Page 3 - Has the New Partnership Representative Been Granted Too Much Power?

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COLUMNS I Tax Practice & Procedure

a court order enjoining the partnership unless the partner happens to be the part- resentative under the BBA audit rules
representative from acting on behalf of nership representative. cannot be abrogated by the partnership
the partnership, or the liquidation or dis- The power of the partnership repre- agreement or state law, partnerships and
solution under state law of an entity oper- sentative also includes the exclusive their partners are advised to address the
ating as a partnership representative [pro- authority to bind all partners with respect scope of the partnership representative’s
posed Treasury Regulations 301.6223- to extensions of the statutes of limita- powers, and the partnership representa-
1(b)(2)-(b)(4)]. tions, settlements with the IRS, the deci- tive’s responsibilities to the partnership,
The designation of a partnership rep- sion to challenge or not to challenge through an amendment to an existing
resentative must be done annually on the adjustments in an FPA, which partner- partnership agreement or the drafting of
partnership tax return and is effective on ship-level defenses to assert, the making a new agreement. The partnership agree-
the date that the return is filed. The des- of partnership elections, and the payment ment should discuss how the partnership
ignation must include information to of partnership tax liabilities. The pro- representative is selected and removed;
demonstrate that the partnership repre- posed Treasury Regulations provide that impose an obligation on the partnership
sentative has a substantial presence in the neither state law nor the partnership representative to provide timely notice
United States and that there are no agreement can curtail the broad authority to partners of all significant communi-
impediments to the partnership represen- granted to the partnership representative cations with the IRS during an audit and
tative’s capacity to act. under the BBA rules [proposed Treasury any ensuing tax litigation; consider
Regulations section 301.6223-2(c)(1)]. restricting the partnership representa-
The Authority of the Partnership Repre- The extent of the power vested in the tive’s power to make elections, extend
sentative partnership representative necessitates that the statute of limitations, settle disputes,
The BBA rules grant the partnership partnerships and their partners make a litigate tax issues, and decide how tax
representative vast powers, including the business-minded decision when selecting assessments will be paid; and include
sole authority to act on behalf of the part- the partnership representative. Among the dispute resolution procedures for dis-
nership in— factors to be considered are whether the agreements that are likely to arise
between the partnership representative
and one or more of the partners.

The extent of the power vested in the partnership rep- Choose the Right Person
The centralized audit regime of the
resentative necessitates that partnerships and their BBA rules was designed to ease the
administrative burden of the IRS in
partners make a business-minded decision when conducting partnership audits, as well
as to advance the IRS’s goal of audit-
selecting the partnership representative. ing more partnership income tax
returns and collecting more tax. The
substantial and unilateral powers vest-
ed in the partnership representative
n all matters involving the examination partnership representative should be a under the BBA rules are a central
of the partnership’s return; partner or a nonpartner; whether the part- component of the IRS’s new strategy
n the conduct of administrative practice nership representative should have IRS for partnership audits. Partnerships
before the IRS, including protests to the audit and tax litigation experience; and their partners, in consultation
Appeals Office and requests for Private whether the partnership representative is with their tax advisors, must exer-
Letter Rulings; and likely to act in a fiduciary capacity to the cise sound business judgment in
n litigation in court of disputed tax adjust- benefit of all partners, or serve only the selecting a partnership representa-
ments. interests of a few; the time commitment tive, as well as in establishing pro-
This exclusive authority means that a involved in acting as a partnership repre- cedures to ensure that the partner-
member of a partnership has no right to sentative; and the length of the term that ship representative acts in the best
be notified of the commencement of an the partnership representative will serve. interests of the partnership. q
audit, to be updated on its progress, or Although the proposed Treasury
to participate in the audit itself or in lit- Regulations provide that the statutory Kevin M. Flynn, JD, LLM, is a partner at
igation disputing audit adjustments, authority granted to the partnership rep- Kostelanetz & Fink, LLP, New York, N.Y.

66 SEPTEMBER 2018 / THE CPA JOURNAL