Fixed Deadline in BBA Regulations May Pose Challenges for Tiered Partnership Structures

Final regulations under the centralized partnership audit regime enacted by the Bipartisan Budget Act of 2015 (BBA) were published in February 2019 (T.D. 9844, the final regulations).

Under the final regulations, partnerships, S corporations, nongrantor trusts, and decedent’s estates (collectively, pass-through partners) that receive a Form 8986, Partner’s Share of Adjustment(s) to Partnership-Related Item(s) generally must either (i) “push out” the adjustments included on the Form 8986, or (ii) become liable for an imputed underpayment (IU) based on the adjustments.

The final regulations provide that the pass-through partner must push out or pay by no later than the extended due date for the adjustment year return of the audited partnership or a partnership filing an administrative adjustment request (AAR), which is indicated in box F of Part II of Form 8986 (the “push out or pay date,” or POP date). Treasury Regulation Section 301.6226-3(e)(3)(ii) (audit context) and Section 301.6227-3(c)(1) (AAR context; the AAR push-out rules generally cross reference the audit push-out rules). See also tax code Section 6226(b)(4)(B) and Section 6227(b)(2).

This article provides a summary of the push-out process and discusses how pass-through partners and partners other than pass-through partners (i.e., non-pass-through partners) take into account their shares of adjustments shown on Form 8986.

1. The initial push out: audited partnerships and AAR partnerships that furnish Forms 8986 to reviewed year partners

Under the BBA, an audited partnership or AAR partnership may elect to “push out” certain adjustments resulting from the audit or AAR. A push out election is made by furnishing Forms 8986 to the reviewed year partners, indicating each partner’s share of the adjustments, and filing a Form 8985, Pass-Through Statement – Transmittal/Partnership Adjustment Tracking Report, and copies of the Forms 8986 with the IRS.

In the case of an AAR, the Forms 8986 and 8985 that are filed with the IRS must be filed together with the AAR. An AAR is made by filing either (1) a Form 1065-X, Amended Return or Administrative Adjustment Request (AAR), if eligible to paper file, or (2) a Form 8082, Notice of Inconsistent Treatment of Administrative Adjustment Request (AAR), along with Form 1065, U.S. Return of Partnership Income (amended return box checked). Adjustments that do not result in an IU (generally, “favorable” adjustments, such as a decrease to income or an increase to losses), must be pushed out in the AAR context.

If the partnership timely pushes out adjustments resulting from an audit or an AAR, the reviewed year partners (rather than the partnership) will become liable for any necessary payments attributable to the adjustments.

Boxes D through G in Part II of the Form 8986 (and Form 8985) include certain dates, including the POP date, that are particularly important for effecting the push-out process through tiers. These are the four dates presented in chronological order (rather than the order they appear on the form).

Box D — Box D indicates the reviewed year (i.e., the partnership taxable year to which the adjustments relate).

Box G — Box G indicates the date the Forms 8986 are furnished to the reviewed year partners.

• In the case of an AAR, the AAR partnership is required to furnish Forms 8986 to its reviewed year partners on the same day that the AAR is filed.
• In the case of an audit, the audited partnership must furnish the Forms 8986 no later than 60 days after the date all of the partnership adjustments to which the Forms 8986 relate are “finally determined” (i.e., the later of the 90-day period to file a petition after the notice of final partnership adjustment (FPA) is mailed or, if a petition is filed, the date when the court’s decision becomes final).

Box E — Box E indicates the last day of the adjustment year.

• In the case of an AAR, the adjustment year is the taxable year in which the AAR is filed.
• In the case of an audit, the adjustment year is generally the taxable year in which an FPA is mailed.

Box F — Box F indicates the POP date.

2. Partners that are not Pass-through Partners

In the case of a non-pass-through partner that receives a Form 8986, the non-pass-through partner must complete Form 8978, Partner’s Additional Reporting Year Tax, including Schedule A, Partner’s Additional Reporting Year Tax (Schedule of Adjustments), to determine its “additional reporting year tax” attributable to the adjustments included on its Form 8986.

The additional reporting year tax is reported by the non-pass-through partner on its U.S. federal income tax return for its reporting year (i.e., the taxable year of the partner during which the audited or AAR partnership pushed out adjustments on Form 8986). A non-pass-through partner that receives a Form 8986 generally is not required to amend its U.S. federal income tax return for its taxable year that corresponds to the reviewed year.

Additional reporting year tax is, very generally, a partner’s change in tax liability under Chapter 1 of the tax code (change in “Chapter 1 tax”) for its reporting year after taking into account the adjustments included on the partner’s Form 8986. Computationally, the additional reporting year tax may be summarized as the sum of the partner’s redetermined Chapter 1 tax liability for (1) its first affected year (i.e., the partner’s taxable year that includes the end of the reviewed year), taking into account the Form 8986 adjustments, and (2) and any intervening years (i.e., taxable years after the first affected year and before the reporting year), taking into account any changes to partner-level tax attributes resulting from taking the Form 8986 adjustments into account in the first affected year.

