Inconsistently Inconsistent: Open Questions On Inconsistent Treatment Under BBA
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.
In this post, Black considers what happens if a partner in a Bipartisan Budget Act of 2015 partnership reports inconsistently from the partnership without filing a notice of inconsistent treatment.
This post reflects the author’s personal views and not necessarily those of Citrin Cooperman.
One of the key features of the centralized partnership audit regime enacted by the Bipartisan Budget Act of 2015 is that partners must report partnership-related items (PRIs) on their returns consistent with how the partnership treated those same PRIs. This means the partner must report the item in the same amount, character, and timing as the partnership. This concept is not new. Partners in partnerships subject to the Tax Equity and Fiscal Responsibility Act of 1982 also, under rules nearly identical to section 6222 (as amended by the BBA), had to report the partnership’s items consistent with how the partnership treated the items and, under section 6037(c), shareholders in S corporations must report the items of an S corporation consistent with how the S corporation treated the items. The partner may file inconsistently with the partnership if the partner notifies the IRS by attaching Form 8082, “Notice of Inconsistent
Treatment or Administrative Adjustment Request (AAR),” to their return.
In my prior article, “To Be or Not to Be — Inconsistent Treatment Under BBA,” I discussed what happens if a partner files inconsistently from the partnership, issues with indirect partners, and the limits on what a partner can treat inconsistently (Tax Notes Federal, Jan. 13, 2025, p. 331). In this two-part article, I go into the unexplored wilds of BBA to ponder some uncertain areas when it comes to inconsistent treatment under BBA. What happens if a passthrough partner1 reports inconsistently from the BBA partnership and does not file a notice of inconsistent treatment? Does it matter whether the adjustments result in an imputed underpayment (IU) or not? I’m not promising to have all the answers here, but I hope you’ll enjoy my academic adventure into the things that make you go “hmmmm” in BBA.2
Pass-Through Partners
Under BBA, if a partner treats PRIs on the partner’s return differently than how the partnership treated those same PRIs, the IRS may adjust the inconsistently reported items on the partner’s return to be consistent with the partnership and assess any additional tax as a result of that change in the same manner as if the tax was from a mathematical or clerical error appearing on the return (that is, without issuing a statutory notice of deficiency) unless the partner attaches a Form 8082 to their return to notify the IRS of the inconsistency. But what happens if the
1 As defined in reg. section 301.6241-1(a)(5).
2 My apologies to C+C Music Factory.
partner is a pass-through partner that wouldn’t normally pay tax? You guessed it — it depends. Now might be a good time to point out one of the major differences between BBA and TEFRA. While both have the requirement that the partner file consistently with the partnership, who that applies to varies dramatically between the two regimes. TEFRA had an explicit definition of “partner.”3 Under TEFRA, a partner was a partner in the partnership (gotta love circular definitions) or any person whose income tax liability was determined, in whole or in part, by taking into account, directly or indirectly, partnership items of the partnership. Therefore, under TEFRA, the term “partner” included direct and indirect partners. But BBA doesn’t have a statutory definition of “partner.” Without an express statutory definition, the definition of “partner” defaults to the general definition under section 7701. Under section 7701(a)(2), the term “partner” includes a member of a partnership (which is defined to include a syndicate, group, pool, joint venture, or other unincorporated organization through which business is conducted but which is not a trust, estate, or corporation). As a partner must be a “member,” partners, under section 7701 (and, thus, BBA), are only direct partners.4
This means that, while under TEFRA, an indirect partner had to be consistent with the source TEFRA partnership and the IRS could adjust the indirect partner directly5 (with some exceptions), the same is not true for BBA.6 Under BBA, the consistent treatment rules only apply to (direct) partners and the IRS arguably cannot skip through the pass-through partner and go directly to the indirect partner like it could under TEFRA. However, BBA has special rules when it comes to
3 IRC section 6231(a)(2) (prior to repeal by the BBA).
4 See generally Sukup Building v. Commissioner, No. 12891-21, 2024 BL 114163 (T.C. Apr. 3, 2024) (order interpreting the definition of “partner” under TEFRA and holding “TEFRA’s definition of partner is broader than merely who is a partner in a partnership (or member of an LLC) in the conventional state law sense” and noting that “any other person whose income tax liability . . . is determined . . . by taking into account.directly or indirectly partnership items” would include indirect partners). Although interpreting section 6231(a)(2)(A) (prior to repeal by BBA), the Tax Court clearly viewed a “partner” in the partnership as being a state law partner and not an indirect partner (although section 6231(a)(2)(B) under TEFRA brought indirect partners into the TEFRA definition of “partner”).
5 See reg. section 301.6222(a)-2.
6 See reg. section 301.6222(a)-2. But see IRC section 6241(12) (treating specified non-partners as partners for purposes of BBA).
pass-through partners who file inconsistently (and do not notify) with BBA partnerships. But how those special rules work depends on what kind of pass-through partner is at issue.
Partnership-Partners
Under section 6232(d)(1), if a direct partner that is itself a partnership files inconsistently from a BBA partnership (and does not notify), rules “similar to” the rules under section 6213(b)(1) (related to adjustments for mathematical and clerical errors appearing on returns) apply to the partnership-partner. But what does that mean for an entity that doesn’t normally pay tax?
