The New Partnership Audit Rules: The Beginning of a New Era

Transcription

1 The New Partnership Audit Rules: The Beginning f a New Era State Bar f Texas Annual Advanced Tax Law Curse August 17-18, 2017 Lee Meyercrd, Thmpsn & Knight August 18, 2017

2 Overview Backgrund Hw did we get here? Overview f the New Partnership Audit Rules Audits Scpe f the Audit Partnership Representative (Designatin, Resignatin and Revcatins) Ntice and Participatin Rights f Partners Statute f Limitatins 2

3 Overview Assessment and Payment Calculatin f the Imputed Underpayment Mdificatins f the Imputed Underpayment Push-Out Electin Partnership Fails t Pay Planning Cnsideratins Electin In Electin Out Drafting Cnsideratins 3

4 Hw did we get here? The Challenges Befre TEFRA Pre-TEFRA Audits were cnducted at the partner-level; if the IRS wanted t adjust a partnership item, IRS had t audit each partner individually Created duplicatin f effrts Led t incnsistencies in hw partners were treated 4

5 Hw did we get here? The Challenges f TEFRA TEFRA Enacted in 1982 t address incnsistent partner treatment and inefficiencies f partner-level audits by allwing the IRS t audit partnership items at the partnership level. Tw Prblems with TEFRA: Prcedures are administratively cmplex. Tax Curt described the TEFRA rules as distressingly cmplex and cnfusing. Tax is assessed and cllected at the partner level. In cmplex tieredentity structures, it is time cnsuming and difficult fr the IRS t identify and assess the tax frm the ultimate tax-paying partners. 5

6 Hw did we get here? The Challenges f TEFRA 6

7 Bipartisan Budget Act f 2015 ( BBA ): Overview Audits and Litigatin: Requires partnership-level reslutin f all items f partnership incme, deductin, gain, lss r credit (like TEFRA). Assessment and Cllectin. Default rule is that the partnership is assessed tax n the imputed underpayment in the year the adjustments are finally determined (the adjustment year). Partnership is generally assessed tax at the highest rate applicable t individuals, althugh the imputed underpayment may be mdified t sme extent t reflect the tax psitins f the reviewed-year partners. The imputed underpayment is reduced t the extent reviewed-year partners file amended returns and pay the tax. Partnership can elect t push-ut the adjustments t the reviewed-year partners. Simplified Administrative Prcedures. Replaced tax matters partner with partnership representative and eliminated partner ntice and participatin rights. 7

8 BBA: Overview Effective fr tax years beginning after 2017 (althugh partnerships may elect t have entity-level assessments apply earlier) New rules are expected t increase partnership audit rates and the related tax assessments. Jint Cmmittee n Taxatin estimates the net revenue effect is $9.325 billin f additinal revenue ver 8 years. 8

9 BBA: Overview BBA had many deficiencies and pen issues regarding administratin f the new rules. PATH Act f 2015 included a few crrectins and clarificatins. Tax Technical Crrectins Act f 2016 was intrduced in December 2016 wuld have addressed sme f the pen issues. Status is unclear. Prpsed Regulatins IRS released a 277 page Ntice f Prpsed Rulemaking n January 18, 2017 Withdrawn n January 20, 2017 as a result f the regulatry freeze Released again n June 13, 2017 with very few changes 9

10 Scpe f the Partnership Audit Under the statute, the partnership audit applies t items f incme, gain, lss, deductin, r credit f a partnership a partner s distributive share theref, and any penalties r additins t tax that relate t an adjustment f such an item. Statute appeared t be mre narrw than TEFRA s scpe that applied t partnership items. 10

11 Scpe f the Partnership Audit Prpsed Regulatins bradly define the scpe f a partnership prceeding t include all items and infrmatin related t r derived frm the partnership including: Cntributins t and distributins frm the partnership Transactins between a partnership and a partner (e.g. a disguised sale) Items relating t partnership terminatins and partners capital accunts Whether a persn is a partner and whether a partnership exists Partnership-level prceeding des nt apply t taxes impsed by ther chapters (e.g., self-emplyment taxes and net investment incme taxes) althugh partnership adjustments are taken int accunt t determine these taxes. 11

