity, properly completed and filed bythe RIC or REIT pursuant to section860(e)(4). To establish the date of thedetermination under section 860(e)(4)and the amount of deficiency dividendsactually paid, the partnership must pro-vide a copy of Form 976, Claim forDeficiency Dividends Deductions by aPersonal Holding Company, RegulatedInvestment Company, or Real Estate In-vestment Trust (Form 976), properlycompleted by or on behalf of the QIEpursuant to section 860(g), together witha copy of each of the required attach-ments for Form 976.

(8) Partner closing agreements. Apartnership may request modificationbased on a closing agreement entered intoby the IRS and any partner (or indirectpartner) pursuant to section 7121, and, ifapproved by the IRS, the IRS will allowmodification with respect to a partnershipadjustment that is fully taken into accountby such partner (or indirect partner) undera closing agreement and for which therequired payment under the closing agree-ment is made. Generally, the IRS will not

approve any additional modification underthis section with respect to a partner (orindirect partner) to which a modificationunder this paragraph (d)(8) has been ap-proved.

(9) Other modifications. A partnershipmay request a modification not describedin paragraph (d) of this section and theIRS will determine whether such modifi-cation is accurate and appropriate in ac-cordance with paragraph (c)(4) of this sec-tion. Additional types of modificationsand the documentation necessary to sub-stantiate such modifications may be setforth in forms, instructions, or other guid-ance prescribed by the IRS.

(e) Examples. The following examplesillustrate the rules of this section. For pur-poses of these examples, each partnershipis subject to the provisions of subchapterC of chapter 63, each partnership and itspartners are calendar year taxpayers, allpartners are U.S. persons (unless other-wise stated), the highest rate of income taxin effect for all taxpayers is 40 percent forall relevant periods, and no partnershiprequests modification under this sectionexcept as provided in the example.

Example 1. The IRS mails a NOPPA to Partner-ship for the 2019 partnership taxable year proposinga single partnership adjustment increasing ordinaryincome by $100, resulting in a $40 imputed under-payment ($100 multiplied by the 40 percent tax rate).Partner, A, held a 20 percent interest in Partnershipduring 2019. Partnership requests modification underparagraph (d)(2) of this section based on A filing anamended return for the 2019 taxable year taking intoaccount $20 of the partnership adjustment and pay-ing the tax and interest due attributable to A’s shareof the increased income and based on A’s effectivetax rate for 2019. No tax attribute in any othertaxable year of A is affected by A taking into ac-count A’s share of the partnership adjustment for2019. IRS approves the modification and the $20increase in ordinary income allocable to A is there-fore not included in the calculation of the total nettedpartnership adjustment (determined in accordancewith § 301.6225–1). Partnership’s total netted part-nership adjustment is reduced to $80 ($100 adjust-ment less $20 taken into account by A), and theimputed underpayment is reduced to $32 (total net-ted partnership adjustment of $80 after modificationmultiplied by 40 percent).

Example 2. The IRS initiates an administrativeproceeding with respect to Partnership’s 2019 tax-able year. Partnership has two equal partners duringits 2019 taxable year: an individual, A, and apartnership-partner, B. For 2019, B has two equalpartners: a tax-exempt entity, C, and an individual,D. The IRS mails a NOPPA to Partnership for its2019 taxable year showing a single partnership ad-justment increasing Partnership’s ordinary incomeby $100, resulting in a $40 imputed underpayment

July 10, 2017 Bulletin No. 2017–2870

($100 total netted partnership adjustment multipliedby 40 percent). Partnership requests modificationunder paragraph (d)(3) of this section with respect toB’s partner, C, a tax-exempt entity. Partnership’spartnership representative provides the IRS withdocumentation demonstrating to the IRS’s satisfac-tion that C holds a 25 percent indirect interest inPartnership through its interest in B and that C is atax-exempt entity defined in paragraph (d)(3)(ii) ofthis section that is not subject to tax with respect toits share of the partnership adjustment allocated to Bwhich is $25 (50 percent x 50 percent x $100). IRSapproves the modification and the $25 increase inordinary income allocable to C is not included in thecalculation of the total netted partnership adjustment(determined in accordance with § 301.6225–1). Part-nership’s total netted partnership adjustment is re-duced to $75 ($100 adjustment less C’s share of theadjustment, $25), and the imputed underpayment isreduced to $30 (total netted partnership adjustmentof $75, after modification, multiplied by 40 percent).

Example 3. The facts are the same as in Example2 of this paragraph (e), except 30 percent of the $25of the adjustment allocated to C is unrelated businesstaxable income (UBTI) as defined in section 512with respect to which C would be subject to tax iftaken into account by C. As a result, the modificationunder paragraph (d)(3) of this section with respect toC relates only to 70 percent of the $25 of ordinaryincome allocated to C that is not UBTI. Therefore,only a modification of $17.50 (70 percent multiplied by$25) of the total $100 partnership adjustment may beapproved by the IRS and excluded when calculating theimputed underpayment for Partnership’s 2019 taxableyear. The total netted partnership adjustment (deter-mined in accordance with § 301.6225–1) is reduced to$82.50 ($100 less $17.50), and the imputed underpay-ment is reduced to $33 (total netted partnership adjust-ment of $82.50, after modification, multiplied by 40percent).

Example 4. The facts are the same as in Example2 of this paragraph (e), but assume that B filed anamended return taking its share of the partnershipadjustments into account. B reports 50 percent of thepartnership adjustments ($50) on its amended return,and B makes a payment pursuant to paragraph(d)(2)(ii) of this section. Partnership’s total nettedpartnership adjustment is reduced by $50 (theamount taken into account by B). Partnership’s totalnetted partnership adjustment (determined in accor-dance with § 301.6225–1) is $50, and the imputedunderpayment, after modification, is $20.

Example 5. The facts are the same as in Example2 of this paragraph (e), except that in addition to themodification with respect to tax-exempt entity Cwhich reduced the imputed underpayment by ex-cluding from the calculation of the imputed under-payment $25 of the $100 partnership adjustmentreflected in the NOPPA, individual D files anamended return for D’s 2019 taxable year taking intoaccount D’s share of the partnership adjustment (50percent of B’s 50 percent interest in Partnership, or$25) and paying the additional tax and interest due inaccordance with paragraph (d)(2) of this section. Notax attribute in any other taxable year of D is affectedby D taking into account D’s share of the partnershipadjustment for 2019. IRS approves the modificationand the $25 increase in ordinary income allocable to

D is not included in the calculation of the total nettedpartnership adjustment (determined in accordancewith § 301.6225–1). As a result, Partnership’s totalnetted partnership adjustment is $50 ($100, less $25allocable to C, less $25 taken into account by D), andthe imputed underpayment, after modification, is$20.

Example 6. The IRS mails a NOPPA to Partner-ship for the 2019 taxable year proposing two part-nership adjustments based on an IRS determinationthat two assets, asset X and asset Y, owned byPartnership were overvalued. The partnership adjust-ment with respect to asset X results in increasedordinary income of $75 and the partnership adjust-ment with respect to asset Y results in an increase indepreciation of $25, which under § 301.6225–1(d)(3)(iii) is treated as a $25 decrease in income.The total netted partnership adjustment (determinedin accordance with § 301.6225–1) is $50 ($75 - $25),resulting in an imputed underpayment of $20 ($50multiplied by 40 percent). Under the partnershipagreement in effect for Partnership’s 2019 taxableyear, the adjustments attributable to both of theseassets are allocated to the partners consistent withtheir ownership percentages in Partnership. Partner-ship requests a modification under paragraph (d)(6)of this section to calculate two imputed underpay-ments with respect to the partnership adjustments for2019: a general imputed underpayment with respectto $50 of the increase in income related to theadjustment of the value of asset X and a specificimputed underpayment with respect to $25 of theincrease in income related to the adjustment of thevalue of asset X and the $25 decrease in incomerelated to the adjustment of the value of asset Y. Ifapproved by the IRS, the general imputed underpay-ment, as modified, is $20 ($50 multiplied by 40percent) and the specific imputed underpaymentwould result in zero (increase in income of $25attributable to asset X offset by the decrease inincome of $25 attributable to asset Y), causing thosetwo adjustments to be disregarded and taken intoaccount by the partnership in the adjustment year asadjustments that do not result in an imputed under-payment. The IRS may determine that the creation ofthe specific imputed underpayment is not appropriatein this circumstance and deny the partnership’s mod-ification request because the adjustments are notrelated to allocations to particular partners and alsobecause the proposed modification results in an in-crease in net non-positive adjustments. See§ 301.6225–1(e)(2)(iii).

(f) Applicability date—(1) In general.Except as provided in paragraph (f)(2) ofthis section, this section applies to part-nership taxable years beginning after De-cember 31, 2017.

(2) Election under § 301.9100–22T ineffect. This section applies to any partner-ship taxable year beginning after Novem-ber 2, 2015 and before January 1, 2018 forwhich a valid election under § 301.9100–22T is in effect.

Par. 9. Section 301.6225–3 is added toread as follows:

§ 301.6225–3 Treatment of partnershipadjustments that do not result in animputed underpayment.

(a) In general. Partnership adjustments(as defined in § 301.6241–1(a)(6)) that donot result in an imputed underpayment (asdescribed in § 301.6225–1(c)(2)) are takeninto account by a partnership in the adjust-ment year (as defined in § 301.6241–1(a)(1)) in accordance with paragraph (b) ofthis section.

(b) Treatment of adjustments by thepartnership—(1) In general. Except asdescribed in paragraphs (b)(2) through(b)(5) of this section, a partnership adjust-ment that does not result in an imputedunderpayment is taken into account as areduction in non-separately stated incomeor as an increase in non-separately statedloss for the adjustment year depending onwhether the adjustment is to an item ofincome or loss.

(2) Separately stated items. In the caseof a partnership adjustment to an item thatis required to be separately stated undersection 702, the adjustment is taken intoaccount by the partnership in the adjust-ment year as a reduction in such sepa-rately stated item or as an increase in suchseparately stated item depending onwhether the adjustment is a reduction oran increase to the separately stated item.

(3) Credits. In the case of a partnershipadjustment to a credit shown on the partner-ship return for the reviewed year (as definedin § 301.6241–1(a)(8)), the adjustment istaken into account by the partnership in theadjustment year as a separately stated item.

(4) Reallocation adjustments. A part-nership adjustment that does not result inan imputed underpayment pursuant to§ 301.6225–1(c)(2)(i) is taken into ac-count by the partnership in the adjustmentyear as a separately stated item or a non-separately stated item, as required by sec-tion 702. The portion of an adjustmentallocated under this paragraph (b)(4) isallocated to adjustment year partners (asdefined in § 301.6241–1(a)(2)) who arealso reviewed year partners (as defined in§ 301.6241–1(a)(9)) with respect to whomthe amount was reallocated. If any re-viewed year partner with respect to whoman amount was reallocated is not also anadjustment year partner, the portion of theadjustment that would otherwise be allo-

Bulletin No. 2017–28 July 10, 201771

cated to such reviewed year partner isallocated instead to the adjustment yearpartner or partners who are the successoror successors to the reviewed year partner.If the partnership cannot identify an ad-justment year partner that is a successor tothe reviewed year partner described in theprevious sentence or if a successor doesnot exist, the portion of the adjustmentthat would otherwise be allocated to thatreviewed year partner is allocated amongthe adjustment year partners according tothe adjustment year partners’ distributiveshares.

(5) Adjustments taken into account bypartners as part of the modification pro-cess. If, as part of modification under§ 301.6225–2, a reviewed year partner(or an indirect partner (as defined in§ 301.6241–1(a)(4)) that holds its interestin the partnership through its interest inthe reviewed year partner) takes into ac-count an adjustment that would otherwisenot result in an imputed underpayment,and the IRS approves the modification,such adjustment is not taken into accountby the partnership in the adjustment year.

(6) Effect of election under section6226. If a partnership makes a valid elec-tion under § 301.6226–1 with respect toan imputed underpayment, a partnershipadjustment that does not result in an im-puted underpayment and that is describedin § 301.6225–1(c)(2)(i) or (c)(2)(ii) istaken into account by the reviewed yearpartners in accordance with § 301.6226–3and is not taken into account under thissection.

