Sec. 301.6226-3 Adjustments taken into account by partners.

(1) In general. For purposes of paragraph (a) of this section, the aggregate of the correction amounts is the sum of the correction amounts described in paragraphs (b)(2) and (3) of this section. A correction amount under paragraph (b)(2) or (3) of this section may be less than zero, and any correction amount that is less than zero may reduce any other correction amount with the result that the aggregate of the correction amounts under this paragraph (b)(1) may also be less than zero. However, nothing in this section entitles any partner to a refund of chapter 1 tax to which such partner is not entitled. See paragraphs (c) and (d) of this section requiring a separate determination of interest and penalties, additions to tax, and additional amounts on the correction amount for each applicable taxable year (as defined in paragraph (c)(1) of this section) without regard to the correction amount for any other applicable taxable year.

(2) Correction amount for the first affected year--

(3) Correction amount for the intervening years--

(4) Coordination of sections 860 and 6226. If a qualified investment entity (QIE) within the meaning of section 860(b) receives a statement described in §301.6226-2(a) and correctly makes a determination within the meaning of section 860(e)(4) that one or more of the adjustments reflected in the statement is an adjustment within the meaning of section 860(d) with respect to that QIE for a taxable year, the QIE may distribute deficiency dividends within the meaning of section 860(f) for that taxable year and avail itself of the deficiency dividend procedures set forth in section 860. If the QIE utilizes the deficiency dividend procedures with respect to adjustments in a statement described in §301.6226-2(a), the QIE may claim a deduction for deficiency dividends against the adjustments furnished to the QIE in the statement in calculating any correction amounts under paragraphs (b)(2) and (3) of this section, and interest on such correction amounts under paragraph (c) of this section, to the extent that the QIE makes deficiency dividend distributions under section 860(f) and complies with all requirements of section 860 and the regulations thereunder.

(1) Interest on the correction amounts. Interest on the correction amounts determined under paragraph (b) of this section is the aggregate of all interest calculated for each applicable taxable year in which there was a correction amount greater than zero at the rate set forth in paragraph (c)(3) of this section. For each applicable taxable year, interest on the correction amount is calculated from the due date (without extension) of the reviewed year partner’s return for such applicable taxable year until the amount is paid. For purposes of this paragraph (c)(1), the term applicable taxable year means the reviewed year partner’s taxable year affected by taking into account adjustments as described in paragraph (b) of this section (for instance, the first affected year and any intervening year in which there is a correction amount greater than zero). For purposes of calculating interest under this paragraph (c), a correction amount under paragraph (b)(2) or (3) of this section for an applicable taxable year that is less than zero does not reduce the correction amount for any other applicable taxable year.

(2) Interest on penalties. Interest on any penalties, additions to tax, or additional amounts determined under paragraph (d) of this section is calculated at the rate set forth in paragraph (c)(3) of this section from the due date (including any extension) of the reviewed year partner’s return for the applicable taxable year until the amount is paid.

(3) Rate of interest. For purposes of paragraph (c) of this section, interest is calculated using the underpayment rate under section 6621(a)(2) by substituting “5 percentage points” for “3 percentage points” in section 6621(a)(2)(B).

(1) Applicability determined at the partnership level. In the case of a partnership that makes an election under section 6226, the applicability of any penalty, addition to tax, and additional amount that relates to an adjustment to any partnership-related item is determined at the partnership level in accordance with section 6221(a). The partnership’s reviewed year partners are liable for such penalties, additions to tax, and additional amounts as determined under paragraph (d)(2) of this section.