Reg. section 301.6232-1(d)(1) provides that, for a partnership-partner that is subject to BBA, the IRS may adjust a BBA partnership-partner’s return to be consistent with the BBA partnership and assess an IU calculated on the adjustments needed to make the BBA partnership-partner consistent with the BBA partnership (although the BBA partnership-partner will be given the opportunity to file an administrative adjustment request (AAR) before the assessment is made). For a partnership-partner that has elected out of BBA for the tax year, reg. section 301.62321(d)(1)(iii) provides that any tax resulting from an adjustment due to the partnership-partner’s failure to report consistently with the BBA partnership will be assessed against the partners of the partnership-partner for the tax year at issue (although the partnership-partner will be given an opportunity to file an amended return first).
As I mentioned above, the term “partner” as used in BBA (including section 6222) only means direct partners. If a non-BBA partnership-partner files inconsistently without notice and the IRS assesses the indirect partners, is this a consistency requirement that does not exist under section 6222? Hmmmm . . .
Outside of BBA, there is no ability to adjust items “at the partnership level” (for income tax purposes) and partnerships are not subject to income tax. This means that if a partnership is not subject to BBA for a tax year, any tax related to adjustments to the items of the non-BBA partnership are assessed at the partner level, through a statutory notice of deficiency issued to the partners. Reg. section 301.6232-1(d)(1)(iii) (which allows the IRS to assess the partners of the
non-BBA partnership-partner that filed inconsistently) states the tax assessed against the partners of the non-BBA partnership-partner is tax resulting from an “adjustment due to the partnership-partner’s failure to comply with section 6222(a).” Therefore, the ability to assess the indirect partners may be an extension of the concept that tax attributable to the adjustments to a non-BBA partnership are assessed at the partner level, but the preamble does not expressly say this.
The differences between how reg. section 301.6232-1(d)(1) treats BBA partnership-partners versus non-BBA partnership-partners creates another (possibly unintended?) disparity. Under reg. section 301.6232-1(d)(1), the IRS can assess the tax resulting from a non-BBA partnershippartner’s inconsistent treatment against the indirect partners but, in the case of a BBA partnership-partner, the IRS may only assess an IU against the BBA partnership-partner. So what disparity am I referring to here?
Not all adjustments made at the partnership level under BBA result in an IU. Neither the statute nor the regulations say what happens if the adjustments needed to make a BBA partnership-partner consistent with the BBA partnership are adjustments that do not result in an IU (ATDNR). Section 6232(d)(1)(B) provides that rules “similar” to section 6213(b) apply if a partnership-partner reports inconsistently from a BBA partnership and does not notify the IRS. Section 6213(b) refers to assessments of underpayments; it does not address any adjustments that may not result in an underpayment. But section 6232(d)(1)(B) says “similar to,” not “exactly.” Does this mean that the IRS could, in the regulations, use the “similar to” language to make adjustments that would not result in an IU and have those adjustments be treated like any other ATDNR under section 6225? Hmmmm . . . Perhaps. But they don’t.
So why do I say this results in a disparity? Well, if there is no way to adjust a BBA partnership-partner if it treats PRIs inconsistently on its returns if the adjustments would be ATDNR, but the IRS can determine and assess any applicable taxes against indirect partners of a nonBBA partnership partner in the same circumstances, this means that the tax impacts of
ATDNR would be captured for non-BBA partnership-partners but not for BBA partnership-partners. Huh? Let’s take an example. Assume BBA Partnership issues a Schedule KI to UTP in Year 1 that reports a $100 capital loss. On its return, UTP treats the $100 loss as an ordinary loss, not a capital loss, and does not file a notice of inconsistent treatment. The partners of UTP report the loss as ordinary, in accordance with the Schedule K-1 they received from UTP. If UTP is a BBA partnership, what can the IRS do under section 6222? Adjusting UTP’s return to be consistent with BBA Partnership’s return (that is, that BBA Partnership has a capital loss and not an ordinary loss) would result in two adjustments — an increase in ordinary income of $100 and an increase in capital loss of $100. But, under reg. section 301.6232-1(d)(1), the IRS assesses an IU calculated on the adjustments needed to make the BBA partnership-partner consistent with the BBA partnership.7 In this example, it would result in an IU of $37, which is the positive adjustment of $100 to ordinary income multiplied by the highest rate under section 1 or 11. Just like with any other IU calculation, the negative adjustment to capital loss will not offset the positive adjustment to ordinary income. Reg. section 301.6225-1. So what happens to the capital loss? Under section 6222, presumably nothing, as there are no rules under section 6222 or section 6232 that address ATDNR in inconsistent treatment. Therefore, without further action from UTP, UTP would pay an IU of $37 and the capital loss would presumably go nowhere.8
But, if UTP elected out of BBA, there is likely a different answer. As under reg. section 301.62321(d)(1), any assessment of tax attributable to a non-BBA partnership-partner’s inconsistent treatment is done at the partner level, the IRS could adjust UTP’s partners’ returns and assess any underpayment resulting from UTP’s inconsistent treatment. In this case, because the
7 UTP would have an opportunity to file an AAR to correct the inconsistent treatment prior to being assessed the IU but, for purposes of this example, I will assume it does not.
8 UTP could file an AAR to correct its inconsistent treatment of the capital loss or the partners of UTP could file inconsistently (and notify!) from UTP to treat the loss as capital instead of ordinary. But this article is about inconsistent treatment, so it only discusses what happens under section 6222.
underpayment is not calculated using the rules for calculating IUs (because it’s not an IU), the underpayment would be based on what UTP’s partners’ tax would be if the partners’ income was increased by $100 of ordinary income and decreased by $100 of capital loss. Hence, disparity.9
In part 2 of this article, I discuss what happens if the partner is a pass-through partner but not a partnership (for example, a partner that is an S corporation, trust, or estate). Do these rules work the same way for them? If not, how do the rules for inconsistent treatment work if the partner is not a partnership-partner? Stay tuned!
