II
113th CONGRESS
2d Session
S. 3018
IN THE SENATE OF THE UNITED STATES
December 16, 2014
Mr. Levin introduced the following bill; which was read twice and referred to the Committee on Finance
A BILL
To amend the Internal Revenue Code of 1986 to reform the rules relating to partnership audits and adjustments.
Short title
This Act may be cited as the Partnership Auditing Fairness Act
.
Partnership audits and adjustments
Repeal of TEFRA partnership audit rules
In general
Chapter 63 of the Internal Revenue Code of 1986 is amended by striking subchapter C.
Clerical amendment
The table of subchapters for chapter 63 of such Code is amended by striking the item relating to subchapter C.
Repeal of electing large partnership rules
In general
Subchapter K of chapter 1 of the Internal Revenue Code of 1986 is amended by striking part IV.
Assessment rules relating to electing large partnerships
Chapter 63 of such Code is amended by striking subchapter D.
Clerical amendments
The table of parts for subchapter K of chapter 1 of such Code is amended by striking the item relating to part IV.
The table of subchapters for chapter 63 of such Code is amended by striking the item relating to subchapter D.
Effective date
The amendments made by this subsection shall apply to returns filed after December 31, 2014.
Partnership audit reform
In general
Chapter 63 of the Internal Revenue Code of 1986, as amended by this section, is amended by inserting after subchapter B the following new subchapter:
Treatment of partnerships
Part I—In general
Part II—Partnership adjustments
Part III—Procedure
Part IV—Definitions and special rules
In general
Sec. 6221. Determination at partnership level.
Sec. 6222. Partner’s return must be consistent with partnership return.
Sec. 6223. Designation of partnership representative.
Determination at partnership level
In general
Items of income, gain, loss, deduction, or credit of a partnership for a partnership taxable year (and any partner’s distributive share thereof) shall be audited, any tax attributable thereto shall be assessed and collected, and the applicability of any penalty, addition to tax, or additional amount which relates to an adjustment to any such item or share shall be determined, at the partnership level pursuant to this subchapter.
Election out for certain partnerships with 100 or fewer partners
This subchapter shall not apply with respect to any partnership for any taxable year if—
the partnership elects the application of this subsection for such taxable year,
the partnership has 100 or fewer partners on the last day of such taxable year,
each of the partners of such partnership is an individual, a C corporation (other than a real estate investment trust or a regulated investment company), any foreign entity that would be treated as a C corporation were it domestic, or an estate of a deceased partner,
the election—
is made with a timely filed return for such taxable year, and
includes (in the manner prescribed by the Secretary) a disclosure of the name and taxpayer identification number of each partner of such partnership, and
the partnership notifies each such partner of such election in the manner prescribed by the Secretary.
Partner’s return must be consistent with partnership return
In general
A partner of any partnership shall, on the partner’s return, treat each item of income, gain, loss, deduction, or credit attributable to such partnership in a manner which is consistent with the treatment of such income, gain, loss, deduction, or credit on the partnership return.
Underpayment due to inconsistent treatment assessed as math error
Any underpayment of tax by a partner by reason of failing to comply with the requirements of subsection (a) shall be assessed and collected in the same manner as if such underpayment were on account of a mathematical or clerical error appearing on the partner’s return. Paragraph (2) of section 6213(b) shall not apply to any assessment of an underpayment referred to in the preceding sentence.
Addition to tax for failure To comply with section
For addition to tax in the case of partner’s disregard of the requirements of this section, see part II of subchapter A of chapter 68.
Partners bound by actions of partnership
Designation of partner
Each partnership shall designate (in the manner prescribed by the Secretary) a partner (or other person) as the partnership representative who shall have the sole authority to act on behalf of the partnership under this subchapter. In any case in which such a designation is not in effect, the Secretary may select any partner as the partnership representative.
Binding effect
A partnership and all partners of such partnership shall be bound—
by actions taken under this subchapter by the partnership, and
by any decision in a proceeding brought under this subchapter.
Partnership adjustments
Sec. 6225. Partnership adjustment by Secretary.
Sec. 6226. Administrative adjustment request by partnership.
