The responsibilities and obligations of the tax matters partner.

The tax matters partner (or tax matters person) performs an integral role as the official representative of the partnership (or limited liability company) vis-a-vis the IRS, receiving various notices of entity audit, notifying other partners and making elections (including choice of forum) on behalf of the entity. This article details these responsibilities, offers planning safeguards and highlights a new election for large partnerships after the Taxpayer ,Relief Act of 1997.

Prior to the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), partnership audits were conducted and any resulting adjustments were made at the partner level. TEFRA Section 402 added Secs. 6221-6231, which generally provide for a unified partnership focus in both administrative and judicial proceedings. Under Sec. 6221, the tax treatment of partnership items is to be determined at the partnership level. This centralized concept applies to all partnerships under Sec. 6231(a)(1)(A), except for certain partnerships having 10 or fewer partners.(1) The Small Business job Protection Act of 1996 (SBJPA) repealed Sec. 6244, which contained unified entity-level audit rules for S corporations.(2)

Because the audit is conducted at the entity level, a "tax matters partner" (TMP) must be designated. The TMP serves as the entity's representative in IRS-related matters.

The number of limited liability companies (LLCs) has increased dramatically in the last few years.(3) Conversion from a partnership to an LLC allows the entity to continue to operate under the partnership form if state LLC requirements are met; the partnership's TMP can continue to serve as the LLC's TMP. However, for new (i.e., unconverted) LLCs, members need to be aware of their responsibility in selecting a TMP, This article discusses the TMP selection process in light of 1996 final regulations(4) and highlights the TMP's various responsibilities. The rules apply equally to partnerships and LLCs.

Designating the TMP

Definitions

Regs. Sec. 301.6231(a)(7)-2(a) provides that a "member-manager" of an LLC is treated as a general partner; a member of an LLC who is not a member-manager is treated as a partner other than a general partner. A member-manager is defined by Regs. Sec. 301.6231(a)(7)-2(b)(3) as a member of the LLC who, alone or together with others, is vested with the continuing exclusive authority to make the management decisions necessary to conduct the business for which the organization was formed. If the LLC has no elected or designated member-managers, each member of the LLC is treated as a member-manager.

Designation Methods

Under Regs. Sec. 301.6231 (a) (7)-1, there are four ways a partnership may designate its TMP:

1. A partnership may designate a TMP for the partnership tax year on the partnership return for that year. The designation is made on the space provided on the partnership return or by attaching a statement to that return (Regs. Sec. 301.6231(a)(7)-1(c)).

2. If a partnership return has previously been filed (and a TMP selected), a successor TMP can be chosen by having the current TMP so certify in a statement sent to the service center where the partnership return is filed (Regs. Sec. 301.6231 (a) (7)-1(d)).

3. A partnership may designate a TMP after filing the partnership return for a tax year by submitting a statement signed by general partners who held more than 50% of the aggregate interest in partnership profits held by all general partners at the close of the tax year. All limited partnership interests held by a general partner are included in computing the aggregate interest in partnership profits held by the general partner (Regs. Sec. 301.6231(a)(7)-1(e)).

4. If the partnership does not have a general partner capable of serving as the TMP, a person other than a general partner may be substituted. The partnership may designate the TMP by filing a statement signed by the general and limited partners. The signing partners must have held more than 50% of the aggregate interest in partnership profits held by all partners at the close of the tax year. The designation may be made if, at the time of the designation, each partner who was a general partner at the close of the tax year for which the designation is made (1) is deceased (or if an entity, has been liquidated or dissolved); (2) has been adjudicated by a court to be incompetent; (3) has had his partnership items converted into nonpartnership items under Sec. 6231 (b); or (4) is no longer a partner in the partnership (Regs. Sec. 301.6231(a)(7)-1(f)).

Regs. Sec. 301.6231(a)(7)-1(b)(1) provides that a general partner may be designated as the TMP if he was a general partner (1) at some time during the tax year for which the designation is made or (2) at the time the designation is made. According to Regs. Sec. 301.6231(a)(7)-1(b)(2), without the Service's consent, a non-U.S. person may not be designated the TMP if a U.S. person is eligible to be the TMP.

