§ 39-22-601.5 — Reporting federal adjustments - definitions

Colorado § 39-22-601.5

• Jurisdiction: Colorado
• Title 39: Taxation
• Art.: Income Tax

Text

(1) As used in
this section, unless the context otherwise requires:

(a) Administrative adjustment request means an administrative adjustment
request filed by a partnership under section 6227 of the internal revenue code.

(b) Audited partnership means a partnership subject to a partnership level
audit resulting in a federal adjustment.

(c) Corporate partner means a partner that is subject to tax under section
39-22-301.

(d) Direct partner means a partner that holds an interest directly in a
partnership.

(e) Exempt partner means a partner that is exempt from taxation under
section 39-22-112 (1), except on unrelated business taxable income under section
39-22-112 (2).

(f) Federal adjustment means a change to an item or amount determined
under the internal revenue code that is used by a taxpayer to compute the tax due
under this article 22 whether that change results from action by the internal
revenue service, including a partnership level audit, or the filing of an amended
federal return, federal refund claim, or administrative adjustment request by the
taxpayer. A federal adjustment is positive to the extent that it increases federal
taxable income as determined under this article 22 and is negative to the extent
that it decreases federal taxable income as determined under this article 22.

(g) Federal adjustments report includes methods or forms required by the
executive director for use by a taxpayer to report final federal adjustments,
including an amended Colorado tax return, an information return, or a uniform
multistate report.

(h) Federal partnership representative means the person the partnership
designates for the taxable year as the partnership's representative, or the person
the internal revenue service has appointed to act as the federal partnership
representative pursuant to section 6223 (a) of the internal revenue code.

(i) Final determination date means:

(I) Except as otherwise provided in this subsection (1)(i), if the federal
adjustment arises from an internal revenue service audit or other action by the
internal revenue service, the first day on which no federal adjustments arising from
the audit or other action remain to be finally determined, whether by internal
revenue service decision with respect to which all rights of appeal have been
waived or exhausted, by agreement, or, if appealed or contested, by a final decision
with respect to which all rights of appeal have been waived or exhausted. For
agreements required to be signed by the internal revenue service and the taxpayer,
the final determination date is the date on which the last party signed the
agreement.

(II) For federal adjustments arising from an internal revenue service audit or
other action by the internal revenue service, if the taxpayer filed a combined report,
a consolidated return, or a combined and consolidated return, the first day on which
no related federal adjustments arising from that audit remain to be finally
determined, as described in subsection (1)(i)(I) of this section, for the entire group;

(III) If the federal adjustment results from filing an amended federal return, a
federal refund claim, or an administrative adjustment request, or if it is a federal
adjustment reported on an amended federal return or other similar report filed
pursuant to section 6225 (c) of the internal revenue code, the day on which the
amended return, refund claim, administrative adjustment request, or other similar
report was filed.

(j) Final federal adjustment means a federal adjustment after the final
determination date for that federal adjustment has passed.

(k) Indirect partner means a partner in a partnership or pass-through entity
that itself holds an interest directly, or through another indirect partner, in a
partnership or pass-through entity.

(l) Nonresident partner means a nonresident individual, a nonresident
estate, or a nonresident trust.

(m) Partner means a person that holds an interest directly or indirectly in a
partnership or other pass-through entity.

(n) Partnership level audit means an examination by the internal revenue
service at the partnership level pursuant to subchapter C of chapter 63 of subtitle F
of the internal revenue code that results in federal adjustments.

(o) Pass-through entity means an entity, other than a partnership, that is
not subject to tax under section 39-22-301.

(p) Resident partner means a partner who is a resident individual, a
resident estate, or a resident trust.

(q) Reviewed year means the taxable year of a partnership that is subject
to a partnership level audit from which federal adjustments arise.

(r) Taxpayer means:

(I) A person subject to tax under this article 22;

(II) A partnership subject to a partnership level audit and a tiered partner of
that partnership; or

(III) A partnership that has made an administrative adjustment request and a
tiered partner of that partnership.

(s) Tiered partner means any partner that is a partnership or pass-through
entity.

