Page 8 - Partnership Audit Rules - Drafting Partnership Agreements: The New Partnership Representative And The Outgoing Tax Matters Partner

Datalogics Unix Job 1 dyanes/0/8310 5-JUL-17 14:35
Style: /opus/environments/proda/edsys/pager/style/journal.bst File: /tigredata/tigredata01/jct/jct_283951.txt
Seq: 8 Color: 0c: Format: rls$prod:journal.fmtFree lead
and responsibilities of the general partners or managers.
Should the TMP be the tax re- turn preparer or tax advisor for the partnership?
There are various views on this sub- ject. Some may feel that the one most knowledgeable about the tax return filings and reporting positions of the partnership, i.e., the CPA who signed the partnership return as preparer, is best able to represent the partnership and should serve as the TMP . Others may disagree, sometimes because of potential con- flicts of interest. Perhaps a bigger problem may be a situation in which the tax return preparer’s rep- resentation of one or more of the partners may cloud his perspective in favor of his clients who are part- ners. Other partners may feel there may be an appearance of bias. Note again, that if a non-member is se- lected, the LLC must be a manager and hopefully the government would respect such status. Other- wise, if a limited partnership, a gen- eral partner, which can be an entity as well as an individual, must be se- lected. Then there are technical is- sues such as attorney-client privi- lege to consider, especially in a delicate audit or where litigation is anticipated. Overall, the more con- servative route may be for a part- nership committee to oversee the acts and decisions of the TMP, ex- ercising authority over the TMP where prior approval is needed in order for the TMP to take decisive action on an issue, a settlement, an appeal, a waiver of the statute of limitations, or the conduct of litiga- tion.
Therefore, in general, it will be difficult for a CPA who is not a member of an LLC or general part-
16 See Section 6224(c)(3)(B).
38D*points, Next 120D, Vjust JCE1:1
ner in a partnership to serve as the TMP.
Selection of judicial forum to challenge partnership adjust- ments.
In many instances the partnership may prefer to challenge a proposed set of deficiencies in tax against the partners (for the reviewed years, of course, since this is pre-BBA) in the U.S. Tax Court, since full payment of the amount in dispute is not re- quired. The benefit to filing a tax refund suit may be the selection of a more favorable forum. It may be desirable to have a jury hear the case in the federal district court where venue lies, but the Court of Federal Claims may be even more attractive because neither side may ask for a jury and the court is not overwhelmed by a docket full of tax cases, as is the Tax Court. There may be more favorable precedent in the Federal Circuit Court of Ap- peals, which tends to favor a refund suit filed in the Court of Federal Claims.
There is also the issue of prece- dent in the appeals court to which an appeal from the trial court would lie. The problem with refund litiga- tion is the Flora rule, requiring full payment of the amount in issue as a jurisdictional requirement. Does the partnership have a reserve in place for such purpose? If not, should the TMP unilaterally decide to have the partners pay the full payment re- quirement? What if some partners refuse? Since refund litigation may be difficult, should the partnership agreement require the TMP to take any federal tax dispute to the Tax Court unless there is a super-major- ity of partners who, after receiving
counsel, decide to embark on refund litigation.
Prior approval for the TMP’s taking affirmative actions.
It obviously protects the partners in the partnership to require prior no- tice and even approval before the TMP takes certain acts. A breach of a prior approval provision could re- sult in the loss of contractual pro- tection, as well as a reduction in compensation, to the TMP. So care- ful consideration should be given to drafting specific provisions in the partnership agreement requiring prior approvals. Points to consider include:
1. The TMP may not enter into a settlement with the IRS on a tax audit, based on a schedule of adjust- ments, without first notifying all partners of the proposed adjustments and receiving the consent of a ma- jority (or super-majority) of the partners, based on percentage own- ership interest, to agree to the settle- ment.
2. As part of considering item 1, the agreement could restrict any partner other than the TMP from entering into a settlement with re- spect to partnership items. This pro- vision could be made expressly sub- ject to item 1, which requires prior approval or, alternatively, the agree- ment may provide the TMP with the express authority to enter into settle- ment agreements.16
3. The TMP must notify all partners within the required number of days of: (a) receipt of a notice of proposed adjustment (“NOP A”) from the IRS for the commence- ment of an audit of the partnership; (b) receipt of an FP A A from the IRS in accordance with Section 6223; (c) the partnership’s filing of a petition for judicial review of any FPAA; (d) any and all information
analysis from the
partnership’ s
tax
8
Corporate Taxation