Sent via to: Judith A. McNamara Service Technical Advisor Financial Accounting and Tax Compliance

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1 August 25, 2008 Sent via to: Judith A. McNamara Service Technical Advisor Financial Accounting and Tax Compliance Dear Ms. McNamara: Members of the American Institute of Certified Public Accountants ( AICPA ) have given considered thought to the July 24, 2008 draft of the 2008 Form 1065, U.S. Return of Partnership Income, including Schedule B, Other Information, the June 6, 2008 draft of new Schedule C, Additional Information for Schedule M-3 Filers, and the June 13, 2008 draft Schedule K-1, Partner s Share of Income, Deduction, Credits, etc. and the accompanying instructions. The comments contained in this communication have not been approved by the AICPA Tax Executive Committee and are, therefore, not comments that represent the views of the AICPA. They are reflective only of the members who wrote them: Troy Lewis, member of the Partnership Taxation Technical Resource Panel (TRP) ((801) or tlewis@sisna.com) and Sarah Staudenraus, member of the TRP ((202) or RS_Staudenraus@msn.com). The comments that follow are with respect to the following 2008 draft forms and instructions: Form 1065, U.S. Return of Partnership Income, Schedule B Instructions to Form 1065, U.S. Return of Partnership Income, Schedule B Instructions to Form 1065, U.S. Return of Partnership Income, Schedule C Schedule K-1, Partner s Share of Income, Deduction, Credits, etc. Instructions to Schedule K-1 Schedule M-3 (Form 1065) Comments on Form 1065, Schedule B and Instructions 1. Schedule B, Questions 3 and 4 Schedule B, Question 3 requires the partnership to disclose with respect to any foreign or domestic corporation, partnership, or trust, or any individual or estate that directly or indirectly owns an interest of 50 percent or more in the partnership s profit, loss, or capital at the end of the tax year, the following information: the name, employer identification number/social security number, type of entity

2 (if applicable), country of organization or citizenship (as applicable), and maximum percentage owned in the profit, loss, or capital of the partnership. Schedule B indicates that the rules of constructive ownership provided for in the instructions (the Sch. B Instructions ) to Schedule B should be used for Question 3 as well as for Question 4 as described below. Question 4 similarly requires the partnership to disclose with respect to any foreign or domestic corporation, partnership or trust in which the reporting partnership owns directly a 20% interest or directly or indirectly a 50% interest at the end of the year, the following information: the name, employer identification number, entity type (if applicable), country of incorporation/organization, and percentage owned in corporate voting stock or maximum percentage owned in the profit, loss, or capital of a partnership, or beneficial interest of a trust (as applicable). The Sch. B Instructions indicate that for purposes of completing Questions 3 and 4, the maximum percentage owned means the highest percentage of interest in a partnership s profit, loss, or capital as of the end of the partnership s tax year, as determined under the partnership agreement. If the partnership agreement does not express the partner s share of profit, loss, or capital as fixed percentages, a reasonable method is to be used to arrive at the percentage items. The Sch. B Instructions further indicate that for purposes of completing Questions 3 and 4, the constructive ownership rules of section 267(c) (excluding section 267(c)(3)) apply in determining the ownership of interests in the partnership and corporate stock, and also in determining the partnership s constructive ownership of other entities. These statutory attribution rules, as well as the Sch. B Instructions, indicate that an interest in the partnership that is owned directly or indirectly by or for another entity (a corporation, partnership, estate or trust), is considered to be owned proportionately by the owners (shareholders, partners, or beneficiaries). The Sch. B Instructions modify the section 267(c) attribution by providing that solely for purposes of completing Question 3, an individual will not be considered to own, under section 267(c)(2), an interest in the partnership owned directly or indirectly by a family member of the individual unless the individual also owns an interest in the partnership either directly, or indirectly through a corporation, partnership, or trust. The Sch. B Instructions further provide as to Questions 3a, 4a, and 4b, that the partnership must list the entity owner of a disregarded entity rather than the disregarded entity. Further, for an affiliated group filing a consolidated tax return, only the parent corporation rather than the subsidiary members should be listed, except where a reporting partnership owns a direct or indirect interest in a subsidiary. 2

