[Federal Register Volume 60, Number 209 (Monday, October 30, 1995)]
[Proposed Rules]
[Pages 55228-55231]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-26738]



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DEPARTMENT OF THE TREASURY
26 CFR Part 301

[PS-34-92]
RIN 1545-AS09


Selection of Tax Matters Partner for Limited Liability Companies

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed regulations relating to the 
designation or selection of a tax matters partner for limited liability 
companies classified as partnerships. This document also amends current 
proposed regulations to consolidate certain guidance necessary to 
determine the tax matters partner for partnerships.

DATES: Written comments and requests for a public hearing must be 
received by January 29, 1996.

ADDRESSES: Send submissions to: CC:DOM:CORP:T:R (PS-34-92), room 5228, 
Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, 
DC 20044. In the alternative, submissions may be hand delivered between 
the hours of 8:00 a.m. and 5:00 p.m. to: CC:DOM:CORP:T:R (PS-34-92), 
Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue NW., 
Washington, DC.

FOR FURTHER INFORMATION CONTACT: D. Lindsay Russell, (202) 622-3050 
(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    Prior to the enactment of the Tax Equity and Fiscal Responsibility 
Act of 1982 (TEFRA), adjustments attributable to the tax items of a 
partnership were made at the partner level. Section 402 of TEFRA added 
sections 6221 through 6231 to the Internal Revenue Code of 1986, as 
amended, to allow for consolidated administrative and judicial 
proceedings to determine the tax treatment of partnership items at the 
partnership level. Under this consolidated proceeding, the tax matters 
partner of a partnership represents the partnership before the IRS in 
all tax matters for a specific taxable year.
    Section 6231(a)(7) provides that the tax matters partner of a 
partnership is the general partner designated as the tax matters 
partner as provided in regulations or, if no general partner is 
designated, the general partner having the largest profits interest in 
the partnership at the close of the taxable year involved (largest-
profits-interest rule). Section 6231(a)(7) also provides that, if no 
general partner is designated and the Commissioner determines that it 
is impracticable to apply the largest-profits-interest rule, the 
partner selected by the Commissioner is treated as the tax matters 
partner.
    Proposed regulations under sections 6221 through 6231 and section 
6233 were published in the Federal Register (51 FR 13231) on April 18, 
1986. Several comments on the proposed regulations were received, but 
no public hearing was requested and none was held. Temporary 
regulations identical to the proposed regulations were published in the 
Federal Register (52 FR 6779) on March 5, 1987. The temporary and 
proposed regulations remain outstanding.
    On February 29, 1988, the IRS published Rev. Proc. 88-16, 1988-1 
C.B. 691. This revenue procedure describes circumstances under which 
the IRS will determine that it is impracticable to apply the largest-
profits-interest rule and describes the criteria the IRS will consider 
in selecting a tax matters partner for the partnership.
    Since the enactment of TEFRA, virtually all states and several 
foreign jurisdictions have enacted laws providing for the formation of 
limited liability companies (LLCs). Although local law varies as to the 
requirements for establishing an LLC, the common denominator is that 
none of the members are liable for the debts and obligations of the LLC 
beyond their contributions (absent an express assumption of liability 
by a member if authorized under the applicable LLC statute). In 
addition, under local law, LLCs may be generally managed by elected or 
designated ``managers,'' who may be members of the LLC. In most 
jurisdictions, however, LLCs need not be managed by elected or 
designated managers. In those cases, all members of the LLC have 
management authority.
    LLCs in most jurisdictions may be classified for Federal tax 
purposes either 

[[Page 55229]]
as partnerships or associations that are taxable as corporations, 
depending on the characteristics of the LLC. See, e.g., Rev. Rul. 88-
76, 1988-2 C.B. 360; Rev. Rul. 93-38, 1993-1 C.B. 233. For LLCs that 
are classified as partnerships for Federal tax purposes, it is 
necessary to determine the tax matters partner for the LLC.

Explanation of Provisions

A. Tax Matters Partner for LLCs

    The proposed regulations provide that a ``member-manager'' of an 
LLC will be treated as a general partner for purposes of determining 
the tax matters partner of the LLC. Any member of an LLC that is not a 
member-manager is treated as a partner other than a general partner. 
The proposed regulations define a member-manager as a member of the LLC 
who, alone or together with others, is vested with the continuing 
exclusive authority to make the management decisions necessary to 
conduct the business for which the organization was formed. This 
approach is adopted because, if a member of the LLC has such continuing 
exclusive management authority, the member should have the necessary 
authority and access to partnership records needed to function as a tax 
matters partner. The proposed regulations also provide that if there 
are no elected or designated member-managers (as described above), each 
member will be treated as a member- manager.
    The proposed regulations define an LLC as an organization formed 
under a law that allows the limitation of the liability of all members 
for the organization's debts and other obligations and classified as a 
partnership for Federal tax purposes.

