[Federal Register Volume 63, Number 205 (Friday, October 23, 1998)]
[Proposed Rules]
[Pages 56878-56881]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-28264]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 301
[REG-102023-98]
RIN 1545-AW14
Partnership Returns Required on Magnetic Media
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking and notice of public hearing.
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SUMMARY: This document contains proposed regulations relating to the
requirements for filing partnership returns on magnetic media under
section 6011(e) of the Internal Revenue Code. The proposed regulations
reflect changes to the law made by the Taxpayer Relief Act of 1997. The
proposed regulations affect partnerships with more than 100 partners.
This document also provides a notice of a public hearing on these
proposed regulations.
DATES: Written comments must be received by January 21, 1999. Requests
to speak (with outlines of oral comments) at the public hearing
scheduled for January 13, 1999, must be received by December 23, 1998.
ADDRESSES: Send submissions to: CC:DOM:CORP:R (REG-102023-98), Room
5228, Internal Revenue Service, POB 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may be hand delivered Monday through
Friday between the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R (REG-
102023-98), 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 on the IRS Home Page, or by submitting comments directly to the
IRS Internet site at htpp://www.irs.ustreas.gov/prod/tax__regs/
comments.html. The public hearing will be held in Room 2615, Internal
Revenue Building, 1111 Constitution Avenue, NW., Washington, DC 20224.
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,
Bridget E. Finkenaur, 202-622-4940;
[[Page 56879]]
concerning submissions of comments, the hearing, and/or to be placed on
the building access list to attend the hearing, Mike Slaughter, 202-
622-7190 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed amendments to the Regulations on
Procedure and Administration (26 CFR part 301) relating to the filing
of partnership returns on magnetic media under section 6011(e)(2) of
the Internal Revenue Code. Section 6011(e)(2) was amended by section
1224 of the Taxpayer Relief Act of 1997, Public Law 105-34 (111 Stat.
788 (1997)) (the Act), effective for taxable years ending on or after
December 31, 1997. Section 6012(e) of the Internal Revenue Service
Restructuring and Reform Act of 1998, Public Law 105-206 (112 Stat. 685
(1998)), changes the effective date of section 1224 of the Act to
taxable years beginning after December 31, 1997.
Section 6011(e) authorizes the Secretary to prescribe regulations
providing the standards for determining which returns must be filed on
magnetic media or in other machine-readable form. Section 6011(e)(2)(A)
provides that the regulations may not require any person to file
returns on magnetic media unless the person is required to file at
least 250 returns during the calendar year. However, the last sentence
of section 6011(e)(2), which was added by section 1224 of the Act,
provides that the Secretary must prescribe regulations requiring
partnerships with more than 100 partners to file returns on magnetic
media. In addition, section 6011(e)(2)(B) requires that the regulations
take into account (among other relevant factors) the ability of the
taxpayer to comply at reasonable cost with the requirements of the
regulations.
Currently, the IRS permits certain partnerships to file their
partnership returns on magnetic media (including magnetic tape, floppy
disk, and electronic filing) with the Internal Revenue Service Center
in Andover, Massachusetts. Under this voluntary program, participants
have the option of: (1) submitting the entire partnership tax return
(including Form 1065, U.S. Partnership Return of Income, Schedules K-1,
Partner's Share of Income, Credits, Deductions, etc., and all other
related forms and schedules) on magnetic media, or (2) submitting only
the Schedules K-1 on magnetic media and filing the rest of the
partnership return on paper.
In Notice 97-77 (1997-52 I.R.B. 18 (December 29, 1997)), the IRS
notified taxpayers that the Act s amendment to section 6011(e)(2) is
not self-executing. Rather, the IRS must first issue regulations that
would require partnerships with more than 100 partners to file their
partnership returns on magnetic media. Accordingly, partnerships were
not required to file their 1997 partnership returns on magnetic media.
Explanation of Provisions
In General
The proposed regulations provide that partnerships with more than
100 partners must file their partnership returns on magnetic media. The
determination of whether a partnership has more than 100 partners is
made by counting the number of partners the partnership had over the
partnership's taxable year, regardless of whether a partner was a
partner for the entire year or whether the partnership had over 100
partners on any particular day in the year.
