82 FR 56765 - Centralized Partnership Audit Regime: International Tax Rules
DEPARTMENT OF THE TREASURY
Internal Revenue Service Federal Register Volume 82, Issue 229 (November 30, 2017)
Internal Revenue Service
Federal Register Volume 82, Issue 229 (November 30, 2017)
| Page Range | 56765-56779 | |
| FR Document | 2017-25740 |
[Federal Register Volume 82, Number 229 (Thursday, November 30, 2017)] [Proposed Rules] [Pages 56765-56779] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2017-25740] ======================================================================= ----------------------------------------------------------------------- DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 301 [REG-119337-17] RIN 1545-BN95 Centralized Partnership Audit Regime: International Tax Rules AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Notice of proposed rulemaking. ----------------------------------------------------------------------- SUMMARY: This document contains proposed regulations implementing section 1101 of the Bipartisan Budget Act of 2015 (BBA), which was enacted into law on November 2, 2015. Section 1101 of the BBA repeals the current rules governing partnership audits and replaces them with a new centralized partnership audit regime that, in general, assesses and collects tax at the partnership level. These proposed regulations provide rules addressing how certain international rules operate in the context of the centralized partnership audit regime, including rules relating to the withholding of tax on foreign persons, withholding of tax to enforce reporting on certain foreign accounts, and the treatment of creditable foreign tax expenditures of a partnership. DATES: Written or electronic comments and requests for a public hearing must be received by January 29, 2018. ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-119337-17), Room 5207, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand delivered Monday through Friday between the hours of 8:00 a.m. and 4:00 p.m. to CC:PA:LPD:PR (REG-119337-17), Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue NW., Washington, DC 20224, or sent electronically via the Federal eRulemaking Portal at www.regulations.gov (IRS REG- 119337-17). FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations relating to creditable foreign tax expenditures, Larry R. Pounders, Jr., of the Office of Associate Chief Counsel (International), (202) 317-5465; concerning the proposed regulations relating to chapters 3 and 4 of subtitle A of the Internal Revenue Code (other than section 1446), Subin Seth of the Office of Associate Chief Counsel (International), (202) 317-5003; concerning the proposed regulations relating to section 1446, Ronald M. [[Page 56766]] Gootzeit of the Office of Associate Chief Counsel (International), (202) 317-4953; concerning the submission of comments or a request for a public hearing, Regina Johnson, (202) 317-6901 (not toll-free numbers). SUPPLEMENTARY INFORMATION: Background This document contains proposed amendments to 26 CFR part 301. These proposed regulations supplement the regulations proposed in the notice of proposed rulemaking (REG-136118-15) published in the Federal Register on June 14, 2017 (82 FR 27334) (the ``June 14 NPRM'') and amend the Procedure and Administration Regulations (26 CFR part 301) under Subpart--Tax Treatment of Partnership Items to implement the centralized partnership audit regime. 1. The New Centralized Partnership Audit Regime For information relating to (1) the new centralized partnership audit regime enacted by the BBA, Public Law 114-74 (129 Stat. 58 (2015)) (as amended by the Protecting Americans from Tax Hikes Act of 2015, Public Law 114-113 (129 Stat. 2242 (2015))); (2) Notice 2016-23 (2016-13 I.R.B. 490 (March 28, 2016)), which requested comments on the new partnership audit regime enacted by the BBA; and (3) the temporary regulations (TD 9780, 81 FR 51795) and a notice of proposed rulemaking (REG-105005-16, 81 FR 51835), which provided the time, form, and manner for a partnership to make an election into the centralized partnership audit regime for a partnership taxable year beginning before the general effective date of the regime, see the Background section of the June 14 NPRM. 2. Proposed Regulations Implementing the Centralized Partnership Audit Regime The June 14 NPRM addresses various issues concerning the scope and process of the new centralized partnership audit regime. Unless otherwise noted, all references to proposed regulations in this Background refer to regulations proposed by the June 14 NPRM. With respect to the scope of the centralized partnership audit regime, proposed Sec. 301.6221(a)-1(a) provides that any adjustment to items of income, gain, loss, deduction, or credit of a partnership and any partner's distributive share is determined at the partnership level. Proposed Sec. 301.6221(a)-1(b)(1) broadly defines the phrase ``items of income, gain, loss, deduction, or credit'' to include all items and information required to be shown, or reflected, on a partnership return or maintained in the partnership's books and records. For example, proposed Sec. 301.6221(a)-1(b)(1)(i)(A) provides that the character, timing, source, and amount of the partnership's income, gain, loss, deductions, and credits, including whether an item is deductible, tax-exempt, or a tax-preference item, must be determined under the centralized partnership audit regime. Similarly, proposed Sec. 301.6221(a)-1(b)(1)(i)(F) provides that an adjustment to the separate category, timing, and amount of the partnership's creditable foreign tax expenditures described in Sec. 1.704-1(b)(4)(viii)(b), is included within the centralized partnership audit regime. Finally, proposed Sec. 301.6221(a)-1(d) provides that the IRS is not precluded from making an adjustment to an item that must be determined under the centralized partnership audit regime for purposes of determining taxes imposed by provisions of the Internal Revenue Code (the Code) outside of chapter 1 of subtitle A (chapter 1). Proposed Sec. 301.6222-1 generally requires a partner to treat items consistently with the partnership's return; however, a partner may take an inconsistent position on an original income tax return if the partner provides notice of the inconsistent position in accordance with proposed Sec. 301.6222-1(c). If a partner treats an item inconsistently with the partnership return position without providing notice, the item may be adjusted to conform to the partnership return, and any underpayment resulting from that adjustment may be assessed and collected as if it were on account of a mathematical or clerical error appearing on the partner's return. Proposed Sec. 301.6223-1 provides rules relating to the designation of the partnership representative. Proposed Sec. 301.6223- 2 provides rules relating to the authority of the partnership representative and the effect of actions taken by the partnership through the partnership representative. Partners are bound by the actions of the partnership representative and may not take a position that is inconsistent with the actions of the partnership (except with notice on the partner's return, as provided under section 6222 and proposed Sec. 301.6222-1). Proposed Sec. Sec. 301.6225-1, 301.6225-2, and 301.6225-3 provide rules relating to partnership adjustments, including the computation of the imputed underpayment, modification of the imputed underpayment, and the treatment of adjustments that do not result in an imputed underpayment. Under proposed Sec. 301.6225-1(d), adjustments are separated into four groupings: the reallocation grouping, the credit grouping, the creditable expenditure grouping, and the residual grouping. The June 14 NPRM reserved Sec. 301.6225-1(d)(2)(iv) for rules addressing the treatment of items in the creditable expenditure grouping. Each grouping is further divided into subgroupings of adjustments to account for preferences, restrictions, limitations, and conventions. For example, an adjustment in the residual grouping could be further divided into subgroupings by character, source, category, and other restrictions under the Code. Under proposed Sec. 301.6225-1, the net positive adjustments in all subgroupings of the residual and reallocation groupings are summed. The sum is the total netted partnership adjustment, which is multiplied by the highest applicable tax rate in effect for the reviewed year (as defined in proposed Sec. 301.6241-1(a)(8)). The resulting figure is then increased, or decreased, by the net adjustments in the credit grouping to produce the imputed underpayment amount. A net non-positive adjustment in the reallocation grouping or the residual grouping (or any subgrouping thereof) is treated as an adjustment that does not result in an imputed underpayment and is taken into account in the adjustment year (as defined under proposed Sec. 301.6241-1(a)(1)) under proposed Sec. 301.6225-3. The partnership may request a modification, under proposed Sec. 301.6225-2, to adjust the imputed underpayment calculated under proposed Sec. 301.6225-1. The modification rules set out in proposed Sec. 301.6225-2 generally allow: (1) Modifications that result in the exclusion of certain adjustments, or portions thereof, from the calculation of the imputed underpayment (such as a modification under proposed Sec. 301.6225-2(d)(2) (amended returns by partners), (d)(3) (tax-exempt partners), (d)(5) (certain passive losses of publicly traded partnerships), (d)(7) (partnerships with partners that are qualified investment entities described in section 860), (d)(8) (partner closing agreements), and, if applicable, (d)(9) (other modifications)); (2) rate modifications, which affect only the taxable rate applied to the total netted partnership adjustment (described in proposed Sec. 301.6225-2(d)(4)); and (3) modifications to the number and composition of imputed underpayments (described in proposed Sec. 301.6225-2(d)(6)). [[Page 56767]] Proposed Sec. 301.6225-3 sets forth rules for the treatment of adjustments that do not result in an imputed underpayment. In general, pursuant to proposed Sec. 301.6225-3(b)(1) the partnership takes the adjustment into account in the adjustment year as a reduction in non- separately stated income or as an increase in non-separately stated loss depending on whether the adjustment is to an item of income or loss. Proposed Sec. 301.6225-3(b)(2) provides that if an adjustment is to an item that is required to be separately stated under section 702, the adjustment shall be taken into account by the partnership on its adjustment year return as an adjustment to such separately stated item. Proposed Sec. 301.6225-3(b)(3) provides that an adjustment to a credit is taken into account as a separately stated item. Proposed Sec. Sec. 301.6226-1, 301.6226-2, and 301.6226-3 provide rules relating to the election under section 6226 by a partnership to have its partners take into account the partnership adjustments in lieu of paying the imputed underpayment determined under section 6225, the statements the partnership must send to its partners (including the computation of the partners' safe harbor amounts), and the computation and payment of the partners' liability. If a partnership makes the election under section 6226 to ``push out'' adjustments to its reviewed year partners, the partnership is not liable for the imputed underpayment. Instead, under proposed Sec. 301.6226-3, reviewed year partners must either pay any additional chapter 1 tax that results from taking the adjustments reflected on the statements into account in the reviewed year and from changes to the tax attributes in the intervening years, or pay a safe harbor amount, which is calculated based on rules similar to those used to calculate the imputed underpayment. In addition to being liable for the additional tax or safe harbor amount, the partner must also pay its allocable share of any penalties, additions to tax, or additional amounts reflected on the statement from the partnership, and any interest determined in accordance with proposed Sec. 301.6226-3(d). Proposed Sec. 301.6227-1 provides rules for a partnership to file an administrative adjustment request (AAR). A partnership subject to the centralized partnership audit regime may file a request for an administrative adjustment to one or more items of income, gain, loss, deduction, or credit of the partnership for any partnership taxable year. Filing an AAR is the only mechanism provided by the centralized partnership audit regime to request a change to an item reported on a partnership return that has already been filed with the IRS. Proposed Sec. 301.6227-1(a) provides that only a partnership representative acting on behalf of the partnership may file an AAR; a partner may not make a request for an item to be adjusted administratively, such as by filing an amended return to take a position that is inconsistent with the partnership return. However, this rule does not preclude a partner from taking an inconsistent position on an original income tax return if the partner provides notice of the inconsistent position in accordance with proposed Sec. 301.6222-1(c). Proposed Sec. Sec. 301.6227-2 and 301.6227-3 provide rules for how the partnership accounts for adjustments in an AAR and for how partners must account for adjustments in an AAR, respectively. Subject to certain special rules, adjustments in an AAR are generally taken into account in a manner similar to IRS-initiated adjustments. For example, an adjustment requested in an AAR may result in an imputed underpayment calculated in a manner similar to the computation of the imputed underpayment under section 6225, although modification is more restricted in the context of an AAR (see proposed Sec. 301.6227- 2(a)(2)). The partnership must pay the imputed underpayment or elect to have it and its partners take the adjustments into account under rules similar to those under section 6226. One significant difference between an IRS-initiated adjustment and an adjustment requested in an AAR is that requested adjustments that do not result in an imputed underpayment are accounted for under rules similar to those under section 6226. Finally, proposed Sec. 301.6241-1 provides definitions for purposes of the centralized partnership audit regime. Explanation of Provisions 1. In General These proposed regulations provide guidance on certain international issues related to the centralized partnership audit regime. This Explanation of Provisions proceeds as follows: Part 2 discusses provisions related to chapters 3 and 4 of subtitle A of the Code. Part 3 discusses provisions related to creditable foreign tax expenditures and foreign tax credits. Part 4 discusses issues related to treaties and reductions to the rate of tax on foreign persons under the Code. Part 5 discusses issues related to certain foreign corporations. Unless otherwise stated, all references to proposed regulations in this Explanation of Provisions are to the new proposed regulations in this Notice of Proposed Rulemaking. Because these regulations are supplementing the regulations published in the June 14 NPRM, the numbering and ordering of some of the provisions do not follow typical conventions. The Department of the Treasury (Treasury Department) and the IRS intend to appropriately integrate these provisions when both these regulations and the proposed regulations in the June 14 NPRM are finalized. 