B. Amending Proposed Regulations to Incorporate the Provisions of Rev. 
Proc. 88-16

    The current proposed regulations under Sec. 301.6231(a)(7)-1 
provIde certain guidance concerning the designation of a tax matters 
partner under the largest-profits-interest rule of section 
6231(a)(7)(B). However, the current proposed regulations do not 
describe circumstances under which the Commissioner will determine that 
it is impracticable to apply the largest-profits-interest rule and do 
not describe how the Commissioner will select a tax matters partner 
when it is impracticable to apply the largest-profits-interest rule. 
This additional guidance is provided in Rev. Proc. 88-16.
    For administrative simplicity, the provisions in this notice of 
proposed rulemaking amend the current proposed regulations to include 
the rules of Rev. Proc. 88-16. As a result, the complete guidance 
necessary for determining the tax matters partner for a partnership and 
an LLC will be contained in the proposed regulations under section 
6231(a)(7).
    As amended, the proposed regulations incorporate the provisions of 
Rev. Proc. 88-16 with one substantive change. Under sections 3.05 and 
3.06 of Rev. Proc. 88-16, if each general partner is deemed to have no 
profits interest under section 3.03(2) or 3.03(3), the IRS will select 
a limited partner as the tax matters partner. Some partnerships, such 
as a general partnership or a foreign LLC in which all members are 
member-managers, do not have limited partners. To permit the 
Commissioner to select a tax matters partner in these situations, the 
proposed regulations allow the Commissioner to select any partner 
(including either a general or limited partner) as the tax matters 
partner.

Proposed Effective Date

    Sections 301.6231(a)(7)-1 and 301.6231(a)(7)-2 are proposed to be 
effective for all designations, selections, and terminations of a tax 
matters partner occurring on or after the date final regulations are 
published in the Federal Register. Any other reasonable designation or 
selection of a tax matters partner of an LLC is binding for periods 
prior to the effective date of this regulation.

Effect on Other Documents

    Rev. Proc. 88-16 is obsolete as of the date final regulations are 
published in the Federal Register.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in EO 12866. Therefore, 
a regulatory assessment is not required. It also has been determined 
that section 553(b) of the Administrative Procedure Act (5 U.S.C. 
chapter 5) and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do 
not apply to these regulations, and, therefore, a Regulatory 
Flexibility Analysis is not required. Pursuant to section 7805(f) of 
the Internal Revenue Code, this notice of proposed rulemaking will be 
submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on its impact on small business.

Comments and Requests for a Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written comments (a signed original 
and eight (8) copies) that are submitted timely to the IRS. All 
comments will be available for public inspection and copying. A public 
hearing may be scheduled if requested in writing by a person that 
timely submits written comments. If a public hearing is scheduled, 
notice of the date, time, and place for the hearing will be published 
in the Federal Register.

Drafting Information

    The principal author of these regulations is D. Lindsay Russell, 
Office of Assistant Chief Counsel (Passthroughs and Special 
Industries). However, other personnel from the IRS and Treasury 
Department participated in their development.

List of Subjects in 26 CFR Part 301

    Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income 
taxes, Penalties, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 301 is proposed to be amended as follows:

PART 301--PROCEDURE AND ADMINISTRATION

    Paragraph 1. The authority citation for part 301 is amended by 
adding entries in numerical order to read as follows:

    Authority: 26 U.S.C. 7805 * * *

    Section 301.6231(a)(7)-1 also issued under 26 U.S.C. 6230 (i) 
and (k). * * *
    Section 301.6231(a)(7)-2 also issued under 26 U.S.C. 6230 (i) 
and (k). *  * *
    Par. 2. Section 301.6231(a)(7)-1 (as proposed to be added in the 
Federal Register for April 18, 1986 (51 FR 13245)) is amended by:
    1. Revising the section heading.
    2. Adding a new sentence at the end of paragraph (a).
    3. Removing the heading for paragraph (c)(1) and redesignating 
paragraph (c)(1) as paragraph (c).
    4. Removing paragraph (c)(2).
    5. Adding a sentence at the end of paragraph (m)(2).
    6. Adding paragraphs (n), (o), (p), (q), (r), and (s). The 
additions and revisions read as follows:


Sec. 301.6231(a)(7)-1  Designation or selection of tax matters partner.

