Page 257 - 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
 Should funding of the audit be borne by reviewed year partners?
 Should the partnership agreement contain provision to ensure that each reviewed year partner (and prior partners) bears his share of the imputed underpayment? How should that provision work?
 The partnership agreement should deal with the possibility that funds will be made
 Should the partnership agreement have any special partnership audit provisions that will apply in the case of mergers and divisions?
The GENERAL EXPLANATION OF TAX LEGISLATION ENACTED IN 2015 (JCS-1-16, March 2016) indicates that a partner other than the partnership representative cannot participate in the audit. Precisely what this means is not clear. Query: Can the partner be a silent observer?
Query: Can the partner say anything in the audit without controlling the audit?
The partnership agreement should discuss funding of the judicial action, including tax payments that are required for courts to have jurisdiction. The partnership agreement also should discuss what happens with the money if the partnership prevails.
The partnership agreement also might address allocation of the assessment among partners and the charge to capital accounts. Query: How do you allocate assessment among partners? How do you ensure that the correct partners bear the burden of partnership adjustments?
If the imputed underpayment assessment is paid at the partnership level, it would seem that this payment should constitute a Section 705(a)(2)(B) amount: “(B) expenditures of the partnership not deductible in computing its taxable income and not properly chargeable to capital account.”
This payment should be charged to capital accounts.
The allocation of the loss associated with the payment should be subject to normal rules of Section 704(b). The allocation will be respected only if it the allocation has substantial economic effect. Otherwise, the loss is allocated in accordance with partners’ interests in the partnership.
© Terence Floyd Cuff and Jerald David August, 2016
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