FORT WORTH CHAPTER/TSCPA TAX INSTITUTE

AUGUST 5, 2016

WHAT EVERY CPA NEEDS TO KNOW ABOUT THE NEW IRS PARTNERSHIP AUDIT RULES

Presented by:

JOEL N. CROUCH, J.D.Board Certified in Tax Law by the Texas Board of Legal Specialization

A REGISTERED LIMITED LIABILITY PARTNERSHIP INCLUDING PROFESSIONAL CORPORATIONS

901 Main Street, Suite 3700Dallas, Texas 75202Main (214) 744-3700Direct (214) 749-2456

Fax (214) 292-2356(800) 451-0093

www.meadowscollier.com

Internet E-Mail:jcrouch@meadowscollier.com

Blog:MC Talks Tax

http://www.meadowscollier.com/?p=7664

Joel N. CrouchManaging PartnerMr. Crouch is Managing Partner of Meadows, Collier, Reed, Cousins, Crouch & Ungerman, L.L.P. He

represents a broad range of clients, including individual taxpayers, closely-held business enterprises, estates,

corporations and tax advisors in all stages of federal civil and criminal tax proceedings. In almost 30 years of

practice, he has helped his clients resolve hundreds of civil and criminal tax matters, many of which involved

sophisticated and complex legal and tax issues, both domestic and international.

Mr. Crouch is board certified in tax law by the Texas Board of Legal Specialization and has been recognized

as one of the best in his field by Texas Monthly and Law and Politics Magazines by being named a Texas

Super Lawyer from 2003 through 2015. He has also been named one of the Best Lawyers in Dallas by D

Magazine for the year 2012-2015 and he has also been named to Best Lawyers in America for Tax Law in

2015.

Mr. Crouch has been interviewed by KXAS NBC 5 regarding various tax topics including, "Crooks Mail Phony

IRS Letters Hoping to Score Cash" and "Consumer Waited on Refund After Routing It to Prepaid Card." In

October 2013, he was recognized as a Top Rated Lawyer in White Collar Criminal Defense Law by ALM as

published in The American Lawyer, Corporate Counsel and The National Law Journal.

He is a frequent speaker on both substantive and procedural tax issues for both legal and accounting

professionals. Topics include Tax Shelter Defense, IRS Examinations, Appeals, Litigation and Collection

Strategies, IRS Criminal Investigations, IRS Offshore Activities, IRS Focus on Tax Professionals, Employment

Classification, IRS penalties, and Litigating Partnership Tax Cases. Mr. Crouch has published various articles

re: the IRS & tax procedures.

Attorney Profile

AREAS OF PRACTICE

• Income Tax Litigation

• Estate and Gift Tax Litigation

• White Collar and Government

Regulatory Litigation

• Commercial Litigation

Professional Associations and Memberships (cont’d)Willow Bend Lakes Home Owners Association

Board MemberSecretary

Publications“Understand the IRS Voluntary Disclosure Program”, April 2012, Texas Lawyer

"Is Three Times a Charm? The IRS Announces a Third Offshore Voluntary Disclosure Initiative", February 2012,BarTabs published by the Collin Country Bar Association

“6 Keys to Avoiding Section 6701 Penalties”, The Value Examiner, May/June 2006 Issue, National Association of Certified Valuation Analysts

“Take Two: IRS Voluntary Disclosures and The Offshore Disclosure Initiatives”, April 2011, BarTabs published by the Collin County Bar Association

“Avoiding Criminal Tax Problems: Voluntary Disclosure”, Originally published in Headnotes, Vol. 36, No. 5, May 1,2011, page 9 (published monthly by the Dallas Bar Association)

Honors and AwardsThe Best Lawyers in America©, 2015, Tax Law

2013 Top Rated Lawyer in White Collar Criminal Defense Law by ALM as published in The American Lawyer, Corporate Counsel & The National Law Journal, October 2013

Texas Super Lawyers-Tax as listed in Texas Super Lawyers Magazine and Texas Monthly, 2003 through 2015

Best Lawyers in Dallas, D Magazine, 2012-2015: Tax Litigation

EducationJ.D., University of Texas School of Law, 1988 B.A., Southern Methodist University, 1985

Bar AdmissionsState Bar of Texas

Professional Associations and MembershipsAmerican Bar Association, Taxation

Member, Court Procedure and Practice Committee Member, Standards of Tax Practice Committee Member, Civil and Criminal Penalties CommitteeMember, Administrative Practice and Procedures Committee

State Bar of TexasMember, Section of Taxation

The College of the State Bar of TexasMember

Dallas Bar AssociationTax Section Council, 2005-2006, 2014-2015

Tax Section Treasurer, 2016

Texas Federal Tax InstituteBoard Member, 2015-2016Planning Committee Member, Civil Tax Controversy Program

Dallas Bar FoundationFellow

Collin County Bar AssociationMember

Plano Symphony OrchestraBoard of Directors, Secretary and Treasurer

St. Andrews United Methodist Church –

Administrative Council - Chairman

Building Committee

Joel N. CrouchPartner

Attorney Profile

2016 Speaking EngagementsSociety of Talent & Entertainment Professionals (STEP), Fort Worth, "The Menancing Legal Tentacles of Worker Classification" – 3/6/16

2015 Speaking EngagementsAAA-CPA North Texas Chapter Meeting, Dallas, "The Art of IRS Penalty Defense" – 4/21/15

First State Bank & Trust Seminar, Lufkin, “The Art of IRS Penalty Defense” –4/24/15

Taxation and Estate Planning Update for Professionals Seminar sponsored Texas Bank and Trust, Tyler, "Judicial Update" – 5/6/15

Taxation and Estate Planning Update for Professionals Seminar sponsored Texas Bank and Trust, Longview, "Judicial Update" – 5/19/15

Fort Worth Chapter/TSCPA Tax Institute, Fort Worth, "Judicial Update" – 8/7/15

Panhandle Chapter/TSCPA 2015 31st Annual Tax Institute, Amarillo, "Judicial Update" – 8/26/15

Central Texas Chapter/TSCPA CPE Expo, Waco, "The Art of IRS Penalty Defense" – 10/27/15

Austin Chapter/TSCPA Annual Tax Conference, Austin, "What to Expect from a Rapidly Changing IRS" – 11/16/15

2015 TSCPA CPE Expo, Arlington, "The Art of IRS Penalty Defense" – 12/2/15

2015 TSCPA CPE Expo, San Antonio, "The Art of IRS Penalty Defense" – 12/7/15

2015 TSCPA CPE Expo, Houston, "The Art of IRS Penalty Defense" – 12/10/15

2014 Speaking EngagementsAmerican Association of Attorney-CPAs, "Self Employment Tax Issues for LLCs and S Corps" – 1/24/14

Corpus Christi Chapter/TSCPA 56th Annual Tax Conference, "Self Employment Tax for LLCs and S Corps" – 1/29/14

First Bank & Trust East Texas Seminar, Lufkin, "Judicial Update" – 4/25/14

Texas Bank & Trust Seminar, Tyler, "Self-Employment Tax for LLCs and S Corps"– 5/6/14

Texas Bank & Trust Seminar, Longview, "Self-Employment Tax for LLCs and S Corps" – 5/15/14

East Texas Chapter/TSCPA Annual CPE Expo, Tyler, "Judicial Update" – 5/19/14

Brazos Valley Chapter/TSCPA, College Station, Recent Developments in Federal Income Taxation" – 5/22/14