(c) Treatment of adjustment year part-ners. The rules under subchapter K ofchapter 1 of subtitle A of the InternalRevenue Code with respect to the treat-ment of partners apply in the case of ad-justments taken into account by the part-nership under this section.

(d) Applicability date—(1) In general.Except as provided in paragraph (d)(2) ofthis section, this section applies to part-nership taxable years beginning after De-cember 31, 2017.

(2) Election under § 301.9100–22T ineffect. This section applies to any partner-ship taxable year beginning after Novem-ber 2, 2015 and before January 1, 2018 forwhich a valid election under § 301.9100–22T is in effect.

Par. 10. Section 301.6225–4 is addedto read as follows:

§ 301.6225–4 Adjustments to partners’outside bases and capital accounts anda partnership’s basis and book value inproperty.—[Reserved]

Par. 11. Section 301.6226–1 is addedto read as follows:

§ 301.6226–1 Election for an alternativeto the payment of the imputedunderpayment.

(a) In general. A partnership may electunder this section an alternative to thepayment by the partnership of an imputedunderpayment determined under section6225 and the regulations thereunder. Inaddition, a partnership making a validelection under paragraph (b) of section isno longer liable for the imputed underpay-ment (as defined in § 301.6241(a)(3)) towhich the election applies. If a notice offinal partnership adjustment (FPA) mailedunder section 6231 includes more than oneimputed underpayment in accordance with§ 301.6225–1(e), a partnership may makean election under this section with respect toone or more imputed underpayments iden-tified in the FPA. See § 301.6226–2(f) re-garding the determination of each reviewedyear partner’s share of the partnership ad-justments (as defined in § 301.6241–1(a)(6))and related penalties, additions to tax, andadditional amounts that must be taken intoaccount.

(b) Effect of election—(1) Reviewedyear partners. If a partnership makes avalid election under this section withrespect to any imputed underpayment,the reviewed year partners (as defined in§ 301.6241–1(a)(9)) must take into ac-count their share of the partnership ad-justments that relate to that imputed un-derpayment and are liable for any tax,penalties, additions to tax, additionalamounts, and interest as described in§ 301.6226 –3. A modification approvedby the IRS under § 301.6225–2 is takeninto account by the reviewed year part-ners in accordance with § 301.6226 –2(f)(2).

(2) Partnership. A partnership makinga valid election under this section is notliable for the imputed underpayment towhich the election applies on the date

such election is made. In addition, adjust-ments that do not result in an imputedunderpayment described in § 301.6225–1(c)(2)(i) and (ii) are not taken into ac-count by the partnership in the adjustmentyear (as defined in § 301.6241–1(a)(1))and instead are included in the reviewedyear partners’ share of the partnership ad-justments reported to the reviewed yearpartners of the partnership.

(c) Time, form, and manner for makingthe election—(1) In general. An electionunder this section is valid only if all of theprovisions of this section and § 301.6226–2(regarding statements furnished to reviewedyear partners and filed with the InternalRevenue Service (IRS)) are satisfied. Anelection under this section may only be re-voked with the consent of the IRS.

(2) Invalid election. If an election un-der this section is determined by the IRSto be invalid, the IRS will notify the part-nership and the partnership representativewithin 30 days of the determination thatthe election is invalid and the reason forthe determination that the election is in-valid. If the IRS makes a final determina-tion that an election under this section isinvalid, section 6225 applies with respectto the imputed underpayment as if theelection was never made and the partner-ship must pay the imputed underpaymentunder section 6225 and any penalties andinterest under section 6233. An electionunder this section is valid until the IRSdetermines that the election is invalid.

(3) Time for making the election. Anelection under this section must be filedwithin 45 days of the date the FPA ismailed by the IRS. The time for filingsuch an election may not be extended.

(4) Form and manner of the election—(i) In general. An election under this sec-tion must be signed by the partnershiprepresentative and filed in accordancewith forms, instructions, and other guid-ance and include the information specifiedin paragraph (c)(4)(ii) of this section.

(ii) Contents of the election. An elec-tion under this section must include—

(A) The name, address, and correct tax-payer identification number (TIN) of thepartnership,

(B) The taxable year to which the elec-tion relates,

(C) A copy of the FPA to which theelection relates,

July 10, 2017 Bulletin No. 2017–2872

(D) In the case of an FPA that includesmore than one imputed underpayment,identification of the imputed underpay-ment(s) to which the election applies,

(E) Each reviewed year partner’sname, address, and correct TIN, and

(F) Any other information prescribedby the IRS in forms, instructions, andother guidance.

(d) Binding nature of statements. Theelection under this section, which includesfiling and furnishing statements describedin § 301.6226–2, are actions of the part-nership under section 6223 and the regu-lations thereunder and, unless determinedotherwise by the IRS, the partner’s shareof the adjustments, the safe harbor amountand interest safe harbor amount (as de-scribed in § 301.6226–2(g)), and any pen-alties, additions to tax, and additionalamounts as set forth in the statement arebinding on the partner pursuant to section6223. Accordingly, a partner may not treatitems reflected on a statement described in§ 301.6226–2 on the partner’s return in-consistently with how those items aretreated on the statement that is filed withthe IRS. See § 301.6222–1(c)(2) (regard-ing items the treatment of which a partneris bound to under section 6223).

(e) Coordination with section 6234 re-garding judicial review. Nothing in this sec-tion affects the rules regarding judicialreview of a partnership adjustment. Accord-ingly, a partnership that makes an electionunder this section is not precluded fromfiling a petition under section 6234(a). See§ 301.6226–2(b)(3), Example 3.

(f) Applicability date—(1) In general.Except as provided in paragraph (f)(2) ofthis section, this section applies to part-nership taxable years beginning after De-cember 31, 2017.

(2) Election under § 301.9100–22T ineffect. This section applies to any partner-ship taxable year beginning after Novem-ber 2, 2015 and before January 1, 2018 forwhich a valid election under § 301.9100–22T is in effect.

Par. 12. Section 301.6226–2 is addedto read as follows:

§ 301.6226–2 Statements furnished topartners and filed with the IRS.

(a) In general. A partnership thatmakes an election under § 301.6226–1

must furnish to each reviewed year part-ner (as defined in § 301.6241–1(a)(9)) andfile with the Internal Revenue Service(IRS) a statement that includes the itemsrequired by paragraphs (e) and (f) of thissection with respect to each reviewed yearpartner’s share of partnership adjustments(as defined in § 301.6241–1(a)(6)) withrespect to the imputed underpayment forwhich an election under § 301.6226–1 ismade. The statements furnished to the re-viewed year partners under this sectionare in addition to, and must be filed andfurnished separate from, any other state-ments required to be filed with the IRS andfurnished to partners, including any state-ments under section 6031(b). A separatestatement under this section must be fur-nished with respect to each reviewed year(as defined in § 301.6241–1(a)(8)) subject toan election under § 301.6226–1.

(b) Time and manner for furnishing thestatements to partners—(1) In general.The statements described in paragraph (a)of this section must be furnished to thereviewed year partners no later than 60days after the date all of the partnershipadjustments to which the statement relatesare finally determined. The partnershipadjustments are finally determined uponthe later of:

(i) The expiration of the time to file apetition under section 6234, or

(ii) If a petition under section 6234 isfiled, the date when the court’s decisionbecomes final.

(2) Address used for reviewed yearpartners. The partnership must furnish thestatement described in paragraph (a) ofthis section to each reviewed year partnerin accordance with the forms, instructions,and other guidance prescribed by the IRS.If the partnership mails the statement, itmust mail the statement to the current orlast address of the reviewed year partnerthat is known to the partnership. If a state-ment is returned to the partnership as un-deliverable, the partnership must under-take reasonable diligence to identify acorrect address for the reviewed year part-ner to which the statement relates.

(3) Examples. The following examplesillustrate the rules of paragraph (b) of thissection.

Example 1. During Partnership’s 2020 taxableyear, A, an individual, was a partner in Partnershipand had an address at 123 Main St. On February 1,2021, A sold his interest in Partnership and informed

Partnership that A moved to 456 Broad St. On March15, 2021, Partnership mails A’s statement undersection 6031(b) for the 2020 taxable year to 456Broad St. On June 1, 2023, A moves again but doesnot inform Partnership of A’s new address. In 2023,the IRS initiates an administrative proceeding withrespect to Partnership’s 2020 taxable year and mailsa notice of final partnership adjustment (FPA) toPartnership for that year. Partnership makes a timelyelection under section 6226 in accordance with§ 301.6226–1 and on May 31, 2024, timely mails astatement described in paragraph (a) of this sectionto A at 456 Broad St. Although the statement wasmailed to the last address for A that was known toPartnership, it is returned to Partnership as undeliv-erable because unknown to Partnership, A hadmoved. After undertaking reasonable diligence as tothe correct address of A, Partnership is unable toascertain the correct address. Therefore, pursuant toparagraph (b)(2) of this section, Partnership hasproperly furnished the statement to A.

Example 2. The facts are the same as in Example1 of this paragraph (b)(3), except that A lives at 789Forest Ave during all of 2024 and reasonable dili-gence would have revealed that 789 Forest Ave isthe correct address for A, but Partnership did notundertake such diligence. Therefore, Partnershipfailed to properly furnish the statement with respectto A pursuant to paragraph (b)(2) of this section.

Example 3. Partnership is a calendar year tax-payer. The IRS initiates an administrative proceed-ing with respect to Partnership’s 2020 taxable year.On January 1, 2024, the IRS mails an FPA withrespect to the 2020 taxable year to Partnership. Part-nership makes a timely election under section 6226in accordance with § 301.6226–1. Partnership timelyfiles a petition for readjustment under section 6234with the Tax Court. The IRS prevails, and the TaxCourt sustains all of the adjustments in the FPA withrespect to the 2020 taxable year. The time to appealthe Tax Court decision expires, and the Tax Courtdecision becomes final on April 10, 2025. Underparagraph (b)(1)(ii) of this section, the adjustmentsin the FPA are finally determined on April 10, 2025,and Partnership must furnish the statements de-scribed in paragraph (a) of this section to its re-viewed year partners and electronically file the state-ments with the IRS no later than June 9, 2025. Seeparagraph (c) of this section for the rules regardingfiling the statements with the IRS.

(c) Time and manner for filing thestatements with the IRS. No later than 60days after the date the partnership adjust-ments are finally determined (as describedin paragraph (b)(1) of this section), thepartnership must electronically file withthe IRS the statements that the partnershipfurnishes to each reviewed year partnerunder this section, along with a transmittalthat includes a summary of the statementsfiled and such other information requiredin forms, instructions, and other guidance.

(d) Correction of statements—(1) Ingeneral. A partnership corrects an error ina statement furnished under paragraph (b)

Bulletin No. 2017–28 July 10, 201773

of this section or filed under paragraph (c)of this section by filing the corrected state-ment with the IRS in the manner pre-scribed in paragraph (c) of this section andfurnishing a copy of the corrected state-ment to the reviewed year partner towhom the statement relates in accordancewith the forms, instructions, and otherguidance prescribed by the IRS.

(2) Error discovered by partnership—(i) Discovery within 60 days of statementdue date. If a partnership discovers anerror in a statement within 60 days of thedue date for furnishing the statements topartners and filing the statements with theIRS as described in paragraphs (b) and (c)of this section, the partnership must cor-rect the error in accordance with para-graph (d)(1) of this section and does nothave to seek consent of the IRS prior todoing so.

(ii) Error discovered more than 60days after statement due date. If a part-nership discovers an error more than 60days after the due date for furnishing thestatements to partners and filing the state-ments with the IRS as described in para-graphs (b) and (c) of this section, thepartnership may only correct the error af-ter receiving consent of the IRS in accor-dance with the forms, instructions, andother guidance prescribed by the IRS.

(3) Error discovered by the IRS. If theIRS discovers an error in the statementsfurnished or filed under paragraphs (b)and (c) of this section, the IRS may re-quire the partnership to correct such errorsin accordance with paragraph (d)(1) ofthis section. Failure by the partnership tocorrect an error when required by the IRSmay be treated by the IRS as a failure toproperly furnish statements to partnersand file the statements with the IRS asdescribed in paragraphs (b) and (c) of thissection.

