Modification of an imputed underpayment

Section 6225 governs the modification procedures. The statutory scheme under section 6225, section 6231, and section 6235 envisions a process where the IRS first mails a NOPPA to the partnership that includes the proposed partnership adjustments and proposed imputed underpayment, followed by a modification period, which is followed by the FPA. The mailing of the NOPPA starts the 270 day period within which anything required to be filed or submitted in the modification process must be filed or submitted to the IRS. After the close of this 270-day period, which may be extended with the consent of the IRS, if modification is requested, the IRS has an additional 270 days to modify the imputed underpayment as necessary to reflect approved modifications and mail the FPA, which will describe the final partnership adjustments and imputed underpayment. After the FPA is issued, there is no basis for the IRS to consider further modifications. The examination is complete and the partnership may then pay the imputed underpayment or elect the push out. The partnership may also challenge the partnership adjustments in court.

Section 301.6225-2 provides the rules and procedures regarding modification of an imputed underpayment by the partnership. Issues with respect to 301.6225-2 primarily fall into the following categories: (1) modification in general; (2) timing of modification requests and determinations; (3) amended return modification; (4) the alternative procedure to filing amended returns; (5) rate modification; (6) modification pertaining to certain passive losses of publicly traded partnerships; (7) modification pertaining to qualified investment entities; (8) closing agreement modification; and (9) recommendations to add additional types of modifications.

Modification in General

The modification provisions under §301.6225-2 are designed to determine an imputed underpayment amount that reflects, as closely as possible, the tax the partners would have paid had they correctly reported the adjusted items, while at the same time maintaining the efficiencies of a streamlined examination and collection process. See JCS-1-16 at 65-66. The statutory modification procedures are designed to allow the partnership to modify the amount of the imputed underpayment, not adjust the substance of the partnership adjustments that underlie the imputed underpayment.

Composition of Modification Items

§301.6225-2(d)(6) provides a procedure for modifying the composition of an imputed underpayment. Under §301.6225-2(d)(6), a partnership may request that the IRS include one or more partnership adjustments in a particular grouping or subgrouping. If certain negative partnership adjustments should be treated as if no limitations or restrictions in fact apply to the partners to whom the adjustments are allocated and the partnership can establish this result, if approved, on modification, such negative adjustments may be properly grouped or subgrouped with other adjustments and therefore allowed to net against those adjustments in accordance with §301.6225-1(e) to reduce the amount of the imputed underpayment.

Modification Based on How Items Are Taken Into Account

§301.6225-2(d)(2)(ii) allows a partnership to request modification based on how adjusted items were taken into account by a partner prior to the item being adjusted by the IRS.

Modification As If Partner Filing Amended Return

Under §301.6225-2(d)(2)(x), a partnership may submit on behalf of a partner, in accordance with forms, instructions, and other guidance prescribed by the IRS, all information and payment of any tax, penalties, additions to tax, additional amounts, and interest that would be required to be provided if the partner were filing an amended return. If the partnership avails itself of this procedure with respect to a partner, the partner does not need to also file an amended return in order for modification to be approved.

Other Modification Procedures

Other modification procedures also provide the partnership with an opportunity to demonstrate the effect of adjustments on specific partners. For instance, tax-exempt modification provides an opportunity for the partnership to demonstrate that partnership adjustments are allocable to a partner that would not owe tax by reason of its status as a tax-exempt entity. Rate modification allows partnerships to demonstrate that partners would be subject to a lower rate than the highest rate of tax applied to calculate the imputed underpayment.

Partners Eligible for Modification

Under the regulations, a partnership may request modification with respect to reviewed year partners (direct partners), including pass-through partners, and indirect partners. A partnership may not request modification, however, with respect to a direct or indirect partner that is a wholly-owned entity disregarded as separate from its owner for Federal income tax purposes.

Partnership Representative’s Authority

The decision whether to solicit a vote of the partners in the partnership as part of determining whether to request modification or a particular type of modification is fully within the authority of the partnership representative. Nothing in the final regulations prevents or requires the solicitation of a vote by the partnership representative. Additionally, if the partnership and its partners impose such a condition on the partnership representative through an agreement with the partnership representative, any failure to adhere to that agreement does not affect actions taken by the partnership representative. See §301.6223-2(d).

The regulations under §301.6225-2(c)(2)(ii) provide that the partnership representative must furnish to the IRS information as required by forms, instructions, or other guidance prescribed by the IRS or as is otherwise requested by the IRS.