16th Annual 2014 San Antonio CPA CE Symposium, San Antonio, "What to Expect from a Rapidly Changing IRS in 2014" – 8/15/14

Panhandle Chapter/TSCPA 2014 Tax Institute, Amarillo, "What to Expect in 2014 from a Rapidly Changing IRS" – 8/27/14

Advanced Tax Law Course 2014 sponsored by TexasBarCLE, Dallas, "Foreign Asset Reporting Obligations to the IRS" – 8/28/14

16th Annual Meadows Collier Taxation Conference, Dallas – 10/28/14

Austin Chapter/TSCPA Annual Tax Conference, Austin – 11/17/14

TSCPA CPE Expo, Houston "What is Happening to Taxpayers in Court?" – 12/4/14

TSCPA CPE Expo, San Antonio "What is Happening to Taxpayers in Court?" –12/8/14

2013 Speaking EngagementsCorpus Christi Chapter/TSCPA 55th Annual Tax Conference, Corpus Christi, "What Can We Expect From the IRS in 2013" – 2/1/13

Dallas Bar Association - Tax Section, Dallas, "Conservation and Facade Easements: Are They for Real or a Facade?" – 4/1/13

2013 Speaking Engagements (cont.)Texas Bank and Trust Seminar, Tyler, "What We Can Expect from the IRS in 2013" – 5/1/13

Convergence 2013 sponsored by the Dallas CPA Society, Dallas, "Panelists -Criminal Tax" – 5/8/13

Texas Bank and Trust Seminar, Longview, "What We Can Expect from the IRS in 2013" – 5/16/13

North American Petroleum Accounting Conference (NAPAC), Dallas, "Self-Employment and Employment Tax Issues in LLCs and S Corporations" – 5/17/13

Wichita Falls Chapter/TSCPA Free CPE Seminar, Wichita Falls, "What We Can Expect from the IRS in 2013" and "Self-Employment and Employment Tax Issues in LLCs and S Corporations" – 5/22/13

Central Texas Chapter/TSCPA CPE Expo, Waco, "What We Can Expect from the IRS in 2013" – 5/29/13

Dallas Bar Association - Real Property Section, Dallas, "Conservation and Facade Easements: Are They for Real or a Facade?" – 7/8/13

UT Law 2013 LLCs, LPs and Partnerships Conference, Austin, "Dysfunctional Family Limited Partnerships” – 7/11/13

Brazos Valley Chapter/TSCPA, College Station, "What We Can Expect from the IRS in 2013" – 6/12/13

Fort Worth Chapter/TSCPA Tax Institute, Fort Worth, “Offers in Compromise: Is the IRS Really Becoming Kinder and Gentler”, – 8/2/13

Texas Association of Certified Public Accountants, Houston, “What to Expect from a Rapidly Changing IRS”, – 8/16/13

15th Annual Meadows Collier Taxation Conference, Dallas, “Judicial Update:, 10/29/13

Accounting Continuing Professional Education Network (ACPEN), Dallas, “Procedural Issues in Partnership Audits and Litigation, Return Preparer Penalties and Hot Litigation Topics”, – 10/30/13

TSCPA CPE Expo, San Antonio – 12/10/13 and Houston – 12/17/13, “What to Expect in 2014 from a Rapidly Changing IRS”

2012 Speaking EngagementsCorpus Christi Chapter/TSCPA, Corpus Christi, "How to Make Sure Your Client Does Not Have IRS Employment Tax Problems" – 1/13/12

Montgomery Coscia Greilich LLP, Dallas, “Current Trends in IRS Examinations and Appeals” – 4/23/12

Texas Bank and Trust Seminar, Tyler, "Civil and Criminal Fraud Audits and Investigations" – 5/2/12

Texas Bank and Trust Seminar, Longview, "The Valuator/Appraiser: Perspectives and Guidance in Navigating Through Valuation Engagements" – 5/8/12

Dallas Bar Association Health Law Section, Dallas, "Health Care and Independent Contractors: How to Avoid Being A Target" – 5/16/12

North American Petroleum Accounting Conference (NAPAC), Dallas, "Compliance Issues for U.S. Partnerships with Foreign Partners and U.S. Partners with Foreign Partnerships" – 5/17/12

Corpus Christi Estate Planning Council, Corpus Christi, "Using Family Limited Partnerships and What to Expect from the IRS" – 5/18/12

Dallas Bar Association Small & Solo Practice Section, Dallas, "What Every Attorney Should Know About the IRS" – 8/1/12

Law Review CLE, Dallas, "Worker Classification" – 8/9/12

Joel N. CrouchPartner

Attorney Profile

2010 Speaking Engagements (cont.)San Angelo Chapter/TSCPA, San Angelo, "Circular 230" – 5/19/10

Central Texas Chapter/TSCPA CPE Expo, Waco, "Tax Disputes Before the IRS: Audit, Appeal and Tax Litigation" – 5/20/10

American Society of Women Accountants, Ft. Worth Chapter, Fort Worth,

"Tax Disputes Before the IRS: Audit, Appeal and Tax Litigation" – 5/26/10

Comerica Bank Counsel, Dallas, "Family Limited Partnership Update" – 8/5/10

Panhandle Chapter/TSCPA MIGI Conference, Amarillo, "Employment Tax Law" –10/21/10

Tax Executives Institute Dallas Chapter, Dallas, "The Changing Relationship Between Taxpayers and the IRS Examination Division" – 11/16/10

Meadows Collier Taxation Conference, Dallas, "IRS Alternative Resolution Options" –10/26/10

National Constitution Center Audio Conferences, Dallas, "Tax Disputes Before the IRS: Audit, Appeal & Tax Litigation" – 11/3/10

TSCPA CPE Expo, San Antonio, Houston & Arlington, "Judicial Update: What's Happening in the Courts?" – 12/3/10, 12/7/10 & 12/10/10

Civil Tax Controversies Representation MattersRepresented client in appeal to the U.S. Supreme Court regarding the IRS attempt to invoke a six year statute of limitations.

Represented client in an appeal to the U.S. Fifth Circuit regarding the IRS attempt to impose a substantial penalty.

Represented client in an appeal to the U.S. Fifth Circuit and successfully argued that the IRS cannot invoke a six year statute of limitations.

Represented client in a successful challenge to the IRS' attempt to retroactively apply a Treasury regulation.

Represented client in successfully resolving issues regarding unfiled payroll tax returns for multiple years.

Represented numerous clients through the IRS Offshore Voluntary Disclosure initiatives and other voluntary disclosure programs.

Represented family in challenge to IRS disallowance of tax benefits and prepared imposition of penalties.

Represented estate in an IRS challenge to the value of interest in a closely-held business. Successfully settled case for significantly less than the IRS’s proposed assessment.

Represented a client in IRS challenge to losses arising from investment in distressed assets.

Represented attorney in a challenge to IRS summons for records related to attorney’s client’s offshore activities.

Represented numerous clients in tax shelter examinations and civil litigation.

Represented clients in IRS attempt to reclassify losses associated with horse and cattle activities as hobby losses under IRC § 183.

Represented numerous clients in tax shelter examinations and civil litigation.

Represented clients in IRS attempt to reclassify losses associated with horse and cattle activities as hobby losses under IRC § 183.

Represented clients in IRS challenges to classification of independent contractors versus employees.

Represented numerous tax professionals under investigation for alleged ethical and IRS Circular 230 violations.

