October 27, 2015
Late last evening, House Speaker John Boehner (R-OH) and the Obama Administration announced a tentative two-year budget deal that would extend the debt ceiling for two years and increase spending over two years above current levels that would be paid for by both spending cuts and certain revenue raisers. One of those raisers would change the procedures on how partnerships are audited for tax purposes. Although these partnership audit changes were based on prior proposals, the changes proposed in the budget legislation reflect most of the changes requested earlier this year by NAREIT, The Real Estate Roundtable and other real estate groups.
A provision including sweeping changes to the partnership audit and collection process for large partnerships was included in former Chairman Dave Camp’s (R-MI) Tax Reform Bill (H.R. 1) introduced last year. Different proposals in this area have been in several of the Obama Administration’s annual budget proposals. The Administration cites unmanageable complexity in the large partnership audit and adjustment procedures as necessitating the change.
In June of this year, Representatives Jim Renacci (R-OH) and Ron Kind (D-WI), both members of the House Ways and Means Committee, introduced The Partnership Simplification Act of 2015 (the “Renacci bill”). The Renacci bill would have applied to partnerships with more than 100 partners or any partnership with fewer than 100 partners when any partner is a pass-through entity. The bill defined REITs as pass-through entities for purposes of the 100 partner test.
In response, NAREIT participated in a task force with The Real Estate Roundtable and other interested trade associations to engage with the tax writing committees to highlight concerns with the Renacci bill. Chief among the concerns the task force expressed was a joint and several liability provision pursuant to which the partnership and the current year partners would be potentially liable for underpayments of tax by both prior and fellow current year partners with respect to partnership income. NAREIT and the task force also proposed removing the provision that would have designated any partnership as a large partnership subject to the new regime if a REIT was a partner in that partnership. NAREIT and the task force also suggested that the provisions of the bill not apply to the extent that a REIT partner uses the “deficiency dividend” part of the REIT rules to address partnership adjustments in prior years.
The budget bill introduced by Speaker Boehner last night (a summary of which is included here) includes a new proposal to address tax audits of large partnerships. While a portion of the Boehner bill is similar to the Camp and Renacci proposals, it importantly addresses many of the concerns that were raised by stakeholders and provides alternative procedures for satisfying any additional tax liability resulting from a prior year partnership audit. Significantly, the proposal reflects changes NAREIT and the task force requested including eliminating the joint and several liability provision and removing REITs as a triggering partner for purposes of applying the new rules. We will continue to work with Congress to clarify that REITs may satisfy any obligation to amend a return to reflect partnership adjustments by utilizing the long-standing deficiency dividend procedures.
The House Leadership plans to have this package voted on by the full House of Representatives tomorrow with a view toward having the legislation signed before early next week, when the Treasury calculates the debt limit might prevent the government from paying its obligations.
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