Effective August 9, 2018, the Treasury Department and the Internal Revenue Service ("IRS") have promulgated final regulations (the "PR Regulations" available here) with respect to the designation, removal, resignation, and authority of the partnership representative ("PR") and the "designated individual" under the centralized partnership audit regime for taxable years beginning after December 31, 2017.
The discussion below highlights some of the significant changes and clarifications that the PR Regulations make to the proposed regulations published on June 14, 2017. For a detailed discussion regarding the centralized partnership audit regime see "Winter is Coming: New Partnership Audit Rules Effective January 1, 2018," available here, which summarizes the regime and the issues raised by the regime that should be addressed in partnership agreements, provides background regarding the development of the regime, discusses proposed legislative amendments to the regime, and describes the proposed regulations.
Eligibility to be the PR
The PR Regulations have clarified the following:
- The PR Regulations explicitly provide that a disregarded entity can be the PR. Under the proposed regulations, it was not clear whether a disregarded entity could be the PR, but this has been clarified in the PR Regulations in response to comments.
- The PR Regulations also clarify that a partnership may designate itself as its own PR. Although a partnership may have met all the requirements to be its own PR under the proposed regulations, it was not clear if such self-appointment could be made.
In each case, the disregarded entity or the partnership must have a "substantial presence" in the United States and must appoint a "designated individual" to act on its behalf.
Changing the PR
A partnership may change its PR
- when the partnership is notified that the partnership return is selected for examination, and
- when the notice of administrative proceeding ("NAP") is mailed.
Under the proposed regulations, the partnership was not able to change its PR until it received the NAP, which is sent to the PR. Because the examination notification, unlike the NAP, is only sent to the partnership, the partnership can now change its PR without involvement of the removed PR and before an administrative proceeding begins.
Under the proposed regulations, a resigning PR had the authority, and in some cases was required, to designate its successor. This authority was problematic where the resigning PR had become adverse to the partnership. In response to comments, the PR Regulations have removed the resigning PR's ability to designate its successor.
Another change to the proposed regulations is that under the PR Regulations a PR cannot resign at the time of filing an administrative adjustment request. This prevents a resigning PR from asking the IRS to adjust partnership items and then resigning, which could be unfair to the partnership.
Procedures for Revoking a PR Designation
To provide the partnership with maximum flexibility, any partner who was a partner during the taxable year to which the revocation of the PR designation relates may sign the revocation. Under the proposed regulations, only a person who was a general partner at the close of the taxable year for which the PR designation was in effect could sign the revocation.
The PR Regulations also clarify that a revocation may occur regardless of when and how the PR designation was made (except with respect to a designation made by the IRS) and that a revocation may be made for any reason.
Effective Date for PR Resignation or Revocation
Generally, a PR revocation (or resignation) is effective immediately upon receipt by the IRS, rather than 30 days from the date the IRS received written notice as the proposed regulations had provided.
If you have any questions or concerns about the impact the PR Regulations may have on your business, please contact any of the authors of this update.
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