2011 Speaking Engagements (cont.)Fort Worth Chapter/TSCPA Tax Institute, Fort Worth, "Worker Classification" –8/10/12

Panhandle Chapter/TSCPA Tax Institute, Amarillo, "IRS Priority #1: Foreign Transactions, Entities and Bank Accounts" – 8/23/12

TSCPA CPE Expo, Houston, "What We Can Expect from the IRS in 2013" –12/10/12

Dallas CPA Society's Member Appreciation Series, Dallas, "IRS Exams and Collections" – 9/19/12

14th Annual Meadows Collier Taxation Conference, Dallas, “Judicial Update” –10/30/12

Austin Chapter/TSCPA Annual Tax Conference, Austin, "Judicial Update" –11/8/12

TSCPA CPE Expo, San Antonio, "What We Can Expect from the IRS in 2013" –12/3/12

2011 Speaking EngagementsDenton Bar Association, Denton, "Divorce and Separation: A 'Taxing' Experience" – 1/4/11

Dallas Bar Association Tax Section, Dallas, "The Changing Relationship Between Taxpayers and the IRS Examination Division" – 2/7/11

Dallas Collaborative Law Group, Dallas, "Tax Issues in Divorce and Separation" –- 4/21/11

Taxation and Estate Planning Update for Professionals Seminar sponsored by Texas Bank and Trust, Tyler, "Don't Give Up on Family Limited Partnerships (FLPs)" – 5/4/11

Taxation and Estate Planning Update for Professionals Seminar sponsored by Texas Bank and Trust, Longview, "Don't Give Up on Family Limited Partnerships (FLPs)" – 5/18/11

Wichita Falls Chapter/TSCPA, Wichita Falls, "What are our Friends at the IRS Doing to us Now?" – 5/25/11

Dallas CPA Society's Continuing Education Day Conference, "Resolving Conflicts Through the IRS Taxpayer Advocate's Office" – 5/26/11

Fort Worth Chapter/TSCPA Tax Institute Fort Worth, "The IRS and the Tax Professional: Friends or Foes?" – 8/4/11

2010 Speaking Engagements13th Annual Meadows Collier Taxation Conference, Dallas, "The Offshore Voluntary Disclosure Initiative is Done: Now What?" – 10/25/11

Accounting Continuing Professional Education Network (ACPEN) Live Webcast, Dallas – 10/26/11

Rio Grande Valley Chapter/TSCPA Expo, South Padre Island, "The Changing Relationship between Taxpayers and the IRS Examination Division" – 10/28/11

Dallas Bar Association - Tort & Insurance Practice Section, Dallas, "The CPAs Continuing Role in Family Limited Partnerships" and "Compliance

Issues for U.S. Partnerships with Foreign Partners and U.S. Partners in Foreign Partnerships" – 11/1/11

Austin Chapter/TSCPA Annual Tax Conference, Austin, "Practical Suggestions and Traps to Avoid When Working with the IRS" – 11/14/11

TSCPA CPE Expo, "The Evolving Relationship Amongst the IRS, Taxpayers and Tax Professionals" – 12/1/11- San Antonio, 12/5/11-Arlington and 12/8/11-Houston

National Constitution Center Audio Conference, Dallas, "Tax Disputes Before the IRS: Audit, Appeal & Tax Litigation" – 2/17/10 & "IRS Criminal Tax Investigations: Successfully Representing Your Client" 6/15/10

Joel N. CrouchPartner

Civil Tax Controversies Representation Matters (cont.)Represented large public company in an IRS challenge to deduction of expenses related to merger with competitor.

Represented owner and closely-held business in IRS examination of issues related to change in accounting method.

Represented client in IRS attempt to impose penalties during litigation of civil tax matter. Successfully convinced court that the government could not propose penalties.

Represented client in connection with IRS challenge to losses arising from failed tender offer for a foreign publicly-traded company.

Represented numerous estates in IRS challenges to the valuation of closely-held businesses and estate planning vehicles fractionalizing ownership and control.

Represented numerous estates in IRS challenges to family limited partnerships involving IRC §§ 2703, 2704 and 2036 and other substance-over-form attacks.

White Collar and Criminal Tax Controversies Representation MattersRepresented a CPA subject of an investigation by the Tax Inspector General's Office and negotiated a resolution involving no criminal charges.

Hired by client post-indictment in mail and wire fraud case and convinced the government to dismiss the indictment before trial.

Successfully avoided criminal prosecution and civil fraud penalties for numerous taxpayers in civil IRS examinations and IRS administrative proceedings with high risk of civil fraud penalties, criminal prosecution or both.

Represented numerous clients in making voluntary disclosures to the IRS regarding unfiled tax returns, substantiation tax issues and offshore activities to avoid criminal prosecution.

Represented large national corporation in investigation of potential environmental criminal violations. Convinced the government that no criminal charges should be brought.

Represented an attorney in an IRS investigation of failure to file tax returns.

Represented a hospital chain in a healthcare fraud investigation following the execution of search warrants based on allegations made by a qui tax relation.

Represented a real estate investor indicted for tax fraud associated with losses for investment in bank-related real estate. The client was acquitted on all counts.

Represented a banker indicted for allegedly failing to disclose relationship to borrowers who later defaulted on loan. The client was acquitted on all counts.

Attorney Profile

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TABLE OF CONTENTS

I. OVERVIEW

A. BackgroundB. Effective DateC. Repeal of Old Rules

II. APPLICABILITY

A. General Rule Regarding Determinations and Applicability to All PartnershipsB. Option to Elect Out for Certain Partnerships with 100 or Fewer Partners

III. CONSISTENCY REQUIREMENT

A. Consistency Generally RequiredB. Failure to Be Consistent

IV. PARTNERSHIP REPRESENTATIVE

A. DesignationB. Failure to DesignateC. Binding EffectD. Existing Law

V. PARTNERSHIP ADJUSTMENTS

A. Imputed Payment Generally Required (Section 6225)B. Alternative to Payment of Imputed Underpayment Amount by Partnership

VI. ADMINISTRATIVE ADJUSTMENT REQUEST

A. General B. AdjustmentC. Period of LimitationsD. Where Notice of Administrative Proceeding Issued

VII. NOTICE OF PROCEEDINGS

A. General Notice RequirementsB. TimingC. Address for Notices

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VIII. ASSESSMENT AND COLLECTION

A. Method for Assessing and CollectingB. TimingC. Mathematical or Clerical AdjustmentsD. Mathematical or Clerical Errors for Upper-Tier PartnershipsE. Partnerships WaiversF. Interest and Penalties

IX. JUDICIAL REVIEW OF PARTNERSHIP ADJUSTMENT

A. Lawsuit to Challenge FPAB. District Court and Court of Federal ClaimsC. Interest D. Scope of Judicial Review E. AppealsF. Effect of Dismissal

X. STATUTE OF LIMITATIONS

A. General 3-Year Statute of LimitationsB. Agreements to ExtendC. ExceptionsD. Suspension of Statute of Limitations for Mailing of FPA

XI. OTHER SPECIAL PROVISIONS

A. Partnership Payments Non-DeductibleB. Partnership Ceases to ExistC. Entities Filing Partnership ReturnsD. Information Returns

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WHAT EVERY CPA NEEDS TO KNOW ABOUT THE NEW IRS PARTNERSHIP AUDIT RULES

I. OVERVIEW

A. Background

On September 18, 2014, the Government Accountability Office (“GAO”) issued a report to Congress relating to the IRS’s effectiveness in auditing large partnerships, which were defined as those partnerships with $100 million or more in assets and 100 or more direct and indirect partners. The report found substantial disparities in the IRS’s audit rates of large partnerships and comparable large C corporations with $100 million or more in assets. Specifically, the GAO found that although the number of large partnerships in operation from 2002 through 2011 had nearly tripled, the IRS audit rate of those partnerships in 2012 was 0.8%. In contrast, the GAO found that the IRS audit rate of large C corporations was 27.1% in 2012 notwithstanding a significant 22% decrease in the number of large C corporations in operation from 2002 through 2011.