The regulations under §301.6225-2(c)(2)(i) also provide that, pursuant to section 6241(10), the partnership may be required to submit or file items required to be provided to the IRS under §301.6225-2 in an electronic format. The form and manner for submission of anything required to be submitted under §301.6225-2 will be described in forms, instructions, and other guidance prescribed by the IRS. Lastly, the regulations under §301.6225-2(c)(2)(i) provide that the IRS will deny modification not only for the failure to substantiate a modification request but also for the failure to pay anything required under §301.6225-2.

Timing of Modification

§301.6225-2(c)(3) provides rules regarding the time for submitting modification information to the IRS.

Pursuant to §301.6235-1(a)(2) and (b), in the case of any modification of an imputed underpayment, no partnership adjustment may be made later than the date that is 270 days after the date on which everything required to be submitted under §301.6225-2 for modification is so submitted. The date on which everything required to be submitted is so submitted is the date the modification period ends or expires. §301.6235-1(b)(2). Accordingly, in the case of a modification request, the IRS must generally mail an FPA to make a partnership adjustment within 270 days of the date the modification period ends.

While the regulations allow for an extension of both the period to submit modification information and the period in which the IRS has to consider such information, neither extension is automatic but rather must be based on the facts and circumstances of the particular case.

Amended Returns

§301.6225-2(d)(2) provides rules regarding modification with respect to amended returns filed by partners. §301.6225-2(d)(2)(i) provides that a partnership may request modification of an imputed underpayment based on an amended return filed by a relevant partner provided all of the partnership adjustments properly allocable to such relevant partner are taken into account.

The requirement in §301.6225-2(d)(2)(i) that partners take into account all partnership adjustments derives from section 6225(c)(2)(A)(ii). Section 6225(c)(2)(A)(ii) states that when partners file amended returns in modification, that return must “take into account all adjustments” under section 6225(a) that are “properly allocable to such partners (and the effect of such adjustments on any tax attributes).”

Section 6225(a) refers to “any adjustment by the Secretary to any partnership-related items with respect to any reviewed year of a partnership . . .” Section 6225(c)(2)(A)(ii)’s reference to “all adjustments” under section 6225(a) does not distinguish between partnership adjustments that result in an imputed underpayment and partnership adjustments that do not result in an imputed underpayment. By not distinguishing between the types of partnership adjustments, the language of section 6225(c)(2)(A)(ii) indicates that all partnership adjustments must be taken into account by partners filing modification amended returns, as opposed to only those adjustments that are associated with the imputed underpayment for which modification is requested. Consistent with section 6225(c)(2)(A)(ii), the regulations under §301.6225-2(d)(2)(i) require that even in the case of multiple imputed underpayments, partners filing modification amended returns must take into account all partnership adjustments, not just the adjustments associated the imputed underpayment for which modification is requested.

Nothing in the regulations imposes specific requirements or limitations on the partnership or its partners when utilizing amended return modification with respect to only one imputed underpayment. The partnership and its partners must comply with all the requirements under §301.6225-2(d)(2) with respect to any request for amended return modification, including a request made for only one imputed underpayment in the case of multiple imputed underpayments.

§301.6225-2(d)(2)(ii)(A) provides that an amended return modification request will not be approved unless the partner filing the amended return has paid all tax, penalties, additions to tax, additional amounts, and interest due as a result of taking into account the adjustments at the time such return is filed with the IRS.

Section 6225(c)(2)(A)(iii) provides that if one or more partners file amended returns during modification, such returns take into account the adjustments properly allocable to such partners, and “payment of any tax due is included with such returns,” the imputed underpayment is determined without regard to the adjustments so taken into account. Payment of any tax due is a statutory requirement under section 6225(c)(2)(A)(iii). Consistent with section 6225(c)(2)(A)(iii), §301.6225- 2(d)(2)(ii)(A) requires full payment of any tax, penalties, and interest due at the time the amended return is filed with the IRS. If payment is not included with the amended return, the IRS will not approve modification with respect to the amended return.

The regulations under §301.6225-2(c)(2)(i) provide that a failure by any person to make any payments required with respect to a modification request within the time restrictions described in §301.6225-2(c) will result in a denial of a modification request.

