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INSIGHT: People, Places, and Things: Final Regulations on the Eligibility, Designation, Revocation, and Authority of Partnership Representatives

September 11, 2018, Bloomberg Tax: Daily Tax Report

Rachel Partain and Aaron Esman of Caplin & Drysdale discuss the IRS final regulations intended to clarify the eligibility requirements and selection process for partnership representatives. The authors conclude that the regulations provide partnerships with flexibility in determining their representative needs.

The Bipartisan Budget Act of 2015 (the BBA) created a new regime by which the Internal Revenue Service will conduct examinations of partnerships and collections related to examination adjustments. One change from the audit regime in place under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) is the replacement of the tax matters partner (TMP) with the newly-created “partnership representative.” The BBA provisions relating to partnership examinations were amended by the Protecting Americans from Tax Hikes Act of 2015 and the Tax Technical Corrections Act of 2018.

Tax code Section 6223 requires each partnership subject to the BBA to designate a partnership representative to act on behalf of the partnership in audit matters. The partnership representative, who must have a substantial presence in the U.S., has the sole authority to bind the partnership and its partners under the BBA procedures.

The IRS promulgated regulations to clarify the eligibility requirements and selection process for partnership representatives. On Aug. 9, 2018, the IRS published final regulations describing who, and what, can serve as a partnership representative. Overall, the regulations are taxpayer favorable, providing the partnership with flexibility to select its representative, while providing the IRS with an administrable set of rules that ensure the IRS is always able to identify who acts on behalf of a partnership.

Eligibility to Serve as a Partnership Representative

The final regulations provide for broad eligibility of service as a partnership representative. Any person as defined under Section 7701(a)(1), including a disregarded entity and the partnership itself, may serve as a partnership representative if the person meets the substantial presence requirements set out in Treasury Regulations Section 301.6223-1(b). Where an entity is designated as the partnership representative, the partnership must also appoint a specific individual who will act on behalf of the entity partnership representative.

The partnership representative and any appointed individual must have a substantial presence in the U.S. in order to be eligible to be designated. In Treas. Reg. Section 301.6223-1(b)(2), the IRS clarified that substantial presence means a U.S. taxpayer identification number, a U.S. address, and a U.S. telephone area code. Also, partnership representatives must make themselves reasonably available to the IRS, including scheduling telephone calls with the IRS, meeting with the IRS at a mutually convenient time, and making the books and records of the partnership available to the IRS.

After initially identifying specific factors (such as death and entity dissolution) that would render a person incapable of acting as a partnership representative, the IRS removed “capacity to act” from the final regulations. The IRS indicated that the capacity concept hindered a partnership's selection of a partnership representative. However, the IRS may still consider these factors, among others, to determine whether partnership representatives or designated individuals lack substantial presence if such persons are incapable of making themselves reasonably available to the IRS.

Designating and Changing a Partnership Representative

The IRS also finalized procedures for designating and changing partnership representatives and appointed individuals. The initial partnership representative and any designated individual for the taxable year must be listed on a partnership's annual tax return.

In general, the partnership representative or the designated individual can be changed only once the partnership has been notified that it has been selected for examination, or upon a subsequent notice of administrative proceeding (NAP) issued to the partnership and partnership representative. A partnership may change its partnership representative or designated individual earlier if the partnership files an administrative adjustment request (AAR), provided that the AAR is filed for substantive reasons beyond merely changing the designated persons. While this timeframe may appear to be a limitation on a partnership's ability to change its partnership representative, the identity of the partnership representative and designated individual only becomes relevant if the IRS commences and examination.

The IRS proposed allowing only a general partner to revoke a partnership representative and appointed individual and to make new designations. However, the final regulations provide that any partner during the taxable year at issue may do so.

Revocations by the partnership are effective immediately upon receipt by the IRS or on the date that the partnership files a valid AAR. No later than 30 days after the receipt of a revocation, the IRS will mail a confirmation of the revocation to both the partnership and the revoked partnership representative.

The IRS also developed a process by which a partnership representative or designated individual can resign once the IRS mails the NAP to the partnership and partnership representative. While the proposed regulations initially contemplated that the resigning partnership representative could designate its successor, the final regulations removed that authority. Instead, the resignation will result in the partnership having no designated partnership representative.

As discussed above, there are some situations in which the IRS may determine that there is no partnership representative designation. Also, if the IRS receives multiple revocations of a partnership representative within a 90-day period, the IRS may determine there is no partnership representative designation in effect. In either case, the IRS will provide notice to the partnership and the most recently designated partnership representative.

Where there is no designated partnership representative as a result of resignation or the IRS's determination of lack of substantial presence, the IRS will provide a 30-day period in which the partnership can make a designation. However, if the partnership does not make a timely designation or if the partnership had multiple revocations within a 90-day period, the IRS has the authority to select a partnership representative and appointed individual for the partnership. The regulations provide several factors that the IRS will consider in making such designations, including the interests in the partnership. It is possible that some partnerships will have not have any persons that meet any of the factors, and it will be interesting to see who the IRS designates in such situations.

The partnership may revoke an IRS-designated representative, but only with the consent of the IRS. The revocation is effective once the IRS sends the partnership notification of its consent.

Authority of the Partnership Representative

Issues relating to the TMP were some of the biggest roadblocks under TEFRA, including questions regarding whether a TMP had to have the authority to act on behalf of the partnership under the partnership agreement and state law. The final regulations ameliorate this problem, and provide that the partnership representative's authority to bind the partnership is granted under federal law.


Rather than provide strict and cumbersome rules, the new regulations demonstrate that the IRS is concerned with providing partnerships with flexibility in determining their representative needs. The partnership representative procedures are also favorable to the IRS, as the timeframe for partnership examinations should be streamlined by the new rules. Overall, partnership audits should operate more efficiently than under the TEFRA audit regime.

Rachel L. Partain is a Member and Aaron M. Esman is an Associate in Caplin & Drysdale's New York City office. Their practice focuses on representing high-net-worth individuals, corporations, and partnerships in complex federal and state tax controversy and litigation matters.

Reproduced with permission from Copyright 2018 The Bureau of National Affairs, Inc. (800-372-1033)

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