Page 16 - Partnership Audit Rules - Drafting Partnership Agreements: The New Partnership Representative And The Outgoing Tax Matters Partner

Datalogics Unix Job 1 dyanes/0/8310 5-JUL-17 14:35
Style: /opus/environments/proda/edsys/pager/style/journal.bst File: /tigredata/tigredata01/jct/jct_283951.txt
Seq: 16 Color: 0c: Format: rls$prod:journal.fmtFree lead
“person” to include an individual, trust, estate, partnership, association, company, or corporation. Provided the person is otherwise eligible, the partnership may appoint a partner or a non-partner, including the partner- ship’s management company, as the partnership representative. Presuma- bly, a “person” for this purpose does not include a disregarded en- tity such as a single member limited liability company (that does not make a reverse default election). Under Prop. Reg. 301.6223-1(b)(3), if an entity is designated as the part- nership representative, the partner- ship must identify and appoint an individual (designated individual) to act on the entity’s behalf. If the partnership does not appoint a des- ignated individual, the IRS may de- termine that the partnership repre- sentative designation is not in effect.44
As noted, the partnership repre- sentative must have a substantial presence in the United States.45 Where an entity is designated as a partnership representative, both the entity partnership representative and the designated individual must meet the substantial presence require- ments.46
The “substantial presence” re- quirement is much different in na- ture than the use of the same phrase for purposes of establishing resi- dency for U.S. income tax purposes under Section 7701(b)(3). The ratio- nale for imposing a “substantial presence” requirement under the BBA partnership audit rules is somewhat obvious, i.e., the IRS needs to have a representative “on the ground” in the United States for conducting an audit and inspecting the books and records of the part-
44 See Prop. Reg. 301.6223-1(f).
45 Prop. Reg. 301.6223-1(b)(2).
46 Prop. Reg. 301.6223-1(b)(3).
47 Prop. Reg. 301.6223-1(b)(4) describes spe-
cific events that cause a person to lose the
32D*points, Next 120D, Vjust JCE1:1
nership, which also must be located within the United States.
Prop. Reg. 301.6223-1(b)(2)(i) in- structs that a person has a substan- tial presence in the United States for the purposes of Section 6223 if three criteria are met. First, the per- son must be able to meet in person with the IRS in the United States at a reasonable time and place as is necessary and appropriate as deter- mined by the IRS. Second, the part- nership representative must have a street address in the United States and a telephone number with a U.S. area code where the partnership rep- resentative can be reached by U.S. mail and telephone during normal business hours in the United States. Third, the partnership representative must have a U.S. taxpayer identifi- cation number.
The partnership representative must warrant (by filing an affidavit, which must be reaffirmed annually) and prove that it will maintain a substantial presence in the United States at all times. This would in- clude an affirmative statement that it will keep and maintain pertinent books and records for such purpose. Where the business office of the partnership is at a different location than the address of the partnership representative, the question will be whether copies of relevant tax records, filings, etc. will be kept at the partnership representative’s loca- tion while the partnerships books and records in general will be held at its regular place of business loca- tion, assuming that it is within the United States.
Under the proposed regulations, a person is ineligible to serve as a partnership representative if he does not have the capacity to act,47 al-
capacity to act and includes a catch-all provi- sion for unforeseen circumstances in which the IRS reasonably determines that the part- nership representative or designated individ- ual may no longer have the capacity to act.
though the partnership audit rules do not explicitly require that the partnership representative have legal capacity. It is not clear what hap- pens if the partnership representa- tive has lost normal legal capacity but enters into an agreement with the IRS. This will create interesting legal and policy questions.
Designation of the partnership representative. Many partnerships will automatically designate a man- aging member, manager, or general partner to serve as the partnership representative. In many instances, this would be a continuation of the same party named as the TMP under TEFRA. But note again, the two terms are not synonymous and the TMP does not automatically roll into the new job under the BBA. The selection of the partnership rep- resentative by the partnership should be done with a fair degree of delib- eration since under the new law the partnership representative will be the effective “czar” over the part- nership. If this individual or entity is himself or itself a major investor in the partnership, any potential conflicts of interest should be ex- amined in advance and it should be determined whether such conflict in fact will constitute a ground for re- moval. Thus, for example, the part- nership may involve targeted alloca- tions that the partnership representative has oversight and de- cision-making authority over as the sole director and officer of a corpo- rate general partner. That partner now has authority over settling allo- cations of income, deductions, and losses with the Service that are part of the targeted allocation process.48 There will be situations that arise where the partners are adverse to
48 See Cuff, “Target Allocations,” 40 Real Es- tate Tax’n 156 (2013).
16
Corporate Taxation