Partnership Representative

Partnership Representative

The Role of the Partnership Representative.

The partnership representative (“PR”) has a key role in a BBA proceeding. Under section 6223, the PR has the sole authority to act on behalf of the partnership. All partners and the partnership are bound by the PR’s actions and the PR’s final decision in a BBA proceeding. Thus, state law fiduciary obligations and other duties may be relevant to a PR’s decisions and actions. 

There may be only one PR for a partnership taxable year at any time. Therefore, it is critical that the PR is clearly identified. A PR can be any person, including the partnership itself.

The PR is not required to be a partner, an employee, or have any other relation to the partnership. This allows the partnership to select the person best situated to represent the partnership. The only requirement is that the PR must have a substantial presence in the United States. If a partnership designates an entity (including the partnership itself) to be the PR, it must also appoint a designated individual (DI) to act on behalf of the EPR. The DI can be anybody but must also have substantial presence in the United States.

The IRS is not bound by any limitations, restrictions or agreements placed upon the PR by the partnership in the partnership agreement, any side agreements or any other document to which it is not a party.

The designation of a PR remains in effect until the designation is terminated by a valid revocation, a valid resignation, or a determination by the IRS that the designation is not in effect. If there is a change to the PR or DI, any actions of the old PR or DI prior to the change will remain valid.

A partnership, through an authorized person, may designate or change the PR or DI by submitting Form 8979 to an IRS point of contact (i.e., examiner, Appeals Officer, or Counsel attorney). An authorized person is a person who was a partner at any time during the partnership tax year to which the designation or change relates.

Form 8979 may also be submitted in conjunction with the partnership’s filing of an administrative adjustment request. If so, the change in designation (or appointment) is treated as occurring prior to the filing of the administrative adjustment request.

Substantial presence in the United States.

Both the PR and DI must have a substantial presence in the United States. All the following requirements must be met:

  • Make themselves available to meet in person with the IRS in the United States at a reasonable time and place as determined by the IRS in accordance with Regulations section 301.7605-1;
  • Have a United States street address and a telephone number with a United States area code; and
  • Have a United States taxpayer identification number (TIN).

If the PR is an entity (including if the PR is the partnership itself), it must be in legal existence to have substantial presence. For example, if the PR is an Entity Partnership Representative (EPR) it must be in legal existence and both the PR and DI must have a United States street address, a telephone number with a United States area code, and a taxpayer identification number.

ELIGIBILITY TO SERVE AS THE PARTNERSHIP REPRESENTATIVE

§ 301.6223-1(b)(1) provides that a partnership may designate any person that has a substantial presence in the United States and that has the capacity to act to be the partnership representative. If an entity is designated as the partnership representative, the partnership must appoint a designated individual to act on the entity’s behalf. See § 301.6223-1(b)(2), (3), and (4).

§ 301.6223-1(b)(1) provides that a disregarded entity can serve as the partnership representative. Any person as defined in section 7701(a)(1), including an entity, can serve as the partnership representative provided that person meets the requirements of § 301.6223-1(b). Therefore, § 301.6223-1(b)(1) provides that a disregarded entity can be a partnership representative. Because a disregarded entity is not an individual and is an entity partnership representative, the partnership must appoint a designated individual to act on behalf of the disregarded entity in accordance with § 301.6223-1(b)(3). In addition, both the disregarded entity and the designated individual must have substantial presence as described in § 301.6223-1(b)(2).

Section 301.6223-1(b)(1) provides that a partnership may designate itself as its own partnership representative. The rules regarding eligibility to serve as a partnership representative are designed to permit the partnership to designate the person it believes is most appropriate to serve as partnership representative, provided that person meets the requirements of § 301.6223-1(b)(2) (substantial presence) and § 301.6223-1(b)(3) (designated individual). Therefore, a partnership can serve as its own partnership representative if the partnership has substantial presence in the United States and also appoints a designated individual that has a substantial presence in the United States to act on the partnership’s behalf in the partnership’s role as partnership representative.

An entity with no employees is permitted to be the partnership representative provided the partnership appoints a designated individual to act on behalf of that entity and both the entity and the designated individual have substantial presence in the United States. The regulations do not require the designated individual to be an employee of the entity partnership representative.

The purpose of the designated individual requirement is to have an individual identified who can act on behalf of the entity partnership representative prior to the beginning of an administrative proceeding under subchapter C of chapter 63 (administrative proceeding). 

Appointment of PR.

