TREASURY REGULATIONS

(a) Items that involve special enforcement matters. In accordance with section 6241(11)(B) of the Internal Revenue Code (Code), the partnership-related items (as defined in § 301.6241-1(a)(6)(ii)) described in this section have been determined to involve special enforcement matters. If the rules in this section apply, only the portion of the partnership-related item to which the special enforcement matter applies may be adjusted without regard to subchapter C of chapter 63. Nothing in this section prohibits the Internal Revenue Service (IRS) from adjusting the entire partnership-related item under subchapter C of chapter 63. See paragraph (i) of this section for rules coordinating adjustments made under subchapter C of chapter 63 with adjustments made without regard to subchapter C of chapter 63.

(b) Partnership-related items underlying items that are not partnership-related items—(1) In general. The IRS may determine that the rules of subchapter C of chapter 63 of the Code (subchapter C of chapter 63) do not apply to an adjustment to a partnership-related item of a partnership if—

(i) An examination is being conducted of a person other than the partnership;

(ii) A determination regarding a partnership-related item is made, as part of, or underlying, an adjustment to an item that is not a partnership-related item of the person described in paragraph (b)(1)(i) of this section; and

(iii) The treatment of the partnership-related item on the return of the partnership under section 6031(a) or in the partnership's books and records is based in whole or in part on information provided by the person described in paragraph (b)(1)(i) of this section from that person's books and records.

(2) Example. The following example illustrates the provisions of paragraph (b)(1) of this section. For purposes of this example, the partnership has no liabilities, is subject to subchapter C of chapter 63, and the partnership and partner each has a calendar taxable year. On June 1, 2018, A acquires an interest in Partnership by contributing Asset to Partnership in a section 721 contribution (Contribution). Under section 722, A claims a basis in its interest in Partnership of $50 equal to A's purported adjusted basis in Asset at the time of the Contribution. Partnership claims a basis in Asset of $50 under section 723 equal to A's purported adjusted basis in Asset as of June 1, 2018, based on information A provided to Partnership as part of the Contribution. There is no activity in Partnership that gives rise to any other partnership-related items between June 1, 2018, and June 2, 2019. On June 2, 2019, A sells A's interest in Partnership to B for $100 in cash and reports a gain of $50 based on A's purported adjusted basis in its interest in Partnership of $50. The IRS opens an examination of A and determines that A's adjusted basis in its interest in Partnership should be $30 instead of the $50 claimed by A because A's Contribution to Partnership should have been $30 instead of $50. Under paragraph (b) of this section, the IRS may determine that the rules of subchapter C of chapter 63 do not apply to the Contribution and make a determination about the Contribution (which is a partnership-related item under § 301.6241-1(a)(6)(v)(C)) as part of an adjustment to A's adjusted basis in its interest in Partnership (which is not a partnership-related item). The IRS may make this determination because Partnership's reported basis in Asset was based on the information provided by A. Because A's adjusted basis in A's interest in Partnership is reduced to $30, the total gain from the sale of A's interest in Partnership is increased to $70 ($50 as originally reported plus $20 as adjusted by the IRS). In accordance with paragraph (h)(2) of this section, if A's basis in its interest in Partnership is adjusted based on a determination about the Contribution, Partnership and the other partners of Partnership are not bound by any determination regarding the Contribution resulting from the examination of A and no adjustment is required to be made to their returns under this section.

(c) Termination and jeopardy assessment. For any taxable year of a partner or indirect partner for which an assessment of income tax under section 6851 or section 6861 is made, the IRS may adjust any partnership-related item with respect to such partner or indirect partner as part of making an assessment of income tax under section 6851 or section 6861 without regard to subchapter C of chapter 63.

(d) Criminal investigations. For any taxable year of a partner or indirect partner for which the partner or indirect partner is under criminal investigation, the IRS may adjust any partnership-related item with respect to such partner or indirect partner without regard to subchapter C of chapter 63.