Default Rules

The Code provides default rules if the partnership fails to properly designate a TMP. Sec. 6231(a)(7)(B) provides that if no general partner is designated, the TMP will be the general partner with the largest profits interest in the partnership at the close of the tax year involved. If there is more than one such partner, the partner whose name appears first alphabetically is the TMP, according to Sec. 6231(a)(7)(B).

According to Regs. Sec. 301.6231 (a)(7)-1(o), the Service may deem it impractical to apply the largest-profits-interest rule in any of the following situations:

1. The general partner with the largest profits interest is not apparent from the Schedules K-1 and not otherwise readily determinable.

2. Each general partner has a zero profits interest because of death, adjudication of incompetence, partnership liquidation or conversion of partnership items to nonpartnership items.

3. The general partner with the largest profits interest (i) has been notified of suspension from practice before the Service, (ii) is incarcerated, (iii) is residing outside the US. or (iv) cannot be located or cannot perform the functions of the TMP. (Lack of cooperation with the Service is not a basis for finding that a partner cannot perform the functions of a TMP)

Regs. Sec. 301.6231(a)(7)-1(p)(1) provides that, when it is impractical to apply the largest-profits-interest rule, the Service will generally select the TMP from the general partners who were such at some time during the tax year under examination. The Service will give the partnership 30 days' notice under Regs. Sec. 301.6231(a)(7)-1(r) (2), during which time the partnership may designate the TMP before the Service does.

According to Regs. Sec. 301.6231(a)(7)-1(p)(2), the Service may select a general or limited partner as the TMP if all of the general partners who were partners at some time during the tax year under examination are deemed to have a zero profits interest in the partnership. The partner must be a partner in the partnership at the close of the tax year under examination. Under Regs. Sec. 301.6231 (a)(7)-1(q) (2), in selecting a partner, the Service may consider:

1. The partner's general knowledge in tax matters and the administrative operation of the partnership.

2. The partner's access to the partnership's books and records.

3. The partner's profits interest.

4. The views of the partners with a majority interest in the partnership regarding the selection.

5. Whether the partner is a partner when the TMP selection is made.

6. Whether the partner is a U.S. person under Sec. 7701 (a) (30).

Cases: In Computer Programs Lambda Ltd.,(5) the Tax Court appointed a limited partner as the TMP after notice and hearing, when there were no general partners meeting the TMP eligibility requirements. Under Regs. Sec. 301.6231(a)(7)-1(q) (3), if a partner is selected by the IRS under Regs. Sec. 301.6231(a)(7)-1(p) (2) or (3) (ii), the partnership may not designate a partner who is not a general partner to serve as the TMP in place of the TMP selected by the Service.

In Monetary II Limited Partnerships,(6) a former general partner was allowed to be TMP for a year in which that partner held a partnership interest. According to the Ninth Circuit, the fact that the partner no longer held an interest in the partnership was not controlling, only that he had been a partner in the year at issue.

In Montana Sapphire Associates, Ltd.,(7) the Tax Court ruled that a limited partnership's accountant, who was not a partner in the limited partnership, could not serve as the entity's TMP.

Similarly, in 1983 Western Reserve Oil & Gas Co., Ltd.,(8) a court-appointed receiver could not be the TMP and thus lacked authority to file a Tax Court petition.

Planning: Regs. Sec. 301.6231(a)(7)-1(p)(1) provides that the Service may not select as TMP a person who was not a general partner during the tax year under examination. If the partnership wants to designate such a partner as the TMP, it can do so only by having the partnership make the designation or by using the largest-profits-interest rule.

Partnerships with more than one general partner should make their own TMP designation. A partnership has the authority under Regs. Sec. 301.6231 (a)(7)-1(j) to revoke its own TMP designation.

The designation of a TMP by a partnership is effective for only one tax year. However, the initial designation of the TMP can be made in the partnership agreement for a period of more than one year (i.e., the designation can remain effective until changed). This TMP would be listed on the entity's return each year. The partnership agreement should provide for changing the TMP designation and for making a new designation if a current TMP's designation is terminated.