Under TEFRA, partnerships and the IRS often spent a significant amount of time establishing that a person designated as the tax matters partner (TMP) was qualified to be the TMP or, in the case of an entity TMP, identifying and locating an individual to act on the entity’s behalf. The introduction of the partnership representative concept under the centralized partnership audit regime was intended to address the shortcomings of the TMP rules. Accordingly, the regulations require the partnership to identify and appoint a designated individual prior to the start of an administrative proceeding to avoid a delay related to locating and confirming the identity of an individual to act on behalf of an entity partnership representative. Thus, the regulations require that in the case of an entity partnership representative, the partnership must appoint a designated individual at the time the partnership representative is designated.

The partnership makes the initial designation of the partnership representative on the partnership’s return. When an entity is chosen, the partnership must appoint a designated individual to act on behalf of the entity partnership representative. See § 301.6223-1(c)(2). While this rule requires that the partnership appoint the designated individual, nothing in the regulations precludes the entity partnership representative from identifying who the designated individual should be and communicating that decision to the partnership. Ultimately, however, the partnership must determine who will be the partnership representative. 

The rule under § 301.6223-1(c)(2) allows the IRS and the partnership to readily identify who can act on behalf of the partnership representative without having to inquire into who has the state law authority to act on behalf of the entity partnership representative. 

Under the centralized partnership audit regime an entity partnership representative can only act through a designated individual. Thus, the partnership must appoint the designated individual for the entity partnership representative to take action under the centralized partnership audit regime. Prior to the appointment of a designated individual, the entity partnership representative does not have the ability to act under the centralized partnership audit regime. 

SUBSTANTIAL PRESENCE

Section 6223(a) provides that a partnership representative must have a substantial presence in the United States. § 301.6223-1(b)(2) provided that a person has substantial presence in the United States for purposes of section 6223 if the person is able to meet in person with the IRS in the United States at a reasonable time and place, has a United States street address and telephone number where the person can be reached during normal business hours, and has a United States taxpayer identification number (TIN). 

Section 301.6223-1(b)(2) is designed to allow the partnership and the IRS maximum flexibility to determine mutually convenient times to meet, to schedule phone calls, and to share information, while at the same time ensuring that the partnership and its books and records are available to the IRS during the administrative proceeding. Because what constitutes a reasonable time and place depends on the facts and circumstances, providing specific rules by regulation applicable to every circumstance that could arise in an administrative proceeding is not feasible and, even if it were, doing so would interfere with rather than facilitate a productive environment for the administrative proceeding. Previously-existing regulations relating to the reasonable time and place for an examination in § 301.7605-1 are applicable to the centralized partnership audit regime. Section 301.7605-1(a) states: “The time and place of examination . . . are to be fixed by an officer or employee of the Internal Revenue Service, and officers and employees are to endeavor to schedule a time and place that are reasonable under the circumstances.” The regulations under § 301.6223-1(b)(2), therefore, cross-reference to these provisions.

The partnership representative must have a telephone number with a United States area code.

Section 301.6223-1(b)(2)(ii) requires the partnership to provide a United States street address and phone number where the partnership representative can be reached by United States mail and telephone. This rule allows the partnership to designate a location within the United States for communications between the partnership representative and the IRS, including receipt of formal documents from the IRS. However, in addition to having a United States street address and telephone, a partnership representative must also make themselves available to meet in person with the IRS. 

The purpose of the substantial presence requirement is to “ensure that the person selected to represent the partnership will be available to the IRS in the United States when the IRS seeks to communicate or meet with the representative.” Because the partnership representative must make themselves available to meet with the IRS, the partnership representative may have any telephone number with a United States area code and a street address in any location in the United States, provided the telephone number and street address allow the IRS to contact the partnership representative. 

CAPACITY TO ACT

Under the regulations, the partnership has complete control over who is designated as the partnership representative and appointed as a designated individual so long as the person designated or appointed satisfies the substantial presence requirement. Further, the partnership had the unilateral power to revoke the partnership representative for any reason. 

DESIGNATING OR CHANGING A PARTNERSHIP REPRESENTATIVE OR A DESIGNATED INDIVIDUAL

A partnership that has elected out of the centralized partnership audit regime is not required to designate a partnership representative. The partnership representative is the person who has the sole authority to act on behalf of the partnership under the centralized partnership audit regime. If a partnership is not subject to the centralized partnership audit regime, a partnership representative has no authority with respect to the partnership. 

