United States: Congress Enacts Entirely New Tax Examination And Collection Regime For Partnerships

A byproduct of the Bipartisan Budget Act of 2015 (the "Act") is a fundamental change to the rules by which partnerships, and entities that elect to be treated as partnerships for tax purposes (e.g. limited liability companies) (hereinafter jointly referred to as "partnerships"), interact with the Internal Revenue Service ("IRS") with respect to the tax examination, litigation, and collection process.  The Act repealed what was once known as the "TEFRA" partnership regime and replaced it with an entirely new set of rules.1  While the new regime has similarities to TEFRA, there are significant changes that will now require careful review and revisions to certain tax provisions of partnership agreements.  In light of the new legislation, partnerships and partners should now evaluate the current provisions of their partnership agreements and make fundamental changes to the tax procedure provisions.

Generally, the Act substantially changed (1) the ability of the IRS to collect an underpayment of tax, penalty, and interest from the partnership itself, (2) current partners' exposure to tax liabilities of prior partners, and (3) the powers entrusted in the partnership's designated liaison with the IRS (formerly known as the "tax matters partner").  Also, Congress provided the Treasury Department with broad regulatory authority to implement the goals of the statutory revisions.  Therefore, partnerships should pay attention to the issuance of new Treasury regulations in the coming months.2

Some of the statutory revisions that affect typical partnership agreements are as follows:

  1. New Tax Terms and Concepts:  The new regime repeals well-known TEFRA terms (e.g., "tax matters partner") and creates completely new legal terms and concepts including "partnership representative," "imputed underpayment," "reviewed year," and "adjustment year."3 To synchronize with the new Code requirements, these terms and concepts should be incorporated into partnership agreements.  Reviewing and revising the partnership agreements now will allow for an orderly process if and when the IRS examines a partnership tax return, makes tax adjustments, and/or requires payments of additional tax, penalties, and/or interest.  Furthermore, revisions to the partnership agreements will provide clarification of the rights and obligations of the partnership and the partners.
  1. Tax Underpayments To Be Collected from Partnership:  As under TEFRA, tax adjustments will continue to be made at the partnership level.4  However, unlike under TEFRA, unless a partnership is eligible to make an annual election and does in fact make the election, the tax attributable to an adjustment, and related interest and penalties, will be collected, subject to certain possible adjustments, at the partnership level.5

When the IRS makes a tax adjustment, the partnership's current partners (the "adjustment year" partners) will effectively pay the tax for the partners who were in place in the tax year for which the adjustment was made (the "reviewed year" partners).6  The tax to be paid is based on another new concept, a calculation called the "imputed underpayment."7  Generally, the imputed underpayment is calculated at the highest tax rate for the reviewed year.  This change in the law may require parties to consider or review indemnification provisions in the partnership agreement.

  1. Ways to Modify or Avoid Tax Collection at Partnership Level:  The "imputed underpayment" collection process can be avoided or modified in one of three ways.

Elect Out on Timely Filed Return:  First, if a partnership has no more than 100 partners and no partner is itself a partnership (or an entity that has elected to be treated as a partnership, like a limited liability company), then the partnership can make an annual "opt out" election on a timely filed tax return.8  To preserve this option, a partnership agreement could be amended to limit the number of partners to 100 and to restrict the ability of other partnerships to join the partnership as a partner.  If a partnership elects out of the new regime, the partnership and partners will be examined under the rules applicable to individual taxpayers.9