§301.6225-2(c)(3) provides that all information required under §301.6225-2 with respect to a request for modification must be submitted on or before 270 days after the date the NOPPA is mailed, unless that period is extended with the permission of the IRS.

The statutory scheme under section 6225, section 6231, and section 6235 envisions a process where the IRS first mails a NOPPA to the partnership that includes the proposed partnership adjustments and proposed imputed underpayment, followed by a modification period, which is followed by the FPA. The mailing of the NOPPA starts the 270 day period within which anything required to be filed or submitted in the modification process must be filed or submitted to the IRS. After the close of this 270-day period, which may be extended with the consent of the IRS, if modification is requested, the IRS has an additional 270 days to modify the imputed underpayment as necessary to reflect approved modifications and mail the FPA, which will describe the final partnership adjustments and imputed underpayment. After the FPA is issued, there is no basis for the IRS to consider further modifications. The examination is complete and the partnership may then pay the imputed underpayment or elect the push out. The partnership may also challenge the partnership adjustments in court.

Section 6225(c)(2), which provides the procedures for filing amended returns and the alternative procedure to filing amended returns was enacted at the same time as section 6225(c)(7). The amended return modification and the alternative procedure to filing amended returns are just two of many statutory modifications.

Section 6225(c)(8) provides that any modification of the imputed underpayment amount “shall be made only upon approval of such modification by the Secretary.” A request for amended return modification must therefore be approved by the IRS. If the partnership fails to comply with the requirements under the rules under §301.6225-2, the IRS may decline to approve the request for modification.

The FPA — the notice of final partnership adjustment – is designed to be the final notice to the partnership from the IRS, not an interim notice subject to further modifications or changes.

A partnership adjustment is defined under section 6241(2) as an adjustment to a partnership-related item, and a partnership-related item is defined as including an imputed underpayment. An adjustment to an imputed underpayment is, therefore, a partnership adjustment as defined in section 6241(2). The approval of a modification affects the amount of an adjustment that is taken into account in the imputed underpayment under the rules described in §301.6225-2(b). Therefore, the IRS must approve or disapprove of a modification before the expiration of the time period for making adjustments under section 6235 or the IRS will have lost its opportunity to do so.

In addition, the IRS is limited as to when it may make a partnership adjustment. According to section 6235(a)(2), “no adjustment under this subchapter for any partnership taxable year may be made after . . . in the case of any modification of an imputed underpayment under section 6225(c), the date that is 270 days [including extensions]. . . after the date on which everything required to be submitted to the Secretary pursuant to such section is so submitted.”

Nothing in section 6235(a)(2) prevents the IRS from mailing a second FPA; however, under section 6231(c), if the partnership petitions the original FPA under section 6234, the Secretary may not mail another notice with respect to the same taxable year in the absence of fraud, malfeasance, or misrepresentation of a material fact.

§301.6225-2(d)(2)(vii)(B) provides that if a relevant partner files an amended return for purposes of modification, such partner may not file a subsequent amended return without the permission of the IRS.

The regulations provide that the restriction under §301.6225-2(d)(2)(vii)(B) only applies to subsequent amended returns that change the treatment of partnership adjustments previously taken into account on a prior amended return that was filed during modification or are filed with respect to an imputed underpayment that was taken into account on a prior modification amended return. The regulations provide exceptions to this rule if the modification amended return or all modifications become inapplicable to the reviewed year. For instance, a court could determine after the issuance of the FPA that the IRS’s determination was erroneous in whole or in part, and there was no longer an imputed underpayment or the imputed underpayment should be reduced. In that case, the amended returns submitted during modification would have been with respect to an imputed underpayment that either no longer existed or was altered. The modifications in that case would either be wholly or partially inapplicable. Alternatively, during the modification process, after a partner files an amended return for purposes of modification, the IRS could deny modification under §301.6225-2(c)(2)(i). In those cases, the partner may file a subsequent amended return to reverse the treatment of partnership adjustments taken into account as part of the request for modification that is no longer applicable, subject to the period of limitations under section 6511. The regulations also provide that the restrictions on amended returns also apply to other claims for refund.

Pursuant to section 7121, a closing agreement approved by the IRS is final and conclusive. Accordingly, as a general rule, a partner may not request a refund of amounts agreed to in, and paid with, a closing agreement, though the determination of whether a partner could file further amended returns or claims for refund with respect to a year in which a closing agreement was executed would depend on the facts and circumstances and the agreed upon terms of the closing agreement.