(4) Adjustments in the corrected state-ments taken into account by the reviewedyear partners. The adjustments includedon a corrected statement are taken intoaccount by a reviewed year partner inaccordance with § 301.6226–3 for the re-porting year (as defined in § 301.6226–3(a)).

(e) Content of the statements. Eachstatement described in paragraph (a) ofthis section must include the followinginformation:

(1) the name and correct TIN of thereviewed year partner to whom the state-ment is being furnished;

(2) the current or last address of thereviewed year partner that is known to thepartnership;

(3) the reviewed year partner’s share ofitems as originally reported for the re-viewed year to the partner on statementsfurnished to the partner under section6031(b) and, if applicable, section 6227;

(4) the reviewed year partner’s share ofpartnership adjustments determined underparagraph (f)(1) of this section;

(5) modifications with respect to thereviewed year partner determined underparagraph (f)(2) of this section;

(6) the reviewed year partner’s share ofany amounts attributable to adjustments tothe partnership’s tax attributes (as definedin § 301.6241–1(a)(10)) for any interven-ing year (as defined in § 301.6226–3(b)(3)) resulting from the partnership ad-justments in the reviewed year;

(7) the reviewed year partner’s share ofany penalties, additions to tax, or addi-tional amounts determined under para-graph (f)(3) of this section;

(8) the reviewed year partner’s safeharbor amount and, if applicable, interestsafe harbor amount, as described underparagraph (g) of this section;

(9) the date the statement is furnishedto the reviewed year partner;

(10) the partnership taxable year towhich the adjustments relate; and

(11) any other information required byforms, instructions, and other guidanceprescribed by the IRS.

(f) Determination of each partner’sshare of adjustments, penalties, additionsto tax, and additional amounts—(1) Ad-justments and other amounts—(i) In gen-eral. Except as described in paragraph(f)(1)(ii), (f)(1)(iii), or (f)(2) of this sec-tion, the adjustments set forth in the state-ment described in paragraph (a) of thissection and any amounts attributable toadjustments to the partnership’s tax attri-butes are reported to the reviewed yearpartner in the same manner as each ad-justed item was originally allocated to thereviewed year partner on the partnershipreturn for the reviewed year or interveningyear, as applicable.

(ii) Adjusted item not reported on thepartnership’s return for the reviewed

year. Except as described in paragraph(f)(1)(iii) of this section, if the adjusteditem was not reported on the partnershipreturn for the reviewed year or interveningyear, as applicable, each reviewed yearpartner’s share of the adjustments must bedetermined in accordance with how suchitems would have been allocated underrules that apply with respect to partnershipallocations, including under the partner-ship agreement.

(iii) Adjustments that specifically allo-cate items. If an adjustment involves anallocation of an item to a specific partneror in a specific manner, including a real-location of an item, the reviewed yearpartner’s share of the adjustment set forthin the statement is determined in accor-dance with the adjustment as finally de-termined (as described in paragraph (b)(1)of this section).

(2) Treatment of modifications disre-garded. If the reviewed year partner filed anamended return pursuant to § 301.6225–3(c)(2) or entered into a closing agreementpursuant to § 301.6225–3(c)(6) and the im-puted underpayment under section 6225was determined without regard to the ad-justed items taken into account on theamended return or in the closing agreement,such adjustments are disregarded for pur-poses of determining each reviewed yearpartner’s share of the adjustments underparagraph (f)(1) of this section. However,these modifications are listed separately onthe statements described in paragraph (a) ofthis section.

(3) Penalties, additions to tax, or ad-ditional amounts. Penalties, additions totax, and additional amounts must be re-ported to each reviewed year partner inthe same proportion as the reviewed yearpartner’s share of the adjustment to whichthe penalty, addition to tax, or additionalamount relates as determined in paragraph(f)(1) of this section. If a penalty, additionto tax, or additional amount does not re-late to a specific adjustment, each re-viewed year partner’s share of the penalty,addition to tax, or additional amount isdetermined in accordance with how suchitems would have been allocated underrules that apply with respect to partnershipallocations, including under the partner-ship agreement, unless it is allocated to aspecific partner in a specific manner in afinal determination of the adjustments, in

July 10, 2017 Bulletin No. 2017–2874

which case it is allocated in accordancewith that final determination. See para-graph (b)(1) of this section regardingwhen adjustments are finally determined.

(g) Safe harbor amount—(1) In gen-eral. The partnership must calculate a safeharbor amount, which cannot be less thanzero, for each reviewed year partner inaccordance with paragraph (g)(2) of thissection and an interest safe harbor amountfor each reviewed year partner that is anindividual in accordance with paragraph(g)(2). Except as provided in paragraph(g)(2)(ii) of this section, the rules of para-graph (f) of this section apply for purposesof paragraph (g) of this section.

(2) Calculating the safe harbor amount—(i) In general. The safe harbor amount foreach reviewed year partner is calculated inthe same manner as the imputed under-payment under § 301.6225–1 except thateach reviewed year partner’s share of thepartnership adjustments on the statementdescribed in paragraph (a) of this section(including any amounts attributable to ad-justments to partnership tax attributes) aresubstituted as the partnership adjustmentstaken into account for purposes of deter-mining the imputed underpayment under§ 301.6225–1.

(ii) Effect of modification on safe har-bor amount—(A) In general. Except asdescribed in paragraph (g)(2)(ii)(B) of thissection, any modification of the imputedunderpayment approved by the IRS, in-cluding modification under § 301.6225–2(d)(4) (regarding rate modification), hasno effect on the determination of the safeharbor amount for any partner.

(B) Amended return and closing agree-ment. Notwithstanding paragraph (g)(2)(ii)(A) of this section, if the reviewed yearpartner filed an amended return pursuant to§ 301.6225–3(d)(2), or entered into a clos-ing agreement pursuant to § 301–6225–3(d)(6), and the imputed underpayment un-der section 6225 to which an election under§ 301.6226–1 applies is determined withoutregard to the adjustments taken into accounton the amended return or in the closingagreement, such adjustments are disre-garded in determining that partner’s safeharbor amount.

(iii) Calculating the interest safe har-bor amount. For partners who are individ-uals and who have calendar year taxableyears, the partnership must also calculate

an interest safe harbor amount. The inter-est safe harbor amount is calculated at therate set forth in § 301.6226–3(d)(4) fromthe due date (without extension) of theindividual reviewed year partner’s returnfor the first affected year (as defined inparagraph § 301.6226–3(b)(2)) until thedue date (without extension) of the indi-vidual reviewed year partner’s return forthe reporting year.

(h) Coordination with other provisionsunder subtitle A of the Internal RevenueCode–(1) Statements furnished to quali-fied investment entities described in sec-tion 860. If a reviewed year partner is aqualified investment entity within the mean-ing of section 860(b) and the partner re-ceives a statement described in paragraph(a) of this section, the partner may be able toavail itself of the deficiency dividend proce-dure described in § 301.6226–3(b)(4).

(2) Liability for tax under section7704(g)(3). An election under this sectionhas no effect on a partnership’s liabilityfor any tax under section 7704(g)(3) (re-garding the exception for electing 1987partnerships from the general rule thatcertain publicly traded partnerships aretreated as corporations).

(3) Adjustments subject to chapters 3and 4 of subtitle A of the Internal RevenueCode.—[Reserved]

(i) Applicability date—(1) In general.Except as provided in paragraph (i)(2) ofthis section, this section applies to part-nership taxable years beginning after De-cember 31, 2017.

(2) Election under § 301.9100–22T ineffect. This section applies to any partner-ship taxable year beginning after Novem-ber 2, 2015 and before January 1, 2018 forwhich a valid election under § 301.9100–22T is in effect.

Par. 13. Section 301.6226–3 is addedto read as follows:

§ 301.6226–3 Adjustments Taken IntoAccount by Partners.

(a) Tax imposed by chapter 1 increasedby additional reporting year tax. The taximposed by chapter 1 of subtitle A of theInternal Revenue Code (chapter 1 tax) foreach reviewed year partner (as defined in§ 301.6241–1(a)(9)) for the taxable year thatincludes the date a statement was furnishedin accordance with § 301.6226–2 (the re-

porting year) is increased by the additionalreporting year tax. The additional reportingyear tax is either the aggregate of the ad-justment amounts (determined in accor-dance with paragraph (b) of this section) or,if an election is made under paragraph (c) ofthis section, the safe harbor amount (deter-mined in accordance with § 301.6226–2(g)). In addition to being liable for theadditional reporting year tax, a reviewedyear partner must also pay for the reportingyear the partner’s share of any penalties,additions to tax, and additional amounts asreflected in the statement described in§ 301.6226–2 and any interest (as deter-mined under paragraph (d) of this section).

(b) Determining the aggregate of theadjustment amounts–(1) In general. Forpurposes of paragraph (a) of this section,the aggregate of the adjustment amountsis the aggregate of the correction amountsdescribed in paragraphs (b)(2) and (b)(3)of this section. A correction amount can-not be less than zero, and any amountbelow zero after applying the rules in thisparagraph (b) does not reduce any othercorrection amount or tax due.

(2) Correction amount for the first af-fected year. The correction amount for thetaxable year of the partner that includesthe end of the reviewed year (the firstaffected year) is the amount by which thereviewed year partner’s chapter 1 taxwould increase for the first affected year ifthe partner’s taxable income for such yearwas recomputed by taking into accountthe reviewed year partner’s share of thepartnership adjustments (as defined in§ 301.6241–1(a)(6)) reflected on the state-ment described in § 301.6226–2 with re-spect to the partner. The correctionamount is the amount by which the chap-ter 1 tax that would have been imposed forthe first affected year if the items as ad-justed in the statement described in§ 301.6226–2 had been reported as suchon the return for the first affected yearexceeds the excess of –

(i) The sum of –(A) The amount of chapter 1 tax shown

by the partner on the return for the firstaffected year (which includes amountsshown on an amended return for suchyear, including an amended return filedunder section 6225(c)(2) by the reviewedyear partner or an indirect partner (as de-fined in § 301.6241–1(a)(4)) that holds its

Bulletin No. 2017–28 July 10, 201775

interest in the partnership through its in-terest in the reviewed year partner withrespect to the first affected year of theindirect partner), plus

(B) Amounts not so shown previouslyassessed (or collected without assessment)(as defined in § 1.6664–2(d) of this chap-ter), less

(ii) The amount of rebates made (asdefined in § 1.6664–2(e) of this chapter).The definition of correction amount alsomay be expressed as –

Correction amount � A – (B � C –D),where A � the amount of chapter 1 taxthat would have been imposed had theitems as adjusted been properly reportedon the return for the first affected year;B � the amount shown as chapter 1 tax onthe return for the first affected year (takinginto account amended returns); C �amounts not so shown previously assessed(or collected without assessment); andD � the amount of rebates made.

(3) Correction amount for the interven-ing years. The correction amount for alltaxable years after the first affected year andbefore the reporting year (the interveningyears) is the aggregate of the correctionamounts determined for each interveningyear. Determining the correction amount foreach intervening year is a year-by-year de-termination. The correction amount for eachintervening year is the amount by which thereviewed year partner’s chapter 1 tax forsuch year would increase if the partner’staxable income for such year was recom-puted by taking into account any adjust-ments to tax attributes (as defined in§ 301.6241–1(a)(10)) under this paragraph(b)(3). Accordingly, the correction amountfor each intervening year is the amount bywhich the chapter 1 tax that would havebeen imposed for the intervening year if anytax attribute for the intervening year hadbeen adjusted after taking into account thereviewed year partner’s share of the adjust-ments for the first affected year as describedin paragraph (b)(2) of this section and if anytax attribute for the intervening year hadbeen adjusted after taking into account anyadjustments to tax attributes in any priorintervening year(s) exceeds the excess of –

(i) The sum of –(A) The amount of chapter 1 tax shown

by the partner on the return for the inter-vening year (which includes amountsshown on an amended return for such

year, including an amended return filedunder section 6225(c)(2) by a reviewedyear partner or an indirect partner thatholds its interest in the partnershipthrough its interest in the reviewed yearpartner), plus

(B) Amounts not so shown previouslyassessed (or collected without assessment)(as defined in § 1.6664–2(d) of this chap-ter), over

(ii) The amount of rebates made (asdefined in § 1.6664–2(e) of this chapter).The definition of correction amount alsomay be expressed as –

Correction amount � A – (B � C –D),where A � the amount of chapter 1 taxthat would have been imposed for theintervening year; B � the amount shownas chapter 1 tax on the return for theintervening year (taking into accountamended returns); C � amounts not soshown previously assessed (or collectedwithout assessment); and D � the amountof rebates made.

