Push-Out Elections

This section discusses the mechanics and effect of making an election under §301.6226-1; the statements furnished to partners and filed with the IRS pursuant to §301.6226-2; and the rules regarding how adjustments are taken into account by partners in accordance with §301.6226-3.

Mechanics and effect of making a “push-out” election under section 6226.

There are several general areas/issues related to the mechanics and effect of making an election under section 6226 that are covered below: (1) the time for making the election; (2) revocations of the election; (3) making the election when there are multiple imputed underpayments or there is no imputed underpayment; (4) notification by the IRS that an election is invalid; (5) making the election and filing a petition for readjustment under section 6234; and (6) whether the election should be mandatory.

What Is a Push-Out Election?

The push out regime is a collection mechanism in lieu of collecting the imputed underpayment from the audited partnership.

Under the centralized partnership audit regime, adjustments to partnership-related items are similarly determined at the partnership level. In contrast to the TEFRA procedures, however, the tax attributable to those adjustments is also assessed and collected at the partnership level in the form of an imputed underpayment determined pursuant to section 6225. An imputed underpayment is assessed as if it were a tax imposed for the adjustment year, generally the year in which the adjustments are finally determined, instead of the year that was subject to examination. Section 6225(d). The partnership, not the partners, is liable for the imputed underpayment. A partnership may elect the alternative to payment of the imputed underpayment under section 6226 and “push out” the adjustments determined at the partnership level, in which case the tax attributable to the adjustments is assessed and collected from the partnership’s partners

A push out election relieves the partnership that made the election under section 6226 (audited partnership) from the requirement to pay the imputed underpayment to which the election relates and shifts the collection of any chapter 1 tax resulting from the partnership adjustment to the partners of the partnership.

Pursuant to section 6226(a)(1), a partnership may make a push out election “with respect to an imputed underpayment.” Section 301.6226-1(a) echoes the statutory language by providing that a partnership may elect under §301.6226-1 an alternative to the payment by the partnership of “an imputed underpayment.” Accordingly, to make a push out election under section 6226(a)(1) and §301.6226-1, there must be at least one imputed underpayment for the taxable year.

The benefit to the audited partnership by making a push out election is that the partnership is no longer liable for the imputed underpayment to which the election relates. One of the requirements to obtain this benefit is that the partnership must furnish correct statements to all of the partnership’s reviewed year partners.

When taking into account adjustments under section 6226, a partner determines the increase or decrease in tax that would have occurred if the adjustments were taken into account for the partner’s tax year correlating to the year that was audited. The partner then adjusts her tax for the current year by the aggregate tax that would have resulted had the adjustments been properly taken into account. Section 6226, in effect, shifts the burden from the IRS to the partner.

Time for Making the Election Under Section 6226

Under section 6226(a) and §301.6226-1(c)(3), a partnership may make an election under section 6226 (push out election) within 45 days of the date on which the FPA is mailed by the IRS. This 45-day period cannot be extended, and once made, the election can only be revoked with the consent of the IRS. See §301.6226-1(c)(1), (3).

The 45-day period for making an election under section 6226 is established by statute. Pursuant to section 6226(a)(1), section 6225 shall not apply to an imputed underpayment if the partnership “not later than 45 days after the date of the notice of final partnership adjustment” elects the application of section 6226 with respect to such imputed underpayment and furnishes statements to its partners for the reviewed year under section 6226(a)(2). The partners must then take into account the adjustments that resulted in that imputed underpayment. Consistent with section 6226(a)(1), §301.6226-1(c)(3) provides that an election under §301.6226-1 must be filed within 45 days of the date the FPA is mailed by the IRS and that the time for filing such an election may not be extended.

Section 6226 does not provide for an exception to the 45-day period described in section 6226(a)(1), nor does section 6226 provide that the 45-day period may be extended by the IRS.

Revocations of Elections under Section 6226.

Section 6226(a) provides that an election under section 6226, once made, “shall be revocable only with the consent of the Secretary.” Accordingly, §301.6226-1(c)(1) provides that an election under §301.6226-1 may only be revoked with the consent of the IRS.