The proposed regulations provide that a partnership return is a
form in Series 1065 (including Form 1065, U.S. Partnership Return of
Income, and Form 1065-B, U.S. Return of Income for Electing Large
Partnerships), along with the corresponding Schedules K-1 and all other
related forms and schedules that are required to be attached to the
Series 1065 form.
Magnetic media means any magnetic media permitted under applicable
regulations, revenue procedures, or publications. The IRS will
prescribe procedures for participation in the mandatory magnetic media
filing program for partnerships with more than 100 partners. Included
in those procedures will be methods for registering for the program and
signing the partnership return. The procedures will be contained in
applicable revenue procedures or publications.
The term magnetic media generally includes magnetic tape, tape
cartridge, and diskette, as well as other media (such as electronic
filing). Consistent with the definition of magnetic media in other
regulations, the proposed regulations define magnetic media broadly.
However, under these regulations, the Service plans to require
partnerships with more than 100 partners to file their partnership
returns electronically. These requirements for electronic filing will
be detailed in applicable revenue procedures or publications.
The IRS and Treasury Department believe that requiring affected
partnerships to file electronically will enhance the quality of IRS s
customer service and will reduce the costs associated with maintaining
the ability to accept forms in a variety of magnetic media.
Furthermore, the IRS and Treasury Department believe that electronic
filing has less burden on taxpayers than filing using other forms of
magnetic media.
Electronic filing reduces the normal processing time associated
with paper returns in that there is minimal hands-on processing and,
therefore, there are no paperwork delays. Faster processing means
faster settling of accounts and better customer service. Electronic
filing also reduces errors and increases security by reducing duplicate
or erroneous returns. In addition, taxpayers receive prompt
acknowledgment that their returns have been received and accepted by
the Internal Revenue Service. Finally, electronic filing reduces the
operating costs for taxpayers whose data already resides on a computer
system. Overall, electronic filing of partnership returns should
increase customer satisfaction and confidence in the filing process,
and be more cost effective for partnerships.
Although the IRS Service Center in Andover, Massachusetts currently
accepts returns in the voluntary program on various forms of magnetic
media, the systems at this facility are not year 2000 compliant and
will not be in operation after 1999. Accordingly, in designing its new
magnetic media systems to accept electronically filed returns only, the
IRS anticipates that it will no longer be able to accept returns filed
in the form currently used by some partnerships in the voluntary
program.
Hardship Waiver
The proposed regulations provide procedures for granting waivers of
the magnetic media filing requirements for one or more years in cases
of hardship. A determination of hardship will be based upon all of the
facts and circumstances. Some factors that will be considered in
granting waivers include the reasonableness of the incremental cost to
the partnership of complying with the magnetic media filing
requirements as well as temporary equipment breakdowns and destruction
of magnetic media filing equipment.
Penalties
The proposed regulations provide that if a partnership has more
than 100 partners and is required to file a partnership return, but
fails to file its Series 1065 form, accompanying Schedules K-1, and all
other related forms and schedules in the manner required, the
partnership is deemed to have failed to file correct information
[[Page 56880]]
returns for purposes of the information reporting penalty under section
6721. Penalties for failure to file correct information returns would
apply for each Schedule K-1 that is not filed using permissible
magnetic media.
Proposed Effective Dates
The IRS is currently focusing a significant portion of its
resources on the Year 2000 date change. In addition, the IRS is
developing new programs to accommodate the new Form 1065-B and
partnership returns filed with a foreign address on the Series 1065
form. Further, partnerships will have to update their processes and
technology to implement the electronic filing requirements.
Taking these factors into consideration, the proposed regulations
would delay the effective date for filing partnership returns on
magnetic media, and phase in the magnetic media filing of certain
partnership returns. Thus, the proposed regulations would be generally
effective for partnership returns for partnership taxable years ending
on or after December 31, 1999. However, electing large partnerships
under section 775 and partnerships using foreign addresses on their
Series 1065 forms would not be required to file their partnership
returns using magnetic media for taxable years ending before January 1,
2001.
Special Analyses
It is hereby certified that the regulations in this document will
not have a significant economic impact on a substantial number of small
entities. This certification is based on a determination that these
regulations will impose no additional reporting or recordkeeping
requirement and will prescribe only the method for filing partnership
returns that are already required to be filed under section 6031.
Accordingly, a Regulatory Flexibility Analysis under the Regulatory
Flexibility Act (5 U.S.C. chapter 6) is not required.
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.
