Return of Partnership Income

DEPARTMENT OF THE TREASURY
Internal Revenue Service 26 CFR Part 1 [REG-209322-82] RIN 1545-AU99

TITLE: Return of Partnership Income

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Withdrawal of notice of proposed rulemaking; notice of
proposed rulemaking and notice of public hearing.

SUMMARY: This document withdraws the notice of proposed rulemaking
relating to partnership returns. The proposed regulations were
published in the Federal Register on January 23, 1986. These
regulations revise the partnership filing requirement to reflect
changes to the law made by the Taxpayer Relief Act of 1997 (TRA).
All partnerships required to file partnership returns, including
certain foreign partnerships, are affected by these regulations.
This document also contains a notice of a public hearing on the
proposed regulations.

DATES: Written comments must be received by April 27, 1998.

Requests to speak and outlines of oral comments to be discussed at
the public hearing scheduled for May 19, 1998, at 10 a.m., must be
received by April 28, 1998.

ADDRESSES: Send submissions to: CC:DOM:CORP:R (REG-209322-82), room
5226, Internal Revenue Service, POB 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may be hand delivered between the
hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R (REG- 209322-82),
Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue
NW., Washington, DC. Alternatively, taxpayers may submit comments
electronically via the Internet by selecting the "Tax Regs" option
of the IRS Home Page, or by submitting comments directly to the IRS
Internet site at:

http://www.irs.ustreas.gov/prod/tax_regs/comments.html. The public
hearing will be held in the IRS Auditorium, 7400 Corridor, Internal
Revenue Building, 1111 Constitution Avenue NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Martin
Schäffer or Christopher Kelley, 202-622-3080; concerning foreign
partnerships, Ronald Gootzeit, 202-622-3860; concerning submissions
and the hearing, Michael Slaughter, 202-622-7190 (not toll-free
numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information contained in this notice of proposed
rulemaking has been submitted to the Office of Management and Budget
for review in accordance with the Paperwork Reduction Act of 1995
(44 U.S.C. 3507(d)). Comments on the collection of information
should be sent to the Office of Management and Budget, Attn: Desk
Officer for the Department of the Treasury, Office of Information
and Regulatory Affairs, Washington, DC 20503, with copies to the
Internal Revenue Service, Attn: IRS Reports Clearance Officer, T:FP,
Washington, DC 20224. Comments on the collection of information must
be received by March 27, 1998. Comments are specifically requested
on:

Whether the proposed collection of information is necessary for the
proper performance of the functions of the Internal Revenue Service,
including whether the information will have practical utility;

The accuracy of the estimated burden associated with the proposed
collection of information (see below); How the quality, utility, and
clarity of the information to be collected may be enhanced;

How the burden of complying with the proposed collection of
information may be minimized, including through the application of
automated collection techniques or other forms of information
technology; and Estimates of the capital or start-up costs and costs
of operation, maintenance, and purchase of services to provide
information.

The collection of information in this proposed regulation is in
§1.6031(a)-1. This information is required to enable the IRS to
verify that a taxpayer is reporting the correct amount of income or
gain or claiming the correct amount of losses, deductions, or
credits from that taxpayer's interest in the partnership. The
collection of information is mandatory. The likely respondents are
businesses and other for-profit institutions.

The burden is reflected in the burden of Form 1065.

An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless it displays a
valid control number assigned by the Office of Management and
Budget.

Books or records relating to a collection of information must be
retained as long as their contents may become material in the
administration of any internal revenue law. Generally, tax returns
and tax return information are confidential, as required by 26
U.S.C. 6103.

Background

This document contains proposed amendments to the Income Tax
Regulations (26 CFR Part 1) under sections 6031 and 6063 of the
Internal Revenue Code of 1986 (Code). These amendments are designed,
in part, to reflect changes made to section 6031 by section 1141 of
TRA, Public Law 105-34, 111 Stat. 788 (1997).

Section 6031 contains rules regarding the filing of returns of
partnership income (partnership returns).

On January 23, 1986, the IRS published in the Federal Register (51
FR 3075) proposed regulations under section 6031 of the Internal
Revenue Code (existing proposed regulations).