Alternates, Resignation, Revocation 

Under Regs. Sec. 301.6231(a)(7)-1 (g), the partnership may designate in its partnership agreement an alternate TMP under any of the methods used to choose a TMP The alternate TMP becomes the TMP only if the designated TMP is terminated due to death or adjudication of incompetence.

The TMP may resign by filing a written statement with the service center in which the partnership return was filed. The signed statement should specify the partnership tax year to which the resignation relates and include the TMP's name, address and taxpayer identification number (TIN).

Regs. Sec. 301.6231(a)(7)-1(j) allows a partnership to revoke its designation by filing a statement with the service center in which the partnership return was filed. The statement should include the following:

1. Name, address, and TIN of the partnership and the general partner whose designation as TMP is being revoked.

2. The partnership tax year to which the revocation relates.

3. A statement revoking the designation of the TMP for the tax year specified.

4. Signature(s) of the general partner(s) (or partners constituting a majority interest) at the close of the partnership tax year to which the revocation relates.

Effective date: A TMP designation, resignation or revocation becomes effective on the day the required statement is filed with the Service, according to kegs. Sec. 301.6231(a)(7)-1(k)(1). However, Regs. Sec. 301.6231 (a)(7)-1(k) (2) states that if a notice of the beginning of an administrative proceeding (NBAP) (discussed below) is mailed before the date on which a statement of designation, resignation or revocation is filed, the Service may disregard the statement until 30 days after it is filed.

Termination of Designation

Under Regs. Sec. 301.6231 (a)(7)-1(1) (1), the designation of a TMP by either the partnership or by the Service terminates on:

1. Death of the designated TMP.

2. Adjudication of incompetence of the TMP.

3. If the TMP is an entity, its liquidation or dissolution.

4. Partnership items of the TMP becoming nonpartnership items under Sec. 6231 (c).

5. The day on which (i) the TMP resigns, (ii) there is a subsequent designation of the TMP or (iii) there is a revocation of the designation.

Regs. Sec. 301.6231(a)(7)-1(1)(2) states that any actions taken by the TMP before the termination of designation remain valid.(9) The partnership also may terminate a designation by selecting a new TMP; Regs. Sec. 301.6231(a)(7)-1(h) provides that subsequent designations supersede prior ones.

Administrative Proceeding

Issuance of NBAP

At the beginning of a partnership administrative proceeding, the Service issues a NBAP at the partnership level. Under Sec. 6229(a), the Service has three years from the later of (1) the date on which the return was filed or (2) the last day for filing the return for that year (excluding extensions) in which to assess tax on a partnership item. The three-year SOL may be extended under Sec. 6229(b)(1)(B) for all partners via an agreement signed by the TMP and filed with the Service. Under Sec. 6229(b)(1)(A), the period may be extended for a single partner via a similar agreement signed by the partner and the Service. If a TMP consents to an extension regarding an examination, he is required by Temp. Regs. Sec. 301.6223(g)1T(b)(1)(v) to notify all partners (other than notice partners (discussed below) and partners excluded from the notice requirements), within 30 days of the date the consent is granted.

Cases: In Miller,(10) a partner contested the TMP's authority to consent to extend the SOL while the TMP was involved in a criminal tax investigation by the Service. The Tax Court agreed with the Service that the TMP had the authority to extend the SOL. While the Service had began a criminal investigation of the TMP before requesting extensions for the tax years under audit, the TMP had not received written notification from the Service of the conversion of items to nonpartnership.

In Thermal Energy Concepts, Inc.,(11) an S shareholder other than the tax matters person consented to an extension of the SOL. The S corporation had previously designated a TMP; however, the chief financial officer and vice-president of the corporation signed and returned the Form 872-R, Special Consent to Extend the Time to Assess Tax Attributable to Items of an S Corporation. The corporation's designated tax matters person contested the validity of the extension. The Tax Court held that the chief financial officer had the authority to sign the Form 872-R, because the corporation's by-laws and state (California) law allowed the officer to act for the corporation.