(2) Amount calculated at partner level. A reviewed year partner calculates the amount of any penalty, addition to tax, or additional amount relating to the partnership adjustments taken into account under paragraph (b)(1) of this section as if the correction amount were an underpayment or understatement of the reviewed year partner for the first affected year or intervening year, as applicable. The calculation of any penalty, addition to tax, or additional amount is based on the characteristics of, and facts and circumstances applicable to, the reviewed year partner for the first affected year or intervening year, as applicable after taking into account the partnership adjustments reflected on the statement. If after taking into account the partnership adjustments in accordance with this section, the reviewed year partner does not have an underpayment, or has an understatement that falls below the applicable threshold for the imposition of a penalty, no penalty is due from that reviewed year partner under this paragraph (d)(2). For penalties in the case of a pass-through partner that makes a payment under paragraph (e)(4) of this section, see paragraph (e)(4)(iv) of this section.

(3) Partner-level defenses to penalties. A reviewed year partner (including a pass-through partner (as defined in §301.6241-1(a)(5))) claiming that a penalty, addition to tax, or additional amount that relates to a partnership adjustment reflected on a statement described in §301.6226-2 (or paragraph (e)(3) of this section) is not due because of a partner-level defense must first pay the penalty and file a claim for refund for the reporting year. Partner-level defenses are limited to those that are personal to the reviewed year partner (for example, a reasonable cause and good faith defense under section 6664(c) that is based on the facts and circumstances applicable to the partner).

(1) In general. Except as provided in paragraph (e)(6) of this section, if a pass-through partner is furnished a statement described in §301.6226-2 (including a statement described in paragraph (e)(3) of this section) with respect to adjustments of a partnership that made an election under §301.6226-1 (audited partnership), the pass-through partner must file with the IRS a partnership adjustment tracking report in accordance with forms, instructions, or other guidance prescribed by the IRS on or before the due date described in paragraph (e)(3)(ii) of this section, and file and furnish statements in accordance with paragraph (e)(3) of this section. The pass-through partner must comply with paragraph (e) of this section with respect to each statement furnished to the pass-through partner.

(2) Failure to file and furnish required documents--

(3) Furnishing statements to partners--

(4) Pass-through partner pays an imputed underpayment--

(5) Treatment of pass-through partners that are not partnerships--

(6) Pass-through partners subject to chapter 1 tax. A pass-through partner that is subject to tax under chapter 1 of the Code on the adjustments (or a portion of the adjustments) reflected on the statement furnished to such partner under §301.6226-2 (or paragraph (e)(3) of this section) takes the adjustments into account under this paragraph (e)(6) when the pass-through partner calculates and pays the additional reporting year tax as determined under paragraph (b) of this section and furnishes statements to its partners in accordance with paragraph (e)(3) of this section. Notwithstanding the prior sentence, a pass-through partner is only required to include on a statement under paragraph (e)(3) of this section the adjustments that would be required to be included on statements furnished to owners or beneficiaries under sections 6037 and 6034A, as applicable, if the pass-through partner had correctly reported the items for the year to which the adjustments relate. If the pass-through partner fails to comply with the requirements of this paragraph (e)(6), the pass-through partner must compute and pay an imputed underpayment, as well as any penalties, additions to tax, additional amounts, and interest with respect to the adjustments reflected on the statement furnished to such partner in accordance with paragraph (e)(4) of this section.

