Page 20 - Partnership Audit Rules - Drafting Partnership Agreements: The New Partnership Representative And The Outgoing Tax Matters Partner

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contrary, the proposed regulations do not include any requirements with respect to providing notice to all partners of significant develop- ments in an administrative proceed- ing or, as mentioned, a provision al- lowing other partners to participate.
Additional powers of the partner- ship representative. In addition to the main or primary powers of the partnership representative, he may hold additional stated or implied powers, such as the power: (1) to hire accountants and lawyers in con- nection with a tax audit, appeal, or legal proceeding; (2) to direct how the accountants and lawyers will work and what issues he wishes to challenge; (3) to hire expert witness; (4) to bind the partnership to in- voices for services rendered by pro- fessionals and experts on behalf of the partnership; (5) to have unfet- tered access to the partnership books, records, tax filings, files from prior audits; and (6) to charge for the value of his services to the partnership. While the list of spe- cific powers referred to in the pre- ceding paragraphs may leave a clear impression of the broad and far- reaching powers of the partnership representative, the list is not com- plete. Indeed there are at least sev- eral other powers that require con- sideration, including the power: (1) to agree with the Service’s determi- nations or otherwise request multi- ple imputed underpayments be is- sued by the Service; (2) to determine whether to be assessed under Section 6225 on the entire imputed underpayment amount or to “push-out” the entire imputed un- derpayment to the reviewed-year partners under Section 6226(b); (3) to further determine which imputed underpayments issued as part of a
56 See, e.g., Napoliello, TCM 2009-104 (final partnership administrative adjustment under TEFRA must provide minimal notice to the
110D*points, Next 120D, Vjust JCE1:1
set of multiple underpayment amounts are to be paid for by the partnership and which are going to be pushed-out to the reviewed-year partners; (4) to determine whether and for which year or years it should file an AAR under Section 6227; and (5) to decide whether to concede or settle a case before the IRS Appeals office or in a tax liti- gation dispute, including whether or not to file an appeal from an ad- verse trial court determination.
V arious commentators have ex- pressed concern that the powers of the partnership representative reflect a low-water mark of taxpayer repre- sentation before the government in a tax audit or tax proceeding. One en- tity or individual, who may not even be a partner, will have the sole and exclusive authority to decide whether the partnership will chal- lenge one or more determinations made by the Service; whether to concede the adjustments in the early stages of the audit; whether to pay the tax itself, which means the ad- justment year partners bear the eco- nomic cost or burden of such tax payments; or whether to engage in a push-out election. This is much dif- ferent than a officer of a corporation representing a consolidated group of corporations and making, in effect, decisions that could affect the fed- eral and state local tax liabilities of the group or in certain instances some of its members. Here, the partnership representative directly affects the tax liabilities of individ- ual partners and may even deter- mine which partners will directly or indirectly bear the burden of paying such taxes.
It is here that the operative terms of the partnership agreement must be set forth in precision and in de- tail to try and limit the otherwise
partnership that the IRS has finally deter- mined adjustments to the partnership return where IRS is not required to notify the part-
unfettered powers of the partnership representative. Remember, it is the Congress, in enacting Section 6223, and the Blue Book assessment of such provision, that should have partners worried. The point is that the partnership agreement is not of concern to the IRS and no partner has standing before the IRS to ap- pear and contest the partnership rep- resentative’ s position or the IRS’ s position on particular matters and, further, has no standing to appear in court as a partner, regardless of his ownership percentage.56
Limitations on the powers of the partnership representative.
The partnership agreement must set forth limitations on the power of the partnership representative, as well as include provisions for the selection, removal, and appointment of a suc- cessor partnership representative.
In an effort to limit the exercise of the powers of the partnership representative, the partnership agreement may fail to make any dif- ference, at least with the govern- ment. Still, the partnership agree- ment, and any amendments, will be part of the audit documentation and can be introduced into evidence in court. What impact, if any, a set of limitations on the power of the part- nership representative would have as evidence is unknown. Perhaps it could be used in a subsequent suit filed by one or more partners against the partnership representa- tive for breach of contract, negli- gence, conflict of interest, breach of fiduciary duty, or even fraud.
Drafting Provisions with respect to the partnership representative.
In many instances, the partnership representative will be a general part- ner or manager of the partnership or
ners of their individual tax deficiencies at the partner level). Compare Walthall, 131 F.3d 1289, 1294-1295 (CA-9, 1997).
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Corporate Taxation