Parties Unveil Model State Statute for Partnership Audit Law

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By Jennifer McLoughlin

Practitioners have rolled out draft model legislation that many hope will serve as the starting point for uniform state statutes addressing the new federal partnership audit regime.

The draft uniform statute was officially unveiled during the Multistate Tax Commission’s Partnership Work Group’s June 8 teleconference. It is a collaborative undertaking by several “interested parties” representing taxpayers and practitioners. The statute proposes a new regime for reporting both adjustments to federal taxable income and federal partnership audit adjustments.

The multi-party drafting effort has come alongside the MTC’s own work, all aimed at navigating the complexities of the Bipartisan Budget Act of 2015 ( Pub. L. No. 114-74), which ushered in a new centralized system for federal audits of partnership entities. The default regime generally provides for assessment and adjustments at the entity level, rather than among individual partners, and has generated questions and concerns over the flow-through impact at the state level.

Bruce P. Ely, a partner with Bradley Arant Boult Cummings LLP, said the draft legislation proposes a “two-part model act,” addressing both state conformity with the new federal partnership audit regime and reporting of federal audit adjustments for all entities (RAR statute).

“I think we all agree that what we want here is state-to-state uniformity, and secondly is substantial federal-to-state conformity,” said Ely, who is co-chair of a task force of the American Bar Association tax section’s State and Local Tax Committee that has collaborated on the draft model statute. He said there are some areas where pure federal conformity might not be in the best interest of states and taxpayers.

“I do believe this is something that is needed by all the states,” Ely added, noting that no state RAR statutes are alike. “Every state is going to have to amend their statutes regardless.”

Other interested parties working with the ABA task force include the American Society of CPAs, Council On State Taxation (COST), Tax Executives Institute, and the Institute for Professionals in Taxation. The presentation of the draft model statute was accompanied by a Power Point presentation highlighting key partnership provisions.

The MTC’s Partnership Work Group will next meet July 6.

Seeking Collaboration

Nikki E. Dobay, senior tax counsel for COST, said none of the interested parties have formally adopted the draft model statute.

“It is meant to be a discussion paper,” she said.

This reiterated Ely’s earlier message, saying that “we want this to be a joint product.”

“We want to avoid dueling model acts,” he said, explaining why the model legislation was released now. And, “we think we’ve got something here that the MTC and the states can look at and glom onto and adopt.”

Three Principles

Pilar Mata, tax counsel for TEI, identified three overriding principles that play into the draft model legislation: consistency among the states, ease of reporting and compliance, and flexibility.

Among several provisions, the draft model legislation contemplates:

  •   standardized definitions, including “final determination date,” “federal partnership representative,” “state partnership representative,” and “imputed underpayment";
  •   procedures for designating state partnership representatives;
  •   allocation and apportionment of adjustments based on factors of the reviewed year; and
  •   options for responding to adjustments arising from partnership level audits.

Federal: ‘Very Soon’

At the federal level, 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 have varied about when Treasury will re-release the regulations.

At a June 5 conference hosted by the New York University School of Professional Studies, Thomas C. West, tax legislative counsel and acting assistant secretary for tax policy at the Treasury Department, said the proposed regulations will be re-issued “very soon.”

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 later this year.

Tax Reform

During a June 7 webinar previewing the model legislation, Ely said there isn’t any indication that partnership entities will subside should tax reform materialize.

“There may be an even greater impetus for partnerships, because of the idea of passing through the lower tax rate to partnerships and their owners,” said Ely, a member of Bloomberg BNA’s State tax Advisory Board.

Steve Wlodychak, a Washington-based principal with Ernst & Young LLP’s Indirect (State and Local Tax) Practice, echoed the same message.

Under any scenario of tax reform, “there is no doubt in my mind that the partnership structure in subchapter K will still be an important element of that,” said Wlodychak, who also serves on Bloomberg BNA’s state tax advisory board. “So these rules aren’t going away anytime soon.”

With assistance from Allyson Versprille in Washington

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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