Almost lost in Friday's tax reform frenzy was the release of additional proposed regulations regarding the new partnership audit regime under the Bipartisan Budget Act ("BBA"). Most importantly, those proposed regulations answer IN THE AFFIRMATIVE the critical question of whether "push out" elections will be available in tiered partnership structures.
The process for push out elections through a tiered structure works as cascading elections available throughout a chain of tiered partnerships. At each level, a partnership that is a direct or indirect partner in the audited partnership has the ability to itself make a push out election or else pay its own imputed underpayment relating to the audit adjustment. If the upper-tier partnership makes a push out election, it is generally subject to same reporting requirements as imposed with respect to the original push out election made by the audited partnership. If the upper-tier partnership does not make a push out election — either because it decides not to or because the deadline for making that election has passed (see below), then the upper-tier partnership must pay its imputed underpayment amount as determined under the statutory provisions of the BBA.
The new proposed regulations do not impose a limit on the number of tiered partnerships through which cascading push out elections may be made. However, as noted above, there is a single time period for making any and all such cascading push out elections. That limit is the extended due date for filing the tax return for the audited partnership for the tax year in which the adjustments become final. For example, assume there is an audit for Partnership ABC's 2018 tax year which is resolved in 2020 with agreed adjustments. The deadline for push out elections with respect to those adjustments is the extended due date for Partnership ABC's 2020 tax return — or September 15, 2021 assuming a calendar tax year. Assuming Partnership ABC makes a push out election, and if the partners in Partnership ABC include partnerships, those upper-tier partnerships can themselves make push out elections, but all such elections must be made by September 15, 2021. Like the push out election at the audited partnership, the push out election at an upper-tier partnership pushes out the adjustments to partners in the partnership during the reviewed year (i.e., 2018 in this example).
If there are multiple layers of tiered partnerships, these cascading elections will create time pressures on making the elections and furnishing the required statements in order to give partnerships further up the chain time to themselves make push out elections. Any partnerships in the chain that do not make the push out election before the deadline will be required to pay their imputed underpayment amount with respect to their allocable share of the adjustments. Also, the availability of push out elections in tiered structures is not limited to upper-tier partnerships but also includes S corporations, certain trusts, and decedents' estates.
In addition to tiered push out elections, the new proposed regulations address other mechanical issues relating to the BBA. These include issues relating to assessment, collection, penalties, interest and period of limitations. These latest proposed regulations do not address the impact on capital accounts and basis from BBA adjustments and tax payments. Those issues should be addressed in future regulations.
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