SECTION 2. BACKGROUND

Section 206(l) of the Technical Corrections Act of 2018, contained in Title II of Division U of the Consolidated Appropriations Act of 2018, Public Law 115–141 (TTCA), added section 6241(11) to the Internal Revenue Code (Code), regarding the treatment of special enforcement matters. Under section 6241(11), in the case of partnership-related items involving special enforcement matters, the Secretary may prescribe regulations providing that the centralized partnership audit regime (or any portion thereof) does not apply to such items and that such items are subject to special rules as the Secretary determines to be necessary for the effective and efficient enforcement of the Code. For purposes of section 6241(11), the term

“special enforcement matters” means: (1) failure to comply with the requirements of section 6226(b)(4)(A)(ii) (regarding the requirement for a partnership-partner or S corporation partner to furnish statements or compute and pay an imputed underpayment); (2) assessments under section 6851 (relating to termination assessments of income tax) or section 6861 (relating to jeopardy assessments of income, estate, gift, and certain excise taxes); (3) criminal investigations; (4) indirect methods of proof of income; (5) foreign partners or partnerships; and (6) other matters that the Secretary determines by regulation present special enforcement considerations.

Section 6221(a) requires that any adjustment to a partnership-related item shall be determined at the partnership level under the centralized partnership audit regime, except to the extent otherwise provided in subchapter C of chapter 63 of the Code. A partnership-related item is defined in section 6241(2) as any item or amount with respect to the partnership which is relevant in determining the tax liability of any person under chapter 1 of the Code, including any distributive share of such an item or amount.

Certain partnerships may elect out of the centralized partnership audit regime under section 6221(b). A partnership is eligible to make an election out if it has 100 or fewer partners for the taxable year, each partner in the partnership is an eligible partner, the election is timely made in the manner prescribed by the Secretary, and the partnership notifies its partners of the election in the manner prescribed by the Secretary. The number of partners is

determined by counting the number of statements required to be furnished by the partnership under section 6031(b) and the number of statements required to be furnished by any S corporation partners of the partnership. Eligible partners are prescribed in section 6221(b)(1)(C) and Treas. Reg. § 301.6221(b)–1(b)(3)(i), and include C corporations.

A qualified subchapter S subsidiary (QSub) is defined in section 1361(b)(3) as a domestic corporation that has 100 percent of its stock held by an S corporation and for which an election has been made to treat it as a QSub. Except as provided by regulation, a QSub is not treated as a corporation separate from its S corporation shareholder and its assets, liabilities, and items of income, deduction and credit are treated as the assets, liabilities, and items of its S corporation shareholder for the taxable year. Section 1361(b)(3)(A). For purposes of the Code, a C corporation is defined under section 1361(a)(2) as a corporation which is not an S corporation. Because a QSub is not an S corporation, it is a C corporation (as defined in section 1361(a)(2)). Because a QSub is a C corporation, it is an eligible partner under section 6221(b).