IRS, States Edgy Over ‘Push-Out’ Election in Partnership Rules

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By Jennifer McLoughlin

Nov. 29 — Federal and state officials share concerns over provisions pushing out tax liability to individual partners under the new federal partnership audit and adjustment regime.

Enacted as part of the Bipartisan Budget Act of 2015 (Pub. L. No. 114-74), and effective for taxable years after Dec. 31, 2017, the rules provide that IRS partnership audits will be conducted and adjustments collected at the entity level. However, the tax code Section 6226 “push-out” election permits a partnership to avoid the entity-level tax by pushing liability for an imputed underpayment to individual partners.

During a Nov. 29 teleconference of the Multistate Tax Commission’s partnership work group, General Counsel Helen Hecht presented a memorandum analyzing how the push-out election may function and highlighting several issues and questions relating to what she said “seems to be a key, if not the key, element to the new federal audit and adjustment rules.”

The memo responded to the work group’s request for more detail on how the election works at the federal level, in order to inform the group’s discussion of the approach states should adopt.

“And the timing of that decision by the work group, as it turns out, was good,” Hecht said. “Because others, including apparently the IRS, are also now taking a much closer look at this election and how it works, and are frankly coming to the conclusion that it raises a number of critical problems and questions that there are not clear answers to in the statute.”

Federal Frustration

IRS Commissioner John Koskinen shared frustration over the complexity of the federal law during a Nov. 15 presentation at the American Institute of CPAs National Tax Conference. His comments suggested that taxpayers and the agency may be worse off under the new system because “nobody quite asked, ‘Hey, would this really work?’” before the legislation was passed.

Agency representatives seem to be in tune with the complications.

Hecht attended a Nov. 16 meeting during which Treasury Department and Internal Revenue Service representatives met with members of a task force of the American Bar Association Section of Taxation and an AICPA work group. Those groups recently partnered on a project addressing the state-specific impact from the federal law.

Hecht said federal representatives couldn’t offer much commentary on the status of regulations or the agency’s approach to the new law. However, she said they seemed to be aware of the various issues discussed.

Fishing for Federal Fixes

“I don’t expect that there are going to be regulations anytime soon,” Hecht said. However, if Congress doesn’t make any “visible manifestation” that it is going to change the statute itself, she said the feds would “probably try to get some kind of proposed regulations out in the next few months.”

“Obviously, if Congress makes some significant adjustments to the statute, that’s going to affect timing of the regulations as well,” she added.

Bruce P. Ely, a partner at Bradley Arant Boult Cummings LLP and co-chairman of the ABA tax section’s task force, told Bloomberg BNA Nov. 17 that a takeaway from the Nov. 16 meeting was that Treasury isn’t prioritizing the release of guidance.

Reports indicate it is unlikely that Congress will push through technical corrections legislation by year-end.

Potential Pause

MTC staff members have maintained a working issues list that sorts through the federal changes and summarizes several state-related issues—focusing on those relating to reporting of state taxes associated with federal audit adjustments (revenue agent report rules). The objective has been to draft model language responding to the federal regime.

The MTC’s Uniformity Committee will discuss during its Dec. 14 meeting whether the work group’s drafting efforts should be put on hold pending Treasury guidance or a congressional technical corrections bill.

Hecht noted that the work group would continue disseminating information and discussing updates on federal developments, and could consider providing written input to the IRS or Congress. In a Nov. 17 letter addressed to leadership in the House Ways and Means Committee and the Senate Finance Committee, the AICPA proposed several revisions to the partnership regime.

To contact the reporter on this story: Jennifer McLoughlin in Washington at jmcloughlin@bna.com

To contact the editor responsible for this story: Ryan C. Tuck at rtuck@bna.com

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