Planning: The partnership agreement or corporate by-laws should designate the TMP and allow only the TMP to enter into consents and other agreements with the Service.

Who Receives Notice?

Notice partners: Under Sec. 6223(b), "notice partners" receive notice directly from the Service; these are all partners in a partnership with less than 100 partners who have at least a 1% interest in partnership profits. Notice partners also include designated members of any "notice groups," which are defined by Sec. 6223(b)(2) as groups of partners having an aggregate interest of 5% or more in partnership profits.

Non-notice partners: According to Temp. Regs. Sec. 301.6223(g)-1T(a)(1) and (2), the TMP, within 75 days of receipt of a NBAP (or within 60 days of receipt of a notice of final partnership administrative adjustment (NFPAA)), must send a copy to each non-notice partner.

Temp. Regs. Sec. 301.6223(g)1T(a)(3) provides that the TMP is not required to notify non-notice partners if:

1. Before expiration of the 75-day (or 60-day) period, a partner's partnership items become non-partnership items.

2. A partner is an indirect partner (discussed below) and has not been identified to the TMP at least 30 days before the TMP is required to send the notice.

3. A person is a partner under Temp. Reg. Sec. 301.6231(a)(2)-1T solely because he is the spouse of an individual who holds a separate interest in the partnership and files a joint return with that person.

4. A partner is a member of a notice group as of the date on which the notice was mailed to the TMP

5. A partner has already been provided notice by another person.

6. The notice has been withdrawn by the IRS under Temp. Regs. Sec. 301.6223(a)-2T.

Indirect and passthrough partners: Indirect partners are defined by Sec. 6231 (a) (10) as persons who hold an interest in a partnership through one or more passthrough partners. Passthrough partners include, under Sec. 6231 (a)(9), partnerships, estates, trusts, S corporations, nominees and other similar persons.

The passthrough partner is required by Temp. Regs. Sec. 301.6223(h)-1T to forward to indirect partners within 30 days of receipt a copy of any notice or information received from the Service, the TMP or another passthrough partner.

According to Temp. Regs. Sec. 301.6223(a)-1T(a)(3)(ii), if the indirect partners have been identified in advance to the Service or the TMP, the Service or the TMP may have notice responsibilities with respect to such partners.

Failure to provide notice: Sec. 6230(f) provides that the failure of a TMP to provide required notice does not relieve the uninformed partners from the final determination of the partnership proceedings. Unless otherwise stated in the partnership agreement, the TMP can make decisions regarding material matters that may affect the partners. For example, within the first 90 days of the mailing of the NFPAA, the TMP has the unrestricted right to select the judicial forum for review of the Service's adjustments.

This selection affects all partners, because it determines which court will hear the case and whether the partners must pay the deficiency in advance of the suit. The TMP represents both the partnership and the partners and is required to notify non-notice partners of the progress of audit proceedings.

Planning: The partners should consider requiring majority approval regarding the selection of judicial forum. Conceivably, a partner could bring a lawsuit against the TMP in state court for breach of contract or fiduciary duty. Therefore, in the LLC or partnership agreement, the partners may choose to indemnify the TMP from potential liability arising from his responsibilities as TMP.

All agreement provisions granting authority to the managing partners should be analyzed for potential conflicts with the authority of the TMP allowed under the regulations. The agreement should also provide for the efficient and timely selection of the successor TMP in case of resignation, retirement or death.

TMP's Obligations

On receipt of the NBAP, Sec. 6230(e) provides that the TMP must furnish the Service with the name, address, profits interest, and TIN of each person who was a partner in the partnership at any time during the tax year(s) to which the notice relates. If the TMP later finds the information furnished to be incomplete or incorrect, he must furnish corrected or additional information to the IRS within 15 days, under Temp. Regs. Sec. 301.6230(e)-1T(c). The TMP must furnish this information to the Service for indirect partners to the extent the TMP has identifying information as to them.

