tax notes federal PROCEDURALLY TAXING
B-B-A, Easy as A-M-T, Part 2
by Jenni Black
Jenni Black is a managing director in Citrin Cooperman’s national tax office and the practice leader of the tax procedure and controversy practice. Jenni is also a contributing author for Procedurally Taxing.
In this post, Black examines the interaction between the alternative minimum tax and the additional reporting year tax when computing a partner’s total chapter 1 tax for the reporting year, in situations in which the partnership has made an election to push out the adjustments to its partners under the centralized partnership audit regime enacted by the Bipartisan Budget Act of 2015.
This post reflects the author’s personal views and not necessarily those of Citrin Cooperman.
Welcome back to “B-B-A, easy as A-M-T.” Part 1 of the article discussed how a partner’s tax is impacted if the partnership elects to push out the adjustments to its reviewed year partners. Part 1 also discussed how the alternative minimum tax is calculated. In part 2 of this article, I put those two things together and discuss how the additional reporting year tax fits into the overall calculation of the partner’s chapter 1 tax for the reporting year. It’s as simple as do-re-mi.
What is the additional reporting year tax? Is it a tax imposed by chapter 1 of the Internal Revenue Code? Well, let’s look at that. The code section that creates the liability is section 6226 (or section 6227) because it imposes liability on partners if the partnership elects to push out the adjustments. Sections 6226 and 6227 are not in chapter 1; they are in subchapter C of chapter 63 in subtitle F.
Does that make it a tax under subtitle F? While section 6226 (and section 6227) imposes tax liability on the partners if the partnership elects to push out, the amount of tax is not calculated under subtitle F; it’s calculated under chapter 1, and it adjusts tax under chapter 1.
Under section 6232, the imputed underpayment (IU) is assessed and collected against the partnership “as if it were” a tax under subtitle A (income taxes). Similarly, section 6233(a)(3) provides that penalties on a partnership under the Bipartisan Budget Act of 2015 are calculated “as if” the partnership was an individual subject to chapter 1 tax and the IU is an actual underpayment or understatement of tax. The partnership’s liability for the IU is also created under subchapter C of chapter 63 of subtitle F, not subtitle A where income taxes are located. But the IU is calculated under section 6225, not chapter 1. The statutes refer to the IU as being treated “as if” it were a tax under subtitle A, not that it actually is a tax under subtitle A; so the IU is not an income tax, it’s just assessed and collected as if it were an income tax. It only follows the rules for chapter 1 taxes when it comes to penalty calculations and assessment and collection.
Section 6226 (and section 6227) do not contain the same “as if” language. Section 6226(b) states that the partner’s “tax imposed by chapter 1” for the tax year is adjusted (section 6227 uses rules “similar to the rules of section 6226”). If the additional reporting year tax adjusts chapter 1 tax, it would seem to be part of chapter 1 tax, right? After all, that’s how other adjustments to items work. If the IRS adjusts a taxpayer’s ordinary income by $100, the $100 adjustment to ordinary income is ordinary income, not something entirely different. Why does this matter?
If the additional reporting year tax is a “tax imposed by chapter 1,” then it is part of “regular tax liability” because it’s not excluded. But the
additional reporting year tax is not part of the calculation of AMT. As discussed above, AMT starts with taxable income, makes adjustments, and calculates its own independent tax that is then compared with regular tax. BBA is not mentioned anywhere in section 55; and it’s outside of the calculation of the tentative minimum tax because the additional reporting year tax is an adjustment to tax, not an item that goes into the calculation of taxable income. If it isn’t part of the calculation of tentative minimum tax but is part of regular tax because it is a tax imposed by chapter 1, then the additional reporting year tax impacts whether the partner is subject to AMT in the reporting year. Let’s consider an example.