Partnership adjustment by Secretary
In general
In the case of any adjustment by the Secretary in the amount of any item of income, gain, loss, deduction, or credit of a partnership, or any partner’s distributive share thereof—
the partnership shall pay any imputed underpayment with respect to such adjustment in the adjustment year as provided in section 6232, and
any imputed overpayment shall be taken into account by the partnership in the adjustment year as a reduction in non-separately stated income or an increase in non-separately stated loss (whichever is appropriate) under section 702(a)(8).
Determination of imputed underpayments and overpayments
For purposes of this subchapter—
In general
Except as provided in subsection (c), any imputed underpayment or imputed overpayment with respect to any partnership adjustment for any reviewed year shall be determined—
by netting all adjustments of items of income, gain, loss, or deduction and multiplying such net amount by the highest rate of tax in effect for the reviewed year under section 1 or 11,
by treating any net increase or decrease in loss under subparagraph (A) as a decrease or increase, respectively, in income, and
by taking into account any adjustments to items of credit as an increase or decrease, as the case may be, in the amount determined under subparagraph (A).
Adjustments to distributive shares of partners not netted
In the case of any adjustment which reallocates the distributive share of any item from one partner to another, such adjustment shall be taken into account under paragraph (1) by disregarding—
any decrease in any item of income or gain, and
any increase in any item of deduction, loss, or credit.
Modification of imputed underpayments
Method in general
The Secretary shall establish procedures under which the imputed underpayment amount may be modified consistent with the requirements of this subsection.
Amended returns of partners
Such procedures shall provide that if—
one or more partners file returns for the taxable year of the partners which includes the end of the reviewed year of the partnership,
such returns take into account all adjustments under subsection (a) properly allocable to such partners (and for any other taxable year with respect to which any tax attribute is affected by reason of such adjustments), and
payment of any tax due is included with such return,
Reallocation of distributive share
In the case of any adjustment which reallocates the distributive share of any item from one partner to another, paragraph (2) shall apply only if returns are filed by all partners affected by such adjustment.
Year and day for submission to Secretary
Anything required to be submitted pursuant to paragraph (1) shall be submitted to the Secretary not later than the close the 180-day period beginning on the date on which the notice of a proposed partnership adjustment is mailed under section 6231 unless such period is extended with the consent of the Secretary.
Decision of Secretary
Any modification of the imputed underpayment amount under this subsection shall be made only upon approval of such modification by the Secretary.
Definitions and special rule
For purposes of this subchapter—
Reviewed year
The term reviewed year
means the partnership taxable year to which the item being adjusted relates.
Adjustment year
The term adjustment year
means the partnership taxable year in which—
in the case of an adjustment pursuant to the decision of a court in a proceeding brought under section 6234, such decision becomes final,
in the case of an administrative adjustment request under section 6226, such administrative adjustment request is made, or
in any other case, notice of the final partnership adjustment is mailed under section 6231.
Administrative adjustment request by partnership
In general
A partnership may file a request for an administrative adjustment in the amount of any item of income, gain, loss, deduction, or credit of the partnership for any partnership taxable year, but only to the extent such adjustment results in an imputed underpayment.
Adjustment
Any adjustment under subsection (a) shall be determined and taken into account by the partnership under rules similar to the rules of section 6225 (other than subsection (c) thereof) for the partnership taxable year in which the administrative adjustment request is made.
Period of limitations
A partnership may not file such a request—
more than 3 years after the later of—
the date on which the partnership return for such year is filed, or
the last day for filing the partnership return for such year (determined without regard to extensions), and
after any notice of an administrative proceeding with respect to the taxable year is mailed under section 6231.
Procedure
Sec. 6231. Notice of proceedings and adjustment.
Sec. 6232. Assessment, collection, and payment.
Sec. 6233. Penalties and interest.
Sec. 6234. Judicial review of partnership adjustment.
Sec. 6235. Period of limitations on making adjustments.
Notice of proceedings and adjustment
In general
The Secretary shall mail to the partnership and the partnership representative—
notice of any administrative proceeding initiated at the partnership level with respect to an adjustment of any item of income, gain, loss, deduction, or credit of a partnership for a partnership taxable year, or any partner’s distributive share thereof,
notice of any proposed partnership adjustment resulting from such proceeding, and
notice of any final partnership adjustment resulting from such proceeding.