The regulations under §301.6225-2(d)(2)(vii) provide that partners may file additional amended returns with respect to partnership adjustments or imputed underpayments, including in the case of denied modification or court readjustment. To file a subsequent amended return, the partners must do so in accordance with forms, instructions, and other guidance prescribed by the IRS. A partner that modifies using the alternative procedure to filing amended returns as described in section 6225(c)(2)(B) that seeks a refund for an amount paid as part of those procedures must follow the rules of §301.6225-2(d)(2)(vii)(B) and (C). There is no separate process for partners that modify using the alternative procedure to amended returns.

§301.6225-2(d)(2)(vi)(B) provides that in accordance with forms, instructions, and other guidance, a pass-through partner making a payment under §301.6225-2(d)(2)(vi)(A) may take into account modifications with respect to its direct and indirect partners to the extent that such modifications are requested by the partnership and approved by the IRS. Therefore, to the extent an upper-tier partner of the pass-through partner has filed an amended return, the partnership has requested modification with respect to that amended return, and the modification is provided, the pass-through partner may take into account that amended return in accordance with forms, instructions, or other guidance when making a payment in modification. The regulations under §301.6225-2(d)(2)(vi)(B) set forth this rule.

The IRS must review all modification requests within 270 days after the modification request has been submitted.

§301.6225-2(d)(2)(ii)(C) provides that in the case of a reallocation adjustment, all partners affected by such adjustment must file amended returns in order for the IRS to approve modification with respect to those amended returns.

Payment and collection of an underpayment is not the only issue required to be resolved by the filing of modification amended returns. In some cases, the purpose of the amended returns is to take into account the tax attributes that may have effects on other modification years. In some cases, the tax effect of adjustments taken into account in one year may be offset by tax effect of adjustments in another year or by another partner, but the unmodified imputed underpayment is designed by statute to take into account only the reviewed year and it does not take into account the specific tax attributes of any partner or the effects of the partnership adjustments in modification years or intervening years. An unmodified imputed underpayment will often result in an amount that is higher than what the partners collectively would have paid had they taken the adjustments into account properly in the reviewed year. The unmodified imputed underpayment protects the IRS’s interests in collecting at least the amount of tax that should have been paid by the partners without having to separately examine and track all the partners. In other words, the unmodified imputed underpayment represents a simple way to allow the partnership to pay, and the IRS to collect, as amount related to the partnership adjustments without having to delve into the specific tax attributes of each partner.

Modification, however, provides an opportunity for the partners and the partnership to demonstrate that specific tax attributes of partners should have an effect on the imputed underpayment. With respect to reallocation adjustments, if partners seek to receive the benefit of modification, each partners subject to a reallocation adjustment must follow the statutory requirement to file amended returns for all adjustments in a reallocation adjustment. It may be the case that one partner pays on modification and another partner is entitled to a refund. However, such a result is unknown until the partners demonstrate that fact through modification. Section 6225(c)(2)(C) expressly requires that all partners have taken into account all partnership adjustments and related tax attributes for the modification years and future years. This statutory mandate makes clear that the purpose of this modification is not to ensure that there is a net tax payment with respect to the partnership adjustments, but instead to ensure that the proper partners have taken the adjustments into account correctly, including in all modification years. The requirement that all partners affected by a reallocation file amended returns is a necessary condition for modification to be approved.

In an administrative proceeding, the adjustment year is the year in which the FPA is mailed under section 6231 or, if the partnership challenges the adjustments in court, the year such decision becomes final. Section 6225(d)(2). If a partner was one of the partners subject to a reallocation adjustment and failed to file an amended return, none of the other amended returns from other partners subject to the reallocation adjustments could be approved as a modification. As a result, the imputed underpayment would be determined in the FPA without reduction with respect to those adjustments.

Recognizing the costs and burdens this rule may create for partnerships, partners, and the IRS in cases where it is clear one partner will not owe tax on its share of a reallocation adjustment, the Treasury Department and the IRS included a rule within §301.6225-2(d)(2)(ii)(C) to mitigate the potential impact of the requirement that all partners file amended returns. §301.6225-2(d)(2)(ii)(C) provides that modification may be approved in the case of a reallocation adjustment even if a relevant partner affected by the adjustment does not file an amended return or utilize the alternative procedure provided the partner takes into account its share of the adjustment through other modifications approved by the IRS or if a pass-through partner takes into account the relevant adjustments. For instance, in the case of an adjustment that reallocates a loss from one partner to another, the IRS may determine that the requirements of §301.6225-2(d)(2)(ii)(C) have been satisfied if one affected relevant partner files an amended return taking into account the adjustment and the other affected relevant partner signs a closing agreement with the IRS taking into account the adjustments. §301.6225-2(d)(2)(ii)(C).