12 Scpe f the Partnership Audit Practice Tip: The brad scpe f the partnership prceeding means that certain defenses that are specific t partners (such as in the cntext f a disguised sale by the partner t the partnership r penalty defenses) will need t be raised in the partnership prceeding. Hwever, nly the partnership representative is entitled t participate in the partnership prceeding. Partners may want t prvide in the partnership agreement that the partnership representative will cnsult with the partners t identify any defenses and raise such defenses in the partnership prceeding. 12

13 Partnership Representative BBA replaces the tax matters partner in TEFRA with the partnership representative The partnership representative has the sle authrity t act n behalf f the partnership and binds bth current and frmer and direct and indirect partners Includes the authrity t extend the statute f limitatins, enter int a settlement, agree t partnership adjustments and make an electin t push-ut the adjustments t the reviewed-year partners Authrity may nt be limited by state law r agreement (including the partnership agreement) 13

14 Wh can be the Partnership Representative? In rder t be the partnership representative, the persn must have (1) a substantial presence in the United States; and (2) the capacity t act. Unlike TEFRA, the partnership representative des nt have t be a partner. A persn has a substantial presence in the United States if the persn: can meet in persn with the IRS at a reasnable time and place; has a U.S. street address and telephne number; and has a U.S. taxpayer identificatin number. If the partnership representative is an entity, the partnership must identify an individual that can act n the entity s behalf that satisfies the eligibility requirements. Nte: Actins taken by an ineligible partnership representative are valid and designatin remains in effect until terminated (by resignatin, revcatin r IRS determinatin). 14

15 Designating the Partnership Representative Partnership designates the partnership representative n its return each year. This means that in a multi-year audit the partnership may have a different partnership representative fr each year under audit. Partnership cannt change the partnership representative until the IRS issues a ntice f administrative prceeding r the partnership files an AAR. Avids unnecessary paperwrk t prcess changes that have n impact because the partnership is nt under audit. 15

16 Resignatin f the Partnership Representative Partnership representative may resign by ntifying the partnership and the IRS in writing (after the ntice f administrative prceeding is issued). The resigning partnership representative may designate a successr, but is nt required t in rder fr the resignatin t be effective. If the partnership representative des nt designate a successr, the partnership has 30 days t designate a successr r the IRS will designate ne. 16

17 Revcatin f the Partnership Representative Partnership can revke a designatin f the partnership representative. This is an exceptin t the general rule that the partnership representative has the sle authrity t act n behalf f the partnership. The revcatin must be signed by a general partner fr the year in which the designatin was in effect (i.e., the reviewed year). If each general partner eligible t sign is n lnger a partner r lacks the capacity t act, anther partner may sign. Revcatin must include a statement under penalties f perjury that the partner is authrized by the partnership t revke the designatin. Partnership must designate a successr in rder fr the revcatin t be effective. 17

18 IRS Designatin f the Partnership Representative IRS may select any persn t serve as the Partnership Representative and will cnsider the fllwing factrs: Whether there is a suitable partner fr the reviewed year r the time the designatin is made The views f the partners having a majrity interest General knwledge f tax matters and the partnership s administrative peratins Access t the partnership s bks and recrds Whether the persn is a U.S. persn Once designated, the partnership cannt revke the designatin withut the IRS s cnsent. 18

19 Audit - Ntice f Partnership Prceedings IRS must mail t the partnership and partnership representative: Ntice f selectin fr examinatin Electin in must be made within 30 days f receipt Ntice f any administrative prceeding (NBAP) initiated at the partnership level Ntice f any prpsed partnership adjustment (NOPPA) If the IRS des nt issue a NOPPA, it may nt issue an FPA and it may nt make any assessments. The IRS may rescind a NOPPA with the partnership s cnsent. 19