(4) Coordination of sections 860 and6226. If a qualified investment entity(QIE) within the meaning of section860(b) receives a statement described in§ 301.6226–2(a) and correctly makes adetermination within the meaning of sec-tion 860(e)(4) that one or more of theadjustments reflected in the statement isan adjustment within the meaning of sec-tion 860(d) with respect to that QIE for ataxable year, the QIE may distribute defi-ciency dividends within the meaning ofsection 860(f) for that taxable year andavail itself of the deficiency dividend pro-cedures set forth in section 860. If the QIEutilizes the deficiency dividend proce-dures with respect to adjustments in astatement described in § 301.6226–2(a),the QIE may claim a deduction for defi-ciency dividends against the adjustmentsfurnished to the QIE in the statement incalculating any correction amounts underparagraphs (b)(2) and (b)(3) of this sec-tion, and interest on that correctionamount under paragraph (d) of this sec-tion, to the extent that the QIE makesdeficiency dividend distributions undersection 860(f) and complies with all re-quirements of section 860 and the regula-tions thereunder. A deficiency dividendsdeduction under this paragraph (b)(4) andsection 860(a) has no effect on a QIE’s

liability for any penalties reflected in astatement described in § 301.6226–2(a).

(c) Election to pay safe harbor amount.A reviewed year partner receiving a state-ment described in § 301.6226–2 mayelect under this paragraph (c) to pay thesafe harbor amount shown on the state-ment in lieu of the additional reportingyear tax determined under paragraph (b)of this section. The election under thisparagraph (c) is made on the reviewedyear partner’s return for the reporting year(as defined in paragraph (a) of this sec-tion) in accordance with forms and in-structions. If a reviewed year partner mak-ing an election under this paragraph (c)fails to report the safe harbor amount onthe partner’s timely-filed return (deter-mined without regard to extension) for thereporting year, the additional reportingyear tax for the reviewed year partner isdetermined under paragraph (b) of thissection.

(d) Interest—(1) Interest on the cor-rection amounts. Interest on the correctionamounts determined under paragraph (b)of this section is the aggregate of all in-terest calculated for each applicable tax-able year at the rate set forth in paragraph(d)(4) of this section. For each applicabletaxable year, interest on the correctionamount is calculated from the due date(without extension) of the reviewed yearpartner’s return for such applicable tax-able year until the amount is paid. Forpurposes of this paragraph (d)(1), the termapplicable taxable year means the re-viewed year partner’s taxable year af-fected by taking into account adjustmentsas described in paragraph (b) of this sec-tion (for instance, the first affected yearand any intervening year in which there isa correction amount).

(2) Interest on the safe harboramount—(i) In general. Except as de-scribed in paragraph (d)(2)(ii) of this sec-tion, in the case of an election under para-graph (c) of this section, interest on thesafe harbor amount is calculated at therate set forth in paragraph (d)(4) of thissection from the due date (without exten-sion) of the reviewed year partner’s returnfor the first affected year (as defined inparagraph (b)(2) of this section) until theamount is paid.

(ii) Election to pay interest safe harboramount. In the case of an election under

July 10, 2017 Bulletin No. 2017–2876

paragraph (c) of this section, a reviewedyear partner who is an individual and whohas a calendar year taxable year may electto pay the interest safe harbor amount inlieu of calculating the interest on the safeharbor amount as described in paragraph(d)(2)(i) of this section. The election un-der this paragraph (d)(2)(ii) is made on thereviewed year partner’s return for the re-porting year (as defined in paragraph (a)of this section) in accordance with formsand instructions. If a reviewed year part-ner making an election under this para-graph (d)(2)(ii) fails to pay the interestsafe harbor amount in full on or before thedue date (without extension) for the returnon which the election is made, interest onthe safe harbor amount is determined un-der paragraph (d)(2)(i) of this section.

(3) Interest on penalties. Interest onany penalties, additions to tax, or addi-tional amounts allocated to a reviewedyear partner in a statement described in§ 301.6226 –2 is calculated at the rateset forth in paragraph (d)(4) of this sec-tion from the due date (without exten-sion) of the reviewed year partner’s re-turn for the first affected year (asdefined in paragraph (b)(2) of this sec-tion) until the amount is paid.

(4) Rate of interest. For purposes ofparagraph (d) of this section, interest iscalculated using the underpayment rateunder section 6621(a)(2) by substituting“5 percentage points” for “3 percentagepoints” in section 6621(a)(2)(B).

(e) Pass-through partners.—[Reserved](f) Partners that are foreign entities.—

[Reserved](g) Examples. The following examples

illustrate the rules of this section. For pur-poses of these examples, each partnershipand partner has a calendar year taxableyear (unless otherwise stated), no modifi-cations are requested by any partnershipunder § 301.6225–2 (unless otherwisestated), and the highest rate of income taxin effect for all taxpayers is 40 percent forall relevant periods.

Example 1. On its partnership return for the 2020tax year, Partnership reported ordinary income of$1,000 and charitable contributions of $400. On June1, 2023, the IRS mails a notice of final partnershipadjustment (FPA) to Partnership for Partnership’s2020 year disallowing the charitable contribution inits entirety and asserting an imputed underpaymentplus a penalty of $32 (a 20 percent accuracy-relatedpenalty under section 6662(b)). Partnership makesa timely election under section 6226 in accordance

with § 301.6226 –1 with respect to the imputedunderpayment in the FPA for Partnership’s 2020year and files a timely petition in the Tax Courtchallenging the partnership adjustments. The TaxCourt determines that Partnership is not entitled to anyof the claimed $400 in charitable contributions andupholds the penalty of $32. The decision regardingPartnership’s 2020 tax year becomes final on Decem-ber 15, 2025. Pursuant to § 301.6225–2(b)(1), the part-nership adjustments are finally determined on Decem-ber 15, 2025. On February 1, 2026, Partnership filesthe statements described under § 301.6226 –2 withthe IRS and furnishes to partner A, an individualwho was a partner in Partnership during 2020, astatement described in § 301.6226 –2. A had a 25percent interest in Partnership during all of 2020and was allocated 25 percent of all items fromPartnership for that year. The statement shows A’sshare of ordinary income reported on Partner-ship’s return for the reviewed year of $250 andA’s share of the charitable contribution reportedon Partnership’s return for the reviewed year of$100. The statement also shows no adjustment toA’s share of ordinary income, but does show anadjustment to A’s share of the charitable contri-bution, a reduction of $100 resulting in $0 chari-table contribution allocated to A from Partnershipfor 2020. In addition, the statement reports $8 asA’s share of the penalty (25 percent of $32) re-lated to the imputed underpayment resulting fromthe denial of the charitable contribution. The state-ment also shows A’s safe harbor amount and in-terest safe harbor amount, as determined under§ 301.6226 –2(g). A does not elect to pay the safeharbor amount and therefore must pay the addi-tional reporting year tax as determined in accor-dance with paragraph (b) of this section, in addi-tion to A’s share of the penalty and interest. Acomputes his additional reporting year tax as fol-lows. First, A determines the correction amountfor the first affected year (the 2020 taxable year)by taking into account A’s share of the partnershipadjustment (�100� reduction in charitable con-tribution) for the 2020 taxable year. A determinesthe amount by which his chapter 1 tax for 2020would have increased if the $100 adjustment to thecharitable contribution from Partnership weretaken into account for that year. There is no ad-justment to tax attributes in A’s intervening yearsas a result of the adjustment to the charitablecontribution for 2020. Therefore, A’s aggregate ofthe adjustment amounts is the correction amountfor 2020, A’s first affected year. In addition to theaggregate of the adjustment amount being addedto the chapter 1 tax that A owes for 2026, thereporting year, A’s tax liability for 2026 includesthe $8 penalty and any interest on the correctionamount for the first affected year and the penaltydetermined in accordance with paragraph (d) ofthis section. Interest on the correction amount forthe first affected tax year runs from April 15,2021, the due date of A’s 2020 return (the firstaffected tax year) until A pays this amount. Inaddition, interest runs on the $8 penalty fromApril 15, 2021, the due date of A’s 2020 return forthe first affected year until A pays this amount. Onhis 2026 income tax return, A must report theadditional reporting year tax determined in accor-

dance with section (b) of this section, which is thecorrection amount for 2020, plus A’s share of theaccuracy-related penalty determined at the part-nership level ($8), and interest determined in ac-cordance with paragraph (d) of this section on thecorrection amount for 2020 and the penalty.

Example 2. The facts are the same as in Example1 of this paragraph (g), except that A makes theelections under paragraphs (c) and (d)(ii) of thissection to pay the safe harbor amount and interestsafe harbor amount. In addition to the safe harboramount and the interest safe harbor amount, A mustalso pay the $8 penalty allocated to A on the state-ment. Therefore, on his 2026 income tax return, Amust report the additional reporting year tax (in thiscase, the safe harbor amount), the penalty of $8, andthe interest safe harbor amount.

Example 3. On its partnership return for the 2020tax year, Partnership reported an ordinary loss of$500 million. On June 1, 2023, the IRS mails an FPAto Partnership for the 2020 taxable year determiningthat $300 million of the $500 million in ordinary lossshould be recharacterized as a long-term capital loss.Partnership has no long-term capital gain for its 2020tax year. The FPA for Partnership’s 2020 tax yearreflects an adjustment of an increase in ordinaryincome of $300 million (as a result of the disallow-ance of the recharacterization of $300 million fromordinary loss to long-term capital loss) and an im-puted underpayment related to that adjustment, aswell as an adjustment of an additional $300 millionin long-term capital loss for 2020 which does notresult in an imputed underpayment pursuant to under§ 301.6225–1(c)(2)(ii). Partnership makes a timelyelection under section 6226 in accordance with§ 301.6226–1 with respect to the imputed underpay-ment in the FPA and does not file a petition forreadjustment under section 6234. Accordingly, un-der § 301.6226–1(b)(2) and § 301.6225–3(b)(6), theadjustment year partners (as defined in § 301.6241–1(a)(2)) do not take into account the $300 millionlong-term capital loss that does not result in animputed underpayment. Rather, the reviewed yearpartners will take into account the $300 millionlong-term capital loss. The time to file a petitionexpires on August 30, 2023. Pursuant to § 301.6225–2(b), the partnership adjustments become finally de-termined on August 30, 2023. On September 30,2023, Partnership files with the IRS statements de-scribed in § 301.6226–2 and furnishes statements toall of its reviewed year partners in accordance with§ 301.6226–2. One partner of Partnership in 2020, B(an individual), had a 25 percent interest in Partner-ship during all of 2020 and was allocated 25 percentof all items from Partnership for that year. Thestatement filed with the IRS and furnished to Bshows B’s allocable share of the ordinary loss re-ported on Partnership’s return for the 2020 taxableyear as $125 million. The statement also shows anadjustment to B’s allocable share of the ordinary lossin the amount of �$75 million�, resulting in acorrected ordinary loss allocated to B of $50 millionfor taxable year 2020 ($125 million originally allo-cated to B less $75 million which is B’s share of theadjustment to the ordinary loss). In addition, thestatement shows an increase to B’s share of long-term capital loss in the amount of $75 million (B’sshare of the adjustment that did not result in the

Bulletin No. 2017–28 July 10, 201777

imputed underpayment with respect to Partnership).The statement also shows B’s safe harbor amountand interest safe harbor amount, as determined under§ 301.6226–2(g). B does not elect to pay the safeharbor amount and therefore must pay the additionalreporting year tax as determined in accordance withparagraph (b) of this section. B computes his addi-tional reporting year tax as follows. First, B deter-mines the correction amount for the first affectedyear (the 2020 taxable year) by taking into accountB’s share of the partnership adjustments (a $75 mil-lion reduction in ordinary loss and an increase of $75million in capital loss) for the 2020 taxable year. Bdetermines the amount by which his chapter 1 tax for2020 would have increased if the $75 adjustment toordinary loss and the $75 million adjustment to cap-ital loss from Partnership were taken into account forthat year. Second, B determines if there is any in-crease in chapter 1 tax for any intervening year as aresult of the adjustment to the ordinary and capitallosses for 2020. B’s aggregate of the adjustmentamounts is the correction amount for 2020, B’s firstaffected year plus any correction amounts for anyintervening years. B is also liable for any interest onthe correction amount for the first affected year andfor any intervening year as determined in accordancewith paragraph (d) of this section.