As was discussed, the TMP is required to furnish a copy of the NBAP to all non-notice partners within 75 days after it is mailed to the TMP by the Service. The notice is deemed mailed on the earlier of the date mailed to the TMP at (1) the address on the partnership return or (2) the TMP's address on his individual Federal income tax return.

The Service is required by Sec. 6223(d)(1) and (2) to furnish an NBAP to all notice partners within 120 days before sending an NFPAA to the TMP.

Planning: Because the notice may be sent to notice partners by the Service sometime after the TMP has received the MAP, the partnership agreement should require the TMP to provide notice to notice partners at the same time notice is provided to non-notice partners.

Withdrawal of NBAP

Temp. Regs. Sec. 301.6223(a)-2T(a) allows the Service to withdraw a NBAP within the first 45 days after it is mailed to the TMP. Neither the Service nor the TMP is required to furnish notice of that proceeding to any other partner.

Planning: The partnership agreement should require the TMP to provide notice of withdrawal of a NBAP by the, Service to all partners who have received a copy of the initial notice.

Participation by Non-TMP Partners

Sec. 6224(a) allows every partner the right to participate in any administrative proceeding relating to the determination of partnership items at the partnership level. Unless the partnership agreement states otherwise, the TMP is under no obligation to send further notices until the closing conference with the examining agent.

Planning: The partnership agreement should require the TMP to provide additional notice to the partners beyond that which is otherwise required and describe in detail the TMP's responsibility to cooperate with other partners wanting to participate in the partnership administrative proceeding.

Closing Conference

On finalizing the audit phase of a partnership administrative proceeding, the IRS sends the TMP a summary report containing a detailed explanation of proposed adjustments. The TMP is required by Temp. Regs. Sec. 301.6223(g)-1T(b)(1)(i) and (3), within 30 days of receiving this information, to furnish notice of the closing conference to all partners (other than notice partners).

Because the TMP is required to notify the Service of the number of partners, or partners' representatives, planning to attend the conference, partners wanting to attend the closing conference should notify the TMP in advance.

60-Day Letter

The TMP will receive a 60-day letter from the Service after the closing conference. This letter starts a 60-day period within which the TMP (or any other partner) may file a written protest of the proposed adjustments.

The 60-day letter is generally accompanied by a copy of the revenue agent's report, outlining the Service's position concerning the proposed adjustments. Within 30 days after receipt of the 60-day letter, the TMP is required by Temp. Regs. Sec. 301.6223(g)-1T(b)(1)(ii) to furnish notice to all partners (other than notice partners) of proposed adjustments, rights of appeal and the requirements for filing a protest. The 60-day letter provides that the TMP has the sole authority to request an extension of the 60-day period within which a protest may be filed.

Settlement Agreements

Form 870-P, Agreement to Assessment and Collection of Deficiency in Tax for Partnership Adjustments, generally accompanies each partner's 60-day letter. The unified partnership proceedings allow the Service to enter into a settlement agreement with one or more partners at any time as to partnership items; thus, a uniform settlement at the partnership level is not required.

Under Sec. 6224(c)(1) and (3), a settlement agreement generally binds only those partners who are parties to the agreement. Indirect partners are bound by a settlement agreement entered into by passthrough partners. Non-notice partners are bound by a settlement agreement entered into by the TMP that states that it is binding on other partners. Indirect partners and non-notice partners may file a statement with the Service withdrawing the authority of the TMP to settle on their behalf.

Consistent settlements: If the Service enters into a settlement agreement with a partner, Temp. Regs. Sec. 301.6224(c)-1T(a) provides that it must offer any other partner who so requests the right to settle under similar terms. Under Temp. Regs. Sec. 301.6224(c)-3T(c)(1), a partner's request for a consistent settlement must be made in writing to the IRS office that entered into the settlement. Sec. 6224(c)(2) states that such request must be filed within the later of (1) 150 days after the NFPAA is mailed to the TMP or (2) 60 days after the settlement was entered into.

