PROCEDURALLY TAXING tax notes federal
by Jenni Black Jenni Black is a managing director in Citrin Cooperman’s national tax office and the practice leader of the tax procedure and controversy practice. She is also a contributing author for Procedurally Taxing. In this post, Black continues her examination of what it means for an item or amount to be a partnership-related item and the seemingly absurd results produced under the Bipartisan Budget Act of 2015 if the determination of a partnership-related item was based on the facts and circumstances of a particular partnership. This post reflects the author’s personal views and not necessarily those of Citrin Cooperman. Part 1 of this article on partnership-related items (PRIs) discussed what it takes to be a PRI under the centralized partnership audit regime enacted by the Bipartisan Budget Act of 2015 (Tax Notes Federal, Mar. 23, 2026, p. 2055). In discussing what it takes for an item or amount to be a PRI that is required to be adjusted at the partnership level under BBA and for which an adjustment could result in an imputed underpayment (IU), part 1 examined what it means to be “relevant” to determining the chapter 1 liability of any person. Part 2 of the article discusses the reality of what would happen if the determination of whether something was a PRI was based on the facts and circumstances of a particular partnership and its partners. In other words, no discussion is complete without a parade of horribles!
Parade of Horribles If an item or amount, to be “relevant” to determining chapter 1 liability, must have an actual impact on chapter 1 liability before it can be PRI, it stands to reason that, before the IRS could make any adjustment to an item on the partnership’s return, it would need to determine whether the adjustment would impact someone’s chapter 1 liability. That seems to mean it must trace the item through all the tiers of the partnership and review every partner’s return to determine if the proposed adjustment would impact any partner’s tax for that year. And as it says “person” and not “partner,” does the IRS have to look at the impact on non-partners too? If it does not have an actual impact, then it would seem to suggest it would not be a PRI, as it is not relevant to determining chapter 1 tax, which would mean it would have to be adjusted at the partner level. This would create absurd results and the “best” meaning of a statute does not result in “absurd” results. Why are the results absurd? First, it is not clear whether the adjustment must have a current, as opposed to a potential future, impact on chapter 1 liability. For example, if the IRS audits the partnership and determines the partnership overstated its basis in a nondepreciable asset, can it adjust the item’s basis? It doesn’t have a current impact on chapter 1 liability, but the asset must be disposed of at some point — at which point basis becomes relevant for gain or loss on the disposition (either by the partnership or, if distributed out to a partner, to the partner). Must the IRS wait until this happens before it can adjust the item’s basis? What about adjustments to items that would normally impact chapter 1 tax, but the partners had net operating losses in the current year? The adjustment wouldn’t impact chapter 1 liability in the year under audit but could in a subsequent tax year due to a reduction in the original NOL. In the context of deficiency
TAX NOTES FEDERAL, VOLUME 190, MARCH 30, 2026 For more Tax Notes® Federal content, please visit www.taxnotes.com.
2221
© 2026 Tax Analysts. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
Partnership-Related Items: Back to Reality, Part 2