Challenging the Validity of a Push-Out Election Under BBA: Is the Push-Out Election a PRI?
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 examines how the IRS may determine if a partnership’s push-out election is invalid.
Under the centralized partnership audit regime enacted by the Bipartisan Budget Act of 2015, any adjustments to partnership-related items (PRIs) must be determined, and any tax attributable to those adjustments must be assessed and collected, at the partnership level, unless BBA provides for an exception.1 One of the exceptions to when the tax attributable to partnership adjustments must be assessed and collected at the partnership level is if the partnership makes an election under section 6226 to “push out” the adjustments to its partners from the reviewed year. 2 This post will examine how the IRS may determine a partnership’s push-out election is
1 Section 6221(a).
2 The reviewed year is the tax year to which the adjustment relates. Section 6225(d)(1); reg. section 301.6241-1(a)(8).
invalid, how the partnership can challenge that determination, complications in tiered structures, and whether partners can challenge an election made by the partnership. This post and two more to follow will also discuss how those issues differ if the election is made as the result of an exam or the filing of an administrative adjustment request (AAR).
In order to make a push-out election, the partnership must receive a notice of final partnership adjustment (FPA)3 from the IRS as part of an examination or make the election as part of the filing of an AAR.4 The FPA is similar to a statutory notice of deficiency and is the notice the IRS must send in order to make adjustments to PRIs (unless a settlement is entered into) and which provides the partne rship its “ticket” to challenge the IRS’s adjustments in court.5 As such, the FPA is issued at the end of an exam. After the IRS issues the FPA, the partnership (through the partnership representative) has 45 days to make an election under section 6226 to push out the adjustments to its reviewed year partners.6 However, that’s not the end of the story. In order to have a valid push-out election, the partnership must properly furnish statements to its reviewed year partners within 60 days of when the partnership adjustments become finally
3 If the partnership settles with the IRS during the course of the exam and the IRS does not issue an FPA, the partnership cannot elect to push out the adjustments. Practitioners should be mindful of this when settling with the IRS and understand fully what the partnership is agreeing to.
4 Sections 6226(a), 6227(b)(2); reg. sections 301.6226-1(c)(2), 301.62271(a).
5 Sections 6231(a)(3), 6234; reg. sections 301.6231-1, 301.6234-1.
6 Section 6226(a)(1); reg. section 301.6226-1(c)(2). Partnerships make the election using Form 8988, “Election for Alternative to Payment of the Imputed Underpayment — Section 6226.” For AARs, the election is made on the AAR.
determined (for an AAR, the statements must be furnished at the time the AAR is filed).7 Therefore, in order to make a valid push-out election and be relieved of the liability for the imputed underpayment (IU) (the amount, calculated on the partnership adjustments, the partnership must pay if it does not make a valid push-out election) the partnership must: (1) make an election within 45 days of when the FPA is issued and (2) issue statements within 60 days of when the adjustments become finally determined.8 For AARs, the partnership makes a valid push-out election if it: (1) makes the election on the AAR, and (2) furnishes statements to its partners at the time the AAR is filed.9
For purposes of determining when the statements must be furnished to the reviewed year partners following an exam, the adjustments become finally determined on the later of the expiration of the time to file a petition in response to the FPA or, if a petition is filed, when the court’s decision becomes final.10 Therefore, following an exam, there may be a long time between when the partnership makes the initial election and when the partnership furnishes statements to its partners. In addition, as the statements are not furnished until after the court’s decision becomes final, there is no way to know if the partnership will be relieved of liability for the IU during the court proceeding.
Under reg. section 301.6226-1(c)(1), a push-out election made by the partnership is valid unless and until the IRS determines the election is invalid.11 Therefore, the partnership and its partners can rely (that is, assume everything is OK) on the election made by the partnership and the statements it furnished unless contacted by the IRS. But what if the IRS determines the partnership did not make a valid push-out election? For example, the IRS could determine the partnership did not make the election within
7 Section 6226(a)(2); reg. sections 301.6226-2(b)(1), 301.6227-1(d).
8 Section 6226(a).
9 Reg. sections 301.6227-1(d), 301.6227-3(c).
10 Reg. section 301.6226-2(b)(1).
11 This same provision is not contained in the rules for filing AARs although this is likely less of a concern because of the differences between a push-out election in an exam versus AAR setting as described in this post.
45 days of when the FPA was issued12 or the partnership did not timely or correctly furnish statements to its partners (for example, the statements were incomplete or contained material errors). If the partnership does not have a valid push-out election, it has not been relieved of liability for the IU. How does the IRS make its determination? What remedies do partnerships have? As with many legal questions, the answer is — it depends.
As previously mentioned any adjustments to PRIs must be made at the partnership level under BBA unless an exception applies.13 As defined in the regulations, a PRI is any item or amount that: (1) is on (or required to be on) the Form 1065, “U.S. Return of Partnership Income,” filed by the partnership or required to be maintained in the partnership’s books and records and (2) is relevant to determining the tax liability of any person under chapter 1, regardless of whether the item or amount has an actual effect on the tax liability of any person.14 So is the push-out election a PRI? Again — it depends.
As an initial matter, it’s important to note that, although there is a push-out election for both exam and AARs, they are two entirely separate elections. A push-out election made in the context of an exam is made under section 6226. An election to push out the adjustments in an AAR is made under section 6227(b)(2), which provides that adjustments in an AAR may be taken into account “under rules similar to the rules of section 6226.” As different elections, different rules and results apply. For ease of reading, this post will refer to push-out elections made under section 6226 as “exam push-out elections” and the pushout elections made under section 6227(b)(2) as “AAR push-out elections.”