2. Provisions Related to Chapters 3 and 4 of Subtitle A of the Code A. Background Chapter 3 (Withholding of Tax on Nonresident Aliens and Foreign Corporations) of subtitle A of the Code imposes withholding requirements on payments or allocations of income to foreign persons (under sections 1441 through 1446) and provides rules regarding the application of those withholding provisions (under sections 1461 through 1464). Sections 1441 and 1442 require all persons having the control, receipt, custody, disposal, or payment of certain specified items of income of any nonresident alien, foreign partnership, or foreign corporation to withhold tax at a 30-percent rate from such items unless a reduced rate of withholding applies. Amounts subject to withholding under sections 1441 and 1442 include amounts from sources within the United States that constitute fixed or determinable annual or periodical income, which in turn is defined under Sec. 1.1441- 2(b)(1)(i) to include all income included in gross income under section 61, subject to certain exceptions. In addition to being required to withhold on a payment made to a foreign person, a domestic (U.S.) partnership is required to withhold under sections 1441 and 1442 on an amount subject to withholding that is includible in the gross income of a partner that is a foreign person. See Sec. 1.1441-5(b)(2)(i). A foreign partnership may also be required to withhold with respect to its foreign partners under sections 1441 and 1442 if it is either a foreign withholding partnership as described in Sec. 1.1441-5(c)(2), or fails to meet the requirements described in Sec. 1.1441-5(c)(3)(v). A partnership satisfies its withholding requirements with respect to its foreign partners by withholding on distributions made to the partner that include amounts subject to withholding, or, to the extent the partnership's withholding liability is not satisfied by withholding on distributions, by [[Page 56768]] withholding on the partner's distributive share. See Sec. 1.1441- 5(b)(2)(i). Section 1446 requires a partnership to pay withholding tax to the extent that the partnership has effectively connected taxable income (ECTI) that is allocable to a foreign partner, at the highest rate applicable to that partner. See Sec. 1.1446-3(a)(2). ECTI generally refers to the partnership's taxable income as computed under section 703, with adjustments as provided in section 1446(c) and Sec. 1.1446- 2, and computed with consideration of only those partnership items that are effectively connected (or treated as effectively connected) with the conduct of a trade or business in the United States. See Sec. 1.1446-2. Section 1443 imposes withholding requirements on certain payments or allocations of income made to foreign tax-exempt organizations, including income includible under section 512 for computing unrelated business taxable income (subject to section 1443(a)) and income subject to tax under section 4948 (subject to section 1443(b)). Because the tax under section 4948 is not a chapter 1 tax, and therefore is not implicated by the centralized partnership audit regime, references to chapter 3 in this preamble and these proposed regulations refer to the provisions in chapter 3 of subtitle A of the Code, excluding section 1443(b). See proposed Sec. 301.6225-1(a)(4). Section 1445 imposes withholding requirements upon the disposition of a U.S. real property interest (as defined in section 897(c)) by a foreign person and certain related distributions. To the extent that a partnership's income from the disposition of a U.S. real property interest is allocable to a foreign partner, the partnership is subject to the requirements under section 1446. See Sec. Sec. 1.1446-2; 1.1446-3(c)(2). Chapter 4 (Taxes to Enforce Reporting on Certain Foreign Accounts) of subtitle A of the Code (chapter 4) requires a withholding agent (as defined in Sec. 1.1473-1(d)) to withhold tax at a 30-percent rate on a withholdable payment (as defined in Sec. 1.1473-1(a)) made to a foreign financial institution (FFI) unless the FFI has entered into an agreement described in section 1471(b) to obtain status as a participating FFI, or the FFI is deemed to have satisfied the requirements of section 1471(b). A participating FFI is required to withhold tax with respect to payments made to recalcitrant account holders (as defined in Sec. 1.1471-5(g)(2)) and nonparticipating FFIs (as defined in Sec. 1.1471-1(b)(82)) to the extent required under Sec. 1.1471-4(b). Chapter 4 also generally requires a withholding agent to withhold tax at a 30-percent rate on a withholdable payment made to a nonfinancial foreign entity (NFFE) unless the NFFE has provided information to the withholding agent with respect to the NFFE's substantial U.S. owners or has certified that it has no such owners. See section 1472. Under sections 1461 and 1474, any person required to withhold tax under chapters 3 and 4 is made liable for such tax, and may also be liable for any penalties, additions to tax, additional amounts, and interest that may apply for failure to timely pay the tax required to be withheld. To the extent that the tax required to be withheld is paid by the beneficial owner of the income (as defined in Sec. Sec. 1.1441- 1(c)(6) and 1.1471-1(b)(8)) or by the withholding agent (as defined in Sec. Sec. 1.1441-7(a)(1) and 1.1473-1(d)), the tax will not be collected a second time from the other; however, the person that did not pay the tax is not relieved from liability for any penalties, additions to tax, or interest that may apply. See Sec. Sec. 1.1446- 3(e); 1.1463-1; 1.1474-4. Under Sec. Sec. 1.1462-1 and 1.1474-3, a beneficial owner is required to include in gross income the entire amount of income from which tax is required to be withheld, but the amount of any tax actually withheld (including any amount withheld on a partner's distributive share) is allowed as a credit under section 33 against the beneficial owner's income tax liability. Similarly, under Sec. 1.1446- 3(d)(2)(i), the amount of section 1446 tax paid by the partnership that is allocable to a foreign partner is allowed as a credit under section 33 against the partner's income tax liability. In general, because the beneficial owner will have gross income during the taxable year when the withholding occurs, the beneficial owner will be required to file a U.S. income tax return for that year. See section 6012. However, a beneficial owner's requirement to file a return is waived when it is not engaged in a U.S. trade or business and its tax liability has been fully satisfied through withholding at source. See Sec. Sec. 1.6012- 1(b)(2)(i); 1.6012-2(g)(2)(i). B. Coordination of the Centralized Partnership Audit Regime With Chapters 3 and 4 Proposed Sec. 301.6221(a)-1(a) (June 14 NPRM) provides that all adjustments to items of income, gain, loss, deduction, or credit of a partnership, and any partner's distributive share of those adjusted items are determined, and any tax attributable thereto is assessed and collected, at the partnership level under the centralized partnership audit regime. Proposed Sec. 301.6221(a)-1(b)(1)(i) (June 14 NPRM) broadly defines the phrase ``items of income, gain, loss, deduction, or credit'' to include all items and information required to be shown, or reflected, on a partnership return or maintained in the partnership's books and records. Proposed Sec. 301.6221(a)-1(b)(3) (June 14 NPRM) defines tax for purposes of the centralized partnership audit regime to be the tax imposed by chapter 1. Proposed Sec. 301.6221(a)-1(d) (June 14 NPRM), however, provides that nothing in subchapter C of chapter 63 and the regulations thereunder (the centralized partnership audit regime) precludes the IRS from making any adjustment to any of these items for purposes of determining taxes imposed by other chapters of the Code. The preamble to the June 14 NPRM explains that those taxes that are not covered by the centralized partnership audit regime include taxes imposed by chapters 3 and 4. Accordingly, the IRS will continue to examine a partnership's compliance with its obligations under chapters 3 and 4 in a proceeding outside of the centralized partnership audit regime. As discussed in Part 2.A of this Explanation of Provisions, a partnership that receives a payment or has income allocable to a partner that is a foreign person, an FFI, or an NFFE may have withholding requirements under chapters 3 and 4. These requirements are imposed on the partnership to ensure that any chapter 1 tax owed by its partners with respect to the item of income is collected, or in the case of chapter 4, to ensure compliance with certain information reporting obligations regarding U.S. persons that hold foreign financial accounts or interests in passive foreign entities. The provisions of chapters 3 and 4, therefore, create a collection mechanism for tax that would otherwise be due from the beneficial owner of the income under chapter 1. This could potentially result in taxes being collected twice and, for this reason, and as discussed in Part 2.A of this Explanation of Provisions, chapters 3 and 4 provide that the tax is collected only once--either from the withholding agent or from the beneficial owner of the income. Similarly, because an imputed underpayment may now be assessed and collected at the partnership level under the centralized partnership audit regime, and is designed to closely reflect the chapter 1 tax that the partners would have reported and paid had the partnership and partners reported [[Page 56769]] correctly, coordination rules are necessary to clarify how the centralized partnership audit regime interacts with a partnership's obligations under chapters 3 and 4, and to ensure that tax is collected only once with respect to the same item of income. To demonstrate the rules regarding the scope of the centralized partnership audit regime and the examination of the partnership's obligations under chapters 3 and 4 outside of the centralized partnership audit regime, these proposed regulations provide examples that illustrate what occurs when (1) a partnership fails to withhold at the correct rate on an item of income allocable to a foreign partner, and (2) a partnership fails to report an item of income and, therefore, also fails to withhold on the additional income allocable to a foreign partner. Example 1 under proposed Sec. 301.6221(a)-1(f) clarifies that a partnership's withholding tax liability for failure to withhold at the correct rate on an item of income that the partnership received and properly reported on its partnership return may be adjusted by the IRS under the procedures applicable to an examination under chapter 3 or chapter 4, and that the procedures under the centralized partnership audit regime do not apply to the adjustment. The same result would occur on a partnership's failure to withhold at the correct rate under section 1441 on a payment made to an unrelated foreign person, or upon a partnership's failure to withhold as a transferee of a U.S. real property interest at the correct rate under section 1445. Example 2 under proposed Sec. 301.6221(a)-1(f) presents a case in which the partnership has failed to report on its partnership return an item of income that it received for which it would have had a withholding obligation under chapters 3 and 4, and the failure to report the item is discovered in an examination of the partnership's compliance with its obligations under chapters 3 and 4. Because an adjustment to increase the partnership's income would be an adjustment to an item of income of the partnership, it would be subject to the centralized partnership audit regime. See proposed Sec. 301.6221(a)-1(a) (June 14 NPRM). However, under proposed Sec. 301.6221(a)-1(d) (June 14 NPRM), the IRS is not precluded from determining an adjustment to the same item under chapters 3 and 4 outside of the centralized partnership audit regime. To address situations in which an item subject to the centralized partnership audit regime is also subject to the rules under chapters 3 and 4, these proposed regulations provide rules that coordinate the interaction between the separate regimes, and ensure that tax is collected only once with respect to the same adjustment. When an examination of the partnership's obligations under chapters 3 and 4 is conducted before the initiation of an administrative proceeding under the centralized partnership audit regime, proposed Sec. 301.6225- 1(c)(5) provides that to the extent that the IRS has collected tax under chapter 3 or chapter 4 attributable to an adjustment to an amount subject to withholding (as defined in Sec. 301.6226-2(h)(3)(i)), that adjustment (or portion thereof) will be disregarded for purposes of calculating the total netted partnership adjustment (upon which the imputed underpayment amount is determined) under the centralized partnership audit regime. When the IRS has not collected tax under chapter 3 or chapter 4 on an amount subject to withholding, and the partnership is subject to examination under the centralized audit partnership regime, proposed Sec. 301.6225-1(a)(4) provides that if the partnership pays the imputed underpayment pursuant to section 6225, and the total netted partnership adjustment (upon which the imputed underpayment amount is determined) includes an adjustment to an amount subject to withholding under chapter 3 or chapter 4, the partnership is treated as having paid the amount required to be withheld with respect to that adjustment under chapter 3 or chapter 4 for purposes of applying Sec. 1.1463-1 or Sec. 1.1474-4. Therefore, the partnership is considered to have satisfied its withholding tax liability associated with the adjustment. The partnership, however, is not relieved from any interest, penalties, or additions to tax that may otherwise apply under current rules for failure to withhold under chapters 3 and 4. See Sec. Sec. 1.1461-1(a)(2); 1.1461-3; 1.1474-1(h). Under proposed Sec. 301.6227-2(b)(3), this same rule applies when the partnership pays the imputed underpayment in an AAR pursuant to section 6227. C. Requirement To Withhold and Report Under Chapters 3 and 4 Upon a Section 6226 Election Under section 6226, a partnership may elect to ``push out'' adjustments to its reviewed year partners rather than paying an imputed underpayment determined under section 6225. If a partnership makes a valid election under section 6226 (a section 6226 election), proposed Sec. 301.6226-2 (June 14 NPRM) requires it to furnish a statement to each reviewed year partner that includes information regarding the partner's allocable share of partnership adjustments with respect to the imputed underpayment for which the election is made and the partner's share of any penalties, additions to tax, or additional amounts (a section 6226 statement). The partnership must also calculate and include on each section 6226 statement a safe harbor amount and, for each reviewed year partner that is an individual, an interest safe harbor amount. Under proposed Sec. 301.6226-3 (June 14 NPRM), each reviewed year partner must increase its tax imposed under chapter 1 by its additional reporting year tax for the taxable year that includes the date on which the section 6226 statement is furnished (the reporting year). The additional reporting year tax is either the aggregate of the adjustment amounts (as computed under proposed Sec. 301.6226-3(b) (June 14 NPRM)) or the safe harbor amount. In addition, each reviewed year partner must also pay its share of any penalties, additions to tax, additional amounts, and interest (either as computed at the partner level under proposed Sec. 301.6226-3(d)(1) (June 14 NPRM) or, if applicable, the interest safe harbor amount). As discussed in the preamble to the June 14 NPRM, it is the view of the Treasury Department and the IRS that, consistent with the purposes of chapters 3 and 4, if adjustments reflected on a section 6226 statement represent additional income allocable to a foreign or domestic partner that was not properly accounted for in the reviewed year, and the partnership makes a section 6226 election to have the partners take the adjustments into account, these allocations of income should be subject to the rules in chapters 3 and 4 to the same extent that these amounts would