Tax advisers who work with small partnerships have long been aware of the late filing relief provided by Revenue Procedure 84-35. But some have wondered that since the procedure refers to a provision removed from the Internal Revenue Code by the Bipartisan Budget Act of 2015 for tax years beginning on or after January 1, 2018, does it continue to apply?

In Program Manager Technical Advice 2020-01[1] the Chief Counsel’s office addressed that question, determining Revenue Procedure 84-35 still is available for taxpayers to use to obtain relief from partnership late filing penalties under IRC §6698.

The Revenue Procedure provides:

A domestic partnership composed of 10 or fewer partners and coming within the exceptions outlined in section 6231(a) (1)(B) of the Code will be considered to have met the reasonable cause test and will not be subject to the penalty imposed by section 6698 for the failure to file a complete or timely partnership return, provided that the partnership, or any of the partners, establishes, if so requested by the Internal Revenue Service, that all partners have fully reported their shares of the income, deductions, and credits of the partnership on their timely filed income tax returns.[2]

But §6231(a)(1)(B) does not apply to partnership tax years beginning on or after January 1, 2018. Old §6231 was part of the TEFRA partnership audit rules, the entirety of which was removed from the law in the Bipartisan Budget Act of 2015 (BBA 2015) that ushered in a new comprehensive partnership audit regime.

The PTMA notes that the relief was mandated by Congress in legislation that predated the TEFRA audit regime:

Congress enacted section 6698 in 1978 as part of Pub. L. No. 95-600, 92 Stat. 2763. In legislative history, Congress indicated that it intended for the reasonable cause exception to the section 6698 penalty to apply automatically to small partnerships that meet certain criteria. The Conference Committee Report stated:

The penalty will not be imposed if the partnership can show reasonable cause for failure to file a complete or timely return. Smaller partnerships (those with 10 or fewer partners) will not be subject to the penalty under this reasonable cause test so long as each partner fully reports his share of the income, deductions and credits of the partnership.

H.R. Rep. No. 95-1800, at 221 (1978) (Conf. Rep.).

Revenue Procedure 81-11 set forth procedures, consistent with the legislative history, under which partnerships with ten or fewer partners would not be subject to the section 6698 penalty for failure to file a partnership return.[3]

Thus, the original revenue procedure providing for relief from the late filing penalties under IRC §6698 for small partnerships did not reference §6231(a)(1)(B), as it did not exist.

But noting a very similar definition of a small partnership added by Congress in the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), the IRS decided to use the same definition found in the then “new” TEFRA partnership rules by issuing a revised revenue procedure:

Shortly after the issuance of Revenue Procedure 81-11, Congress enacted a definition of small partnership as part of the Tax Equity and Fiscal Responsibility Act (TEFRA) of 1982, Pub. L. 97-248. Section 6231(a)(1)(B), as enacted in TEFRA, provided that the term “partnership,” for purposes of sections 6221 through 6232, did not include a partnership if the partnership had 10 or fewer partners, each of whom is a natural person (other than a nonresident alien) or an estate, and each partner's share of each partnership item is the same as such partner's share of every other item. A husband and wife, and their estates, were treated as one partner in determining whether the partnership had 10 or fewer partners for purposes of section 6231(a)(1)(B). TEFRA did not amend section 6698 or redefine the scope of the penalty for failure to file a partnership return.

To conform the relief provided in Revenue Procedure 81-11 to the definition of small partnership newly provided by section 6231(a)(1)(B), the IRS issued Revenue Procedure 84-35 to modify and supersede Revenue Procedure 81-11. Revenue Procedure 84-35 cited the definition of small partnership provided by section 6231(a)(1)(B). In order to qualify for the relief provided in Revenue Procedure 84-35, the partnership must come “within the exceptions outlined in section 6231(a)(1)(B) of the Code.” See Rev. Proc. 84-35, § 3.01. In citing section 6231(a)(1)(B), Revenue Procedure 84-35 was referencing law that existed at the time the revenue procedure was issued. The IRS did not express an intent that later amendments to TEFRA audit procedures would affect application of the exception to the partnership failure to file penalty.[4]

The repeal of §6231 simply restored the law prior to TEFRA. But this relief had been mandated by Congress before the passage of TEFRA and Congress did not remove that relief as part of BBA 2015.

The PMTA concludes:

A question was raised concerning how to interpret Revenue Procedure 84-35 now that section 6231(a)(1)(B) has been repealed and will be inapplicable to any partnership for which the relief provided in Revenue Procedure 84-35 is relevant. Significantly, the reference in Revenue Procedure 84-35 to IRC section 6231(a)(1)(B) is a reference to IRC section 6231(a)(1)(B) as it was in effect when Revenue Procedure 84-35 was originally issued. Thus, it is irrelevant that there does not exist any current section 6231(a)(1)(B) that is generally effective and applicable to partnerships seeking relief under Revenue Procedure 84-35. Moreover, the legislative history of section 6698, which is the basis for the relief provided in Revenue Procedure 84-35, is still relevant, and the scope of the section 6698 penalty for failure to file a partnership return has not been affected by the repeal of the TEFRA provisions. Thus, Revenue Procedure 84-35 is not obsolete and continues to apply.

Revenue Procedure 84-35 provides that in order to qualify for the relief provided in the revenue procedure, the partnership, or any of the partners, must establish, if so requested by the IRS, that all partners have fully reported their shares of the income, deductions, and credits of the partnership on their timely filed income tax returns. Rev. Proc. 84-35, § 3.01. Additionally, the revenue procedure states that all the relevant facts and circumstances will be taken into account in determining whether a partner has fully reported the partner's share of the income, deductions, and credits of the partnership. Rev. Proc. 84-35, § 3.04. Accordingly, the IRS may develop procedures in accordance with Revenue Procedure 84-35 to ensure that any partnership claiming relief is in fact entitled to such relief.[5]

[1] Program Manager Technical Advice 2020-01, November 19, 2019, released on IRS website January 15, 2020 (retrieved January 17, 2020)

[2] Revenue Procedure 84-35, Section 3.01

[3] Program Manager Technical Advice 2020-01, p. 2

[4] Program Manager Technical Advice 2020-01, pp. 3-4

[5] Program Manager Technical Advice 2020-01, p. 3