(1) Example 1. On its partnership return for the 2020 tax year, Partnership reported ordinary income of $1,000 and charitable contributions of $400. On June 1, 2023, the IRS mails a notice of final partnership adjustment (FPA) to Partnership for Partnership’s 2020 year disallowing the charitable contribution in its entirety and determining that a 20 percent accuracy-related penalty under section 6662(b) applies to the disallowance of the charitable contribution, and setting forth a single imputed underpayment with respect to such adjustments. Partnership makes a timely election under section 6226 in accordance with §301.6226-1 with respect to the imputed underpayment in the FPA for Partnership’s 2020 year and files a timely petition in the Tax Court challenging the partnership adjustments. The Tax Court determines that Partnership is not entitled to any of the claimed $400 in charitable contributions and upholds the applicability of the penalty. The decision regarding Partnership’s 2020 tax year becomes final on December 15, 2025. Pursuant to §301.6226-2(b), the partnership adjustments are finally determined on December 15, 2025. On February 2, 2026, Partnership files the statements described under §301.6226-2 with the IRS and furnishes to partner A, an individual who was a partner in Partnership during 2020, a statement described in §301.6226-2. A had a 25 percent interest in Partnership during all of 2020 and was allocated 25 percent of all items from Partnership for that year. The statement shows A’s share of ordinary income reported on Partnership’s return for the reviewed year of $250 and A’s share of the charitable contribution reported on Partnership’s return for the reviewed year of $100. The statement also shows an adjustment to A’s share of the charitable contribution, a reduction of $100 resulting in $0 charitable contribution allocated to A from Partnership for 2020. In addition, the statement reports that a 20 percent accuracy-related penalty under section 6662(b) applies. A must pay the additional reporting year tax as determined in accordance with paragraph (b) of this section, in addition to A’s penalties and interest. A computes his additional reporting year tax as follows. First, A determines the correction amount for the first affected year (the 2020 taxable year) by taking into account A’s share of the partnership adjustment (-$100 reduction in charitable contribution) for the 2020 taxable year. A determines the amount by which his chapter 1 tax for 2020 would have increased or decreased if the $100 adjustment to the charitable contribution from Partnership were taken into account for that year. There is no adjustment to tax attributes in A’s intervening years as a result of the adjustment to the charitable contribution for 2020. Therefore, A’s aggregate of the correction amounts is the correction amount for 2020, A’s first affected year. In addition to the aggregate of the correction amounts being added to the chapter 1 tax that A owes for 2026, the reporting year, A must calculate a 20 percent accuracy-related penalty on A’s underpayment attributable to the $100 adjustment to the charitable contribution, as well as interest on the correction amount for the first affected year and the penalty determined in accordance with paragraph (c) of this section. Interest on the correction amount for the first affected tax year runs from April 15, 2021, the due date of A’s 2020 return (the first affected tax year) until A pays this amount. In addition, interest runs on the penalty from April 15, 2021, the due date of A’s 2020 return for the first affected year until A pays this amount. On his 2026 income tax return, A must report the additional reporting year tax determined in accordance with paragraph (b) of this section, which is the correction amount for 2020, plus the accuracy-related penalty determined in accordance with paragraph (d) of this section, and interest determined in accordance with paragraph (c) of this section on the correction amount for 2020 and the penalty.

(2) Example 2. On its partnership return for the 2020 tax year, Partnership reported an ordinary loss of $500. On June 1, 2023, the IRS mails an FPA to Partnership for the 2020 taxable year determining that $300 of the $500 in ordinary loss should be recharacterized as a long-term capital loss. Partnership has no long-term capital gain for its 2020 tax year. The FPA for Partnership’s 2020 tax year reflects an adjustment of an increase in ordinary income of $300 (as a result of the disallowance of the recharacterization of $300 from ordinary loss to long-term capital loss) and an imputed underpayment related to that adjustment, as well as an adjustment of an additional $300 in long-term capital loss for 2020 which does not result in an imputed underpayment under §301.6225-1(f). Partnership makes a timely election under section 6226 in accordance with §301.6226-1 with respect to the imputed underpayment in the FPA and does not file a petition for readjustment under section 6234. Accordingly, under §301.6226-1(b)(2) and §301.6225-3(b)(6), the adjustment year partners (as defined in §301.6241-1(a)(2)) do not take into account the $300 long-term capital loss that does not result in an imputed underpayment. Rather, the $300 long-term capital loss is taken into account by the reviewed year partners. The time to file a petition expires on August 30, 2023. Pursuant to §301.6226-2(b), the partnership adjustments become finally determined on August 31, 2023. On September 30, 2023, Partnership files with the IRS statements described in §301.6226-2 and furnishes statements to all of its reviewed year partners in accordance with §301.6226-2. One partner of Partnership in 2020, B (an individual), had a 25 percent interest in Partnership during all of 2020 and was allocated 25 percent of all items from Partnership for that year. The statement filed with the IRS and furnished to B shows B’s allocable share of the ordinary loss reported on Partnership’s return for the 2020 taxable year as $125. The statement also shows an adjustment to B’s allocable share of the ordinary loss in the amount of -$75, resulting in a corrected ordinary loss allocated to B of $50 for taxable year 2020 ($125 originally allocated to B less $75 which is B’s share of the adjustment to the ordinary loss). In addition, the statement shows an increase to B’s share of long-term capital loss in the amount of $75 (B’s share of the adjustment that did not result in the imputed underpayment with respect to Partnership). B must pay the additional reporting year tax as determined in accordance with paragraph (b) of this section. B computes his additional reporting year tax as follows. First, B determines the correction amount for the first affected year (the 2020 taxable year) by taking into account B’s share of the partnership adjustments (a $75 reduction in ordinary loss and an increase of $75 in long-term capital loss) for the 2020 taxable year. B determines the amount by which his chapter 1 tax for 2020 would have increased or decreased if the $75 adjustment to ordinary loss and the $75 adjustment to long-term capital loss from Partnership were taken into account for that year. Second, B determines if there is any increase or decrease in chapter 1 tax for any intervening year as a result of the adjustment to the ordinary and capital losses for 2020. B’s aggregate of the correction amounts is the correction amount for 2020, B’s first affected year plus any correction amounts for any intervening years. B is also liable for any interest on the correction amount for the first affected year and for any intervening year as determined in accordance with paragraph (c) of this section.

