Page 217 - 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
other factors, under regulations provided by the Secretary. For example, for the purpose of whether a partnership ceases to exist under new section 6241(7), a partnership that has no significant income, revenue, assets, or activities at the time the partnership adjustment takes effect may be treated as having ceased to exist.
We do not know precisely what “cease to exist” means in this context. The question of partnerships that have ceased to exist may turn out to be one of the most interesting aspects of the proposed regulations when they are published. The Internal Revenue Service may be anxious to say that a partnership has ceased to exist when the partnership does not have sufficient assets to pay the tax assessment. The GENERAL EXPLANATION OF TAX LEGISLATION ENACTED IN 2015 (JCS-1-16, March 2016) refers to “[i]f a partnership ceases to exist before a partnership adjustment under the centralized system is made.” Cease to exist apparently is judged at or before the instant of the assessment. This may encourage the partnership to prolong its existence so that the partnership continues to exist at the instant of the assessment – but may cease to exist sometime later. A partnership presumably can still exist even though the partnership will be liquidated in bankruptcy.
Partners may seek to use the new audit rules to leave the tax liability behind as the liability of an insolvent partnership. The partners may seek to prolong the existence of the partnership in order to avoid transferee or successor liability. The partners may transfer their partnership interests to entities that do not have assets, so that insolvent entities will have any successor liability. The operation of the “cease to exist” rules should be considered in regulations.
A partnership may have significant income, revenue, assets, and activities at the time of the partnership adjustment. The partnership nevertheless may be insolvent. Query: Will the partnership be treated as having ceased to exist? We cannot be confident until regulations are finalized.
The general partner of a general partnership should have liability for the adjustment in any event.
Section 6241(7) suggests a series of unresolved issues. We do not know what “cease to exist” means. We are not sure the “former partners” who end up with liability are. There also is ambiguity in concerning what it means for the adjustment to be taken into account by the former partners. Of course, we do not know how regulations will resolve these issues.
© Terence Floyd Cuff and Jerald David August, 2016
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