20 Audit - Ntice f Partnership Prceedings IRS must mail t the partnership and partnership representative: Ntice f any final partnership adjustment (FPA) IRS must wait 270 days after the NOPPA (r lnger, if perid extended) t see if partnership submits a request t mdify the imputed underpayment : If nt, the FPA is issued in the next 60 days (r up t three years after partnership return is due r filed, whichever is later) If s, the FPA is issued in the next 270 days (r up t three years after partnership return is due r filed, whichever is later) If an FPA is issued, the limitatins perid is suspended during the 90-day perid in which the partnership may file a petitin fr judicial review, and if filed, until the curt decisin becmes final, plus ne year. 20

21 Statutes f Limitatins Only partnership-level statute f limitatins relevant A partner s statute f limitatins is n lnger taken int accunt, unless the partnership elects ut f the new rules Except partners may nt file an amended return t pay tax and reduce the imputed underpayment unless partner statute f limitatins fr assessments is pen Unanswered Questin: Is the IRS able t pen the statute f limitatins by issuing a NOPPA? 21

22 Audit - Partner Participatin Rights Unlike under TEFRA, partners d nt have the right t participate in the prceedings r receive ntice f the prceedings frm the IRS. All partners are bund by a final reslutin in the partnership prceeding. 22

23 Imputed Underpayment Cmputatin Step 1 Grup Adjustments: Adjustments placed in ne f fur grupings Reallcatin Credit Residual Creditable Expenditures (Reserved) Residual gruping further put int subgrupings based n character, etc. s items f different character are nt netted Step 2 Net Grups and Subgrups: Items in same grup r subgrup are netted (except that ffsetting amunts in reallcatin grup are nt netted). Net psitive amunts aggregated. Net Nn-Psitive Amunt (i.e., taxpayer favrable adjustment) in residual r reallcatin grup is NOT an imputed underpayment. Taken int accunt in the adjustment year as a decrease in incme r an increase in lss Step 3 Cmpute Imputed Underpayment (Multiply by Highest Tax Rate and Apply Credits): Multiply aggregated amunt by highest tax rate fr reviewed year and apply credits. This is the imputed underpayment. 23

24 Imputed Underpayment Cmputatin Prp. Reg (f) Example 2: Original Return As Adjusted Amunt f Adjustment Ordinary Incme $300 $500 $200 Depreciatin Deductin ($100) ($70) $30 Subttal Ordinary Subgrup $230 Lng-Term Capital Gain $125 $200 $75 Lng-Term Capital Lss ($75) ($25) $50 Subttal Lng-Term Capital Subgrup $125 Ttal Aggregate Net-Psitive Adjustments $355 Tax Credit $5 $3 $2 Step 1: Grup adjustments. Ordinary incme and depreciatin deductin in ne subgrup LTCG and LTCL in a separate subgrup Tax credit Step 2: Net subgrups. Aggregate net psitive adjustments. Step 3: Cmpute Imputed Underpayment ($355 x 40% = $142 + $2 credit = $144) 24

25 Imputed Underpayment Cmputatin Net Nn-Psitive (Taxpayer Favrable) Adjustment Original Return As Adjusted Amunt f Adjustment Ordinary Incme $300 $100 ($200) Depreciatin Deductin ($100) ($70) $30 Subttal Ordinary Subgrup ($170) Lng-Term Capital Gain $125 $200 $75 Lng-Term Capital Lss ($75) ($25) $50 Subttal Lng-Term Capital Subgrup $125 Ttal Aggregate Net-Psitive Adjustments $125 Step 1: Grup adjustments. Ordinary incme and depreciatin deductin in ne subgrup LTCG and LTCL in a separate subgrup Step 2: Net subgrups Ordinary: ($170) Net nn-psitive (taxpayer favrable) adjustment that des nt result in an imputed underpayment. Reduces incme in adjustment year. Capital: $125 Step 3: Cmpute Imputed Underpayment ($125 x 40% = $50) 25