(3) Example 3. On its partnership return for the 2020 tax year, Partnership, a domestic partnership, reported U.S. source dividend income of $2,000. On June 1, 2023, the IRS mails an FPA to Partnership for Partnership’s 2020 year increasing the amount of U.S. source dividend income to $4,000 and determining that a 20 percent accuracy-related penalty under section 6662(b) applies to the increase in U.S. source dividend income. Partnership makes a timely election under section 6226 in accordance with §301.6226-1 with respect to the imputed underpayment in the FPA for Partnership’s 2020 year and does not file a petition for readjustment under section 6234. The time to file a petition expires on August 30, 2023. Pursuant to §301.6226-2(b), the partnership adjustments become finally determined on August 31, 2023. On September 30, 2023, Partnership files the statements described under §301.6226-2 with the IRS and furnishes to partner C, a nonresident alien individual who was a partner in Partnership during 2020 (and remains a partner in Partnership in 2023), a statement described in §301.6226-2. C had a 50 percent interest in Partnership during all of 2020 and was allocated 50 percent of all items from Partnership for that year. The statement shows C’s share of U.S. source dividend income reported on Partnership’s return for the reviewed year of $1,000 and an adjustment to U.S. source dividend income of $1,000. In addition, the statement reports that a 20 percent accuracy-related penalty under section 6662(b) applies. Under §301.6241-6(b)(4)(i), because the additional $1,000 in U.S. source dividend income allocated to C is an amount subject to withholding (as defined in §301.6241-6(b)(2)), Partnership must pay the amount of tax required to be withheld on the adjustment. See §§1.1441-1(b)(1) and 1.1441-5(b)(2)(i)(A) of this chapter. Under §301.6241-6(b)(4)(ii), Partnership may reduce the amount of withholding tax it must pay because it has valid documentation from 2020 that establishes that C was entitled to a reduced rate of withholding in 2020 on U.S. source dividend income of 10 percent pursuant to a treaty. Partnership withholds $100 of tax from C’s distributive share, remits the tax to the IRS, and files the necessary return and information returns required by §1.1461-1 of this chapter. On his 2023 return, C must report the additional reporting year tax determined in accordance with paragraph (b) of this section, the accuracy-related penalty determined in accordance with paragraph (d) of this section, and interest determined in accordance with paragraph (c) of this section on the correction amount for the first affected year, the correction amount for any intervening year, and the penalty. Under paragraph (f) of this section, C may claim the $100 withholding tax paid by Partnership pursuant to §301.6241-6(b)(4)(i) as a credit under section 33 against C’s income tax liability on his 2023 return.