(2) Except in the case of final federal adjustments that are required to be
reported by a partnership and its partners using the procedures in subsection (3) of
this section, and final federal adjustments required to be reported for federal
purposes by taking those adjustments into account in the partnership return for the
year of adjustment, a taxpayer shall report and pay any tax due under this article 22
with respect to final federal adjustments arising from an audit or other action by
the internal revenue service or reported by the taxpayer on a timely filed amended
federal income tax return, including a return or other similar report filed pursuant to
section 6225 (c)(2) of the internal revenue code, or federal claim for refund by filing
a federal adjustments report with the executive director for the reviewed year and,
if applicable, paying the additional tax owed under this article 22 by the taxpayer
no later than one hundred eighty days after the final determination date.

(3) (a) Except for adjustments required to be reported for federal purposes
by taking those adjustments into account in the partnership return for the year of
adjustment and the distributive share of adjustments that have been reported as
required under subsection (2) of this section, partnerships and partners shall report
final federal adjustments arising from a partnership level audit or an administrative
adjustment request and make payments as required under this subsection (3).

(b) (I) With respect to an action required or permitted to be taken by a
partnership under this subsection (3) and a proceeding under section 39-21-103 or
39-21-105 with respect to that action, the state partnership representative for the
reviewed year has the sole authority to act on behalf of the partnership, and the
partnership's direct partners and indirect partners are bound by those actions.

(II) The state partnership representative for the reviewed year is the
partnership's federal partnership representative unless the partnership designates
in writing another person as its state partnership representative.

(III) The executive director may establish reasonable qualifications and
procedures for designating a person other than the federal partnership
representative to be the state partnership representative.

(c) (I) Final federal adjustments subject to the requirements of this
subsection (3), except for those subject to a properly made election under
subsection (3)(d) of this section, must be reported as provided in this subsection
(3)(c).

(II) No later than ninety days after the final determination date, the
partnership shall:

(A) File a completed federal adjustments report with the executive director
including any information the executive director may prescribe;

(B) Notify each of its direct partners of their distributive share of the final
federal adjustments including any information the executive director may
prescribe;

(C) File an amended composite return for direct partners as required under
section 39-22-601 (5)(d) or (5.5)(d), as applicable, or an amended return under
subpart 3 of part 3 of this article 22, and pay the additional amount that would have
been due had the final federal adjustments been reported properly as required; and

(D) For any direct partner for which payment was made under section 39-22-601 (5)(h), pay the additional amount that would have been due had the final federal
adjustments been reported properly as required.

(III) Except as provided under subsection (4) of this section, no later than one
hundred eighty days after the final determination date, each direct partner that is
not included in an amended composite return under subsection (3)(c)(II)(C) of this
section and that is subject to tax under section 39-22-104 shall:

(A) File a federal adjustments report reporting their distributive share of the
adjustments reported to them under subsection (3)(c)(II)(B) of this section; and

(B) Pay any additional amount of tax due as if final federal adjustments had
been properly reported, plus any penalty and interest due under section 39-22-621
and less any credit for related amounts paid or withheld and remitted on behalf of
the direct partner under subsection (3)(c)(II)(D) of this section.

(d) (I) No later than ninety days after the final determination date, an audited
partnership making an election under this subsection (3)(d) shall file a completed
federal adjustments report, including such information as the executive director
may prescribe, and notify the executive director that it is making the election under
this subsection (3)(d).

(II) No later than one hundred eighty days after the final determination date,
an audited partnership making an election under this subsection (3)(d) shall pay the
amount determined under subsection (3)(e) of this section in lieu of taxes owed by
its direct and indirect partners.

(III) Final federal adjustments subject to the election provided in this
subsection (3)(d) exclude:

(A) The distributive share of final audit adjustments that under part 3 of this
article 22 must be included in the unitary business income of any direct or indirect
corporate partner if the audited partnership can reasonably determine this; and

(B) Any final federal adjustments resulting from an administrative
adjustment request.

(IV) An audited partnership not otherwise subject to any reporting or
payment obligation to the state that makes an election under this subsection (3)(d)
consents to be subject to Colorado laws related to reporting, assessment, payment,
and collection of Colorado tax calculated under the election.