Further notices restricted
If the Secretary mails a notice of a final partnership adjustment to any partnership for any partnership taxable year and the partnership files a petition under section 6234 with respect to such notice, in the absence of a showing of fraud, malfeasance, or misrepresentation of a material fact, the Secretary shall not mail another such notice to such partnership with respect to such taxable year.
Authority To rescind notice with partnership consent
The Secretary may, with the consent of the partnership, rescind any notice of a partnership adjustment mailed to such partnership. Any notice so rescinded shall not be treated as a notice of a partnership adjustment for purposes of this subchapter, and the taxpayer shall have no right to bring a proceeding under section 6234 with respect to such notice.
Assessment, collection, and payment
In general
Any imputed underpayment—
shall be assessed and collected in the same manner as if it were a tax imposed for the adjustment year by subtitle A, and
shall be paid on or before the return due date for the adjustment year.
Limitation on assessment
Except as otherwise provided in this chapter, no assessment of a deficiency may be made (and no levy or proceeding in any court for the collection of any amount resulting from such adjustment may be made, begun or prosecuted) before—
the close of the 90th day after the day on which a notice of a final partnership adjustment was mailed, and
if a petition is filed under section 6234 with respect to such notice, the decision of the court has become final.
Premature action may be enjoined
Notwithstanding section 7421(a), any action which violates subsection (b) may be enjoined in the proper court, including the Tax Court. The Tax Court shall have no jurisdiction to enjoin any action under this subsection unless a timely petition has been filed under section 6234 and then only in respect of the adjustments that are the subject of such petition.
Exceptions to restrictions on adjustments
Adjustments arising out of math or clerical errors
In general
If the partnership is notified that, on account of a mathematical or clerical error appearing on the partnership return, an adjustment to a partnership item is required, rules similar to the rules of paragraphs (1) and (2) of section 6213(b) shall apply to such adjustment.
Special rule
If a partnership is a partner in another partnership, any adjustment on account of such partnership’s failure to comply with the requirements of section 6222(a) with respect to its interest in such other partnership shall be treated as an adjustment referred to in subparagraph (A), except that paragraph (2) of section 6213(b) shall not apply to such adjustment.
Partnership may waive restrictions
The partnership may at any time (whether or not any notice of partnership adjustment has been issued), by a signed notice in writing filed with the Secretary, waive the restrictions provided in subsection (b) on the making of any partnership adjustment.
Limit where no proceeding begun
If no proceeding under section 6234 is begun with respect to any notice of a final partnership adjustment during the 90-day period described in subsection (b) thereof, the amount for which the partnership is liable under section 6225 shall not exceed the amount determined in accordance with such notice.
Penalties and interest
Penalties and interest determined from reviewed year
In general
In the case of an imputed underpayment with respect to a partnership adjustment for a reviewed year, the partnership—
shall pay to the Secretary interest computed under paragraph (2), and
shall be liable for any penalty, addition to tax, or additional amount as provided in paragraph (3).
Determination of amount of interest
The interest computed under this paragraph with respect to any partnership adjustment is the interest which would be determined under chapter 67—
on the imputed underpayment determined with respect to such adjustment, and
for the period beginning on the day after the return due date for the reviewed year and ending on the return due date for the adjustment year (or, if earlier, the date payment of the imputed underpayment is made).
Penalties
A partnership shall be liable for any penalty, addition to tax, or additional amount for which it would have been liable if such partnership had been an individual subject to tax under chapter 1 for the reviewed year and the imputed underpayment were an actual underpayment (or understatement) for such year.
Interest and penalties with respect to adjustment year return
In general
In the case of any failure to pay an imputed underpayment on the date prescribed therefor, the partnership shall be liable—
for interest as determined under paragraph (2), and
for any penalty, addition to tax, or additional amount as determined under paragraph (3).
Interest
Interest determined under this paragraph is the interest that would be determined by treating the imputed underpayment as an underpayment of tax imposed in the adjustment year.