have been if they had been properly accounted for by the partnership in the reviewed year. Accordingly, these proposed regulations provide rules that apply withholding and reporting requirements under chapters 3 and 4 to a partnership that makes a section 6226 election with respect to a reviewed year partner that would have been subject to withholding in the reviewed year, and rules that apply to the reviewed year partner when taking these adjustments into account. Under proposed Sec. 301.6227-2(b)(4), these same rules apply when a partnership elects to have its reviewed year partners take into account adjustments requested in an AAR. Proposed Sec. 301.6226-2(h)(3)(i) requires a partnership that makes a section 6226 election to pay the amount of tax required to be withheld under chapters 3 and 4 on any adjustment [[Page 56770]] allocable to a reviewed year partner that would have been subject to withholding in the reviewed year. The partnership must pay the withholding tax (in the manner prescribed by the IRS in forms, instructions, and other guidance) on or before the due date for furnishing the section 6226 statement that reports the adjusted item. Proposed Sec. 301.6226-2(h)(3)(iii) clarifies the reporting requirements of chapters 3 and 4, including a requirement to file an applicable return (Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons, or Form 8804, Annual Return for Partnership Withholding Tax (Section 1446)) and any associated information returns (Forms 1042-S, Foreign Person's U.S. Source Income Subject to Withholding, or Forms 8805, Foreign Partner's Information Statement of Section 1446 Withholding Tax). The partnership must file the return and issue information returns for the partnership's taxable year (for withholding reported on Forms 8804 and 8805) or the calendar year (for withholding reported on Forms 1042 and 1042-S) that includes the date on which the partnership furnishes the section 6226 statement. Proposed Sec. 301.6226-2(h)(3)(ii) allows a partnership that is required to pay withholding tax under proposed Sec. 301.6226- 2(h)(3)(i) to reduce the amount of that tax to the extent that the reviewed year partner provides valid documentation to establish that it is entitled to a reduced rate of tax under chapters 3 and 4. For this purpose, these proposed regulations allow the partnership to rely on documentation that the partnership possesses that is valid with respect to the reviewed year (determined without regard to the expiration after the reviewed year of any validity period prescribed in chapters 3 and 4), or new documentation that the partnership obtains from the reviewed year partner if the partner includes a signed affidavit stating that the associated information and representations are accurate with respect to the reviewed year. However, proposed Sec. 301.6226- 2(h)(3)(ii) does not allow the partnership to reduce the amount of withholding tax due based on partner-level items as provided in Sec. 1.1446-6. Consideration of these partner-level items raises administrability issues given the partner's activities in the intervening taxable years between the reviewed year and the reporting year. For example, partner-level deductions and losses certified to the partnership for the reviewed year may have been used in a subsequent year to offset the partner's allocable share of partnership ECTI or income effectively connected (or treated as effectively connected) with the conduct of a trade or business in the United States from other sources. Accordingly, reductions to the amount of withholding tax a partnership is required to pay under proposed Sec. 301.6226-2(h)(3)(i) are limited to those based on a reduced rate of tax. The procedures under proposed Sec. 301.6226-2(h)(3)(ii) do not constitute a modification as described in section 6225. Proposed Sec. 301.6226-3(f) requires a reviewed year partner that is subject to withholding under proposed Sec. 301.6226-2(h)(3)(i) to file a return for the reporting year to report its additional reporting year tax and its share of penalties, additions to tax, additional amounts, and interest, notwithstanding any filing exception in Sec. 1.6012-1(b)(2)(i) or Sec. 1.6012-2(g)(2)(i). Therefore, a reviewed year partner whose allocable share of adjustments is subject to withholding under chapters 3 and 4 must file a federal income tax return for the reporting year and pay its allocable share of penalties, additions to tax, additional amounts, and interest, even if the partner's additional reporting year tax has been satisfied by the partnership through withholding at source and the partner would not otherwise be required to file a federal income tax return under an exception in the section 6012 regulations. In certain circumstances, the reviewed year partner is allowed a credit under section 33 for tax paid by the partnership under proposed Sec. 301.6226-2(h)(3)(i) that the partner may apply against its income tax liability for its reporting year. For purposes of sections 1441 through 1443 and 1471 through 1474, a reviewed year partner is allowed a credit for the amount of tax actually withheld from that partner (including any amounts withheld on the partner's distributive share). To the extent the tax is not withheld, but is instead paid by the partnership (because, for example, the reviewed year partner is no longer a partner in the partnership), the partnership (rather than the partner) is allowed a credit against its withholding tax liability for the amount of tax paid. In that case, the tax will not be collected a second time from the partner, but the partner would remain liable for any applicable penalties, additions to tax, or interest. See Sec. Sec. 1.1463-1; 1.1464-1; 1.1474-4. For purposes of section 1446, a reviewed year partner is allowed a credit for the tax paid by the partnership with respect to ECTI allocable to the partner. See Sec. 1.1446- 3(d)(2). A partner claiming a credit under section 33 must properly report the additional reporting year tax on its return and substantiate the credit with the appropriate information return (Form 1042-S or Form 8805), as well as any other requirements prescribed by the IRS in forms, instructions, and other guidance. Because Sec. 301.6226-1(c)(1) (June 14 NPRM) requires a partnership to satisfy the provisions of proposed Sec. Sec. 301.6226-1 and 301.6226-2 (June 14 NPRM) to make a valid section 6226 election, a partnership must pay the tax due under proposed Sec. 301.6226- 2(h)(3)(i) and meet the reporting obligations under proposed Sec. 301.6226-2(h)(3)(iii) to satisfy this requirement. However, a partnership that anticipates making a section 6226 election may instead request during the modification process that the IRS determine a specific imputed underpayment (as defined in Sec. 301.6225- 1(e)(2)(iii) (June 14 NPRM)) with respect to adjustments allocated to reviewed year partners that would have been subject to withholding in the reviewed year, and a general imputed underpayment (as defined in Sec. 301.6225-1(e)(2)(ii) (June 14 NPRM)) with respect to all other adjustments. If the IRS agrees with the modification request, upon receipt of the notice of final partnership adjustment the partnership could then (1) pay under section 6225 the specific imputed underpayment that includes adjustments subject to withholding, and (2) make a timely section 6226 election with respect to the adjustments that result in the general imputed underpayment. A partnership might make such a request so that its partners subject to withholding under chapters 3 and 4 would not need to file a return as they would under proposed Sec. 301.6226-3(f) when the partnership makes a section 6226 election with respect to those adjustments. The Treasury Department and the IRS are considering additional ways to alleviate the filing obligation in proposed Sec. 301.6226-3(f) for foreign persons when a partnership pushes out its adjustments and does not make a specific imputed underpayment for adjustments subject to withholding. Specifically, the Treasury Department and the IRS are considering whether to allow a partnership that pays the withholding tax required under proposed Sec. 301.6226-2(h)(3)(i) to elect to pay the share of penalties, additions to tax, additional amounts, and interest attributable to a partner that would have been subject to withholding in the reviewed year. Under this approach, if the partner's additional reporting year tax and the partner's share of penalties, [[Page 56771]] additions to tax, additional amounts, and interest have been satisfied by the partnership, the partner's tax liability would be treated as having been fully satisfied through withholding at source with respect to the adjustments on its section 6226 statement. In that case, the partner may be relieved of any filing obligation that would otherwise arise upon receiving a section 6226 statement if the foreign partner otherwise qualifies for a filing exception under Sec. 1.6012- 1(b)(2)(i) or Sec. 1.6012-2(g)(2)(i). Comments are requested regarding this approach and how it should operate. In the June 14 NPRM, the Treasury Department and the IRS requested comments on how the rules under chapters 3 and 4 should apply when a section 6226 statement includes income allocable to a foreign partner that is an intermediary or flow through entity. The Treasury Department and the IRS continue to study this issue in conjunction with the broader issue of how to treat pass-through partners generally under the section 6226 regime. Specifically, comments are still requested regarding the application of chapters 3 and 4 to section 6226 in the case of partners that are foreign flow through entities, including partners that assume primary withholding responsibility as withholding foreign partnerships or withholding foreign trusts. 3. Provisions Related to U.S. Foreign Tax Credits A. Background Subject to limitations, a taxpayer may elect to claim a credit under section 901 for income, war profits, and excess profits taxes paid or accrued during the taxable year to any foreign country or possession of the United States. This credit is generally referred to as the foreign tax credit (FTC). Under section 902, certain corporations are deemed, for FTC purposes, to have paid the foreign taxes that are paid or accrued by foreign subsidiaries from which they receive a dividend. Under section 960, inclusions under subpart F of part III of subchapter N of chapter 1 of the Code (subpart F) are treated as dividends for purposes of computing the foreign taxes deemed paid under section 902. A partnership is not eligible to claim an FTC under section 901 (or a deduction for foreign taxes under section 164). See section 703(b)(3). Instead, under sections 702(a)(6), 706(a), and 901(b)(5) each partner takes into account its distributive share of the creditable foreign taxes paid or accrued by the partnership in the partner's tax year with or within which the partnership's tax year ends. See Sec. 1.702-1(a)(6). Under section 702(a)(6), this amount, known as a creditable foreign tax expenditure (CFTE), is accounted for as a separately stated item. Similarly, under section 902(c)(7), a partner is treated as owning a proportional share of stock owned by or for the partnership for purposes of computing a deemed paid credit under section 902. Therefore, while a partnership is not deemed to pay foreign taxes paid by a foreign corporation in which it holds stock, each of its domestic corporate partners, if eligible, independently calculates foreign taxes deemed paid with respect to dividends or subpart F inclusions relating to stock owned by or for the partnership. The amount of FTC allowed against a taxpayer's U.S. tax in a given year is limited to the amount of pre-credit U.S. tax on the taxpayer's foreign source income. See section 904. This FTC limitation is applied separately to foreign source income in each of the separate categories described in section 904(d)(1) (i.e., the passive category and general category) and additional separate categories described in Sec. 1.904- 4(m). The components of the FTC limitation computation are maintained and adjusted at the partner level; several of these attributes must be tracked from year to year and can affect the computation of the partner's FTC and FTC limitation (e.g., FTC carrybacks or carryovers under section 904(c) and overall foreign loss accounts or overall domestic loss accounts under section 904(f) and (g)). Other specific rules may further limit a taxpayer's utilization of FTCs (e.g., sections 901, 907, 908, and 909). If a taxpayer pays or accrues creditable foreign tax in excess of the limitation, the taxpayer may not use the excess credits in that year. However, section 904(c) provides that excess FTCs are first carried back one year and then forward for up to 10 years and are utilized in the first year in which the taxpayer has sufficient excess limitation to use the FTCs. Given the nature and purpose of the FTC to mitigate the effects of double taxation and the importance of preventing the inappropriate use of the credit, special procedural rules often apply. For example, because the amount of foreign tax may change as the result of a foreign audit, refund claim, or other dispute resolution process involving a foreign tax authority, taxpayers are required to notify the IRS if a foreign tax for which credit is claimed is refunded (in whole or in part), if an accrued tax remains unpaid after two years, or if the amount of taxes paid differs from the amount accrued. See section 905(c). Any underpayment resulting from a change to the amount of creditable foreign tax paid or accrued is collectable upon notice and demand, without regard to the generally applicable statute of limitations. See section 6501(c)(5). Moreover, taxpayers have a special ten-year period of limitations under section 6511(d)(3) for claiming refunds of overpayments attributable to the application of an FTC. The IRS also permits a taxpayer to accrue a contested foreign tax if the amount of the tax has actually been paid to the foreign tax authority. Rev. Rul. 70-290 (1970-1 C.B. 160). These special rules allow increased flexibility with regard to the timing of adjustments in order to better match foreign income and the foreign tax on that income and thereby mitigate double taxation of income. Neither the statutory text of the centralized partnership audit regime nor the explanation of that text prepared by the staff of the Joint Committee on Taxation explicitly addresses coordination with the FTC rules. Joint Comm. on Taxation, JCS-1-16, General Explanations of Tax Legislation Enacted in 2015, 57 (2016) (JCS-1-16). Nothing in the BBA indicates that the new procedures should increase the incidence of double taxation or alter the pre-existing restrictions, limitations, or obligations affecting a taxpayer's right to claim (or retain) an FTC. It is also unlikely that the enactment of the new centralized partnership audit regime was meant to change significant and well- established FTC rules without any explicit reference to those rules in the statutory text. The view of the Treasury Department and the IRS is that, to the maximum extent possible, the long-standing FTC rules should be preserved while implementing the broader purpose of the centralized partnership audit regime. In order to coordinate these provisions in a manner that is administrable and fair, rules should be promulgated to clarify the appropriate interaction of these two regimes. Some of these issues are discussed in this preamble and addressed in the regulations proposed herein, such as the treatment of CFTEs under the imputed underpayment provisions of the centralized partnership audit regime. Additionally, this preamble discusses the application of the FTC limitation of partners in a partnership subject to the centralized partnership audit regime, certain special