Page 128 - 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
ii. Trusts as eligible to be part of an “election out” of the consolidated audit rules.
The GENERAL EXPLANATION OF TAX LEGISLATION ENACTED IN 2015 (JCS-1-16, March 2016) suggests that a trust, including a grantor trust, will not qualify a qualifying partner under the election out rules, except as regulations may provide. Were the regulations to permit this expansion of the statute, the partnership must include (in the manner prescribed by the Secretary) a disclosure of the name and taxpayer identification number of the trustee, each person who is or is deemed to be an owner of the trust, and any other person that the Secretary determines to be necessary and appropriate, and each one of such persons is taken into account as if each were a statement recipient in determining whether the 100-or-fewer-statements criterion is met. Similar guidance may be provided with respect to a partnership with a partner that is a grantor trust, a former grantor trust that continues in existence for the two- year period following the death of the deemed owner, or a trust receiving property from a decedent’s estate for a two-year period.
A non-grantor trust is not permitted to qualify under the statutory language under Section 6221(b)(1)(C) and was not a permitted partner under the current law’s small partnership exception under Section 6231(a)(1)(B)(i) (“the term ‘partnership’ shall not include any partnership having 10 or fewer partners each of whom is an individual (other than a nonresident alien), a C corporation, or an estate of a deceased partner. For purposes of the preceding sentence, a husband and wife (and their estates) shall be treated as 1 partner”). 63 If any partner in a partnership is a “pass thru partner,” then the small partnership exception could not apply regardless of whether there were 10 or fewer ultimate partners. Under the TEFRA regime, a “pass thru” partner includes a partnership, estate, trust, S corporation, nominee, or other similar person through whom other persons hold an interest in the partnership. 64
iii. S Corporations as partners in a partnership seeking to elect-out of the consolidated audit regime.
Special rules are provided for partners that are S corporations. The rules essentially look through to S corporation partners to their shareholders in counting K-1 partners.
A partnership may have a partner that is an S corporation. The partnership may desire to elect out of the partnership audit regime. The
63 Note, however, that under the small partnership exception the partnership could elect application of the TEFRA audit rules.
64 Treas. Reg. § 301.6231(a)(1)-1(a)(2).
© Terence Floyd Cuff and Jerald David August, 2016
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