26 Imputed Underpayment Cmputatin Reallcatin IRS determines $30 f rdinary incme and $70 f depreciatin allcated t B shuld have been allcated t A. The partnership adjustment is a net $40 increase allcated t B and a crrespnding $40 decrease allcated t A. A B Original Return $0 ($40) As Adjusted ($40) $0 Amunt f Adjustment ($40) $40 Step 1: Grup adjustments reallcatin grup. Step 2: D nt net ffsetting amunts because in reallcatin grup. $40 net decrease f incme t A is a net nn-psitive amunt (taxpayer favrable) and therefre nt an imputed underpayment. Taken int accunt in adjustment year by partnership and allcated t A r successr t A s interest (r, if n successr, amng adjustment year partners per distributive shares) $40 net increase t B is the ttal netted partnership adjustment. Step 3: Cmpute Imputed Underpayment ($40 x 40% = $16) 26

27 Imputed Underpayment Cmputatin Multiple Imputed Underpayments IRS may designate, in its discretin, a single r multiple imputed underpayment(s) with respect t a partner r varius partners Decisin is based n the nature f the partnership adjustments IRS may decline t designate multiple imputed underpayments if result is an increase in net nn-psitive (taxpayer favrable) adjustments If multiple imputed underpayments designated by the IRS, the partnership may separately elect t push ut each imputed underpayment Partnerships may request that the IRS create multiple imputed underpayments, but the IRS is nt required t d s Example: IRS determines Partner A s cntributin f prperty t the partnership in the reviewed year was a disguised sale. IRS may designate the adjustments relating t the disguised sale as ne imputed underpayment and the remaining adjustments as a separate imputed underpayment. The partnership can elect t push ut ne, bth r neither f the imputed underpayments. 27

28 Mdificatin f Imputed Underpayment Types f Mdificatin Seven Types f Mdificatins that the IRS will Cnsider: 1. Amended Return 2. Tax-Exempt Partner 3. Rate Mdificatin (Crprate r individual partner) 4. Passive Lsses f PTPs 5. Multiple Imputed Underpayments (requests regarding the number and cmpsitin f imputed underpayments) 6. RIC r REIT Deficiency Dividend 7. Clsing Agreement The IRS als allws a partnership t request a mdificatin nt listed abve. IRS apprval required. Nte: Partnership representative may prvide infrmatin t the IRS t reduce the imputed underpayment during the audit, but after the NOPPA is issued, the frmal mdificatin prcedures and timelines apply 270 days unless extended r waived. 28

29 Mdificatin f Imputed Underpayment Amended Returns (Reviewed-Year Partners) Partners wh were partners during the reviewed year file amended returns taking int accunt their distributive share f partnership adjustments and pay the applicable tax. Partner must file amended returns fr all years with respect t which any tax attribute is affected by the adjustments and pay any tax due. Partnership reduces the imputed underpayment by the tax attributable t the partners wh filed amended returns. Reductin in imputed underpayment is based n the partners distributive shares f partnership adjustments. 29

30 Mdificatin f Imputed Underpayment Amended Returns Prpsed Regulatins T file an amended return t pay tax, partner s statute f limitatins fr assessments must be pen. If nt, cannt file an amended return but ther mdificatin alternatives are still available (e.g., a clsing agreement). Partner can file amended returns fr refunds relating t partnership adjustments at anytime. Partnership representative must prvide affidavits frm each partner that partner filed amended returns and paid tax due. After filing amended return, partner cannt file additinal amended returns with respect t partnership adjustments unless partner receives IRS permissin. In a reallcatin adjustment, all partners affected must file amended returns unless partner takes the relevant adjustment int accunt by sme ther type f mdificatin. 30

31 Mdificatin f Imputed Underpayment Amended Returns Prpsed Regulatins Pass-Thru Partners. A pass-thrugh partner may file an amended return taking int accunt the adjustments and pay tax using the tax rate determined by substituting the ttal net incme f the partner fr the taxable year (as adjusted) fr taxable incme in 1(c). Indirect Partners. Indirect partners can file amended returns. Open Issue: Can a partner that hlds its partnership interest thrugh a disregarded entity file an amended return? 31

