Page 22 - Partnership Audit Rules - Drafting Partnership Agreements: The New Partnership Representative And The Outgoing Tax Matters Partner

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best efforts, in connection with rep- resenting the partnership in an audit. 17.The partnership representative must obtain the prior approval of the partnership management or, as otherwise provided in the partner- ship agreement, the vote of the part- ners in the adjustment year, before deciding to make a push-out elec- tion with respect to an imputed un- derpayment in accordance with Sec-
tion 6226(b).
18.The partnership representative
must obtain the prior approval of the partnership management, or as otherwise provided in the partner- ship agreement, to file an adminis- trative adjustment request in accor- dance with Section 6227.
19.The partnership representative must obtain prior approval in the manner set forth in the partnership or services agreement before filing a judicial action in response to a no- tice of final partnership adjustments for a particular tax year, and set forth the justification for the selec- tion of the particular forum for the case.
20.A liquidated damages provi- sion for violating one of the restric- tions or limitations may serve as a good “control” over the partnership representative, preventing him from entering into settlements or taking other actions in an audit or under the payment method rules that do not have the requisite approval. In some instances, such as negligence or fraud, the damage claims may be difficult to estimate. So, there could be alternative remedies for breach of contract or fiduciary duty set forth in the personal service contract or under the partnership agreement with respect to the partnership rep- resentative.
21.Other Provisions. Partnership agreement provisions affecting the
59 Obviously, some of the same topics were discussed with respect to partnership repre- sentatives. Moreover, there may be countless
70D*points, Next 120D, Vjust JC1:1
relationship of the TMP to the part- nership and the partners may also apply to the partnership representa- tive, including: (a) selection of the TMP (partnership representative); (b) term of the TMP (partnership representative); (c) compensation of the TMP (partnership representa- tive): (d) replacement of the TMP (partnership representative): (e) con- flicts of interest; (f) indemnification provisions (and exceptions); (g) in- demnification of a successor TMP (partnership representative); (h) con- firmation of the fiduciary duty; (i) contractual authority; (j) whether the TMP (partnership representative) should be the tax return preparer or tax advisor for the partnership; (k) selection of the judicial forum to challenge partnership adjustments; and (l) prior approval for the TMP’s (partnership representative’s ) taking affirmative actions.59
22.Provisions imposed by third parties. V arious third parties who are not partners may want to see provisions inserted into the partner- ship agreement, an amendment to the partnership agreement, or a cer- tified resolution specifying the rights of such third parties to notice of an audit, notice of the issues in- volved in the audit, and indications of what a favorable settlement may look like, etc. In some instances, such as a commercial lender, third parties may insist that the audited partnership always make a push-out election, so that an application of funds borrowed from a bank or other financial institution are not used to pay off prior years’ taxes. Lenders may also want to undertake a thorough review of the contingent tax liabilities of the partnership. The same sort of contractual due dili- gence and assurances may be in- voked by the purchaser of a partner-
other provisions that learned counsel will want to ensure be placed in the documents.
ship interest. Also, representations and warranties will be required to be made in many instances by part- nerships where partnership interests are being purchased from another partner or partners or as part of a partnership subscription. Of course, the same process will be involved in a merger or even a division of part- nerships.
Fiduciary duty and agency rela- tionship.
The partnership representative pre- sumably has the normal fiduciary duties of loyalty and care and should have the legal relationship of the partnership’s agent. “Agency is the fiduciary relationship that arises when one person (a “principal”) manifests assent to another person (an “agent”) that the agent shall act on the principal’s behalf and subject to the principal’ s control, and the agent manifests assent or otherwise consents so to act.”60
“Subject to any agreement with the principal, an agent has a duty to the principal to act with the care, competence, and diligence normally exercised by agents in similar cir- cumstances. Special skills or knowl- edge possessed by an agent are cir- cumstances to be taken into account in determining whether the agent acted with due care and diligence. If an agent claims to possess special skills or knowledge, the agent has a duty to the principal to act with the care, competence, and diligence nor- mally exercised by agents with such skills or knowledge.”61
The duty of care obligates the partnership representative to act solely in the best interests of his principal to the exclusion of all other interests, including the part- nership representative’s self-interest. However, it is not clear whether the
60 Restatement (Third) of Agency § 1.01. 61 Restatement (Third) of Agency § 8.08.
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Corporate Taxation