TIME FOR CHANGING THE PARTNERSHIP REPRESENTATIVE

Under § 301.6223-1(d)(2) and (e)(2), a partnership representative designation can only be changed after the IRS mails a NAP or in conjunction with the filing of a valid AAR by the partnership under section 6227. 

The regulations provide that a partnership representative may only be changed in the context of an administrative proceeding or in conjunction with the filing of a valid AAR. 

§ 301.6223-1(e)(2) allows the partnership to change the partnership representative through revocation when the partnership is notified that the partnership return is selected for examination as part of an administrative proceeding, in addition to when the NAP is mailed. In general, the IRS will issue the partnership, but not the partnership representative, a notice of selection for examination prior to mailing the NAP to inform the partnership that it is being selected for examination. 

This provides the partnership an opportunity to change its partnership representative before an administrative proceeding commences, allowing the partnership to be represented by the partnership representative of its choice throughout the administrative proceeding. 

Under § 301.6223-1(c), a partnership must designate the partnership representative on the partnership return for that partnership taxable year, that is, Form 1065, U.S. Return of Partnership Income. Identification of a partnership representative on an annual basis with the return provides certainty regarding who is the partnership representative for a particular taxable year.  The identification, selection, and designation of the partnership representative is wholly within the discretion of the partnership (provided the person designated meets the requirements under § 301.6223-1(b)). For example, nothing in the regulations prevents a partnership from designating the same partnership representative on each partnership return it files or, once administrative proceedings with respect to more than one taxable year have commenced, designating one partnership representative (through the revocation procedures described in § 301.6223-1(e)) to act for the partnership for all years subject to the administrative proceeding.

RESIGNATION.

§ 301.6223-1(d) provides the rules for resignations of partnership representatives and designated individuals. 

The regulations do not provide the ability of a resigning partnership representative or designated individual to designate a successor. The resignation of a partnership representative or designated individual is considered the final action of that person for purposes of the centralized partnership audit regime.

A resigning partnership representative is not able to resign by filing an AAR. The partnership representative or designated individual may be revoked simultaneously with the filing of an AAR, though an AAR may not be filed solely for that purpose. See § 301.6227-1(a). The regulations prohibit a resignation at the time of the filing of an AAR. 

REVOCATION

The regulations allow any partner who was a partner during the partnership taxable year to which the revocation relates, not just a general partner, to sign a revocation. The regulations also provide that a revocation may occur regardless of when and how the designation was made, except with respect to a designation made by the IRS. See § 301.6223-1(e)(6).  The regulations allow any person who was a partner at any time during the taxable year to which the revocation relates to sign the revocation. 

The regulations under § 301.6223-1(e)(1) provide that if a partnership revokes the appointment of a designated individual and not the entity partnership representative, the partnership must appoint a successor designated individual at the same time of the revocation. Similar to the rules under the regulations with respect to the partnership representative resignation, failure to follow the rules of § 301.6223-1(e), including failure to appoint a successor designated individual, results in an invalid revocation of the designated individual.

EFFECTIVE DATE OF A RESIGNATION OR REVOCATION

The regulations, under § 301.6223-1(d) and (e), provide that generally a partnership representative resignation or revocation is effective immediately upon receipt by the IRS. In cases where there is a revocation of a partnership representative designated by the IRS, the regulations provide that the revocation is effective on the date the IRS sends notification that it determined that the revocation is valid.

§ 301.6223-1(d)(1) and (e)(1) provide that the IRS will notify the partnership and other affected persons (the resigning partnership representative or designated individual or the partnership representative (and designated individual, if applicable) whose status is being revoked) when the IRS receives a resignation or revocation. The regulations provide that, no later than 30 days after receipt of a valid notification of a revocation or resignation, the IRS will notify the partnership and the resigning partnership representative or designated individual or the partnership representative (and designated individual, if applicable) whose status is being revoked of its acceptance.

§ 301.6223-1(e)(4) provides that a partnership cannot revoke the designation of a partnership representative designated by the IRS unless the partnership receives permission from the IRS. The regulations under § 301.6223-1(e)(6), however, provide that the IRS will not unreasonably withhold such permission.

State law and any contractual arrangement between the parties generally control the terms of the relationship between the partnership and the partnership representative. Except as necessary to carry out the statute, the regulations implementing the centralized partnership audit regime attempt not to impose requirements with respect to interactions between the partnership and the partnership representative. A resigning partnership representative and a partnership making a revocation must now only notify the IRS of the change in designation. As long as they notify the IRS as required under the regulations, the partnership and the partnership representative may agree to other notification requirements and are in the best position to determine if such requirements are necessary.

