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Partnerships and their advisers are continuing to prepare for the new tax-auditing regime that will take effect Jan. 1, despite the lack of congressional action on technical corrections sought to fill in gaps from the original legislation.
“The most significant issue in the technical corrections bill is multiple tier push-outs,” said Don Susswein, a principal at RSM US LLP in Washington. Tax accountants and lawyers have been pushing for corrections to the Bipartisan Budget Act of 2015—which enacted the new auditing regime—that would allow tax adjustments to be pushed out to the final partner in a tiered partnership.
The 2015 law allows the IRS to collect unpaid tax at the entity level—rather than among individual partners—absent an election that would push out liability to the partners.
Legislation that would address the multiple tier issue and other industry concerns was introduced in the last session of Congress by top tax-writers but has yet to be reintroduced this year. In its absence, the Internal Revenue Service may take the matter into its own hands and issue regulations on the tiered partnership issue. The agency said in proposed regulations in June (REG-136118-15) that it was considering an approach to tiered push-outs for future guidance.
“We all expect, in the long run, that we will be able to push out through tiers,” said Eric B. Sloan, a partner with Gibson, Dunn & Crutcher LLP in New York. “I think most of us are drafting our agreements based on that assumption, with fall back provisions in the event it doesn’t happen,” he said in an email.
For example, many agreements include language that says the partnership will push out if it is able to, and if it can’t, it “will deal with imputed underpayments in a way that puts the partners in the same position they would have been in had the partnership elected out,” Sloan said, adding that many of his clients are taking this approach.
Susswein echoed Sloan’s comments. “You could certainly write provisions that go both ways,” he told Bloomberg Tax. “You can say we anticipate a push-out being available, and to the extent appropriate, say we will take advantage of it, but if for some reason we can’t, we reserve the right to go against you for your share of any entity-level tax we pay,” he said.
“I’ve also seen agreements that basically give the partnership a right to go back against even former partners and say, ‘Hey, make us whole, indemnify us,’” Susswein said. But “I don’t think that’s widespread, and I don’t think anyone wants that or views that” as the long-term answer.
Sloan said some partnerships are also considering provisions that deal with situations where tiered push-outs are permitted but the partnership is unable or unwilling to comply with “mapping” requirements the government may impose.
IRS and Treasury Department officials have said at conferences that it can be difficult to track down the ultimate partner in a tiered push-out, making it hard for the government to collect all the taxes that are owed. Some have suggested they would require partnerships that want to push out through the tiers to supply information that would help track down the appropriate partner—in essence, “a map.”
The standard advice that practitioners are giving to clients seems to be “we will push out,” said Glenn Dance, a managing director at Grant Thornton LLP who recently left the position of special counsel to the IRS associate chief counsel (Passthroughs and Special Industries). “I think that’s pretty much what the community is doing at large,” said Dance, who worked on the regulations while at the IRS.
However, Dance said he personally recommends that people don’t lock themselves into a tiered push-out because of that concern— that it may be difficult or impossible for partnerships to track down the identity of the ultimate partners. Having partners amend their returns would be a less costly option and wouldn’t hit the same barrier, he said.
Dance said when he was at the IRS, the agency was working on a regulatory solution to tiered push-outs in parallel with Congress’ work on a technical corrections bill.
“I think the government knows it needs to do something with tiered partnerships in the push-out context but is a little bit hamstrung to figure out what to do,” he said. The Joint Committee on Taxation’s “bluebook” explaining the provisions of the BBA suggested a different treatment for tiered partnerships than the technical corrections bill did, Dance said.
The IRS is probably leaning toward adopting the approach taken in the technical corrections bill, but there are government workers who are reluctant to rely too much on that legislation when writing regulations, because it hasn’t been enacted, he said.
“Some people think without a technical correction we can’t do things like impose a tax on an upper-tier partnership,” he said. And some disagree about whether “we can allow the upper-tier partnership to push out because there’s nothing in the statute that addresses them in a way that would say, ‘You can let them push out.’”
“There is a legitimate chance that a technical corrections bill may be included in tax reform,” Marc Gerson, a member at Miller & Chevalier Chartered, said. It could come up when the bill is introduced or be added as an amendment during the markup process, he said.
Technical corrections bills are revenue neutral because the impact of the change has already been included in the JCT’s score of the original legislation, Gerson said. That’s helpful because it means revenue concerns won’t hold the package back, he said.
It’s logical that the technical corrections bill could be included in a tax reform bill, but there hasn’t been much discussion of it in recent months, a House GOP aide said.
Susswein suggested a possible complication. Passing a tax bill using the budget reconciliation process, which imposes restrictions on a bill adding to the deficit after a decade, may pose a barrier to tacking the technical corrections bill onto tax reform, he said. “In general, reconciliation bills are supposed to include items that are needed to fulfill the budgetary aspects of the reconciliation instruction”—raising revenue, reducing revenue, increasing spending, or reducing spending, he said.
“Technical corrections legislation is generally viewed as akin to correcting a typo, in a way that is consistent with the original policy and original revenue estimate of the corrected legislation, and thus typically does not carry any revenue effects,” Susswein said. It doesn’t raise or lower taxes, and thus arguably wouldn’t be “germane” to the reconciliation instruction, he said.
“This analysis could be quibbled with, but I believe it is the underlying reason that general practice is not to include ‘technical corrections’ in reconciliation bills,” he said.
With assistance from Laura Davison in Washington.
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