    (a) * * * If a partnership does not designate a general partner as 
the tax matters partner for a specific taxable year, or if the 
designation is terminated without the partnership designating 

[[Page 55230]]
another general partner as the tax matters partner, the tax matters 
partner is the partner determined under this section.
* * * * *
    (m) * * *
    (2) * * * For purposes of this paragraph (m)(2), the general 
partner with the largest profits interest is determined based on the 
year-end profits interests reported on the Schedules K-1 filed with the 
partnership income tax return for the taxable year for which the 
determination is being made.
* * * * *
    (n) Selection of tax matters partner by Commissioner when 
impracticable to apply the largest-profits-interest rule. If the 
partnership has not designated a tax matters partner under this section 
for the taxable year and it is impracticable (as determined under 
paragraph (o) of this section) to apply the largest-profits-interest 
rule of paragraph (m)(2) of this section, the Commissioner will select 
a tax matters partner as described in paragraph (p) of this section.
    (o) Impracticability of largest-profits-interest rule. It is 
impracticable to apply the largest-profits-interest rule of paragraph 
(m)(2) of this section if, on the date the rule is applied, any one of 
the following three conditions is met:
    (1) General partner with the largest profits interest is not 
apparent. The general partner with the largest profits interest is not 
apparent from the Schedules K-1 and is not otherwise readily 
determinable.
    (2) Each general partner is deemed to have no profits interest in 
the partnership. Each general partner is deemed to have no profits 
interest in the partnership under paragraph (m)(3) of this section 
(concerning termination of a designation under the largest-profits-
interest rule) because of the occurrence of one or more of the events 
described in paragraphs (l)(1) through (4) of this section (involving 
death, adjudication of incompetency, liquidation, and conversion of 
partnership items to nonpartnership items).
    (3) General partner with the largest profits interest is 
disqualified. The general partner with the largest profits interest 
determined under paragraph (m)(2) of this section--
    (i) Has been notified of suspension from practice before the 
Internal Revenue Service;
    (ii) Is incarcerated;
    (iii) Is residing outside the United States, its possessions, or 
territories; or
    (iv) Cannot be located or cannot perform the functions of a tax 
matters partner for any reason, except that lack of cooperation with 
the Internal Revenue Service by the general partner with the largest 
profits interest is not a basis for finding that the partner cannot 
perform the functions of a tax matters partner.
    (p) Commissioner's selection of the tax matters partner--(1) When 
the general partner with the largest profits interest is not apparent. 
If it is impracticable under paragraph (o)(1) of this section to apply 
the largest-profits interest rule of paragraph (m)(2) of this section, 
the Commissioner will select (in accordance with the notification 
procedures set forth in paragraph (r) of this section) as the tax 
matters partner any person who was a general partner at any time during 
the taxable year under examination.
    (2) When each general partner is deemed to have no profits interest 
in the partnership. If it is impracticable under paragraph (o)(2) of 
this section to apply the largest-profits- interest rule of paragraph 
(m)(2) of this section, the Commissioner will select a partner 
(including a general or limited partner) as the tax matters partner in 
accordance with the criteria set forth in paragraph (q) of this 
section. The Commissioner will notify both the partner selected and the 
partnership of the selection, effective as of the date specified in the 
notice.
    (3) When the general partner with the largest profits interest is 
disqualified--(i) In general. Except as otherwise provided in paragraph 
(p)(3)(ii) of this section, if it is impracticable under paragraph 
(o)(3) of this section to apply the largest-profits-interest rule of 
paragraph (m)(2) of this section, the Commissioner will treat each 
general partner who fits the criteria contained in paragraph (o)(3) of 
this section as having no profits interest in the partnership for the 
taxable year and will select (in accordance with the notification 
procedures set forth in paragraph (r) of this section) a tax matters 
partner from the remaining persons who were general partners at any 
time during the taxable year.
    (ii) Partner selected if no general partner may be selected. If all 
general partners during the taxable year either are treated as having 
no profits interest in the partnership for the taxable year under 
paragraph (m)(3) of this section (concerning termination of a 
designation under the largest-profits-interest rule) or are described 
in paragraph (o)(3) of this section (general partner with the largest 
profits interest is disqualified), the Commissioner will select a 
partner (including a general or limited partner) as the tax matters 
partner in accordance with the criteria set forth in paragraph (q) of 
this section. The Commissioner will notify both the partner selected 
and the partnership of the selection, effective as of the date 
specified in the notice.
    (q) Criteria for selecting a partner as tax matters partner--(1) In 
general. The Commissioner will select a partner as the tax matters 
partner under paragraph (p)(2) or (3)(ii) of this section only if the 
partner was a partner in the partnership at the close of the taxable 
year under examination.
    (2) Criteria to be considered. The Commissioner may consider the 
following criteria in selecting a partner as the tax matters partner:
    (i) The general knowledge of the partner in tax matters and the 
administrative operation of the partnership.
    (ii) The partner's access to the books and records of the 
partnership.
    (iii) The profits interest held by the partner.
    (iv) The views of the partners having a majority interest in the 
partnership regarding the selection.
    (v) Whether the partner is a partner of the partnership at the time 
the tax-matters-partner selection is made.
    (vi) Whether the partner is a United States person (within the 
meaning of section 7701(a)(30)).
    (3) Limited restriction on subsequent designation of a tax matters 
partner by the partnership. For purposes of paragraphs (p)(2) and 
(3)(ii) of this section, the partnership cannot designate a partner who 
is not a general partner to serve as tax matters partner in lieu of a 
partner selected by the Commissioner.
    (r) Notification of partnership--(1) In general. If the 
Commissioner selects a tax matters partner under the provisions of 
paragraph (p)(1) or (3)(i) of this section, the Commissioner will 
notify both the partner selected and the partnership of the selection, 
effective as of the date specified in the notice.
    (2) Limited opportunity for partnership to designate the tax 
matters partner. (i) Before the Commissioner selects a tax matters 
partner under paragraphs (p)(1) and (3)(i) of this section, the 
Commissioner will notify the partnership by mail that, after 30 days 
from the date of the notice, the Commissioner will make a determination 
that it is impracticable to apply the largest-profits-interest rule of 
paragraph (m)(2) of this section and will select the tax matters 
partner unless a prior designation is made by the partnership. This 
delay in making the determination will permit the partnership to 
designate a tax matters partner under paragraph (e) (designation 

