Final partnership adjustment may add QBI omitted from proposed notice

Plain-English summary

Chief Counsel advised that a final partnership adjustment may include a qualified business income adjustment that was not proposed in the earlier notice of proposed partnership adjustment. Section 6235 governs the limitations period for making BBA partnership adjustments, and issuing the proposed notice does not close that period. The proposed notice contains proposed rather than final adjustments, and the BBA rules do not require every final adjustment to have appeared there first. Qualified business income is a partnership-related item and generally enters the calculation of the imputed underpayment as a positive adjustment. The IRS may treat the adjustment as zero solely for that calculation if it is already sufficiently reflected in other adjustments.

Ruling snapshot

• Question: May the IRS add a qualified business income adjustment to the final partnership adjustment when it was absent from the proposed notice, and how does it affect the imputed underpayment?
• Outcome: advice given
• Key authorities: IRC §§ 6225, 6231, 6235; Treas. Reg. §§ 301.6225-1, 301.6231-1

Full text (IRS public release)

 ID:      CCA_2024011109030043                   [Third Party Communication:

 UILC:    6225B.01-00, 6231B.00-00               Date of Communication: Month DD, YYYY]

Number: 202417014
Release Date: 4/26/2024
From: --------------------
Sent: Thursday, January 11, 2024 9:03:00 AM
To: ------------------------------------------
Cc:
Bcc:
Subject: RE: BBA question


Adjustments can be added to the FPA that were not included in the NOPPA. Section
6235 provides the period of limitations for making adjustments (not assessments) to a
partnership subject to BBA. As long as the section 6235 period of limitations for making
adjustments remains open, the IRS may make adjustments. Issuing a NOPPA does not
stop the period of limitations for making adjustments to PRIs. See I.R.C. § 6235. Rather,
the section 6235 period of limitations extends beyond the issuance of the NOPPA,
allowing the IRS to make adjustments after mailing the NOPPA. I.R.C. § 6235(a).

The FPA makes adjustments and asserts the applicability of any penalties on those
adjustments. This is similar to a notice of final partnership administrative adjustment
(FPAA) under TEFRA or a section 6212(a) notice of deficiency. See Clovis I v.
Commissioner, 88 T.C. 980, 982 (1987) (the FPAA is to TEFRA litigation what the
statutory notice of deficiency is to tax controversies under section 6213). The NOPPA
includes only proposed, not final, adjustments. See I.R.C. § 6231; Treas. Reg. §
301.6231-1(a)(2). Although BBA requires the IRS to issue a NOPPA prior to issuing an
FPA, BBA does not require the IRS to propose every adjustment prior to finally
determining all adjustments. See I.R.C. § 6231; Treas. Reg. § 301.6231-1(a)(2).
Therefore, there is no problem including the QBI adjustment in the FPA.

I note that the QBI adjustment could change the amount of the imputed underpayment
(IU). The IU is calculated on adjustments to partnership-related items (PRIs). A PRI is
any amount on/required to be on the Form 1065 or required to be maintained in the
partnership’s books and records that is relevant to determining the chapter 1 tax liability
under the Code. QBI meets this definition and is a PRI. Under section 6225(a) “[i]n the
case of any adjustments by the Secretary to any [PRI] . . . such adjustments result in an
[IU] . . . .” Therefore, the QBI adjustment would be included in the calculation of the IU.
Because an adjustment is not an increase to an item of income, decrease in an item of
expense, or an increase to a credit, it is a positive adjustment. Treas. Reg. 301.6225-
1(d)(2)(iii). Positive adjustments increase the IU. However, under section 301.6225-
1(b)(4) the IRS may treat the WBI adjustment as zero, solely for purposes of calculating
the IU, if it determines the QBI adjustment is sufficiently reflected in one or more other
adjustments.
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Please let me know if you have any questions.

Thanks,
Jenni

Jenni Black (she/her)
Senior Counsel
CC:PA:06
Phone: (202) 317-5216