Section 1.6031-1 of the existing proposed regulations provides rules
that, if finalized, would implement the partnership filing
requirements of section 404 of the Tax Equity and Fiscal
Responsibility Act of 1982 (TEFRA), Public Law 97-248, 96 Stat.

669 (1982). Because section 1141 of TRA supersedes the partnership
filing requirements of section 404 of TEFRA, the IRS and Treasury
consider it appropriate to reissue proposed regulations reflecting
recent changes to the law, while giving taxpayers another
opportunity to comment. Accordingly, this document withdraws
§1.6031-1 of the existing proposed regulations published in the
Federal Register on January 23, 1986 (51 FR 3075). A partnership
that has followed the rules contained in §1.6031-1 of the existing
final regulations for all taxable years prior to the taxable year
for which these new regulations will become effective will be
treated as fully complying with the partnership filing requirements
with respect to such taxable years.

Section 6063 provides that a partnership return shall be signed by
any one of the partners. The proposed regulations clarify who must
sign a partnership return filed solely for the purpose of making
certain partnership-level elections.

Explanation of Provisions

Filing Requirement

Section 6031(a) requires every partnership to file a partnership
return. New section 6031(e), as added by section 1141 of TRA,
exempts certain foreign partnerships from the filing requirement of
section 6031(a). Section 6031(e) provides that a foreign partnership
is not required to file a return for a tax year unless during that
year it derives gross income from sources within the United States
or has gross income that is effectively connected with the conduct
of a trade or business within the United States. Further exceptions
to the filing requirement for foreign partnerships may be provided
by regulations.

The proposed regulations separately describe the filing requirements
for domestic and foreign partnerships. In accordance with section
6031(a), the proposed regulations provide that, except in certain
limited circumstances, every domestic partnership must file a
partnership return.

Under section 6031 and the proposed regulations, a foreign
partnership generally must file a partnership return only if it has
either United States source income or income effectively connected
(or treated as effectively connected) with the conduct of a trade or
business within the United States. However, under the proposed
regulations, a foreign partnership that has no gross income that is
effectively connected with the conduct of a trade or business within
the United States, and that would be required to file a partnership
return only because it has gross income derived from sources within
the United States, will be exempt from the requirement to file a
partnership return if (i) no United States person has a direct or
indirect interest in the partnership; (ii) the gross income derived
from sources within the United States is either fixed or
determinable annual or periodical income described in §1.1441-2(b)
or other amounts subject to withholding described in §1.1441-2(c);
(iii) Forms 1042 and 1042-S are filed with respect to all such gross
income in accordance with §1.1461-1(b) and (c); and (iv) the tax
liability of the partners with respect to such gross income has been
fully satisfied by the withholding of tax at the source, if
applicable, under chapter 3. The foreign partnership's obligation to
file Forms 1042 and 1042-S is generally eliminated by the
regulations under section 1461 published in the Federal Register on
October 14, 1997 (62 FR 53387) if those returns are filed by the
withholding agent (or agents) making the payments of United States
source income to the partnership and the partners' tax liability
with respect to United States source income has been fully satisfied
by withholding. See §1.1461-1(b)(2) and (c)(4). The IRS and Treasury
invite comments addressing other ways to reduce duplicative
information filing.

Any domestic or foreign partnership that elects to be excluded from
subchapter K of Chapter 1 of the Code under section 761(a) will not
be required to file a partnership return, except that where a
partnership makes an election under §1.761- 2(b)(2)(i), the
partnership must timely file a partnership return that contains the
information required by §1.761-2(b)(2)(i) for the taxable year for
which the election is made.

Failure to Meet Filing Requirement

If a partnership that is not a small partnership under section
6231(a)(1)(B) is required to file a partnership return under section
6031 but fails to do so, the period of limitations on assessment of
tax attributable to items of that partnership remains open
indefinitely under section 6229(a). The failure of a partnership to
file a return required by section 6031 might also result in
disallowance under section 6231(f) of the deductions, losses, and
credits flowing through to the partners and could subject the
partnership to penalties under section 6698 and/or section 7203.

