(Dow Jones) The Internal Revenue Service wants corporations with stakes in hedge funds, private equity and other partnerships to start telling it like it is taxwise, which could mean trouble for all their partners.

A coming tax rule means that many companies will have to flag their aggressive tax positions. In addition, when a company has a stake in a partnership, its reports will shine a light on everyone else invested alongside it.

Right now, many partnerships and their investors go unaudited, so the rule is likely to mean a big shift.

Under the change, corporations with more than $10 million in assets would have to file a new form known as a Schedule UTP, an abbreviation for uncertain tax position. Until now, companies have held a cash reserve in place in case the IRS questions an aggressive tax position, but have not had to report them to the tax authority.

Taxpayers need to know what the final rules will be as soon as possible so they can establish a process to decide which tax positions must be reported on the new schedule, according to Eli Dicker, chief tax counsel at the Tax Executives Institute, an association of in-house tax professionals. They also need to work with their outside auditors to adapt their practices "concerning what and how tax positions are reported on financial statements," said Dicker.

An example of how it may play out when a corporate investor files a Schedule UTP: A partnership with a hypothetical $150 of income takes a $50 deduction and reports $100 of net income. It gives $10 to every partner, and each individual reports $10 on his tax return. The corporate partner decides that the $50 deduction is aggressive, and puts a reserve in place in case the IRS challenges it. It would have to file a Schedule UTP under the new rule, making the whole partnership a potential audit target.

If the IRS denies the deduction, the partnership would have to issue new K-1 income forms to all partners, and individuals would have to file amended Forms 1040.

Specifically, the IRS has proposed that some corporations, insurance companies and foreign companies file the UTP for the 2010 tax year. The agency is reviewing an avalanche of public comments and still has to decide when to start requiring the forms from real estate investment trusts, regulated investment companies, partnerships and tax-exempt organizations. Tax advisors widely expect the rule to be adopted.

Diana Wollman, a partner in the New York office of law firm Sullivan & Cromwell LLP, said during a conference on tax issues last week that the Schedule UTP could have the effect of making partners "rat out" one another. If a partnership takes an aggressive position, a corporate partner may feel obliged to file a UTP highlighting it. Individual partners may then end up with adjustments in their K-1s, said Wollman.

What could evolve after the rule is passed is that partnerships require corporate investors to notify them before they file a Schedule UTP. That is "what I would want in the partnership agreement," said Wollman.


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