3 We note that our earlier comments regarding these Questions 3 and 4, which were provided to the Internal Revenue Service (the Service ) on September 14, 2007, 1 in large part are still applicable, and request that the Service reconsider its proposed filing requirements for the above information on the grounds that (a) the partnership may not have this information available and will need to make requests for such information which increases the administrative burdens and costs associated with filing the Form 1065, (b) the partnership may never obtain the required ownership information for a variety of reasons including that the ownership information may raise privacy concerns for many partners, because partners may view such information as irrelevant to the taxable income computations of the partnership, and because there is currently no statutory or regulatory requirement for the partners to provide such information, (c) direct ownership reporting is duplicative as it is otherwise generally provided elsewhere within the Form 1065 submission, and (d) the determination of an interest in partnership profits, loss, or capital under section 267(c) is complex and therefore substantially increases income tax return compliance costs for an exercise that otherwise would not be necessary to compute partnership taxable income. While we understand the Service s desire to obtain ownership information at the time of the filing of the return so as to help assess compliance risk, we suggest that information regarding compliance risks might be better obtained through targeted questions, such as those added to Schedule B and new Schedule C, along with ownership information already provided on Schedule K-1, Form 5471, Form 8858, Form 8865, and Schedule M- 3. The information requested in Questions 3 and 4 has little, if any, impact on the computation of partnership taxable income for the majority of partnerships. We believe that burdening partnerships with these additional filing requirements will lead to the Service receiving an inordinate amount of data, much of which may be inaccurate or incomplete. Note further that pursuant to Circular 230, section 10.22(a)(1), a practitioner associated with a return that omits the requested information may be subject to sanction unless he or she demonstrates that due diligence was performed in attempting to secure the information, even though the omission of such information cannot lead to an underpayment of tax and consequently should not result in the taxpayer being exposed to liability for the accuracy-related penalty. Thus, these additional questions raise the possibility that the tax return preparer will be considered to have not been sufficiently diligent in requesting information necessary to file a complete tax return, on the threat of sanctions under Circular 230. Any additional questions should therefore be carefully considered as to relevance and ability to obtain the requested information before incorporating them into the tax return forms. 1 The comments of the members of the AICPA submitted September 14, 2007, were originally provided with respect to the draft Form 1065 Schedules B and C originally issued July 30, Questions 3 and 4 of the draft Form 1065 Schedule B issued July 24, 2008, in large part replicates questions originally issued in the 2007 drafts, and thus many or our original comments are still applicable. 3

4 Finally, we note that these questions require identifying information of any partner that owns directly a 20% interest or a direct/indirect 50% interest in the partnership, whether that partner is U.S. or foreign. Thus, the form is requiring partner information even though such identifying information may be excepted under regulations for certain partnerships. See, generally, Treasury Regulation section (a)-1(b) (exempting certain foreign partnerships from providing Schedules K-1 for certain foreign partners). Therefore, we reiterate that the request for this information may lead to noncompliance and/or inconsistency in reporting thus increasing the administrative burdens on all reporting partnerships and partners while generating limited useful information to the Service. Accordingly, we respectfully reiterate our aforementioned comments that the request for information required in Schedule B Questions 3 and 4 be stricken. If these Questions 3 and 4 are to remain in the Schedule B, we have the following comments regarding the Sch. B Instructions: a. Reduced reporting due to limited familial attribution. We appreciate the elimination of requiring the reporting of any individual family members that constructively own an interest of 50 percent or greater under section 267(c), if such individuals do not own a direct interest or an indirect interest through attribution from a partnership, corporation, or trust. b. Reduced reporting related to consolidated corporate groups. Similarly, we appreciate the elimination of reporting all subsidiary members of an affiliated group filing a consolidated return as this will also reduce the required reporting burden. c. Attribution rules for Schedule B as compared to Schedule M-3, Reportable entity Partner, reporting. The ownership attribution rules referenced by Questions 3 and 4 employ a modified section 267(c) attribution rule regime. We note that these attribution rules are different from the attribution rules governing the Reportable Entity Partner (REP) determinations required for purposes of the Form 1065 Schedule M-3 (requiring generally that partners that directly or indirectly own a 50% or greater interest in a partnership under the instructions to Form 1065 Schedule M-3 ( REPs ) notify such partnerships of their ownership status). Thus, the information being requested for purposes of completing this Schedule B could be potentially different from the information and analysis used to determine REP status for purposes of notification under the Schedule M-3 rules. We make note of this for the purpose of highlighting to the Service that it is now requesting information that the Service s LMSB previously acknowledged would be difficult for a partnership to obtain in many cases, and as such put responsibility on a REP to notify such partnership. We further note that the Service is requesting 50% control information using several different sets of attribution rules thus increasing the administrative burdens to the partners in a partnership as well as the partnership itself, since some 4