Example 4. On its partnership return for the 2020tax year, Partnership reported ordinary income of$100 million and a capital gain of $40 million.Partnership had four equal partners during the 2020tax year: E, F, G, and H, all of whom were individ-uals. On its partnership return for the 2020 tax year,the entire capital gain was allocated to partner E andthe ordinary income was allocated to all partnersbased on their equal (25 percent) interest in Partner-ship. The IRS initiates an administrative proceedingwith respect to Partnership’s 2020 taxable year anddetermines that the capital gain should have beenallocated equally to all four partners and that Part-nership should have recognized an additional $10million in ordinary income. No modifications wereapproved by the IRS and no penalties are imposed.On June 1, 2023, the IRS mails an FPA to Partner-ship reflecting the reallocation of the $40 millioncapital gain so that F, G, and H each have $10million increase in capital gain and E has a $30million reduction in capital gain for 2020. In addi-tion, the FPA reflects the partnership adjustmentincreasing ordinary income by $10 million. The FPAreflects a general imputed underpayment with re-spect to the increase in ordinary income and a spe-cific imputed underpayment with respect to the in-crease in capital gain allocated to F, G, and H. Inaddition, the FPA reflects a $30 million partnershipadjustment that does not result in an imputed under-payment, that is, the reduction of $30 million incapital gain with respect to E. Partnership makes atimely election under section 6226 in accordancewith § 301.6226–1 with respect to the specific im-puted underpayment relating to the reallocation ofcapital gain. Partnership does not file a petition forreadjustment under section 6234. The time to file apetition expires on August 30, 2023. Pursuant to§ 301.6225–2(b), the partnership adjustments be-come finally determined on August 30, 2023. Part-nership timely pays and reports the general imputedunderpayment relating to the partnership adjustment

to ordinary income. On September 30, 2023, Part-nership files with the IRS statements described in§ 301.6226–2 and furnishes statements to its part-ners reflecting their share of the partnership adjust-ments as finally determined in the FPA that relate tothe specific imputed underpayment, that is, the real-location of capital gain. The statements for F, G, andH each reflect a partnership adjustment of an addi-tional $10 million of capital gain for 2020. Thestatements also show that each partner’s safe harboramount and interest safe harbor amount, determinedunder § 301.6226–2(g). F, G, and H elect to pay thesafe harbor amount and interest safe harbor amount.The statement for E reflects a partnership adjustmentof a reduction of $10 million of capital gain for 2020.The statement also reflects that E’s safe harboramount, as determined under § 301.6226–2(g), is $0(�$10 million� multiplied by 40 percent but notless than zero). F elects to pay the safe harboramount, which is zero.

Example 5. On its partnership return for the 2020taxable year, Partnership reported a capital loss of $5million. During an administrative proceeding withrespect to Partnership’s 2020 taxable year, the IRSmails a notice of proposed partnership adjustment(NOPPA) in which it proposes to disallow $2 millionof the reported $5 million capital loss. No penaltiesare imposed with respect to the $2 million adjust-ment. F, a C corporation partner with a 50 percentinterest in Partnership, received 50 percent of allcapital losses for 2020. As part of the modificationprocess described in § 301.6225–2(d)(2) F files anamended return for 2020 taking into account F’sshare of the partnership adjustment ($1 million re-duction in capital loss) and pays the tax owed for2020, including interest. Also as part of the modifi-cation process, F also files amended returns for 2021and 2022 and paid additional tax (and interest) forthese years because the reduction in capital loss for2020 affected the tax due from F for 2021 and 2022.See § 301.6225–2(d)(2)(iv). The reduction of thecapital loss in 2020 did not affect any other taxableyear of F. The IRS approves the modification withrespect to F and on June 1, 2023, mails an FPA toPartnership for Partnership’s 2020 year reflecting thepartnership adjustment reducing the capital loss inthe amount of $2 million. The FPA also reflects themodification to the imputed underpayment based onthe amended returns filed by F taking into accountF’s share of the reduction in the capital loss. Part-nership makes a timely election under section 6226in accordance with § 301.6226–1 with respect to theimputed underpayment in the FPA for Partnership’s2020 year and files a timely petition in the Tax Courtchallenging the partnership adjustments. The TaxCourt upholds the determinations in the FPA and thedecision regarding Partnership’s 2020 tax year be-comes final on December 15, 2025. Pursuant to§ 301.6225–2(b)(1), the partnership adjustments arefinally determined on December 15, 2025. On Feb-ruary 1, 2026, Partnership files the statements de-scribed under § 301.6226–2 with the IRS and fur-nishes to its partners statements reflecting theirshares of the partnership adjustment. The statementissued to F reflects F’s share of the partnershipadjustment for Partnership’s 2020 taxable year asfinally determined by the Tax Court. The statementshows F’s share of the capital loss reported on Part-

nership’s return for the reviewed year of $1 millionand the $1 million reduction in capital losses takeninto account by F as part of the amended returnmodification. The statement shows that F’s safe har-bor amount, as determined under § 301.6226–2(g),is $0 ([$1 million adjustment less the $1 milliontaken into account in the amended return] multipliedby 40 percent). F elects to pay the safe harboramount, which is zero.

(h) Applicability date—(1) In general.Except as provided in paragraph (h)(2) ofthis section, this section applies to part-nership taxable years beginning after De-cember 31, 2017.

(2) Election under § 301.9100–22T ineffect. This section applies to any partner-ship taxable year beginning after Novem-ber 2, 2015 and before January 1, 2018 forwhich a valid election under § 301.9100–22T is in effect.

Par. 14. Section 301.6226–4 is addedto read as follows:

§ 301.6226–4 Adjustments to partners’outside bases and capital accounts anda partnership’s basis and book value inproperty.—[Reserved]

Par. 15. Section 301.6227–1 is addedto read as follows:

§ 301.6227–1 Administrative adjustmentrequest by partnership.

(a) In general. A partnership may file arequest for an administrative adjustmentwith respect to one or more items of income,gain, loss, deduction, or credit of the part-nership (as defined in § 301.6221(a)–1(b)(1)) and any partner’s distributive sharethereof (as described in § 301.6221(a)–1(b)(2)) for any partnership taxable year.When filing an administrative adjustmentrequest (AAR), the partnership must deter-mine whether the adjustments requested inthe AAR result in an imputed underpayment(as defined in § 301.6241–1(a)(3)) in accor-dance with § 301.6227–2(a) for the re-viewed year (as defined in § 301.6241–1(a)(8)). If the adjustments requested in theAAR result in an imputed underpayment,the partnership must take the adjustmentsinto account under the rules described in§ 301.6227–2(b) unless the partnershipmakes an election under § 301.6227–2(c), inwhich case each reviewed year partner (asdefined in § 301.6241–1(a)(9)) must takethe adjustments into account in accordancewith § 301.6227–3. If the adjustments re-

July 10, 2017 Bulletin No. 2017–2878

quested in the AAR do not result in animputed underpayment (as determined un-der § 301.6227–2(a)), such adjustmentsmust be taken into account by the reviewedyear partners (as defined in § 301.6241–1(a)(9)) in accordance with § 301.6227–3.A partner may not file an AAR except if thepartner is doing so on behalf of the partner-ship in the partner’s capacity as the partner-ship representative designated under section6223 or if the partner is a partnership-partner (as defined in § 301.6241–1(a)(7))filing an AAR under § 301.6227–3(c). Inaddition, a partnership may not file an AARsolely for the purpose of allowing the part-nership to change the designation of a part-nership representative. See § 301.6223–1(regarding designation of the partnershiprepresentative).

(b) Time for filing an AAR. An AARmay only be filed by a partnership withrespect to a partnership taxable year aftera partnership return for that taxable yearhas been filed with the Internal RevenueService (IRS). A partnership may not filean AAR with respect to a partnership tax-able year more than three years after thelater of the date the partnership return forsuch partnership taxable year was filed orthe last day for filing such partnershipreturn (determined without regard to ex-tensions). In no event may an AAR befiled for a partnership taxable year after anotice of administrative proceeding withrespect to such taxable year has beenmailed by the IRS under section 6231.

(c) Form and manner for filing anAAR—(1) In general. An AAR, includ-ing any required statements, forms, andschedules as described in this section,must be filed with the IRS in accordancewith the forms, instructions, and otherguidance prescribed by the IRS, andmust be signed under penalties of per-jury by the partnership representative(as defined in section 6223(a) and theregulations thereunder).

(2) Contents of AAR filed with the IRS.A valid AAR filed with the IRS mustinclude —

(i) The adjustments requested,(ii) If a reviewed year partner is re-

quired to take into account the adjust-ments requested under § 301.6227–3,statements described in paragraph (e) ofthis section, including any transmittalwith respect to such statements required

by forms, instructions, and other guid-ance, and

(iii) Other information prescribed bythe IRS in forms, instructions, or otherguidance.

(d) Copy of statement furnished to re-viewed year partners in certain cases. If areviewed year partner is required to takeinto account adjustments requested in anAAR under § 301.6227–3, the partnershipmust furnish a copy of the statement de-scribed in paragraph (e) of this section tothe reviewed year partner to whom thestatement relates in accordance with theforms, instructions and other guidanceprescribed by the IRS. If the partnershipmails the statement, it must mail the state-ment to the current or last address of thereviewed year partner that is known to thepartnership. The statement must be fur-nished to the reviewed year partner on thedate the AAR is filed with the IRS.

(e) Statements—(1) Contents. Eachstatement described in this paragraph (e)must include the following information:

(i) the name and correct TIN of thereviewed year partner to whom the state-ment is being furnished;

(ii) the current or last address of thepartner that is known to the partnership;

(iii) the reviewed year partner’s shareof items as originally reported on state-ments furnished to the partner under sec-tion 6031(b) and, if applicable, section6227;

(iv) the reviewed year partner’s shareof the adjustments as described underparagraph (c)(2) of this section;

(v) the date the statement is furnishedto the partner;

(vi) the partnership taxable year towhich the adjustments relate; and

(vii) any other information required byforms, instructions, and other guidanceprescribed by the IRS.

(2) Determination of each partner’sshare of adjustments—(i) In general. Ex-cept as provided in paragraphs (e)(2)(ii)and (iii) of this section, each reviewedyear partner’s share of the adjustmentsrequested in the AAR is determined in thesame manner as each adjusted item wasoriginally allocated to the reviewed yearpartner on the partnership return for thereviewed year.

(ii) Adjusted item not reported on thepartnership’s return for the reviewed

year. Except as provided in paragraph(e)(2)(iii) of this section, if the adjusteditem was not reported on the partnershipreturn for the reviewed year, each re-viewed year partner’s share of the adjust-ments must be determined in accordancewith how such items would have beenallocated under rules that apply with re-spect to partnership allocations, includingunder the partnership agreement.

(iii) Allocation adjustments. If an ad-justment involves allocation of an item toa specific partner or in a specific manner,including a reallocation of an item, thereviewed year partner’s share of the ad-justment requested in the AAR is deter-mined in accordance with the AAR.

(f) Binding nature of AAR. Filing anAAR as described in paragraph (c) of thissection and furnishing statements as de-scribed in paragraph (d) of this section areactions of the partnership under section6223 and the regulations thereunder. Ac-cordingly, unless determined otherwise bythe IRS, each partner’s share of the ad-justments set forth in a statement de-scribed in paragraph (e) of this section arebinding on the partner pursuant to section6223. A partner may not treat items onthe partner’s return inconsistently withhow those items are treated on the state-ment that is filed with the IRS underparagraph (c) of this section. See§ 301.6222–1(c)(2) (regarding items thetreatment of which a partner is bound tounder section 6223).