Notice of settlement: The TMP is required by Temp. Regs. Sec. 301.6223(g)-1T(b)(1)(iv) to furnish to all partners (other than notice partners) information related to the Service's acceptance of any settlement offer, within 30 days of such acceptance. The Service is not required to notify the TMP or partners that a settlement has been offered to (or accepted by) a partner.

Planning: The partnership agreement should require that partners reaching a settlement with the Service must notify the TMP regarding the terms of the settlement.

Appeals Conference

An appeals conference will be scheduled by the Service if a partner files a protest in response to the 60day letter. Under Temp. Regs. Sec. 301.6223(g)-1T(b)(iii), the TMP must notify all partners (other than non-TMP notice partners) of the time and place of the appeals conference within 30 days of receiving such information. If multiple protests are filed, a consolidated appeals conference may be held in the appeals office servicing the area in which the partnership has its principal place of business.(12)

Partners not settling with the Service have a right to attend the appeals conference. They must notify the TMP in advance so that he can furnish the Service with the names of the partners (or their representatives) who will be attending the conference.

Judicial Proceedings

After the appeals conference, the TMP and notice partners will receive a NFPAA. The NFPAA begins the 150-day period within which the final adjustments to partnership items may be appealed in court.

Cases: In Government Arbitrage Trading Co.,(13) a general partner with a 0.5% interest in the partnership filed a Tax Court petition in response to a NFPAA. The court determined that the partner was not a notice partner for the tax year at issue, because he owned less than a 1% interest in partnership profits, so his petition was untimely filed.

Petition for Readjustment 

Under Sec. 6226(a), a petition for readjustment of partnership items may be filed in either: (1) the Tax Court, (2) the district court for the district in which the partnership's principal place of business is located or (3) the Court of Federal Claims. The partnership's principal place of business is determined as of the date the petition is filed. Under Sec. 6226(a), in the first 90 days after the NFPAA is mailed to the TMP, he has sole authority-to-file a petition for readjustment of partnership items with the Tax Court, the district court or the Court of Federal Claims.

Sec. 6226(f) allows the court in which the petition is filed to have jurisdiction to determine all partnership items for the tax year(s) to which the NFPAA relates, the proper allocation of such items among the partners and the applicability of any penalty, addition to tax, or additional amount that relates to an adjustment to partnership items.

If the TMP does not file a petition for readjustment within the 90-day period, any notice partner (or notice group) may file a petition under Sec. 6226(b)(1) within 60 days after the close of the 90-day period. A petition for readjustment filed by a notice partner or a notice group member during the 90-day period is deemed filed on the last day of the 60-day period after the close of the 90-day period, as long as no other action is brought during the 60-day period.

In either case, the TMP is required by Temp. Regs. Sec. 301.6223(g)-1T(b)(1)(vii) to furnish notice to all partners (other than notice partners) of the filing of a petition within 30 days from the time the petition is initially filed.

If a petition for readjustment is filed in any court by a partner other than the TMP, Sec. 6226(b)(6) gives the TMP the right to intervene on behalf of the partnership in the judicial proceeding.

Planning: The TMP's right to select the forum for judicial review of the Service's determination is a critical right, because it will determine (1) the body of law that will be applicable and (2) whether the partners can be required to prepay an amount equal to their respective tax deficiencies.

When drafting a partnership agreement, the TMP's ability to select the judicial forum in which to file a petition for readjustment may be restricted by requiring him to obtain the approval of a certain percentage of partners before selecting a particular court.

Appeals and Redeterminations

The TMP or any notice partner (or notice group) can request an appellate review of a judicial determination. The TMP is required by Temp. Regs. Sec. 301.6223(g)-1T(b)(1)(viii) and (ix) to provide notice to all partners (other than notice partners) of (1) the filing by any partner of an appeal of any judicial determination and (2) any final judicial redetermination within 30 days of its occurrence.

Indemnification and Reimbursement 

Indemnification and reimbursement provisions for the TMP should be included in the partnership agreement. Such provisions provide incentives for a partner to take on the responsibility of the TMP and help to deter lawsuits against the TMP, including for breach of fiduciary duty or contract.