§ 301.6223-1(e)(1) provides that the IRS will only give notification of a revocation made after the issuance of a notice of selection for examination or a NAP.  The regulations do not require the IRS to give notification of a revocation made simultaneously with an AAR. 

The regulations also clarify that the failure of the IRS to send any notifications under §§ 301.6223-1(d) and (e) to acknowledge receipt of a valid resignation or revocation does not invalidate the resignation or revocation. A resignation or revocation that is valid under paragraph (d) or (e) of § 301.6223-1 is valid regardless of whether the IRS sends notification of receipt.

IRS DESIGNATION OF PARTNERSHIP REPRESENTATIVE.

DETERMINATION THAT A DESIGNATION IS NOT IN EFFECT

§ 301.6223-1(f) provides the IRS may determine a designation is not in effect under certain circumstances. Under § 301.6223-1(f)(1), if the IRS makes a determination that a designation is not in effect, the IRS will notify the partnership and “the most recent partnership representative for that partnership taxable year” of that determination. 

A partnership representative designated under § 301.6223-1 is in effect unless and until the IRS determines otherwise. See § 301.6223-1(b)(1). Therefore, a person designated on a partnership return as the partnership representative is the partnership representative for that taxable year even if the person lacks substantial presence as defined in § 301.6223-1(b)(2) unless and until the IRS makes a determination, in accordance with § 301.6223-1(f), that the designation is not in effect. Accordingly, prior to the issuance of a notification from the IRS under § 301.6223-1(f)(1) that the partnership representative designation is not in effect, the designation of the partnership representative on the partnership return is in effect, even if the person designated lacks substantial presence in the United States.

Because a designated partnership representative is in effect unless and until the IRS determines otherwise, the vast majority of partnerships will have a partnership representative designation in effect because they will have designated the partnership representative on the return as required under § 301.6223-1(c). As a result, in most cases there will be a partnership representative to whom the notification must be sent. However, there may be situations in which the partnership failed to make a valid designation in accordance with § 301.6223-1(c). To address these situations, § 301.6223-1(f)(1) provides that the IRS is not required to notify the most recent partnership representative if the partnership failed to designate one.

If there has been a determination that a partnership representative designation is not in effect for a taxable year, the IRS takes the position that the partnership representative is no longer a valid partnership representative for purposes of conducting an administrative proceeding of that partnership with respect to that taxable year. 

§ 301.6223-1(f)(2) provides a list of reasons why the IRS might determine that a partnership representative designation is not in effect. § 301.6223-1(f)(2) provides that the IRS may determine a designation is not in effect when, among other circumstances, the IRS has received multiple revocations within a 90-day period. See § 301.6223-1(e)(7). 

The regulations provide that if the IRS determines a designation is not in effect in the case of multiple revocations, the IRS will designate a partnership representative, and unlike the general rule for IRS designation of a partnership representative, the partnership will not be given 30 days to designate a partnership representative. The regulations thus provide for a stricter rule in the case of multiple revocations. 

§ 301.6223-1(e)(7) provides that if the IRS receives a revocation (the current revocation), and, within the 90-day period prior to receiving the current revocation, the IRS had received another revocation for the same partnership taxable year, the IRS may determine that a designation is not in effect. 

§ 301.6223-1(e)(7)(ii) provides for a time limitation for the IRS to notify the partnership that the designation is not in effect. That time limitation provides that if the IRS plans to determine a designation is not in effect due to receipt of multiple revocations, the IRS must do so within 90 days of the receipt of the current revocation the IRS is considering. For example, assume the partnership files two revocations with respect to the same taxable year—one on May 31, 2019 and one on August 25, 2019. With respect to the August 25th revocation, the IRS received the May 31st revocation within the 90-day period prior to August 25, 2019, meaning the multiple revocation rule under § 301.6223-1(e)(7)(i) applies. Under the time limitation provided in § 301.6223-1(e)(7)(ii), the IRS would then have 90 days from August 25, 2019 to determine a designation is not in effect. If, during that 90-day period starting with August 25, 2019, the IRS received another revocation, the multiple revocation rule under § 301.6223-1(e)(7)(i) would again be triggered, and pursuant to § 301.6223-1(e)(7)(ii), the IRS would have another 90 days from that additional revocation to determine a designation is not in effect. 

