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Treasury officials are encouraging comments prior to the reintroduction of regulations implementing the new federal partnership audit regime, according to a tax practitioner leading efforts to develop state-side model legislation.
“The IRS’s theory is they will fast track as much as possible of the proposed regs once they’re reissued,” Bruce Ely, a partner with Bradley Arant Boult Cummings LLP, said during a May 18 teleconference for the Multistate Tax Commission’s partnership work group. Ely was among practitioners who met with Treasury officials during last week’s American Bar Association tax section meeting.
Feedback indicated that “if you have comments on the regs, if you’d like to see them changed, you better file those now, even though they have not been reissued,” he said, adding that he hopes the new set of regulations will incorporate public comments.
Proposed regulations (REG-136118-15) implementing the entity-level audit regime surfaced in mid-January, but were withdrawn Jan. 20 when the White House announced a regulatory freeze shortly after President Donald Trump’s inauguration. Projections are varied about when Treasury will re-release the regulations—Ely said that he heard during the ABA tax section meeting that IRS guidance might be reissued within the next six weeks.
Leadership in the Senate Finance and House Ways and Means committees introduced the Tax Technical Corrections Act (H.R. 6439, S. 3506) to tweak the federal law late last year. The bill has stalled, however, and has yet to be reintroduced this Congress—potentially attached to another legislative package with tax provisions, such as the American Health Care Act or a tax reform bill.
Government officials have indicated that the law will take effect in 2018. There was buzz that lawmakers would push back the statute’s start date, but Ely said he heard that efforts to delay the 2018 effective date have ceased.
State officials and practitioners are awaiting the revived regulations for guidance and clarity on a system that continually raises questions about the state-specific impact.
Both Ely and MTC General Counsel Helen Hecht noted that potential comments and questions largely arise out of what wasn’t incorporated in the proposed regulations. Ely said that the IRS may be open to suggestions of new regulatory language and concepts.
“I can anticipate some things that the states in particular would like to know from the IRS,” Hecht said, noting that the states may not necessarily take a position, but would benefit from additional guidance to inform their preparation for the new regime.
Ely said that the ABA State and Local Tax (SALT) Committee and American Institute of CPAs are gearing up to submit comments. Hecht said the MTC Uniformity Committee has discussed the commission potentially providing comments to the IRS, and she will circle back with committee leadership regarding their thoughts about a potential MTC submission.
Ely said he doesn’t expect that the reissued rules will reflect material changes, with the exception of potential revisions addressing multi-tiered entities.
The default regime provides for assessments and adjustments at the entity level—rather than among individual partners—absent an election to “push out” liability to the partners. During a May 18 panel at a Practising Law Institute tax planning program, comments highlighted practitioner concerns overabout whether the IRS will permit partnerships to push audit adjustments through multiple tiers.
The withdrawal of the proposed rules in the January regulatory freeze has tax lawyers “on pins and needles” to see whether its replacement will address the open issue of whether it’s possible for tiered partnerships to push audit adjustments out to the ultimate partner, said Diana Wollman, an attorney with Cleary Steen Gottlieb & Hamilton LLP in New York who’s a former IRS official.
Alongside the MTC partnership work group’s efforts, several “interested parties” have been collaborating on model legislation addressing both procedures for reporting federal income tax changes and procedures for reporting changes under the new partnership audit regime. In addition to the ABA SALT Committee and AICPA, other parties include the Council On State Taxation (COST), Tax Executives institute and the Institute for Professionals in Taxation.
The agenda for the partnership work group’s next meeting on June 1 will include a presentation of the draft model legislation.
Nikki E. Dobay, senior tax counsel for COST, said during the May 18 MTC call that the draft legislation is moving through the internal approval processes for each interested party. The goal is to finalize the draft for presentation during the June 1 meeting. However, Dobay said that some processes may require additional time—if the interested parties can’t deliver the draft legislation by June 1, they will go through a PowerPoint presentation that details statutory concepts.
Dobay said the interested parties are providing a discussion draft. They anticipate further changes and intend the June 1 presentation as an opportunity to kick-start dialogue around the model and gather the MTC partnership work group’s initial thoughts.
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Information on the MTC Partnership Work Group is at http://www.mtc.gov/Uniformity/Project-Teams/Partnership-Informational-Project.
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