Penalties
Penalties, additions to tax, or additional amounts determined under this paragraph are the penalties, additions to tax, or additional amounts that would be determined—
by applying section 6651(a)(2) to such failure to pay, and
by treating the imputed underpayment as an underpayment of tax for purposes of part II of subchapter A of chapter 68.
Judicial review of partnership adjustment
In general
Within 90 days after the date on which a notice of a final partnership adjustment is mailed under section 6231 with respect to any partnership taxable year, the partnership may file a petition for a readjustment for such taxable year with—
the Tax Court,
the district court of the United States for the district in which the partnership’s principal place of business is located, or
the Claims Court.
Jurisdictional requirement for bringing action in district court or Claims Court
In general
A readjustment petition under this section may be filed in a district court of the United States or the Claims Court only if the partnership filing the petition deposits with the Secretary, on or before the date the petition is filed, the amount of the imputed underpayment (as of the date of the filing of the petition) if the partnership adjustment was made as provided by the notice of final partnership adjustment. The court may by order provide that the jurisdictional requirements of this paragraph are satisfied where there has been a good faith attempt to satisfy such requirement and any shortfall of the amount required to be deposited is timely corrected.
Interest payable
Any amount deposited under paragraph (1), while deposited, shall not be treated as a payment of tax for purposes of this title (other than chapter 67).
Scope of judicial review
A court with which a petition is filed in accordance with this section shall have jurisdiction to determine all items of income, gain, loss, deduction, or credit of the partnership for the partnership taxable year to which the notice of final partnership adjustment relates, the proper allocation of such items among the partners, and the applicability of any penalty, addition to tax, or additional amount for which the partnership may be liable under this subchapter.
Determination of court reviewable
Any determination by a court under this section shall have the force and effect of a decision of the Tax Court or a final judgment or decree of the district court or the Claims Court, as the case may be, and shall be reviewable as such. The date of any such determination shall be treated as being the date of the court’s order entering the decision.
Effect of decision dismissing action
If an action brought under this section is dismissed other than by reason of a rescission under section 6231(c), the decision of the court dismissing the action shall be considered as its decision that the notice of final partnership adjustment is correct, and an appropriate order shall be entered in the records of the court.
Period of limitations on making adjustments
In general
Except as otherwise provided in this section, no adjustment under this subpart for any partnership taxable year may be made after the date which is 3 years after the latest of—
the date on which the partnership return for such taxable year was filed,
the return due date for the taxable year, or
the date on which the partnership filed an administrative adjustment request with respect to such year under section 6226.
Extension by agreement
The period described in subsection (a) (including an extension period under this subsection) may be extended by an agreement entered into by the Secretary and the partnership before the expiration of such period.
Special rule in case of fraud, etc
False return
In the case of a false or fraudulent partnership return with intent to evade tax, the adjustment may be made at any time.
Substantial omission of income
If any partnership omits from gross income an amount properly includible therein and such amount is
described in section 6501(e)(1)(A), subsection (a) shall be applied by
substituting 6 years
for 3 years
.
No return
In the case of a failure by a partnership to file a return for any taxable year, the adjustment may be made at any time.
Return filed by Secretary
For purposes of this section, a return executed by the Secretary under subsection (b) of section 6020 on behalf of the partnership shall not be treated as a return of the partnership.
Suspension when Secretary mails notice of adjustment
If notice of a final partnership adjustment with respect to any taxable year is mailed under section 6231, the running of the period specified in subsection (a) (as modified by the other provisions of this section) shall be suspended—
for the period during which an action may be brought under section 6234 (and, if a petition is filed under such section with respect to such notice, until the decision of the court becomes final), and
for 1 year thereafter.
Definitions and special rules
Sec. 6241. Definitions and special rules.
Definitions and special rules
Definitions and special rules
For purposes of this subchapter—
Partnership
The term partnership
means any partnership required to file a return under section 6031(a).
Partner
The term partner
means—
a partner in the partnership, and
any other person whose income tax liability under subtitle A is determined in whole or in part by taking into account directly or indirectly income, gain, deduction, or loss of the partnership.
Partnership adjustment
The term partnership adjustment
means any adjustment in the amount of any item of income, gain, loss, deduction, or credit of a
partnership, or any partner’s distributive share thereof.