Partner receives a push out statement (Form 8986, “Partner’s Share of Adjustment(s) to Partnership-Related Item(s) (Required Under Sections 6226 and 6227)”) from a BBA partnership that was furnished in 2024, which requires him to take into account the adjustments on the statement on his 2024 tax return. Partner calculates an additional reporting year tax of $10. Before adjusting for the additional reporting year tax, Partner’s tax imposed by chapter 1 for 2024 is $20, resulting in a total regular tax of $30. If Partner’s tentative minimum tax for 2024 is $25, Partner does not pay any AMT; he just pays the regular tax liability of $30. However, if Partner never received a push out statement, Partner would have AMT of $5 ($25 tentative minimum tax less $20 regular tax). In this example, although the additional reporting year tax is $10, the actual impact on Partner’s 2024 taxes is only $5 (without the additional reporting year tax, Partner would have paid $25 and now Partner pays $30).
But the opposite would also be true. If instead of a positive $10 additional reporting year tax, Partner has a negative $10 additional reporting year tax, Partner may pay AMT, though he wouldn’t without the additional reporting year tax. If the additional reporting year tax was negative $10, Partner’s regular tax would be $10 ($20 tax before the additional reporting year tax less the $10 negative additional reporting year tax). For this example to work (I am just making up random numbers after all), we need to assume his tentative minimum tax is $15, resulting in Partner paying $10 of regular tax plus $5 of AMT.
Without the additional reporting year tax, Partner’s regular tax would be $20, which is more than the tentative minimum tax, meaning Partner would pay the $20 regular tax and no AMT. With the additional reporting year tax, Partner pays $15 instead of $20, even though the additional reporting year tax was a $10 reduction in tax. Obviously, how much, if any, a partner’s AMT tax is impacted by the additional reporting year tax is entirely fact dependent.
If the additional reporting year tax is not a tax imposed by chapter 1 but just an “adjustment” to chapter 1 tax that is imposed by subtitle F, then what happens? You guessed it — it depends. As mentioned in part 1, “regular tax liability” is the tax imposed by chapter 1 excluding 26 specific taxes imposed by chapter 1. Even if the additional reporting year tax is not a tax imposed by chapter 1, it’s still an adjustment to tax imposed by chapter 1. Is an adjustment to the tax imposed by chapter 1 part of regular tax liability? It would seem to me that if something adjusts the tax imposed by chapter 1, it’s a component in determining what the tax imposed by chapter 1 is, and you can’t have tax imposed by chapter 1 without all its components (and section 26(b) excludes the components it means to exclude).
Another view would be that the additional reporting year tax, if it is not a tax imposed by chapter 1 but just an adjustment to it, isn’t a component of the tax imposed by chapter 1 but something separate. Under this theory, the additional reporting year tax is independent from and not part of chapter 1 tax. If that’s the case, the additional reporting year would not be included in regular tax and would not impact AMT in the reporting year. But, as mentioned above, we treat other adjustments to items as the same as the item (for example, an adjustment to ordinary income is still ordinary income), so why would it be different here? The word “adjustment” doesn’t mean something different in section 6226(b) than it does elsewhere in the code. It doesn’t have a special definition so it would just be the ordinary meaning of the word. There is certainly nothing in section 6226(b) that treats the additional reporting year tax as anything other than part of chapter 1 tax for the reporting year; it just states that the partner’s tax imposed by chapter 1 for the reporting year is increased or decreased by the
sum of amounts calculated using the rules under chapter 1.
So what is the additional reporting year tax? My view is that, if you look at everything together, the additional reporting year tax is part of the tax imposed by chapter 1.1 Why do I say that? Section 6226(b) states that the tax imposed by chapter 1 shall be adjusted by the sum of the increases and decreases to chapter 1 tax that would have occurred if the items were reported as adjusted to begin with. The additional reporting year tax, unlike the IU, is calculated under chapter 1 — it’s calculated by determining how much a partner’s chapter 1 tax would have increased or decreased if the items were reported as adjusted. Section 6226(b) then takes that theoretical aggregate change in chapter 1 tax and adjusts chapter 1 tax in the reporting year. That seems to tie the additional reporting year tax directly to tax imposed by chapter 1, unlike the provisions dealing with the IU that clearly segregate it from chapter 1 (that is, the IU is treated “as if it were” a tax under subtitle A, not that it is). I think it’s hard to say that something that is calculated by redetermining chapter 1 tax and then applying that change in tax to chapter 1 tax in a different tax year is not a tax imposed by chapter 1, or at least a component of it (which would still make it part of regular tax). At the end of the day, the word “adjustment” has its ordinary meaning so that an adjustment to an item (that is, chapter 1 tax) is the same as the item being adjusted. It is changing the underlying item, not something separate. Nothing in BBA would suggest otherwise.
