Partnership Audit Rules - Drafting Partnership Agreements: The New Partnership Representative And The Outgoing Tax Matters Partner

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PARTNERSHIP AUDIT RULES
DRAFTING PARTNERSHIP AGREEMENTS: THE NEW PARTNERSHIP REPRESENTATIVE AND THE OUTGOING TAX MATTERS PARTNER
Although new partnership audit rules have been enacted, the TEFRA entity-level audit rules, particularly the tax manger partner rules, continue to be relevant.
JERALD DAVID AUGUST
JERALD DAVID AUGUST is a partner at Kostelanetz & Fink, LLP, and a member of the Journal’ s Board of Advisors.  2017, Jerald David August, all rights reserved.
The Bipartisan Budget Act of 2015 (the “BBA”),1 which the Pres- ident signed into law on November 2, 2015 (as modified by the Protect- ing Americans from Tax Hikes Act of 2015 (the “PATH Act”),2 funda- mentally changes how the Service will conduct audits of partnerships.3 The BBA repeals the partnership
1 P.L. 114-74, Act § 1101.
2 P.L. 114-113.
3 The Bipartisan Budget Act of 2015, P.L.
114-74, Act § 1101 was signed into law by President Obama on November 2, 2015 and was modified by the Protecting Americans from Tax Hikes Act of 2015 (the “P A TH Act”), P.L. 114-113. On August 5, 2016, Treasury and the IRS published temporary regulations (TD 9780) pertaining to the early election-in permitted for any partnership re- turn filed for a partnership tax year beginning after November 2, 2015, and before January 1, 2018. See Temp. Reg. 301.9100-22T(a). Proposed regulations were issued
112D*points, Next 120D, Vjust JCE2:1
audit provisions of the Tax Equity and Fiscal Responsibility Act of 1982 (“TEFRA”) and electing large partnership regimes and replaces them with a new set of rules for partnership audits and judicial re- view of partnership audit adjust- ments under a centralized or consol- idated partnership audit regime. While the new rules may have had the specific purpose of streamlining partnership audits and raising reve- nue from incorrect tax positions taken by large partnerships, the stat- utory language and principles in the new legislation suffer from several structural defects, some of which are fundamentally inconsistent with the long-standing principles of part- nership taxation under Subchapter K.
Proposed regulations were re- leased on January 19, 2017, but just prior to being released were with- drawn on the following day pursu- ant to an executive order. The cen- tralized partnership audit regime regulations were reissued on June 13, 2017.
The Tax Technical Corrections Act of 2016 (the “TTCA”)4 pro- poses important “clarifications” to the BBA, but has not yet been en- acted into law. Noteworthy provi- sions in the TTCA include: (1) the expansion of the term “partnership- related item,” as defined in Section 6241(a)(2)(B)(i); (2) limits on the scope of the BBA to taxes con-
(REG-136118-15) and were withdrawn fol- lowing the issuance of a White House memo- randum on January 20, 2017, ordering a freeze on all new and pending regulations. The proposed regulations were recently re-is- sued on June 13, 2017.
See, in general, August and Cuff, “The New Partnership Audit Rules: Guidance Needed,” 44 Corp. Tax’n 3 (Jan/Feb 17); August and Cuff, “The TEFRA Partnership Audit Rules Repeal: Partnership and Partner Impacts,” ALI-CLE Video Webcast (July 17, 2016); August, “The Good the Bad, and Possibly the Ugly in the New Audit Rules: Congress Rescues the IRS from Its Inability to Audit Large Partnerships,”
tained in chapter 1 (income taxes); (3) a provision for modification of adjustments not resulting in an im- puted underpayment; and (4) rules permitting tiered partnerships to be subject to the push-out election. Treasury is deciding whether the principles in the TTCA require en- actment or instead can be adopted as part of the final regulations.
The focus of this article is on the need to revise outstanding partner- ship agreements, which will first have to continue to address the TEFRA audit rules and the role of the tax matters partner, as well as on drafting new partnership agree- ments that will be subject to the BBA (for tax years beginning after 2017), including defining the role of the partnership representative. The first part of the article summarizes the TEFRA rules and the run up to the enactment of the BBA. This is followed by a discussion of the partnership representative and re- lated drafting considerations.
Repeal of the TEFRA Partner- ship Audit Rules
Prior to enactment of the entity- level audit rules in TEFRA, audits involving partnership items were conducted by the IRS examination division at the partner level in rec- ognition of the fact that partnerships under Subchapter K were not sub- ject to income tax. Thus, for exam- ple, if a partnership had eight part-
18 Business Entities 4 (May/June 2016); Au- gust, “Entity-Level Audit Rules Continue to Pose Challenges for Partners,” Parts 1 and 2, 16 Business Entities 4 (Nov/Dec 2014), 17 Busi- ness Entities 4 (July/Aug 2015). Budget Act section 1101 repeals the current rules governing partnership audits with a new centralized part- nership audit regime that, in general, assesses and collects tax at the partnership level. On the new audit provisions generally, see NYS Bar Ass’n, Tax Section, “Report on the Partnership Audit Rules of the Bipartisan Budget Act of 2015,” Report No. 1347 (May 25, 2016).
4 H.R. 6439 and S. 3506 (Dec. 6, 2016).
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