Page 17 - Partnership Audit Rules - Drafting Partnership Agreements: The New Partnership Representative And The Outgoing Tax Matters Partner

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one another with respect to the reso- lution of issues that are part of a tax audit. How does the partnership rep- resentative proceed in such in- stances? What if a group of partners put the partnership representative “on notice” that it or he will be held accountable if the case is resolved on a basis that they view as unfair to their interests. Perhaps there are other conflicting views from one or more of the other partners. TEFRA sure worked better in this area.
What if the partnership represen- tative needs funds to make tax pay- ments under Section 6225(a)? Is there a mandatory call provision in the agreement? Is there a claw-back from reviewed-year partners? What if only several partners come for- ward with the funds necessary for the partnership to pay the imputed underpayment assessment, penalties, and interest? Should such funds be treated as loans to the partnership or as capital contributions? Who de- cides that question? Presumably, the partnership agreement should be controlling, as it does not appear to involve the IRS at all. Perhaps not, but perhaps the IRS may take a po- sition on prior years’ advances as equity and not debt.
Is it wise to have an accounting firm (and its designated individual) be appointed as the partnership rep- resentative? The same thought pro- cess may lead to selecting a law firm. In selecting an outside ac- counting firm as partnership repre- sentative, what problems might arise as a result of such selection? Will a tax return position that may be viewed as aggressive be softly set- tled at no cost to the IRS? What if the position previously taken was wrong, will the accounting firm openly admit to the error or will it be swept under the rug as a “no challenge” position? So, is an ac-
118D*points, Next 120D, Vjust JCE2:1
counting firm selection one that is fraught with an ethical problem from day one? The same may be said for the law firm that advised the partnership on one or more tax issues that are part of the audit. The law firm may claim it is in the best position to advise the client and deal directly with the IRS. But is that explanation correct? While the law firm can be authorized by the partnership representative to appear before the IRS in the matter as its tax advisor and tax counsel, to ap- point the law firm as a partnership representative may pose a substan- tial ethical problem, especially in representing all of the partners. In the weeks and months ahead, there will be more discussion on the se- lection of an outside accounting firm or law firm as the partnership representative.
Fund managers of large hedge and investment funds will likely form a captive management entity that will serve, inter alia, as the partnership representative, perhaps in a non-partner role. That is exactly the type of third party that the new legislation was directed towards, with the Service receiving more funds, more efficiently, and without the attending cost and uncertainties that it suffered under the TEFRA rules. So expect investment firms to appoint themselves or an affiliate as the partnership representative and further expect that taxes will be paid at the fund level as the number of partners and indirect partners in- crease. With respect to these large funds, it will be part of normal commerce that the partnership rep- resentative will not be held to any fiduciary duty or similar standard in representing the partnership before the IRS or in making any decision concerning an audit or the applica-
tion of the consolidated partnership audit regime.
Designation procedures. A partner- ship must designate the partnership representative on the partnership’s return filed for the partnership tax year.49 A partnership must desig- nate a partnership representative separately for each tax year. In other words, a designation for one tax year is not effective for any other tax year. A designation of the partnership representative for a part- nership tax year remains in effect until the designation is terminated under Prop. Reg. 301.6223-1(d) (resignation), Prop. Reg. 301.6223-1(e) (revocation), or Prop. Reg. 301.6223-1(f) (determination that the designation is not in effect). The proposed regulations provide that the partnership or the partner- ship representative may change the initial designation of the partnership representative simultaneously with filing an AAR, but the form used for filing an AAR may not be used solely for the purpose of changing the partnership representative.
Resignation or removal. In a break from the TMP rules, the proposed regulations provide that a partner- ship representative designation may not be changed (either by resigna- tion or revocation) until the IRS is- sues a notice of administrative pro- ceeding to the partnership, except when the partnership files a valid AAR in accordance with Section 6227 and Prop. Reg. 301.6227-1. However, the partnership represen- tative may resign at any time after the issuance of the notice of an ad- ministrative proceeding. Prop. Reg. 301.6223-1(d) allows a part- nership representative to resign by notifying the partnership and the IRS in writing. The partnership rep- resentative may resign regardless of
49 Prop. Reg. 301.6223-1(c).
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