On behalf of the apartment industry, NMHC/NAA sent a letter to the Internal Revenue Service (IRS) on August 11 requesting that final partnership audit regulations allow upper tier partnerships to push out tax adjustments to its partners rather than paying an entity-level tax with respect to the adjustment. The multifamily industry’s letter comes in response to proposed regulations released on June 13 that would overhaul how partnerships are audited.
Currently, the IRS generally holds individuals within a partnership responsible for their share of tax liability. Effective for taxable years beginning after December 31, 2017, the proposed rules would instead mandate that a partnership be audited at the entity, not the individual, level. Therefore, the partnership would be responsible for any additional taxes.
Notably, the proposed regulations provide an option that would allow partnerships to remit amended K-1s to the individual partners instead of paying tax at the partnership level. Unfortunately, the regulations do not fully address the issue of enabling a partner that is itself a partnership to push through adjustments to its own individual partners.
NMHC/NAA’s letter focuses on asking the IRS to address this issue so that there are no cases in which one partner becomes liable for another partner’s tax obligations. Noting its concerns about allowing such push outs through multiple partnership tiers, the IRS said in its proposed regulations that it is considering approaches on how to address this issue that will be the subject of future regulations.
NMHC/NAA are also focused on securing a legislative solution that would require partnership push outs of tax liabilities. Congressional tax writers introduced bicameral technical corrections legislation on December 6, 2016, that would address the treatment of tiered partnerships by specifically allowing downstream partnership to remit amended K-1s to its own individual partners. Although the technical corrections have not yet been reintroduced in the 115th Congress, they will likely serve as a baseline for action in 2017.
The proposed regulations are a result of bipartisan budget legislation enacted in late 2015 that was designed to set spending levels and increase the nation’s debt ceiling. Lawmakers sought to reformulate the partnership audit process to address the fact that large real estate partnerships are audited at much lower rates than corporations.
NMHC/NAA have long worked to ensure that the partnership audit process does not disadvantage multifamily industry participants or unintentionally disturb investment. NMHC/NAA requested a change to original partnership audit proposal introduced in Congress in 2015. That proposal would have made all partners jointly and severally liable for the entire partnership’s tax liability. This would have curbed investment because a partner wouldn’t want to participate in a partnership with essentially unlimited tax liability. This proposal was removed and is a significant benefit to the real estate industry.