Page 110 - The TEFRA Partnership Audit Rules Repeal:

ALI CLE Live Video Webcast / “The TEFRA Partnership Audit Rules Repeal: Partnership and Partner Impacts” June 7, 2016, Jerald David August and Terence Floyd Cuff
partnership should be able to continue using partnership accountants or partnership counsel from handling the audit, although perhaps this should be clarified in regulations.)
The partnership representative seems to be an extremely powerful person in the partnership audit. This suggests that the partnership agreement should be crafted carefully in order to control the power of the partnership representative. In certain instances, the partnership representative may in fact be confronted with one or several conflicts in interest. This could occur, for example, where a United States based manager of portfolios of funds for various investment partnerships, is designated as the partnership representative with respect to each such partnership. Assume the partnerships are under audit and the partnership representative settles certain partnerships out in a manner that is less favorable to other partnerships which he or it represents as well, can the partnership representative be contractually held harmless in the operating agreement from any resulting adverse outcome to one set of partners vis-à-vis another set? Certainly, fund managers will be asking for such “hold harmless” provisions.
Any adjustment to items of income, gain, loss, deduction, or credit of a partnership for a partnership taxable year, and any partner’s distributive share, are determined at the partnership level under the new regime.
The imputed underpayment that results is imposed on the partnership level (unless the partnership elects out or elects to push out adjustments) at highest individual or corporate rates for the adjustment year [the year in which the audit concludes] (the year in which the audit is closed, not the year under audit). This tends to punish the current partners for the tax sins of the prior partners. Having adjustments from the reviewed year [the year under audit] impact on the partnership (and indirectly on the current partners rather than the reviewed year partners) is a controversial aspect of the new audit rules.
The purpose of this collection mechanism presumably is to make it easier for the Internal Revenue Service to audit the partnership, to assess and to collect the tax liability. The Internal Revenue Service needs to pursue only one taxpayer under the new rules. The problem is that this may leave the Internal Revenue Service to pursue the wrong taxpayer. New partners may be left indirectly to bear the old tax burden of prior partners. Of course, it also is possible that the partnership will not have the assets to pay the tax liability,
partnership is not in effect, the Secretary may select any person as the partnership representative.
© Terence Floyd Cuff and Jerald David August, 2016
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