5 partnerships feel responsible for attempting to determine this information regarding REPs, even if not provided by its partners. d. Request for additional guidance on determination of proportionate ownership. We request that the Sch. B Instructions provide an explanation of what proportionate ownership by partners in a partnership means where the partners own varying interests in profits, losses, and capital. The Sch. B Instructions provide examples applying constructive ownership of a partnership where each partner owns the same percentage of capital, profits, and losses. However, since many partnership arrangements along with their accompanying partnership agreements as written today are not straight up partnership arrangements, the Sch. B Instructions fail to provide guidance on how to apply the section 267(c) constructive ownership rules to most ownership structures. e. Request for guidance regarding partnership ownership. The Sch. B Instructions should provide guidance to the partnership for determining what is meant by the maximum percentage owned at the end of the tax year in a partnership investment. We note that the accompanying Sch. B Instructions fail to provide guidance on how to complete this question for many, if not most, partnership ownership arrangements that employ varying ownership interests in their business arrangements. To illustrate the complications in determining ownership for purposes of Schedule B reporting, consider a simple and common example: Example - Partner Reporting of Investment in Lower-tier Partnership- Partner A is a partnership. Partner A is a partner in Partnership AB. Partner A originally contributed 75% of the fair market value of the initial capital contributions made to AB. The AB Partnership Agreement requires capital accounts to be maintained in accordance with section 704(b). The AB partnership agreement allocates section 704(b) profits and losses 100% first to Partner A in an amount equal to a 5% preferred return on capital, then 80% to Partner A and 20% to Partner B until A has been allocated profits equal to a 10% preferred return, and then any residual profits are allocated 60% to Partner A and 20% to Partner B. Allocations of taxable income or loss follow the section 704(b) allocations, and Partnership AB uses the section 704(c) traditional method to account for any differences between section 704(b) profits and losses and tax profits and losses. Partnership AB generates $1,000 of section 704(b) profits in 2008, and $900 in taxable income. Under the AB partnership agreement, Partner A was allocated $665 section 704(b) profits as follows: $100 to equal a 5% preferred return, an additional $100 profits equal to a 10% preferred return, and then $465 equal to 60% of the residual Partnership AB s 5