In the report, the IRS identified several potential reasons for the disparity in audit rates. First, the IRS indicated that it was difficult to identify the appropriate partnership to audit when the partnership was part of a complex tiered-partnership structure. Second, the IRS indicated that the complexities in the TEFRA audit procedures made it more difficult to timely assess tax related to the partnership within the general 3-year statute of limitations period. Third, the IRS indicated that the TEFRA audit procedures resulted in burdensome time and costs to the IRS because after the IRS determined adjustments of tax at the partnership level, the IRS was required to recalculate the tax liability of each partner based on the partnership adjustment.

The GAO report recommended several legislative proposals to increase the IRS’s audit rates of large partnerships. The most significant legislative proposal in the report was to require large partnerships to pay any tax due at the partnership level. The GAO noted that such a change would “save the . . . [IRS’s] resources that are now devoted to the paper driven, labor intensive process of passing adjustments through to large numbers of partners.”

On February 2, 2015, President Obama submitted his fiscal year 2016 budget proposal to the United States Congress. In his budget proposal, President Obama recommended repealing the existing TEFRA and electing large partnership audit procedures because those audit procedures were “inefficient and more complex than those applicable to other large entities.” In their place, President Obama recommended enactment of a new partnership audit regime where the IRS would audit the partnership and make adjustments at the partnership level.

Congress responded to the GAO report with several legislative proposals. Most notably, in June 2015, Rep. Renacci (R-OH) and Rep. Kind (D-WI) introduced H.R. 2821, the Partnership Audit Simplification Act. The Act sought to replace the existing TEFRA and electing large partnership audit rules with rules that would require partnerships to be audited at the partnership level.

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On November 2, 2015, President Obama signed into law H.R. 1314, the Bipartisan Budget Act of 2015, which adopted many of the revised partnership audit provisions in H.R. 2821. Congress estimates that the new partnership audit rules will bring in an additional $13.4 billion in tax revenue over the next 10 years.

B. Effective Date

1. Generally: The RPAR amendments apply to returns filed for partnership taxable years beginning after December 31, 2017.

2. Administrative Adjustments Requests: In the case of administrative adjustment requests, the RPAR amendments apply to requests with respect to returns filed for partnership taxable years beginning after December 31, 2017. Note: Presumably, the old rules will continue to apply for prior years.

3. Earlier Application Election: A partnership may elect (at the time and in such form as the Secretary may prescribe) for the RPAR (other than Section 6221(b) which provides for the opt-out election for partnerships with 100 or fewer partners) to apply to any return of the partnership filed for taxable years beginning after the date of the enactment of the RPAR (November 2, 2015) and before January 1, 2018.

Note: The IRS issued Notice 2016-23 on Friday, March 4, 2016 stating, “The Department of the Treasury (“Treasury Department”) and the Internal Revenue Service (“IRS”) intend to issue guidance implementing the new partnership audit regime. Specifically, guidance describing procedures for making the election to have parts of the new regime apply to taxable years beginning after November 2, 2015 and before January 1, 2018 is expected to be published in the near future. Partnerships that wish to make this election should wait until that guidance is published to ensure the election complies with the requirements for making a valid election.”

C. Repeal of Old Rules

The Revised Partnership Audit Rules (“RPAR”) repeals entirely subchapter C which includes the old “TEFRA” audit rules and subchapter D which provides audit rules for electing large partnerships.

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II. APPLICABILITY

A. General Rule Regarding Determinations and Applicability to All Partnerships

1. New Law: Section 6221 provides a general rule that any adjustment to items of income, gain, loss, deduction, or credit of a partnership for a partnership taxable year (and any partner’s distributive share thereof) shall be determined, any taxattributable thereto shall be assessed and collected, and the applicability of any penalty, addition to tax, or additional amount which relates to an adjustment to any such item or share shall be determined, at the partnership level.

2. Existing Law: Under existing TEFRA (referred to herein as “TEFRA”), the TEFRA rules apply to the tax treatment of any partnership item (and the applicability of any penalty, addition to tax, or additional amount which relates to an adjustment to a partnership item) shall be determined at the partnership level.

Note: The RPAR rules seem to do away with the concept of a partnership item which has resulted in significant litigation. IRC Sec. 6221.

B. Option to Elect Out for Certain Partnerships with 100 or Fewer Partners

1. General Opt Out Election: The RPAR states that its provisions do not apply with respect to any partnership for any taxable year if (i) the partnership elects out for such taxable year, (ii) for such taxable year, the partnership is required to furnish 100 or fewer statements under Section 6031(b) with respect to its partners (i.e., Schedule K-1s); (iii) each of the partners of such partnership is an individual, a C corporation, any foreign entity that would be treated as a C corporation were it domestic, an S corporation, or an estate of a deceased partner; (iv) the election is made with a timely filed return for such taxable year and includes a disclosure of the name and taxpayer identification number of each partner of such partnership, and the partnership notifies such partners of such election in the manner prescribed by the Secretary.

2. Special Rules for S Corporation Partners: For any partnership with an S Corporation that seeks to elect out under the above provisions, the partnership must include (in the manner prescribed by the Secretary) a disclosure of the name and taxpayer identification number of each person with respect to whom such S corporation is required to furnish a statement under section 6037(b) for the taxable year of the S corporation ending with or within the partnership taxable year for which the election to opt out is made. The statements such S corporation is required to furnish shall be treated as statements furnished by the partnershipfor purposes of paragraph (1)(ii)(i.e., for purposes of applying the 100 partner rule).

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3. Foreign and Other Partners: The Secretary may provide for alternative identification of any foreign partners. The Secretary may by regulation or other guidance prescribe rules similar to the rules above with respect to any partners not described above.

4. Existing Law: Under existing TEFRA law, a partnership subject to TEFRA is defined to exclude small partnerships. A small partnership for these purposes is refers to any partnership having 10 or fewer partners each of whom is an individual (other than a nonresident alien), a C corporation, or an estate of a deceased partners. A small partnership may for any taxable year elect not to be treated as a small partnership and therefore be subject to the TEFRA provisions. IRC Sec. 6231(a).

Observation: The purpose for the enactment of TEFRA was to eliminate duplicitous litigation and inconsistent treatment among partners. Because partnerships with a large number of partners will be eligible to opt out, this would appear to have the opposite effect. Specifically, a partnership with up to 100 qualifying partners could elect out and very likely would. This would mean that, if the IRS wanted to audit that partnership, it would have to open an audit for all 100 partners. Moreover, each partner should be able to litigate the adjustments against him/her separately, potentially in different courts,creating the potential for inconsistent results on identical issues. In addition, a successful audit at the partner level will largely depend on the partnership’s cooperation in providing information and documentation. Failure to do so could be very detrimental to a partner. The partners may want to have their partnership agreement include language requiring the partnership to cooperate in a partner-level audit.

Query: To what extend could the IRS use partnership information and documents obtained from an audit of one partner in an audit of another partner?

III. CONSISTENCY REQUIREMENT

A. Consistency Generally Required

Section 6222 of the RPAR sets forth the general requirement that a partner treat each item of income, gain, loss, deduction, or credit attributable to a partnership in a manner which is consistent with the treatment of such income, gain, loss, deduction, or credit on the partnership return.