Information To Be Furnished to Partners

Under section 6031(b), every partnership that is required by section
6031(a) to file a partnership return must furnish information to its
partners as required by regulations. The rules governing partnership
statements to partners and nominees are in §1.6031(b)-1T.

Partnership Elections

A foreign partnership otherwise exempt from the filing requirement
that wants to make a partnership-level election under section 703(b)
must file a partnership return for the year of the election. The
proposed regulations provide rules similar to those contained in
§1.7701-3(c)(2) of the entity classification regulations with
respect to who has the authority to file such returns. Generally,
the return must be signed by all partners or by an authorized
partner.

Proposed Effective Dates

These regulations are proposed to be applicable to partnership tax
years ending on or after the 90th day after final regulations on
this subject are published in the Federal Register. However, the
exceptions for certain foreign partnerships contained in
§1.6031(a)-1(b)(2) will not be applicable to any partnership taxable
years beginning before January 1, 1999.

Special Analyses

It has been determined that this notice of proposed rulemaking is
not a significant regulatory action as defined in EO 12866.
Therefore, a regulatory assessment is not required.

It also has been determined that section 553(b) of the
Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to
these proposed regulations. It is hereby certified that the
collection of information contained in these proposed regulations
will not have a significant economic impact on a substantial number
of small entities. This certification is based on the fact that the
regulations would reduce (rather than increase) the number of small
entities that are required to file a partnership return.
Specifically, the proposed regulations would eliminate the filing
requirements for certain foreign partnerships that are fully subject
to withholding in order to prevent duplicative filing requirements.
In addition to eliminating the filing requirements in these
circumstances, for ease of reference the proposed regulations update
and restate the general requirements to file a partnership return as
set forth in existing regulations. Because the proposed regulations
would not impose any new reporting requirements that are not imposed
by the existing regulations, and the only significant modification
of the existing regulations is to eliminate the filing requirement
for certain foreign partnerships, the regulations will not have a
significant economic impact on a substantial number of small
entities. Accordingly, a Regulatory Flexibility Analysis under the
Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required.
Pursuant to section 7805(f) of the Code, these proposed regulations
will be submitted to the Chief Counsel for Advocacy of the Small
Business Administration for comment on their impact on small
business.

Comments and Public Hearing

Before these proposed regulations are adopted as final regulations,
consideration will be given to any written comments (preferably a
signed original and eight (8) copies) that are submitted timely to
the IRS. All comments will be available for public inspection and
copying.

A public hearing has been scheduled for Tuesday, May 19, 1998, at 10
a.m., in the IRS Auditorium, 7400 Corridor, Internal Revenue
Building, 1111 Constitution Avenue NW., Washington, DC.

Because of access restrictions, visitors will not be admitted beyond
the building lobby more than 15 minutes before the hearing starts.

The rules of 26 CFR 601.601(a)(3) apply to the hearing.

Persons that wish to present oral comments at the hearing must
submit written comments by April 27, 1998, and submit an outline of
the topics to be discussed and the time to be devoted to each topic
(signed original and eight (8) copies) by April 28, 1998.

A period of 10 minutes will be allotted to each person for making
comments.

An agenda showing the scheduling of the speakers will be prepared
after the deadline for receiving outlines has passed.

Copies of the agenda will be available free of charge at the
hearing.

Drafting Information

The principal authors of these regulations are Martin Schäffer and
Christopher Kelley, Office of Assistant Chief Counsel (Passthroughs
and Special Industries), and Ronald Gootzeit, Office of the
Associate Chief Counsel (International).

However, other personnel from the IRS and Treasury Department
participated in their development.

List of Subjects 26 CFR Part 1 Income taxes, Reporting and
recordkeeping requirements.

Withdrawal of Proposed Amendments to the Regulations Accordingly,
under the authority of 26 U.S.C. 7805, the notice of proposed
rulemaking that was published in the Federal Register on January 23,
1986 (51 FR 3075) is withdrawn.