6 profits. Partnership AB then allocated all tax items to follow the section 704(b) allocations, with the exception of a $100 capital loss which was solely allocated to Partner A under section 704(c). The 2008 Partnership AB allocations are contained in the AB work papers, which are not provided to Partner A. Partnership AB only provides Partner A, as is common, a Schedule K-1 at year-end to assist Partner A in accounting for the activity of Partnership AB. Partner A s 2008 Schedule K-1 shows $565 in taxable income, comprised of a $665 share of ordinary income from a trade or business on Schedule K-1, line 1, and the $100 capital loss from the sale of the capital investment. The Schedule K-1 does not contain any information indicating how Partner A s allocations were calculated or determined. The Schedule K-1, which shows Partner A s sharing ratio in capital as 50%, is presented on a GAAP basis. Partner A is attempting to complete its 2008 Schedule B, using the Sch. B Instructions for Question 4b. Based on the Sch. B Instructions, Partner A does not know what its maximum percentage interest in the 2008 profits of Partnership AB is, as determined under the partnership agreement. Partner A determines that five different answers potentially could be considered reasonable under the AB agreement: (a) 100%, as this is the highest stated percentage in the partnership agreement. (b) 60%, as this is the last sharing percentage stated in the partnership profit allocation provisions. If so, note that Partner A may not know whether the current year allocation thresholds reached this final tier. (c) 63%, as this is Partner A s relative sharing of tax profits for the year. Note, unfortunately, that if this is the right answer, Partner A will not know what this sharing ratio is as the Schedule K-1 it received from Partnership AB does not indicate the amount of total taxable income of Partnership AB. (d) 66.5% as this is Partner A s relative sharing of tax income items (exclusive of the tax loss). If so, note that unfortunately Partner A will not know what this sharing ratio is as the Schedule K-1 it receives does not indicate total Partnership AB income items. (e) 66.5%, as this is Partner A s relative sharing of economic section 704(b) profits for the year. If so, note that unfortunately Partner A will not know what this sharing ratio is as the Schedule K-1 it received from Partnership AB does not separately indicate the amount of Partner A s share of economic profits. Similarly, Partner A also does not know what its share in partnership losses might be under the partnership agreement. It determines there are 6

7 potentially three ways to answer the request for maximum percentage interest in losses: (a) 100%, as there was only one item of loss recognized by the Partnership AB, and it was allocated under section 704(c) only to Partner A. However, unfortunately Partner A does not have the information to determine this ratio. (b) 0%, as Partnership AB did not have any section 704(b) losses in 2008; rather under its partnership agreement it had solely a net section 704(b) income amount. Again, unfortunately Partner A is not aware of this information. (c) 75%, as this is Partner A s original capital contribution on formation, which likely represents Partner A s ultimate sharing in losses should they materialize. Finally, Partner A also does not know how to report its maximum share of partnership capital at the end of 2008, under the partnership agreement. Partner A determines there are potentially four ways to complete this Schedule B question: (a) 75%, as this is the ratio provided in the partnership agreement as A s share of capital on formation ten years ago. This is the only capital account ratio stated within the AB agreement. (b) 60%, as this is Partner A s share of section 704(b) capital at the end of the year according to the partnership s records. However, Partner A s Schedule K-1 does not indicate this information, but instead is prepared on a GAAP basis which may not comport to the capital account maintenance provisions under the partnership agreement. (c) 65%, as this is Partner A s share of capital at the beginning of 2008 according to the partnership s records (and thus is the maximum amount of capital owned at the end of 2008). However, Partner A s Schedule K-1 does not indicate this information, but instead is prepared on a GAAP basis which may not comport to the capital account maintenance provisions under the partnership agreement. (d) 50%, as this is Partner A s share of capital as disclosed on the Schedule K-1. Partner A believes that GAAP capital accounts must also be determined under the partnership agreement as the Sch. B Instructions reference, and accordingly the GAAP ownership ratio provided on the Schedule K-1 should be reported to the Service. The above example is intended to illustrate that a partner in a partnership that has a relatively common partnership agreement arguably does not have the information necessary to properly complete the draft version of Schedule B, and absent more specific guidance on how to complete Schedule B, such partner could arguably report in a variety of reasonable manners. Furthermore, while the example illustrates a complexity associated with downward investment reporting 7

