Page 7 - Partnership Audit Rules - Drafting Partnership Agreements: The New Partnership Representative And The Outgoing Tax Matters Partner

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flict? Are there other adversely af- fected partners (“notice partners”) who can participate in the process? What if the conflict of interest in- volves both notice and non-notice partners? How does the TMP pro- tect himself from lawsuit? Many TMPs will want a waiver of con- flict-of-interest contractual protec- tion. Legal counsel representing the partnership should be reluctant to agree to this type of waiver unless he or she can get unanimous or close to unanimous consent from the other partners. Granted this problem is more severe under the new BBA regime since the partner- ship representative is the sole au- thority who speaks for the partner- ship and its partners, the issue is still present under TEFRA rules. Ul- timately, it should be expected that the TMP will be called to speak on behalf of the majority in interest of the partners.
Indemnification of the tax mat- ters partner.
Even in a non-conflict-of-interest situation, the TMP will want to be held harmless and indemnified by the partnership for any claim made by a current or former partner for damages alleged to have been caused by his acting on behalf of the partnership in a tax audit, ad- ministrative appeal, or judicial pro- ceeding, including in a situation that
15 See, e.g., Feely, AK-Feel, LLC and Oculus Capital Group, LLC, v. NHAOCG, LLC, 62 A.3d 649 (Court of Chancery of Delaware, 2012) (As noted by the court, the Delaware Limited Liability Company Act (the “LLC Act”) contemplates that equitable fiduciary duties will apply by default to a manager or managing member of a Delaware LLC. Sec- tion 18–1104 states that “[i]n any case not provided for in this chapter, the rules of law and equity . . . shall govern.” 6 Del. C. § 18–1104. Like the Delaware General Corpo- ration Law, the LLC Act does not explicitly provide for fiduciary duties of loyalty or care; consequently, the traditional rules of law and equity govern). See Auriga Capital Corp. v. Gatz Properties LLC, 40 A.3d 839,
114D*points, Next 650D, Vjust JCE2:1
a conflict of interest could be as- serted. There may be a need to get a policy or general business liability coverage for the TMP , as there would be for a managing member or general partner of a partnership.
Exceptions to indemnification. Of course, where the offensive conduct is reckless, careless, grossly negli- gent, or fraudulent, the indemnifica- tion provision should be tailored to not hold the TMP harmless.
Indemnification of successor tax matters partner. This situation may be just as critical to address as the subject of the indemnification of the TMP. That is because a succes- sor TMP may inherit a “bad” or “critical” situation where important decisions are immediately front and center, yet the successor TMP may lack sufficient history in the matter or even the expertise to make these decisions. Another consideration is whether the successor TMP wants to bring in a new set of tax advi- sors? If so, will the partnership bear the cost of the replacement team? It should be anticipated that the suc- cessor TMP will want to be held harmless and indemnified with re- spect to all pending and prior tax matters affecting the partnership, as well as the prior years’ returns re- porting of partnership items. Again, there should be exceptions from
849–856 (“A fiduciary relationship is a situ- ation where one person reposes special trust in and reliance on the judgment of another or where a special duty exists on the part of one person to protect the interests of another. The managing member of an LLC “is vested with discretionary power to manage the business of the LLC” and “easily fits the definition of a fiduciary.”). Metro Ambulance, Inc. v. E. Med. Billing, Inc., 1995 WL 409015, at *2 (Del.Ch., July 5, 1995) (quoting Cheese Shop Int’l, Inc. v. Steele, 303 A.2d 689, 690 (Del.Ch.1973), rev’d on other grounds 311 A.2d 870 (Del.1973)).
A plain reading of section 18–1101(c) of the Delaware LLC Act is consistent with section
such indemnification for gross neg- ligence or fraud.
Confirmation of fiduciary duty.
While this is more problematic under the BBA, where the partner- ship representative may not be a partner in the partnership, generally the TMP will be under a fiduciary duty to perform his services under the applicable state law standard pertinent to fiduciaries of business entities. This includes a duty of loy- alty, good faith disclosure, etc.15
Contractual authority of the tax matters partner.
The partnership agreement should address the authority of the TMP to hire and discharge accountants, law- yers, experts, etc. in connection with the partnership returns, audits, ap- peals, and litigation involving tax matters. It should also consider whether such authority should be limited to a specific dollar amount for the calendar year or other pe- riod. For additional charges, ap- proval of a majority in interest of the partners may be required. Per- haps the TMP should have a budget for such expenditures approved in advance as part of an annual busi- ness plan. The duties and responsi- bilities of the TMP should be set out in a separate provision of the partnership agreement and should not be included as part of the duties
18 – 1104 and confirms that default fiduciary duties apply. Section 18 – 1101(c) states: “To the extent that, at law or in equity, a member or manager or other person has duties (including fiduciary duties) to a limited liability company or to another member or manager or to another person that is a party to or is otherwise bound by a limited liability company agreement, the member’s or manager’s or other person’s duties may be expanded or restricted or eliminated by provisions in the limited liability company agreement....”
See Hecker, Jr., “Fiduciary Duties in Busi- ness Entities Revisited,” 61 U. Kan. L. Rev. 923 (2013).
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