(e) Indirect methods of proof of income. The IRS may adjust any partnership-related item as part of a determination of any deficiency (or portion thereof) of the partner or indirect partner that is based on an indirect method of proof of income without regard to subchapter C of chapter 63.

(f) Special relationships and extensions of the partner's period of limitations. If the period of limitations under section 6235 on making partnership adjustments has expired for a taxable year, the IRS may adjust any partnership-related item that relates to any item or amount for which the partner's period of limitations on assessment of tax imposed by chapter 1 of the Code (chapter 1) has not expired for the taxable year of the partner or indirect partner, without regard to subchapter C of chapter 63 if—

(1) The direct or indirect partner is related to the partnership under section 267(b) or 707(b); or

(2) Under section 6501(c)(4), the direct or indirect partner agrees, in writing, to extend the partner's section 6501 period of limitations on assessment for the taxable year but only if the agreement expressly provides that the partner is extending the time to adjust and assess any tax attributable to partnership-related items for the taxable year.

(g) Penalties and taxes imposed on the partnership under chapter 1. The IRS may adjust any tax, penalties, additions to tax, or additional amounts imposed on, and which are the liability of the partnership under chapter 1 without regard to subchapter C of chapter 63. The IRS may also make determinations about any partnership-related item, without regard to subchapter C of chapter 63, as part of any adjustment made to the amount and applicability of the tax, penalty, addition to tax, or additional amount imposed on the partnership being determined without regard to subchapter C of chapter 63. Any determinations under this paragraph (g) will be treated as a determination under a chapter of the Code other than chapter 1 for purposes of § 301.6241-6.

(h) Determination that subchapter C of chapter 63 does not apply—(1) Notification. If the IRS determines, in accordance with paragraph (b), (c), (d), (e), (f), or (g) of this section, that some or all of the rules under subchapter C of chapter 63 do not apply to any partnership-related item (or portion thereof), then the IRS will notify, in writing, the taxpayer to whom the adjustments are being made.

(2) Effect of adjustments not made under subchapter C of chapter 63. Any final decision with respect to any partnership-related item adjusted in a proceeding not under subchapter C of chapter 63 is not binding on any person that is not a party to the proceeding. For example, if the partnership or any other partner does not become a party to a partner-level proceeding conducted as a result of the application of this section, the partnership and those other partners are not bound to the adjustments determined in the partner-level proceeding.

(i) Coordination with adjustments made at the partnership level. This section will not apply to the extent the partner can demonstrate adjustments to partnership-related items included in the deficiency or an adjustment by the IRS were—

(1) Previously taken into account under subchapter C of chapter 63 by the person being examined; or

(2) Included in an imputed underpayment paid by a partnership (or pass-through partner) for any taxable year in which the partner was a reviewed year partner or indirect partner but only if the amount included in the deficiency or adjustment exceeds the amount reported by the partnership to the partner that was either reported by the partner or indirect partner or is otherwise included in the deficiency or adjustment determined by the IRS.

(j) Applicability date—(1) In general. Except for paragraph (b) of this section, this section applies to partnership taxable years ending on or after November 20, 2020. Notwithstanding the preceding sentence, upon agreement between the partner under examination and the IRS, any provision of this section except for paragraph (b) of this section may apply to any taxable year of a partner that relates to a partnership taxable year subject to subchapter C of chapter 63 (as amended) that ended before November 20, 2020. In addition, a partnership and the IRS may agree to apply paragraph (g) to any partnership taxable year ended before November 20, 2020, that is subject to subchapter C of chapter 63, as amended.

(2) Partnership-related items underlying items that are not partnership-related items. Paragraph (b) of this section applies to partnership taxable years beginning after December 20, 2018. Notwithstanding the preceding sentence, upon agreement between the partner under examination and the IRS, paragraph (b) of this section may apply to any taxable year of a partner that relates to a partnership taxable year subject to subchapter C of chapter 63, as amended, that ended on or before December 20, 2018.