Page 4 - Tax Controversy Corner: Consider the Constructive Partnership Rules Before reorganizing to Elect Out of the BBA

TAX CONTROVERSY CORNER

was invalid. Treasury views election out of the BBA as causing more
In Rev. Rul. 94-43, the IRS reversed its position and administrative burdens and complexity for the IRS, and its
revoked Rev. Rul. 77-220. Instead, the IRS stated that the statements in the Proposed and Final Regulations signal
election of the separate corporations should be respected, that it would likely take the approach of Rev. Rul. 77-220,
explaining that “[t]he purpose of the number of share- and not Rev. Rul. 94-43.
holders requirement is to restrict S corporation status to It will be interesting to see whether the IRS sticks to the
corporations with a limited number of shareholders so as approach described in the Proposed and Final Regulations,
to obtain administrative simplicity in the administration or if it eventually decides that the election out should be
of the corporation’s tax affairs …. As a result, the purpose viewed like the small business corporation election in Rev.
of the number of shareholders requirement is not avoided Rul. 94-43. In the meantime, practitioners should think
by the structure in Rev. Rul. 77-220 and, therefore, the through whether, under the judicial doctrines discussed
election of the corporations should be respected.” Thus, above, the IRS will respect the restructuring of a partner-
the IRS allowed taxpayers to structure their organizations ship to obtain eligibility for the election out rules, and
with the principal purpose of meeting the 10-shareholder ensure that the parties’ intent and the substance of the
election requirement because it achieved the intended transaction match its form.
goal of administrative simplicity.
ENDNOTES

* Ms. Megan L. Brackney focuses her practice in 4 Code Sec. 6221(b)(1). 18 BCP Trading and Investments, LLC, 114 TCM 151,
the areas of civil and criminal tax controver- 5 Reg. §301.6221(b)-1(b)(1), (2). Partners that are Dec. 60,982(M), TC Memo. 2017-151, at **49-50
sies. She attended the University of Kansas S corporations count each Form K-1 issued (citing H.M. Luna, 42 TC at 1077–1078); see also
School of Law and received her LL.M in Taxation by the S corporation to its shareholders in TIFD III–E, Inc., CA-2, 2006-2 ustc ¶50,442, 459
from New York University. She can be reached determining the total number of Forms K-1. F3d 220, 231-32.
at mbrackney@kflaw.com. Reg. §301.6221(b)-1(b)(2)(ii). 19 See, e.g., BCP Trading and Investments, LLC,
1 Act Sec. 1101 of the Bipartisan Budget Act of 6 Reg. §§301.6221(b)-1(b)(1), (3)(i). 114 TCM 151, Dec. 60,982(M), TC Memo. 2017-
2015 (P.L. 114-74), 129 Stat. 584, 625–38 (Nov. 2, 7 Reg. §301.6221(b)-1(b)(3)(ii). 151; Russian Recovery Fund Ltd., CA-FC, 2017-1
2015); P.L. 114-113, div. Q (Dec. 18, 2015) (correct- 8 Treasury stated that it may revisit this issue in ustc ¶50,177, 851 F3d 1253; Historic Boardwalk
ing and clarifying certain amendments made the future after it has experience administering Hall, LLC, CA-3, 2012-2 ustc ¶50,538, 694 F3d
clarifyying c
and
by the BBA). )BBA).y the Bby the BBA. 83 FR 24-01, 28 (Jan. 2, 2018). 425, 455-61 ; TIFD III-E, Inc., CA-2, 2006-2 ustc
¶50,442, 459 F3d 200.
2 See, e.g., New York State Bar Association, ar Associag., Newee, e.gSe w Yorkk St 9 Tax Equity and Fiscal Responsibility Act E ty ct ¶
yer Re ief Act
97
FR ”) and he Tax
ection
of Taaxatioon, R
on Propo
Se
Section of Taxation, Report on Proposed ( (“TEFRA”) and the Taxpayer Relief Act of 1997 20 Russian Recovery Fund Ltd., CA-FC, 2017-1 ustc A-FC, 2 71 ustR ssi ecove un d.,
Regulations Implementing the Centralized (P 9 48) ¶ 0,1 51 3d 53.
e Centralized
ions IImplemp men
¶50,177, 851 F3d 1253.
egulatg
(P.L. 97-248).
Re
Partnership Audit and Collection Regime 10 83 FR 24-01, 28.83 FR 01 21 Gabriel, 66 TCM 1283, Dec. 49,394(M), TC Memo. ,394(M), C MG bri 6 T M 1283, Dec.
artner
ion Regime
Pa
rship AAudit an
19 3-524 (19
ug. 18
ug. 18
nynys
A
/Sections/
8, 20117), ww7), wwwww.
8, 20
(Aug. 18, 2017), www.nysba.org/Sections/ 11 11 82 FR 27334-01, 27344 (June 14, 2017).8 FR 2 34-01 27344 (J ne 2017). 1993-524 (1993).
Tax/Tax_Section_Reports/Tax_Reports_2017/ 12 Id. 22 Id. at *6.
_Section R
/Tax
Tax_Section_Report_1378.html; Report on the 13 83 FR 24-01, 26. 23 Madison Gas and Electric Co., 72 TC. 521, Dec.
Partnership Audit Rules of the Bipartisan 14 H.M. Luna, 42 TC 1067, 1077, Dec. 26,967 (1964). 36,142 (1979), aff’d, CA-7, 80-2 ustc ¶9754, 633
Budget Act of 2015 (May 15, 2016), www.nysba. 15 Code Secs. 761(a) and 7701(a)(2). F2d 512.
org/Sections/Tax/Tax_Section_Reports/ 16 W.O. Culbertson, SCt, 49-1 ustc ¶9323, 337 US 24 72 TC 562.
Tax_Reports_2016/Tax_Section_Report_1347. 733, 742, 69 SCt 1210. 25 Bergford, CA-9, 12 F3d 166.
html. 17 Russian Recovery Fund Ltd., CA-FC, 2017-1 26 Id., at 170.
3 Code Sec. 6221(g)(4) provides that a partnership ustc ¶50,177, 851 F3d 1253, 1264 (quoting W.O. 27 Rev. Rul. 77-220, 1977-1 CB 263.
may elect to have the BBA provisions apply for Culbertson, 337 US at 743); BCP Trading and 28 Rev. Rul. 94-43, 1994-2 CB 199.
any return filed for partnership tax years after Investments, LLC, 114 TCM 151, Dec. 60,982(M), 29 Former Code Sec. 1371 (predecessor of Code
the November 2, 2015, enactment date. TC Memo. 2017-151, at *50. Sec. 1361).
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62 JOURNAL OF PASSTHROUGH ENTITIES MAY–JUNE 2018