03 December 2017

US Corporate Law News: Withers issues guidance on new partnership tax audit rules

Gregory Pun
Associate | US

Withers recently issued guidance as to the effectiveness on January 1, 2018 of the Bipartisan Budget Act of 2015 (BBA), repealing existing partnership audit procedures and establishing a new audit system (especially with respect to tiered partnership structures). Under the BBA, audits will continue to take place at the partnership level, but all audit adjustments will now be calculated and paid at the partnership (rather than the partner) level and at the highest individual or corporate tax rate then in effect, with the partnership required to pay audit adjustment-driven tax deficiencies (unless the partnership passes adjustments on to partners). Partners also will no longer have the same information or participation rights in the audit process that they had since the previous set of rules were created in 1982. The new rules apply both to partnerships and limited liability companies taxed as partnerships, in each case with over 100 partners (or to partnerships with fewer partners if any partner is a trust or partnership). Smaller partnerships, which are eligible to elect out of the new rules, must make an annual election and notify their partners thereof. The BBA also replaces the “tax matters partner” with a “partnership representative” (who must have a substantial U.S. presence, but is not required to be a partner) to handle IRS audits for the partnership. In the case of acquisition, merger or investment transactions to which partnerships are a party, the parties will need to consider partnership elections, tax indemnification, allocation of burden of partnership-level taxes and audit coordination as to pre-closing tax periods, as well as whether a successor to a partnership will be deemed a tax “continuation” of that partnership (since such a continuation may cause the acquirer to take over pre-acquisition tax liabilities). To prevent current partners from bearing the tax burdens of former partners, any partnership may elect to “push out” any final partnership adjustments to the partners of the reviewed year so long as the election is made within 45 days of the adjustment's issuance. To best prepare for the BBA's effectiveness, partners should consider amending partnership agreements, including appointment of a “partnership representative” and addition of terms to deal with changes in partner composition and to address whether or not a 45-day election is required. Partners also should utilize indemnification agreements or claw-back provisions to ensure that former partners reimburse the partnership for their share of tax adjustments. Investors in joint ventures taxed as partnerships should inquire as to how the joint venture will deal with the BBA rules. For more information, see https://www.withersworldwide.com/en-gb/new-years-resolutions-revising-partnership-agreements-as-new-audit-rules-take-effect-january-1-2018.

Gregory Pun Associate | Greenwich

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