32 Mdificatin f Imputed Underpayment Amended Returns Technical Crrectins Amended return prcedure is nt available t indirect partners (per Jint Cmmittee Technical Explanatin) Prpsed Regulatins allw indirect partners t file amended returns In the case f a reallcatin adjustment, all partners affected must file amended returns. Prpsed Regulatins allw ther types f mdificatins 32

33 Mdificatin f Imputed Underpayment Mdificatin Requests and Submissin f Dcuments and Evidence Wh? Only the partnership representative may request a mdificatin and the mdificatin must be apprved by the IRS When? Within 270 days f the NOPPA 270-day perid can be extended by agreement 270-day perid can be waived by agreement f the parties (e.g., if partnership wants t litigate the adjustments) 33

34 Mdificatin f Imputed Underpayment Mdificatin Requests and Submissin f Dcuments and Evidence Hw? IRS may set frth prcedures in frms and instructins t request and substantiate a mdificatin Partnership must substantiate mdificatins t satisfactin f IRS Partnership representative must prvide detailed descriptin f the structure, allcatins, wnership and wnership changes, and partners (including any indirect partners, if relevant) Dcuments and infrmatin based n facts and circumstances and type f mdificatin requested Necessary dcuments and infrmatin may include tax returns, partnership perating dcuments, certificatins 34

35 Mdificatin f Imputed Underpayment Example Multiple Mdificatins (Amended Return and Tax-Exempt Entity) D Crpratin 50% B Partnership 50% C Tax-Exempt Entity 50% Partnership $100 x 40% = $40 E Crpratin A LLC (DRE) 50% NOPPA shws $100 increase in rdinary incme resulting in $40 imputed underpayment. Partnership can submit evidence that C wns an indirect 25% interest in Partnership and is a tax-exempt entity. N tax n C s $25 share, reducing imputed underpayment t $30. Can D als file an amended return reprting D s $25 share? Prpsed regulatins: Yes Technical Crrectins: N A cannt file an amended return reprting A s share because A is a disregarded entity. Open issue whether E can file an amended return since A is nt a pass-thrugh partner. B can file an amended return reprting B s share. 35

36 Mdificatin f Imputed Underpayment Example Rate Mdificatin (Capital Gains) C Crpratin 50% A 25% B S Crpratin 25% NOPPA shws $100 increase in lng-term capital gain resulting in $40 imputed underpayment. Partnership can submit evidence t reduce the imputed underpayment as fllws: C s share = $50 x 35% = $17.50 Partnership A s share = $25 x 20% = $5 B s share = $25 x 20% = $5 $100 x 40% = $40 Ttal tax burden reduced frm $40 t $

37 Assessment and Payment After the mdificatin prcess, IRS will issue a FPA. Default rule The partnership pays the tax. This means current-year partners bear the ecnmic burden fr the tax, nt reviewed-year partners. Partnership can make a push-ut electin t push-ut the adjustments t the reviewed-year partners. 37

38 The Push-Out Electin Partnership must furnish statements (equivalent f amended K-1s) t reviewed-year partners. A reviewed-year partner pays the tax n its reprting-year return which is the year in which it receives the statement frm the partnership reflecting the adjustments. Example: If a partnership makes a push-ut electin and prperly furnishes statements t its partners n August 1, 2020, an individual partner wuld pay the tax n the adjustments n his r her 2020 return due April 15, Tax is the amunt that wuld have been paid if the adjustments had been crrectly reprted initially less the amunt actually paid. Adjustments include the audit year and any intervening year with tax attributes affected by the audit year. Cst f the electin is that partner must pay ht interest n the underpayment (federal shrt-term rate plus five percentage pints). 38

39 The Push-Out Electin Timing f Electin. Partnership must make the electin within 45 days f the date the FPA was mailed. Statement must be attached t the FPA and include the name, address and TIN f the partnership, audit year, imputed underpayment, and each reviewed-year partner s name, address and TIN. Under BBA it was unclear whether a partnership that makes a push-ut electin culd still seek judicial review. Prpsed Regulatins clarify that the push-ut electin des nt impact partnership s ability t challenge FPA in Tax Curt. Example: If the FPA is mailed June 1 the push-ut electin must be made by July 16 and the petitin must be filed in Tax Curt by August 30. The partnership will have t furnish the statements n r befre 60 days after the curt decisin becmes final. If the partnership des nt want the push-ut electin t apply after the cnclusin f the curt prceeding, the partnership can request IRS cnsent t revke the electin. 39

40 The Push-Out Electin Statements Furnished t Reviewed-Year Partners In rder fr the push-ut electin t be valid, the partnership must prperly furnish statements (equivalent f amended K-1s) t the reviewed-year partners reflecting their share f partnership adjustments Statements must be furnished within 60 days f when the adjustments becme final. Statement must include the partner s name, address and TIN, share f any adjustments (in audit year r any intervening year), mdificatins attributable t the partner, the safe harbr amunt and the date the statement is furnished. Partnership must mail the statement t the current r last knwn address f the partner and if a statement is returned undertake reasnable diligence t identify the reviewed-year partner s crrect address. Prpsed Regulatins d nt address what happens if the partnership fails t prperly furnish the required statement t the partner 40

41 The Push-Out Electin Statements Furnished t Reviewed-Year Partners Safe Harbr Amunt. Partner can elect t pay a safe harbr amunt in lieu f cmputing the crrect amunt f tax fr the reviewed year and any intervening years. Partnership calculates and includes safe harbr amunt in statement furnished t reviewed-year partners. The safe harbr amunt is calculated like the imputed underpayment except based nly n the partner s share f the partnership adjustments. Mdificatins due t the partner filing an amended return r entering int a clsing agreement will reduce the safe harbr amunt. All ther mdificatins are nt taken int accunt. The safe harbr amunt prvides a simplified means fr a partner t take int accunt its share f the adjustments. Electin t pay the safe harbr amunt is made n the return fr the reprting year. 41

42 The Push-Out Electin in Tiers Under the BBA, it was unclear whether pass-thrugh partners wuld be able t push-ut adjustments t their wners instead f paying tax n the adjustments at the first tier. Technical Crrectins wuld allw pass-thrugh partners t push-ut adjustments t their partners. Prpsed Regulatins d nt and nte that this apprach presents significant administrative cncerns. Prpsed Regulatins request cmments n hw the IRS might administer the push-ut electin in tiered structures. 42

43 Cmparisn f Partnership s Optins under Prpsed Regulatins Partnership Pays (Default) Mdificatins Push-Out Electin Wh bears the ecnmic burden? Current-Year Partners T the extent mdified by amended returns r clsing agreement, reviewed-year partners. Reviewed-Year Partners Requirements N/A Partnership Representative must request mdificatin and substantiate within 270 days after NOPPA issued. IRS must agree. Electin must be made within 45 days f date FPA is issued and statements furnished t partners within 60 days f when adjustments are finally determined. Treatment f Tiers N/A Mdificatins may be based n Indirect Partners and Indirect Partners and Pass-Thrugh Partners may file amended returns. Nt available fr Upper-Tiers 43

44 What if partnership can t pay? If Partnership Cannt Pay: Prpsed Regulatins If a partnership terminates, disslves r therwise lacks the ability t pay an imputed underpayment, the IRS can determine the partnership ceases t exist. If IRS determines a partnership ceases t exist, the partnership is n lnger liable fr the imputed underpayment. Instead, the adjustment-year partners are liable fr the tax n their share f the partnership adjustments. Partners are severally, but nt jintly, liable fr the imputed underpayment. 44

45 What if partnership can t pay? If Partnership Cannt Pay: Technical Crrectins If a partnership fails t pay an imputed underpayment within 10 days f ntice and demand, the interest rate n the underpayment will increase by 2% and the IRS may assess and cllect adjustment against adjustment-year partners fr their prprtinate shares. Partners are severally, but nt jintly, liable fr the imputed underpayment. Same result as Prpsed Regulatins but prescribed prcedure. 45