Proposed Amendments to the Regulations Accordingly, 26 CFR part 1 is
proposed to be amended as follows:

PART 1--INCOME TAXES

Paragraph 1. The authority citation for part 1 is amended by adding
an entry in numerical order to read as follows:

Authority: 26 U.S.C. 7805. * * *

Section 1.6031(a)-1 also issued under 26 U.S.C. 6031. * * *

§1.6031-1 [Removed]

Par. 1a. Section 1.6031-1 is removed.

Par. 2. Section 1.6031(a)-1 is added to read as follows:

§1.6031(a)-1 Return of partnership income.

(a) Domestic partnerships--(1) Return required. Except as provided
in paragraphs (a)(3) and (c) of this section, every domestic
organization that is a partnership must file a return of partnership
income under section 6031 (partnership return) for each taxable year
on the form prescribed for the partnership return. The partnership
return must be filed for the taxable year of the partnership
regardless of the taxable years of the partners. For taxable years
of a partnership and of a partner, see section 706 and §1.706-1. For
the rules governing partnership statements to partners and nominees,
see §1.6031(b)-1T.

(2) Content of return. The partnership return must contain the
information required by the prescribed form and the accompanying
instructions.

(3) Special rule. A partnership that has no income, deductions, or
credits for federal income tax purposes for a taxable year is not
required to file a partnership return for that year.

(4) Failure to file. For the consequences of a failure to comply
with the requirements of section 6031(a) and this paragraph (a), see
sections 6229(a), 6231(f), 6698, and 7203.

(b) Foreign partnerships--(1) Return required. A foreign partnership
must file a partnership return for a partnership taxable year only
if it has gross income derived from sources within the United States
or it has gross income that is (or is treated as) effectively
connected with the conduct of a trade or business within the United
States for the taxable year. Certain exceptions to this requirement
are provided in paragraphs (b)(2) and (c) of this section. A foreign
partnership that is required to file a partnership return must file
the partnership return in accordance with the rules provided for
domestic partnerships in paragraph (a) of this section.

(2) Exception to partnership return requirement for certain foreign
partnerships investing in the United States. A foreign partnership
that has no gross income that is effectively connected with the
conduct of a trade or business within the United States, and that
would be required to file a partnership return only because it has
gross income derived from sources within the United States, is not
required to file a partnership return under section 6031 if--

(i) No United States person has a direct or indirect interest in the
partnership;

(ii) The gross income derived from sources within the United States
is either fixed or determinable annual or periodical income
described in §1.1441-2(b) or other amounts subject to withholding
described in §1.1441-2(c);

(iii) Forms 1042 and 1042-S are filed with respect to all such gross
income in accordance with §1.1461-1(b) and (c). In order to satisfy
this requirement, Forms 1042 and 1042-S must be filed by the
partnership unless the partnership is not required to file such
returns under §1.1461-1(b)(2) and (c)(4), in which case, Forms 1042
and 1042-S must be filed by another withholding agent (or agents);
and

(iv) The tax liability of the partners with respect to such gross
income has been fully satisfied by the withholding of tax at the
source, if applicable, under chapter 3 of the Internal Revenue Code.

(3) Partnership information or returns required of partners who are
United States persons--(i) In general. If a United States person is
a partner in a partnership that is not required to file a
partnership return, the district director or director of the service
center may require that person to render the statements or provide
the information necessary to verify the accuracy of the reporting by
that person of any items of partnership income, gain, loss,
deduction, or credit.

(ii) Certain partnership elections. For a partnership that is not
otherwise required to file a partnership return, if an election that
can only be made by the partnership under section 703 (affecting the
computation of taxable income derived from a partnership) is to be
made by or for the partnership, a return on the form prescribed for
the partnership return must be filed for the partnership. The return
must be signed by--

(A) Each partner that is a partner in the partnership at the time
the election is made; or

(B) Any partner of the partnership who is authorized (under local
law or the partnership's organizational documents) to make the
election and who represents to having such authorization under
penalties of perjury.

(iii) Controlled foreign partnerships. Certain United States persons
who are partners in a foreign partnership controlled (within the
meaning of section 6038(e)(1)) by United States persons may be
required to provide information with respect to the partnership
under section 6038.

