Under new federal partnership audit rules, partnerships must designate a representative. That person has sole authority to act on behalf of the partnership under the rules.
Several states have adopted the Multistate Tax Commission (MTC) model partnership audit statute or similar provisions. In addition to impacting new partnership and LLC agreements, current agreements should be reviewed and amended addressing the new partnership representative provisions.
Partnership Representative Role Under Federal Rules
The federal partnership audit rules require partnerships to designate a partner or other person with a substantial presence in the United States to be the partnership representative. The partnership and all partners are bound by the partnership representative’s actions and by any final decision in a proceeding brought under the audit rules. This includes partners who have elected out of the centralized audit regime.
MTC Partnership Representative Model Statute
In an effort to provide uniformity across the states, the MTC has adopted a Model Uniform Statute for Reporting Adjustments to Federal Taxable Income and Federal Partnership Audit Adjustments (Model RAR/Partnership Statute). Many states have adopted new laws based on the model.
The MTC model statute addresses the role and authority of the partnership representative. The MTC provisions adopt the federal partnership representative procedure. However, the partnership may choose one person to act as its representative for federal purposes and another person to serve in that capacity at the state level. Accordingly, reasonable qualifications of and procedures for designating a state level representative may be established by the state tax agency.
State Adoption of Partnership Representative Provisions
Several states have addressed the new partnership audit rules and the role of the partnership representative. These states follow the MTC model rules or have enacted similar provisions:
States that follow the MTC model rules include common provisions such as:
- granting the partnership representative sole authority to act on behalf of the partnership for any action required or permitted;
- binding the direct and indirect partners to the partnership representative’s actions;
- designating the partnership’s federal partnership representative for the reviewed year as the state partnership representative, unless the partnership designates in writing another person as its state partnership representative; and
- allowing the state taxing authority to establish reasonable qualifications for and procedures for designating a person, other than the federal partnership representative, to be the state partnership representative.
Some states provide additional details, including:
- defining the federal partnership representative as the person the partnership designates for the taxable year as the partnership’s representative, or the person the IRS has appointed to act as the federal partnership representative;
- specifying the circumstances and proceedings under which the state partnership representative has authority to act and bind the partnership and its partners;
- referring to pass-through entities as well as partnerships; and
- explaining the procedure for designating a different state partnership representative than the federal partnership representative.
Partnership Agreement Provisions
Partnership agreements, limited liability company operating agreements, or other contractual provisions among partners, should address the designation, duties, and authority of a partnership representative. Current agreements should be reviewed and amended to add the new partnership representative provisions.
Additionally, partners may want to consider including provisions in the partnership agreement that:
- limit ownership, and the transferability of partnership interests, to persons or entities who will not render the partnership ineligible to elect out of the new federal partnership audit regime;
- direct the partnership representative to elect out of, or consider electing out of, the new audit regime; and
- limit the personal representative’s authority with respect to other elections available to the partnership.
By Tralawney Trueblood, J.D., M.B.A.