Section 6225(c)(2)(C) provides that in the case of a reallocation adjustment, amended return modification applies only if all the requirements of either amended return modification or the alternative procedure to filing amended returns “are satisfied with respect to all partners affected by such adjustment.” This rule demonstrates that reallocation adjustments made by the IRS under the centralized partnership audit regime are included in the calculation of the imputed underpayment unless all partners affected by such adjustments take them into account. Section 6225(c)(2)(C) does not contain an exception to the rule that all partners take the adjustments into account. Consistent with section 6225(c)(2)(C)’s requirement that all affected partners take the reallocation adjustments into account, the IRS permits modification in the case of a reallocation adjustment where a relevant partner affected by such adjustment has met the requirements of another modification method and that modification has been approved by the IRS.

The regulations provide that a partner filing an amended return or using the alternative procedure to filing amended returns only is required to pay tax due under chapter 1 of the Code with respect to the amended return and the alternative procedure to filing amended returns. The exception to the limitation of tax to chapter 1 tax is for a pass-through partner filing an amended return under §301.6225-2(d)(2)(vi) because the pass-through partner, but for §301.6225-2(d)(2)(vi), might otherwise not owe tax under chapter 1. Nothing in the regulations limits the IRS’s authority under section 6241(9). The type of tax paid in a closing agreement, however, will depend on the terms of the closing agreement. The regulations clarify the type of tax paid in these situations in §§301.6225- 2(d)(2)(ii)(A) and (d)(8).

Section 6225(c)(2)(D) provides that section 6501 and 6511 shall not apply with respect to returns filed in modification. Prior to the enactment of the TTCA, section 6225(c)(2) stated that section 6511 did not apply with respect to amended return modification, but it was silent on whether section 6501 limitations on assessment applied. The TTCA explicitly provided that section 6501 does not apply with respect to returns filed in modification.

The Alternative Procedure to Filing Amended Returns

The TTCA created an additional statutory modification under section 6225(c)(2)(B), titled the alternative procedure to filing amended returns (the alternative procedure), which is referred to as the “pull in” or “push in.”

The purpose of the modification process is not only to reduce the amount of the imputed underpayment, but for those partners that take the adjustments into account as part of the modification requested, they are required to pay any additional tax, interest and penalties due and agree to adjust their tax attributes in exchange for the IRS approving the modification. As such, the regulations contain rules related to the alternative procedure as defined in section 6225(c)(2)(B) and §301.6225-2(d)(2)(x) and under that procedure the partnership may satisfy the requirements of amended return modification by submitting on behalf of relevant partners, in accordance with forms, instructions, and other guidance prescribed by the IRS, all information and payment of any tax, penalties, additions to tax, additional amounts, and interest that would be required to be provided if the relevant partner were filing a modification amended return. The partnership must also demonstrate that relevant partners have agreed to take into account tax attributes consistent with taking into account the partnership adjustments allocable to that partner. The regulations provide another modification under §301.6225-2(d)(10), where the IRS will consider any other request for modification and determine whether it is appropriate in the circumstances.

Requests for the alternative procedure under §301.6225-2(d)(2)(x) are not claims for refunds for the reasons described later in this section of this preamble.

There is nothing in the regulations that precludes the partnership from requesting modification with respect to a relevant partner under the alternative procedure where the relevant partner would otherwise be entitled to a refund had the partner instead filed amended returns. However, the regulations state that a request for modification under the alternative procedure is not a claim for refund with respect to any person. As a result, a relevant partner may not make a claim for refund via the alternative procedure. This position is based on the statutory requirement under section 6225(c)(2)(B)(i) that requires a partner to pay any amount due under section 6225(c)(2)(A)(iii) if the partnership requests the alternative procedure. If a partner, after taking into account all partnership adjustments allocable to the partner, would not owe any amount as required in amended return modification under section 6225(c)(2)(A)(iii), the partner is not required to make a payment as part of the alternative procedure. The fact that a partner may utilize the alternative procedure without making a payment does not, however, allow the partner access to a refund through the alternative procedure.