procedural FTC rules (including those under sections 905(c) and 6511(d)(3)), and the treatment of credits under sections 902 and 960 (which are not themselves items of the partnership, but the calculation of [[Page 56772]] which turns on certain items of the partnership, such as the amount and separate category of dividend or subpart F inclusion). The Treasury Department and the IRS request comments both with respect to the items specifically identified and also with respect to any additional issues regarding the coordination of the FTC regime and the new centralized partnership audit regime that warrant clarification or additional guidance. B. Adjustments Affecting the Category or Amount of CFTEs of a BBA Partnership A partnership reports CFTEs to its partners as separately stated items, allowing each partner to elect either a credit under section 901 or a deduction under section 164(a)(3). See Sections 702(a)(6) and 901(b)(5). Under current rules, the partnership is not required to maintain records or report to the IRS whether its partners claimed credits or deductions with respect to their CFTEs or the extent to which any such credits are subject to a partner's FTC limitation. Accordingly, the tax effects of an adjustment to the CFTEs reported by a partnership cannot be determined solely by examining the return and other records of the partnership. Similarly, the partnership lacks the necessary information to determine those tax effects in connection with an AAR. Proposed Sec. 301.6225-1(a)(2) (June 14 NPRM) provides that for purposes of determining the imputed underpayment, all applicable preferences, restrictions, limitations, and conventions will be taken into account to disallow netting of adjustments as if the adjusted item was originally taken into account in the manner most beneficial to the partners. Similarly, proposed Sec. 301.6225-1(d)(1) (June 14 NPRM) provides that items within each grouping are divided into subgroups, for netting purposes, based on preferences, limitations, restrictions, and conventions, such as source, character, holding period, or restrictions under the Code applicable to such items. Consistent with this general approach, proposed rules are added in the paragraph reserved in the June 14 NPRM for the creditable expenditure grouping, proposed Sec. 301.6225-1(d)(2)(iv)(A), relating to the treatment of adjustments to CFTEs made in an administrative proceeding under the centralized partnership audit regime. Proposed Sec. 301.6225-1(d)(2)(iv)(A)(1) provides that the creditable expenditure grouping includes all adjustments to CFTEs, as defined in Sec. 1.704-1(b)(4)(viii)(b). Proposed Sec. 301.6225-1(d)(2)(iv)(A)(2) further provides that adjustments to CFTEs are included in subgroupings based on the category of income to which the CFTEs relate in accordance with section 904(d) and the regulations thereunder and in order to account for different allocations of CFTEs between partners. Proposed Sec. 301.6225-1(d)(2)(iv)(A)(3) provides rules used in computing the imputed underpayment when there are one or more adjustments to CFTEs. Specifically, proposed Sec. 301.6225-1(d)(2)(iv)(A)(3) provides that a net reduction to CFTEs in any subgrouping is treated as a decrease to credits in the credits grouping and therefore increases the imputed underpayment (and safe harbor amount) on a dollar-for-dollar basis. A net increase to CFTEs in any subgrouping is an adjustment that does not result in an imputed underpayment and is therefore taken into account in the adjustment year in accordance with proposed Sec. 301.6225-3 (June 14 NPRM). Examples 6, 7, 8, and 9 are added to proposed Sec. 301.6225-1(f) to illustrate the application of the rules in proposed Sec. 301.6225-1(d)(2)(iv). These CFTE subgrouping rules serve several goals. First, subgrouping prevents netting of CFTEs between partners, or between separate categories with respect to the same partner, a restriction which is necessary to preserve the application of the category-by- category limitation required under section 904 and the regulations thereunder. Second, by subgrouping based on the sharing ratio of the partners in the reviewed year, adjustments that would be allocable to one partner cannot be netted against adjustments to CFTEs that would be allocable to another partner. This is intended to provide greater consistency with the requirement that CFTEs be allocated in accordance with the partners' interests in the partnership under section 704 and the regulations thereunder. Subgrouping based on the category and allocation of the adjustment between the partners is necessary to avoid a net reduction in the U.S. tax collected as the result of adjustments to CFTEs for which no credit would have been allowed to the partner if the CFTEs had been correctly reported in the reviewed year. One comment received in response to Notice 2016-23 addressed the treatment of adjustments to CFTEs in calculating the imputed underpayment. Specifically, the comment noted the complex FTC limitation computation which must be made at the partner level, based on components maintained and adjusted each year by the partner. After discussing several possible approaches, the comment recommended that CFTEs be treated as a credit for purposes of computing the imputed underpayment, increasing the imputed underpayment to account for any decrease to CFTEs, but suggested that the regulations disallow any reduction to the imputed underpayment based on an increase to CFTEs, since they may be subject to limitation at the partner level. The comment explained that while this treatment may cause the imputed underpayment to overstate the correct tax amount, this overstatement can be remedied if the partnership provides additional information through the modification process. Proposed Sec. 301.6225-1(d)(2)(iv) generally adopts the recommended approach. If the amount of CFTEs is decreased on audit, the proposed regulations treat the item as if the partners had reduced their U.S. tax by that amount and, therefore, increase the imputed underpayment by the amount of the CFTE reduction. Conversely, if the amount of CFTEs is increased on audit, the proposed regulations treat the item as if the FTC limitation would prevent use of the increased credit and, therefore, do not reduce the imputed underpayment. The Treasury Department and the IRS recognize that the rules proposed in Sec. 301.6225-1(d)(2)(iv) may cause the amount of the imputed underpayment to exceed the amount of tax that would have been due if the partnership had accurately reported in the reviewed year, either because CFTEs reported in the reviewed year were not claimed by all partners as FTCs or because any additional CFTEs agreed to on audit could be claimed as FTCs. However, because the partners' FTC posture is neither reflected on the partnership returns nor required to be maintained in the partnership's books and records, the only practical way to maintain the efficacy of the FTC rules is to assume both that the partners claimed FTCs for all CFTEs originally reported and that the FTC limitation would prevent any additional CFTEs from being claimed as credits. This approach preserves the long-standing principles underlying the FTC regime, especially the FTC limitation rules in section 904 and the regulations thereunder, and is consistent with the general rule in Sec. 301.6225-1(a)(2) (June 14 NPRM) which explicitly provides that the adjusted items are treated as if they were originally taken into account by the partnership or the partners, as applicable, in the manner most beneficial to the partnership and the partners. The modification process under section 6225 (including [[Page 56773]] modification resulting from a partner filing an amended return or entering into a closing agreement) will generally provide an opportunity for the partnership to take the partners particular facts and circumstances into account when determining the imputed underpayment, while at the same time adhering to those long-standing principles. In addition to the amended return modification or section 6226 election available under the current rules, additional types of modification may be appropriate with respect to some CFTEs under section 6225(c)(6) and proposed Sec. 301.6225-2(d)(9) (June 14 NPRM). For example, not all partners are eligible to look through the partnership for purposes of determining the separate category of their CFTEs. See Sec. 1.904-5(h). Such partners have only passive category CFTEs, regardless of the category of those items at the partnership level. Under these circumstances, a partnership may request modification under section 6225(c)(6) by providing sufficient evidence that a particular portion of CFTEs would be allocable to a partner or group of partners who cannot look through the partnership to characterize such CFTEs, so that all adjustments to CFTEs allocable to that partner or group of partners may be netted without regard to separate category. Similarly, if different sharing ratios apply to the allocation of adjusted CFTEs, some portion of the adjustments subject to different sharing ratios may still ultimately be allocable to the same partner or group of partners. Under these circumstances, the partnership may request modification by providing sufficient evidence of the portion of each adjustment that is allocable to the same partner or group of partners in order to allow netting of those CFTEs by modification, where appropriate. The Treasury Department and the IRS request comments on the application of the netting rules to CFTEs and the related computation of the imputed underpayment, including any special modification rules that may be appropriate with respect to CFTEs. The Treasury Department and the IRS also request comments regarding circumstances in which the grouping and subgrouping of CFTE adjustments could be improved while preserving the FTC limitation rules. These proposed regulations continue to reserve the rules on creditable expenditures other than CFTEs. The Treasury Department and the IRS request comments as to whether special rules are needed to address any other creditable expenditures and if so, whether those rules should follow or differ from the grouping and netting rules for CFTEs set forth in these proposed regulations. C. Preserving FTC Limitation Rules Under Section 904 Under the principles of proposed section 301.6225-1 (June NPRM), an adjustment decreasing the amount of foreign source income would not offset an adjustment increasing the amount of U.S. source income under the netting process described in proposed Sec. 301.6225-1(c) (June 14 NPRM). Instead, these items, the foreign source income adjustment (which is negative) and the U.S. source income adjustment (which is positive), would be in separate subgroups. Assuming no other adjustments, the decrease in foreign source income would be treated as an adjustment which does not result in an imputed underpayment, and the increase in U.S. source income would be a net positive adjustment included in computing the imputed underpayment. This is an appropriate result. Without a subgrouping requirement, the netting of U.S. and foreign source items would circumvent FTC limitation calculations under section 904 by effectively ignoring the potential impact of changes to foreign source income on FTCs. Specifically, netting U.S. and foreign source items at the partnership level would, in many cases, understate the true underpayment of tax caused by the partnership treating these items incorrectly in the reviewed year and, in other cases, would cause a permanent reduction in the partners' FTC limitation over time. Similarly, in the case of adjustments to items allocable to foreign partners, because foreign partners typically owe tax only with respect to U.S. source income, netting adjustments to U.S. source items against adjustments to foreign source items may understate the tax owed. Grouping adjustments by source may also facilitate modification requests with respect to amounts allocable to foreign partners. One obstacle to subgrouping foreign source and U.S. source items is that the source (or allocation and apportionment) of certain partnership items is determinable only by the partners. In this regard, section 861 and the regulations thereunder provide that deductible expenses, including interest expense and research and experimentation (R&E) expense, are allocated and apportioned between foreign source gross income and other income on the basis of partner-level attributes. For example, Sec. 1.861-9(e) provides that, subject to certain exceptions, a partner's distributive share of the interest expense of a partnership is considered to be related to all income-producing activities and assets of the partner and is apportioned between a partner's U.S. and foreign source income based on the relative values of the partner's assets. See also, for example, Sec. 1.871-17 (providing rules for the allocation and apportionment of R&E expense). Therefore, these expense items, when allocated and apportioned, affect the partners' net foreign and U.S. source income (and therefore the partner's FTC limitation), in amounts that cannot be determined at the partnership level. Similarly, items of gain or loss attributable to sales of non-inventory property are sourced at the partner level. See section 865(i)(5). Because the source of certain items cannot be accurately established at the partnership level (and because certain expenses must be allocated and apportioned at the partner level), those items cannot definitively be included in either foreign or U.S. source income subgroupings for purposes of computing the imputed underpayment. Moreover, if an adjustment to items sourced (or allocated and apportioned) at the partner level can offset other adjustments not sourced (or allocated and apportioned) in that manner, the purposes of the FTC limitation rules could effectively be circumvented. Under the proposed regulations in the June 14 NPRM, adjustments to items that may be sourced (or allocated and apportioned) at the partner level will generally be divided into subgroups in accordance with the specific method applicable for the sourcing (or allocation and apportionment) of those items in order to avoid netting that would undermine the application of the FTC limitation under section 904 unless the IRS determines otherwise. See proposed Sec. 301.6225- 1(a)(2) (June 14 NPRM). This would prevent, for example, an increase to interest expense from being netted against an increase to U.S. source income. However, netting of an increase to interest expense from one activity against a decrease to interest expense from another activity would generally be permissible because netting these adjustments would not typically affect the partners' section 904 limitation. The Treasury Department and the IRS recognize that subgrouping significant items of expense, such as R&E or interest, may cause imputed underpayments to exceed the tax that would have been owed had all items been treated correctly in the reviewed year. While the partnership can attempt to reduce this distortion during the [[Page 56774]] modification process or by making a section 6226 election, the Treasury Department and the IRS request comments regarding whether such distortions can be reduced when computing the imputed underpayment before the modification process, while remaining consistent with the purpose of the source and allocation and apportionment rules under sections 861 and 865, as well as the application of the FTC limitation under section 904. The Treasury Department and the IRS request comments with respect to the grouping and subgrouping of items of income, gain, loss, or deduction based on source and separate category. Specifically, the Treasury Department and the IRS request comments on any rule or modification method that would allow the calculation of