8 under Sch. B Question 4, the same principles of ownership attribution will apply as partners strive to give information to partnerships to respond to Sch. B Question 3. The example also illustrates that many similarly situated taxpayers may provide the Service with information that has limited comparative value, and at a high cost to taxpayers as a result of the administrative burden to the partnership and partners that are in many cases not otherwise required to properly compute federal taxable income. We reiterate that partnership agreements with profit and loss sharing tiers, distribution preferences (which may affect loss allocations), and variable relative sharing in partnership capital over time are routine and common. Most agreements drafted today base their allocations on section 704(b) economic income, which is not reported on a Schedule K-1. All of these agreements likely provide for variable sharing in profits, loss, and capital during a reporting year and potentially even between reporting years. Furthermore, many of these partnerships may have regulatory allocations in any given year (e.g., nonrecourse deductions, minimum gain chargebacks, or gross income allocations under a qualified income offset provision) that further add to the variability of partnership allocations between partners. Given these economic partnership arrangements, partners are being asked to provide information that a non-tax matters partner will not typically possess on a current or multi year basis. Finally, even if the partner had a copy of the partnership allocation work papers, the Sch. B Instructions do not specify what percentage ratios should be used, as illustrated above. We respectfully request that either Schedule B, Questions 3 and 4 be stricken, or that the Service provides detailed instructions as noted above on how to properly complete Schedule B, Questions 3 and Schedule B, Question 8 Question 8 requires the partnership to indicate whether it had any debt that was cancelled, forgiven, or had the terms modified so as to reduce the principal amount of the debt. The Sch. B Instructions are silent with respect to this Question 8. As a general matter, and in particular today due to the current activity in the financing arena, this question as broadly written may cause a large number of positive responses, regardless of whether the modifications impact the partnership s taxable income computations. We respectfully request that either Schedule B Question 8 be stricken, or the instructions be supplemented to define that this question should be answered yes if any of the modifications to the debt instrument were properly characterized as a significant modification of the debt instrument for purposes of Section 1001 (with sufficient information provided to guide the preparer to the appropriate authorities governing debt modifications so that the question can be properly answered). 3. Schedule B, Question 12a. 8

9 Question 12a requires the partnership to indicate if it is making, or has made (and not revoked) a section 754 election. Regulation section (c) provides that a partnership with a section 754 election in effect may only revoke such election by submitting a request for revocation that is approved by the Service. We note that the Sch. B Instructions for Question 12a will likely be read to indicate only if a section 754 election has been revoked within the meaning of this regulation. We are concerned that a partnership that previously made a section 754 election which is no longer valid due to a technical termination, as defined under section 708(b)(1)(B), will incorrectly respond affirmatively to Question 12. Accordingly, this instruction should be expanded and clarified to indicate that any election made by a predecessor partnership that subsequently technically terminated under section 708(b)(1)(B) is considered revoked for purposes of completing Question 12a. 4. Schedule B, Question 13 Question 13 includes no instructions. a. Clearly define like-kind exchange. Question 13 requests that the partnership alert the Service if at any time during the current or prior year, the partnership distributed any property received in a like-kind exchange or contributed such property to another entity (including a disregarded entity). Although common in the vernacular of many tax practioners, the term like-kind exchange is not a widely recognized and understood phrase for many taxpayers that self prepare their own tax returns. Either the instructions and/or the form should be updated to include a reference to section 1031 with an additional reference to various Service publications that would better define the term like-kind exchange. b. Delete disclosure of holding like-kind property in a disregarded entity. Question 13 requests in part that the partnership indicate whether the partnership contributed property received in a like-kind exchange to another entity, specifically including to a disregarded entity. Banking covenants increasingly require partnerships to hold separate properties in single member limited liability companies. A disregarded entity, by definition, is disregarded from its single member for most federal income tax purposes. Accordingly, we anticipate that there will be a large number of positive responses to this question, as this may be a common ownership holding structure utilized for non-tax reasons. It does not appear that this question will therefore yield any useful information to the Service. Accordingly, we respectfully request that the disclosure of holding of received like-kind property in a disregarded entity be removed. c. Explain the scope of the question. Question 13 also includes the phrase, current or prior tax year. Sch. B Instructions should clarify whether this question is referring to (1) a distribution or contribution in a prior year, (2) the receipt of likekind property in the current or a prior year that was distributed or contributed in the current year, or (3) to some other interpretation. 9