B. Failure to Be Consistent

1. Mathematical or Clerical Error: Any underpayment of tax by a partner by reason of failing to comply with the requirements of subjection (a) shall be assessed and collected in the same manner as if such underpayment were on account of a mathematical or clerical error appearing on the partner’s return.

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2. Option to Request Abatement of Assessment under Section 6213(b)(2) Not Applicable: Under standard deficiency procedures (outside the partnership context), the IRS may make an assessment against a taxpayer on account of a mathematical or clerical error. Such assessments are not subject to the normal deficiency assessment procedures. However, under IRC section 6213(b)(2) a taxpayer may file a request of an abatement of any assessment specified in such notice within 60 days after the notice is sent. Upon receipt of such request, the IRS must abate the assessment. Any reassessment of such tax is subject the normal deficiency procedures. The RPAR states that paragraph (2) of Section 6213 (b) does not apply to an assessment treated as mathematical or clerical error under the above provisions.

Observation: As a practical matter, the above provisions permit the IRS to make an assessment resulting from an inconsistent position on a summary basis without affording the taxpayer any administrative or judicial relief, if none of the exceptions below apply.

3. Exceptions:

a. Notification of Inconsistent Statement: The consistency requirement andmathematical/clerical assessment provisions do not apply if (i) the partnership has filed a return but the partner’s treatment on the partner’s return is (or may be) inconsistent with the treatment of the item on the partnership return, or (ii) the partnership has not filed a return; and (iii) the partner files with the Secretary a statement identifying the inconsistency.

b. Erroneous Partnership Statement: A partner is treated as having complied with the requirement to file with the Secretary a statement identifying the inconsistency with respect to an item if the partner demonstrates that the treatment of the item on the partner’s return is consistent with the treatment of the item on the statement furnished to the partners by the partnership and elects to have Section 6222 apply to them.

c. Partnership Not Bound: Any final decision with respect to an inconsistent position identified under these exceptions to which the partnership is not a party shall not be binding on the partnership.

Observation: Apparently, any assessment attributable to any of these exceptions shall be treated as an assessment against the individual partner, rather than the partnership, possibly subject to the usual deficiency proceedings applicable to that entity.

4. Existing Law: Under Section 6222, a partner is required to treat partnership items in a manner consistent with the treatment of such partnership item or to comply with the limited exceptions. Failure to comply with these provisions istreated by the partnership as a mathematical or clerical error which is not subject to the FPAA provisions that generally govern partner level adjustments.

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IV. PARTNERSHIP REPRESENTATIVE

A. Designation

Section 6223 requires that each partnership designate (in the manner prescribed by the Secretary) a partner (or other person) with substantial presence in the United States as the partnership representative who shall have the sole authority to act on behalf of the partnership for purposes of the RPAR.

Observation: Note that any person may be designated to serve as partnership representative. It does not have to be a partner. This is a departure from existing law. See IRC sec. 6231(a)(7).

B. Failure to Designate

In any case in which such designation is not in effect, the Secretary may select any person as the partner representative.

Observation: Note that the RFAR gives the IRS broad authority to select any person as partner representative where one has not been designated by the partnership. Although the Regulations may narrow the universe of persons who may be designated by the IRS,partnership agreements should be drafted so that there is always a partnership representative to ensure the IRS is never in a position to designate one.

C. Binding Effect

The partnership and all partners of the partnership are bound by actions taken under the RPAR by the partnership and by any final decision in a proceeding brought under the RPAR with respect to the partnership.

D. Existing Law

Existing law gives any partner the right to participate in any administrative proceeding relating to the determination of partnership items at the partnership level. In addition, under Section 6224, a tax matters partner has authority to enter into a settlement agreement with the Internal Revenue Service.

Observation: The RPAR does away with all of the rights accorded to partners with respect to participating in and being notified of partnership proceedings. There does noteven appear to be an obligation to notify the partners of an audit under the RPAR, although other statutory, common law and contractual provisions may very well require this. In any event, the partners may want to require some level of notice in the partnership agreement.

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V. PARTNERSHIP ADJUSTMENTS

A. Imputed Payment Generally Required (Section 6225)

In the case of any adjustment by the Secretary in the amount of any item of income, gain, loss, deduction, or credit of a partnership, or any partner’s distributive share thereof,

1. Payment By Partnership: The partnership must pay any imputed underpayment with respect to such adjustment in the adjustment year as provided in Section 6232 (the “Imputed Underpayment”); and

2. Other Adjustments: Any adjustment that does not result in an Imputed Underpayment must be taken into account by the partnership in the adjustment year as follows,

a. Non-credit items: With respect to non-credit items, as a reduction in non-separately stated income or an increase in non-separately stated loss (whichever is appropriate) under section 7022(a)(8); or

b. Credit items: With respect to credit items, as a separately stated item.

Observation: The requirement to pay tax at the partnership level in the year of adjustment is a dramatic change in policy. Historically, any tax attributable to partnership adjustments have been accounted and paid for at the partner level. The Imputed Tax Amount provisions had the effect of creating an entity level tax. Another particularly noteworthy consequence of this new rule is that the partners in the year that an adjustment is made will be the partners that take a hit for any amount due that is attributable to partnership adjustments, not the partners in the partnership for the year under audit. This potentially inequitable result should be addressed in a partnership agreement.

3. Computation of Imputed Underpayment Amount: The Imputed Underpayment Amount is determined as follows:

a. Generally: By netting all adjustments of items of income, gain, loss, or deduction and multiplying such net amount by the highest rate of tax in effect for the reviewed year under section 1 or 11;

b. Treatment of Losses: By treating any net increase or decrease in loss as a decrease or increase respectively, in income; and

c. Treatment of Credits: By taking into account any adjustments to items of credit as an increase or decrease, as the case may be, in the amount of tax due under the above computation.

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d. Reallocations: In the case of any adjustment which reallocates the distributive share of any item from one partner to another, such adjustment shall be taken into account under the above provisions by disregarding any decrease in any item of income or gain, and any increase in any item of deduction, loss or credit.

Observation: The Imputed Tax Amount does not appear to take the AMT or Net Investment Tax into account. In addition, affected items at the partner level appear to be ignored.

4. Modification of Imputed Underpayment Amount: The Secretary of Treasury is required to establish procedures under which the Imputed Underpayment Amount may be modified as follows:

a. Amended Returns of Partners: If one or more partners file returns(notwithstanding the section 6511 statute of limitations) for the taxable year of the partners which includes the end of the reviewed year ofthe partnership, such returns take into account all IRS partnership adjustments properly allocable to such partners (and for any other taxable year with respect to which any tax attribute is affected by reason of such adjustments), and payment of any tax is included in such return, then the Imputed Underpayment Amount shall be determined without regard to the portion of the adjustments so taken into account. In the case of any adjustment which reallocates the distributive share of any item from one partner to another, an adjustment to the Imputed Underpayment Amount shall apply only if returns are filed by all partners affected by such adjustment.

Observation: Note that the statute of limitations for refund claims and credits under Section 6511 appears to be reopened for taxpayers that make an election under this provision. Note also that under Section 6235(a)(2), the statute of limitations on assessments for elections under this provision is effectively reopened. Thus, it appears that a taxpayer who makes an election under this provision can make any changes to their personal return, even if it involves a refund. Note also that a partner in a partnership that makes this election must take into account affected items not only for the reviewed year, but also for any other years, in computing any amount owed by the partner.

b. Tax Exempt Partners: The procedures established by the IRS for adjusting the Imputed Adjustment Amount must provide for determining the Imputed Underpayment Amount without regard to the portion thereof that the partnership demonstrates is allocable to a partner that would not owe tax by reason of its status as a tax-exempt entity (as defined in IRC sec. 168(h)(2).

