Caplin & Drysdale’s Charles M. Ruchelman spoke with Bloomberg BNA’s Laura Davison regarding the potential for investment in partnerships declining and S corporation status gaining in popularity if neither Congress nor the IRS revise a disputed provision in the new partnership audit regime about how far a multitiered entity can push out an adjustment. For the full article, please visit Bloomberg BNA’s website (subscription required).
Excerpt taken from the article.
This disagreement between those administering the tax and those paying it hits on the underlying reason why the law was enacted—to make it easier for the IRS to audit partnerships. This is the “pressure point” between the IRS’s goal to streamline tax collection and partnerships’ desire to maintain the flexibility in partnership structuring, Charles Ruchelman, a member at Caplin & Drysdale, Chartered, said.
The JCT description appeared in the 2015 “bluebook,” which outlines the mechanics of the new partnership audit law and other tax legislation signed into law last year. IRS officials, who are in the process of writing proposed regulations to implement the law effective in 2018, have said they are wary of straying from the JCT interpretation.
If Congress leaves the status unchanged and the IRS adopts the JCT position, partnerships are likely to be much less interested in investing in another partnership, because the entity could end up stuck with a tax liability instead of passing it through to its partners, Ruchelman said.
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The JCT bluebook seems to offer a work-around that would let an upper-tier partnership that receives a revised Schedule K-1 (Form 1065), Partner’s Share of Income, Deductions, Credits, etc., prepare an administrative adjustment request to push the tax out to its partners, Ruchelman said. However, there may be statute of limitation concerns that limit the AAR option.
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Provisions in the law that make audits easier for the IRS to administer fits with the intent of the law, Ruchelman said, but “the goal of simplifying tax collection should not justify resolving an important issue with a blunt instrument.”