ALERT Tax Law NOVEMBER 2015 Important Revisions to Partnership Tax Audit and Payment Rules by Alan Tarr, Co-Chair and Tom Lawson, Partner The recently enacted 2015 Budget Act includes a that would be a C corporation if it were domestic), an dramatic change in the rules for tax audits of, and S corporation or an estate of a decedent, may elect the payment of tax deficiencies by, partnerships out of the new rules. Partnerships and trusts are not (including limited liability companies that are taxable as qualified partners for this purpose. As a practical matter, partnerships). Although the new rules generally are not this election out will not be available to private equity or effective until 2018, partnerships may elect to apply the hedge funds, which typically have partnership members. rules sooner.

In light of these new rules, agreements for For other partnerships, it raises questions for clients as acquiring or disposing of partnership interests require to whether they want to prohibit nonqualified partners additional provisions dealing with these rule, new and disqualifying transfers so as to come within this partnership agreements need to take them into account exception, and what to do if they already have such and existing partnerships should consider how their partners. Although audits at the partner level may be less agreements should be amended. likely, transfers to family partnerships and trusts are very common for estate and family planning. Under the new rules, audits with respect to items of income, gain, loss, deduction and credit from a If the partnership does not (or cannot) elect out, it partnership are generally conducted at the partnership may still elect to require the deficiency based on the level, and the partnership (not any of the partners) is partnership level adjustments to be paid by the reviewed liable for any deficiency based on an assumed tax year partners. In such a case, however, the interest rate rate.

As a result, the partners in the year in which the charged by the IRS will generally be increased by 200 adjustment is made (called the “adjustment year”) bear basis points. the cost, rather than the persons who were partners in the year that was audited (called the “reviewed year”). In the audit, the partnership is represented by a partnership representative who may or may not be There are two general methods under the statute to put a partner. All partners are bound by the partnership the burden back on the reviewed year partners. First, a level adjustment.

Net downward adjustments will not partnership that has 100 or fewer partners (taking into result in refunds, but will reduce the partnership’s account certain look-through rules), each of which is an individual, a C corporation (including a foreign entity Los Angeles New York Chicago Nashville This publication may constitute “Attorney Advertising” under the New York Rules of Professional Conduct and under the law of other jurisdictions. Washington, DC Beijing Hong Kong www.loeb.com . income otherwise allocated to the partners in the If you have any questions or would like assistance adjustment year. Special rules apply to misallocations with your agreements, please contact Alan Tarr in NY between partners. (212.407.4900, atarr@loeb.com) or Tom Lawson in LA The purpose of the new rules is to make it easier to (310.282.2298, tlawson@loeb.com). audit partnerships and collect any related deficiencies. This alert is a publication of Loeb & Loeb and is intended to provide As a result, we expect the new rules will increase such continue an attorney client relationship nor should it be construed as audits. Unfortunately, there are many open questions and much of the implementation of the new rules has information on recent legal developments. This alert does not create or legal advice or an opinion on specific situations. © 2015 Loeb & Loeb LLP.

All rights reserved. been left to future guidance. We will keep you apprised of additional developments. Loeb & Loeb’s Tax Practice JOHN ARAO jarao@loeb.com 310.282.2231 THOMAS N. LAWSON tlawson@loeb.com 310.282.2289 maspinwall@loeb.com 310.282.2377 JEROME L.

LEVINE jlevine@loeb.com 212.407.4950 RYAN M. AUSTIN raustin@loeb.com 310.282.2268 MARY ANN MANCINI mmancini@loeb.com 202.618.5006 LEAH M. BISHOP lbishop@loeb.com 310.282.2353 ANNETTE MEYERSON ameyerson@loeb.com 310.282.2156 sblumenthal@loeb.com 202.618.5009 RONALD C.

PEARSON rpearson@loeb.com 310.282.2230 DEBORAH J. BROSS dbross@loeb.com 310.282.2245 ALYSE N. PELAVIN apelavin@loeb.com 310.282.2298 TARIN G.

BROSS tbross@loeb.com 310.282.2267 JONATHAN J. RIKOON jrikoon@loeb.com 212.407.4844 CHRISTOPHER W. CAMPBELL cwcampbell@loeb.com 310.282.2321 CRISTINE M.

SAPERS csapers@loeb.com 212.407.4262 REGINA I. COVITT rcovitt@loeb.com 310.282.2344 JOHN F. SETTINERI jsettineri@loeb.com 212.407.4851 TERENCE F.

CUFF tcuff@loeb.com 310.282.2181 ALAN J. TARR atarr@loeb.com 212.407.4900 ldeitch@loeb.com 310.282.2296 STUART P. TOBISMAN stobisman@loeb.com 310.282.2323 pfrimmer@loeb.com 310.282.2383 JESSICA C.

VAIL jvail@loeb.com 310.282.2132 RACHEL J. HARRIS rharris@loeb.com 310.282.2175 BRUCE J. WEXLER bwexler@loeb.com 212.407.4081 DIARA M.

HOLMES dholmes@loeb.com 202.618.5012 MARLA ASPINWALL SUSAN G. BLUMENTHAL LINDA N. DEITCH PAUL N.

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