(g) Administrative proceeding for ataxable year for which an AAR is filed.Within the period described in section6235, the IRS may initiate an administra-tive proceeding with respect to the part-nership for any partnership taxable yearregardless of whether the partnership filedan AAR with respect to such taxable yearand may adjust any item subject to adjust-ment under subchapter C of chapter 63 ofthe Internal Revenue Code, including anyitem adjusted in an AAR filed by thepartnership. The amount of an imputedunderpayment determined by the partner-ship under § 301.6227–2(a)(1), includingany modifications determined by the part-nership under § 301.6227–2(a)(2), may bere-determined by the IRS.

(h) Notice of change to the amount ofcreditable foreign tax expenditures. [Re-served]

Bulletin No. 2017–28 July 10, 201779

(i) Applicability date—(1) In general.Except as provided in paragraph (h)(2) ofthis section, this section applies to part-nership taxable years beginning after De-cember 31, 2017.

(2) Election under § 301.9100–22T ineffect. This section applies to any partner-ship taxable year beginning after Novem-ber 2, 2015 and before January 1, 2018 forwhich a valid election under § 301.9100–22T is in effect.

Par. 16. Section 301.6227–2 is addedto read as follows:

§ 301.6227–2 Determining andaccounting for adjustments requested inan administrative adjustment request bythe partnership.

(a) Determining whether adjustmentsresult in an imputed underpayment—(1)Determination of the imputed underpay-ment. The determination of whether ad-justments requested in an administrativeadjustment request (AAR) result in animputed underpayment (as defined in§ 301.6241–1(a)(3)) in the reviewedyear (as defined in § 301.6241–1(a)(8))and the determination of the amount ofthe imputed underpayment, if any, ismade in accordance with the rules under§ 301.6225–1.

(2) Modification of imputed underpay-ment for purposes of this section. A part-nership may request modification of theamount of the imputed underpayment de-termined under paragraph (a)(1) of thissection using only the provisions under§ 301.6225–2(d)(3) (regarding tax-exemptpartners), § 301.6225–2(d)(4) (regarding mod-ification of applicable tax rate), § 301.6225–2(d)(5) (regarding specified passive activitylosses), § 301.6225–2(d)(7) (regarding certainqualified investment entities), or as provided informs, instructions, or other guidance pre-scribed by the IRS with respect to AARs. Thepartnership may not modify an imputed un-derpayment resulting from adjustments re-quested in an AAR except as described in thisparagraph (a)(2). When requesting modifica-tion of the amount of an imputed underpay-ment under this paragraph (a)(2):

(i) The partnership is not required toseek the approval from the Internal Rev-enue Service (IRS) prior to modifying theamount of any imputed underpayment un-

der paragraph (a)(1) of this section as re-ported on the AAR; and

(ii) As part of the AAR filed with theIRS in accordance with forms, instruc-tions, and other guidance, the partnershipmust –

(A) Notify the IRS of any modification,(B) Describe the effect of the modifica-

tion on the imputed underpayment,(C) Provide an explanation of the basis

for such modification, and(D) Provide documentation to support the

partnership’s eligibility for the modification.(b) Adjustments resulting in an im-

puted underpayment taken into account bythe partnership—(1) In general. Except inthe case of an election under paragraph (c)of this section, a partnership must pay anyimputed underpayment (as determinedand modified under paragraph (a) of thissection) resulting from the adjustments re-quested in an AAR on the date the part-nership files the AAR. For the rules appli-cable to the partnership’s expenditure forthe imputed underpayment, as well as anypenalties and interest paid by the partner-ship with respect to the imputed under-payment, see § 301.6241–4.

(2) Penalties and interest. The IRSmay impose a penalty, addition to tax, andadditional amount with respect to an im-puted underpayment determined underthis section in accordance with section6233(a)(3) (penalties determined from thereviewed year). In addition, the IRS mayimpose a penalty, addition to tax, and ad-ditional amount with respect to a failure topay an imputed underpayment on the datean AAR is filed in accordance with sec-tion 6233(b)(3) (penalties with respect tothe adjustment year return). Interest on theimputed underpayment is determined un-der chapter 67 for the period beginning onthe date after the due date of the partner-ship return for the reviewed year (as de-fined in § 301.6241–1(a)(8)) (determinedwithout regard to extension) and endingon the earlier of the date payment of theimputed underpayment is made, or the duedate of the partnership return for the ad-justment year (as defined in § 301.6241–1(a)(1)). See section 6233(a)(2). In thecase of any failure to pay an imputedunderpayment before the due date of thepartnership return for the adjustment year,interest is determined in accordance withsection 6233(b)(2).

(c) Election to have adjustments re-sulting in an imputed underpaymenttaken into account by reviewed yearpartners. In lieu of paying the imputedunderpayment under paragraph (b) ofthis section, the partnership may elect tohave each reviewed year partner (as de-fined in § 301.6241–1(a)(9)) take intoaccount the adjustments requested in theAAR in accordance with § 301.6227–3.A partnership makes an election underthis paragraph (c) at the time the AAR isfiled in accordance with the forms,instructions, and other guidance pre-scribed by the IRS. If the partnershipmakes a valid election in accordancewith this paragraph (c), the partnershipis not required to pay the imputed un-derpayment resulting from the adjust-ments requested in the AAR. Rather,each reviewed year partner must takeinto account their share of the adjust-ments requested in the AAR in accor-dance with § 301.6227–3. If an electionis made under this paragraph (c), mod-ifications requested under paragraph(a)(2) of this section are disregarded andall adjustments requested in the AARmust be taken into account by each re-viewed year partner in accordance with§ 301.6227–3.

(d) Adjustments not resulting in an im-puted underpayment. If the adjustmentsrequested in an AAR do not result in animputed underpayment (as determined un-der paragraph (a) of this section), the part-nership must furnish statements to eachreviewed year partner and file such state-ments with the IRS in accordance with§ 301.6227–1. Each reviewed year partnermust take into account its share of theadjustments requested in the AAR in ac-cordance with § 301.6227–3.

(e) Applicability date—(1) In general.Except as provided in paragraph (e)(2) ofthis section, this section applies to part-nership taxable years beginning after De-cember 31, 2017.

(2) Election under § 301.9100–22T ineffect. This section applies to any partner-ship taxable year beginning after Novem-ber 2, 2015 and before January 1, 2018 forwhich a valid election under § 301.9100–22T is in effect.

Par. 17. Section 301.6227–3 is addedto read as follows:

July 10, 2017 Bulletin No. 2017–2880

§ 301.6227–3 Adjustments requested inan administrative adjustment request takeninto account by reviewed year partners.

(a) In general. Each reviewed yearpartner (as defined in § 301.6241–1(a)(9))is required to take into account its share ofadjustments requested in an administrativeadjustment request (AAR) if the partnershipmakes an election under § 301.6227–2(c)with respect to such AAR. In addition, eachreviewed year partner must take into ac-count its share of adjustments requested inan AAR that do not result in an imputedunderpayment (as defined in § 301.6241–1(a)(3)) as determined under § 301.6227–2(a). Each reviewed year partner receiving astatement furnished in accordance with§ 301.6227–1(b) must take into account ad-justments reflected in the statement in thetaxable year that includes the date the state-ment is furnished (reporting year) in accor-dance with paragraph (b) of this section.

(b) Adjustments taken into account bythe reviewed year partner in the reportingyear—(1) In general. A reviewed yearpartner that is furnished a statement de-scribed in paragraph (a) of this sectionmust treat the statement as if it were is-sued under section 6226(a)(2) and, on orbefore the due date for the reporting yearmust pay the additional reporting year tax(as defined in § 301.6226–3(a)), if any,determined after taking into account thatpartner’s share of the adjustments re-quested in the AAR in accordance with§ 301.6226–3. For purposes of this para-graph (b), the rules under § 301.6226–3(c) (regarding the election to pay the safeharbor amount), § 301.6226–3(d)(2) (re-garding interest on the safe harbor amount),and § 301.6226–3(d)(4) (regarding the in-creased rate of interest) do not apply, andthe last sentence in § 301.6226–3(b)(1) (re-garding the prohibition on correctionamounts being less than zero) is disre-garded. Nothing in this section entitles anypartner to a refund of tax imposed by chap-ter 1 of subtitle A of the Internal RevenueCode (chapter 1 tax) to which such partneris not entitled. For instance, a partnership-partner (as defined in § 301.6241–1(a)(7))may not claim a refund with respect to itsshare of any adjustment.

(2) No additional reporting year taxdue. A reviewed year partner may reducechapter 1 tax for the reporting year by the

amount determined under paragraph(b)(1) of this section.

(3) Examples. The following examplesillustrate the rules of this paragraph (b).

Example 1. In 2022, partner A, an individual,received a statement described in paragraph (a) ofthis section from Partnership with respect to Partner-ship’s 2020 taxable year. Both A and Partnership arecalendar taxpayers and A is not claiming any refund-able tax credit in 2020. The only adjustment shownon the statement is an increase in ordinary losses.Taking into account the adjustment, A determinesthat his additional reporting year tax for 2022 (thereporting year) is �$100� (that is, a reduction of$100.) A’s chapter 1 tax for 2022 (without regard toany additional reporting year tax) is $150. Applyingthe rules in paragraph (b)(2) of this section, A’schapter 1 tax for 2022 is reduced to $50 ($150chapter 1 tax without regard to the additional report-ing year tax plus �$100� additional reporting yeartax).

Example 2. The facts are the same as in Example1 of this paragraph (b)(3), except A’s chapter 1 taxfor 2022 (without regard to any additional reportingyear tax) is $75. Applying the rules in paragraph(b)(2) of this section, A’s chapter 1 tax for 2022 isreduced by the �$100� of additional reporting yeartax. Accordingly, A’s chapter 1 tax for 2022 is $0($75 chapter 1 tax without regard to any additionalreporting year tax plus �$100� of additional report-ing year tax), A owes no chapter 1 tax for 2022, andA may make a claim for refund with respect to theoverpayment of $25.

(c) Reviewed year partners that arepass-through partners.—[RESERVED]

(d) Applicability date—(1) In general.Except as provided in paragraph (d)(2) ofthis section, this section applies to part-nership taxable years beginning after De-cember 31, 2017.

(2) Election under § 301.9100–22T ineffect. This section applies to any partner-ship taxable year beginning after Novem-ber 2, 2015 and before January 1, 2018 forwhich a valid election under § 301.9100–22T is in effect.

Par. 18. Section 301.6241–1 is addedto read as follows:

§ 301.6241–1 Definitions.

(a) Definitions. For purposes of sub-chapter C of chapter 63 of the InternalRevenue Code –

(1) Adjustment year. The term adjust-ment year means the partnership taxableyear in which –

(i) In the case of an adjustment pursu-ant to the decision of a court in a proceed-ing brought under section 6234, such de-cision becomes final;

(ii) In the case of an administrativeadjustment request (AAR) under section6227, such AAR is made; or

(iii) In any other case, a notice of finalpartnership adjustment is mailed undersection 6231or, if the partnership waivesthe restrictions under section 6232(b) (re-garding limitations on assessment), thedate the waiver is executed by the IRS.

(2) Adjustment year partner. The termadjustment year partner means any per-son who held an interest in a partnershipat any time during the adjustment year.

(3) Imputed underpayment. The term im-puted underpayment means the amount de-termined in accordance with § 301.6225–1.

(4) Indirect partner. The term indirectpartner means any person who has aninterest in a partnership through their in-terest in one or more pass-through part-ners (as defined in paragraph (a)(5) of thissection).

(5) Pass-through partner. The termpass-through partner means a pass-throughentity that holds an interest in a partnership.A pass-through entity is a partnership asdescribed in § 301.7701–2(c)(1) (includinga foreign entity that is classified as apartnership under § 301.7701–3(b)(2)(i)(A) or (c)), an S corporation, a trust(other than a trust described in the nextsentence), and a decedent’s estate. Forpurposes of this paragraph (a)(5), apass-through entity is not a disregardedentity described in § 301.7701–2(c)(2)(i) or a trust that is wholly owned byonly one person, whether the grantor oranother person, and the trust reports theowner’s information to payors under§ 1.671– 4(b)(2)(i)(A).

