What Is Revenue Code 771 for Partnerships?
Understand the role of IRC Section 771. It isn't a substantive rule but a key navigational guide for partners to other important tax code provisions.
Internal Revenue Code Section 771 is a repealed provision that is no longer an active part of the tax code. Historically, Section 771 was enacted as part of the Internal Revenue Code of 1954 to establish the effective dates for partnership tax rules. More recently, the provision was part of a section of the code that provided rules for “electing large partnerships,” which the Bipartisan Budget Act of 2015 repealed.
What Was an Electing Large Partnership?
An electing large partnership (ELP) was a partnership that, under former tax law, could choose a simplified reporting system. This election was designed to ease the administrative burden for partnerships with a large number of partners. To qualify as an ELP, a partnership had to have at least 100 partners in the preceding tax year and make a formal election with the IRS.
The primary benefit was that the partnership could provide a simplified Form 1065-B and a less detailed Schedule K-1 to its partners, which streamlined the reporting process.
The Role of Section 771 in the ELP Regime
Within the framework of the ELP rules, Section 771 played a specific role. It served as the effective date provision for the entire subchapter governing ELPs. Section 771 stipulated when the ELP rules would apply and provided transition rules for partnerships that chose to make the election. This meant that any partnership wanting to become an ELP had to look to Section 771 to understand when their new reporting obligations would begin.
Repeal by the Bipartisan Budget Act of 2015
Partnership taxation changed with the passage of the Bipartisan Budget Act of 2015 (BBA). A major change was the creation of a new, centralized partnership audit regime. This system allows the IRS to audit large partnerships and collect taxes at the partnership level, rather than from each partner. The old system, under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), made it difficult for the IRS to conduct audits effectively.
As part of this overhaul, Congress eliminated the ELP regime. The logic was that the new BBA audit rules would apply to all large partnerships, making the separate ELP system redundant. The BBA repealed the entire set of statutes related to ELPs, including Section 771. This repeal was effective for partnership tax years beginning after December 31, 2017.
What Replaced the ELP Rules?
The new BBA centralized partnership audit regime became the default system for most partnerships. This regime is mandatory for most partnerships, although some smaller partnerships may be able to elect out of it. Under the BBA, the IRS can assess and collect underpayments of tax, penalties, and interest directly from the partnership. Previously, the IRS had to pursue each partner for their share of a tax deficiency.
The partnership can designate a “partnership representative” with sole authority to act for the partnership in an audit. This is different from the old “tax matters partner” under the TEFRA rules, as the partnership representative has much broader authority. This system is intended to be more efficient for the IRS and partnerships, though it also places a greater burden on the partnership to manage the audit process internally.
Why Might You Encounter Section 771 Today?
Given that Section 771 has been repealed for several years, most taxpayers or practitioners will not need to engage with it directly. However, a few specific scenarios exist where understanding the old ELP rules and Section 771 might be relevant. The primary reason is dealing with an audit or amended return for a tax year prior to 2018, when the ELP rules were still in effect. A partnership with an ELP election for one of those years is still governed by the old rules.
Another situation could involve legal research or historical analysis of partnership tax law. A tax professional might research the BBA’s legislative history, which would involve looking at the repealed ELP regime. Academic researchers or those involved in complex litigation might need to reference the former Section 771 to understand how partnership taxation has evolved over time.
Conclusion
Internal Revenue Code Section 771 is from a past partnership tax system. It was a procedural provision that set the effective date for the electing large partnership rules, a system that offered simplified reporting for partnerships with 100 or more partners. The Bipartisan Budget Act of 2015 introduced a new audit regime that made the ELP system obsolete.
As a result, Section 771 was repealed and no longer has any effect for current tax years. While it may surface when dealing with old tax years or in historical research, for practical purposes, it is no longer a relevant part of the U.S. tax code. The modern landscape of partnership taxation is governed by the centralized audit rules established by the BBA.