In light of the collection nature of the push out regime, whether a revocation of a push out election will be granted largely depends on the facts and circumstances. For example, a revocation may benefit the IRS, the partnership, and its partners in the case of an agreement by the partnership to pay at the partnership level in lieu of pushing out the adjustments to its partners. On the other hand, a revocation may prejudice the IRS and the partners if, for example, the revocation is granted after statements have already been furnished to the partners. In that case, some partners may have already paid any resulting tax. If the revocation is significantly delayed, some partners may be time-barred from filing refund claims. In turn, any refund claim filed by a partner would require additional processing by the IRS, which could become administratively burdensome particularly in the case of tiered structures. Also, the period to assess the imputed underpayment against the partnership may have expired at the time of the revocation request.

Making the Election when There are Multiple Imputed Underpayments or when There is no Imputed Underpayment.

Under §301.6226-1(a), if an FPA includes more than one imputed underpayment (as described in §301.6225-1(g)), a partnership may make an election under §301.6226-1 with respect to one or more of the imputed underpayments identified in the FPA. The regulations under §301.6226-1(a) do not contain any restrictions or limitations on a partnership’s ability to make an election under section 6226 for a particular imputed underpayment identified in an FPA. For each imputed underpayment for which the partnership plans to make a push out election, the partnership is required to satisfy the provisions of §§301.6226-1 and 301.6226-2, including the requirement under §301.6226-1(c)(3)(ii)(D) that the election identify the imputed underpayment to which the election relates.

Notification that an Election Under Section 6226 is Invalid.

Under §301.6226-1(c)(1), an election under §301.6226-1 is valid until the IRS determines that the election is invalid. If an election is determined by the IRS to be invalid, the IRS will notify the partnership and the partnership representative within 30 days of such determination and provide the reasons for the determination. See §301.6226-1(d). Under §301.6226-1(d), the IRS may determine an election is invalid without first notifying the partnership or providing the partnership an opportunity to correct any failures to satisfy all of the provisions of §301.6226-1 and §301.6226-2, including an opportunity to correct errors in pursuant to §301.6226-2(d).

An election under section 6226 may be invalid for a number of reasons. For example, the partnership may make an election, but never furnish required statements to its partners

Effect of Filing a Petition for Readjustment Under Section 6226.

Under §301.6226-1(f), a partnership that has made an election under §301.6226-1 is not precluded from filing a petition under section 6234(a). Section 6234(a) provides that a partnership may file a petition in the Tax Court, a United States district court, or the Court of Federal Claims, within 90 days of the date on which an FPA is mailed under section 6231. A petition under section 6234 may be filed in a district court or the Court of Federal Claims only if the partnership filing the petition makes a jurisdictional deposit in accordance with section 6234(b).

§301.6234-1(b) provides that the jurisdictional deposit is the amount of (as of the date of the filing of the petition) any imputed underpayment (as shown on the FPA) and any penalties, additions to tax, and additional amounts with respect to such imputed underpayment.

Nothing in the regulations limits a partnership’s ability to file a petition in a district court or the Court of Federal Claims if the partnership has made an election under section 6226 (provided the partnership has made the jurisdictional deposit required by section 6234(b)). §301.6226-1(e) expressly provides that a partnership making the election under §301.6226-1 is not precluded from filing a petition under section 6234(a) (which includes petitions in the Tax Court as well as petitions in district courts and the Court of Federal Claims). The plain language of §301.6226-1(f) makes clear that a partnership can take both actions.

Elective Nature of Section 6226.

Sections 6225 and 6226 provide that the default rule, absent an affirmative election by the partnership, is that the partnership shall pay any imputed underpayment resulting from the partnership adjustments. A partnership “elects the application of” section 6226 with respect to an imputed underpayment. Section 6226(a)(1). That election is statutory and, like under any other election under the Code, is a choice by the partnership.

Election Must Include Address for Each Reviewed Year Partner.

§301.6226-1(c) requires that an election under §301.6226-1 must include each reviewed year partner’s name, address, and TIN. Under §301.6226-2(e), each statement furnished by the partnership to a reviewed year partner must include “the current or last address of the reviewed year partner that is known to the partnership.” A partnership should use the same standard for determining the address included for each reviewed year partner in the election under §301.6226-1 as the address included in each statement under §301.6226-2. The regulations under §301.6226-1(c) provide that an election under §301.6226-1 must include the “the current or last address of each reviewed year partner that is known to the partnership.”