§ 301.6223-1(f)(2)(vii) provides that the IRS may determine that a designation is not in effect for any other reason described in published guidance. The regulations also provide that the IRS is under no obligation to search for information about whether any of the circumstances listed in § 301.6223-1(f)(2) exists. In addition, the regulations clarify that even if the IRS has knowledge that one of the circumstances listed in § 301.6223-1(f)(2) exists, the IRS is not required to determine that a designation is not in effect. 

IRS DESIGNATION.

§ 301.6223-1(f)(5) provides that the IRS may not designate an IRS employee, agent, or contractor as the partnership representative unless the individual is a partner in the partnership subject to an administrative proceeding. Even if the IRS employee, agent, or contractor is a partner in such partnership, however, the IRS has indicated that it intends to avoid designating such an individual as the partnership representative if another suitable person is available.

The regulations clarify that the IRS may select an entity partnership representative and that if it does so, the IRS must provide the partnership with the contact information of the designated individual. Therefore, if the IRS does designate an entity to be the partnership representative, the IRS will also appoint a designated individual and provide the contact information of the designated individual to the partnership. See § 301.6223-1(f)(5)(i).

§ 301.6223-1(f)(5)(ii) clarifies that the IRS will ordinarily consider one or more of the factors (set out therein) when determining whom to designate as partnership representative, no single factor is determinative, and a person may be designated by the IRS as partnership representative even if none of the factors is applicable.

The factors listed in § 301.6223-1(f)(5)(ii) include consideration of the profits interests of the partners.

BINDING EFFECT OF ACTIONS TAKEN BY THE PARTNERSHIP REPRESENTATIVE.

The authority of the partnership representative under federal law preempts any state law requirements. The regulations provide that the failure to adhere to state law requirements has no effect on actions taken by the partnership representative with respect to the centralized partnership regime.

The regulations provide significant flexibility to the partnership to determine who will represent it and for the partnership and the partnership representative to negotiate the terms of their relationship. The partnership and the partnership representative are free to enter into contractual agreements to define the scope and limits of their relationship. However, because the IRS is not a party to these agreements, it is not bound by them. Any remedy the partnership would have against partnership representative if the partnership representative failed to act in accordance with those agreements would be under state law with respect to the partnership representative.

Section 301.6223-2(d) is not intended to prevent partnerships from taking advantage of state law remedies for partnerships who wish to restrict a partnership representative’s authority under state law. Rather, the regulations leave the enforcement of such restrictions to the relevant parties.

AUTHORITY

Under section 6223 the authority of a person to act as partnership representative is based on whether the person was properly designated as the partnership representative in accordance with section 6223 and the regulations, not on whether state law or notice from the partners confirms such authority.

OTHER ISSUES.

§ 301.6223-2(d) provides that a partnership representative may engage a person to act on behalf of the partnership representative under a power of attorney during the administrative proceeding (referred to as a “POA”) and that the POA can participate in meetings or receive copies of correspondence. Nothing in the regulations prevents the partnership representative from engaging a POA for this purpose. § 301.6223-1(a), however, clarifies that appointment of a POA does not designate the POA as partnership representative.

§ 301.6231-1(f) allows the IRS to withdraw a NAP after it has been issued. § 301.6231-1(f) further provides that the withdrawn NAP has no effect for purposes of the centralized partnership audit regime.

The partnership representative may have taken actions before withdrawal of the NAP. In addition, after the NAP has been issued, but before the NAP has been withdrawn, the partnership representative may have changed. Section 301.6223-2(c) clarifies that even though the withdrawn NAP has no effect, any actions taken by a partnership representative (or successor partnership representative after a change in partnership representative that occurred after the issuance of the NAP and before the NAP was withdrawn) are binding on the partnership, even though the NAP has been withdrawn.

There is no requirement in the statute for the partnership representative to notify any partner of significant developments (for example, extensions of the period of limitations, settlements, petitioning a court, etc.). This is a departure from TEFRA, which required certain notifications and provided participation rights for certain partners. The regulations adhere to the legislative judgment that the partnership representative is the sole representative of the partnership, and the actions of the partnership representative bind the partners. Nothing in the regulations prevents the partnership from contracting with the partnership representative to require the partnership representative to notify the partnership or the partners of any developments, significant or otherwise.

The Treasury Department and the IRS determined that the government should not mandate how and when the partnership representative communicates with partners or other persons. By remaining silent on this issue, the regulations allow a partnership, its partners, and the partnership representative to arrange their own affairs without unnecessary regulatory requirements that interfere with these relationships. § 1.6223-1(a) provides that a partnership representative must update the partnership representative’s contact information when such information changes as required by forms, instructions, and other guidance prescribed by the IRS.