On May 26, 2020, the Internal Revenue Service (IRS) issued PMTA 2020-08 to provide guidance on the period of limitations for Internal Revenue Code (IRC) section 965, transition tax-related adjustments of partnerships. Typically, pursuant to IRC section 6501, the IRS has three years to assess a tax liability for a tax year. However, IRC section 6501(e)(1)(C) states that if the taxpayer omits from gross income an amount properly includible in income under IRC section 951(a), the tax may be assessed at any time within six years after the return was filed. Moreover, this special six-year limitation on assessment applies to the entire tax liability reportable on that return. Because special assessment and adjustment rules apply to partnerships, the IRS issued guidance on how the rules are applicable to certain partnerships and partners with section 965-related items.

For a deferred foreign income corporation’s (DFIC) last taxable year beginning before January 1, 2018, IRC section 965 imposes a one-time tax on a US shareholder’s pro rata share of the DFIC’s earnings and profits (E&P) otherwise deferred from US taxation. The IRS describes three steps for the calculation under IRC section 965: (1) IRC section 965(a) deems the DFIC to repatriate its untaxed E&P through a subpart F inclusion in the US shareholder’s gross income equal to the greater of its E&P as of two measurement dates in 2017; (2) IRC section 965(b) reduces the IRC section 965(a) inclusion by the E&P deficits of the US shareholder’s other foreign corporations; and (3) IRC section 965(c) provides for a deduction (based on the aggregate IRC section 965(a) inclusion amount and on cash positions) that has the effect of reducing the effective rate of US tax on the US shareholder’s IRC section 965(a) inclusion.

With respect to partnerships, in the guidance the IRS indicated that it can make three broad categories of adjustments that affect the computation of IRC section 965 amounts. Revisions could be made to the tax attributes and financial data underlying the computation of the IRC section 965(a) inclusion, the IRC section 965(c) deduction and foreign tax amounts. Such adjustments could affect the IRC section 965(a) inclusion amount and IRC section 965(c) deduction amount reportable by the partnership and affect the IRC section 965(a) inclusion and the IRC section 965(c) deduction reported by the partners. Accordingly, the IRS outlined how to apply the assessment and adjustment period rules apply when there are partners with IRC section 965-related items arising from partnerships subject to different procedures and audit regimes.

Under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), the IRS indicated it can make adjustments at any time provided the period for assessing tax attributable to the adjustments is open. The IRC section 965(a) inclusion amount and the IRC section 965(c) deduction amount reported by the partnership may be adjusted for the required reporting year if either: (1) the partner’s IRC section 6501 period of limitations on assessing tax attributable to adjustments to partnership items has not [...]

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