(6) Partnership adjustment. The termpartnership adjustment means any adjust-ment to any item of income, gain, loss,deduction, or credit of a partnership (asdefined in § 301.6221(a)–1(b)(1)), or anypartner’s distributive share thereof (as de-scribed in § 301.6221(a)–1(b)(2)).

(7) Partnership-partner. The termpartnership-partner means a partnershipthat holds an interest in another partner-ship.

(8) Reviewed year. The term reviewedyear means the partnership taxable year towhich a partnership adjustment relates.

(9) Reviewed year partner. The termreviewed year partner means any person

Bulletin No. 2017–28 July 10, 201781

who held an interest in a partnership atany time during the reviewed year.

(10) Tax attribute. A tax attribute isanything that can affect, with respect to apartnership or a partner, the amount ortiming of an item of income, gain, loss,deduction, or credit (as defined in§ 301.6221(a)–1(b)(1)) or that can affectthe amount of tax due in any taxable year.Examples of tax attributes include, but arenot limited to, basis and holding period, aswell as the character of items of income,gain, loss, deduction, or credit and carry-overs and carrybacks of such items.

(b) Applicability date—(1) In general.Except as provided in paragraph (b)(2) ofthis section, this section applies to part-nership taxable years beginning after De-cember 31, 2017.

(2) Election under § 301.9100–22T ineffect. This section applies to any partner-ship taxable year beginning after Novem-ber 2, 2015 and before January 1, 2018 forwhich a valid election under § 301.9100–22T is in effect.

Par. 19. Section 301.6241–2 is addedto read as follows:

§ 301.6241–2 Bankruptcy of thePartnership.

(a) Coordination between Title 11 andproceedings under subchapter C of chap-ter 63—(1) In general. If a partnership isa debtor in a case under Title 11 of theUnited States Code (Title 11 case), therunning of any period of limitations undersection 6235 with respect to the time formaking a partnership adjustment (as de-fined in § 301.6241–1(a)(6)) and undersections 6501 and 6502 with respect to theassessment or collection of any imputedunderpayment (as defined in § 301.6241–1(a)(3)) determined under subchapter C ofchapter 63 of the Internal Revenue Code(subchapter C of chapter 63) is suspendedduring the period the Internal RevenueService (IRS) is prohibited by reason ofthe Title 11 case from making the adjust-ment, assessment, or collection until –

(i) 60 days after the suspension ends,for adjustments or assessments, and

(ii) 6 months after the suspension ends,for collection.

(2) Interaction with section 6232(b).The filing of a proof of claim or requestfor payment (or the taking of any other

action) in a Title 11 case is not be treatedas an action prohibited by section 6232(b)(regarding limitations on assessment).

(3) Suspension of the time for judicialreview. In a Title 11 case, the running ofthe period specified in section 6234 (re-garding judicial review of partnership ad-justments) is suspended during the periodduring which the partnership is prohibitedby reason of the Title 11 case from filinga petition under section 6234, and for 60days thereafter.

(4) Actions not prohibited. The filing ofa petition under Title 11 does not prohibitthe following actions:

(i) an administrative proceeding withrespect to a partnership under subchapterC of chapter 63;

(ii) the mailing of any notice with re-spect to a proceeding with respect to apartnership under subchapter C of chapter63, including:

(A) a notice of administrative proceeding,(B) a notice of proposed partnership

adjustment, and(C) a notice of final partnership adjust-

ment;(iii) a demand for tax returns;(iv) the assessment of any tax, includ-

ing the assessment of any imputed under-payment with respect to a partnership; and

(v) the issuance of notice and demandfor payment of an assessment under sub-chapter C of chapter 63 (but see section362(b)(9)(D) of Title 11 of the UnitedStates Code regarding the timing of whena tax lien takes effect by reason of suchassessment).

(b) Applicability date—(1) In general.Except as provided in paragraph (b)(2) ofthis section, this section applies to part-nership taxable years beginning after De-cember 31, 2017.

(2) Election under § 301.9100–22T ineffect. This section applies to any partner-ship taxable year beginning after Novem-ber 2, 2015 and before January 1, 2018 forwhich a valid election under § 301.9100–22T is in effect.

Par. 20. Section 301.6241–3 is addedto read as follows:

§ 301.6241–3 Treatment where aPartnership Ceases to Exist.

(a) Former partners take adjustmentsinto account—(1) In general. Except as

described in paragraphs (a)(2) and (a)(3)of this section, if the Internal RevenueService (IRS) determines that any partner-ship (including a partnership-partner asdefined in § 301.6241–1(a)(7)) ceases toexist (as defined in paragraph (b)(2) ofthis section) before any partnership ad-justment (as defined in § 301.6241–1(a)(6)) under subchapter C of chapter 63of the Internal Revenue Code (subchapterC of chapter 63) takes effect (as describedin paragraph (c) of this section), the part-nership adjustment is taken into accountby the former partners (as described inparagraph (d) of this section) of the part-nership in accordance with paragraph (e)of this section.

(2) Partnership no longer liable forany amounts resulting from a partnershipadjustment. A partnership that ceases toexist is no longer liable for any amountsresulting from a partnership adjustmentrequired to be taken into account by aformer partner under this section.

(3) Partnerships making an electionunder section 6221(b). The former part-ners of a partnership that ceases to existare not required to take a partnership ad-justment into account under this section ifthe partnership has an election under sec-tion 6221(b) in effect for the partnershiptaxable year that includes the end of thereviewed year of the partnership subject toa proceeding to which such adjustmentrelates.

(b) Determination that partnershipceases to exist—(1) In general. For pur-poses of this section, the IRS may, in itssole discretion, make a determination thata partnership ceases to exist for purposesof this section, but the IRS is not requiredto do so even if the definition in paragraph(b)(2) of this section applies with respectto such partnership. If the IRS determinesthat a partnership ceases to exist, the IRSwill notify the partnership and the formerpartners (as defined in paragraph (d) ofthis section), in writing, within 30 days ofsuch determination using the last knownaddress of the partnership and the formerpartners.

(2) Cease to exist defined—(i) In gen-eral. The IRS may determine that a part-nership ceases to exist if the partnershipterminates within the meaning of section708(b)(1)(A), or does not have the abilityto pay, in full, any amount due under the

July 10, 2017 Bulletin No. 2017–2882

provisions of subchapter C of chapter 63for which the partnership is or becomesliable. For purposes of this section, a part-nership does not have the ability to pay ifthe IRS determines that the account withrespect to the partnership is not collectiblebased on the information the IRS has atthe time of such determination. For pur-poses of this section, a partnership doesnot cease to exist solely because –

(A) The partnership has a technical ter-mination under section 708(b)(1)(B);

(B) A valid election under section 6226and the regulations thereunder is in effectwith respect to any imputed underpay-ment (as defined in § 301.6241–1(a)(3));or

(C) The partnership has not paid anyamount required to be paid under sub-chapter C of chapter 63.

(ii) Year in which a partnership ceasesto exist. If a partnership terminates undersection 708(b)(1)(A), the partnershipceases to exist on the last day of the part-nership’s final taxable year. If a partner-ship does not have the ability to pay, thepartnership ceases to exist on the date thatthe IRS makes a determination underparagraph (b)(2)(i) of this section that thepartnership ceases to exist.

(iii) Limitation on IRS determinationthat partnership ceases to exist. In noevent may the IRS determine that a part-nership ceases to exist with respect to apartnership adjustment after the expirationof the period of limitations on collectionapplicable to the amount due resultingfrom such adjustment.

(c) Partnership adjustment takes ef-fect—(1) Full payment of amounts result-ing from a partnership adjustment. Forpurposes of this section, a partnership ad-justment under subchapter C of chapter 63takes effect when there is full payment ofamounts resulting from a partnership ad-justment. For purposes of this section, fullpayment of amounts resulting from a part-nership adjustment means all amounts dueunder subchapter C of chapter 63 resultingfrom the partnership adjustment are fullypaid by the partnership.

(2) Partial payment of amount due bythe partnership. If a partnership payspart, but not all, of any amount dueresulting from a partnership adjustmentbefore the partnership ceases to exist,the former partners of the partnership

that has ceased to exist are not requiredto take into account any partnership ad-justment to the extent amounts havebeen paid by the partnership with re-spect to such adjustment. The notifica-tion that the IRS has determined that thepartnership has ceased to exist will in-clude information regarding the portionof the partnership adjustments with re-spect to which appropriate amountshave not already been paid by the part-nership and therefore must be taken intoaccount by the former partners (de-scribed in paragraph (d) of this section)in accordance with paragraph (e) of thissection.

(d) Former partners—(1) Adjustmentyear partners—(i) In general. Except asdescribed in paragraphs (d)(1)(ii) and(d)(2) of this section, the term formerpartners means the adjustment year part-ners (as defined in § 301.6241–1(a)(2)) ofa partnership that ceases to exist for thepartnership taxable year to which the part-nership adjustment relates.

(ii) Partnership-partner ceases to exist.If the adjustment year partner is apartnership-partner that the IRS has deter-mined ceased to exist, the partners of suchpartnership-partner during the partnership-partner’s taxable year that includes the endof the adjustment year (as defined in§ 301.6241–1(a)(1)) of the partnership thatis subject to a proceeding under subchapterC of chapter 63 are the former partnersfor purposes of this section. If thepartnership-partner ceased to exist be-fore the partnership-partner’s taxableyear that includes the end of the adjust-ment year of the partnership that is sub-ject to a proceeding under subchapter Cof chapter 63, the former partners forpurposes of this section are the partnersof such partnership-partner during thepartnership taxable year for which thefinal partnership return of thepartnership-partner under section 6031is filed.

(2) No adjustment year partners. Ifthere are no adjustment year partners of apartnership that ceases to exist, the termformer partners means the partners of thepartnership during the last taxable year forwhich a partnership return under section6031 was filed with respect to such part-nership. For instance, if a partnership ter-minates under section 708(b)(1)(A) (and

therefore ceases to exist under paragraph(b)(2)(i) of this section) before the adjust-ment year and files a final partnershipreturn for the partnership taxable year ofsuch partnership, the former partners forpurposes of this section are the partners ofthe partnership during the partnership tax-able year for which a final partnershipreturn is filed.

(e) Taking adjustments into account—(1) In general. For purposes of paragraph(a) of this section, a former partner of apartnership that ceases to exist takes apartnership adjustment into account as ifthe partnership had made an electionunder section 6226 and the regulationsthereunder (regarding the alternative topayment of the imputed underpayment).A former partner must take into accountthe former partner’s share of a partner-ship adjustment as set forth in thestatement described in paragraph (e)(2)of this section in accordance with§ 301.6226 –3.

(2) Statements furnished to formerpartners. If a partnership is notified by theIRS that the partnership has ceased toexist as described in paragraph (b)(1) ofthis section, the partnership must furnishto each former partner a statement reflect-ing such former partner’s share of thepartnership adjustment required to betaken into account under this sectionand file a copy of such statement withthe IRS in accordance with the rulesunder § 301.6226 –2, except that –

(i) the adjustments are taken into ac-count by the applicable former partner (asdescribed in paragraph (d) of this section),rather than the reviewed year partners (asdefined in § 301.6241–1(a)(9)), and

(ii) the partnership must furnish state-ments to the former partners and file thestatements with the IRS no later than 30days after the date of the notification tothe partnership that the IRS has deter-mined that the partnership has ceased toexist.

(3) Authority to issue statements. If anystatements required by paragraph (e) ofthis section are not timely furnished to aformer partner and filed with the IRS inaccordance with paragraph (e)(2)(ii) ofthis section, the IRS may notify the formerpartner in writing of such partner’s shareof the partnership adjustments based onthe information reasonably available to

Bulletin No. 2017–28 July 10, 201783

the IRS at the time such notification isprovided. For purposes of paragraph (e) ofthis section, a notification to a former part-ner under this paragraph (e)(3) is treatedthe same as a statement required to befurnished and filed under paragraph (e)(2)of this section.

(f) Examples. The following examplesillustrate the provisions of this section.For purposes of the examples, all partner-ships and partners are calendar year tax-payers and no partnership has an electionunder section 6221(b) in effect with re-spect to any taxable year.