Return due date
The term return due date
means, with respect to the taxable year, the date prescribed for filing the partnership return for
such taxable year (determined without regard to extensions).
Joint and several liability
In general
The partnership and any partner of the partnership shall be jointly and severally liable for any imputed underpayment and any penalty, addition to tax, or additional amount attributable thereto.
Period for assessment of partners
The period for assessment of an imputed underpayment with respect to a partner of a partnership shall not expire earlier than 3 years after the date on which an assessment of such imputed underpayment was made with respect to the partnership.
Determining partners
A person shall be treated as partner of the partnership if such person is a partner of such partnership at any time during the reviewed or adjustment year.
Payments nondeductible
No deduction shall be allowed under subtitle A for any payment required to be made by a partnership under this subchapter.
Special rule for deductions, losses, and credits of foreign partnerships
Except to the extent otherwise provided in regulations, in the case of any partnership the partnership representative of which resides outside the United States or the books of which are maintained outside the United States, no deduction, loss, or credit shall be allowable to any partner unless section 6031 is complied with for the partnership’s taxable year in which such deduction, loss, or credit arose at such time as the Secretary prescribes by regulations.
Partnerships having principal place of business outside United States
For purposes of sections 6234, a principal place of business located outside the United States shall be treated as located in the District of Columbia.
Partnerships in cases under title 11 of United States Code
Suspension of period of limitations on making adjustment, assessment, or collection
The running of any period of limitations provided in this subchapter on making a partnership adjustment (or provided by section 6501 or 6502 on the assessment or collection of any imputed underpayment determined under this subchapter) shall, in a case under title 11 of the United States Code, be suspended during the period during which the Secretary is prohibited by reason of such case from making the adjustment (or assessment or collection) and—
for adjustment or assessment, 60 days thereafter, and
for collection, 6 months thereafter.
Suspension of period of limitation for filing for judicial review
The running of the period specified in section 6234 shall, in a case under title 11 of the United States Code, be suspended during the period during which the partnership is prohibited by reason of such case from filing a petition under section 6234 and for 60 days thereafter.
.
Clerical amendment
The table of subchapters for chapter 63 of such Code is amended by inserting after the item relating to subchapter B the following new item:
Subchapter C. Treatment of partnerships
.
Conforming amendments
Section 6422 of the Internal Revenue Code of 1986 is amended by striking paragraph (12).
Section 6501(n) of such Code is amended—
by striking paragraphs (2) and (3), and
by striking Cross references
and all that follows through For period of limitations
and inserting Cross reference.—For period of limitations
.
Section 6503(a)(1) of such Code is amended by striking (or section 6229
and all that follows through of section 6230(a))
.
Section 6504 of such Code is amended by striking paragraph (11).
Section 6511 of such Code is amended by striking subsection (g).
Section 6512(b)(3) of such Code is amended by striking the second sentence.
Section 6515 of such Code is amended by striking paragraph (6).
Section 6601(c) of such Code is amended by striking the last sentence.
Section 7421(a) of such Code is amended by striking 6225(b), 6246(b)
and inserting 6232(c)
.
Section 7422 of such Code is amended by striking subsection (h).
Section 7459(c) of such Code is amended by striking section 6226
and all that follows through or 6252
and inserting section 6234
.
Section 7482(b)(1) of such Code is amended—
by striking section 6226, 6228, 6247, or 6252
in subparagraph (E) and inserting section 6234
,
by striking subparagraph (F), by striking or
at the end of subparagraph (E) and inserting a period, and by inserting or
at the end of subparagraph (D), and
by striking section 6226, 6228(a), or 6234(c)
in the last sentence and inserting section 6234
.
Section 7485(b) of such Code is amended by striking section 6226, 6228(a), 6247, or 6252
and inserting section 6234
.
Effective date
Except as provided in subsection (b)(4), the amendments made by this section shall apply to returns filed for partnership taxable years ending after December 31, 2014, except that a partnership may elect (at such time and in such form and manner as the Secretary of the Treasury may prescribe) for such amendments to apply to any return of the partnership filed for partnership taxable years ending after the date of the enactment of this Act and before January 1, 2015.