The additional reporting year tax increases or decreases a partner’s chapter 1 tax for the reporting year. AMT is a tax imposed by chapter 1. Does this mean that the additional reporting year tax increases or decreases total chapter 1 tax (that is, regular tax and AMT added together)? As mentioned above, if the additional reporting year tax is a tax imposed by chapter 1 (which I think it is), it is included in “regular tax liability” because it is not specifically excluded. As we also discussed, AMT is an independent tax calculation
1 This is also how the IRS treats the additional reporting year tax. See, e.g., Form 6251, “Alternative Minimum Tax — Individuals” (line 10 (regular tax) includes the additional reporting year tax (Form 8978, “Partner’s Additional Reporting Year Tax”)).
that starts with taxable income and makes certain adjustments that are listed in the statute. Under section 55, if the tentative minimum tax exceeds regular tax, the taxpayer pays the regular tax plus the difference between the tentative minimum tax and regular tax. Although this has the practical effect of the taxpayer paying the amount of the tentative minimum tax, under section 55 the taxpayer still pays regular tax plus the AMT. Does this matter? I think so.
Because the additional reporting year tax is included in regular tax (which the partner pays), if the total chapter 1 tax (regular tax plus AMT) is adjusted for the additional reporting year tax, the partner would pay (or reduce reporting year tax by) the additional reporting year tax twice — once as part of regular tax and once added (subtracted) onto the end. If instead under section 55 the taxpayer pays the tentative minimum tax instead of regular tax if tentative minimum tax exceeds regular tax, then adding (subtracting) the additional reporting year tax would not include it twice, as the additional reporting year tax is not part of the calculation of AMT. But that’s not how section 55 is worded. As the additional reporting year tax adjusts (that is, is included in) regular tax, it’s already accounted for in the sum of regular tax plus any AMT. Therefore, chapter 1 tax would not be adjusted a second time. Section 6226(b) states that the additional reporting year tax adjusts the tax imposed under chapter 1 for the reporting year; it doesn’t specify at what point in the calculation the adjustment occurs. But it clearly does not say it adjusts it twice.
Did Congress intend to have the additional reporting year tax impact AMT in the reporting year? Probably not. Did they think about it? Also probably not. But does it impact AMT? Yes, I think so. I think the easiest thing Congress could have done is include it in the list of taxes excluded from regular tax liability under section 26(b). But it didn’t. The BBA repealed the 1982 Tax Equity and Fiscal Responsibility Act and replaced it with a new partnership audit regime. It also made almost no conforming amendments to other areas of the code (except section 6031). As such, there are many areas of the code that perhaps do not function as intended when it comes to BBA. For example, there are many areas of the code that impact or refer to the period of limitations on
assessment, whereas the period of limitations under BBA is a period of limitations on making adjustments, not assessments.2 If I was betting, I would say AMT is one of the areas that is perhaps not working as intended. But as with these other areas, it’s up to Congress to fix the statute.
2 In an attempt to give Congress the benefit of the doubt on the period of limitations, the electing large partnership regime that was enacted as part of TEFRA also had a period of limitations on making adjustments. See section 6248 (before repeal by the BBA). Perhaps Congress thought it did not have to make any conforming changes as any needed conforming changes were made when the electing large partnership regime was enacted in 1982. Putting aside the fact that the code section numbers would be different (section 6248 (electing large partnership) vs. section 6235 (BBA)), you would think it would be easy to check that.