Summary of Responsibilities

The TMP's responsibilities are crucial to the proper conduct of administrative and judicial proceedings. Sec. 6230(f) provides that the failure of the TMP to properly serve as the partnership's representative does not relieve the partnership or its partners from any adverse effects stemming therefrom.

Administrative and Judicial Proceedings

According to Sec. 6223(g), the TMP receives all notices and must keep each partner informed of all administrative and judicial proceedings for the adjustment at the partnership level of partnership items. The TMP is the contact for the Service in acquiring access to the partnership's books and records. Under Secs. 6226(a) and 6228(a), the TMP has the responsibility of the choice of forum in which to litigate.

The TMP is responsible for keeping the notice partners and notice group representatives informed of the following:

1. Proposed audit adjustments.

2. Scheduling of the audit closing conference.

3. Procedure for administrative appeal, including time and place thereof 4. Acceptance of any settlement offer by the Service.

5. Consent to an extension of the SOL.

6. Filing of the administrative adjustment request (AAR).

7. Filing of a petition for judicial review of a NFPAA.

8. The procedure for judicial review.

9. Final judicial redetermination of a NFPAA or AAR.

The TMP must also furnish copies of the NBAP and NFPAA to all non-notice partners not part of a notice group. Under Sec. 6230(e), the TMP is also responsible for (1) submitting a list of all partners' names, addresses, profits interests and TINs after receipt of a NBAP and (2) updating within 15 days any previously submitted information that is incorrect or incomplete.

The TMP is required by Tax Court Rule 241(f)(1) to send notice of the filing of a Tax Court petition to all other partners within five days after receiving the Notification of Receipt of Petition from the Tax Court. If a partner other than the TMP filed the Tax Court petition, Tax Court Rule 241 (f) (2) requires that partner to serve a copy of the petition on the TMP within five days of receipt of the Notification of Receipt of Petition from the Tax Court. The TMP then has five days to notify all of the other partners of the filing. Because the TMP has the authority under Tax Court Rule 248(a) to settle a Tax Court case for all partners, the TMP must notify the partners of the settlement and allow 90 days for responses from them before entering into a Tax Court decision.

Extension of SOL

The TMP has the authority under Sec. 6229(b)(1)(B) to extend the SOL for partnership items under audit by executing either Form 872-O, Special Consent to Extend the Time to Assess Tax Attributable to Items of a Partnership, or Form 872-P, Consent to Extend the Time to Assess Tax Attributable to Items of a Partnership.

Settlement Agreements

The TMP's authority under Sec. 6224(c)(3)(A) to enter into a settlement agreement during an administrative proceeding is effective only as to certain non-notice partners. This authority, however, can be withheld under Sec. 6224(c)(3)(B) by filing with, the Service a written statement stating that the TMP does not have the authority to enter into a binding settlement agreement for that partner. The TMP's authority to enter into a settlement agreement does not extend to notice partners or members of a notice group.

If the NFPAA is subject to a Tax Court petition, the TMP has the authority under Tax Court Rule 248(a) to bind all partners to a Tax Court decision. Partners who have filed a notice of election to participate under Tax Court Rule 245 (b) may be subject to the settlement obtained by the TMP.

TRA '97 Highlights

Simplified Audit Procedure for Large Partnerships

TRA '97 Section 1222 created a new auditing procedure for large partnerships. Under new Secs. 771-777, partnerships with 100 or more partners ("electing large partnerships" (ELPs) as defined in Sec. 775) can use a simplified flow-through reporting system. ELPs can report audit adjustments as additional distributive share items in the year the adjustment is imposed, rather than the year to which the adjustment relates. As a result, a current-year partner could be liable for additional tax relating to an audit adjustment to a year he was not a partner. Thus, the adjustments do not generally affect a partner's prior year returns, except for changes to distributive shares.

Alternatively, under new Sec. 6242, added by TRA '97 Section 1222(a), a large partnership may elect to pay the additional tax on the audit adjustment at the entity level; the tax is computed by netting the adjustments of income and loss to the partnership and multiplying the result by the highest income tax rate.

