SECTION 2. BACKGROUND

.01 Partnership and Partner Returns

Section 6031(a) of the Internal Revenue Code (Code) requires every partnership to file a return for each taxable year stating specifically the items of its gross income and the deductions allowable by subtitle A of the Code and such other information for the purposes of carrying out the provisions of subtitle A as the Secretary may by forms and regulations prescribe, including information about the partners in the partnership. Section 1.6031(a)-1(a)(2) requires that the partnership return contain the information required by the prescribed

form and the accompanying instructions. For a partnership, the return required by section 6031(a) is Form 1065, U.S. Return of Partnership Income, which includes Schedules K-1 (Form 1065). Schedule K-1 (Form 1065) provides the name of the partner and the partner’s distributive share of taxable income and other information related to the partner regarding the partnership.

Section 6031(b) requires that a partnership required to file a return under section 6031(a) furnish to each partner a copy of the Schedule K-1 (Form 1065) that includes such information as may be required to be shown by regulations. In general, section 6031(b) also prohibits partnerships from amending the information required to be furnished to its partners after the due date of the return, unless the partnership has made an election under section 6221(b) for the taxable year. A partnership subject to this prohibition under section 6031(b) that has not timely filed a request to extend the time to file its Form 1065 may not be eligible for the relief provided by this notice unless the partnership fulfills the requirements of Rev. Proc. 2019-32, 2019-33 I.R.B. 659, which allows a Form 1065 to be filed by an extended deadline. A partnership seeking relief under Rev. Proc. 2019-32 must furnish Schedules K-1 consistent with the superseding Form 1065.

Section 6222(a) generally requires a partner in a partnership to treat a partnership-related item, as defined in section 6241(2)(B) and the corresponding regulations, consistently on the partner’s return with the treatment of such item by the partnership on its return.

Section 6222(c) provides that the consistency requirement of section 6222(a) does not apply to a partnership-related item if the partner files with the Secretary a statement identifying the inconsistency. The statement required by section 6222(c) is Form 8082, Notice of Inconsistent Treatment or Administrative Adjustment Request (AAR), which may be filed on an original, amended, or superseding return.

Sections 6072(b) and 6031(b) provide that the deadline for filing Form 1065 and furnishing Schedules K-1 (Form 1065) to

partners is generally the fifteenth day of the third month after the end of the partnership’s taxable year. For a calendar-year partnership, this deadline generally is March 15.

Section 6081(a) permits the Secretary of the Treasury Department to grant a reasonable extension of time, generally no more than six months, for filing any return, statement, or other required document. Generally, to receive an extension of time to file a return, §1.6081-2(b) provides that a partnership must submit an application before the date prescribed for filing Form 1065 (taking into account certain extensions). For a calendar-year partnership that requests a six-month extension, the extended deadline for its 2018 taxable year is September 16, 2019.

.02 S Corporation and Shareholder Returns

Section 6037(a) requires every S corporation to file a return for each taxable year stating specifically the items of its gross income and the deductions allowable by subtitle A of the Code, the names and addresses of all persons owning stock in the corporation at any time during the taxable year, the number of shares of stock owned by each shareholder at all times during the taxable year, the amount of money and other property distributed by the corporation during the taxable year to each shareholder, the date of each distribution, each shareholder’s pro rata share of each item of the corporation for the taxable year, and such other information for the purpose of carrying out the provisions of subchapter S of chapter 1 of the Code, as the Secretary may by forms and regulations prescribe. Section 1.60371(a) provides in part that the return shall set forth the items of gross income and the deductions allowable in computing taxable income as required by the return form or in the instructions issued with respect thereto. For an S corporation, the return required by section 6037(a) is Form 1120S, U.S. Income Tax Return for an S Corporation, which includes Schedule K-1 (Form 1120S). Schedule K-1 (Form 1120S) provides the name of the share

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holder and the shareholder’s pro rata share of taxable income and other information related to the shareholder regarding the S corporation.

Section 6037(b) requires that an S corporation required to file a return under section 6037(a) furnish a copy of the Schedule K-1 (Form 1120S) to each shareholder that includes such information as may be required to be shown by regulations.

Section 6037(c)(1) generally requires a shareholder of an S corporation to treat a subchapter S item, as defined in section 6037(c)(4), consistently on the shareholder’s return with the treatment of such item by the S corporation on its return.

Section 6037(c)(2) provides that the consistency requirement of section 6037(c)(1) does not apply to a subchapter S item if the shareholder files with the Secretary a statement identifying the inconsistency. The statement required by section 6037(c)(2) is Form 8082 , which may be filed on an original, amended, or superseding return.

Sections 6072(b) and 6037(b) provide that the deadline for filing Form 1120S and furnishing Schedules K-1 (Form 1120S) to shareholders of an S corporation is generally the fifteenth day of the third month after the end of the S corporation’s taxable year. For a calendar-year S corporation, this deadline generally is March 15. As with partnership returns, this deadline generally may be extended upon request for up to six months under section 6081(a). For a calendar-year S corporation that requests a six-month extension, the extended deadline for its 2018 taxable year is September 16, 2019.

.03 Potentially Applicable Penalties

Section 6698(a) imposes a penalty if any partnership that is required to file a return under section 6031 fails to file a timely return, or files a return that fails to show the information required under that section, unless the failure is due to reasonable cause.

Section 6699(a) imposes a penalty if any S corporation required to file a return under section 6037 fails to file a timely return, or files a return that fails to show the information required under that section, unless the failure is due to reasonable cause.

Section 6722(a) imposes penalties for failing to include all required information or for including incorrect information on a payee statement (as defined in section 6724(d)(2) and the corresponding regulations), such as a Schedule K-1 (Form 1065) or Schedule K-1 (Form 1120S), unless section 6724(a) applies because the failure is due to reasonable cause and was not due to willful neglect.