10 d. Explain the scope of the question. Question 13 requires the partnership to disclose if it made a distribution of any property received in a like-kind exchange. Please clarify whether this applies to any property received in a like-kind exchange at any time in the history of the partnership, as opposed to within a short period of time prior to the distribution. Note that if the Service intends to require disclosure of any like-kind exchange property that is distributed, most partnerships do not have accounting systems which track property as like-kind, as there is not otherwise any requirement to track such property (other than certain like-kind property for a period of two years). Accordingly, such a reporting requirement may be one with respect to which the partnership is unable to comply. 2. Schedule B, Question 14 Question 14 requires the partnership to affirmatively report if at any time during the tax year, the partnership distributed to any partner a tenancy-in-common or other undivided interest in partnership property. a. Clearly define terms. In the instructions to Question 14, the term "fractional interest is utilized. Although the term tenancy-in-common is explained in the Sch. B Instructions in short detail, the term fractional interest is not defined. Failure to define the term fractional could leave many partnerships unsure of whether their particular arrangement is a tenancy-in-common relationship. We suggest that the term fractional interest be defined. b. Specify scope of applicable distribution. In the instructions to Question 14, an undivided interest in partnership property is defined to include an interest in a disregarded entity. As noted above, holding property in a disregarded entity is becoming increasingly common for non-tax reasons. The distribution of property held within an entity disregarded from the distributing partnership is therefore becoming increasingly common and we anticipate that this question may result in a large amount of positive responses. Additionally, the distribution of interests in a disregarded entity to more than one partner may cause the disregarded entity to become a regarded entity classified as a partnership (see Rev. Rul. 99-5, 1999 C.B. 434), which may be contrary to identifying properties held by the partners in an undivided ownership interest. Accordingly, we suggest that the instructions to Question 14 be expanded to specify the fact patterns for which the Service is requesting disclosure. Comments on Instructions to Schedule C (Form 1065) 1. Question 1. Question 1 requires the partnership to disclose whether there were any transfers between the partners and its partnership subject to disclosure under the disguised sale 10

11 regulations of reg. section This question is duplicative of information already required to be reported by the partners and should be stricken. 2. Question 2. Question 2 requires the partnership to disclose whether the partnership is reporting its distributive share of taxable income from a partnership that is disproportionate to any other sharing ratio in income, gain, loss, deduction, credit, or capital. This question requires the partner to know information regarding partnership allocations and relative capital accounts that it typically does not have on a year to year basis and should be stricken. Furthermore, this question requires the partner to know what the definition of disproportionate is, which is currently unaddressed within the instructions to Question 2. This question should be stricken from Schedule C. If required to be reported to the Service, this question is better suited as a reporting item required on Schedule K-1. Comments on Schedule K-1, Part II, Item N Partner s Capital Account Analysis Schedule K-1 requires the partnership to report each partner s capital account reconciliation for the year on Schedule K-1, Part II, Item N. The reconciliation provides a separate line for each of the following: beginning capital, capital contributions, current year increases (decreases), withdrawals and distributions, and ending capital. As currently written, there is no good place to identify transfers (e.g., when one partner sells an interest to another party and the corresponding capital account associated with that interest is transferred from the transferor partner to the transferee partner). This causes confusion to the partners, and makes the partner s determination of its basis in its partnership interest more complex. We respectfully request that Item N be revised to include a line for capital account transfers. Comments on Instructions to Schedule K-1, Part II, Item J Percentage Interest in Partnership Profit, Loss, and Capital The instructions to Schedule K-1 (the K-1 Instructions ), indicate that Item J should be completed to report the partner s share of partnership profit, loss, and capital at the beginning and end of the partnership s tax year, as determined under the partnership agreement. The K-1 Instructions indicate that this amount must be expressed as a percentage, and if such share is not expressed in the partnership agreement as a percentage, the partnership may use any reasonable method to arrive at each percentage, so long as such method is consistent with the partnership agreement, and from year to year. These K-1 Instructions provide no other guidance as to how to compute these ownership percentages. 1. Clarify reporting basis. This question requires a determination of sharing percentages without any guidance on how to determine those sharing percentages. Many of the same complexities associated with determining ratios for purposes of this Item J are the same as those as noted above for sharing ratios required to complete Schedule B, Questions 3 and 4. In the interest of simplification, we request that the instructions to Schedule K-1, 11