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c. Modification of Applicable Highest Rates: The procedures established by the IRS for adjusting the Imputed Adjustment Amount must provide for taking into account a lower tax rate with respect to any portion of the Imputed Underpayment Amount that the partnership demonstrates is allocable to a partner which (i) is a C corporation, or (ii) in the case of a capital gain or qualified dividend, is an individual. In no event may the lower rate be less than the highest rate in effect with respect to the income and taxpayer described in (i) or (ii), as the case may be. For purposes of clause (ii), an S corporation shall be treated as an individual.

d. Application of Lower Rate to Partners:

i. Generally: The portion of the Imputed Underpayment to which the lower rate applies with respect to a partner under the above provisions is determined by reference to the partners’ distributive share of items to which the Imputed Underpayment relates.

ii. Varied Interests: If the Imputed Underpayment Amount is

attributable to the adjustment of more than 1 item, any partner’s distributive share of such items is not the same with respect to all such items, then the portion of the Imputed Underpayment to which the lower rate applies with respect to a partner is determined by reference to the amount which would have been the partner’s distributive share of net gain or loss if the partnership had sold all of its assets at their fair market value as of the close of the reviewed year of the partnership.

e. Passive Losses of Publicly Traded Partnerships:

i. Adjustment to Imputed Underpayment Amount: In the case of a publicly traded partnership, the procedures established by the Secretary for modifying the Imputed Underpayment Amount must provide (i) for determining the Imputed Underpayment Amount without regard to the portion thereof that the partnership demonstrates is attributable to a net decrease in a specified passive activity loss which is allocable to a specified partner; and (ii) for the partnership to take such net decrease into account as an adjustment in the adjustment year with respect to the specified partners to which such decrease relates.

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ii. Specified Passive Activity Loss: The term “specified passive activity loss” means, with respect to any specified partner, the lesser of (i) the passive activity loss of such partner which is separately determined with respect to such partnership under Section 469(k) with respect to such partner’s taxable year in which or with which the reviewed year of such partnership ends, or (ii) such passive activity loss so determined with respect to such partner’s taxable year in which or with which the adjustment year of such partnership ends.

iii. Specified Partner: The term “specified partner” means any person if such person is a partner of the publicly traded partnership; is described in section 469(a)(2); and has a specified passive activity with respect to such publicly traded partnership, with respect to each taxable year of such person which is during the period beginning with the taxable year of such person in which or with which the reviewed year of such publicly traded partnership ends and ending with the taxable year of such person in which or with which the adjustment year of such publicly traded partnership ends.

5. Other Procedures for Modification of Imputed Underpayment: The Secretary may by regulations or guidance provide for additional procedures to modify the Imputed Underpayment Amount on the basis of such other factors as the Secretary determines are necessary or appropriate.

6. Deadline for Submitting Documentation for Modification of Imputed Adjustment Amount: Anything required under Secretary procedures for modification of the Imputed Adjustment Amount must be submitted to the Secretary not later than the close of the 270-day period beginning on the date on which the notice of a proposed partnership adjustment is mailed unless such period is extended with the consent of the Secretary.

7. Secretary Approval Required for Modification of Imputed Adjustment Amount: Any modification of the Imputed Underpayment Amount may be made only upon approval by the Secretary.

B. Alternative to Payment of Imputed Underpayment Amount by Partnership

Section 6226 of the RPAR provides for an alternative to payment of the Imputed Underpayment Amount by the Partnership as follows.

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1. A partnership is not required to pay the Imputed Underpayment Amount if the partnership meets the following two criteria (i) not later than 45 days after the date of the notice of final partnership adjustment, the partnership elects the application of Section 6226 and (ii) at such time and in such manner as the Secretary provides, the partnership furnishes to each partner of the partnership for the reviewed year and to the Secretary a statement of the partner’s share of any adjustment to income, gain, loss, deduction, or credit (as determined in the notice of final partnership adjustment). In such case, Section 6225 does not apply and each partner must take such adjustment into account as provided below.

Observation: The term “partner” is not defined. So it is unclear whether a partnership will be required to furnish a statement to any indirect partners. If not, what happens when an upper tier entity that itself is treated as a partnership for federal income tax purposes receives a statement? Presumably, this will be addressed in the Regulations.

2. Amount Due By Partners: Each partner’s income tax for the taxable year which includes the date the statement was furnished by a partnership that makes the above election is increased by the aggregate of the adjustment amounts determined below:

a. Partner Year that Includes End of Partnership Reviewed Year: In the case of the taxable year of the partners which includes the end of the reviewed year, the amount by which the income tax would increase if the partner’s share of the adjustments described in subsection above were taken into account for such taxable year, plus

b. Subsequent Years: In the case of any subsequent taxable years before the taxable year in which the statement was furnished by the partnership, the amount by which income tax would increase by reason of the adjustments to any tax attribute which would have been affected. For these purposes, any tax attribute affected by the adjustments must be appropriately adjusted with respect to any subsequent taxable year.

Observation: Note that the adjustments that are taken into account by a partner where an election is made under this provision include only those that increase a taxpayer’s liability. An election under Section 6226 does not address adjustments that result in an overpayment of tax. So, as currently written, it appears that affected items for both the reviewed year and later years may only be taken into account if they increase a taxpayer’s liability. Before making this election, the partners will want to make certain they know what their net tax liability would be as it may not be intuitive.

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3. Penalties: Notwithstanding an election by the partnership to have its partners rather than the partnership pay tax, any penalties, additions to tax, or additionalamount must still be determined at the partnership level and the partners of the partnership for the reviewed year shall be liable for any such penalty, addition to tax, or additional amount.

Observation: The logistics of applying and computing penalties remain to be determined. It is not entirely clear for example whether penalties are applied against the amount owed by the partners where an election is made or against the Imputed Adjustment Amount given that penalties must be determined at the partnership level. Most likely, penalties will be applied against the amount owed by the partners with any determination regarding the applicability of such penalty occurring at the partnership level and collection of the tax occurring at the partner level. Presumably, the anticipated Treasury regulations will clear this up and more.

4. Interest: In the case of an Imputed Underpayment with respect to which an election under Section 6226 is made, interest will be determined at the partner level, from the due date of the return for the taxable year to which the increase is attributable and at the underpayment rate under Section 6621(a)(2) determined by substituting 5 percentage point for 3 percentage points. Note: Under the underpayment rate in Section 6621(a)(2) is generally the federal short term rate plus 3 percentage points.

Observation: Partners in a partnership that elect to report partnership adjustments under their individual returns under either Section 6226 or Section 6225(c)(2) will apparently have to take the 3.8 percent net investment tax as well as any affected items into account. By contrast, a partnership that does not make any such election and instead pays tax on the Imputed Tax Amount.

Observation: The RPAR provisions should be carefully considered in the sale of a partnership interest. The buy-sale agreement should address how a later audit will be handled relation to the selling partner(s).

VI. ADMINISTRATIVE ADJUSTMENT REQUESTS

The Administrative Adjustment Request Provisions of the Tax Code generally describe the procedures for amending partnership returns and filing related refund claims.

A. General

A partnership may file a request for an administrative adjustment in the amount of one or more items of income, gain, loss, deduction, or credit of the partnership taxable year.

