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Minnesota has filed conformity legislation that appears to address the early opt-in election under the new federal partnership audit regime.
Introduced Feb. 15, and authored by Rep. Greg Davids (R), H.F. 1227 responds to the new federal approach to auditing partnership entities. Enacted through the Bipartisan Budget Act of 2015 (Pub. L. No. 114-74), the federal regime generally provides for assessment and adjustments at the partnership entity level—rather than among individual partners—absent an election that would transfer liability to the partners.
The bill provides that the provisions are “effective retroactively” and apply to taxpayers making an election after Nov. 2, 2015 and before Jan. 1, 2018.
The Treasury Department and Internal Revenue Service released temporary regulations (T.D. 9780) in August 2016 addressing the election to opt in early. However, practitioners don’t anticipate many partnerships making the election absent federal guidance on implementation.
“This is the first state legislation that we’ve seen dealing only with what can only be a handful of LLCs and partnerships that opt-in prior to 2018,” Bruce Ely, a tax partner with Bradley Arant Boult Cummings LLP, told Bloomberg BNA via e-mail. “The fact that the bill is so narrow in scope only illustrates the need to wait until next Spring and look at a more comprehensive fix.”
Ely said that H.F. 1227 doesn’t make clear “that it applies only to tax years prior to 2018 and the literal handful of Subchapter K entities that have, or will, opt in by 12/31/2017.”
He further noted that the bill would likely have a limited impact, as tax practitioners are aggressively advising clients not to opt-in early, given the overall lack of uncertainty and guidance.
“Why not wait until next year—when the dust has (hopefully) settled both in Congress and at the IRS and there is the prospect of a model act or at least some model language that the states could adopt,” Ely said. “The bill could clearly cover those handful of Subchapter K entities that opted-in during 2017 or the last few months of 2016.”
To date, only Arizona has enacted legislation addressing the federal regime. A Montana proposal has been tabled, and partnership audit provisions were stripped from a Georgia conformity bill during a Feb. 15 hearing of a Ways and Means subcommittee.
Practitioners have urged states to adopt a “wait and see” approach while questions remain regarding the regime.
A technical corrections bill has stalled in Congress, with some lawmakers hopeful that it passes this year. The Internal Revenue Service released proposed rules (REG-136118-15) in mid-January, outlining the agency’s plans to administer the new partnership audit law—which President Donald Trump subsequently ordered withdrawn two days later.
During a Feb. 14 teleconference of the Multistate Tax Commission’s partnership work group, Ely said that the IRS announced the withdrawn regulations likely won’t be re-issued anytime soon.
A task force of the American Bar Association tax section’s State and Local Tax Committee and an American Institute of CPAs work group have collaborated on a checklist for states mulling legislation that responds to or conforms with the federal legislation.
Ely, co-chair of the ABA task force, said that the checklist is an “opening suggestion” for states to review when contemplating how to address the new federal approach. However, states aren’t encouraged to push through conformity legislation this year.
In reviewing the Georgia bill, and referring to the checklist, Ely said he was “almost sick to my stomach to try to figure out how to wedge all of these questions into one bill.” A bill would likely be a “monster in terms of length and complexity” to wire together existing state statutes that relate to the issues.
“There are some things by state law or state constitution, or good practice, that can be included in regulations,” he said. “Most of this checklist, however, would require a statutory fix one way or another.”
MTC General Counsel Helen Hecht noted that the partnership work group’s discussions, including an earlier analysis of the Montana proposal, have highlighted three considerations for states:
During the MTC’s committee meetings in March, the MTC Uniformity Committee is expected to consider a request to initiate a drafting project for a new model revenue agent report (RAR) statute. The joint request is from the AICPA and ABA task force, including Tax Executives Institute Inc. and the Council On State Taxation, which have provided a draft model RAR statute.
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Text of H.F. 1227 is at http://src.bna.com/mf0.
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