The alternative procedure as described in section 6225(c)(2)(B) does not provide that the partners may obtain refunds. The alternative procedure provides a streamlined process for partners and the partnership generally to those partners paying additional amounts of tax, in lieu of filing amended returns. Partners that have been allocated negative adjustments, including reallocation or recharacterization adjustments, may take those adjustments into account using the alternative procedure but by doing so will forego any claim for refund of any amounts related to taking those adjustments into account. In other words, if, for instance, the partner had offsetting income against which the negative adjustment might be netted, the partner could utilize the alternative procedure to make whatever payment resulted from the remaining offsetting income. If the partner would be entitled to a refund as a result of its allocated adjustments, the partner must use the amended return procedures to obtain that refund.

The regulations under §301.6225-2(d)(2)(vii)(B) provide that the restrictions on subsequent amended returns or claims for refund apply equally to the amended return process and the alternative procedure. Because the alternative procedure does not exist outside the centralized partnership audit regime, there is no method by which a partnership could use the alternative procedure to obtain a refund of amounts paid during modification. The partner may file a subsequent amended return, however, if the circumstances described in §301.6225-2(d)(2)(vii)(C) are met.

Rate Modification

Under §301.6225-2(d)(4), a partnership may request modification based on a lower rate of tax for the reviewed year with respect to adjustments that are allocable to a relevant partner that is a C corporation and adjustments with respect to capital gains or qualified dividends that are allocable to a relevant partner who is an individual.

Rate modification is designed to address situations in which there is an adjustment to a particular type of income that is allocable to an individual or an adjustment that is allocated to a corporate taxpayer. A partnership may demonstrate that a lower rate of tax applies with respect to that income type or based on the type of taxpayer. Section 6225(c)(4)(A) (flush language) limits the rates that may apply by providing that “[i]n no event shall the lower rate determined . . . be less than the highest rate in effect with respect to the income and taxpayer . . ..” §301.6225-2(d)(4) provides a rule consistent with this statutory mandate. For instance, with respect to an adjustment attributable to a C corporation, the highest rate in effect for the reviewed year with respect to all C corporations would apply to that adjustment, regardless of the rate that would apply to the C corporation based on the amount of that C corporation’s taxable income.

In contrast, the amended return (or the alternative procedure to filing amended returns) allows a partner to take into account the partner’s share of adjusted items and apply the specific tax rate that applies to the partner’s amount of taxable income. When taking into account her share of the adjustments, which includes both the adjustment increasing ordinary income and the adjustment decreasing capital gain, the partner is able to offset additional partnership income with any permissible deductions. For example, a partner may utilize the increase in capital loss to offset the capital gain that was originally reported and subsequently re-characterized, thereby reducing the partner’s tax on capital gains to potentially zero and paying tax on her share of ordinary income at the partner’s specific effective tax rate.

§301.6225-2(b)(3) provides rules for calculating an imputed underpayment in the case of a rate modification. The first step in determining an imputed underpayment in the case of a rate modification is to determine each relevant partner’s distributive share of the partnership adjustments based on how each adjustment subject to rate modification would be properly allocated under section 702 to such relevant partner in the reviewed year. §301.6225-2(b)(3)(iii)(A). In the case of an adjusted item that was specially allocated to a partner or group of partners, however, each relevant partner’s distributive share is determined based on the amount of net gain or loss to the partner that would have resulted if the partnership had sold all of its assets at their fair market value as of the close of the reviewed year. §301.6225-2(b)(3)(iv).

Section 6225(c)(4)(B)(ii) provides if an imputed underpayment is attributable to the adjustment of more than one item, and any partner’s distributive share of such items is not the same with respect to all such items, then the portion of the imputed underpayment to which the lower rate applies with respect to such partner shall be determined by reference to the amount which would have been the partner’s distributive share of net gain or loss if the partnership had sold all of its assets at their fair market value as of the close of the reviewed year of the partnership.

§301.6225-1(g)(2)(iii) provides that the IRS may designate a specific imputed underpayment with respect to adjustments to items that were allocated to a partner or group of partners that had the same or similar characteristics, that participated in the same or similar transaction, “or on such other basis as the IRS determines properly reflects the facts and circumstances.” A partnership may request designation of a specific imputed underpayment during the examination or during modification. See §301.6225-2(d)(6).