The amount of additional reporting year tax may be either positive or negative. Under the final regulations, a negative amount of additional reporting year tax is treated like a nonrefundable credit in the reporting year. As such, the tax benefit associated with any negative additional reporting year tax is capped by the non-pass-through partner’s tax liability for the reporting year.

Under Section 6222, partners in a BBA partnership generally are required to treat partnership-related items consistently on the partner’s return with how the partnership treats those items on its return. In the case of inconsistent treatment (i.e., where an item is treated and reported one way by the partnership and a different way by the partner), a partner loses all rights to contest the substantive nature of an adjustment unless the partner has filed a Form 8082.

3. Pass-through Partners – push out or pay IU

If a pass-through partner does not timely push out the adjustments included on the Form 8986, in accordance with the time and manner requirements provided in the final regulations, the pass-through partner will be liable for any IU based on the adjustments.

A pass-through partner pushes out its share of adjustments by furnishing its own Forms 8986 to its affected partners (i.e., any partner (or shareholder or beneficiary) that held an interest in the pass-through partner at any time during the pass-through partner’s taxable year to which the adjustments relate) and filing a Form 8985 and copies of the Forms 8986 with the IRS (via fax in the AAR context and electronically if resulting from an audit).

Example 1. Lower-tier partnership LTP files an AAR on Aug. 16, 2021, that reflects an increase in LTP’s ordinary income in 2019. UTP, a partner in LTP, is classified as a partnership. UTP’s share of the increase in LTP’s ordinary income is $10 million. If UTP does not timely push out this adjustment before the extended due date of LTP’s 2021 return, UTP will be liable for an IU of $3.7 million (the amount of the adjustment, $10 million, times the highest tax rate applicable to individuals or corporations in 2019). UTP must push out or pay the IU no later than the POP date.

A pass-through partner must pay or push out by no later than the POP date (which is indicated in box F of Part II of Form 8986).

Multiple tiers. In the case of an ownership structure consisting of multiple tiers of pass-through partners, each affected partner that is a pass-through partner (an upper-tier pass-through partner) also generally must push out no later than the POP date (defined above).

Because the deadline for a pass-through partner to push out partnership adjustments is fixed, each pass-through partner up the ownership chain will have less time to push out its share of adjustments to its affected partners.

Example 2. Upper-tier partnership (UTP) owns an interest in middle-tier partnership (MTP1), which owns an indirect interest (through another pass-through partner, MTP2) in lower-tier partnership (LTP). LTP is a calendar year partnership. On Dec. 1, 2021, LTP files an AAR to report an increase in income with respect to its 2019 taxable year and furnishes Forms 8986 to its reviewed year partners. The Forms 8986 furnished by LTP to its reviewed year partners indicate that the extended due date for LTP’s adjustment year return (2021) is Sept. 15, 2022.

MTP2 furnishes a Form 8986 to MTP1 on Aug. 2, 2022. On Sept. 1, 2022, MTP1 furnishes a Form 8986 to UTP. UTP has only two weeks, until Sept. 15, 2022 (the POP date), to push out its share of adjustments. Otherwise, UTP must compute an IU based on the adjustments included on its Form 8986 and pay that IU by Sept. 15, 2022. For example, if UTP’s share of the adjustments is an increase in income of $10 million, UTP will be required to pay an IU of $3.7 million (the amount of the adjustment, $10 million, times the highest tax rate applicable to individuals or corporations in 2019).

In preparing its own push-out forms, the dates in boxes D through G of Part II of the Forms 8986 and 8985 furnished by a pass-through partner are exactly the same as the dates shown in Part II of the Form 8986 received by the pass-through partner. It is critical that no changes should be made to these four dates, because these dates describe actions by the lowest-tier partnership, not actions by the pass-through partner.

The final regulations provide a special rule for affected partners that are non-pass-through partners for purposes of Section 6651. Section 6651 generally imposes delinquency penalties for failure to file tax returns or pay an amount of tax. For affected partners that are non-pass-through partners, the final regulations provide that no addition to tax under Section 6651 related to any additional reporting year tax (attributable to adjustments reflected on the Form 8986) will be imposed if the partner pays the additional reporting year tax within 30 days of the POP date.

4. State tax considerations

While some states have adopted rules for reporting adjustments resulting from a BBA audit or AAR, state timing requirements for reporting those adjustments may be different than the timing requirements under the BBA. For example, some states may require a partnership to file an amended state return and furnish amended state K-1s reflecting federal adjustments long before the push out statements are due under the BBA regime. Partnerships that file an AAR generally will be subject to any relevant state’s timing requirements for reporting adjustments resulting from an AAR.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Matthew Lay is a Managing Director in the passthroughs group in the Washington National Tax office of Deloitte Tax LLP. Before joining Deloitte, Matthew worked for the Passthroughs and Special Industries division in the IRS Office of Chief Counsel in various roles, specializing in the taxation of partnerships.

Ira Aghai is a Manager in the passthroughs group in the Washington National Tax office of Deloitte Tax LLP.

This article contains general information only and Deloitte is not, by means of this article, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This article is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this article.

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