Example 1. The IRS initiates a proceeding undersubchapter C of chapter 63 with respect to the 2020partnership taxable year of Partnership. During2023, in accordance with section 6235(b), Partner-ship extends the period of limitations on adjustmentsunder section 6235(a) until December 31, 2025. OnFebruary 1, 2025, the IRS mails Partnership a noticeof final partnership adjustment (FPA) that deter-mines partnership adjustments that result in a singleimputed underpayment. Partnership does not timelyfile a petition under section 6234 and does not makea valid election under section 6226. On May 1, 2026,the IRS mails Partnership notice and demand forpayment of the amount due resulting from the ad-justments determined in the FPA. Partnership fails tomake a payment. On September 1, 2029, IRS deter-mines Partnership ceases to exist for purposes of thissection because the IRS has determined that Partner-ship does not have the ability to pay under paragraph(b)(2)(i) of this section. Under § 301.6241–1(a)(1),the adjustment year is 2025 and A and B, bothindividuals, are the only adjustment year partners ofPartnership during 2025. Accordingly, under para-graph (d)(1) of this section, A and B are formerpartners. Therefore, A and B are required to taketheir share of the partnership adjustments determinedin the FPA into account under paragraph (e) of thissection.

Example 2. The IRS initiates a proceeding undersubchapter C of chapter 63 with respect to the 2020partnership taxable year of Partnership. G, a partner-ship, is a partner of Partnership during 2020. OnFebruary 3, 2025, the IRS mails Partnership an FPAthat determines partnership adjustments that result ina single imputed underpayment. Partnership does nottimely file a petition under section 6234, but doesmake a timely election under section 6226. On May31, 2025, Partnership timely files and furnishes astatement to G as required by section 6226 and theregulations thereunder. G terminated under section708(b)(1)(A) on December 31, 2024. On June 1,2026, the IRS determines that G ceased to exist in2024 for purposes of this section in accordance withparagraph (b)(2)(i) of this section. J and K, individ-uals, were the only partners of G during 2024. There-fore, under paragraph (d)(1)(ii) of this section, J andK, the partners of G during G’s 2024 partnershiptaxable year, are the former partners of G for pur-poses of this section. Therefore, J and K are requiredto take into account their share of the adjustmentscontained in the statement furnished by Partnershipto G in accordance with paragraph (e) of this section.

(g) Applicability date—(1) In general.Except as provided in paragraph (g)(2) ofthis section, this section applies to part-nership taxable years beginning after De-cember 31, 2017.

(2) Election under § 301.9100–22T ineffect. This section applies to any partner-ship taxable year beginning after Novem-ber 2, 2015 and before January 1, 2018 forwhich a valid election under § 301.9100–22T is in effect.

Par. 21. Section 301.6241–4 is addedto read as follows:

§ 301.6241–4 Payments nondeductible.

(a) Payments nondeductible. No de-duction is allowed under subtitle A of theInternal Revenue Code for any paymentrequired to be made by a partnership un-der subchapter C of chapter 63 of theInternal Revenue Code (subchapter C ofchapter 63). Payment by a partnership ofany amount required to be paid under sub-chapter C of chapter 63, including anyimputed underpayment (as defined in§ 301.6241–1(a)(3)), any amount under§ 301.6226–3, or interest, penalties, addi-tions to tax, or additional amounts withrespect to an imputed underpayment orany amount under § 301.6226–3, istreated as an expenditure described in sec-tion 705(a)(2)(B).

(b) Applicability date—(1) In general.Except as provided in paragraph (b)(2) ofthis section, this section applies to part-nership taxable years beginning after De-cember 31, 2017.

(2) Election under § 301.9100–22T ineffect. This section applies to any partner-ship taxable year beginning after Novem-ber 2, 2015 and before January 1, 2018 forwhich a valid election under § 301.9100–22T is in effect.

Par. 22. Section 301.6241–5 is addedto read as follows:

§ 301.6241–5 Extension to EntitiesFiling Partnership Returns.

(a) Entities filing a partnership re-turn. Except as described in paragraph(c) of this section, an entity that files apartnership return for any taxable year issubject to the provisions of subchapterC of chapter 63 of the Internal RevenueCode (subchapter C of chapter 63) and

the regulations thereunder with respectto such taxable year even if it is deter-mined that the person filing the partner-ship return was not a partnership forsuch taxable year. Accordingly, anyitem of income, loss, gain, deduction, orcredit (as defined in § 301.6221(a)–1(b)(1)), any partner’s distributive sharethereof (as described in § 301.6221(a)–1(b)(2)), and any person holding an in-terest in the entity, either directly orindirectly, at any time during that tax-able year are subject to the provisions ofsubchapter C of chapter 63 and the reg-ulations thereunder for such taxableyear.

(b) Partnership return filed but no en-tity found to exist. Paragraph (a) of thissection also applies where a partnershipreturn is filed for a taxable year, but theIRS determines that no entity existed at allfor such taxable year. For purposes ofapplying paragraph (a) of this section, thepartnership return is treated as if it werefiled by an entity.

(c) Exceptions. Paragraph (a) of thissection does not apply to –

(1) Entities for any taxable year forwhich an election under section 6221(b) isin effect, treating the return as if it werefiled by a partnership for the taxable yearto which the election relates, and

(2) Entities for any taxable year forwhich a partnership return was filed forthe sole purpose of making the electiondescribed in section 761(a) (regardingelection out of subchapter K for certainunincorporated organizations).

(d) Applicability date—(1) In general.Except as provided in paragraph (d)(2) ofthis section, this section applies to part-nership taxable years beginning after De-cember 31, 2017.

(2) Election under § 301.9100–22T ineffect. This section applies to any partner-ship taxable year beginning after Novem-ber 2, 2015 and before January 1, 2018 forwhich a valid election under § 301.9100–22T is in effect.

Kirsten WielobobDeputy Commissioner for Services and

Enforcement.

(Filed by the Office of the Federal register on June 13, 2017,8:45 a.m., and published in the issue of the Federal Registerfor June 14, 2017, 82 F.R. 27334.)

July 10, 2017 Bulletin No. 2017–2884

Definition of TermsRevenue rulings and revenue procedures(hereinafter referred to as “rulings”) thathave an effect on previous rulings use thefollowing defined terms to describe theeffect:

Amplified describes a situation whereno change is being made in a prior pub-lished position, but the prior position isbeing extended to apply to a variation ofthe fact situation set forth therein. Thus, ifan earlier ruling held that a principle ap-plied to A, and the new ruling holds thatthe same principle also applies to B, theearlier ruling is amplified. (Compare withmodified, below).

Clarified is used in those instanceswhere the language in a prior ruling isbeing made clear because the languagehas caused, or may cause, some confu-sion. It is not used where a position in aprior ruling is being changed.

Distinguished describes a situationwhere a ruling mentions a previously pub-lished ruling and points out an essentialdifference between them.

Modified is used where the substanceof a previously published position is beingchanged. Thus, if a prior ruling held that aprinciple applied to A but not to B, and thenew ruling holds that it applies to both A

and B, the prior ruling is modified becauseit corrects a published position. (Comparewith amplified and clarified, above).

Obsoleted describes a previously pub-lished ruling that is not considered deter-minative with respect to future transac-tions. This term is most commonly used ina ruling that lists previously published rul-ings that are obsoleted because of changesin laws or regulations. A ruling may alsobe obsoleted because the substance hasbeen included in regulations subsequentlyadopted.

Revoked describes situations where theposition in the previously published rulingis not correct and the correct position isbeing stated in a new ruling.

Superseded describes a situation wherethe new ruling does nothing more thanrestate the substance and situation of apreviously published ruling (or rulings).Thus, the term is used to republish underthe 1986 Code and regulations the sameposition published under the 1939 Codeand regulations. The term is also usedwhen it is desired to republish in a singleruling a series of situations, names, etc.,that were previously published over a pe-riod of time in separate rulings. If the newruling does more than restate the sub-

stance of a prior ruling, a combination ofterms is used. For example, modified andsuperseded describes a situation where thesubstance of a previously published rulingis being changed in part and is continuedwithout change in part and it is desired torestate the valid portion of the previouslypublished ruling in a new ruling that isself contained. In this case, the previouslypublished ruling is first modified and then,as modified, is superseded.

Supplemented is used in situations inwhich a list, such as a list of the names ofcountries, is published in a ruling and thatlist is expanded by adding further namesin subsequent rulings. After the originalruling has been supplemented severaltimes, a new ruling may be published thatincludes the list in the original ruling andthe additions, and supersedes all prior rul-ings in the series.

Suspended is used in rare situations toshow that the previous published rulingswill not be applied pending some futureaction such as the issuance of new oramended regulations, the outcome ofcases in litigation, or the outcome of aService study.

AbbreviationsThe following abbreviations in currentuse and formerly used will appear in ma-terial published in the Bulletin.

A—Individual.Acq.—Acquiescence.B—Individual.BE—Beneficiary.BK—Bank.B.T.A.—Board of Tax Appeals.C—Individual.C.B.—Cumulative Bulletin.CFR—Code of Federal Regulations.CI—City.COOP—Cooperative.Ct.D.—Court Decision.CY—County.D—Decedent.DC—Dummy Corporation.DE—Donee.Del. Order—Delegation Order.DISC—Domestic International Sales Corporation.DR—Donor.E—Estate.EE—Employee.E.O.—Executive Order.ER—Employer.

ERISA—Employee Retirement Income Security Act.EX—Executor.F—Fiduciary.FC—Foreign Country.FICA—Federal Insurance Contributions Act.FISC—Foreign International Sales Company.FPH—Foreign Personal Holding Company.F.R.—Federal Register.FUTA—Federal Unemployment Tax Act.FX—Foreign corporation.G.C.M.—Chief Counsel’s Memorandum.GE—Grantee.GP—General Partner.GR—Grantor.IC—Insurance Company.I.R.B.—Internal Revenue Bulletin.LE—Lessee.LP—Limited Partner.LR—Lessor.M—Minor.Nonacq.—Nonacquiescence.O—Organization.P—Parent Corporation.PHC—Personal Holding Company.PO—Possession of the U.S.PR—Partner.PRS—Partnership.

PTE—Prohibited Transaction Exemption.Pub. L.—Public Law.REIT—Real Estate Investment Trust.Rev. Proc.—Revenue Procedure.Rev. Rul.—Revenue Ruling.S—Subsidiary.S.P.R.—Statement of Procedural Rules.Stat.—Statutes at Large.T—Target Corporation.T.C.—Tax Court.T.D.—Treasury Decision.TFE—Transferee.TFR—Transferor.T.I.R.—Technical Information Release.TP—Taxpayer.TR—Trust.TT—Trustee.U.S.C.—United States Code.X—Corporation.Y—Corporation.Z—Corporation.

Bulletin No. 2017–28 July 10, 2017i

Numerical Finding List1

Bulletin 2017–27 through 2017–28

Action on Decision:

2017-5, 2017-27 I.R.B. 1

Announcements:

2017-05, 2017-27 I.R.B. 52017-08, 2017-28 I.R.B. 9

Proposed Regulations:

REG-136118-15, 2017-28 I.R.B. 9

Revenue Rulings:

2017-14, 2017-27 I.R.B. 2

1A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2017–01 through 2017–26 is in Internal Revenue Bulletin2017–26, dated June 27, 2017.

July 10, 2017 Bulletin No. 2017–28ii

Finding List of Current Actions onPreviously Published Items1

Bulletin 2017–27 through 2017–28

1A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2017–01 through 2017–26 is in Internal Revenue Bulletin2017–26, dated June 27, 2017.

Bulletin No. 2017–28 July 10, 2017iii

INTERNAL REVENUE BULLETINThe Introduction at the beginning of this issue describes the purpose and content of this publication. The weekly Internal Revenue

Bulletins are available at www.irs.gov/irb/.

We Welcome Comments About the Internal Revenue BulletinIf you have comments concerning the format or production of the Internal Revenue Bulletin or suggestions for improving it, we

would be pleased to hear from you. You can email us your suggestions or comments through the IRS Internet Home Page(www.irs.gov) or write to the Internal Revenue Service, Publishing Division, IRB Publishing Program Desk, 1111 Constitution Ave.NW, IR-6230 Washington, DC 20224.

Internal Revenue ServiceWashington, DC 20224Official BusinessPenalty for Private Use, $300