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B. Adjustment

Any administrative adjustment must be taken into account for the partnership taxable year in which the administrative adjustment request is made (i) by the partnership under rules similar to the rules of Section 6226 (adjustments by the Secretary) with the exception that the rules applicable to filing of amended returns by the partners within 270 days of a partnership adjustment do not apply and (ii) Section 6226(alternative to payment of imputed underpayment by partnership). Subsection (i) above which refers to Section 6226 does not apply if the administrative adjustment at issue would not result in an imputed underpayment. In that case,Section 6226 applies with appropriate adjustments.

C. Period of Limitations

A partnership may not file an administrative adjustment request more than 3 years after the later of (1) the date on which the partnership return for such year is filed; or (2) the last day for filing the partnership return for such year (determined without regard to extensions).

D. Where Notice of Administrative Proceeding Issued

A partnership may not file an administrative adjustment request after a notice of an administrative proceeding with respect to the taxable year is mailed under Section 6231.

VII. NOTICE OF PROCEEDINGS

A. General Notice Requirements

The RPAR require the IRS to mail to the partnership and the partnership representative (1) notice of administrative proceeding initiated at the partnership level with respect to an adjustment of any item of income, gain, loss, deduction, or credit of a partnership for a partnership taxable year, or any partners’ distributive share thereof; (2) Notice of Proposed Partnership Adjustments resulting from such proceeding; and (3) Notice of Final Partnership Adjustments resulting from such proceeding (FPA).

B. Timing

A FPA may not be mailed earlier than 270 days after the date on which the notice of the proposed partnership adjustment is mailed. The RPAR states that this timing requirement applies to any proceeding with respect to an administrative adjustment request filed by the partnership under Section 6227.

C. Address for Notices

The RPAR states that notices shall be sufficient if mailed to the last known address of the partnership representative or the partnership (even if the partnership has terminated its existence).

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VIII. ASSESSMENT AND COLLECTION

A. Method for Assessing and Collecting

Any Imputed Underpayment Amount must be assessed and collected in the same manner as if it were a tax imposed for the adjustment year by subtitle A, except that it in the case of an administrative adjustment request, the underpayment must be paid when the request is filed.

B. Timing

Generally, no assessment of a deficiency may be made (and no levy or proceeding in any court for the collection of any amount resulting from such adjustment may be made, begun or prosecuted) before (1) the close of the 90th day after the day on which a notice of FPA was mailed, and (2) if a petition is filed in court with respect to such notice, the decision of the court has become final.

C. Mathematical or Clerical Adjustments

If a partnership is notified that, on account of a mathematical or clerical error appearing on the partnership return, an adjustment to an item is required, rules similar to the rules of paragraph’s (1) and (2) of Section 6213(b) shall apply to such adjustment.

Note: Section 6213 (a) and (b) set forth procedures for making mathematical or clerical adjustments to a return. Generally, such assessments are not subject to the deficiency procedures unless a taxpayer requests abatement within 60 days of notice. In such instance, any reassessment is subject to the deficiency procedures of the Internal Revenue Code.

D. Mathematical or Clerical Errors for Upper-Tier Partnerships

If a partnership is a partner in another partnership, any adjustment on account of such partnership’s failure to comply with the requirements of section 6222(a)(requiring partners to be consistent with a partnership return) with respect to its interest in such other partnership shall be treated as a mathematical or clerical error. However, in such instance, subparagraph (2) of Section 6213 which provides a mechanism for abating the assessment and forcing the issuance of a notice of deficiency shall not apply.

E. Partnership Waivers

A partnership may at any time (whether or not any notice of partnership adjustment has been issued), by a signed notice in writing filed with the Secretary, waive the restrictions imposed on the issuance of an assessment in the making of any partnership adjustment.

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F. Interest and Penalties

1. Computation Up to Year of Adjustment:

a. Penalties: Except to the extent discussed above with respect to elections made under Section 6226 to have partners pay tax rather than a partnership following the conclusion of a partnership proceeding, the partnership is liable for any penalty, addition to tax or additional amount. Any penalty, addition to tax, or additional amount must be determined at the partnership level as if such partnership had been an individual subject to tax under chapter 1 of the Internal Revenue Code for the reviewed year and the Imputed Underpayment Amount were an actual underpayment (or understatement) for such year.

b. Interest: Except to the extend provided under Section 6226(c), interest is computed with respect to any partnership adjustment is the interest which would be determined under chapter 67 for the period beginning on the day after the return due date for the reviewed year and ending on the return due date for the adjustment year (or if earlier, the date payment of the imputed underpayment is made). Proper adjustments shall be made for adjustments required for partnership taxable years after the reviewed year and before the adjustment year by reason of such partnership adjustment.

2. Failure to Pay Imputed Underpayment Amount When Due: In the case of any failure to pay an Imputed Underpayment Amount on the date prescribed therefore, the partnership shall be liable for interest that would be determined by treating the Imputed Underpayment as an underpayment of tax imposed in the adjustment year. Likewise, penalties, additions to tax, or additional amounts as the penalties, additions to tax, or additional amounts that would be determined by applying the failure to pay penalties in section 6651(a)(2) and by treating the Imputed Underpayment as an underpayment of tax for purposes of the accuracy-related and fraud penalties in Part II of Chapter 68 of the Internal Revenue Code.

IX. JUDICIAL REVIEW OF PARTNERSHIP ADJUSTMENT

A. Lawsuit to Challenge FPA

Within 90 days after the date on which a notice of a FPA is mailed, the partnership may file a petition for a readjustment with either (1) the United States Tax Court; (2) the district court of the United States for the district in which the partnership’s principal place of business is located; or (3) the United States Court of Federal Claims. Under Section 6241(5) a principal place of business located outside the United States is treated as located in the District of Columbia.

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B. District Court and Court of Federal Claims

A petition for readjustment may be filed in a district court of the United States or the Court of Federal Claims only if the partnership filing the petition deposits with the Secretary, on or before the date the petition is filed, the amount of the Imputed Underpayment (as of the date of the filing of the petition) if the partnership adjustment was made as provided by the FPA. The court may by order provide that the jurisdictional requirements are satisfied where there has been a good faith attempt to satisfy such requirement and any shortfall of the amount is timely corrected.

Observation: This prepayment requirement for filing a lawsuit in either federal district court or the Court of Federal Claims does not appear to carve out an exception for or specifically address the situation where a partnership wishes to make an election under Section 6226 to have its partners pay the tax attributable to partnership adjustments rather than having the partnership pay the Imputed Underpayment Amount. Instead, it seems to require that the Imputed Underpayment Amount be paid in all cases where a lawsuit is to be filed in either District Court or the Court of Federal Claims. For all practical purposes, this could mean that federal district court and the Court of Federal Claims may not be available to any partnership that wishes to make an election under Section 6226 unless the regulations provide otherwise. Otherwise, the partnership may be required to make the Imputed Underpayment Amount in addition to having the partners account for tax due under Section 6226 for partnership adjustments where a lawsuit in filed in either of these forums. In addition, what happens to a partner who files an amended return under Section 6225(c)? Hopefully, the regulations will address these issues.

C. Interest

Section 6234(b)(2) states that any amount deposited under Section 6234 for purposes of filing a lawsuit in either district court or Claims Court shall not be treated as a payment of tax for purposes of the Internal Revenue Code, other than for purposes of Chapter 67(Interest). Presumably, this means that the deposit will earn interest if it is ultimately refunded to the partnership.