the imputed underpayment to more accurately reflect the amount of tax that would have been due if the partnership had reported correctly in the reviewed year. The Treasury Department and the IRS also specifically request comments relating to any rules that would preserve the potential effects of adjustments to partnership items that are sourced (or allocated and apportioned) at the partner level in determining the imputed underpayment without requiring that all of these items be assigned to separate subgroupings. D. Application of Section 905(c) to Creditable Foreign Tax Expenditures Section 905(c) generally requires a taxpayer to notify the IRS in the event of certain changes to creditable foreign taxes. A taxpayer must notify the IRS if any foreign tax claimed as a credit is refunded in whole or in part. Similarly, a taxpayer must notify the IRS if an accrued foreign tax claimed as a credit remains unpaid after two years or if the amount when paid differs from the amount accrued. The notice requirement under section 905(c) is generally satisfied by the taxpayer filing an amended return for the year or years to which the foreign tax relates and paying any underpayment that results from the adjustment to the amount of creditable foreign tax. If such an adjustment results in an overpayment of tax, a taxpayer may generally claim a refund or credit within the 10-year period described in section 6511(d)(3). See section 905(c)(3). In the context of a partnership, the partner who claimed the FTC has historically borne the primary obligation to notify the IRS if there was a change in the foreign tax liability described in section 905(c) (and to pay any underpayment, upon notice and demand, or timely file a claim for refund of any overpayment). However, several aspects of the centralized partnership audit regime make it difficult to determine the most appropriate application of section 905(c) with respect to CFTEs reported by a partnership subject to the centralized partnership audit regime. Neither the statutory text of the centralized partnership audit regime, nor the explanation of that text prepared by the staff of the Joint Committee on Taxation, explicitly addresses section 905(c). See JCS-1-16. There is no indication that the new procedures were intended to restrict either the taxpayer's or the government's right to recoup any overpayment or underpayment of U.S. tax resulting from a redetermination required under section 905(c). It is also unlikely that Congress would effectuate a change to long-standing principles through generic procedural provisions without any specific discussion of section 905(c) in the statutory text. Generally, if a partnership reports CFTEs and has an adjustment described in section 905(c), there are two ways of viewing the adjustment required under section 905(c): It is either an adjustment at the partnership level, which is subject to the centralized partnership audit regime, or it is an adjustment at the partner level, which is subject to the historic application of this provision in the partnership context. Either of these two approaches presents administrative challenges. Therefore, the Treasury Department and the IRS request comments addressing coordination and administration of section 905(c) and the centralized partnership audit regime. Specifically, the Treasury Department and the IRS request comments on using the AAR process for purposes of satisfying the requirements of section 905(c) with respect to changes to the foreign tax liability reported by a partnership as a CFTE. E. Foreign Taxes Deemed Paid Under Sections 902 and 960 Under sections 902 and 960, certain domestic corporations are permitted to claim credits for foreign taxes ``deemed paid'' corresponding to foreign taxes paid by a foreign subsidiary from which the domestic corporation receives a dividend or with respect to which the domestic corporation has a subpart F inclusion. As discussed in Part 3.A. of this Explanation of Provisions, section 902(c)(7) provides that stock of a foreign corporation held by or on behalf of a partnership will be treated as if it was actually owned (proportionally) by the partners for purposes of computing the foreign taxes deemed paid under sections 902 and 960. Thus, qualifying partners are generally entitled to claim FTCs for deemed paid taxes attributable to their allocable share of partnership dividend income and subpart F inclusions. Section 6221(a) provides that any adjustment to an item of income, gain, loss, deduction, or credit of a partnership for a partnership taxable year must be determined, and any tax attributable thereto must be assessed and collected, at the partnership level pursuant to the centralized partnership audit regime. Further, proposed Sec. 301.6221(a)-1 (June 14 NPRM) provides that all items required to be shown or reflected on the partnership's return and information in the partnership's books and records related to a determination of these items, as well as factors that affect the determination of items of income, gain, loss, deduction, or credit, are subject to determination and adjustment at the partnership level under the centralized partnership audit regime. Under existing filing requirements, a partnership reports dividends from its subsidiaries, foreign and domestic, and domestic (U.S.) partnerships also report subpart F inclusions, but neither foreign nor domestic partnerships are required to report the amount of foreign taxes deemed paid by a partner with respect to stock held by or for the partnership. Further, a partnership is generally not required to maintain or report all information upon which the computations of those amounts are based (for example, the foreign subsidiary's pools of post- 1986 undistributed earnings and post-1986 foreign income taxes). Accordingly, the amount of any deemed paid foreign tax computed with respect to stock owned by or for a partnership cannot be determined based on existing partnership reporting requirements. The centralized partnership audit regime did not explicitly address the treatment of FTCs allowed with respect to deemed paid foreign taxes under the centralized partnership audit regime. However, the dividends and subpart F inclusions that trigger the availability of the deemed paid FTC are subject to that regime. Therefore, in order to preserve the IRS's ability to audit FTCs for deemed paid taxes claimed with respect to stock owned through partnerships subject to the centralized partnership audit regime, coordinating rules are necessary. These rules should ensure that all restrictions and limitations on the FTC allowed under sections 902 and 960 are given effect with respect to both the items giving rise to FTCs and the FTCs themselves. The broad scope of the centralized partnership audit regime contemplates [[Page 56775]] that all tax effects, including FTCs for deemed paid taxes, are considered during a centralized partnership audit. However, in the case of sections 902 and 960, the current rules require the partners, and not the partnership, to maintain and report the relevant information. Therefore, the Treasury Department and the IRS request comments on whether it would be appropriate to require a partnership, as opposed to the individual partners, to maintain and report the information necessary to compute deemed paid foreign taxes with respect to foreign corporations in which the partnership owns shares, so that the IRS can audit foreign tax credits under section 902 and 960 entirely at the partnership level. The Treasury Department and IRS request comments on how this information-reporting requirement could be crafted to minimize compliance costs and burdens, especially for partnerships whose partners are not eligible to compute deemed paid taxes. Alternatively, the Treasury Department and the IRS request comments on any approach, consistent with the statutory principles of the centralized partnership audit regime and the FTC regime, whereby the IRS could effectively adjust credits for deemed paid foreign taxes at either the partnership level or at the partner level, without creating unreasonable distortions or undue burdens on taxpayers or tax administration. 4. Modification of an Imputed Underpayment Based on the Status of a Foreign Partner and Other Treaty Issues Proposed Sec. 301.6225-2(d)(2) through (8) (June 14 NPRM) provides seven enumerated types of modifications the IRS will consider if requested by the partnership. The preamble to the June 14 NPRM requested comments on modifications that could be considered appropriate where a partner is a foreign person and thus may be subject to gross basis taxation under section 871(a) or 881(a), or where a partnership, partner, or indirect partner is entitled to a reduced rate of tax under the Code or as a resident of a country that has in effect an income tax treaty with the United States. Under U.S. tax treaties, a foreign partner or partnership may be entitled to benefits with respect to an item of income, profit, or gain paid to an entity that is fiscally transparent under the laws of the United States to the extent it is treated as an item of income, profit, or gain of a resident of the applicable treaty jurisdiction. See also section 894. Thus, for example, the Treasury Department and the IRS are considering providing a modification in proposed Sec. 301.6225-2(d) (June 14 NPRM) that would apply as illustrated in the following example: The IRS initiates an administrative proceeding with respect to a domestic partnership, and determines a single partnership adjustment increasing the U.S. source dividend income received by the partnership. The partnership had two equal partners during the reviewed year: A, a U.S. citizen, and B, a nonresident alien individual resident in Country X. The United States has in effect an income tax treaty with Country X, and Country X treats the partnership as fiscally transparent. Assuming that the other requirements set forth in the regulations for modifications are satisfied, if the partnership provides documentation demonstrating to the IRS's satisfaction the amount of the adjustment that is allocable to B under the partnership agreement and B's entitlement to a reduced rate of tax on dividends in the reviewed year pursuant to the income tax treaty between Country X and the United States, the IRS could agree to a modification to the imputed underpayment with respect to the amount of the adjustment allocable to B that is subject to a reduced rate of tax under the income tax treaty. Additionally, other methods for modifications could be provided in future guidance with respect to other Code-based exemptions from tax applicable to foreign persons, including sections 871(h) and 881(c), which provide an exemption from tax for foreign persons with respect to interest on certain portfolio debt investments. See also sections 871(a)(2) and 881(a) (limiting taxation of foreign persons on U.S. source capital gains). The Treasury Department and the IRS are still considering additional modifications to address circumstances where a partnership, partner, or indirect partner is a foreign person, and which potential modifications, such as modifications for portfolio interest and U.S. source capital gains, may already be addressed by one of the seven types of modifications included in the June 14 NPRM. See proposed Sec. 301.6225-2(d)(3) (June 14 NPRM) (providing rules for modifications for tax-exempt partners which, as defined, includes certain foreign persons or entities). Accordingly, the Treasury Department and the IRS continue to request comments on what specific types of modifications available to partners or partnerships that are foreign persons (including partners that are foreign persons described under section 501(c)) should be included in proposed Sec. 301.6225-2(d) (June 14 NPRM). The June 14 NPRM also requested comments on the coordination of the proposed rules with the mutual agreement procedures (MAP) available under income tax treaties that a partnership, partner, or indirect partner may invoke in order to determine eligibility for treaty benefits that may affect the calculation of the imputed underpayment. Pursuant to income tax treaties in effect between the United States and other jurisdictions, the Treasury Department and the IRS intend to allow access to MAP, when and where appropriate, for a partnership, partner, or indirect partner that is subject to the centralized partnership audit regime. However, the Treasury Department and the IRS are continuing to study this issue and request comments on how to coordinate MAP with the centralized partnership audit regime. 5. Foreign Corporations The preamble to the June 14 NPRM stated that the Treasury Department and the IRS intend to issue regulations to address situations where a partnership pushes out an adjustment under section 6226 to a direct partner in the partnership that is a foreign entity, such as a trust or corporation, that may not be liable for U.S. federal income tax with respect to one or more adjustments, but an owner of the direct partner is or could be liable for tax with respect to that amount. For example, if a direct partner in the audited partnership is a controlled foreign corporation, the foreign corporation as a direct partner may not have a U.S. tax liability with respect to a given adjustment; however, the adjustment may impact the tax liability of its U.S. shareholder(s) by increasing the subpart F income of the CFC that is included in the income of the U.S. shareholder(s) under section 951(a). The Treasury Department and the IRS continue to study this issue and continue to request comments both on how the reporting obligations concerning foreign entities should be modified to ensure that statements issued under section 6226 are reflected on the returns of the U.S. owners of these entities, and more generally, on how to incorporate rules governing foreign corporations into the centralized partnership audit regime. Special Analyses Certain IRS regulations, including these, are exempt from the requirements of Executive Order 12866, as supplemented and reaffirmed by Executive Order 13563. Therefore, a [[Page 56776]] regulatory impact assessment is not required. Because the regulations would not impose a collection of information on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of the Code, these regulations have been submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business. Statement of Availability of IRS Documents IRS Revenue Procedures, Revenue Rulings, Notices and other guidance cited in this preamble are published in the Internal Revenue Bulletin (or Cumulative Bulletin) and are available from the Superintendent of Documents, U.S. Government Publishing Office, Washington, DC 20402, or by visiting the IRS Web site at www.irs.gov. Comments and Requests for Public Hearing Before these proposed regulations are adopted as final regulations, consideration will be given to any electronic and written comments that are submitted timely to the IRS as prescribed in this preamble under the ADDRESSES heading. The Treasury Department and the IRS request comments on all aspects of the proposed rules. All comments will be available at www.regulations.gov or upon request. A public hearing will be scheduled if requested in writing by any person that timely submits written comments. If a public hearing is scheduled, then notice of the date, time, and place for the public hearing will be published in the Federal Register. Drafting Information The principal authors of these proposed regulations are Larry R. Pounders, Jr., Ronald M. Gootzeit, and Subin Seth of the Office of the Associate Chief Counsel (International). However, other personnel from the Treasury Department and the IRS participated in their development. List of Subjects in 26 CFR Part 301 Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income taxes, Penalties, Reporting and recordkeeping requirements. Proposed Amendments to the Regulations Accordingly, 26 CFR part 301, as proposed to be amended June 14, 2017 (82 FR 27334), is proposed to be further amended as follows: PART 301--PROCEDURE AND ADMINISTRATION 0 Paragraph 1. The authority citation for part 301 continues to read in part as follows: Authority: 26 U.S.C. 7805 * * * 0 Par. 2. Section 301.6221(a)-1 is amended by adding paragraph (f) to read as follows: Sec. 301.6221(a)-1 Scope of the partnership procedures under subchapter C of chapter 63 of the Internal Revenue Code. * * * * * (f) Examples. The following examples illustrate the rules of paragraphs (a) and (d) of this section as applied to cases in which a partnership has a withholding obligation under chapter 3 or chapter 4 of subtitle A of the Internal Revenue Code (Code) with respect to income that the partnership earns. For purposes of these examples, each partnership is subject to the provisions of subchapter C of chapter 63 of the Code, and the partnership and its partners are calendar year taxpayers. Example 1. Partnership, a partnership created or organized in the United States, has two equal partners, A and B. A is a nonresident alien who is a resident of Country A, and B is a U.S. citizen. In 2018, Partnership earned $200 of U.S. source royalty income. Partnership was required to withhold 30 percent of the gross amount of the royalty income allocable to A unless Partnership had documentation that it could rely on to establish that A was entitled to a reduced rate of withholding. See Sec. Sec. 1.1441-1(b)(1) and 1.1441-5(b)(2)(i)(A) of this chapter. Partnership withheld $15 from the $100 of royalty income allocable to A based on its incorrect belief that A is entitled to a reduced rate of withholding under the U.S.