Pursuant to section 7805(f) of the Internal Revenue Code, this
notice of proposed rulemaking will be submitted to the Chief Counsel
for Advocacy of the Small Business Administration for comment on its
impact on small business.
Comments and Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any comments that are submitted timely
to the IRS. All comments will be available for public inspection and
copying.
A public hearing has been scheduled for Wednesday, January 13,
1999, at 10 a.m. in Room 2615 of the Internal Revenue Building, 1111
Constitution Avenue, NW., Washington, DC. Due to building security
procedures, visitors must enter at the 10th Street entrance, located
between Constitution and Pennsylvania Avenues, NW. In addition, all
visitors must present photo identification to enter the building.
Because of access restrictions, visitors will not be admitted beyond
the immediate entrance area more than 15 minutes before the hearing
starts. For information about having your name placed on the building
access list to attend the hearing, see the FOR FURTHER INFORMATION
CONTACT section of this preamble.
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 comments and an outline of the topics to be discussed and the
time to be devoted to each topic by December 23, 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 author of these proposed regulations is Bridget E.
Finkenaur, Office of the Assistant Chief Counsel (Income Tax and
Accounting). However, other personnel from the IRS and Treasury
Department participated in the development of these proposed
regulations.
List of Subjects
26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
26 CFR Part 301
Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income
taxes, Penalties, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR parts 1 and 301 are proposed to be amended as
follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 continues to read as
follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.6031(a)-1 as proposed to be added at 63 FR 3679
is amended by adding paragraph (e)(1)(iv) to read as follows:
Sec. 1.6031(a)-1 Return of partnership income.
* * * * *
(e) * * *
(1) * * *
(iv) Returns filed on magnetic media. Notwithstanding the
provisions of paragraphs (e)(1)(i) and (ii) of this section, the return
of a partnership that is required to be filed on magnetic media under
Sec. 301.6011-3 of this chapter must be filed at the Service Center
indicated in relevant Internal Revenue Service revenue procedures,
publications, forms, or instructions.
* * * * *
PART 301--PROCEDURE AND ADMINISTRATION
Par. 4. The authority citation for part 301 is amended by adding an
entry in numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * * Section 301.6011-3 also issued
under 26 U.S.C. 6011; * * *
Par. 5. Section 301.6011-3 is added to read as follows:
Sec. 301.6011-3 Required use of magnetic media for partnership
returns.
(a) Partnership returns required on magnetic media. If a
partnership with more than 100 partners is required to file a
partnership return pursuant to Sec. 1.6031(a)-1 of this chapter, the
information required by the applicable forms and schedules must be
filed on magnetic media, except as otherwise provided in paragraph (b)
of this section. Returns filed on magnetic media must be made in
accordance with applicable revenue procedures or publications. In
prescribing revenue procedures or publications, the Commissioner may
determine that partnerships will be required to use any one form of
magnetic media filing. For example, the Commissioner may determine that
partnerships with more than 100 partners must file their partnership
returns electronically. In filing its return, a partnership must
register to participate in the magnetic media filing program in the
manner prescribed by the Internal Revenue Service in applicable revenue
procedures or publications.
[[Page 56881]]
(b) Waiver. The Commissioner may waive the requirements of this
section if hardship is shown in a request for waiver filed in
accordance with this paragraph (b). A determination of hardship will be
based upon all of the facts and circumstances. One factor in
determining hardship will be the reasonableness of the incremental cost
to the partnership of complying with the magnetic media filing
requirements. Other factors, such as equipment breakdowns or
destruction of magnetic media filing equipment, also may be considered.
A request for waiver must be made in accordance with applicable revenue
procedures or publications. The waiver will specify the type of
partnership return and the period to which it applies. The waiver will
also be subject to such terms and conditions regarding the method of
filing as may be prescribed by the Commissioner.
(c) Failure to file. If a partnership fails to file a partnership
return on magnetic media in the manner required and when required to do
so by this section, the partnership will be deemed to have failed to
file the return in the manner prescribed for purposes of the
information return penalty under section 6721. See Sec. 301.6724-
1(c)(3) for rules regarding the waiver of penalties for undue economic
hardship relating to filing returns on magnetic media.
