Page 18 - Partnership Audit Rules - Drafting Partnership Agreements: The New Partnership Representative And The Outgoing Tax Matters Partner

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whether that person was designated by the partnership or the IRS. The resigning partnership representative may, but is not required to, desig- nate a successor partnership repre- sentative. If the resigning partner- ship representative does not designate a successor, the IRS will determine that the designation is not in effect under Prop. Reg. 301.6223-1(f) and provide the part- nership with an opportunity to des- ignate a new partnership representa- tive. If the partnership fails to designate a new partnership repre- sentative, the IRS will designate a new partnership representative pur- suant to Prop. Reg. 301.6223-1(f)(5).
A resignation is effective 30 days after the date the notice of resigna- tion is sent to the IRS.50 Similar rules apply to designated individu- als, allowing the designated individ- ual to resign and appoint a succes- sor.51 Some may question why there is a 30-day wait for the part- nership representative to effectively resign or be removed, particularly if “bad acts,” negligence, or similar conduct is the cause for removal.
In general, a change in the part- nership representative or designated individual should occur only when the partnership representative re- signs and appoints a successor under Prop. Reg. 301.6223-1(d). Still, there may be instances where the partnership would like to change the designation and the partnership representative or designated individ- ual is not willing to step aside and tender a resignation to the IRS (and the partnership). The proposed regu- lations provide flexibility to the partnership in these circumstances. Prop. Reg. 301.6223-1(e) sets forth rules that allow the partnership to revoke the partnership representative
50 See Prop. Reg. 301.6223-1(d)(1). 51 See Prop. Reg. 301.6223-1(d)(3). 52 See Prop. Reg. 301.6223-1(e)(1).
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designation and designate a succes- sor. This revocation provision is an exception to the general rule that the partnership representative has the sole authority to act on behalf of the partnership.
In the case of a revocation (re- moval), the partnership must notify the IRS in writing and must also notify the partnership representative whose designation is being revoked of the revocation. As noted, the partnership may not revoke the part- nership representative designation prior to the issuance of a notice of an administrative proceeding except in conjunction with the filing of a valid AAR.52 Upon the receipt of a valid revocation, the IRS will notify the partnership and any partnership representative whose designation is being revoked of the acceptance of the revocation.
Prop. Reg. 301.6223-1(e)(3) pro- vides the rules for who may sign a revocation. Under the proposed reg- ulations, a general partner as shown on the partnership return at the close of the tax year for which the partnership representative was des- ignated must sign the revocation. If no general partner has the capacity to act on behalf of the partnership (as described in Prop. Regs. 301.6223-1(b)(4)(i)-(v)), Prop. Reg. 301.6223-1(e)(3)(i) provides that any reviewed-year partner in the partnership may sign the revocation. Prop. Reg. 301.6223-1(e)(3)(ii) pro- vides definitions with respect to LLCs and rules for which members of an LLC may sign a revocation. For purposes of which partners may sign a revocation, member-managers are treated as general partners, and other members are treated as part- ners other than a general partner. If there is no member-manager, the proposed regulations provide that
53 The IRS is not required to designate a per- son designated among the multiple revoca-
each member is treated as a mem- ber-manager for these purposes.
Additionally, Prop. Reg. 301.6223-1(e) provides that any rev- ocation must include a statement signed under penalties of perjury that the partner signing the revoca- tion is authorized by the partnership to revoke the designation and has provided a copy of the revocation to the partnership and partnership rep- resentative. The IRS, upon receiving and accepting the revocation notice, provides further notice to the part- nership and allows for the partner- ship to take action against unautho- rized revocations and designations.
The proposed regulations further address the issue of receiving multi- ple notices of resignation of the partnership representative and ap- pointment of a successor partnership representative within a 90-day pe- riod. In such instance, Prop. Reg. 301.6223-1(e)(5) may determine that a designation is not in effect due to multiple revocations and fol- low Prop. Reg. 301.6223-1(f) to designate a new partnership repre- sentative.53
Designation of the Partnership Representative by the Service. Prop. Reg. 301.6223-1(f) sets forth rules that allow the IRS to designate a partnership representative where a designation is not in effect. When the IRS makes such a determination, it is required to notify the partner- ship and the last partnership repre- sentative, if there was one, of the IRS’ s determination. The designa- tion is terminated as of the day the IRS notifies the partnership that no designation is in effect. Prop. Reg. 301.6223-1(f)(4) provides that ex- cept in cases where the partnership designation is not in effect because there were multiple revocations, the
tions it receives. See Prop. Reg. 301.6223-1(e)(4).
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Corporate Taxation