WASHINGTON, DC—One Congressional bill that has had the commercial real estate industry very worried is the bipartisan "Partnership Audit Simplification Act of 2015", which was introduced in June by Rep. James Renacci (R- OH) and Congressman Ron Kind (D-WI). While the legislation is still being written, The Real Estate Roundtable says that it is likely that some of the alternative measures developed by The Tax Policy Advisory Committee of the Real Estate Roundtable will be included in the final bill in place of the most onerous requirements that were part of the original proposal.

"Key members of Congress in both parties have expressed a strong interest in reforming partnership audit rules," Roundtable CEO Jeff DeBoer told GlobeSt.com.

But, he continued, the form it takes will be crucial as it has the potential cause significant harm to real estate activity.

"Based on the feedback we have received, we believe The Roundtable proposals, developed by our tax committee, have made an important contribution to the debate and will be taken closely into account in the next version of legislation on this issue."

Any alteration of the original legislation would be welcome from the industry's perspective.

The bill addresses a growing concern in Congress that existing partnership audit rules are being flouted by the industry, and that the Internal Revenue Service is incapable of effectively auditing large or complex partnerships. The bill would impose joint and several liability not only on current partners, but also prior partners during the year being adjusted, and the partnership itself for tax liabilities identified during the audit process.

In addition, all partners would be bound by the decisions of a designated partnership representative.

The partnership would be taxed at the highest statutory income tax rate, now 39.6%.

Individual partners would have to amend prior tax return and prove they are subject to a reduced tax rate.

Not surprisingly in the eyes of the CRE community, the legislation is overkill and has "several provisions that could hurt the retail real estate industry's ability to attract equity by significantly increasing tax liability," the International Council of Shopping Centers concluded [PDF] after analyzing the proposal.

The Real Estate Roundtable branded the provisions has having "severe, negative consequences for real estate investment partnerships — e.g., generating uncertainty, risk, and tax exposure that would likely deter new investors and threaten the market for real estate interests held in partnership form. It would also impede partnerships' ability to transfer partnership interests."

There are 3.3 million partnerships in the United States, and nearly half of those (49%) are real estate-related, it also noted.

It was in this environment that TPAC went to work to develop alternatives to the proposal. Roundtable committee members met with staff from the House and Senate tax committees, staff from Congress' Joint Tax Committee, and the IRS chief counsel. The alternative they eventually developed reflected the feedback from these meetingts.

Namely, they center around three key elements:

(1) there would be conformity in the tax return positions of covered partnerships, direct partners, and indirect partners with respect to the original return and subsequent adjustments;

(2) notice requirements to partners other than the tax matters partner prior to commencement of an audit would be eliminated; and

(3) following adjustments, adjusted K-1s by partnerships would be issued. The ultimate taxpayer would have to include any additional tax liability and interest on his/her current return, but it would be computed as if included in the original K-1 and original taxpayer return.

Of course, no one can say with certainty that a revised bill will contain these provisions. But the Real Estate Roundtable rarely goes out on a limb with its projections about Hill legislation unless it is feeling confident.

And it ended its analysis of the situation with this statement.

"For now, congressional tax-writers continue to work on modifications to Renacci's bill, and are expected to incorporate some aspects of the RER white paper in their next draft."

Instant Insights /

Congress Inclined to Add Alternative Measures to CRE Audit Bill

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