-Country A Income Tax Treaty. In 2020, the IRS determines in an examination of Partnership's Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons, that Partnership should have withheld $30 instead of $15 on the $100 of royalty income allocable to A because Partnership failed to obtain documentation from A establishing a valid treaty claim for a reduced rate of withholding. The rate of withholding on the income allocable to A is not an item of income, gain, loss, deduction, or credit under paragraph (b)(1) of this section. Therefore, in accordance with paragraph (a) of this section, the adjustment to increase Partnership's withholding tax liability by $15 is not determined under subchapter C of chapter 63, and instead must be determined as part of the Form 1042 examination. Example 2. Partnership, a partnership created or organized in the United States, has two equal partners, A and B. A is a nonresident alien who is a resident of Country A, and B is a U.S. citizen. In 2018, Partnership earned $100 of U.S. source dividend income. Partnership was required to report the dividend income on its 2018 Form 1065, ``U.S. Return of Partnership Income,'' and withhold 30 percent of the gross amount of the dividend income allocable to A unless Partnership had documentation that it could rely on to establish that A was entitled to a reduced rate of withholding. See Sec. Sec. 1.1441-1(b)(1) and 1.1441-5(b)(2)(i)(A) of this chapter. In 2020, in an examination of Partnership's Form 1042, the IRS determines that Partnership earned but failed to report the $100 of U.S. source dividend income in 2018. The adjustment to increase Partnership's dividend income by $100 would be an adjustment to an item of income, gain, loss, deduction, or credit under paragraph (b)(1) of this section if made in an administrative proceeding under subchapter C of chapter 63. The tax imposed on Partnership for its failure to withhold on that income, however, is not a tax as defined in paragraph (b)(3) of this section because it is a tax imposed by chapter 3 of subtitle A of the Code (chapter 3 tax). Pursuant to paragraph (d) of this section, the IRS may determine, assess, and collect that chapter 3 tax without conducting a proceeding under subchapter C of chapter 63. Therefore, the IRS may determine the chapter 3 tax in the examination of Partnership's Form 1042 by adjusting Partnership's withholding tax liability by an additional $15 for failing to withhold on the $50 of dividend income allocable to A. If the IRS subsequently initiates an administrative proceeding under subchapter C of chapter 63 and makes an adjustment to the same item of income, the portion of the dividend income allocable to A will be disregarded in the calculation of the imputed underpayment to the extent that the chapter 3 tax has been collected with respect to such income. See Sec. 301.6225-1(c)(5). 0 Par. 3. Section 301.6225-1 is amended by adding paragraphs (a)(4) and (c)(5), revising paragraph (d)(2)(iv), and adding Examples 6 through 9 to paragraph (f) to read as follows: Sec. 301.6225-1 Partnership Adjustment by the Internal Revenue Service. * * * * * (a) * * * (4) Coordination with chapters 3 and 4 when partnership pays an imputed underpayment. If a partnership pays an imputed underpayment (as determined under paragraph (c) of this section) and the total netted partnership adjustment (as determined under paragraph (c)(3) of this section) includes a partnership adjustment to an amount subject to withholding (as defined in Sec. 301.6226-2(h)(3)(i)), the partnership is treated as having paid (at the time that the imputed underpayment is paid) the amount required to be withheld with respect to that adjustment under chapter 3 or chapter 4 for purposes of applying Sec. Sec. 1.1463-1 and 1.1474-4 of this chapter. For purposes of the regulations under subchapter C of chapter 63 of the Internal Revenue Code (Code), the term [[Page 56777]] chapter 3 means sections 1441 through 1464 of subtitle A of the Code, but does not include section 1443(b), and the term chapter 4 means sections 1471 through 1474 of subtitle A of the Code. See paragraph (c)(5) of this section for the coordination rule that applies when an adjustment is made to an amount subject to withholding for which tax has been collected under chapter 3 or chapter 4. * * * * * (c) * * * (5) Adjustments to items for which tax has been collected under chapters 3 and 4. To the extent that the IRS has collected tax under chapter 3 or chapter 4 (as defined in paragraph (a)(4) of this section) attributable to an adjustment to an amount subject to withholding (as defined in Sec. 301.6226-2(h)(3)(i)), that adjustment (or portion thereof) will be disregarded for purposes of calculating the total netted partnership adjustment under paragraph (c)(3) of this section. See paragraph (a)(4) of this section for the coordination rule that applies when a partnership pays an imputed underpayment that includes an adjustment to an amount subject to withholding under chapter 3 or chapter 4. (d) * * * (2) * * * (iv) Creditable expenditure grouping--(A) Creditable foreign tax expenditures--(1) In general. The creditable expenditure grouping includes all partnership adjustments (including reallocation adjustments as described in paragraph (d)(2)(ii) of this section) to creditable foreign tax expenditures (CFTEs) as defined in Sec. 1.704- 1(b)(4)(viii)(b) of this chapter. (2) Subgroupings. Adjustments to CFTEs are grouped into subgroupings based on the separate category of income to which the CFTEs relate in accordance with section 904(d) and the regulations thereunder, and to account for different allocations of CFTEs between partners. Two or more adjustments are included within the same subgrouping only if each adjustment relates to CFTEs in the same separate category and each adjusted item would be allocated to the partners in the same ratio had those items been properly reflected on the partnership return for the reviewed year. An adjustment that changes the separate category of a CFTE for section 904 purposes or that reallocates the distributive share of a CFTE between partners is treated as two separate adjustments: An increase to the amount of CFTEs in one subgrouping and a decrease in another subgrouping. (3) Effect on Imputed Underpayment. For purposes of computing the imputed underpayment in paragraph (c)(1) of this section, a net decrease to CFTEs in any CFTE subgrouping is treated as a decrease to credits in the credit grouping described in paragraph (d)(2)(iii) of this section. A net increase to CFTEs in any CFTE subgrouping is treated as a net non-positive adjustment, as defined in paragraph (d)(3)(ii)(C) of this section. See paragraphs (b) and (c)(2) of this section and Sec. 301.6225-3 for the treatment of adjustments that do not result in an imputed underpayment. (B) Other creditable expenditures. [Reserved] * * * * * (f) * * * Example 6. Partnership reports on its 2019 partnership return $400 of CFTEs in the general category under section 904(d). The IRS initiates an administrative proceeding with respect to Partnership's 2019 taxable year and determines that the amount of CFTEs was $300 instead of $400 ($100 adjustment to CFTEs). No other adjustments are made for the 2019 taxable year. The $100 adjustment to CFTEs falls within the creditable expenditure grouping described in paragraph (d)(2)(iv) of this section and is within the general category subgrouping. Because there are no other adjustments for the 2019 taxable year in this subgrouping, the net adjustment in the subgrouping is $100. Pursuant to paragraph (d)(2)(iv)(A)(3) of this section, a net decrease to CFTEs in a subgrouping in the creditable expenditure grouping is treated as a decrease to credits under paragraph (d)(2)(iii) of this section. Because no other adjustments have been made, the $100 adjustment to credits under paragraph (d)(2)(iii) of this section produces an imputed underpayment of $100 under paragraph (c)(1) of this section. Example 7. Partnership reports on its 2019 partnership return $400 of CFTEs in the passive category under section 904(d). The IRS initiates an administrative proceeding with respect to Partnership's 2019 taxable year and determines that the CFTEs reported by Partnership were general category instead of passive category CFTEs. No other adjustments are made. Under the rules in paragraph (d)(2)(iv)(A)(2) of this section, an adjustment to the category of a CFTE is treated as two separate adjustments: An increase to general category CFTEs of $400 and a decrease to passive category CFTEs of $400. Both adjustments are included in the creditable expenditure grouping under paragraph (d)(2)(iv) of this section, but they are included in separate subgroupings. Therefore, the two amounts do not net. Instead, the $400 increase to CFTEs in the general category subgrouping is treated as a net non-positive adjustment within the meaning of paragraph (d)(3)(ii)(C) of this section and is an adjustment that does not result in an imputed underpayment within the meaning of paragraphs (b) and (c)(2) of this section. Therefore, the $400 increase to CFTEs in the general category subgrouping of the creditable expenditure grouping is taken into account in accordance with Sec. 301.6225-3. The decrease to CFTEs in the passive category subgrouping of the creditable expenditure grouping results in a net decrease to CFTEs. Therefore, pursuant to paragraph (d)(2)(iv)(A)(3) of this section, it is treated as a decrease to credits under paragraph (d)(2)(iii) of this section, which results in an imputed underpayment of $400 under paragraph (c)(1) of this section. Example 8. Partnership has two partners, A and B. Under the partnership agreement, $100 of the CFTE is specially allocated to A for the 2019 taxable year. The IRS initiates an administrative proceeding with respect to Partnership's 2019 taxable year and determines that $100 of CFTE should be reallocated from A to B. The partnership adjustment is a <$100> adjustment to general category CFTE allocable to A and an increase of $100 to general category CFTE allocable to B. Pursuant to paragraph (d)(2)(iv)(A)(2) of this section, the <$100> adjustment to general category CFTE and the increase of $100 to general category CFTE are included in separate subgroupings, and the increase is disregarded for purposes of computing the imputed underpayment under paragraph (c)(1) of this section. The increase and decrease of $100 of general category CFTE do not net. Instead, the net increase to CFTEs in the general- category, B-allocation subgrouping is treated as a net non-positive adjustment, which does not result in an imputed underpayment and is therefore taken into account by the partnership in the adjustment year in accordance with Sec. 301.6225-3. The net decrease to CFTEs in the general-category, A-allocation subgrouping is treated as a decrease to credits in the credit grouping under paragraph (d)(2)(iii) of this section, resulting in an imputed underpayment of $100 under paragraph (c)(1) of this section. Example 9. Partnership has two partners, A and B. Partnership owns two entities, DE1 and DE2, that are disregarded as separate from their owner within the meaning of Sec. 301.7701-3 and are operating in and paying taxes to foreign jurisdictions. The partnership agreement provides that all items (income, gain, loss, deduction, credit, etc.) from DE1 and DE2 are allocable to A and B in the following manner. Items related to DE1: To A 75% and to B 25%. Items related to DE2: To A 25% and to B 75%. Partnership reports CFTEs in the general category of $300, $100 with respect to DE1 and $200 with respect to DE2. Partnership allocates the $300 of CFTEs $125 and $175 to A and B respectively. On examination, the IRS determines that Partnership understated the amount of creditable foreign tax paid by DE2 by $40 and overstated the amount of creditable foreign tax paid by DE1 by $80. No other adjustments are made. Because the two adjustments each relate to CFTEs that are subject to different allocations, the two adjustments are in different subgroupings under paragraph (d)(2)(iv)(A)(2) of this section. The adjustment reducing the CFTEs related to DE1 produces a net decrease to CFTEs within that subgrouping and is treated as a reduction to credits under paragraph (d)(2)(iii) of this section and results in an imputed [[Page 56778]] underpayment of $80 under paragraph (c)(1) of this section. The increase of $40 of general category CFTE related to the DE2 subgrouping results in a net increase to CFTEs within that subgrouping and is treated as a net non-positive adjustment, which does not result in an imputed underpayment and is taken into account in the adjustment year in accordance with Sec. 301.6225-3. * * * * * 0 Par. 4. Section 301.6226-2 is amended by revising paragraph (h)(3) to read as follows: Sec. 301.6226-2 Statements furnished to partners and filed with the IRS. * * * * * (h) * * * (3) Adjustments subject to chapters 3 and 4--(i) In general. A partnership that makes an election under Sec. 301.6226-1 with respect to an imputed underpayment must pay the amount of tax required to be withheld under chapter 3 or chapter 4 (as defined in Sec. 301.6225- 1(a)(4)) on the amount of any adjustment set forth in the statement described in paragraph (a) of this section to the extent that it is an adjustment to an amount subject to withholding and the IRS has not already collected tax attributable to the adjustment under chapter 3 or chapter 4. The partnership must pay the amount due under this paragraph (h)(3)(i) on or before the due date (as determined under paragraph (b) of this section) for furnishing the statement required under paragraph (a) of this section that reflects the adjustment, and must make the payment in the manner prescribed by the IRS in forms, instructions, and other guidance. For purposes of the regulations under subchapter C of chapter 63 of the Internal Revenue Code, the term amount subject to withholding means an amount subject to withholding (as defined in Sec. 1.1441-2(a) of this chapter), a