  1. "Reviewed Year" Partner Pays Tax With Current Year Individual Return: Second, within 45 days of receiving a notice of final partnership adjustment, any partnership, regardless of size, may elect out of the "imputed underpayment" process so long as it provides the IRS with "a statement of each partner's share of any adjustment to income, gain, loss, deduction, or credit (as determined in the notice of final partnership adjustment)."10 Under this procedure, "reviewed year" partners calculate their share of additional tax due based on the statement described above (i.e., like an amended Schedule K-1) and the "reviewed year" partners will pay the additional amount with their respective current year individual tax returns.11  An election under this provision, however, increases the applicable underpayment interest rate by two percentage points.12  The new statute requires fast action by the partnership (i.e., 45 days) to perform computations and send the proper notices.  Therefore, a procedure should be put in place to accomplish this procedural route.
  1. Modify "Imputed Underpayment" Where Reviewed Year Partner Files Amended Reviewed Year Tax Return: Third, a partnership can reduce the amount of the "imputed underpayment" if one or more of the "reviewed year" partners files an amended return and pays the tax attributable to the adjustment allocable to that partner.  To implement this, the partnership must submit information to the IRS sufficient to modify the "imputed underpayment" amount within 270 days of the notice of proposed adjustment.13  Verifying that an amended tax return has been filed by a reviewed year partner may raise certain privacy concerns.  A partnership thus may wish to establish a method that allows for the implementation of this alternative, rather than undergo the "imputed underpayment" procedure.
  1. Powerful New Partnership Representative: The Code now mandates that the partnership designate a "partnership representative" instead of a "tax matters partner."14 The "partnership representative" will "have sole authority to act on behalf of the partnership" and the "partnership and all partners shall be bound by actions taken ... by the partnership."15 Interestingly, this controlling entity need not be a partner in the partnership.  Furthermore, the new rule significantly curtails the ability of other partners to participate in an IRS examination or litigation with the IRS.  Therefore, partnership agreements may need to be adjusted to provide contract rights to other partners that once existed as a statutory matter under TEFRA.  For example, a partnership might consider whether the Partnership Representative has unbridled power to settle a case or extend the statute of limitations without approval from the other partners.  This new regime obviates the need of the IRS to "chase down" each and every partner to sign a Form 870-PT (Agreement for Partnership Items and Partnership Level Determinations as to Penalties, Additions to Tax, and Additional Amounts) or sign a Form 906 (Closing Agreement On Final Determination Covering Specific Matters) in order to implement an examination's adjustments or a settlement.  For present purposes, partnership agreements should be revised to reflect this new, critical designation.  If there is no partnership designated representative, the Code gives the IRS the authority to designate one.16  Certainly, partnerships and partners do not want to relinquish that selection right to the IRS.

These new rules apply to partnership tax years beginning after December 31, 2017.  However, a partnership may elect to have the new rules apply to partnership tax years beginning after the date of enactment and before January 1, 2018. 17  Given the many new legal terms and concepts, and the potentially significant shift of the benefits and burdens of post-adjustment tax items, existing partnerships and partners should review and modify their partnership agreements.  New partnership agreements should accommodate the new partnership tax audit and collection regime.

Footnotes

1  "TEFRA" stands for the "Tax Equity and Fiscal Responsibility Act of 1982," the statute that originally enacted the unified partnership examination provisions.

2  The Act also changed the statute of limitations for partnership assessments. Under the new law, the statute of limitations starts to run only when the partnership's tax return is filed and no longer takes into consideration the date of the filing of the individual partner's return.  Section 6235(a) of the Internal Revenue Code of 1986 as amended (26 U.S.C.) (the "Code").

3  Sections 6623(a), 6625(b), (d)(1), and (d)(2) of the Code.

4  Section 6621(a) of the Code.

Id. ("... any tax attributable thereto shall be assessed and collected ... at the partnership level pursuant to this subchapter.") (emphasis added).

6  Section 6225(a) of the Code.

7  Section 6225(b) of the Code.

8  Section 6221(b) of the Code.

9  Section 6225(d)(1) of the Code

10  Sections 6226(a)(1) and (2) of the Code.

11  Section 6226(b)(1) of the Code.

12  Section 6226(c)(2)(C) of the Code.

13  Section 6225(c)(6) of the Code.

14  Section 6223 of the Code.

15  Sections 6223(a) and (b) of the Code.

16  Section 6223(a) of the Code.

17  Section 6241(g)(4).

This article is designed to give general information on the developments covered, not to serve as legal advice related to specific situations or as a legal opinion. Counsel should be consulted for legal advice.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Rachel L. Partain
Similar Articles
Relevancy Powered by MondaqAI
Ostrow Reisin Berk & Abrams
Ropes & Gray LLP
Dickinson Wright PLLC
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Ostrow Reisin Berk & Abrams
Ropes & Gray LLP
Dickinson Wright PLLC
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions