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16 - Introduction to Partnership 1
Page 311-331
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16 - Introduction to Partnership 2
Page 311-331
I. What’s New
Caution: IRS issues 277 pages of proposed regulations as a result of the Bipartisan Budget Act of 2015, AICPA lobbies for: Please slow down on the audit provisions. Please fix this thing in a letter to Senate Finance State conformity is still lacking and encourages
state societies to work with their legislatures as state burden on multi-state partnerships is confusing.
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I. What’s New
IRS audit rates have begun to rise significantly for partnerships rising by 18.6% (albeit from a VERY low exam rate), expect them to continue to rise with new audit procedures.
Troublesome – Lots of gotchas contained in the new law and regulations.
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II. New Partnership Due Dates
The result of the change: Form 1065 is due 2
months and 15 days after the end of the tax year March 15th is the new
April 15th
Good News -Extensions will now be for 6 months
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II. New Partnership Due Dates
The rest of the problem:
The termination, i.e. end of the partnership year will require a filing within 2 ½ months, or 8 ½ months with extension
Example – Partnership technically terminates due to partner buyout on March 31st , return is due on with extension 12/15, please find the forms.
Tax
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A. Effective for tax years beginning after 12/31/2017 but can be elected to apply for tax years that begin after 11/02/2015
B. Prior TEFRA procedures have been repealed.
C. All adjustments will occur at partnership level.
III. New Centralized Partnership Audit Regime and Repeal of TEFRA
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D. The tax will be assessed at the current highest tax rate and collected from the partnership.
E. If the partnership can show that the tax would be lower if paid by the partners the assessment can be lowered.
F. Only the partnership representative may raise any defense or objections to adjustments.
III. New Centralized Partnership Audit Regime and Repeal of TEFRA
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A. Partnerships of > 100 (subject to new math rules) may elect out of new audit regime:a. Based on number of K-1s issuedb. If S Corporation partner that K-1 will add the
number of K-1s issued by the S Corporation.c. Spouses will count as two partners
IV. Electing Out of the Partnership Audit Regime
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2. What partnerships cannot elect out of the new Audit Regime? Those with partners that are
a. Partnershipsb. Trustsc. Most foreign entitiesd. Disregarded entitiese. Nominees or other such similar individualsf. Estates of other than a deceased partner who was
a natural person.
IV. Electing Out of the Partnership Audit Regime
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B. The election must be part of a timely filed return in the required format and cannot be revoked without consent
C. There are disclosure requirements regarding each partner as part of the election.
D. The partnership must notify each partner within 30 days of making the election.
E. The election will apply only to the partnership that makes the election.
IV. Electing Out of the Partnership Audit Regime
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V. Requirement for Partner’s Return toBe Consistent with Partnership Return
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Prop. Reg. § 301.6222-1(a)(1)A. Partner’s return must be consistent with partnership
return.B. Determination of consistency is based on 1065 and
not K-1sC. If the partner’s return fails to reflect that consistency
IRS has the ability under it’s math error authority to assess partner’s return. The partner has 60 days to request an abatement of that assessment.
Observation: Form 8082, Notice of Inconsistent Treatment is critical when partner determines they disagree with K-1.
A. Each partnership MUST designated an eligible partnership representative.
B. The partnership and partners are bound by the partnership representative.
C. There must be a partnership representative designated for each partnership year.
D. The designated partnership representative shall remain as such unless terminated by a valid resignation or revocation.
VI. Partnership Representatives
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Who may serve as a partnership representative?B. The designee must have a substantial US presence.C. If an entity there must be a designated individual
appointed.D. Each year must have a representative appointment
E. A representative may resign by informing IRS and the partnership 30 days prior to resignation.
VII. Eligibility to Serve as Partnership Representative
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A representative may bind the partnership and its partners for:1. Settlements2. Notice of Partnership
Adjustment3. An IRC 6226 Election4. An agreement to extension of
the statute5. This authority extends to ALL
partners
VII. Eligibility to Serve asPartnership Representative
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Agreement can affect: 1065
AND 1040 of ALL
partners
Any “imputed” underpayment is assessed and payable by the partnership.
VIII. Imputed Underpayments
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There is an option to the partnership paying the imputed underpayment – The Push-Out ElectionB. Partners, upon election, make adjustments on
their returns.C. The partnership makes the election within 45
days of the finalization of the adjustment by notifying the IRS and each partner.
D. The election is only revocable with IRS consent.
IX. “Push-Out” Election
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When the partnership makes the election the partners will:E. Adjust their income for any adjustment
amount attributed to them.F. The partner is liable for any associated
penalty, additional tax or interestG. Interest will be determined at the partner
level.
IX. “Push-Out” Election
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What is an AAR?A. A request to have an a correction for an error
on a return.B. If an AAR is submitted and accepted it will
be taken into account in the year in which the AAR is made.
C. The standard procedures apply either the partnership can accept the adjustments or make a “push out” election.
X. Administrative Adjustment Requests
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XII. General Characteristics
A failure of the entity principle in favor of the aggregate concept.
Or a failure to convert the property, who knows.
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XIII. Electing Out of Partnership Status
This can be tricky territory
Sharing expenses okay but selling together not
Failure to file tax return can be solved as long all individuals file timely returns and are “natural” people
Watch how the property is titled each individual no dba names or any other “fictitious” names
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XIII. Electing Out of Partnership Status
Some of the problems recently tackled.
While taxpayer had no involvement in management or operation those “benefits” were inferred by those who did.
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XIII. Electing Out of Partnership Status
The “transfer” that was not a sale but was in fact a like kind exchange on an undivided fractional interest.
The importance of the PLR provided an insight on how to “transfer” a slice of a piece of pie, i.e. real estate in separate transactions by exchanging under, IRC 1031, over a period of years (no more than 5).
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XIII. Electing Out of Partnership Status
There was not joint undertaking as the IRS found there was no oil, gas or mineral operations but was nothing but a sale of tax credits, no risk and no activity.
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XIII. Electing Out of Partnership Status
Expense sharing shall not a partnership be IF there is no allocation of expenses other than the amounts actually paid by the participants..
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XIII. Electing Out of Partnership Status
F. Investment Clubs – Review Pub 550 – many of these clubs do not file in belief that they are exempt however:
The assets are usually held in name of club and NOT as co-owners – not allowed.
Sale rights of securities are reserved to treasurer agent under direction of members and title to brokerage account rests with “club” – not allowed.
Most investment clubs should be filing a partnership return.
Looks a lot like many “real estate” family ventures
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XIII. Electing Out of Partnership Status
The “family” real estate joint venture:
Are joint rent checks received? Is the title held in the name of an
artificial entity? Are there any special allocation
of expenses, i.e. one of the “partners” contributed the down payment and the loan interest is allocated disproportionally to one of the participants?
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What TMP means: IRS will deal with the TMP (tax matters
partner(s)) as designated or largest partnership interest holder if none designated.
Issues of audit and litigation will be managed at the partnership level adjustments agreed to MUST reflect on Form 1040.
XVIII. Tax Matters Partner (TMP)Through 2017
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XVIII. Tax Matters Partner (TMP)Through 2017
10 or more
The TMP will receive all notices of exam and will enter into the settlement agreements which will bind all of the partners
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XVIII. Tax Matters Partner (TMP)Through 2017
Who can be a TMP Anyone who has been a general partner
(managing member) at anytime during the year If the TMP is a non-US Citizen or artificial
person the commissioner must consent The TMP can be changed each year DANGER – If no TMP is a noted the IRS will
assign the partner with the greatest profit interest or if all the same the first one listed with the greatest interest
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XVIII. Tax Matters Partner (TMP)Through 2017
X
If one of the partners is not a “natural person” the TEFRA audit rules apply and a TMP must appointed
Pass thru entities are the primary causes of the failure to have natural persons or foreign entities
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XVIII. Tax Matters Partner (TMP)Through 2017
With the growth of the LLC and disregarded entities IRS addressed was the disregarded entity a natural person - NO
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XVIII. Tax Matters Partner (TMP)Through 2017
A disregarded entity holding a partnership interest is not a “natural person” but a pass thru entity subject to the TEFRA rules for 2017.Note: For 2018 and beyond a partnership with a disregarded entity as a partner will not be eligible to elect out of the partnership audit regime.
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XIX.Who is Authorized to Signa POA for a Partnership or LLC?
A Legal Advice Memorandum – 2015-004 addressed the issue of who can sign and/or obtain a POA.C. Determine who is a “legal representative”
under state law or the operating agreement.E. If a TEFRA “partnership” the TMP partner
identified by the return or appointed by IRS.F. As IRS can make and receive inquires from
“all parties of interest” then any beneficial owner can sign the Form 2848.
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XIX.Who is Authorized to Signa POA for a Partnership or LLC?
A Legal Advice Memorandum – 2015-004 addressed the issue of who can sign and/or obtain a POA.G. If the POA is in the name of the entity itself, it
must be signed by an authorized individual, i.e. a general partner or state law manager. This means that a limited “partner/member” cannot grant a POA to a non-authorized party.
H. Only authorized parties may bind the partnership in a TEFRA exam.
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XIX.Who is Authorized to Signa POA for a Partnership or LLC?
There are two events that can only be signed by the Tax Matters Partner:1. Any Exam Report
Agreement2. Any Agreement to
Extend the Statute
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XX. Late Filing & Penalty Exceptions
Late filing penalty issues:A. The penalty cannot be
assessed for more than 12 months.
B. Failure to file penalty is $200 per partner per month.
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XX. Late Filing & Penalty Exceptions
C. Revenue Procedure 84-35
Domestic partnershipsTen or fewer partners (natural persons only) No special allocationsALL partners included all items on a timely filed returns
Reasonable Cause Exception
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XX. Late Filing & Penalty Exceptions
IRS will review the filing history of ALL partners when this exception under Rev. Proc. 84-35 is requested
Do your homework
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XX. Late Filing & Penalty Exceptions
The FTA has become a popular choice in dealing with late filing penalties.
Which is - Prior three years with No significant penalties All returns filed timely
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XX. Late Filing & Penalty Exceptions
Hot News – IRS in IR-2017-141 indicates automatic application under FTA rules if a partnership filed extension request using April versus March date for 2016
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