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Many expect proposed technical corrections for the new federal partnership audit regime will be folded into another legislative measure—it’s more a question of when it will happen.
Emily Schillinger, a spokeswoman for House Ways and Means Committee Chairman Kevin Brady (R-Texas), told Bloomberg BNA that there are no specific plans at this time for the Tax Technical Corrections Act of 2016 (H.R. 6439/S. 3506) to move forward. However, technical corrections could be folded into a future legislative package, such as a measure repealing the Affordable Care Act or a tax overhaul bill.
The technical corrections bill didn’t pass after it was introduced late last year, but federal lawmakers have indicated the measure will pass this year. On Jan. 18, the Internal Revenue Service released proposed implementing regulations for the new partnership audit regime, which is set to take effect in 2018.
The proposed rules (REG-136118-15, RIN:1545-BN77) outline the agency’s plans to administer the new regime introduced in the Bipartisan Budget Act of 2015 ( Pub. L. No. 114-74). The law 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.
In the meantime, states continue to work through the implications of the new rules.
Some states, such as Arizona and Montana, have taken a more proactive approach by adopting or proposing legislation. However, Max Behlke, manager of state-federal relations for the National Conference of State Legislatures, told Bloomberg BNA that he isn’t aware of other states following their lead at this time.
During a Jan. 17 teleconference, the Multistate Tax Commission’s partnership work group reconvened to discuss updates at both the federal and state levels.
Jonathan Horn, senior technical manager of tax policy and advocacy with the American Institute of CPAs, told the group that federal lawmakers aren’t burying efforts to clean up the regime. Prompted by criticism regarding the law’s complexity, the technical changes legislation was introduced in early December.
“What we’re hearing is that it is still a priority of the chairs on both sides,” Horn said, noting the technical corrections bill was introduced as a bipartisan, bicameral measure.
“Our belief is that this will get reintroduced shortly,” he added. “And that it will, because it is considered non-controversial, that it could possibly be attached to anything that moves forward. It doesn’t necessarily need to have a tax reform or a tax package. So we’re hopeful that it will be soon.”
Federal officials are also watching for movement on this front.
Rep. James Renacci (R-Ohio) told Bloomberg BNA that he is hopeful a technical corrections bill will pass early this year.
Practitioners have reported that Jan. 1, 2018, is the target for final IRS regulations, after a promulgation process likely to include public comments and hearings.
Horn noted that the IRS hopes Congress will soon complete the technical corrections, as they directly affect the administrative regulations.
As Congress cleans up the rules, most states appear to be adopting the “wait and see” approach recommended by the American Institute of CPAs and a task force of the American Bar Association tax section’s State and Local Tax Committee. Rather than push through legislation, states have been advised to hold off until there is more clarity from the federal level.
Select states, however, are following another path.
Arizona enacted legislation attempting to conform to the federal partnership audit regime in 2016. However, lawmakers are expected to amend the statute.
H.B. 47 represents Montana’s effort to respond to the federal partnership audit regime. Following a Jan. 11 hearing before the Montana House Taxation Committee, the bill’s chief sponsor, Rep. Zach Brown (D), told Bloomberg BNA that the measure will be undergoing revisions through the end of February, when House bills must be transmitted to the Senate.
Short of a “workable solution” by then, Brown doesn’t anticipate the bill will move forward.
During the MTC call, Tracee Abel, an income tax specialist with Montana’s Department of Revenue, said that practitioners are providing comments and suggestions for H.B. 47.
She explained that the DOR proposed the legislation this session for two reasons. The department had been considering improved procedures for passthrough entities for quite a while and circled back to re-think how to respond to the federal changes.
Another reason was that the Legislature, which meets biannually, is in session now. To introduce the proposal in 2019 would leave the DOR with little time to work out the finer details through proposed regulations by 2020.
Abel noted that H.B. 47 “creates a separate process and procedure for partnerships exclusively,” and “is not in any way amending our individual or corporate” revenue agent report (RAR) statutes.
The bill “really provides procedures for reporting the results of the federal adjustments to the state when the partnership is audited under the new federal rule,” she said, adding that the Montana proposal incorporated several provisions from Arizona’s statute.
MTC staff have maintained a working-issues list that sorts through the federal changes and summarizes several state-related issues. A separate MTC analysis focuses on the push-out election—permitting a partnership to avoid the entity-level tax by pushing liability for an imputed underpayment to individual partners—which many practitioners have identified as the primary source of ambiguity and complexity.
MTC General Counsel Helen Hecht said that staff will analyze Montana’s proposed legislation alongside the issues the MTC has identified and advise on how Montana is addressing the same. The work group’s next meeting is Jan. 31.
During its March meeting, the MTC Uniformity Committee will consider a request to initiate a drafting project for a new model RAR statute. The joint request is from the AICPA and ABA task force, including Tax Executives Institute Inc. and the Council On State Taxation.
With assistance from Laura Davison in Washington.
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