Page 9 - 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: 9 Color: 0c: Format: rls$prod:journal.fmtFree lead
required under Section 6223(g); and (e) all other information required to be delivered to the partners in ac- cordance with the terms of the part- nership agreement.
4. The TMP may not (or may), unless he first receives the neces- sary prior approval by appropriate written resolution of the partners in accordance with the agreed terms of the partnership agreement, (a) enter into a settlement with the IRS on any tax audit, appeal, or judicial proceeding; (b) file a petition for ju- dicial review of an FPAA pursuant to Section 6226; (c) intervene in any action brought by any other partner for judicial review of a final administrative adjustment; (d) file a request for an administrative adjust- ment with the IRS or file a petition for judicial review with respect to the request; (e) enter into an agree- ment to extend the statute of limita- tions for assessment of tax under Section 6229; or (f) take any other action on behalf of the partners or partnerships pertaining to any ad- ministrative or judicial proceeding to the extent allowed by the Code or regulations.
Drafting Partnership Agreements Under the New Consolidated Au- dit Rules
The new partnership audit rules are important not only for tax lawyers but for business lawyers and estate planners who undertake to advise
17 In August 2016, the Service issued tempo- rary regulations pertaining to elections to have the newly enacted audit procedures ap- ply with respect to certain tax years begin- ning before January 1, 2018. See TD 9780. The rules permit the election to be made before January 1, 2018, by partnerships that have received notices of selection for exami- nation of the partnership for that year. Such partnerships must make the election to have the new consolidated audit rules apply within 30 days of the date of notification. Where a partnership files an “early, elect-in” election in accordance with the temporary regulations,
76D*points, Next 120D, Vjust JCE2:1
clients on partnership agreements and further undertake the responsi- bility for negotiating and drafting such agreements.
The new rules generally go into effect in January 2018,17 however, currently drafted partnership agree- ments and LLC operating agree- ments should take the new audit rules into account. The current audit rules (the “TEFRA audit rules”) re- main in effect until 2018.18
Summary of the BBA’s New Partnership Consolidated Audit Rules
The BBA’s partnership audit provi- sions continue the rule that started with TEFRA that the Service con- ducts its tax audit at the partnership level. A core principle of the flow- through treatment of a partnership for federal income tax purposes is that it is not a taxable entity in comparison with a regular or C cor- poration. Instead, federal income tax with respect to taxable partnership income (and the allowance of a net operating or capital loss, subject to applicable limitations) is the liability of each partner, determined in ac- cordance with each partner’s distrib- utive share of that income. There- fore, under TEFRA, as has always been true under the Code, the as- sessment and collection of federal income tax occurs at the partner level.
The centralized audit rules con- tinue to impose a consistency re-
it is not permitted to elect out under the small partnership exception under Section 6221(b) for that return. Temp. Reg. 301.9100-22T(a) further provides that an election made not in accordance with these temporary regulations is not valid, and an election, once made, may be revoked only with the consent of the Service. In some in- stances, the elect-in now election will be treated as invalid where it frustrates the pur- poses of the BBA. A taxpayer cannot request an extension of time for making the election under Reg. 301.9100-3. An election will not
quirement. Each partner on its re- turn must treat each item of income, gain, loss, deduction, or credit at- tributable to a partnership consist- ently with how such item is treated on the partnership return.19 A re- sulting underpayment in tax from the failure of a partner to conform with the partnership’s reporting of tax items is treated as a mathemati- cal error and cannot be abated under Section 6213(b)(2). Nevertheless, a partner is permitted to file a state- ment identifying the inconsistent po- sition taken on its return from that of the partnership.20 A final deci- sion in an administrative or judicial proceeding with respect to a part- nership under the centralized system is binding on the partnership and all partners of the partnership.21 In contrast, a final determination in an administrative or judicial proceeding with respect to a partner’s identified inconsistent position is not binding on the partnership if the partnership is not a party to the proceeding.22
The most profound change in the BBA is in Section 6225, which now provides a default rule that in the event of adjustments made by the IRS in an audit that increase the partnership’s taxable income or re- duce the amount of a previously re- ported loss with respect to a re- viewed year, the partnership will be responsible for any resulting im- puted underpayment. The imputed underpayment, including additions to tax in the form of penalties that
be valid if it frustrates the purposes of sec- tion 1101 of the BBA (Temp. Reg. 301.9100-22T(a)).
18 Partnerships with ten or fewer partners often are not subject to the TEFRA audit rules. Section 6321(a)(1)(B) (exception for small partnerships).
19 Section 6222(a). References to Code sec- tions under the BBA are to the Code after 2017.
20 Section 6222(c). 21 Section 6223(b). 22 Section 6222(d).
9