By Jaye Calhoun
It’s time to amend the governing documents of flow-through entities taxed as partnerships to address recent federal legislative changes impacting all such entities. Failure to amend now could result in unfavorable tax consequences. Section 1101 of The Bipartisan Budget Act of 2015 (the “BBA”) substantially changes how the Internal Revenue Service may conduct audits of flow through entities taxed as partnerships. Due to the increased popularity of limited liability companies, most taxed as partnerships, the Internal Revenue Service has been chafing under the relatively restrictive rules governing audits found in the Tax Equity and Fiscal Responsibility Act of 1982 (“TEFRA”). The BBA eliminates many of the provisions of TEFRA that made IRS’ job of policing compliance by partnerships with the tax laws more difficult and replaces them with new centralized partnership audit rules, effective for returns filed for partnership tax years beginning after Dec. 31, 2017. In order to implement the new rules, IRS has re-released proposed regulations on June 13, 2017 and has invited comments in anticipation of a hearing on the proposed regulations currently scheduled for September 18, 2017. The proposed regulations were initially released on January 18, 2017, but were withdrawn on January 20, 2017 in light of the Trump Administration’s freeze on all new and proposed federal rule making.
As a result of BBA, and as fleshed out in the proposed regulations, the new partnership audit rules provide that, among other things:
- Out with the TMP and in with the PR – There is no longer a “tax matters partner/member,” but, instead, partnerships must designate a “partnership representative,” who will have the sole authority to act on behalf of the partnership (including, under certain circumstances, to decide which partners will pay any deficiency) and who is not required to be a partner. If the partnership fails to designate the partnership representative, the IRS will designate a partnership representative for it.
- Partnership Itself May be the Taxpayer – Unless certain partnerships makes an election to “push out” additional taxes owed as a result of an audit to the audited (“reviewed”) year partners, such additional taxes will now be paid by the partnership;
- Annual Election Out Available to Certain Partnerships – The new rules apply to all partnerships except for those that are both qualified to “elect out” (generally partnerships with under 100 partners, none of which can be a disregarded entity or another partnership), and which make an annual election that the new rules do not apply.
The significant changes brought about by the BBA and the proposed regulations (likely to become final in substantially similar form) require substantive amendments to governing documents of all entities taxed as partnerships to address these issues and others. Of note, Louisiana does not currently tax partnerships, as partnerships, and will have to adopt rules to adapt to the federal changes. In the meantime, the January 1, 2018 effective date of the BBA is approaching. Thus, the time for providing notice and counsel to your clients is quickly running out.
- This article originally appeared in the New Orleans Bar Associations Tax Law Committee Blog.