Page 9 - Repeal of the TEFRA Entity Level Audit Rules Under the Bipartisan Budget Act of 2015

additional amounts that would be determined by imposing the failure to pay penalty under Code Sec. 6651(a)(2) as well as the accuracy-related and civil fraud penalties.
Judicial Review of FPAA Issued to Partnership
Code Sec. 6234 sets forth rules applicable to the judicial review of the final partnership adjustment. Under Code Sec. 6234(a), the partnership may file a petition for read- justment for such tax year (under review and set up for a proposed deficiency in tax in the FPAA) within 90 days after the date the FPAA is issued per Code Sec. 6231. Suit may be filed in the Tax Court, the district court of the United States for the district in which the partner- ship’s principal place of business is located or the Court of Federal Claims. Under Code Sec. 6234(b), a readjust- ment petition may be filed in a refund suit forum, such as the federal district court of Court of Federal Claims, only where the partnership filing the petition deposits the amount of the imputed underpayment with the IRS prior to or on the same day the petition is filed. The court may provide that the “full payment” rule notion embodied in Code Sec. 6234(b)(1) has been met where there is a good faith effort to meet this requirement and any shortfall of the required amount is timely correct. In a Title 11 bank- ruptcy proceeding, the 90-day period requirement will be suspended for the period during which the partnership is prohibited by reason of the case from filing a petition and for 60 days thereafter. The reviewing court has jurisdiction over all tax items of the partnership for the partnership tax year to which the FPAA relates, the proper allocation of such items among the partners, and the imposition of any penalty, addition to tax or additional amount for which the partnership may be liable.41
Election Out for Certain Partnerships
As mentioned above, under new Code Sec. 6221(b), an eligible partnership, by filing an annual election, may opt out of the partnership level assessment procedure based on the amount of the “imputed underpayment.” The partnership must have 100 or fewer partners for such tax year and must furnish to each partner a copy of such election.42 Each of the partners must be an individual, a C corporation, any foreign entity that would be treated as a C corporation if it were organized in the United States, an S corporation or an estate of a deceased partner.43 The
election must be made on a timely filed return for the tax year and must include a disclosure of the name and tax- payer identification number with respect to each partner of the partnership.44 It is noted that the IRS may provide alternative rules with respect to foreign partners and S corporations, etc. At this time, however, it appears that a lower-tier partnership, as well as a single member LLC or grantor trust may not be able to make the election out on the technical ground that it disqualifies the partnership from making the election.45
If the election-out of a particular year meets all eligibility and notice requirements, then the audit function applies solely at the partner level. In many instances it should be expected that partnerships eligible to elect out will do so and such election out will be required in the entity’s operating agreement. Will the regulations preclude, per se, any partner from participating in a judicial proceeding involving the partnership adjustment amount? Presumably a partner should be able to participate under a partner payment approach under Code Sec. 6226(b). From a drafting standpoint, much thought and consideration must be given to the selection, removal, duties and actions that pertain to the partnership representative. The partner- ship representative does not have to be a partner. Is this preferable? Should the accounting firm that prepares and files the Form 1065 serve as the partnership representa- tive? That may be one big hat that is too large to put on the partnership taxation Technical Resource Panel (TRP).
Effect on Dispositions of Partnership Interests
The new rules of course pose challenges to those seeking to acquire or purchase partnership interests. Indeed, there is a new exposure associated with prior years’ underre- porting of income, overreporting of expense or allowable credits, etc. Moreover, for reallocations of income, such as Code Sec. 704(c) built-in gain that was underreported for a prior year, the new rules do not require a matching offset. This can result in an overall set of adjustments that imposes federal income tax in excess of 100 percent of the partnerships’ tax income for the specific years involved, i.e., years reviewed and years of adjustment.
Areas for Required Guidance
While there are several provisions contained in the new provisions which specifically call for the issuance of guid- ance, such as Code Sec. 6225(c) which authorizes the IRS to establish additional procedures to modify the imputed
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