(4) Example 4. On its partnership return for the 2020 tax year, Partnership reported ordinary income of $100 and a long-term capital gain of $40. Partnership had four equal partners during the 2020 tax year: E, F, G, and H, all of whom were individuals. On its partnership return for the 2020 tax year, the entire long-term capital gain was allocated to partner E and the ordinary income was allocated to all partners based on their equal (25 percent) interest in Partnership. The IRS initiates an administrative proceeding with respect to Partnership’s 2020 taxable year and determines that the long-term capital gain should have been allocated equally to all four partners and that Partnership should have recognized an additional $10 in ordinary income. On June 1, 2023, the IRS mails an FPA to Partnership reflecting the reallocation of the $40 long-term capital gain so that F, G, and H each have $10 increase in long-term capital gain and E has a $30 reduction in long-term capital gain for 2020. In addition, the FPA reflects the partnership adjustment increasing ordinary income by $10. The FPA reflects a general imputed underpayment with respect to the increase in ordinary income and a specific imputed underpayment with respect to the increase in long-term capital gain allocated to F, G, and H. In addition, the FPA reflects a $30 partnership adjustment that does not result in an imputed underpayment, that is, the reduction of $30 in long-term capital gain with respect to E that is associated with the specific imputed underpayment in accordance with §301.6225-1(g)(2)(iii)(B). Partnership makes a timely election under section 6226 in accordance with §301.6226-1 with respect to the specific imputed underpayment relating to the reallocation of long-term capital gain. Partnership does not file a petition for readjustment under section 6234. The time to file a petition expires on August 30, 2023. Pursuant to §301.6226-2(b), the partnership adjustments become finally determined on August 31, 2023. Partnership timely pays the general imputed underpayment that resulted from the partnership adjustment to ordinary income. On September 30, 2023, Partnership files with the IRS statements described in §301.6226-2 and furnishes statements to its partners reflecting their share of the partnership adjustments as finally determined in the FPA that relate to the specific imputed underpayment, that is, the reallocation of long-term capital gain. The statements for F, G, and H each reflect a partnership adjustment of an additional $10 of long-term capital gain for 2020. The statement for E reflects a partnership adjustment of a reduction of $30 of long-term capital gain for 2020. Because E, F, G, and H are all individuals, all partners must report the additional reporting year tax as determined in accordance with paragraph (b) of this section in the partners’ reporting year, which is 2023. They compute their additional reporting year tax as follows. First, they determine the correction amount for the first affected year (the 2020 taxable year) by taking into account their share of the partnership adjustments for the 2020 taxable year. They each determine the amount by which their chapter 1 tax for 2020 would have increased or decreased if the adjustment to long-term capital gain from Partnership were taken into account for that year. Second, they determine if there is any increase or decrease in chapter 1 tax for any intervening year as a result of the adjustment to the long-term capital gain for 2020. Their aggregate of the correction amounts is the sum of the correction amount for 2020, their first affected year and any correction amounts for any intervening years. They are also liable for any interest on the correction amount for the first affected year and for any intervening year as determined in accordance with paragraph (c) of this section.

