Daily Tax Report: State provides authoritative coverage of state and local tax developments across the 50 U.S. states and the District of Columbia, tracking legislative and regulatory updates,...
State tax commissioners were bombarded with questions about a new federal partnership audit regime just hours after the IRS released revised proposed rules for implementing it.
“This new federal law is going to require some adaptation by the states,” Multistate Tax Commission General Counsel Helen Hecht said of the rules (REG-135118-15), re-issued June 13, and the underlying Bipartisan Budget Act of 2015. Hecht led a panel discussion that day at the Federation of Tax Administrators annual meeting in Seattle, which shed light on not only what may be the most arcane part of the tax code, but also the importance of partnerships in the economy.
Noting that more than half the business income produced in the U.S. is reported in the form of passthrough income, Hecht said an MTC work group’s efforts are focused on how states should adapt to federal changes with respect to partnerships. She called partnership regulation “probably the most complex part of the very complex federal tax system.”
Chapter K of the Internal Revenue Code has spawned highly complicated partnership structures, said Hecht, who displayed a slide of a multi-tiered partnership that looked like the family tree of Genghis Khan, founder of the Mongol Empire. Such complex structures have meant “the IRS has found it virtually impossible to audit at the taxpayer level and trace that income back through and understand that it was, in fact, reported correctly, allocated correctly to the partners,” she said.
The new rules—which apply to multi-tiered partnerships of more than 100 partners—shift from the IRS to partnerships the burden of identifying who among the partners is responsible for tax in the wake of an audit, Hecht said. Despite the new rules, the states still have a lot of work to do.
Tracee Abel, a passthrough expert from the Montana Department of Revenue, zeroed in on the important question of how to treat tiered partnerships, an issue she said the 2015 BBA didn’t completely address. Fellow panel member Nikki Dobay, Council On State Taxation (COST) senior tax counsel, said the IRS has yet to answer the question in the new proposed rules, instead seeking input from practitioners.
Dobay said there is a technical corrections bill being floated in Congress that hasn’t moved on its own but might have a chance of being attached to another bill. It wouldn’t make substantive changes, but would address elements in the original statute that are unclear. “We’re still holding hope that something will happen on that,” Dobay said.
Abel briefed the assembled tax commissioners on some of the many issues relevant to states, including how to:
Passthrough expert Sue Leighton of the Pennsylvania Department of Revenue shared with the tax administrators her state’s experience with imposing tax at the partnership level. If the department makes an adjustment at the entity level, amended Schedule K1s, Partner’s Share of Income, Deductions, Credits, etc., are issued to let the partners know that they have to adjust their outside basis. “They’ll be notified that a payment has been made on their behalf,” she said. “So it really puts the onus on the partnerships because the statute mandates for them to issue the K1s.”
Said Dobay: “I keep telling my lawyer friends that in about five years, litigation among partners will be through the roof. Nobody is going to be suing the IRS. They’re just going to be suing each other.”
Dobay said a document called Draft Model Uniform Statute and Regulation for Reporting Adjustments to Federal Taxable Income and Federal Partnership Audit has been developed by a group of interested parties involved with the MTC process. The parties include COST, the American Bar Association SALT Committee Task Force, the American Institute of CPAs, the Institute for Professionals in Taxation, and the Tax Executives Institute.
Hecht said the draft will be available on the MTC Partnership Work Group website, and she encouraged comment from practitioners.
To contact the reporter on this story: Paul Shukovsky in Seattle at PShukovsky@bna.com
To contact the editor responsible for this story: Ryan C. Tuck at firstname.lastname@example.org
Copyright © 2017 Tax Management Inc. All Rights Reserved.
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to email@example.com.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to firstname.lastname@example.org.
Put me on standing order
Notify me when new releases are available (no standing order will be created)