Page 171 - The TEFRA Partnership Audit Rules Repeal:

ALI CLE Live Video Webcast / “The TEFRA Partnership Audit Rules Repeal: Partnership and Partner Impacts” June 7, 2016, Jerald David August and Terence Floyd Cuff
Example 3. Congress intended under the new law that partners, including indirect partners, may not participate in or contest the results of an examination of a partnership by the IRS. As stated, the partnership and all partners are bound by any final decision in a consolidated audit proceeding. Consider in this regard, a settlement agreement entered into by the partnership that is not contested or the final decision of the court with respect to the partnership if the notice of the final partnership adjustment is contested, binds the partnership and all partners. Suppose therefore, that during an audit partners 1 through 25 of a 200 partner investment partnership sold or transferred their partnership interests on or about July 31, 2018. In 2020, the adjustment year, the partnership, through its partnership representative, closes out the audit that also started in 2020. The reviewed years are 2018 and 2019. Query: Are the transferees, including donees of partners who sold or gift their interests in the “reviewed year” bound? Yes. Based on this outcome, it would be prudent for the purchaser of a partnership interest to be indemnified from any resulting tax adjustment for years in which the partner selling his interest was an owner, such as for the first half of 2018. Query: What rights should a purchaser be given in this regard? Does the later partnership liability affect the fair market value of the gift? Should a distinction be made between a valuation adjustment for which the partnership makes payment under Section 6225 and one for which the partnership elects the push-out rule under Section 6225(b)? What are the tax effects of an indemnification payment?
ii. Conducting an audit under the centralized audit rules.
The partnership representative participates and conducts the partnership’s side of the audit. The actions of the partnership representative bind the partnership and the partners. The GENERAL EXPLANATION OF TAX LEGISLATION ENACTED IN 2015 (JCS-1-16, March 2016) says that, “Thus, for example, partners may not participate in or contest results of an examination of a partnership by the Secretary.” That is not nearly so clear from Section 6223.89 The partnership representative controls actions on behalf of the
89 I.R.C. § 6223 (“Sec. 6223. Partners bound by actions of partnership. (a) Designation of partnership representative. – Each partnership shall designate (in the manner prescribed by the Secretary) a partner (or other person) with a substantial presence in the United States as the partnership representative who shall have the sole authority to act on behalf of the partnership under this subchapter. In any case in which such a designation is not in effect, the Secretary may select any person as the partnership representative. (b) Binding effect. – A partnership and all partners of such partnership shall be bound – (1) by actions taken under this subchapter by the partnership, and (2) by any final decision in a proceeding brought under this subchapter with respect to the partnership.”).
© Terence Floyd Cuff and Jerald David August, 2016
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