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Two-Year Budget Bill Contains Significant Tax Provisions


11/10/15

Synopsis
 
On November 2, 2015, President Obama signed a two-year budget bill, the Bipartisan Budget Bill of 2015, H.R. 1314 (“the Bill”), which contains several important tax provisions. These include measures to eliminate the TEFRA unified partnership audit rules and the electing large partnership rules, rules relating to partnership interests created by gift, revisions to, and expansion of, certain pension provisions, and other changes.
 
Issue
 
Partnership Audit Rules 
 
Current Law
A partnership may be audited under three different audit regimes:
 
  • Partnerships with 100 or more partners, that elect to be governed by the Electing Large Partnerships (ELPs) rules, are subject to simplified audit procedures.
  • For partnerships with more than 10 partners, under the unified TEFRA rules, the IRS conducts a single administrative proceeding to resolve tax audit issues.
  • For partnerships with 10 or fewer partners, each of which is an individual U.S. resident, C Corporation, or estate, the IRS applies the audit procedures for individual taxpayers so that the partnership and partner are each audited separately. The unified audit rules don’t apply to these partnerships.
     
New Law 
For partnership tax years beginning after December 31, 2017, the new legislation repeals both the TEFRA uniform partnership audit rules and the electing large partnership rules. It replaces them with a new streamlined system for auditing partnerships and their partners at the partnership level. 
 
Under this streamlined audit approach, the IRS will examine the partnership’s items of income, gain, loss, deduction, credit, and partner’s distributive shares for a particular year of the partnership. Any adjustments, including penalties, are taken into account by the partnership (not the individual partners) in the year that the audit or any judicial review is completed. Partners would not be subject to joint and several liability for any liability determined at the partnership level. The partnership would generally be required to pay the “imputed underpayment” which is the net of all adjustments to the partnership return for the year under review multiplied by the highest individual or corporate tax rate.
 
Partnerships would also have the option of demonstrating that the adjustment would be lower if it were based on certain partner-level information from the reviewed year rather than imputed amounts determined solely on the partnership’s information in such year. For example, if a partner is opting to file an amended return taking into account its share of the adjustment, or if the applicable tax rate should be different for a particular type of partner, or if the type of income (ordinary, dividends, capital gains) would have a different applicable rate.
 
Rather than taking the adjustment into account at the partnership level, the partnership can make an election to issue adjusted K-1s to the partners, who would file amended returns for the reviewed year through a simplified amended-return process. The election has to be made no later than 45 days after a notice of final partnership adjustment, and can only be revoked with the IRS’s consent.
 
Opt-Out for small partnerships: The legislation will allow partnerships with 100 or fewer qualifying partners (individuals, C corporations, foreign entities, that would be treated as a C corporation if it were domestic, S corporations, or estates) to opt-out of the new audit system. Those that opt-out will be audited under the general rules applicable to individual taxpayers.
 
Partnership Interests Created by Gift 
 
The new legislation clarifies that a family member who receives, via gift, a capital interest in a partnership where capital is a material income-producing factor, should be respected as a partner in the partnership. Therefore, the family member will be taxed on the income from that partnership. Some taxpayers have argued that this family partnership rule provides an alternative test for determining who is a partner without regard to how the term is generally defined in the partnership tax rules. Under the new rules, an individual or entity holding a capital interest in a partnership could be construed to be a partner even if there is no joint profit motive with the other partners.
 
Applying to partnership tax years beginning after December 31, 2015, the new provision clarifies that Congress did not intend for the family partnership rules to provide an alternative test as to whether a person is a partner in a partnership. The determination of whether the owner of a capital interest is a partner will be made under the generally applicable rules defining a partnership and a partner. 
 
The new legislation clarifies the family partnership rules to provide that a person is treated as a partner in a partnership where capital is a material income-producing factor regardless of whether the interest was obtained by purchase or gift or whether such interest was acquired from a family member.
 
Single Employer Plan Annual Premium Rates
 
New Law
Single-employer pension plans annually pay a fixed premium to the Pension Benefit Guaranty Corporation (PBGC). The Bill increases the single-employer fixed premium to $68 for 2017, $73 for 2018, and $78 for 2019, and subsequently re-indexes for inflation.  The variable rate premium will continue to be indexed for inflation, but will be increased by an additional $2 in 2017, and an additional $3 in both 2018 and 2019. 
 
Pension Payment Acceleration 
 
Current Law
Generally, the flat-rate and variable-rate PBGC premium filing due date is the 15th day of the tenth full calendar month of the premium payment year. Therefore, the due date is October 15 for calendar year plans.
 
New Law
The premium due date for plan years beginning in 2025 will be the 15th day of the ninth calendar month beginning on or after the first day of the premium payment year. 
 
What Does CohnReznick Think?
Partnerships that qualify for the small partnership exception should evaluate whether or not to elect out and should consult their tax advisor. Additional consideration should be given to partnership transfers – under the new rules, a new partner could be impacted by the audit adjustments arising from a reviewed year before they were a partner. This may need to be taken into consideration in determining liability indemnification for a purchaser of a partnership interest.
 
Contact
 
For more information, please contact Thomas Nice, Partner, at 301-961-5542 or thomas.nice@cohnreznick.com, or Daniel King, Senior Manager, at 301-280-3069 or daniel.king@cohnreznick.com

Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

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