Advocate Solutions advises clients on a wide range of transactions involving partnership tax, including:
- Choice of Entity Issues
- Partnership Formation and Restructuring Issues
- Contributions and Distributions of Appreciated Property
- Exchange of Debt for Equity
- Redemption and Sales of Partnership and LLC Interests
Partnerships and Limited Liability Companies have become the entity of choice for many business transactions due to their flexibility for tax and state law purposes. Although flexible, the taxation of such entities is one of the most complex in the Internal Revenue Code. We integrate our business acumen with tax planning strategies to achieve our clients’ goals.How Will the New Partnership Audit Procedures Affect My Partnerhip or LLC?
The new partnership audit procedures enacted under the Bipartisan Budget Act of 2015 (BBA or New Audit Rules) provide that a tax adjustment resulting from a partnership audit generally will be determined at the partnership level, unless the partnership elects to have partners assume the audit tax liability or Elects-Out. One of the key components of the New Audit Rules is the requirement that partnerships designate a person with "substantial presence in the United States" to serve as the partnership's representative. If the partnership fails to designate a representative, the IRS has authority to appoint any person as the representative. The partnership representative need not be a partner but during the audit, the IRS will engage exclusively with the partnership representative, raising serious due process concerns for the partners of the entity who may wish to participate in the audit proceedings. Individual partners would also be denied the opportunity to settle with the IRS on an individual basis.
The IRS has already expressed that it intends to carefully review a partnership's Election Out decision to ensure the Election Out rules are not used to frustrate the IRS' compliance efforts. The IRS has issued proposed regulations that implement the New Audit Rules but the regulations have not officially been published in the Federal Register due to the regulatory freeze announced by the White House on January 20, 2017. It is expected that the regulatory freeze will be lifted as it pertains to the publication of these proposed regulations now that Steven Mnuchin has been confirmed into office as Treasury Secretary.
Entities taxed as partnerships are well-advised to revise their operating or partnership agreements before December 31, 2017 to appoint a Partnership Representative, add provisions to their partnership agreements requiring partner input, as needed, in order to enable the partnership to be able to reduce any tax deficiency identified through an audit, and/or provide tax covenants and indemnification provisions to protect individual partners from historic tax liabilities.