[[Page 55231]]
by general partners with a majority interest) or (f) of this section 
(designation by partners with a majority interest under certain 
circumstances), thereby avoiding a selection made by the Commissioner.
    (ii) During the 30-day period and prior to a tax-matters-partner 
designation by the partnership, the Commissioner will communicate with 
the partnership by sending all correspondence or notices to ``The Tax 
Matters Partner'' in care of the partnership at the partnership's 
address.
    (iii) Any subsequent designation of a tax matters partner by the 
partnership after the 30-day period will become effective as provided 
under paragraph (k)(2) of this section (concerning designations made 
after a notice of beginning of administrative proceeding is mailed).
    (s) Effective date. This section applies to all designations, 
selections, and terminations of a tax matters partner occurring on or 
after the date final regulations are published in the Federal Register.
    Par. 3. Section 301.6231(a)(7)-2 is added to read as follows:


Sec. 301.6231(a)(7)-2  Designation or selection of tax matters partner 
for a limited liability company (LLC).

    (a) In general. Solely for purposes of applying section 6231(a)(7) 
and Sec. 301.6231(a)(7)-1 to an LLC, only a member-manager of an LLC is 
treated as a general partner, and a member of an LLC who is not a 
member-manager is treated as a partner other than a general partner.
    (b) Definitions--(1) LLC. Solely for purposes of this section, LLC 
means an organization:
    (i) Formed under a law that allows the limitation of the liability 
of all members for the organization's debts and other obligations 
within the meaning of Sec. 301.7701-2(d); and
    (ii) Classified as a partnership for Federal tax purposes.
    (2) Member. Solely for purposes of this section, member means any 
person who owns an interest in an LLC.
    (3) Member-manager. Solely for purposes of this section, member-
manager means a member of an LLC who, alone or together with others, is 
vested with the continuing exclusive authority to make the management 
decisions necessary to conduct the business for which the organization 
was formed. Generally, an LLC statute may permit the LLC to choose 
management by one or more managers (whether or not members) or by all 
of the members. If there are no elected or designated member-managers 
(as so defined in this paragraph (b)(3)) of the LLC, each member will 
be treated as a member-manager for purposes of this section.
    (c) Effective date. This section applies to all designations, 
selections, and terminations of a tax matters partner of an LLC 
occurring on or after the date final regulations are published in the 
Federal Register. Any other reasonable designation or selection of a 
tax matters partner of an LLC is binding for periods prior to the 
effective date of this section.
Margaret Milner Richardson,
Commissioner of Internal Revenue.
[FR Doc. 95-26738 Filed 10-27-95; 8:45 am]
BILLING CODE 4830-01-U