D. Scope of Judicial Review

A court with which a petition is filed has jurisdiction to determine all items of income, gain, loss, deduction, or credit of the partnership for the partnership taxable year to which the FPA.

E. Appeals

Any determination by the U.S. Tax Court, district court or Claims Court has the force and effect of a decision or final judgment from that court as the case may be and is reviewable as such. The date of any such determination is treated as the date of the court’s order entering the decision.

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F. Effect of Dismissal

If an action filed in any of the courts above is dismissed, other than by reason of rescission under Section 6231(c), the dismissal shall be considered as a decision that the FPA is correct and an appropriate order will be entered in the records of the court.

X. STATUTE OF LIMITATIONS

A. General 3-Year Statute of Limitations

The RPAR states that, except as otherwise provided, no adjustment may be made after the later of

1. The date which is 3 years after the latest of (A) the date on which the partnership return for such taxable year was filed; (B) the return due date for the taxable year; or (C) the date on which the partnership filed an administrative adjustment request with respect to such year or

2. In the case of any modification of an Imputed Underpayment under section 6225(c), the date that is 270 days (plus the number of days of any extension consented to by the IRS under Section 6225(c)(7)) after the date on which everything required to be submitted to the IRS pursuant to such section is submitted, or

3. In the case of any notice of a proposed partnership adjustment, the date that is 330days (plus the number of days of any extension consented to by the Secretary under Section 6225(c)(7)) after the date of such notice.

Note: The general three-year statute of limitations seems to overrule the prior approach to the statute of limitations which may it merely a minimum 3-year limitations period rather than an exclusive limitations period. However, read literally, the last provision dealing with Imputed Underpayments seems to swallow-up the general three-year statute of limitations. There is no specific time-frame or deadline for issuing a notice of proposed partnership adjustment. In theory, the IRS could issue that notice at any time and would always have 270 days from that date to issue an FPA.

B. Agreements to Extend

The statute of limitations may be extended by an agreement entered into by the IRS and the partnership before the expiration of such period.

C. Exceptions

1. Fradulent Return: No statute of limitations applies in the case of a false or fraudulent partnership return with intent to evade tax.

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2. Substantial Omission: The 3-year statute of limitations is extended to 6 years if any partnership omits from gross income an amount properly includible thereinand such amount is described in Section 6501(e)(1)(A) (referring in part to the 6-year statute of limitations that generally applies to taxpayers where a 25% or more omission of income occurs);

3. No Return: If a partnership fails to file a return for any taxable year, there is no statute of limitations and the adjustment may be made at any time. For these purposes, a return executed by the IRS under Section 6020(b) on behalf of the partnership is not treated as a return of the partnership.

D. Suspension of Statute of Limitations for Mailing of FPA

If an FPA with respect to any taxable year is mailed, the running of the statute of limitations, as modified by other provisions in Section 6235, is suspended for the period during which an action may be filed in court (and if a petition is filed, until the decision of the court becomes final), and for 1 year thereafter.

Note: Special rules apply in the case of a bankruptcy proceeding.

XI. OTHER SPECIAL PROVISIONS

A. Partnership Payments Non-Deductible

No deduction is allowed for any payment required to be made by a partnership under the RPAR.

B. Partnership Ceases to Exist

If a partnership ceases to exist before a partnership adjustment takes effect, such adjustment shall be taken into account by the former partners of such partnership under regulations prescribed by the Secretary.

C. Entities Filing Partnership Returns

If a partnership return is filed by an entity for a taxable year but it is determined that the entity is not a partnership (or that there is no entity) for such year, then, to the extent provided in regulations, the provisions of the RPAR are extended in respect to such year to such entity and its items and to persons holding an interest in such entity.

Note: This provision seems to suggest that the RPAR apply to an entity that files a partnership return even if it is not a partnership.

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D. Information Returns

The RPAR also amend Section 6031(b) which requires partnerships to provide its partners with certain information as required under IRS regulations (i.e., Schedule K-1s). It deletes the last sentence requiring such information to be provided by electing large partnerships by March 15th and instead adds a provision stating that except as provided in the procedures under Section 6225(c) (dealing with modifications to the Imputed Underpayment Amounts), with respect to section 6225(c)(providing alternative procedures to the Imputed Underpayment payment requirement by a partnership), or as otherwise provided by the Secretary, information required to be furnished by the partnership under Section 6031(b) may not be amended after the due date of the partnership return.

Note: This amendment effectively precludes a partnership from changing information provided in a K-1 after the due date of the partnership return. It is not clear how this prohibition against amendments correlates with a partnership’s ability to file administrative adjustment requests (i.e., amended partnership returns) with the IRS.

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Questions for Partnership & Partners

1. Is the partnership eligible to elect out of the new audit rules and, if so, will the annual

election be made to do so,

2. If the partnership intends to elect out, should the partnership agreement prohibit (a)

transfers (including issuances by the partnership) of partnership interests to ineligible

persons (e.g., trusts and entities taxed as partnerships), (b) transfers of partnership

interests (including to an S corporation having more than one S corporation shareholder)

that cause the partnership to have more than 100 partners within the meaning of IRC

Amended Section 6221(b), and (c) S corporation partners from increasing the number of

their shareholders in violation the 100-partner threshold.

3. Who will be designated the partnership representative, what procedures will apply for a

successor partnership representative, and what restrictions (if any) will be imposed by the

partners on the partnership representative’s broad statutory rights,

4. What contractual rights (if any) will partners acquire from the partnership and the

partnership representative with respect to (a) notice of and participation in partnership

audits and related judicial proceedings, (b) approval of various partnership elections

under the 2015 Act, and (c) approval of resolution of partnership audit adjustments,

5. Should the partnership and partners indemnify the partnership representative for acting as

the partnership representative,

6. Will the partnership elect to transfer the payment obligation for any partnership imputed

underpayment tax to its partners by issuing special K-1s to the partners, thus subjecting

such partners to the increased interest rate on their portion of the tax deficiency,

7. How will a partnership that is an upper-tier partnership handle receipt of a special K-1

from the lower-tier partnership,

8. Will partners (including former partners) be required to file amended returns and pay tax

for the audit year reflecting their share of partnership tax adjustments in order to reduce

the partnership imputed underpayment tax and, if so, such partners should be required to

(a) promptly furnish such amended returns to the partnership representative, and (b)

reasonably cooperate with the partnership representative,

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9. If the partnership decides to pay the imputed underpayment tax, will the current partners

be required to contribute or loan cash to the partnership to fund such tax if the partnership

has insufficient cash.

10. Will the partnership agreement require a partner who leaves the partnership (and who

thus becomes a former partner) to indemnify the partnership and its current partners for

the partnership tax cost relating to partnership adjustments for audit years during which

the former partner was a partner,

11. Will lenders of the partnership require the partnership to shift the payment obligation for

any partnership imputed underpayment tax from the partnership to its partners by issuing

special K-1s to its partners or by electing out of the new audit rules, thus eliminating IRS

as a creditor of the partnership,

12. What information must a partner provide to the partnership representative (for example,

(a) a corporate partner’s status as a C corporation, permitting the partnership to calculate

a portion of the imputed underpayment tax at the corporate tax rate, and (b) information

relating to an S corporation partner and its owners and relating to an upper tier

partnership and its owners),

13. How will the partnership allocate partnership tax items attributable to partnership audit

adjustments (and partnership tax payments) to its partners,

14. What provisions should be addressed in the partnership agreement relating to the

partnership audit adjustments that are made after the partnership terminates, and

15. What consequences occur to a partner who fails to comply with partnership provision

related to the new partnership audit rules?