Budget Bill Would Repeal TEFRA and Streamline Partnership Audits

Posted by Mary McNulty and Lee Meyercord          The bipartisan budget bill introduced earlier this week (available here) would repeal TEFRA and apply rules similar to the electing large partnership (“ELP”) rules to most partnerships, including partnerships with a limited liability company, a trust, or another partnership as a partner.  If passed, the bill would apply to returns filed for partnership tax years beginning after 2017. The bill is a combination of various proposals made by President Obama (discussed here), Congressman Renacci, and two now-retired members of Congress, Democratic Senator Carl Levin and Republican Congressman, Dave Camp, the former Chair of the House Ways and Means Committee.  The common theme among most proposals, and reflected in the bill, is a shift in the payment of tax from those persons who were partners for the year under audit and received the tax benefit from the tax item at issue, to the partnership and its current partners. The bill did not adopt a suggestion made by various practitioners that would have expanded the application of the ELP rules at the first-tier level for pass-through partners, rather than at the partnership entity level.  That approach would have addressed the complex computational problems present in multi-tiered partnerships but been a less draconian approach than the entity-level assessment approach in the bill.The bill also makes several other simplifying changes.  The bill replaces the tax matters partner rules with a simplified partnership representative provision that allows a partnership to designate either a partner or non-partner, such as a company’s Vice-President of Tax, to be the partnership representative with the sole authority to act of behalf of the partnership for purposes of partnership audit and judicial proceedings.The bill also simplifies the statute of limitations for assessments by looking solely at when the partnership’s return was filed and extensions between the IRS and the partnership.  Partners’ individual statutes of limitation would no longer be taken into account.  Similarly, the statute of limitations for filing partnership refund claims would be based solely on when the partnership return was filed but could not be extended by agreement.Complexities remain in the streamlined provisions in the bill, particularly regarding the computation of the imputed underpayment and determining who pays.  The bill presents several alternatives for the payor of the tax due, including the partnership, the partnership and the partners who file amended returns for the reviewed year, all partners in the reviewed year for which the partnership files adjusted K-1s, and the former partners of a partnership that ceases to exist.The bill did not adopt Congressman Renacci’s proposal that would have imposed joint and several liability on each of (1) the partnership under audit, (2) all direct and indirect partners during the adjustment and (3) all direct and indirect partners of the partnership during a reviewed year.  While the bill’s approach is taxpayer favorable and much welcomed, further proposals may be needed to ensure payment of a partnership’s entire tax liability.If you have any questions about the budget bill or partnership audits, please contact one of us or any of the other Tax lawyers at Thompson & Knight.