46 Planning Cnsideratins: Electin In The BBA permits a partnership t make an early electin int the new partnership audit regime, but des nt prvide details n hw such an electin wuld be made. The temprary regulatins issued n August 5, 2016 prvide further clarity n this electin. Accrding t the regulatins, the electin can nly be made after the partnership has received ntice frm the IRS that a partnership tax return fr a qualifying taxable year has been selected fr audit. Once made, the electin can nly be revked with the cnsent f the IRS. The partnership needs t designate a partnership representative. Early electin requires representatins regarding the slvency f the partnership and that n filing fr bankruptcy prtectin is expected. The temprary regulatins d nt address the questin whether the push ut electin is available if an early electin is made. 46

47 Planning Cnsideratins: Electin Out Wh can elect ut? Partnerships with 100 partners r less all f whm are eligible partners Cunting Partners. Partnership has 100 r fewer partners if required t furnish 100 r fewer K-1s Any K-1s furnished t an S crpratin sharehlder are cunted fr purpses f the 100-partner test Eligible Partners. Partners must be individuals, C Crpratins (including any freign entity that wuld be treated as a C crpratin if dmestic), S Crpratins r estates A partnership, trust (including a grantr trust), disregarded entity, nminee r agent are nt eligible partners An S crpratin is an eligible partner even if its sharehlders wuld nt be eligible partners if direct partners 47

48 Planning Cnsideratins: Electin Out Examples Cunting Partners fr Electin Out Partnership has 98 partners at the beginning f the year. Partners A, B and C sell their interest during the year. Partnership is required t furnish 101 K- 1s fr the year. Partnership cannt elect ut. Partnership has 51 partners, 50 partners that are individuals and an S crpratin. S crpratin has 50 sharehlders during the tax year. 101 K-1s are issued (51 t the direct partners plus 50 t the S crpratin sharehlders). Partnership cannt elect ut. 48

49 Planning Cnsideratins: Electin Out Eligible Partners Example C is nt an eligible partner because it is a partnership. D E Crpratin F Crpratin B is nt an eligible partner because it is a disregarded entity. A cannt elect ut. C Partnership B LLC (DRE) Cnclusin: Crpratin must be a direct partner t be an eligible partner fr electin ut. Individual D cannt hld her partnership interest thrugh a passthrugh entity t be an eligible partner fr electin ut. A Partnership 49

50 Planning Cnsideratins: Electin Out Eligible Partners Example C is an eligible partner even thugh C s sharehlder E wuld nt be an eligible partner if it held a direct interest in A. B is an eligible partner. A can elect ut. D E Trust C S Crpratin B Crpratin A Partnership 50

51 Planning Cnsideratins: Electin Out Hw t elect ut? Electin is made n a timely filed partnership return (Frm 1065). Partnership must prvide the names, TINs and federal tax classificatins f all partners and, if there is an S crpratin partner, all f its sharehlders. Partnerships must ntify each partner f the electin ut within 30 days f the electin. Shuld eligible partnerships elect ut? If they d, the IRS must make determinatins at the partner level (same as pre- TEFRA where a partnership with 99 partners can have 99 separate audits and 99 different results). General cnsensus amng practitiners is t elect ut if pssible. Fr this reasn, IRS is reluctant t expand electin ut, and prpsed regulatins decline t expand the list f eligible partners t include pass-thrugh partners r disregarded entities. 51

52 Drafting Cnsideratins: Partnership Representative Draft/Amend Partnership Agreements t Appint Partnership Representative Current practice is t include a Partnership Representative prvisin in the TMP sectin. Standards fr designating the Partnership Representative and revking a designatin. Scpe f the Partnership Representative prvisin will depend n wh yu represent (i.e., ttal authrity v. partner cnsent) Key Issues: ntice t partners, duty t infrm r cnsult, extensin f the statute f limitatins, settlements, litigatin, mdificatins f the imputed underpayment, push-ut electin. Decisins t pay tax r make a push-ut electin? Must partners apprve? Which partners? What threshld? De minimis payments? Other cnsideratins? Indemnificatin f Partnership Representative? 52