.04 Global Intangible Low-Taxed Income (Section 951A)

Section 14201(a) of Pub. L. 115-97 (131 Stat. 2054, 2208), commonly referred to as the Tax Cuts and Jobs Act (TCJA), added section 951A, which applies to taxable years of foreign corporations beginning after December 31, 2017, and to taxable years of United States shareholders (as defined in section 951(b)) (U.S. shareholders) in which or with which such taxable years of foreign corporations end.

Section 951A(a) requires a U.S. shareholder of any controlled foreign corporation (as defined in section 957) (CFC) for any taxable year to include in gross income the shareholder’s global intangible low-taxed income (GILTI) inclusion for such taxable year. In general, a U.S. shareholder’s GILTI inclusion amount is determined by reference to the stock of CFCs that the shareholder owns within the meaning of section 958(a). See section 951A(e)(1), cross-referencing section 951(a)(2). Section 951(b) defines a U.S. shareholder of a foreign corporation as a United States person (U.S. person) that owns (within the meaning of section 958(a)), or is considered as owning by applying the ownership rules of section 958(b), at least 10 percent of the total combined voting power or value of stock of the foreign corporation. Section 957(c) generally defines a U.S. person by reference to section 7701(a)(30), which defines a U.S. person as a citizen or resident of the United States, a domestic partnership, a domestic corporation, and certain estates and trusts. Section 1373(a) provides, in part, that for purposes of subpart F of part III of subchapter N of the Code (sections 951 through 965), an S corporation is treated as a partnership, and the shareholders of

such corporation are treated as partners of such partnership.

On October 10, 2018, the Treasury Department and the IRS published in the Federal Register proposed regulations under section 951A (REG-104390-18, 83 FR 51072) (Proposed Regulations). The Proposed Regulations provided a hybrid approach to the treatment of a domestic partnership that is a U.S. shareholder (U.S. shareholder partnership) of a CFC (partnership CFC). Under the hybrid approach, a U.S. shareholder partnership would determine its GILTI inclusion amount, and the partners of the partnership that were not also U.S. shareholders of the partnership CFC would take into account their distributive share of the partnership’s GILTI inclusion amount. See proposed §1.951A-5(b). Partners that were themselves U.S. shareholders of a partnership CFC would not take into account their distributive share of the partnership’s GILTI inclusion amount, and instead would be treated as proportionately owning the stock of the partnership CFC within the meaning of section 958(a) as if the domestic partnership were a foreign partnership. See proposed §1.951A-5(c).

On June 21, 2019, the Treasury Department and the IRS published in the Federal Register final regulations under section 951A (T.D. 9866, 84 FR 29288) (Final Regulations). The Final Regulations did not adopt the hybrid approach with respect to domestic partnerships in the Proposed Regulations. Under the Final Regulations, a domestic partnership (including a U.S. shareholder partnership) does not have a GILTI inclusion amount, and therefore no partner of the partnership has a distributive share of a GILTI inclusion amount. See §1.951A-1(e)(1). Rather, for purposes of determining the GILTI inclusion amount of any partner of a domestic partnership, each partner is treated as proportionately owning the stock of a CFC owned by the partnership within the meaning of section 958(a) in the same manner as if the domestic partnership were a foreign partnership. See id. Because only a U.S. person that is a U.S. shareholder can have a GILTI inclusion amount, a partner that is not a U.S. shareholder of a partnership CFC does not have a GILTI inclusion amount determined by reference to such partnership CFC. In

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summary, under the Final Regulations, a partner that is not a U.S. shareholder with respect to a partnership CFC has neither a distributive share of a GILTI inclusion amount nor a GILTI inclusion amount that is determined by reference to such partnership CFC.

The Final Regulations apply to taxable years of foreign corporations beginning after December 31, 2017, and to taxable years of U.S. shareholders in which or with which such taxable years of foreign corporations end. See §1.951A-7. Therefore, domestic partnerships and S corporations that file their income tax returns for the 2018 tax year after June 21, 2019, must, absent the relief provided in this notice, file income tax returns consistent with the Final Regulations and furnish Schedules K-1 to their partners and shareholders that are consistent with these income tax returns.

The Treasury Department and the IRS are aware that many domestic partnerships and S corporations furnished Schedules K-1 to their partners and shareholders on or before the date of publication of the Final Regulations on June 21, 2019. Consistent with proposed §1.951A-5, these Schedules K-1 (Proposed Regulation Schedules K-1) may have reported a distributive share of the domestic partnership’s GILTI inclusion amount or a pro rata share of the S corporation’s GILTI inclusion amount. In the absence of relief, to avoid potential penalties under section 6698, 6699, or 6722, these domestic partnerships and S corporations could be required to file returns for the 2018 taxable year consistent with the Final Regulations, and furnish Schedules K-1 consistent with their Form 1065 (Schedule K) or Form 1120S (Schedule K). The issuance of corrected Schedules K-1 consistent with the Final Regulations under these circumstances may result in significant additional costs to these domestic partnerships and S corporations and significant burden to the IRS related to processing amended returns based on corrected Schedules K-1.

After considering the compliance burden of domestic partnerships and S corporations associated with §1.951A-1(e), the Treasury Department and the IRS have decided to provide relief in this notice for certain domestic partnerships and S cor

porations (described in section 3 of this notice) so that they may apply the rules in the Proposed Regulations for taxable years ending before June 22, 2019. In addition, section 4 of this notice provides that certain penalties that might otherwise apply to domestic partnerships or S corporations that acted consistently with proposed §1.951A-5 prior to June 22, 2019, do not apply.