(5) Example 5. On its partnership return for the 2020 taxable year, Partnership reported a long-term capital loss of $500. During an administrative proceeding with respect to Partnership’s 2020 taxable year, the IRS mails a notice of proposed partnership adjustment (NOPPA) in which it proposes to disallow $200 of the reported $500 long-term capital loss, the only adjustment. Accordingly, the imputed underpayment reflected in the NOPPA is $80 ($200 x 40 percent). F, a C corporation partner with a 50 percent interest in Partnership, received 50 percent of all long-term capital losses for 2020. As part of the modification process described in §301.6225-2(d)(2), F files an amended return for 2020 taking into account F’s share of the partnership adjustment ($100 reduction in long-term capital loss) and pays the tax owed for 2020, including interest. Also as part of the modification process, F also files amended returns for 2021 and 2022 and pays additional tax (and interest) for these years because the reduction in long-term capital loss for 2020 affected the tax due from F for 2021 and 2022. See §301.6225-2(d)(2). The reduction of the long-term capital loss in 2020 did not affect any other taxable year of F. This is the only modification requested. The IRS approves the modification with respect to F and on June 1, 2023, mails an FPA to Partnership for Partnership’s 2020 year reflecting the partnership adjustment reducing the long-term capital loss in the amount of $200. The FPA also reflects the modification to the imputed underpayment based on the amended returns filed by F taking into account F’s share of the reduction in the long-term capital loss. Therefore, the imputed underpayment in the FPA is $40 ($100 x 40 percent). Partnership makes a timely election under section 6226 in accordance with §301.6226-1 with respect to the imputed underpayment in the FPA for Partnership’s 2020 year and files a timely petition in the Tax Court challenging the partnership adjustments. The Tax Court upholds the determinations in the FPA and the decision regarding Partnership’s 2020 tax year becomes final on December 15, 2025. Pursuant to §301.6226-2(b), the partnership adjustments are finally determined on December 15, 2025. On February 1, 2026, Partnership files the statements described under §301.6226-2 with the IRS and furnishes to its partners statements reflecting their shares of the partnership adjustment. The statement issued to F reflects F’s share of the partnership adjustment for Partnership’s 2020 taxable year as finally determined by the Tax Court. The statement shows F’s share of the long-term capital loss adjustment for the reviewed year of $100, as well as the $100 long-term capital loss taken into account by F as part of the amended return modification. Accordingly, in accordance with paragraph (b) of this section, when F computes its correction amounts for the first affected year (the 2020 taxable year) and the intervening years (the 2021 through 2026 taxable years), F computes any increase or decrease in chapter 1 tax for those years using the returns for the 2020, 2021, and 2022 taxable years as amended during the modification process and taking into account any chapter 1 tax paid with those amended returns. F also takes into account the interest paid with F’s amended returns when determining the interest under paragraph (c) of this section that must be paid in the reporting year.

(6) Example 6. Partnership has two equal partners for the 2020 tax year: M (an individual) and J (a partnership). For the 2020 tax year, J has two equal partners -- K and L -- both individuals. On June 1, 2023, the IRS mails an FPA to Partnership for Partnership’s 2020 year increasing Partnership’s ordinary income by $500,000 and asserting an imputed underpayment of $200,000. Partnership makes a timely election under section 6226 in accordance with §301.6226-1 with respect to the imputed underpayment in the FPA for Partnership’s 2020 year and does not file a petition for readjustment under section 6234. The time to file a petition expires on August 30, 2023. Pursuant to §301.6226-2(b), the partnership adjustments become finally determined on August 31, 2023. Therefore, Partnership’s adjustment year is 2023, the due date of the adjustment year return is March 15, 2024 and the extended due date for the adjustment year return is September 16, 2024. On October 12, 2023, Partnership timely files with the IRS statements described in §301.6226-2 and timely furnishes statements to its partners reflecting their share of the partnership adjustments as finally determined in the FPA. The statements to M and J each reflect a partnership adjustment of $250,000 of ordinary income. M takes her share of the adjustments reflected on the statements furnished by Partnership into account on M’s return for the 2023 tax year in accordance with paragraph (b) of this section. On April 1, 2024, J files the adjustment tracking report and files and furnishes statements to K and L reflecting each partner’s share of the adjustments reflected on the statements Partnership furnished to J. K and L must take their share of adjustments reflected on the statements furnished by J into account on their returns for the 2023 tax year in accordance with paragraph (b) of this section by treating themselves as reviewed year partners for purposes of that paragraph.