53 Drafting Cnsideratins: Partnership Representative Partnership Representative Prvisin (Simple) With respect t tax years beginning after December 31, 2017, the partnership representative f the Partnership pursuant t Cde Sectin 6223(a) shall be, r any Partner r ther persn with a substantial presence in the United States designated by the General Partner in the manner prescribed by the Internal Revenue Service. 53

54 Drafting Cnsideratins: Partnership Representative Partnership Representative Prvisin (Cmplex) (a) Fr tax years beginning n r befre December 31, 2017: The Tax Matters Member, with the apprval f a majrity f the Bard f Managers, may elect (at such time and in such frm and manner as the Internal Revenue Service may prescribe) fr the amendments t Sectins made by Sectin 1101 f the Bipartisan Budget Act f 2015 (H.R. 1315) t apply t any return f the partnership filed fr partnership taxable years beginning after Nvember 2, 2015 and befre January 1, (b) With respect t tax years beginning after December 31, 2017, the partnership representative f the Cmpany pursuant t Sectin 6223(a) f the Internal Revenue Cde shall be any Member r ther persn with a substantial presence in the United States designated by the Bard f Managers in the manner prescribed by the Internal Revenue Service. (Any persn wh is designated as the partnership representative is referred t herein as the Partnership Representative ). The Partnership Representative is authrized t take such actins and t execute and file all statements and frms n behalf f the Cmpany which may be permitted r required by the applicable prvisins f the Internal Revenue Cde r Treasury Regulatins issued thereunder, prvided that the Partnership Representative may file suit nly with the apprval f a majrity f the Bard f Managers. The Partnership Representative shall have the sle authrity t act n behalf f the Cmpany under Subchapter C f Sectin 63 f the Internal Revenue Cde (relating t IRS partnership audit prceedings) and in any tax prceedings brught by ther taxing authrities, and the Cmpany and all Members shall be bund by the actins taken by the Partnership Representative in such capacity. The Partnership Representative shall be reimbursed by the Cmpany fr all expenses incurred in cnnectin with all examinatins f the Cmpany s affairs by tax authrities, including resulting Prceedings, and is authrized t expend Cmpany funds fr prfessinal services and csts assciated therewith. If an audit results in an imputed underpayment by the Cmpany as determined under Sectin 6225 f the Internal Revenue Cde, the Partnership Representative, with the apprval f a majrity f the Bard f Managers, may make the electin under Sectin 6226(a) f the Internal Revenue Cde within 45 days after the date f the ntice f final partnership adjustment in the manner prvided by the Internal Revenue Service. If such an electin is made, the Cmpany shall furnish t each Member f the Cmpany fr the year under audit a statement reflecting the Member s share f the adjusted items as determined in the ntice f final partnership adjustment, and each such Member shall take such adjustment int accunt as required under Sectin 6226(b) f the Internal Revenue Cde and shall be liable fr any related interest, penalty, additin t tax, r additinal amunt. 54

55 Drafting Cnsideratins: Transactins and Partnership Agreements Transfer/wnership restrictins t preserve ability t elect ut require C crpratin partners t wn interest directly Tax due diligence in partnership interest acquisitin/cntributin is even mre imprtant Ecnmic burden f imputed underpayment may be brne by adjustment year partners Identify uncertain tax psitins and ptins t mitigate risk Will acquiring partners require a push-ut electin? Indemnificatin by frmer partners if partnership pays the tax Cnfirmatin that the partnership will nt elect int the new rules early Ability t amend partnership agreement as future guidance is issued Need t identify arrangements that may be treated as partnerships and subject t partnership audit rules (cnstructive partnerships, jint perating agreements, etc.) 55

56 Drafting Cnsideratins: Transactins and Partnership Agreements Require partners t take actins t reduce imputed tax liability? Require partners t file amended returns if statute is pen Prvide infrmatin t partnership representative t mdify the imputed underpayment/privacy cncerns Lender requirements require a push-ut electin? 56