Page 15 - Partnership Audit Rules - Drafting Partnership Agreements: The New Partnership Representative And The Outgoing Tax Matters Partner

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mined at the partnership level as if the partnership had been an individ- ual subject to income tax for the re- viewed year and the imputed un- derpayment were an actual underpayment (or understatement) for the year.
As to the payments of tax owed for the year in which the adjustment is made, if there is a failure to pay an imputed underpayment on the prescribed date, the partnership will be liable for interest and any penal- ties, additions to tax, or additional amounts as determined under the following rules. Interest will accrue with respect to the failure to timely pay the imputed underpayment in the adjustment year in the same manner as a failure to pay tax in general, and penalties, additions to tax, or additional amounts will be the penalties, additions to tax, or ad- ditional amounts that would be de- termined by imposing the failure-to- pay penalty under Section 6651(a)(2), as well as the accuracy- related and civil fraud penalties.
Judicial Review of FPAA Issued to Partnership
Section 6234 sets forth applicable rules and principles related to initi- ating judicial review of the final partnership adjustment. The partner- ship may file a petition for readjust- ment for such tax year (under re- view and set for a proposed tax deficiency in the FPAA) within 90 days after the date the FPAA is is- sued.38 The petition/claim for re- fund may be filed in the Tax Court, the U.S. district court for the district in which the partnership’s principal place of business is located, or the Court of Federal Claims. Under Section 6234(b), a readjustment pe- tition may be filed in a refund suit forum, such as the federal district court or Court of Federal Claims,
38 See Section 6231.
39 See Blue Book, supra note 33.
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only where the partnership filing the petition deposits the amount of the imputed underpayment with the Ser- vice prior to or on the same day the petition is filed. The court may pro- vide that “Flora Rule” reflected in Section 6234(b)(1) is satisfied where there is a good faith effort to meet this requirement and any shortfall of the required amount to be paid is corrected. In a Title 11 bankruptcy proceeding, the 90-day period requirement will be sus- pended for the period during which the partnership is prohibited from filing a petition and for 60 days thereafter. The reviewing court has jurisdiction over all tax items of the partnership for the partnership tax year to which the FPAA relates, the proper allocation of such items among the partners, and the imposi- tion of any penalty, addition to tax, or additional amount for which the partnership may be liable.
The Partnership Representative: It Is Not the Same as the TMP— It is Bigger!
Under new Section 6223(a), the “partnership representative” replaces the “tax matters partner,” the term used in TEFRA, to represent the partnership and serve as the inter- face between the partners and the IRS under the centralized audit rules. The partnership representative serves a similar function as the TMP , but the differences in their role before the IRS are profoundly different. In a significant departure, the partnership representative does not have to be a partner, but must be a person having a “substantial presence” in the United States. Sec- tion 6223(a) grants the partnership representative the sole, and presum- ably exclusive, authority to act on behalf of the partnership. Where a designation is not in effect by the
40 Prop. Reg. 301.6223-1(a). 41 Prop. Reg. 301.6223-1(b).
entity taxable as a partnership, the Service may select any person as the partnership representative. Under Section 6223(b), a partner- ship and all partners are bound by any actions taken by the partnership through the partnership representa- tive and by any final decision in a proceeding brought under the new rules.39
While not required by the Code, the partnership representative should be designated by the partnership in writing (a convenient place is the partnership agreement). The draft- sperson of a partnership or LLC agreement must consider what du- ties, functions, and obligations the partnership representative will have. He should also consider how he can limit the discretion of the partner- ship representative.
Proposed Regulations on the partnership representative.
Prop. Reg. 301.6223-1 provides rules requiring a partnership to des- ignate a partnership representative,40
rules describing the eligibility re- quirements for a partnership repre- sentative,41 rules describing the des- ignation of the partnership representative,42 and rules describ- ing the termination of a designation of a partnership representative.43
The initial inquiry consists of two questions. First, who is eligible to serve as the partnership representa- tive? Second, who would be the preferred choice in selecting a part- nership representative?
Eligibility requirements. Prop. Reg. 301.6223-1(b)(1) provides that a partnership may designate any person (as defined in Section 7701(a)(1)), including an entity, that meets the requirements of Prop. Regs. 301.6223-1(b)(2), (b)(3), and (b)(4). Section 7701(a)(1) defines
42 Prop. Regs. 301.6223-1(c)-(f). 43 Prop. Reg. 301.6223-1(d)-(f).
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