(4) Exclusion for certain organizations. The return requirement of
section 6031 and this section does not apply to the International
Telecommunications Satellite Organization, the International
Maritime Satellite Organization, or any organization that is a
successor of either.

(c) Partnerships excluded from the application of subchapter K--(1)
Wholly excluded--(i) Year of election. An eligible partnership as
described in §1.761-2(a) that elects to be excluded from all the
provisions of subchapter K of chapter 1 of the Internal Revenue Code
in the manner specified by §1.761-2(b)(2)(i) must timely file the
form prescribed for the partnership return for the taxable year for
which the election is made. In lieu of the information otherwise
required, the return must contain or be accompanied by the
information required by §1.761-2(b)(2)(i).

(ii) Subsequent years. Except as otherwise provided in paragraph (c)
(1)(i) of this section, an eligible partnership that elects to be
wholly excluded from the application of subchapter K is not required
to file a partnership return.

(2) Deemed excluded. An eligible partnership that is deemed to have
elected exclusion from the application of subchapter K beginning
with its first taxable year, as specified in §1.761-2(b)(2)(ii), is
not required to file a partnership return.

(d) Definitions--(1) Partnership. For the meaning of the term
partnership, see §1.761-1(a).

(2) United States person. In applying this section, United States
person means a person described in section 7701(a)(30); the
government of the United States, a State, or the District of
Columbia (including an agency or instrumentality thereof); or a
corporation created or organized in Guam, the Commonwealth of
Northern Mariana Islands, the U.S. Virgin Islands, and American
Samoa, if the requirements of sections 881(b)(1)(A), (B), and (C)
are met for such corporation. The term does not include an alien
individual who is a resident of Puerto Rico, Guam, the Commonwealth
of Northern Mariana Islands, the U.S. Virgin Islands, or American
Samoa, as determined under §301.7701(b)-1(d) of this chapter.

(e) Procedural requirements--(1) Place for filing--(i) Domestic
partnerships. The return of a domestic partnership that is required
to file under paragraph (a) of this section must be filed with the
service center for the internal revenue district in which the
partnership has its principal office or principal place of business
in the United States.

(ii) Foreign partnerships with United States business or income. The
return of a foreign partnership that is required to file under
paragraph (b)(1) of this section must be filed--

(A) With the service center for the internal revenue district in
which the partnership has its principal office or principal place of
business in the United States; or

(B) With the Internal Revenue Service Center, Philadelphia, PA
19255-0011 if the partnership has no office or place of business in
the United States.

(iii) Foreign partnerships without United States business or income.
The return of a foreign partnership filed under paragraph (b)(3)(ii)
of this section (regarding partnerships for which an election under
section 703 is made) must be filed with the Internal Revenue Service
Center, Philadelphia, PA 19255-0011.

A statement must be attached to the partnership return indicating
that the return is being filed pursuant to paragraph (b)(3)(ii) of
this section solely to make one or more elections under section 703.

(2) Time for filing. The return of a partnership must be filed on or
before the fifteenth day of the fourth month following the close of
the taxable year of the partnership.

(3) Magnetic media filing. For magnetic media filing requirements
with respect to partnerships, see section 6011(e)(2) and the
regulations thereunder.

(f) Effective date. This section applies to taxable years of a
partnership ending on or after the 90th day after the date final
regulations on this subject are published in the Federal Register.
However, in no event will paragraph (b)(2) of this section apply to
taxable years of a partnership that begin before January 1,
1999..Par. 3. Section 1.6063-1 is amended by adding paragraph (c) to
read as follows:

§1.6063-1 Signing of returns, statements, and other documents made
by partnerships.

* * * * *

(c) Certain partnership elections--(1) In general. For rules
regarding the authority of a partner to sign a partnership return
filed solely for the purpose of making certain partnership-level
elections, see §1.6031(a)-1(b)(3)(ii).

(2) Effective date. The provisions of paragraph (c) of this section
apply for taxable years of a partnership ending on or after the 90th
day after the date final regulations on this subject are published
in the Federal Register.

Michael P. Dolan
Deputy Commissioner of Internal Revenue

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