Centralized Partnership Audit Regime (CPAR) is a somewhat new regime that followed TEFRA. Congress promulgated CPAR as part of the Bi-partisan Budget Act of 2015.[1] For taxable years beginning in 2018, CPAR is the controlling authority. In broad terms, CPAR disallows partners from participating in the audit of the partnership and requires that the partnership designate a representative to handle a potential audit.[2]
Treas. Reg. § 301.6223-1
The regulations provide a few options to taxpayers designating a Partnership Representative (PR). Namely, the regulations prescribe the proper method to designate a PR.[3] Moreover, the regulations provide that the designation must be made for each year.[4] Thus, barring an exception, a change in PR in Year 2 would not have an impact on the PR for an audit in Y1.
Additionally, the regulations provide the rules regarding eligibility to serve as the PR.[5] In short, the PR may be an individual or an entity with a substantial presence in the U.S.[6] If an entity is selected, then the “entity partnership representative” must choose a designated individual with a substantial presence in the U.S. through which the entity partnership representative shall act.[7]
Furthermore, the regulations contain rules for some additional important facets—resignation, revocation, and IRS redetermination.[8] It may be that the PR wishes to relinquish his responsibilities or that the partnership desires to revoke the designation.[9] In some cases, the IRS may redetermine the PR.[10] However, as the regulations provide, the IRS has no obligation to make that redetermination.[11]
For all of the above situations—designation, revocation, resignation, and redetermination—there may be special rules that apply given the circumstances. Even in a year with a valid revocation, the PR has the authority to bind the partnership to certain actions taken prior to revocation.[12] The ability to bind the partnership is the potential trap for the unwary.
Rev. Rul. 99-5 & The Trap for the Unwary
For example, consider Rev. Rul. 99-5. In that ruling, the Service analyzed the tax consequences of purchasing an interest in a single member LLC that is disregarded as an entity separate (DRE) from its owner under Treas. Reg. § 301.7701-3.[13]
The Service provided that, for federal tax purposes, the purchase of a membership interest is treated as a purchase of the assets which are directly held by the seller.[14] Accordingly, the remaining assets held by each member are subsequently contributed to the entity in a tax-free transaction.[15] However, note that the seller would recognize gain prior to the contribution on the deemed asset sale.[16]
Importantly though, these unsuspecting members have formed a partnership for federal tax purposes. For tax compliance, this scenario would warrant review. In particular, the parties to this transaction would need to understand their options under the CPAR.
If eligible, a partnership may elect out of CPAR. On the facts of Rev. Rul. 99-5 this option would be available. If, however, a partnership has more than 100 partners or has certain persons holding a partnership interest, then the partnership may not elect out of CPAR.
[1] Sometimes CPAR is referred to as the BBA Regime.
[2] While the statute and regulations do not use permissive language, the IRS would designate a PR if the partnership never designated one or did so in an improper fashion. See, Treas. Reg. § 301.6223-1(f)(2).
[3] Treas. Reg. § 301.6223-1(c)(2).
[4] Treas. Reg. § 301.622301(c)(1).
[5] Treas. Reg. § 301.6223-1(b).
[6] Treas. Reg. § 301.6223-1(b)(1)-(3).
[7] Treas. Reg. § 301.6223-1(b)(3)(i).
[8] Treas. Reg. § 301.6223-1(d)-(f).
[9] Treas. Reg. § 301.6623-1(d), (e).
[10] Treas. Reg. § 301.6223-1(f).
[11] Treas. Reg. § 301.6223-1(f)(2).
[12] See, Treas. Reg. § 301.6223-2.
[13] Rev. Rul. 99-5 (Situation 1).
[14] Id.
[15] § 721(a); Rev. Rul. 99-5.
[16] § 1001(a), (c); Rev. Rul. 99-5.
