Page 78 - 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
The prior TEFRA audit rules dealt with the problems created by having to audit partnerships at the partnership level. Prior to the TEFRA rules, all partnership audits were conducted at the partner level as audits of partners. The Internal Revenue Service determined that this was an unsatisfactory method to audit partnerships. The TEFRA rules provided for a consolidated audit at the partnership level in which partnership issues would be determined. Nonpartnership issues still would be determined at the partner level.8 Generally, TEFRA audit rules apply to a partnership with 11 or more partners at any one time during the partnership’s tax year. Many partnerships
Check Sheet; BNA Tax Management Portfolios Audit Procedures for Pass-Through Entities (No. 624-1st); Internal Revenue Service, Office of Chief Counsel, TEFRA Update 1998, Tax Equity and Fiscal Responsibility Act, Document 10808 (4-98). Last fall members of both tax-writing committees of Congress negotiated the BBA, including the new partnership audit rules which is scored as a revenue raiser. The BBA was styled along the lines of the Camp proposal.
Under Section 1101 of the Bipartisan Budget Act of 2015:
SEC. 11 01. PARTNERSHIP AUDITS AND ADJUSTMENTS.
(a) REPEAL OF TEFRA PARTNERSHIP AUDIT RULES. – Chapter 63 of the
Internal Revenue Code of 1986 is amended by striking subchapter C (and by striking the item relating to such subchapter in the table of subchapters for such chapter).
(b) REPEAL OF ELECTING LARGE PARTNERSHIP RULES. –
(1) IN GENERAL. – Subchapter K of chapter 1 of such Code is amended by striking part IV (and by striking the item relating to such part in the table
of parts for such subchapter).
(2) ASSESSMENT RULES RELATING TO ELECTING LARGE
PARTNERSHIPS. – Chapter 63 of such Code is amended by striking subchapter D (and by striking the item relating to such subchapter in the table of subchapters for such chapter).
8 Certain investment entities, joint extraction, or production arrangements that are joint
undertakings for profit under may still elect “out” of partnership status in accordance with the regulations to Section 761, in which case such enterprise is also not treated as a partnership under the TEFRA audit rules. Treas. Reg. § 1.761-2. See I.R.C. § 7701(a)(2); Powell v. Commissioner, 26 T.C.M. 161 (1967); Rev. Rul. 68-344, 1968-1 C.B. 569. But see Bentex Oil Corp. v. Commissioner, 20 T.C. 565 (1953); Madison Gas & Electric Co. v. Commissioner, 633 F.2d 512 (7th Cir. 1980). The regulations describe an “investing partnership” that may “elect out” of partnership status as one in which: (1) The partners own the property as co-owners (2) Each owner reserves the right to separately take or dispose of their shares of any property acquired or retained; (3) the owners do not actively conduct business or irrevocably authorize some person or persons acting in a representative capacity to purchase, sell, or exchange such investment property, although each separate participant may delegate authority to purchase, sell, or exchange his share of any such investment property for a period of up to one year. Under Treas. Reg. § 1.761-2(a)(3), a group may elect out of Subchapter K where the participants enter into an operating agreement for the joint production, extraction, or use of property in which: (1) the participants own the property as co-owners, either in fee or under lease or other form of contract granting exclusive operating rights; (2) the participants reserve the right separately to take in kind or dispose of their shares of any property produced, extracted, or used; and (3) the participants do not jointly sell services or the property produced or extracted. The election-out mechanics are contained in Treas. Reg. §1.761-2(b). The election out would also negate application of the entity-level audit rules under TEFRA and presumably under the BBA, subject to the issuance of regulations.
© Terence Floyd Cuff and Jerald David August, 2016
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