(d) Meaning of terms. The following definitions apply for purposes
of this section:
(1) Magnetic media. The term magnetic media means any magnetic
media permitted under applicable regulations, revenue procedures, or
publications. These generally include magnetic tape, tape cartridge,
and diskette, as well as other media (such as electronic filing)
specifically permitted under the applicable regulations, procedures, or
publications.
(2) Partnership. The term partnership means a partnership as
defined in Sec. 1.761-1(a) of this chapter.
(3) Partner. The term partner means a member of a partnership as
defined in section 7701(a)(2).
(4) Partnership return. The term partnership return means a form in
Series 1065 (including Form 1065, U.S. Partnership Return of Income,
and Form 1065-B, U.S. Return of Income for Electing Large
Partnerships), along with the corresponding Schedules K-1 and all other
related forms and schedules that are required to be attached to the
Series 1065 form.
(5) Partnerships with more than 100 partners. A partnership has
more than 100 partners if, over the course of the partnership's taxable
year, the partnership had more than 100 partners, regardless of whether
a partner was a partner for the entire year or whether the partnership
had over 100 partners on any particular day in the year. For purposes
of this paragraph (d)(5), however, only those persons having a direct
interest in the partnership must be considered partners for purposes of
determining the number of partners during the partnership s taxable
year.
(e) Examples. The following examples illustrate the provisions of
paragraph (d)(5) of this section. In the examples, the partnerships
utilize the calendar year, and the taxable year in question is 1999:
Example 1. Partnership P had five general partners and 90
limited partners on January 1, 1999. On March 15, 1999, 10 more
limited partners acquired an interest in P. On September 30, 1999,
the 10 newest partners sold their individual partnership interests
to C, a corporation which was one of the original 90 limited
partners. On December 31, 1999, P had the same five general partners
and 90 limited partners it had on January 1, 1999. P had a total of
105 partners over the course of partnership taxable year 1999.
Therefore, P must file its 1999 partnership return on magnetic
media.
Example 2. Partnership Q is a general partnership that had 95
partners on January 1, 1999. On March 15, 1999, 10 partners sold
their individual partnership interests to corporation D, which was
not previously a partner in Q. On September 30, 1999, corporation D
sold one-half of its partnership interest in equal shares to five
individuals, who were not previously partners in Q. On December 31,
1999, Q had a total of 91 partners, and on no date in the year did Q
have more than 100 partners. Over the course of the year, however, Q
had 101 partners. Therefore, Q must file its 1999 partnership return
on magnetic media.
Example 3. Partnership G is a general partnership with 100
partners on January 1, 1999. There are no new partners added to G in
1999. One of G's partners, A, is a partnership with 53 partners. A
is one partner, regardless of the number of partners A has.
Therefore, G has 100 partners and is not required to file its 1999
partnership return on magnetic media.
(f) Effective date. In general, this section applies to partnership
returns for taxable years ending on or after December 31, 1999.
However, electing large partnerships under section 775 and partnerships
using foreign addresses on their Series 1065 forms are not required to
file using magnetic media for taxable years ending before January 1,
2001.
Par. 6. Section 301.6031-1 is revised to read as follows:
Sec. 301.6031-1 Return of partnership income.
For provisions relating to the requirement of returns of
partnership income, see Sec. 1.6031(a)-1 of this chapter. For
provisions relating to magnetic media filing of partnership returns,
see Sec. 301.6011-3.
Par. 7. Section 301.6721-1 is amended by removing the third,
fourth, and fifth sentences of paragraph (a)(2)(ii) and adding four
sentences in their place to read as follows:
Sec. 301.6721-1 Failure to file correct information returns.
(a) * * *
(2) * * *
(ii) * * * However, no penalty is imposed under paragraph (a)(1) of
this section solely by reason of any failure to comply with the
requirements of section 6011(e)(2), except to the extent that such a
failure occurs with respect to more than 250 information returns (the
250-threshold requirement) or in the case of a partnership with more
than 100 partners, more than 100 information returns (the 100-threshold
requirement) (collectively, the threshold requirements). Each Schedule
K-1 considered in applying the 100-threshold requirement will be
treated as a separate information return. These threshold requirements
apply separately to each type of information return required to be
filed. Further, these threshold requirements apply separately to
original and corrected returns. * * *
* * * * *
Michael P. Dolan,
Deputy Commissioner of Internal Revenue.
[FR Doc. 98-28264 Filed 10-22-98; 8:45 am]
BILLING CODE 4830-01-U