Appointing a Representative

An ELP is required to designate a partner or other person who has authority to act on the entity's behalf vis-a-vis the Service. This representative has duties similar to the TMP under Sec. 6231(a)(7). However, new Sec. 6255(b), added by TRA '97 Section 1222(a), does not require the representative to be a partner.

Under Sec. 6255(b)(1), the Service may designate any of the ELP's partners as the representative to act on the ELP's behalf. However, an ELP can select another partner to replace the Service-appointed representative.

Notice Requirements

The IRS is not required to notify an ELP's individual partners of the commencement of an administrative proceeding or adjustment resulting therefrom; under Sec. 6245(b)(2), only the ELP will receive such notice. The ELP has 90 days after the notice was sent to file a petition for readjustment. Under Sec. 6247(a), only the ELP, not the partners, has the right to appeal the adjustment.

Conclusion

The TMP plays a pivotal role in the unified partnership administrative and judicial proceedings. The LLC or partnership should designate the TMP after careful and thoughtful consideration; otherwise, the Service will make the designation under the default rules. The duties of the TMP include (1) providing notice of an audit to partners, (2) negotiating settlement agreements, (3) extending SOLs for the partnership and partners and (4) determining the forum for judicial review.

The TMP is also responsible for conducting the audit in an efficient manner, as well as providing the members (or partners) with current information on the audit proceedings so that they can decide whether to participate.

The TMP provisions in LLC and partnership agreements can be crucial to the successful settlement of an LLC or partnership audit. Careful planning, especially in the selection of the TMP, is a necessary ingredient in that success.

(1) Under Sec. 6231 (a) (1) (B), partnerships with 10 or fewer partners, each of whom is a natural person (other than a nonresident alien), a C corporation or an estate of a deceased partner, may elect to have the unified partnership proceedings rules apply.

(2) SBJPA Sec. 1307 (c) (1) repealed the TEFRA audit provisions for S corporations (Secs. 6241-6245) for tax years beginning after 1996.

(3) Regs. Sec. 301.6231(a)(7)-2(b)(1)(i) and (ii) define an LLC as an organization (1) formed under a law that allows the limitation of the liability of all members for the organization's debts and other obligations and (2) classified as a partnership for Federal tax purposes.

(4) TD 8698 (12/20/96), effective Dec. 23, 1996.

(5) Computer programs Lambda Ltd., 90TC 1124 (1988).

(6) Monetary II Limited Partnership, 47 F3d 342 (9th Cir. 1995) (75 AFTR2d 95-777, 95-1 USTC [paragraph] 50,073), aff'g TC Memo 1992-562.

(7) Montana Sapphire Associates, Ltd., 95 TC 477 (1990).

(8) 1983 Western Reserve Oil & Gas Co., 95 TC 51 (1990).

(9) For example, if the TMP had previously consented to an extension of the statute of limitations (SOL) under Sec. 6229 (b) (1) (B), the extension would remain valid even after the termination of the designation.

(10) In re Guy Miller, 174 BR 791 (9th Cir. 1994)(74 AFTR2d 94-7370, 95-1 USTC [paragraph] 50,106).

(11) Thermal Energy Concepts, Inc., TC Memo 1993-541.

(12) Temp. Regs. Sec. 301.6226(a)-1T(a). If the partnership's principal place of business is outside the U.S., it is treated as being located in the District of Columbia, according to Sec. 6255(c), added by the Taxpayer Relief Act of 1997 (TRA '97), Section 1222(a).

(13) Government Arbitrage Trading Co., TC Memo 1994-136.

RELATED ARTICLE: EXECUTIVE SUMMARY

* Because the audit is conducted at the entity level, a tax matters person must be designated, to serve as the entity's representative in IRS-related matters.

* The regulations provide four ways for a partnership to designate a TMP; default rules are also provided.

* The partnership agreement or corporate by-laws should designate the TMP and allow only the TMP to enter into consents and other agreements with the Service.

Larry R. Garrison, Ph.D., CPA Professor of Taxation Henry W. Bloch School of Business and Public Administration University of Missouri-Kansas City Kansas City, MO