(7) Example 7. On its partnership return for the 2020 tax year, Partnership reported that it placed Asset, which had a depreciable basis of $210,000, into service in 2020 and depreciated Asset over 5 years, using the straight-line method. Accordingly, Partnership claimed depreciation of $42,000 in each year related to Asset. Partnership has two equal partners for the 2020 tax year: M (a partnership) and N (an S corporation). For the 2020 tax year, N has one shareholder, O, who is an individual. On June 1, 2023, the IRS mails an FPA to Partnership for Partnership’s 2020 year. In the FPA, the IRS determines that Asset should have been depreciated over 7 years instead of 5 years and adjusts the depreciation for the 2020 tax year to $30,000 instead of $42,000 resulting in a $12,000 adjustment. This adjustment results in an imputed underpayment of $4,800 ($12,000 x 40 percent). Partnership makes a timely election under section 6226 in accordance with §301.6226-1 with respect to the imputed underpayment in the FPA for Partnership’s 2020 year and does not file a petition for readjustment under section 6234. The time to file a petition expires on August 30, 2023. Pursuant to §301.6226-2(b), the partnership adjustments become finally determined on August 31, 2023. On October 12, 2023, Partnership timely files with the IRS statements described in §301.6226-2 and furnishes statements to its partners reflecting their share of the partnership adjustments as finally determined in the FPA. The statements to M and N reflect a partnership adjustment of $6,000 of ordinary income for the 2020 tax year. On February 1, 2024, N takes the adjustments into account under paragraph (e)(3) of this section by filing a partnership adjustment tracking report and furnishing a statement to O reflecting her share of the adjustments reported to N on the statement it received from Partnership. M does not furnish statements and instead chooses to calculate and pay an imputed underpayment under paragraph (e)(4) of this section equal to $1,200 ($6,000 x 40 percent) on the adjustments reflected on the statement it received from Partnership plus interest on the amount calculated in accordance with paragraph (e)(4)(iv)(B) of this section. On her 2023 return, O properly takes the adjustments into account under this section. Therefore, O reports and pays the additional reporting year tax determined in accordance with paragraph (b) of this section, which is the correction amount for 2020 plus any correction amounts for 2021 and 2022 (if the adjustments in 2020 resulted in any changes to the tax attributes of O in those years), and pays interest determined in accordance with paragraph (c) of this section on the correction amounts for each of those years.

(8) Example 8. On its partnership return for the 2020 tax year, Partnership reported $1,000 of ordinary loss. Partnership has two equal partners for the 2020 tax year: P and Q, both S corporations. For the 2020 tax year, P had one shareholder, R, an individual. For the 2020 tax year, Q had two shareholders, S and T, both individuals. On June 1, 2023, the IRS mails an FPA to Partnership for Partnership’s 2020 year determining $500 of the $1,000 of ordinary loss should be recharacterized as $500 of long-term capital loss and $500 of the ordinary loss should be disallowed. The FPA asserts an imputed underpayment of $400 ($1,000 x 40 percent) with respect to the $1,000 reduction to ordinary loss and reflecting an adjustment that does not result in an imputed underpayment of a $500 capital loss. Partnership makes a timely election under section 6226 in accordance with §301.6226-1 with respect to the imputed underpayment in the FPA for Partnership’s 2020 year and does not file a petition for readjustment under section 6234. The time to file a petition expires on August 30, 2023. Pursuant to §301.6226-2(b), the partnership adjustments become finally determined on August 31, 2023. On October 12, 2023, Partnership timely files with the IRS statements described in §301.6226-2 and furnishes statements to its partners reflecting their share of the partnership adjustments as finally determined in the FPA. The statements to P and Q each reflect a partnership adjustment of $500 increase in ordinary income and a $250 increase in capital loss in accordance with §301.6225-3(b)(6). P takes the adjustments into account under paragraph (e)(3) of this section by timely filing a partnership adjustment tracking report and furnishing a statement to R. Q timely filed a partnership adjustment tracking report, but chooses not to furnish statements and instead must calculate and pay an imputed underpayment under paragraph (e)(4) of this section as well as interest on the imputed underpayment determined under paragraph (e)(4)(iv)(B) of this section. After applying the rules set forth in §301.6225-1, Q calculates the imputed underpayment that it is required to pay of $200 ($500 adjustment to ordinary income x 40 percent). Q also has one adjustment that does not result in an imputed underpayment -- the $250 increase to capital loss. Pursuant to paragraph (e)(1) of this section, Q files the partnership adjustment tracking report and pay the amounts due under paragraph (e)(4) of this section by September 15, 2024, the extended due date of Partnership’s return for the adjustment year, 2023. Pursuant to paragraph (e)(4)(v) of this section, on its 2024 return, the year in which Q made its payment of the imputed underpayment, Q reports and allocates the $250 capital loss to its shareholders for its 2024 taxable year as a capital loss as provided in §301.6225-3.