12 Part II, Item J conform the basis for presenting items here as those ultimately required to complete Schedule B. 2. Clarify whether GAAP reporting ratios may be utilized. For many partnerships, the historical completion of Item J has been based on each partner s relative share of items in the capital account rollforward presented on Schedule K-1, Item K (most particularly with respect to the relative share of partnership capital). For many of these partnerships, the ratios presented may therefore be based on GAAP numbers. The K-1 Instructions should clarify whether the interest in profits, losses, and capital is based on section 704(b) capital, if that is the allocation base within the partnership agreement, or on taxable income profits, losses, and capital, or on GAAP allocations. 3. Provide guidance through examples. Where the partnership agreement allocates profits and losses using solely one ratio, Item J should be relatively straightforward to complete. However, it is increasingly common and possibly now the norm for partnership agreements to allocate profits and losses between the partners using different ratios throughout the year, between years, or using a different ratio to allocate specific partnership items of income, loss, gain, deduction or credit. For a large number of partnerships, therefore, the partnership must use a reasonable method to determine the ratios to report for each partner. We respectfully request that the K-1 Instructions to Item J contain some examples that illustrate the application of a reasonable method, particularly with respect to the following common partnership arrangements: (a) Service partnership where partners are allocated profits based on one sharing percentage during the year, but where individual service partners are also receiving guaranteed payments. The K-1 Instructions should clarify whether the guaranteed payment income is or is not included in determining the partner s share of partnership profits (for purposes of completing Item J). (b) Partnership with multiple business activities. Each partner shares in a different sharing ratio with respect to each activity. The K-1 Instructions should clarify whether a partner s share of partnership profits for purposes of Item J is based on total income allocated to the partner relative to total income generated by the partnership, or on some other basis. (c) Partnership with varying sharing ratios throughout the tax year, depending on partnership performance or preferred return thresholds. The K-1 Instructions should clarify whether the partner s share of profits at the end of the year (for purposes of completing Item J) is based on relative income allocated during the year, or based on the profits hurdle achieved by the end of the partnership s tax year. Comments on Schedule M-3 (Form 1065), Part I Line 12 We note in the July 1, 2008 draft of the 2008 Schedule M-3 that the Service has proposed to increase taxpayer burden through the addition of new line 12 in Part I, which would 12

13 require the worldwide reconciliation of assets and liabilities. Many preparers will have difficulty obtaining this information for partnerships that have financial statements. As such, we request that this requirement be eliminated, postponed, or at least considered related to the overall additional burden being imposed on partnerships for tax year 2008 under the proposed Form 1065 revisions. In summary, we note that many of the proposed amendments to the draft 2008 Form 1065 require taxpayers to expend a significant amount of time and expense to gather, analyze, and correctly report information which is otherwise unrelated to the computation of partnership taxable income. The request for much of this information is being made pursuant to a tax form instruction, and not pursuant to a regulatory requirement. A regulatory requirement would have gone through certain approval procedures, including the determination of whether it is a significant regulatory action requiring a regulatory assessment under the Regulatory Flexibility Act. Because certain of these form questions impose significant administrative burdens on taxpayers, we question whether it is appropriate to require this information through a forms change. We additionally note that this increased administrative burden is falling on partnerships for the first year in which the extended filing season has been truncated to five months. And finally, in light of the concerns regarding the partnership s ability to obtain and analyze information prior to the date for filing its Form 1065, we hope that the Service gives consideration to disclosures, as modified by our suggestions above and in our prior letter, that would enable a partnership and tax return preparer to sign a return with the understanding that it will be considered complete and accurate even if all required information is not included on the return, though it had been requested, because such information was not provided to them in a timely fashion. We appreciate the opportunity to provide input in this process. If you have any questions regarding these comments, please contact Marc A. Hyman, AICPA Technical Manager at (202) or mhyman@aicpa.org or one of the members listed above. cc: Eric Solomon Assistant Secretary (Tax Policy) Department of the Treasury Bill Wilson Partnership Technical Advisor Internal Revenue Service 13