Page 13 - Partnership Audit Rules - Drafting Partnership Agreements: The New Partnership Representative And The Outgoing Tax Matters Partner

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turn; (2) the due date for the return; or (3) the date on which the partner- ship filed an administrative adjust- ment request (“AAR”) under Sec- tion 6227. A six-year period will apply for substantial omissions and no limitation will apply where no partnership return is filed or with respect to items reflected on the partnership return that are false (civil fraud). The partnership repre- sentative and the Service may agree to an extension or waiver of the statute of limitations otherwise ap- plicable.
Where the proposed adjustment resulting in an imputed underpay- ment is timely issued within three years, the NOPA may be issued no later than either the date that is 270 days after the partnership has com- pleted its response in seeking a modification or no later than 270 days after the date of a NOPA where no response or only a partial or incomplete response has been made by the partnership. The limita- tion period may be extended if the issuance of a NOPA commences the 270-day period in which the part- nership may obtain a modification of the imputed underpayment. Dur- ing this 270-day period, a notice of an FPAA is not permitted to be is- sued.
Note, however, that the statute of limitations rules change when a push-out election is made by the partnership. The statute of limita- tions at the partner level for the re- viewed (audited) year is not applica- ble since the assessment in tax is imposed with respect to the adjust- ment year. That means that re- viewed-year partners can wait years to be subject to a push-out election for a finally determined amount. Any penalties, additions to tax, or additional amounts will be deter- mined at the partnership level and
108D*points, Next 120D, Vjust JC2:1
the partners of the partnership for the reviewed year will also be liable for such penalties, additions to tax, or additional amounts.34
If a partner does not pay the “add-on” tax assessed with respect to a push-out assessment, such part- ner will be exposed to penalties for failure to pay, as well as accuracy- related penalties for inconsistent re- porting. Interest will be determined at the partner level and will com- mence from the due date of the re- turn for the tax year to which the increase is attributable (taking into account any increases resulting from a change in tax attributes for tax years for which the tax attributes were redetermined). The interest rate is five percentage points (in- stead of three) over the federal short-term rate. Finally, the statute of limitations for the partner (for the reviewed year) is not directly in- volved, as the adjusted Schedule K-1 is treated as a current surcharge in the amount of the partner’s cur- rent year’s income tax liability.
Notice of Administrative Proceed- ings and Adjustment
Section 6231(a) provides that the Service will mail to the partnership and the partnership representative notice of: (1) any administrative proceeding initiated at the partner- ship level with respect to an adjust- ment of any item of income, gain, loss, deduction, or credit of a part- nership for a partnership tax year, or any partner’ s distributive share thereof; (2) any proposed partner- ship adjustment resulting from such proceeding; and (3) any final part- nership adjustment resulting from such proceeding.
Section 6231(a) further provides that any notice of an FPAA will not be mailed earlier than 270 days af- ter the date on which the notice of
the proposed partnership adjustment is mailed to the last known address of the partnership’s designated rep- resentative or the partnership (even if the partnership has terminated its existence). The same notice provi- sion applies with respect to a pro- ceeding pursuant to an AAR claim filed by a partnership under Section 6227. Where an FPAA for any part- nership tax year is issued, and the partnership files a petition in re- sponse under Section 6234, absent fraud, malfeasance, or misrepresen- tation of a material fact, the Service is prohibited from sending an addi- tional notice to the partnership with respect to such year.
It is noteworthy that unlike the TEFRA partnership audit rules, partners have no right to individu- ally participate in settlement confer- ences and, presumably, will not be permitted to intervene in litigation proceedings. Unless a contrary posi- tion is taken in the regulations, part- ners will have no individual right to request a refund. Tax cases involv- ing the Service’ s proposed adjust- ments require that only the partner- ship representative represent the partnership.
Administrative Adjustment Re- quest by Partnership
In accordance with Section 6227, a partnership may file an AAR in the amount of one or more items of in- come, gain, loss, deduction, or credit for a partnership tax year. Af- ter the AAR is filed, the partnership is, in general, allowed to apply sev- eral of the modification rules under Section 6225(c). Where additional income tax results from the AAR adjustment, the additional tax may be paid by the partnership in the manner in which a partnership pays an imputed underpayment or, alter- natively, any increase in tax may be
34 Section 6226(c)(1).
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