§301.6225-2(b)(3)(iv) allows a partnership requesting rate modifications in the case of special allocations to determine the distributive share for all adjustments to which the lower rate applies with respect to all partners based on the test under either section 6225(c)(4)(B)(i) or section 6225(c)(4)(B)(ii).

The regulations allow partnerships and partners to request modification based on what they determine is the most appropriate method to measure partners’ distributive shares. The rule, however, does not remove the ability of a partnership to request modification based on section 6225(c)(4)(B)(ii). The regulations clarify that the distributive share referenced in section 6225(c)(4)(B)(i) is the distributive share as determined in the NOPPA, and if no determination regarding that distributive share was made in the NOPPA, the rules of subchapter K of chapter 1 of the Code (subchapter K).

The regulations under §301.6225-2(b)(3)(iv) expressly provide that any calculation by the partnership that is necessary for purposes of complying with the rule under §301.6225-2(b)(3)(iv) is not a revaluation for purposes of section 704.

Certain Passive Losses of Publicly Traded Partnerships

§301.6225-2(d)(5) provides rules for modification regarding certain passive activity losses of publicly traded partnerships. Pursuant to §301.6225-2(d)(5), in the case of a publicly traded partnership that is a relevant partner, an imputed underpayment is determined without regard to the portion of any adjustment the partnership demonstrates would be reduced by a specified passive activity loss which is allocable to a “specified partner.” §301.6225-2(d)(5)(iii) defines specified partner as a person that is a partner of a publicly traded partnership; that is an individual, estate, trust, closely held C corporation, or personal service corporation; and that has a specific passive activity loss with respect to the publicly traded partnership.

A qualified relevant partner is eligible for modification under §301.6225-2(d)(5). A qualified relevant partner is a relevant partner that meets the requirements of a specified partner for each year starting with the first affected year through the last year for which a return was filed by the partnership. The regulations provide that an indirect partner may also be a qualified relevant partner, and therefore be eligible for modification under §301.6225-2(d)(5), if the indirect partner is an individual, estate, trust, closely held C corporation, or personal service corporation and has a specified passive activity loss with respect to the publicly traded partnership.

§301.6225-2(d)(5) applies in the case of a publicly traded partnership that is a relevant partner. The regulations provide that modification under §301.6225-2(d)(5) applies only to the publicly traded partnership requesting modification under §301.6225-2 (that is, the partnership under examination).

Pursuant to section 6225(d), the adjustment year in the case of an administrative proceeding is the year in which a case is fully adjudicated under section 6234, or if no petition is filed under section 6234, when the FPA is mailed. A modification request must be submitted within 270 days of the issuance of the NOPPA, which must be mailed before the FPA. See section 6231(b)(2)(A). As a result of these rules, section 6225(c)(5) does not operate properly in the case of an administrative proceeding.

When the partnership submits modification under section 6225(c)(5), the partnership cannot know what the adjustment year is, much less what tax effects there might be in that year. The only circumstance in which section 6225(c)(5) operates properly with respect to the adjustment year is if an AAR has been issued. This is because under section 6225(d) the adjustment year in the case of an AAR is the year in which the AAR is filed. In light of this, the IRS has used the authority under section 6225(c)(6) to provide that the partnership may request modification under §301.6225-2(d)(5) with respect to the adjustment year or the most recent year for which the publicly traded partnership has filed a return under section 6031.

The regulations in §301.6225-2(d)(5) describe the requirements for modification by publicly traded partnerships under section 6225(c)(5). This section does not require the partnership requesting modification to provide any particular information about partners to the IRS, but the partnership must meet the general requirement to provide all information necessary to approve the modification as described in §301.6225-2(c)(2). Specifically, §301.6225-2(c)(2)(i) provides that the IRS may set forth in forms, instructions, and other guidance the information necessary to request modification.

The definition of qualified relevant partner allows partners to be eligible for modification under §301.6225-2(d)(5) provided they are partners through the year for which the most recent partnership was filed.

The regulations do not specify what specific information is required for modification under §301.6225-2(d)(5).

Section 301.6225-2(d)(5)(v) requires that the partnership report, in accordance with forms, instructions, and other guidance prescribed by the IRS, to each specified partner or qualified relevant partner the amount of the reduction in suspended passive loss carryovers.

