Scope of the BBA Regime
Scope of the BBA Regime
Section 6241(2)(B) broadly defines a partnership-related item as any item or amount with respect to the partnership which is relevant in determining the tax liability of any person under chapter 1 of the Code and any partner’s distributive share thereof. Section 6241(2)(B).[1] That definition does not limit the term partnership-related item to income reported by the partnership. Rather, partnership-related items include any items with respect to the partnership that are relevant to determining any person’s chapter 1 tax, which could include partnership expenses, credits generated by partnership activity, assets and liabilities of the partnership, and any other items concerning the partnership that are relevant to someone’s chapter 1 tax, irrespective of the impact such items have on the partnership’s income.
The core feature of the centralized partnership audit regimes is the provision of a centralized method of examining items of a partnership. Adjusting items on a partnership’s return or in the partnership’s books and records, regardless of their effect on partnership income, in a centralized partnership proceeding at the partnership level results in efficiencies because one proceeding can be conducted that will bind all partners and the partnership. See section 6223(b). Under the IRS’s view, the statute does not require that only items that affect the partnership’s income, as reported on the partnership’s return, be adjusted at the partnership level.
§301.6241-6(b)(4) and (5) define the phrase “item or amount with respect to the partnership” to include an item or amount that relates to a transaction with the partnership by a partner acting in its capacity as a partner or by an indirect partner acting in its capacity as an indirect partner as well as an item or amount relating to a transaction that is described in section 707(a)(2), 707(b), or 707(c). Accordingly, under the regulations if an item or amount related to a transaction that is described in section 707(a)(2), 707(b), or 707(c) and was relevant in determining chapter 1 tax, that item was a partnership-related item and must be determined at the partnership level.
BBA Regulations
The regulations clarify that items or amounts relating to transactions of the partnership are items or amounts with respect to the partnership only if those items or amounts are shown, or required to be shown, on the partnership return or are required to be maintained in the partnership’s books and records. The regulations further clarify that items or amounts shown, or required to be shown, on a return of a person other than the partnership (or in that person’s books and records) that result after application of the Code to a partnership-related item and that take into account the facts and circumstances specific to that person are not partnership-related items and, therefore, are not determined at the partnership level under the centralized partnership audit regime.
§301.6241-1(a)(6)
§301.6241-1(a)(6) provides that only items or amounts reflected, or required to be reflected on the partnership’s return or in its books and records are deemed to be with respect to the partnership. If such items are relevant to determining chapter 1 tax, the IRS maintains that such items are partnership-related items. This rule applies equally to items or amounts relating to any transaction with, liability of, or basis in the partnership.
§301.6241-1(a)(6) further provides that items reflected, or required to be reflected on the return of a person other than the partnership or in that person’s books and records that result after application of the Code to a partnership-related item are not with respect to a partnership and, thus, not partnership- related items. Accordingly, only items of the partnership are partnership-related items under §301.6241-1(a)(6). The regulations under §301.6221(a)-1(b) provide that any legal or factual determinations underlying any adjustment or determination made under the centralized partnership audit regime are also determined at the partnership level under the centralized partnership audit regime. For instance, such determinations include the period of limitations on making adjustments under the centralized partnership audit regime and any determinations necessary to calculate the imputed underpayment or any modification of the imputed underpayment under section 6225.
[1] Prior to amendment by the TTCA, section 6221(a) provided that any adjustment to items of income, gain, loss, deduction, or credit of a partnership shall be determined at the partnership level. The TTCA amended section 6221(a) by replacing the phrase “items of income, gain, deduction, loss or credit of a partnership for a partnership taxable year (and any partner’s distributive share thereof)” with the term “partnership-related item.” The TTCA added a definition of “partnership-related item” to section 6241(2) BBA.