withholdable payment (as defined in Sec. 1.1473-1(a) of this chapter), or the allocable share of effectively connected taxable income (as computed under Sec. 1.1446- 2(b) of this chapter). (ii) Reduced rate of tax. A partnership may reduce the amount of tax it is required to pay under paragraph (h)(3)(i) of this section to the extent that it can associate valid documentation from a reviewed year partner pursuant to the regulations under chapter 3 or chapter 4 (other than pursuant to Sec. 1.1446-6 of this chapter) with the portion of the adjustment that would have been subject to a reduced rate of tax in the reviewed year. For this purpose, the partnership may rely on documentation that the partnership possesses that is valid with respect to the reviewed year (determined without regard to the expiration after the reviewed year of any validity period prescribed in Sec. 1.1441-1(e)(4)(ii), Sec. 1.1446-1(c)(2)(iv)(A), or Sec. 1.1471- 3(c)(6)(ii) of this chapter), or new documentation that the partnership obtains from the reviewed year partner that includes a signed affidavit stating that the information and representations associated with the documentation are accurate with respect to the reviewed year. (iii) Reporting requirements. A partnership required to pay tax under paragraph (h)(3)(i) of this section must file the appropriate return and issue information returns as required by regulations under chapter 3 or chapter 4. For return and information return requirements, see Sec. 1.1446-3(d)(1)(iii); Sec. 1.1461-1(b), (c); Sec. 1.1474- 1(c), (d) of this chapter. The partnership must file the return and issue information returns for the year that includes the date on which the partnership furnishes the statement required under paragraph (a) of this section. The partnership must report the information on the return and information returns in the manner prescribed by the IRS in forms, instructions, and other guidance. * * * * * 0 Par. 5. Section 301.6226-3 is amended by revising paragraph (f), and adding Example 6 to paragraph (g) to read as follows: Sec. 301.6226-3 Adjustments Taken Into Account by Partners. * * * * * (f) Partners subject to withholding under chapters 3 and 4. A reviewed year partner that is subject to withholding under Sec. 301.6226-2(h)(3)(i) must file an income tax return for the reporting year to report its additional reporting year tax and its share of any penalties, additions to tax, additional amounts, and interest (notwithstanding any filing exception in Sec. 1.6012-1(b)(2)(i) or Sec. 1.6012-2(g)(2)(i) of this chapter). The amount of tax paid by a partnership under Sec. 301.6226-2(h)(3)(i) is allowed as a credit under section 33 to the reviewed year partner to the extent that the tax is allocable to the reviewed year partner (within the meaning of Sec. 1.1446-3(d)(2) of this chapter) or is actually withheld from the reviewed year partner (within the meaning of Sec. 1.1464-1(a) or Sec. 1.1474-3 of this chapter). The credit is allowed against the reviewed year partner's income tax liability for its reporting year. The reviewed year partner must substantiate the credit by attaching the applicable Form 1042-S, ``Foreign Person's U.S. Source Income Subject to Withholding,'' or Form 8805, ``Foreign Partner's Information Statement of Section 1446 Withholding Tax,'' to its income tax return for the reporting year, as well as meeting any other requirements prescribed by the IRS in forms and instructions. (g) * * * Example 6. On its partnership return for the 2020 tax year, Partnership, a domestic partnership, reported U.S. source dividend income of $2,000. On June 1, 2023, the IRS mails an FPA to Partnership for Partnership's 2020 year increasing the amount of U.S. source dividend income to $4,000 and asserting an imputed underpayment plus an accuracy-related penalty under section 6662(b). Partnership makes a timely election under section 6226 in accordance with Sec. 301.6226-1 with respect to the imputed underpayment in the FPA for Partnership's 2020 year and does not file a petition for readjustment. The time to file a petition expires on August 30, 2023. Pursuant to Sec. 301.6226-2(b), the partnership adjustments become finally determined on August 30, 2023. On September 30, 2023, Partnership files the statements described under Sec. 301.6226-2 with the IRS and furnishes to partner A, a nonresident alien individual who was a partner in Partnership during 2020 (and remains a partner in Partnership in 2023), a statement described in Sec. 301.6226-2. A had a 50 percent interest in Partnership during all of 2020 and was allocated 50 percent of all items from Partnership for that year. The statement shows A's share of U.S. source dividend income reported on Partnership's return for the reviewed year of $1,000 and an adjustment to U.S. source dividend income of $1,000. In addition, the statement reports A's share of the accuracy-related penalty related to the imputed underpayment, and A's safe harbor amount and interest safe harbor amount (as determined under Sec. 301.6226-2(g)). Under Sec. 301.6226-2(h)(3)(i), because the additional $1,000 in U.S. source dividend income allocated to A is an amount subject to withholding (as defined in Sec. 301.6226- 2(h)(3)(i)), Partnership must pay the amount of tax required to be withheld on the adjustment. See Sec. Sec. 1.1441-1(b)(1) and 1.1441-5(b)(2)(i)(A) of this chapter. Under Sec. 301.6226- 2(h)(3)(ii), Partnership may reduce the amount of withholding tax it must pay because it has valid documentation from 2020 that establishes that A was entitled to a reduced rate of withholding in 2020 on U.S. source dividend income of 10 percent pursuant to a treaty. Partnership withholds $100 of tax from A's distributive share, remits the tax to the IRS, and files the necessary return and information returns required by Sec. 1.1461-1 of this chapter. A does not elect to pay the safe harbor amount and therefore must pay the additional reporting year tax as determined in accordance with paragraph (b) of this section, in addition to A's share of the penalty and interest. On his 2023 return, A must report the additional reporting year tax determined in accordance with paragraph (b) of this section, plus A's share of the accuracy related penalty determined at the partnership level, and interest determined in accordance with [[Page 56779]] paragraph (d) of this section. Under paragraph (f) of this section, A may claim the $100 withholding tax paid by Partnership pursuant to Sec. 301.6226-2(h)(3)(i) as a credit under section 33 against A's income tax liability on his 2023 return. * * * * * 0 Par. 6. Section 301.6227-2 is amended by adding paragraphs (b)(3) and (4) to read as follows. Sec. 301.6227-2 Determining and accounting for adjustments requested in an administrative adjustment request by the partnership. * * * * * (b) * * * (3) Coordination with chapters 3 and 4 when partnership pays an imputed underpayment. If a partnership pays an imputed underpayment resulting from adjustments requested in an AAR under paragraph (b)(1) of this section, the rules in Sec. 301.6225-1(a)(4) apply to treat the partnership as having paid the amount required to be withheld under chapter 3 or chapter 4 (as defined in Sec. 301.6225-1(a)(4)). (4) Coordination with chapters 3 and 4 when partnership elects to have adjustments taken into account by reviewed year partners. If a partnership elects under paragraph (c) of this section to have its reviewed year partners take into account adjustments requested in an AAR, the rules in Sec. 301.6226-2(h)(3) apply to the partnership, and the rules in Sec. 301.6226-3(f) apply to the reviewed year partners that take into account the adjustments pursuant to Sec. 301.6227-3. * * * * * Kirsten Wielobob, Deputy Commissioner for Services and Enforcement. [FR Doc. 2017-25740 Filed 11-29-17; 8:45 am] BILLING CODE 4830-01-P
![Federal Register / Vol. 82, No. 229 / Thursday, November 30, 2017 / Proposed Rules 56765
FDA mutually agreed upon threshold https://www.fda.gov/AboutFDA/ DEPARTMENT OF THE TREASURY
evaluation criteria and (2) such PartnershipsCollaborations/
applicants must have met approval MemorandaofUnderstandingMOUs/ Internal Revenue Service
DomesticMOUs/.
criteria and have NIOSH approval. N95s
with applications that meet the 26 CFR Part 301
List of Subjects in 21 CFR Part 878
mutually agreed upon threshold [REG–119337–17]
evaluation criteria and approval criteria Medical devices.
and remain approved by NIOSH would Therefore, under the Federal Food, RIN 1545–BN95
be exempt from FDA’s 510(k) Drug, and Cosmetic Act (21 U.S.C. 321
requirements under section 510(k) of the Centralized Partnership Audit Regime:
et seq., as amended) and under International Tax Rules
FD&C Act. Unless an N95 meets the authority delegated to the Commissioner
mutually agreed upon threshold of Food and Drugs, it is proposed that AGENCY: Internal Revenue Service (IRS),
evaluation criteria and approval criteria 21 CFR part 878 be amended as follows: Treasury.
and has NIOSH approval, the device ACTION: Notice of proposed rulemaking.
would still be subject to 510(k) review; PART 878—GENERAL AND PLASTIC
this includes devices with applications SURGERY DEVICES SUMMARY: This document contains
pending NIOSH review, as well as proposed regulations implementing
devices with no submitted applications. ■ 1. The authority citation for part 878 section 1101 of the Bipartisan Budget
N95s are the only devices included continues to read as follows: Act of 2015 (BBA), which was enacted
within the scope of the MOU. As such, Authority: 21 U.S.C. 351, 360, 360c, 360e, into law on November 2, 2015. Section
this proposed exemption would only 360j, 360l, 371. 1101 of the BBA repeals the current
apply to devices currently regulated by ■ 2. In § 878.4040, revise paragraph rules governing partnership audits and
FDA under product code MSH. If (b)(1) to read as follows: replaces them with a new centralized
finalized, this exemption would not partnership audit regime that, in
affect any other subset of surgical § 878.4040 Surgical apparel. general, assesses and collects tax at the
apparel classified under 21 CFR * * * * * partnership level. These proposed
878.4040. In addition to being subject to (b) * * * regulations provide rules addressing
the general limitations to the (1) Class II (special controls) for how certain international rules operate
exemptions found in 21 CFR 878.9 and surgical gowns and surgical masks. A in the context of the centralized
the conditions of exemption identified surgical N95 respirator or N95 filtering partnership audit regime, including
in this document, these devices will facepiece respirator is not exempt if it rules relating to the withholding of tax
also remain subject to current good is intended to prevent specific diseases on foreign persons, withholding of tax
manufacturing practices and other or infections, or it is labeled or to enforce reporting on certain foreign
general controls under the statute. An otherwise represented as filtering accounts, and the treatment of
exemption from the requirement of surgical smoke or plumes, filtering creditable foreign tax expenditures of a
510(k) does not mean that the device is specific amounts of viruses or bacteria, partnership.
exempt from any other statutory or reducing the amount of and/or killing DATES: Written or electronic comments
regulatory requirements, unless such viruses, bacteria, or fungi, or affecting and requests for a public hearing must
exemption is explicitly provided by allergenicity, or it contains coating be received by January 29, 2018.
order or regulation. technologies unrelated to filtration (e.g., ADDRESSES: Send submissions to:
to reduce and or kill microorganisms). CC:PA:LPD:PR (REG–119337–17), Room
IV. References Surgical N95 respirators and N95 5207, Internal Revenue Service, P.O.
The following references are on filtering facepiece respirators are Box 7604, Ben Franklin Station,
display in the Dockets Management exempt from the premarket notification Washington, DC 20044. Submissions
Staff (see ADDRESSES) and are available procedures in subpart E of part 807 of may be hand delivered Monday through
for viewing by interested persons this chapter subject to § 878.9, and the Friday between the hours of 8:00 a.m.
between 9 a.m. and 4 p.m., Monday following conditions for exemption: and 4:00 p.m. to CC:PA:LPD:PR (REG–
through Friday; they are also available (i) The user contacting components of 119337–17), Courier’s Desk, Internal
electronically at https:// the device must be demonstrated to be Revenue Service, 1111 Constitution
www.regulations.gov. FDA has verified biocompatible. Avenue NW., Washington, DC 20224, or
the Web site addresses, as of the date (ii) Analysis and nonclinical testing
sent electronically via the Federal
this document publishes in the Federal must:
(A) Characterize flammability and be eRulemaking Portal at
Register, but Web sites are subject to www.regulations.gov (IRS REG–119337–
change over time. demonstrated to be appropriate for the
intended environment of use; and 17).
1. FDA Guidance, ‘‘Procedures for Class II FOR FURTHER INFORMATION CONTACT:
(B) Demonstrate the ability of the
Device Exemptions from Premarket Concerning the proposed regulations
Notification, Guidance for Industry and device to resist penetration by fluids,
CDRH Staff,’’ February 19, 1998, such as blood and body fluids, at a relating to creditable foreign tax
available at https://www.fda.gov/ velocity consistent with the intended expenditures, Larry R. Pounders, Jr., of
downloads/MedicalDevices/ use of the device. the Office of Associate Chief Counsel
DeviceRegulationandGuidance/ (iii) NIOSH approved under its (International), (202) 317–5465;
nshattuck on DSK9F9SC42PROD with PROPOSALS
GuidanceDocuments/UCM080199.pdf. regulation. concerning the proposed regulations
2. ‘‘Memorandum of Understanding Between relating to chapters 3 and 4 of subtitle
the Food and Drug Administration,
* * * * *
A of the Internal Revenue Code (other
Center for Devices and Radiological Dated: November 24, 2017. than section 1446), Subin Seth of the
Health, and the Centers for Disease Leslie Kux,
Control and Prevention, National Office of Associate Chief Counsel
Associate Commissioner for Policy. (International), (202) 317–5003;
Institute for Occupational Safety and
Health, National Personal Protective [FR Doc. 2017–25781 Filed 11–29–17; 8:45 am] concerning the proposed regulations
Technology Laboratory,’’ available at BILLING CODE 4164–01–P relating to section 1446, Ronald M.
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![Federal Register / Vol. 82, No. 229 / Thursday, November 30, 2017 / Proposed Rules 56777
chapter 3 means sections 1441 through (3) Effect on Imputed Underpayment. the creditable expenditure grouping is taken
1464 of subtitle A of the Code, but does For purposes of computing the imputed into account in accordance with § 301.6225–
not include section 1443(b), and the underpayment in paragraph (c)(1) of this 3. The decrease to CFTEs in the passive
category subgrouping of the creditable
term chapter 4 means sections 1471 section, a net decrease to CFTEs in any
expenditure grouping results in a net
through 1474 of subtitle A of the Code. CFTE subgrouping is treated as a decrease to CFTEs. Therefore, pursuant to
See paragraph (c)(5) of this section for decrease to credits in the credit paragraph (d)(2)(iv)(A)(3) of this section, it is
the coordination rule that applies when grouping described in paragraph treated as a decrease to credits under
an adjustment is made to an amount (d)(2)(iii) of this section. A net increase paragraph (d)(2)(iii) of this section, which
subject to withholding for which tax has to CFTEs in any CFTE subgrouping is results in an imputed underpayment of $400
been collected under chapter 3 or treated as a net non-positive adjustment, under paragraph (c)(1) of this section.
