Daily Tax Update - January 18, 2017: IRS Releases Proposed Rules for New Centralized Partnership Audit Regime

IRS Releases Proposed Rules for New Centralized Partnership Audit Regime:  Today the Treasury Department and the IRS released proposed regulations regarding implementation of the new partnership audit regime, which was enacted into law by the Bipartisan Budget Act of 2015 (BBA).  The BBA repeals current rules governing partnership audits and replaces them with a new centralized partnership audit regime that, in general, assesses and collects tax at the partnership level.  The proposed regulations provide rules for partnerships subject to the new regime, including procedures for electing out of the centralized partnership audit regime, filing administrative adjustment requests, and determining amounts owed by the partnership or its partners attributable to adjustments that arise out of an examination of a partnership.  The proposed regulations also address the scope of the centralized partnership audit regime and provide definitions and special rules that govern its application, including the designation of a partnership representative.  The proposed rules apply to partnerships for taxable years beginning after December 31, 2017 and any partnership that elects application of the centralized partnership audit regime for taxable years beginning after November 5, 2015 and before January 1, 2018.  

Aaron Nocjar, a partner in Steptoe’s Washington office, noted: “The operation of the new statutory rules has been subject ‎to much debate, including whether the new rules actually simplify (for the government and for taxpayers) the audit and litigation rules for tax partnerships.  In fact, there are already proposals to modify the new statutory rules, which very well may be included in any broader tax reform legislation this year.  However, in light of the inherent uncertainty of the legislative process and the looming effective date of the new rules, the issuance of these regulations was, nevertheless, expected to some degree."

IRS Releases Rules Package Address Transfers of Property by US Persons to Partnerships With Related Foreign Partners:  Today the Treasury Department and the IRS released temporary regulations (T.D. 9814) that address transfers of appreciated property by US persons to partnerships with foreign partners related to the transferor.  The regulations override the rules providing for non-recognition of gain on a contribution of property to a partnership in exchange for an interest in the partnership under section 721(a) pursuant to section 721(c) unless the partnership adopts the remedial method and certain other requirements are satisfied.  Final regulations were also released that revise and add cross-references to coordinate the application of the temporary regulations.  The regulations are effective as of today.  

The text of the temporary regulations also serves as the text of proposed regulations.  

IRS Releases Final Rules Regarding Application of Modified Carryover Basis to General Basis Rules:  Today the Treasury Department and the IRS released final regulations regarding the application of the modified carryover basis rules of section 1022.  Specifically, the final rules modify provisions of existing regulations under various sections of the Internal Revenue Code to take into account the application of the modified carryover basis rules of section 1022.  The rules stem from the temporary repeal of the estate tax in 2010 under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA).  The EGTRRA also enacted section 1022, which set forth a modified carryover basis system applicable after 2009 generally providing that the recipient’s basis in property acquired from a decedent is the lesser of the decedent’s adjusted basis in the property or the fair market value of the property on the decedent’s date of death.  The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (TRIRJCA) retroactively reinstated the estate tax and repealed section 1022 with respect to the estates of decedents who died in 2010.  However, the TRIRJCA allowed the executor of the estate of a decedent who died in 2010 to elect to have the provisions of section 1022 apply.  

Proposed Rules on Dependency Exemption Released:  Today the Treasury Department and the IRS withdrew proposed regulations relating to the dependency exemption for a child placed for adoption issued prior to the changes made to the law by the Working Families Tax Relief Act of 2004 (WFTRA).  New proposed regulations were released that reflect changes made by the WFTRA and by the Fostering Connections to Success and Increasing Adoptions Act of 2008.  Specifically, the new proposed rules provide that any child legally adopted by a person, or any child who is placed with a person for legal adoption by that person, is treated as a child by blood of that person for purposes of the relationship tests under section 152(c)(2) and 152(d)(2).  Foster children are also included in the definition.

In addition, the new proposed regulations amend the regulations relating to the surviving spouse and head of household filing statuses, the tax tables for individuals, the child and dependent care credit, the earned income credit, the standard deduction, joint tax returns, and taxpayer identification numbers for children placed for adoption.  The new proposed regulations change the IRS’s position regarding the category of taxpayers permitted to claim the childless earned income credit.  Further, in determining a taxpayer’s eligibility to claim a dependency exemption, the new proposed regulations change the IRS’s position regarding the adjusted gross income of a taxpayer filing a joint return for purposes of the tiebreaker rules and the source of support of certain payments that originated as governmental payments.  

Miscellaneous Guidance: 
Revenue Ruling 2017-04 provides various prescribed rates for federal income tax purposes including the applicable federal interest rates, the adjusted applicable federal interest rates, the adjusted federal long-term rate, and the adjusted federal long-term tax-exempt rate.  These rates are determined as prescribed by section 1274.  

Revenue Procedure 2017-22 provides a safe harbor under section 118(a) for certain amounts received by corporate taxpayers under certain Department of Transportation programs. 

Notice 2017-14 provides an additional situation in which the hardship exemption from the individual shared responsibility payment under section 5000A may be claimed on a federal income tax return without obtaining a hardship exemption certification from the Health Insurance Marketplace.  The situation described in the notice is a hardship exemption established by the Department of Health and Human Services, for an individual who is not enrolled in health insurance coverage that qualifies for the health coverage tax credit (HCTC) allowed by section 35 for one or more months between July 2016 and December 2016, but who would have been eligible for the HCTC under section 35 if enrolled.