Page 6 - Partnership Audit Rules - Drafting Partnership Agreements: The New Partnership Representative And The Outgoing Tax Matters Partner

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justment request on behalf of the partnership under Section 6227(c). The TMP is required to provide the Service with information concerning the address and identify of the part- ners if requested.12
Selection of the tax matters part- ner.
It is axiomatic that in a carefully drafted partnership or organization agreement for a limited liability company or limited liability partner- ship (collectively referred to herein as the “partnership”) the partners or members may negotiate the selec- tion of the TMP, taking into ac- count, inter alia, who is best suited to represent the partnership before the IRS and other taxing authorities. In some instances, the majority part- ner or majority group does the se- lecting. As a threshold considera- tion, should the TMP be the general partner in a limited partnership or a member of the corporate general partner’ s board of directors? The answer is “yes,” since the TMP is required to be a general partner.13 If there is no general partner desig- nated as the TMP, the general part- ner having the largest profits inter- est in the partnership at the close of the tax year involved is generally required to serve as TMP. If the partnership is a limited liability company, should the TMP be the manager of the LLC? What if there is more than one general partner or LLC manager, how is the selection made? On the basis of which part- ner has the largest capital or profits interest as general partner? Or the largest overall capital and profits in- terests as both general partner/man- ager and limited partner/member? With respect to an LLC, the pre- ferred view appears to be that a manager-member must be selected
12 Section 6230(e). 13 Section 6231(a)(7).
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as TMP, as compared with a man- ager who is not a member.14
Under the TEFRA partnership procedures, a TMP may be desig- nated, including through a resigna- tion or revocation, at any time after the filing of the initial partnership return by submitting a new designa- tion to the IRS. The IRS processes each of these subsequent designa- tions regardless of whether the part- nership is examined, creating unnec- essary work for the IRS because very often the TMP is not required to take any action on behalf of the partnership or the partners.
Term of the tax matters partner.
The term of the TMP should be set out in the partnership agreement. Since a new partnership may not be audited for several years or more, the initially selected TMP , absent resignation, death, disability, or the fact that such individual is no longer a partner at a later date, should initially serve a term of of- fice for an extended period of years, e.g., five tax years. The period can be shorter of course. On the other hand, an extended or indefinite pe- riod for the TMP’s term of service may prove to be undesirable and concentrate too much authority in one individual on tax matters than may be tolerable to the other part- ners.
Compensation of the tax matters partner.
Since the obligations and duties of the TMP are substantial, the TMP’s services should be paid out of the cash flow of the partnership as a Section 707(a) payment and not as a part of the TMP’s distributive share of partnership profits. The compen- sation should be based on an aware- ness of the amount of time neces-
14 Reg. 301.6231(a)(7)-2(a) (“only a member- manager of an LLC is treated as a general partner”).
sary for the TMP to do his or her tasks carefully and properly and with due regard to the business op- erations of the partnership, the na- ture of its assets, and the relative complexity of its tax reporting and compliance profiles. It is conceiva- ble that a majority owner may “for- feit” or decline to serve for compen- sation. In my experience as a tax counsel who has represented numer- ous TEFRA partnerships in difficult audits, appeals, and tax litigation matters, the TMP is not a bystander to the process and must be directly involved in the tax audit, etc., and in making judgment calls and keep- ing the partners notified about what is going on.
Replacement of the tax matters partner.
The operating agreement should set forth a procedure for voting out the TMP or replacing the TMP who re- signs or is unable to serve due to illness or some other factor. The election process should correspond to the selection process. The TMP should be removed for acts of mal- feasance, recklessness, or fraud. Of course, the replacement TMP must be eligible under Section 6231(a)(7).
Conflicts of interest.
The question that surfaces here is whether the TMP serves as a fiduci- ary to the partnership and its part- ners. The assumption must be that he or she is a fiduciary to the other partners. What if the fiduciary, how- ever, has competing interests with respect to what he or she wants the IRS to do with respect to one or more items to benefit his tax posi- tion that unfortunately results in a tax detriment to one or more other partners? In such instance is there a voting procedure to resolve the con-
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Corporate Taxation