BBA: Adjustments to ‘Nonmoney’ Numbers

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. She has over two decades of combined legal and accounting experience and has extensive experience dealing with complex tax issues, including partnership audit procedures under the Tax Equity and Fiscal Responsibility Act of 1982 and the Bipartisan Budget Act of 2015.

In this post, Black considers how adjustments to nonmonetary items on partnership returns should be treated under the Bipartisan Budget Act’s centralized partnership audit regime.

Most people are familiar with the iconic quote from the movie Jerry Maguire in which Tom Cruise’s character yells into the phone, “Show me the money!” (Sadly, this movie is likely considered “old” or “classic” at this point even though it came out the year I graduated high school, which couldn’t be that long ago.) Dealing with money, and specifically adjusting items that are money, under the centralized partnership audit regime enacted by the Bipartisan Budget Act of 2015 is fairly straightforward (although not without controversy) — you add them together and multiply them by the highest tax under section 1 or section 11 for the tax year to which the adjustments relate. But what about items on the partnership return that aren’t money (nonmoney or nonmonetary), such as gallons of fuel for certain fuel credits, kilowatt hours for certain energy credits, whether the partner is general or

limited, or even whether the partnership validly elected out of BBA? These items are clearly partnership-related items (PRIs) as they appear on the partnership return and are relevant to determining the tax liability of any person under chapter 1. See reg. section 301.6241-1(a)(6)(ii)-(iv). As PRIs, any adjustments to those items, and any tax attributable thereto, must occur at the partnership level. But as these items don’t represent money, you can’t really apply a tax rate to them. So, what are they?

As with all legal questions the answer is: It depends. Section 6241(2)(A) defines the term “partnership adjustment” as “any adjustment to a [PRI].” When a partnership adjustment is made, section 6225(a) places the adjustments into two categories — adjustments that result in an imputed underpayment (IU), and those that don’t. Reg. section 301.6225-1(f) defines adjustments that do not result in an IU (ATDNR) as the adjustments included in a grouping or subgrouping which, after netting, totals zero or less than zero, and adjustments included in the calculation of an IU when the total IU is zero or less than zero.

But, practically, how can an adjustment result in an IU if an IU is the amount of money the partnership owes, and these items are not money? If you want to get super technical (and who among us does not?), a nonmonetary item would be placed in its own subgrouping as it is not something that can net with other adjustments and that subgrouping, after netting, would be zero or less than zero making all adjustments in that subgrouping an ATDNR. But subgroups are only created if there is a negative adjustment and an adjustment to a non-monetary item is not a negative adjustment because it’s not a decrease in income, increase in an expense, increase in a credit, or decrease in a chapter 1 liability or prior IU. Reg. section 301.6225-1(d)(2)(ii). But taking this approach would mean that a nonmonetary

adjustment would only have any real impact if there was (1) a negative adjustment to another PRI (which would trigger subgrouping), (2) an amended return modification, or (3) a push out election. Otherwise, the nonmonetary adjustment would reside in the residual grouping and effectively disappear into the ether if the IU is paid. That doesn’t seem like the right answer.

Until recently, my view was that all adjustments to nonmonetary numbers were ATDNR. After all, you couldn’t include them in a tax calculation because they aren’t money, so they must be outside the IU calculation and, thus, ATDNR. But recently I began to think that instead of all being ATDNR, adjustments to PRIs that are not money are really just part of any related “money” adjustments. Hear me out. Take my favorite example of a nonmonetary adjustment: gallons of fuel for certain types of credits (for example, sections 40, 40A, 40B, etc.). If the IRS determines a partnership reported too many gallons as eligible for the credit, the IRS may make (at least) two adjustments — gallons of fuel and total credit. Clearly the adjustment to the credit is a monetary adjustment that ends up in the credit grouping and becomes part of the IU.

If a partnership pays the IU and there are ATDNR, the ATDNR are taken into account by the partnership on its adjustment year return as an increase or decrease in non-separately stated income or, if separately stated, as an increase or decrease in that separately stated item. Although gallons of fuel don’t really fit neatly into either one of those categories, for purposes of this example I will treat it as separately stated. If the IRS reduced the gallons of fuel eligible for the credit and it is an ATDNR, this means the partnership would reduce the gallons of fuel eligible for the credit on its adjustment year return. This would result in a decrease in the fuel credit for the adjustment year (if there was one) which would duplicate the tax effect of the decrease in the credit that was part of the IU paid by the partnership. That doesn’t seem like the right answer either.

So, if all adjustments to nonmonetary items are not ATDNR, then what are they? Perhaps the best way to think about adjustments to nonmonetary items is to treat them as part of the monetary adjustments to which they relate (if

any). In the example above, the adjustment to the gallons of the fuel would be part of the adjustment to the credit and would not be a separate adjustment taken into account on the partnership’s adjustment year return. Similarly, a determination that the partnership did not make a valid election under section 754 would be considered part of the related adjustments to the partnership’s inside basis in its assets and depreciation or amortization expense. A determination that a partner is a general, and not a limited, partner would be related to the adjustment to net earnings from self-employment allocable to that partner.

Even less direct relationships could fit here. For example, a determination that a partnership did not validly elect out of the BBA relates to all the adjustments made in the BBA audit. If there was a valid election out of the BBA there would be no ability to make adjustments at the partnership level; instead, adjustments would be made to the underlying partners. Treating adjustments to nonmonetary items as part of their related monetary adjustments allows the adjustment to the nonmonetary item to be meaningful without resulting in shenanigans on the adjustment year return.

But what about adjustments to nonmonetary items that are not related to a monetary adjustment? For example, whether the partnership made a valid election to be treated as a qualified opportunity fund. This is where it gets a bit tricky. If it doesn’t relate to a monetary adjustment, it can’t really result in an IU. Does that mean it’s an ATNDR? This brings me back to my original answer: It depends. In order for adjustments to nonmonetary items to be meaningful, perhaps the best way to treat them is as adjustments that result in an IU when they relate to a monetary adjustment and ATDNR when they do not. The regulations implementing the BBA are silent as to how adjustments to nonmonetary items are treated under the BBA, although they are clearly PRIs. The IRS and Treasury may want to consider clarifying how adjustments to nonmonetary items are treated under the BBA.