Federal Partnership Rules May Be Tricky for States: ABA Group

Daily Tax Report: State provides authoritative coverage of state and local tax developments across the 50 U.S. states and the District of Columbia, tracking legislative and regulatory updates,...

By Che Odom

State and local governments may find themselves in a pickle when a new federal partnership audit regime goes into effect, according to a Sept. 11 letter addressed to Internal Revenue Service Commissioner John A. Koskinen from the American Bar Association’s Section on Taxation.

The comment letter offers suggested changes to the IRS’ proposed regulations (REG-136118-15, RIN:1545-BN77) implementing the centralized partnership audit procedures enacted as part of the Bipartisan Budget Act of 2015. The federal regime is set to take effect in 2018.

The ABA group noted that the proposed regulation Section 301.6225-1(a)(1) states that an imputed underpayment will be treated “in the same manner as if it were a tax imposed.”

“Whether the Imputed Underpayment is deemed to be a tax on the partnership or a payment of the partners’ tax liabilities by the partnership on behalf of the partners can be important for state income tax purposes,” the letter said.

This section could cause trouble because a majority of states don’t impose a net income tax on partnerships, according to the letter. The group suggested the IRS regulations clarify that the imputed underpayment is a payment by the partnership of its partners’ tax liabilities rather than a tax on the partnership entity.

“If the Imputed Underpayment is deemed to be a tax on the partnership, states that do not impose an entity-level tax on partnerships may not have the authority to impose additional tax similar to the Imputed Underpayment even though the Imputed Underpayment relates to adjustments made to the partnership’s calculation of taxable income,” the letter said.

Other Comments

The Multistate Tax Commission, an intergovernmental state agency that develops model tax laws and regulations for states, submitted an Aug. 14 letter, asking the IRS to clarify how the proposed regulations will implement certain aspects of the new federal regime.

States need clarification so that they may decide how to respond to federal rule changes, possibly by modifying their laws or regulations. Important to states, “who are analyzing how they will adapt to the new regime, is that they have the information as soon as possible,” according to the letter.

The American Institute of CPAs also submitted a letter Aug. 14 to the IRS, making multiple recommendations related to the proposed regulations.

To contact the reporter on this story: Che Odom in Washington at COdom@bna.com

To contact the editor responsible for this story: Jennifer McLoughlin at jmcloughlin@bna.com

For More Information

Text of the ABA Section on Taxation letter is at http://src.bna.com/sq1.

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