12 In situations in which a petition is filed in response to the FPA, the partnership likely knows whether the IRS believes the election was made timely before the case resolves.
13 None of the exceptions to when the IRS can adjust a PRI outside of BBA apply in the situations covered by this post.
14 Reg. section 301.6241-1(a)(6)(ii). An item or amount is relevant to determining the tax liability of any person under chapter 1 if it is possible for the item or amount to impact chapter 1 liability under the Internal Revenue Code; it does not have to have an actual impact on chapter 1 tax in any particular case.
AAR Push-Out Elections
An AAR push-out election is made on the face of the AAR (either Form 1065-X, “Amended Return or Administrative Adjustment Request (AAR),” or on Form 8082, “Notice of Inconsistent Treatment or Administrative Adjustment Request (AAR),” which is attached to the Form 1065 with the “amended” box checked). Likewise, the pushout statements (Form 8986, “Partner’s Share of Adjustment(s) to Partnership-Related Items(s)”) are attached to the AAR.15 Accordingly, an AAR push-out election meets the first part of the test to be a PRI — it is on the partnership return.16 An AAR push-out election is relevant to determining the chapter 1 liability of any person because an election impacts whether the partners have an increase or decrease in their chapter 1 tax as a result of the adjustments. Thus, the AAR push-out election meets both parts of the test, so it is a PRI. As a PRI, the IRS may only adjust the election at the partnership level under BBA.17 Therefore, if the IRS determines the AAR push-out election is invalid, it must open an exam of the partnership and issue an FPA.18
Exam Push-Out Elections
An exam push-out election relevant in determining the chapter 1 liability of any person, for the same reason as an AAR push-out election. Therefore, it meets that part of the test for determining if it is a PRI. However, an exam pushout election is made on the Form 8988, “Election for Alternative to Payment of the Imputed Underpayment,” section 6226, not the partnership return. Similar to AARs, the statements the partnership must furnish to the partners when it makes an exam push-out election are on Form 8986, but, unlike AARs, are issued independently
15 Reg. section 301.6227-1.
16 In addition to the fact that an AAR is made on Form 1065-X (or an iteration of the Form 1065) and is amending the items on the partnership’s previously filed Form 1065, reg. section 301.6222-1 provides that, for purposes of determining the treatment of a PRI on the partnership return, that the partnership return includes any amendments to the return, including any AARs. Therefore, it is clear that an AAR is a “partnership return” for purposes of determining whether an item or amount is on the partnership return.
17 Section 6221(a).
18 The IRS has three years from when the AAR is filed to make adjustments to the partnership’s tax year covered by the AAR. IRC section 6235(a)(1)(C).
of, and are not part of, the partnership return.19 In addition, there is nothing that requires the partnership to maintain anything about the exam push-out election in its books and records either for the reviewed year or any other year. In fact, the exam push-out election and all of the adjustments covered by the election do not even exist until well after the end of the reviewed year and are taken into account by the partners (not the partnership) in the reporting year,20 not the reviewed year. So, is an exam push-out election a PRI? It looks like it’s not.
As a practical matter, an exam push-out election can’t be a PRI. Presumably, if an exam push-out election was a PRI, it would be a PRI for the reviewed year as the election is made with respect to an IU for adjustments from the reviewed year. In order to have an exam push-out election, the IRS had to issue an FPA for the reviewed year. It cannot issue another FPA (if the FPA was petitioned). Therefore, if an exam pushout election was a PRI, it would seem as if the IRS would have no way to determine it is invalid because it could not issue a second FPA on the election’s validity. In addition, if the partnership disputes the first FPA in court, there would be nothing holding open the period of limitations on making adjustments under section 6235 for the reviewed year while the case was pending. Accordingly, if an exam push-out election is a PRI, it seems as if the IRS would have no means to challenge whether the push-out election was valid due to faulty push-out statements. That can’t be the answer.
If an exam push-out election is not a PRI, then how does the IRS determine the election is invalid? BBA only applies to adjustments to PRIs. If the exam push-out election is invalid, the partnership is liable for the IU, which is a PRI.21 But unlike with an AAR, the IU relating to an exam push-out election was already determined,
19 Reg. section 301.6226-2(a) (“The statements furnished to the reviewed year partners under [section 6226] are in addition to, and must be filed and furnished separate from, any other statements required to filed with the IRS and furnished to partners, including any statements under section 6031(b).”).
20 The reporting year is the tax year of the partner that includes the date the AAR or audited partnership furnishes statements to its partners. Reg. section 301.6226-3(a).
21 Section 6241(2)(B)(i).
either through a court decision or a defaulted FPA.22 And, as mentioned above, it’s not possible to determine if the partnership will ultimately be liable for the IU during a proceeding in response to the FPA because the last piece of the election (the furnishing of statements) does not occur until after the court’s decision becomes final. Under section 6232, deficiency procedures do not apply to IUs and the IRS may only assess an IU if it issues an FPA.23 In the case of an exam push-out election, the IRS has already issued an FPA so there are no longer any restrictions on assessment for the IU that resulted from the exam if the IRS determines the exam push-out election is invalid. If an AAR push-out election is a PRI and an exam push-out election is not, how can the partnership challenge the IRS’s determination that its push-out election is invalid? In my next post I discuss the possible forums for judicial review of an IRS’s determination that its push-out election is invalid. Stay tuned!
22 Section 6232(e) (providing that, if no petition is filed in response to the FPA, the PRI the partnership is liable for shall not exceed the PRI determined in the FPA).
23 Exceptions are for IUs included with an AAR, math error adjustments, and assessments of IUs paid by passthrough partners (as defined in reg. section 301.6241-1(a)(5)) as the result of a push-out election. See section 6232(a), (b), (d)(1).