It’s Time to Amend Operating Agreements as the Result of TEFRA Repeal
Jaye Calhoun, David Hamm
Kean Miller, LLP
It’s time to amend the governing documents of flow-through entities taxed as partnerships to address recent federal legislative changes impacting all such entities. Failure to amend now could result in unfavorable tax consequences. Section 1101 of The Bipartisan Budget Act of 2015 (the “BBA”) substantially changes how the Internal Revenue Service may conduct audits of flow through entities taxed as partnerships. Due to the increased popularity of limited liability companies, most taxed as partnerships, the Internal Revenue Service has been chafing under the relatively restrictive rules governing audits found in the Tax Equity and Fiscal Responsibility Act of 1982 (“TEFRA”). The BBA eliminates many of the provisions of TEFRA that made IRS’ job of policing compliance by partnerships with the tax laws more difficult and replaces them with new centralized partnership audit rules, effective for returns filed for partnership tax years beginning after Dec. 31, 2017. In order to implement the new rules, IRS has re-released proposed regulations on June 13, 2017 and has invited comments in anticipation of a hearing on the proposed regulations currently scheduled for September 18, 2017. The proposed regulations were initially released on January 18, 2017, but were withdrawn on January 20, 2017 in light of the Trump Administration’s freeze on all new and proposed federal rule making.
As a result of BBA, and as fleshed out in the proposed regulations, the new partnership audit rules provide that, among other things:
The significant changes brought about by the BBA and the proposed regulations (likely to become final in substantially similar form) require substantive amendments to governing documents of all entities taxed as partnerships to address these issues and others. Of note, Louisiana does not currently tax partnerships, as partnerships, and will have to adopt rules to adapt to the federal changes. In the meantime, the January 1, 2018 effective date of the BBA is approaching. Thus, the time for providing notice and counsel to your clients is quickly running out.