(e) Subject to the limitations in subsection (3)(d)(III) of this section, the
amount due under subsection (3)(d)(II) of this section is calculated as follows:

(I) Exclude from final federal adjustments the distributive share of these
adjustments reported to a direct exempt partner not subject to tax under section
39-22-112 (1);

(II) For the total distributive shares of the remaining final federal
adjustments reported to direct corporate partners subject to tax under section 39-22-301, and to direct exempt partners subject to tax under section 39-22-112 (2),
apportion and allocate such adjustments as provided under section 39-22-303.6
and multiply the resulting amount by the highest tax rate in effect under section
39-22-301;

(III) For the total distributive shares of the remaining final federal
adjustments reported to nonresident partners that are direct partners subject to
tax under section 39-22-104, determine the amount of such adjustments derived
from sources within Colorado under section 39-22-203 and multiply the resulting
amount by the highest tax rate in effect under section 39-22-104;

(IV) For the total distributive shares of the remaining final federal
adjustments reported to tiered partners:

(A) Determine the amount of such adjustments which is of a type that it
would be subject to sourcing by a nonresident partner under section 39-22-109 and
then determine the portion of this amount that would be sourced to the state
applying the rules of that section;

(B) Determine the amount of such adjustments which is of a type that it
would not be subject to sourcing by a nonresident partner under section 39-22-109;

(C) Determine the portion of the amount determined in subsection
(3)(e)(IV)(B) of this section that can be established, under rules promulgated by the
executive director, to be properly allocable to nonresident partners that are indirect
partners or other partners not subject to tax on the adjustments or that can be
excluded under procedures for a modified reporting and payment method allowed
under subsection (3)(g) of this section;

(V) Multiply the total of the amounts determined in subsection (3)(e)(IV)(A)
and (3)(e)(IV)(B) of this section and then reduced by the amount determined in
subsection (3)(e)(IV)(C) of this section by the highest tax rate in effect under section
39-22-104;

(VI) For the total distributive shares of the remaining final federal
adjustments reported to resident partners that are direct partners subject to tax
under section 39-22-104, multiply that amount by the highest tax rate in effect
under section 39-22-104; and

(VII) Add the amounts determined in subsections (3)(e)(II), (3)(e)(III), (3)(e)(V),
and (3)(e)(VI) of this section along with penalty and interest as provided in section
39-22-621.

(f) The direct and indirect partners of an audited partnership that are tiered
partners and all of the partners of those tiered partners that are subject to tax
under this article 22 are subject to the reporting and payment requirements of
subsection (3)(b) of this section, and the tiered partners are entitled to make the
elections provided in subsection (3)(d) and (3)(g) of this section. The tiered partners
or their partners shall make required reports and payments no later than ninety
days after the time for filing and furnishing statements to tiered partners and their
partners as established under section 6226 of the internal revenue code and the
regulations thereunder. The executive director may promulgate rules to establish
procedures and interim time periods for the reports and payments required by
tiered partners and their partners and for making the elections under this
subsection (3).

(g) Under procedures adopted by and subject to the approval of the
executive director, an audited partnership or tiered partner may enter into an
agreement with the executive director to utilize an alternative reporting and
payment method, including applicable time requirements or any other provision of
this subsection (3), if the audited partnership or tiered partner demonstrates that
the requested method will reasonably provide for the reporting and payment of
taxes, penalties, and interest due under the provisions of this subsection (3) or if the
audited partnership or tiered partner can show that their direct partners have
agreed to allow a refund of the state tax to the entity. Application for approval of an
alternative reporting and payment method must be made by the audited
partnership or tiered partner within the time for election as provided in subsection
(3)(d) or (3)(f) of this section, as appropriate.

(h) (I) The election made pursuant to subsection (3)(d) or (3)(g) of this section
is irrevocable, unless the executive director, in the executive director's discretion,
determines otherwise.

(II) If properly reported and paid by the audited partnership or tiered partner,
the amount determined in subsection (3)(e) of this section, or similarly under an
optional election under subsection (3)(g) of this section, will be treated as paid in
lieu of taxes owed by its direct and indirect partners, to the extent applicable, on
the same final federal adjustments. The direct partners or indirect partners may not
take any deduction or credit for this amount or claim a refund of the amount in the
state. Nothing in this subsection (3)(h)(II) precludes a resident partner that is a
direct partner from claiming a credit against taxes paid to the state pursuant to
section 39-22-108 for any amounts paid by the audited partnership or tiered partner
on the resident partner's behalf to another state or local tax jurisdiction.

