Amendments to Partnership Audit Regime

Amendments to Partnership Audit Regime

by Ronald Levitt *

On November 2, 2015, the Bipartisan Budget Act of 2015 (Pub L No 114-74, 114th Cong (Nov 2, 2015)) (the Act) became law. The Act radically alters the audit procedures for partnerships. In this respect, Act Section 1101 (Partnership Audits and Adjustments) repeals the TEFRA Partnership Audit Rules (IRC Sections 6221 through 6234), the electing large partnership rules (IRC Sections 771 through 777), and the assessment rules relating to electing large partnerships (IRC Sections 6240 through 6242) and generally replaces those provisions with a scheme under which the partnership entity will be liable for imputed underpayments determined by netting all adjustments of items of income, gain, loss, deduction, or credit determined at the partnership level and taxing the net adjustment at the highest rate of tax under IRC Section 1 or IRC Section 11 for the reviewed year.

Because of the complexities of the Act, many practitioners and their clients may choose S corporation status over partnership status to avoid such complexity, especially where the benefits of subchapter K are minimal.

The amendments to the current partnership audit regime generally will apply to partnership returns for tax years beginning after December 31, 2017. (The Bipartisan Budget Act of 2015, Pub L No 114-74, 114th Cong, § 1101(g)(1) (Nov 2, 2015).) This long lead time is necessary because the new provisions contain numerous disconnects that requires a massive amount of regulatory guidance (see REG-136118-15) to implement and, most significantly, will require much thought about the effects of these provisions on partnerships in the real world, including the formation, operation, and disposition of partnerships (and the acquisition, holding, and disposition of interests therein).

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Ronald Levitt, J.D., LL.M. is a shareholder in the firm of Sirote & Permutt, P.C. in Birmingham, Alabama. He earned his J.D. at the University of Alabama and his LL.M. in Taxation at the University of Florida. He is listed in Best Lawyers in America in Taxation (1994); Leadership Birmingham (1996); Fellow, American College of Tax Counsel; Adjunct Professor: University of Alabama School of Law LL.M. in Taxation Program (Partnership Taxation); Cumberland School of Law (Partnership Taxation). He is a frequent instructor for the American Bar Association Tax Section, the New York University Institute on Federal Taxation, the Alabama Society of CPAs, the Tennessee Tax Institute, the Federal Tax Clinic, Inc., the Birmingham Tax Forum and other organizations. Publications include: "Back to Back Loans," presented at the 65th New York University Institute on Federal Taxation in October/November 2006; "The Uncertainty of Basis Increases in Connection with Back-to-Back Loans to S Corporations," published in Business Entities magazine, January/February 2007; and "Redemptions and Purchases of S Corporation Stock," presented at the 63rd New York University Institute on Federal Taxation in October/November, 2005.

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