(9) Example 9. On its partnership return for the 2020 tax year, Partnership reported a $1,000 long-term capital gain on the sale of Stock. Partnership has two equal partners for the 2020 tax year: U (an individual) and V (a partnership). For the 2020 tax year, V has two equal partners: W (an individual) and X (a partnership). For the 2020 tax year, X has two equal partners: Y and Z, both of which are C corporations. On June 1, 2023, the IRS mails a NOPPA to Partnership for Partnership’s 2020 year proposing a $500 increase in the long-term capital gain from the sale of Stock and an imputed underpayment of $200 ($500 x 40 percent). On July 17, 2023, Partnership timely submits a request to modify the rate used in calculating the imputed underpayment under §301.6225-2(d)(4). Partnership submits sufficient information demonstrating that $375 of the $500 adjustment is allocable to individuals (50 percent of the $500 adjustment allocable to U and 25 percent of the $500 adjustment allocable to W) and the remaining $125 is allocable to C corporations (the indirect partners Y and Z). The IRS approves the modification and the imputed underpayment is reduced to $81.25 (($375 x 15 percent) + ($125 x 20 percent)). See §301.6225-2(b)(3). No other modifications are requested. On February 28, 2024, the IRS mails an FPA to Partnership for Partnership’s 2020 year determining a $500 increase in the long-term capital gain on the sale of Stock and asserting an imputed underpayment of $81.25 after taking into account the approved modifications. Partnership makes a timely election under section 6226 in accordance with §301.6226-1 with respect to the imputed underpayment in the FPA for Partnership’s 2020 year and does not file a petition for readjustment under section 6234. The time to file a petition expires on May 28, 2024. Pursuant to §301.6226-2(b), the partnership adjustments become finally determined on May 29, 2024. On July 26, 2024, Partnership timely files with the IRS statements described in §301.6226-2 and furnishes statements to its partners reflecting their share of the partnership adjustments as finally determined in the FPA. The statements to U and V each reflect a partnership adjustment of a $250 increase in long-term capital gain. V timely files the adjustment tracking report but fails to furnish statements and therefore must calculate and pay an imputed underpayment under paragraph (e)(4) of this section as well as interest on the imputed underpayment determined under paragraph (e)(4)(iv)(B) of this section. On February 3, 2025, V pays an imputed underpayment of $43.75 (($125 x 20 percent for the adjustments allocable to X) + ($125 x 15 percent for the adjustments allocable to W)) which takes into account the rate modifications approved by the IRS with respect to Y and Z. V must also pay any interest on the amount as determined in accordance with paragraph (e)(4)(iv)(B) of this section. V must file the adjustment tracking report and pay the amounts due under paragraph (e)(4) of this section no later than September 15, 2025, the extended due date of Partnership’s return for the 2024 year, which is the adjustment year.

(1) In general. Except as provided in paragraph (i)(2) of this section, this section applies to partnership taxable years beginning after December 31, 2017, and ending after August 12, 2018.

(2) Election under §301.9100-22 in effect. This section applies to any partnership taxable year beginning after November 2, 2015, and before January 1, 2018, for which a valid election under §301.9100-22 is in effect.