(i) Nothing in this subsection (3) prevents the executive director from
assessing direct partners or indirect partners for taxes they owe, using the best
information available, if a partnership or tiered partner fails to timely make any
report or payment required by this subsection (3) for any reason.

(4) The executive director may promulgate rules to establish a de minimis
amount upon which a taxpayer shall not be required to comply with subsections (2)
and (3) of this section.

(5) The executive director shall assess additional tax, interest, and penalties
arising from final federal adjustments arising from an audit by the internal revenue
service, including a partnership level audit, or reported by the taxpayer on an
amended federal income tax return or as part of an administrative adjustment
request on or before the following dates:

(a) If a taxpayer files with the executive director a federal adjustments
report or an amended return as required within the period specified in subsection
(2) or (3) of this section, the executive director may assess any amounts, including
in-lieu-of amounts, taxes, interest, and penalties arising from those federal
adjustments, if the executive director issues a notice of deficiency to the taxpayer
on or before the later of:

(I) The expiration of the limitations period specified in section 39-21-107 (2);
or

(II) The expiration of the one-year period following the date of filing with the
executive director of the federal adjustments report.

(b) If the taxpayer fails to file the federal adjustments report within the
period specified in subsection (2) or (3) of this section, as appropriate, or the federal
adjustments report filed by the taxpayer omits final federal adjustments or
understates the correct amount of tax owed, the executive director may assess any
taxes, interest, and penalties arising from the final federal adjustments if the
executive director issues a notice of deficiency to the taxpayer on or before the
later of:

(I) The expiration of the limitations period specified in section 39-21-107 (2);

(II) The expiration of the one-year period following the date the federal
adjustments report was filed with the executive director; or

(III) In the absence of fraud, the expiration of the six-year period following
the final determination date.

(6) A taxpayer may make estimated payments to the executive director,
following the process prescribed by the executive director, of the Colorado tax
expected to result from a pending internal revenue service audit prior to the due
date of the federal adjustments report without having to file the report with the
executive director. The estimated tax payments shall be credited against any tax
liability ultimately found to be due to Colorado and will limit the accrual of further
statutory interest on that amount. If the estimated tax payments exceed the final
tax liability and statutory interest ultimately determined to be due, the taxpayer is
entitled to a refund or credit for the excess if the taxpayer files a federal
adjustments report or claim for refund or credit of tax no later than one year
following the final determination date.

(7) (a) Except for final federal adjustments required to be reported for
federal purposes by taking those adjustments into account in the partnership
return for the year of adjustment, a taxpayer may file a claim for refund or credit of
tax arising from federal adjustments made by the internal revenue service on or
before the later of:

(I) The expiration of the last day for filing a claim for refund or credit of tax
pursuant to section 39-21-108 (1), including any extensions; or

(II) One year from the date a federal adjustments report prescribed in
subsection (2) or (3) of this section, as applicable, was due to the executive director,
including any extensions pursuant to subsection (8) of this section.

(b) The federal adjustments report is the means for the taxpayer to report
additional tax due, report a claim for refund or credit of tax, and make other
adjustments including to its net operating losses resulting from adjustments to the
taxpayer's federal taxable income. Any refund granted to the entity under
subsection (3) of this section is in lieu of state tax that may be owed to the partners.

(8) (a) Unless otherwise agreed to in writing by the taxpayer and the
executive director, any adjustments by the executive director or by the taxpayer
made after the expiration of the period described in section 39-21-107 (2) or 39-21-108 (1), as applicable, is limited to changes to the taxpayer's tax liability arising
from federal adjustments.

(b) The periods provided for in this section may be extended:

(I) Automatically, upon written notice to the executive director, by sixty days
for an audited partnership or tiered partner which has ten thousand or more direct
partners; or

(II) By written agreement between the taxpayer and the executive director.

(c) Any extension granted under this subsection (8) for filing the federal
adjustments report extends the last day prescribed by law for assessing any
additional tax arising from the adjustments to federal taxable income and the
period for filing a claim for refund or credit of taxes.

(9) This section applies to any adjustments to a taxpayer's federal taxable
income with a final determination date occurring on and after January 1, 2024.

Legislative History

Source: L. 2023: Entire section added, (HB 23-1277), ch. 290, p. 1745, � 2, effective August 7.