chapter 4. as defined in paragraph (d)(3)(ii)(C) of Example 8. Partnership has two partners,
A and B. Under the partnership agreement,
* * * * * this section. See paragraphs (b) and
$100 of the CFTE is specially allocated to A
(c) * * * (c)(2) of this section and § 301.6225–3 for the 2019 taxable year. The IRS initiates
(5) Adjustments to items for which tax for the treatment of adjustments that do an administrative proceeding with respect to
has been collected under chapters 3 and not result in an imputed underpayment. Partnership’s 2019 taxable year and
4. To the extent that the IRS has (B) Other creditable expenditures. determines that $100 of CFTE should be
collected tax under chapter 3 or chapter [Reserved] reallocated from A to B. The partnership
4 (as defined in paragraph (a)(4) of this * * * * * adjustment is a <$100> adjustment to general
category CFTE allocable to A and an increase
section) attributable to an adjustment to (f) * * * of $100 to general category CFTE allocable to
an amount subject to withholding (as Example 6. Partnership reports on its 2019 B. Pursuant to paragraph (d)(2)(iv)(A)(2) of
defined in § 301.6226–2(h)(3)(i)), that partnership return $400 of CFTEs in the this section, the <$100> adjustment to
adjustment (or portion thereof) will be general category under section 904(d). The general category CFTE and the increase of
disregarded for purposes of calculating IRS initiates an administrative proceeding $100 to general category CFTE are included
the total netted partnership adjustment with respect to Partnership’s 2019 taxable in separate subgroupings, and the increase is
under paragraph (c)(3) of this section. year and determines that the amount of disregarded for purposes of computing the
See paragraph (a)(4) of this section for CFTEs was $300 instead of $400 ($100 imputed underpayment under paragraph
adjustment to CFTEs). No other adjustments (c)(1) of this section. The increase and
the coordination rule that applies when
are made for the 2019 taxable year. The $100 decrease of $100 of general category CFTE do
a partnership pays an imputed adjustment to CFTEs falls within the not net. Instead, the net increase to CFTEs in
underpayment that includes an creditable expenditure grouping described in the general-category, B-allocation
adjustment to an amount subject to paragraph (d)(2)(iv) of this section and is subgrouping is treated as a net non-positive
withholding under chapter 3 or chapter within the general category subgrouping. adjustment, which does not result in an
4. Because there are no other adjustments for imputed underpayment and is therefore
(d) * * * the 2019 taxable year in this subgrouping, the taken into account by the partnership in the
(2) * * * net adjustment in the subgrouping is $100. adjustment year in accordance with
(iv) Creditable expenditure Pursuant to paragraph (d)(2)(iv)(A)(3) of this § 301.6225–3. The net decrease to CFTEs in
section, a net decrease to CFTEs in a the general-category, A-allocation
grouping—(A) Creditable foreign tax
subgrouping in the creditable expenditure subgrouping is treated as a decrease to credits
expenditures—(1) In general. The grouping is treated as a decrease to credits in the credit grouping under paragraph
creditable expenditure grouping under paragraph (d)(2)(iii) of this section. (d)(2)(iii) of this section, resulting in an
includes all partnership adjustments Because no other adjustments have been imputed underpayment of $100 under
(including reallocation adjustments as made, the $100 adjustment to credits under paragraph (c)(1) of this section.
described in paragraph (d)(2)(ii) of this paragraph (d)(2)(iii) of this section produces Example 9. Partnership has two partners,
section) to creditable foreign tax an imputed underpayment of $100 under A and B. Partnership owns two entities, DE1
expenditures (CFTEs) as defined in paragraph (c)(1) of this section. and DE2, that are disregarded as separate
§ 1.704–1(b)(4)(viii)(b) of this chapter. Example 7. Partnership reports on its 2019 from their owner within the meaning of
partnership return $400 of CFTEs in the § 301.7701–3 and are operating in and paying
(2) Subgroupings. Adjustments to
passive category under section 904(d). The taxes to foreign jurisdictions. The partnership
CFTEs are grouped into subgroupings IRS initiates an administrative proceeding agreement provides that all items (income,
based on the separate category of with respect to Partnership’s 2019 taxable gain, loss, deduction, credit, etc.) from DE1
income to which the CFTEs relate in year and determines that the CFTEs reported and DE2 are allocable to A and B in the
accordance with section 904(d) and the by Partnership were general category instead following manner. Items related to DE1: To
regulations thereunder, and to account of passive category CFTEs. No other A 75% and to B 25%. Items related to DE2:
for different allocations of CFTEs adjustments are made. Under the rules in To A 25% and to B 75%. Partnership reports
between partners. Two or more paragraph (d)(2)(iv)(A)(2) of this section, an CFTEs in the general category of $300, $100
adjustments are included within the adjustment to the category of a CFTE is with respect to DE1 and $200 with respect to
treated as two separate adjustments: An DE2. Partnership allocates the $300 of CFTEs
same subgrouping only if each
increase to general category CFTEs of $400 $125 and $175 to A and B respectively. On
adjustment relates to CFTEs in the same and a decrease to passive category CFTEs of examination, the IRS determines that
separate category and each adjusted $400. Both adjustments are included in the Partnership understated the amount of
item would be allocated to the partners creditable expenditure grouping under creditable foreign tax paid by DE2 by $40 and
in the same ratio had those items been paragraph (d)(2)(iv) of this section, but they overstated the amount of creditable foreign
properly reflected on the partnership are included in separate subgroupings. tax paid by DE1 by $80. No other adjustments
return for the reviewed year. An Therefore, the two amounts do not net. are made. Because the two adjustments each
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adjustment that changes the separate Instead, the $400 increase to CFTEs in the relate to CFTEs that are subject to different
category of a CFTE for section 904 general category subgrouping is treated as a allocations, the two adjustments are in
net non-positive adjustment within the different subgroupings under paragraph
purposes or that reallocates the
meaning of paragraph (d)(3)(ii)(C) of this (d)(2)(iv)(A)(2) of this section. The
distributive share of a CFTE between section and is an adjustment that does not adjustment reducing the CFTEs related to
partners is treated as two separate result in an imputed underpayment within DE1 produces a net decrease to CFTEs within
adjustments: An increase to the amount the meaning of paragraphs (b) and (c)(2) of that subgrouping and is treated as a reduction
of CFTEs in one subgrouping and a this section. Therefore, the $400 increase to to credits under paragraph (d)(2)(iii) of this
decrease in another subgrouping. CFTEs in the general category subgrouping of section and results in an imputed
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![Federal Register / Vol. 82, No. 229 / Thursday, November 30, 2017 / Proposed Rules 56779
paragraph (d) of this section. Under of gasoline and diesel fuel as the entities LLC; U.S. Oil & Refining Company (the
paragraph (f) of this section, A may claim the responsible for complying with the ‘‘Small Refinery Owners Ad Hoc
$100 withholding tax paid by Partnership annual percentage standards adopted Coalition’’) filed a petition for
pursuant to § 301.6226–2(h)(3)(i) as a credit under the Renewable Fuel Standard reconsideration of 40 CFR 80.1406. On
under section 33 against A’s income tax
liability on his 2023 return.
(RFS) program. February 12, 2016, Valero Energy
DATES: November 30, 2017. Corporation and its subsidiaries
* * * * * (‘‘Valero’’) filed a ‘‘petition to reconsider
■ Par. 6. Section 301.6227–2 is amended ADDRESSES: The EPA has established a
docket for this action under Docket ID and revise’’ the rule. On June 13, 2016,
by adding paragraphs (b)(3) and (4) to Valero submitted a petition for
read as follows. No. EPA–HQ–OAR–2016–0544. All
documents in the docket are listed on rulemaking to change the definition of
§ 301.6227–2 Determining and accounting the http://www.regulations.gov Web ‘‘obligated party.’’ On August 4, 2016,
for adjustments requested in an site. Although listed in the index, some the American Fuel and Petrochemical
administrative adjustment request by the information is not publicly available, Manufacturers (‘‘AFPM’’) filed a
partnership. e.g., CBI or other information whose petition for rulemaking to change the
* * * * * disclosure is restricted by statute. definition of ‘‘obligated party.’’ On
(b) * * * Certain other material, such as September 2, 2016, Holly Frontier also
(3) Coordination with chapters 3 and copyrighted material, is not placed on filed a petition for rulemaking to change
4 when partnership pays an imputed the Internet and will be publicly the definition of ‘‘obligated party.’’
underpayment. If a partnership pays an available only in hard copy form. The petitioners all seek to have the
imputed underpayment resulting from Publicly available docket materials are point of obligation shifted from refiners
adjustments requested in an AAR under available electronically through http:// and importers, but differed somewhat in
paragraph (b)(1) of this section, the rules www.regulations.gov. their suggestions for alternatives in their
in § 301.6225–1(a)(4) apply to treat the petitions. Some requested in their
FOR FURTHER INFORMATION CONTACT: Julia petitions that EPA shift the point of
partnership as having paid the amount MacAllister, Office of Transportation
required to be withheld under chapter 3 obligation from refiners and importers
and Air Quality, Assessment and to those parties that blend renewable
or chapter 4 (as defined in § 301.6225– Standards Division, Environmental
1(a)(4)). fuel into transportation fuel. Others
Protection Agency, 2000 Traverwood suggested that it be shifted to those
(4) Coordination with chapters 3 and Drive, Ann Arbor, MI 48105; telephone
4 when partnership elects to have parties that hold title to the gasoline or
number: 734–214–4131; email address: diesel fuel immediately prior to the sale
adjustments taken into account by macallister.julia@epa.gov.
reviewed year partners. If a partnership of these fuels at the terminal (these
SUPPLEMENTARY INFORMATION: parties are commonly called the
elects under paragraph (c) of this section
to have its reviewed year partners take I. Background ‘‘position holders’’), or to ‘‘blenders and
into account adjustments requested in distributors’’. All petitioners argued,
On March 26, 2010, the EPA issued a among other things, that shifting the
an AAR, the rules in § 301.6226–2(h)(3) final rule (75 FR 14670) establishing
apply to the partnership, and the rules point of obligation to parties
regulatory amendments to the downstream of refiners and importers in
in § 301.6226–3(f) apply to the reviewed renewable fuel standards (‘‘RFS’’)
year partners that take into account the the fuel distribution system would align
program regulations to reflect statutory compliance responsibilities with the
adjustments pursuant to § 301.6227–3. amendments to Section 211(o) of the parties best positioned to make
* * * * * Clean Air Act enacted as part of the decisions on how much renewable fuel
Kirsten Wielobob, Energy Independence and Security Act is blended into the transportation fuel
of 2007. These amended regulations supply in the United States. Some of the
Deputy Commissioner for Services and
Enforcement. included 40 CFR 80.1406, identifying petitioners further claimed that
refiners and importers of gasoline and changing the point of obligation would
[FR Doc. 2017–25740 Filed 11–29–17; 8:45 am]
diesel fuel as the ‘‘obligated parties’’ result in an increase in the production,
BILLING CODE 4830–01–P
responsible for compliance with the distribution, and use of renewable fuels
RFS annual standards. Beginning in in the United States and would reduce
2014, and continuing to the present, the cost of transportation fuel to
ENVIRONMENTAL PROTECTION some obligated parties and other
AGENCY consumers.
stakeholders have questioned whether On November 22, 2016, EPA
40 CFR 80.1406 should be amended, published a notice in the Federal
40 CFR Part 80
and a number of them have filed formal Register announcing its proposed denial
[EPA–HQ–OAR–2016–0544; FRL–9971–36– petitions for reconsideration of the of all petitions seeking a change in the
OAR] definition of ‘‘obligated party’’ in 40 definition of ‘‘obligated party’’ in 40
CFR 80.1406, or petitions for CFR 80.1406, and soliciting comment on
Notice of Denial of Petitions for rulemaking to amend the provision. On its draft analysis of the petitions and
Rulemaking To Change the RFS Point January 27, 2014, Monroe Energy LCC proposed rationale for denial. (81 FR
of Obligation (‘‘Monroe’’) filed a ‘‘petition to revise’’ 83776). EPA opened a public docket
AGENCY: Environmental Protection 40 CFR 80.1406 to change the RFS point under Docket ID No. EPA–HQ–OAR–
Agency (EPA). of obligation, and on January 28, 2016, 2016–0544, where it made its draft
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ACTION: Denials of rulemaking requests. Monroe filed a ‘‘petition for analysis available. EPA received over
reconsideration’’ of the regulation. On 18,000 comments on the proposed
SUMMARY: The Environmental Protection February 11, 2016, Alon Refining Krotz denial, including comments from the
Agency (EPA) is providing notice of its Springs, Inc.; American Refining Group, petitioners, stakeholders, and
denial of several petitions requesting Inc.; Calumet Specialty Products individuals supporting the request that
that EPA initiate a rulemaking process Partners, L.P.; Lion Oil Company; EPA change the point of obligation for
to reconsider or change 40 CFR 80.1406, Ergon-West Virginia, Inc.; Hunt Refining the RFS program, as well as from many
which identifies refiners and importers Company; Placid Refining Company stakeholders and individuals supporting
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Document Created: 2017-11-30 00:35:00
Document Modified: 2017-11-30 00:35:00
| Category | Regulatory Information | |
| Collection | Federal Register | |
| sudoc Class | AE 2.7: GS 4.107: AE 2.106: | |
| Publisher | Office of the Federal Register, National Archives and Records Administration | |
| Section | Proposed Rules | |
| Action | Notice of proposed rulemaking. | |
| Dates | Written or electronic comments and requests for a public hearing must be received by January 29, 2018. | |
| Contact | Concerning the proposed regulations relating to creditable foreign tax expenditures, Larry R. Pounders, Jr., of the Office of Associate Chief Counsel (International), (202) 317-5465; concerning the proposed regulations relating to chapters 3 and 4 of subtitle A of the Internal Revenue Code (other than section 1446), Subin Seth of the Office of Associate Chief Counsel (International), (202) 317-5003; concerning the proposed regulations relating to section 1446, Ronald M. Gootzeit of the Office of Associate Chief Counsel (International), (202) 317-4953; concerning the submission of comments or a request for a public hearing, Regina Johnson, (202) 317-6901 (not toll-free numbers). | |
| FR Citation | 82 FR 56765 | |
| RIN Number | 1545-BN95 | |
| CFR Associated | Employment Taxes; Estate Taxes; Excise Taxes; Gift Taxes; Income Taxes; Penalties and Reporting and Recordkeeping Requirements |
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