The regulations under §301.6225-2(d)(5)(v) provide that the IRS may require reporting to an indirect partner that is a qualified relevant partner through forms, instructions, or other guidance.

Modification Relating to Qualified Investment Entities

§301.6225-2(d)(7) provides that a partnership may request a modification of an imputed underpayment based on deficiency dividends distributed as described in section 860(f) by a relevant partner that is a qualified investment entity (QIE) under section 860(b). Under §301.6225-2(c)(3)(i), the partnership must provide all information required to request modification (including modification for deficiency dividends paid by a QIE partner) on or before 270 days after the issuance of the NOPPA. A partnership may request an extension of this 270-day period, subject to the consent of the IRS. Section 301.6225-2(c)(3)(ii).

Section 860(e)(1)-(4) provides that a “determination” means (1) a court decision; (2) a closing agreement; (3) an agreement signed by the Secretary and by the QIE relating to the QIE liability for tax; or (4) a statement by the QIE attached to its amendment or supplement to a tax return. A NOPPA does not fall into any of these four categories. Accordingly, a NOPPA is not a “determination” for purposes of section 860(e). Moreover, §301.6225-2(d)(7)(ii) requires that the partnership provide documentation of the QIE partner’s “determination” described in section 860(e) as part of the partnership’s request for modification. This rule makes clear that the determination in this context is the determination with respect to the QIE partner, which does not, by definition, include the NOPPA mailed to the partnership.

Closing Agreement Modification

§301.6225-2(d)(8) provides that a partnership may request modification based on a closing agreement between the IRS and the partnership or between the IRS and a relevant partner, or both. Although the IRS may, pursuant to §301.6223-2(d)(1), allow a person that is not the partnership representative to participate in the examination of the partnership, the IRS is not required to do so. The centralized partnership audit regime is designed to provide for a single, unified proceeding in which the IRS works solely with the partnership representative who has the sole authority to bind the partnership and all its partners. The partnership representative may request that the IRS work directly with a partner on a closing agreement or other issues, but it is solely within the IRS’s discretion to allow that. See §301.6223-2(d)(1).

Requests for Additional Modifications

Section 6225(c)(6) provides that the “Secretary may by regulations or guidance provide for additional procedures to modify imputed underpayment amounts on the basis of such other factors as the Secretary determines are necessary or appropriate” for the purposes of section 6225(c). §301.6225-2(d)(10) provides that a partnership may request a modification not otherwise described in §301.6225-2(d), and the IRS will determine whether such modification is accurate and appropriate. Additional types of modifications and the documentation necessary to substantiate such modifications may be set forth in forms, instructions, or other guidance prescribed by the IRS.

§301.6225-2(d)(3)(ii) defines a tax-exempt entity to mean a person or entity defined in section 168(h)(2)(A), (C), or (D). A foreign person or entity as defined in section 168(h)(2)(C) includes a foreign government or foreign organization. Accordingly, to the extent an adjustment is allocable to a foreign government or foreign organization, the partnership may request modification with respect to such adjustment provided the requirements of §301.6225-2(c) and (d)(3) are met.

§301.6225-2(d)(9) provides rules for tax treaty modifications. Under §301.6225-2(d)(9), a partnership may request modification with respect to a relevant partner’s distributive share of an adjustment to a partnership-related item if the relevant partner was a foreign person who would have qualified, under an income tax treaty with the United States, for a reduction or exemption from tax with respect to such partnership-related item in the reviewed year, would have derived the item (within the meaning of §1.894-1(d)) had it been taken into account properly in the partnership’s reviewed year return, and is not otherwise prevented under the income tax treaty with the United States from claiming such reduction or exemption with respect to the reviewed year at the time of the modification request.

A treaty modification is only available to the extent the relevant partner would have qualified for the treaty benefit at issue, whether a rate reduction or exemption from tax, had the item been taken into account by the partner in the reviewed year. In general, that means a non-U.S. partner may submit a treaty modification only if the partner was, for the reviewed year, a treaty resident; would have derived the item of income through the partnership, or tiers of partnerships, if applicable, under the tax laws of its country of residence; would have been the beneficial owner of the item of income (not a nominee or conduit); would have satisfied the limitation on benefits article under the treaty, if any; and met any other specific requirement for claiming the benefit under the treaty, such as a stock ownership threshold in the case of a claim for a reduced rate of tax on U.S. source dividends.

The regulations do not address which form will be used for tax treaty modification, or for any type of modification.