Page 215 - 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
in the same manner and subject to same restrictions as any other imputed underpayment determined after examination.
f. Several liability of partners or members.
The new partnership audit rules do not impose joint and several liability on the partners for the partnership liability. The partnership and not the partners have liability for the partnership assessment (except to the extent that partners have general liability for partnership obligations). Each partner is liable in the increase in his tax liability if the partnership elects out of the new audit regime or the partnership pushes out the adjustments. Prior versions of the legislation128 contained a joint and several liability approach. Joint and several liability was removed from the final bill. State law (and, when appropriate, federal Bankruptcy law) would be controlling on whether partners in a partnership would be jointly and severally liable for underpayments in tax of the partnership. Partners would have liability for tax assessed at the partnership level if the partnership is a general partnership. Partners also could have liability for the partnership tax on account of prior fraudulent transfers by the partnership to the partners or distributions not permitted under state law and subject to clawback.129 Partners also may have liability for partnership tax on account of clawbacks under the Bankruptcy Act.
Partner liability for the partnership tax liability could occur under state law government fraudulent transfers, for example, if the partnership was liable under Section 6225(a) and did not have sufficient assets to pay the assessed liability.
There is also the potential application of transferee liability under Section 6901 as well as fraudulent conveyancing rights enforceable by the Internal Revenue Service in accordance with state law. Consider whether the partnership agreement should contain a form of clawback provision requiring former partners who owned interests in the partnership for one or more “reviewed years” be required to pay back to the partnership its pro rata share of any resulting income tax liability resulting in an imputed underpayment. Drafting this provision could prove challenging. Alternatively, the partnership agreement could require the partnership to create a reserve for unpaid taxes to be held back from retirement distributions to a retiring partner. The idea of a
128 This includes proposed Sections 6241(d)(1) of the Tax Reform Act of 2014, and the same section under the Partnership Audit Simplification Act of 2015.
129 See B. Skarlatos & C. Rule, “The Key to Transferee Liability in Midco Cases: Did the Taxpayers Know Or Have Reason to Know of the Unpaid Taxes?”, Journal of Tax Practice and Procedure, Penalties (Oct-Nov 2015).
© Terence Floyd Cuff and Jerald David August, 2016
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