[Federal Register Volume 61, Number 247 (Monday, December 23, 1996)]
[Rules and Regulations]
[Pages 67458-67463]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-32121]
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DEPARTMENT OF THE TREASURY
26 CFR Parts 301 and 602
[TD 8698]
RIN 1545-AS09
Selection of Tax Matters Partner for Limited Liability Companies
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
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SUMMARY: This document contains final regulations giving guidance
necessary for the designation or selection of a tax matters partner for
partnerships including limited liability companies classified as
partnerships.
DATES: These regulations are effective December 23, 1996.
For dates of applicability of these regulations, see
Sec. 301.6231(a)(7)-2(c).
FOR FURTHER INFORMATION CONTACT: D. Lindsay Russell, (202) 622-3050
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collections of information contained in these final regulations
have been reviewed and approved by the Office of Management and Budget
in accordance with the Paperwork Reduction Act (44 U.S.C. 3507) under
control number 1545-0790. Responses to these collections of information
enable the designation, and the termination of the designation, of a
tax matters partner for a partnership.
An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless the collection of
information displays a valid control number.
The estimated annual burden per respondent varies from .50 hour to
1 hour, depending on individual circumstances, with an estimated
average of .75 hour.
Comments concerning the accuracy of this burden estimate and
suggestions for reducing this burden should be sent to the Internal
Revenue Service, Attn: IRS Reports Clearance Officer, T:FP, Washington,
DC 20224, and to the Office of Management and Budget, Attn: Desk
Officer for the Department of the Treasury, Office of Information and
Regulatory Affairs, Washington, DC 20503.
[[Page 67459]]
Books or records relating to this collection of information must be
retained as long as their contents may become material in the
administration of any internal revenue law. Generally, tax returns and
tax return information are confidential, as required by 26 U.S.C. 6103.
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 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.
On April 18, 1986, a notice of proposed rulemaking (LR-205-82)
concerning sections 6221 through 6231 and section 6233 was published in
the Federal Register (51 FR 13231). The notice of proposed rulemaking
included guidance concerning designating tax matters partners. 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 in LR-205-82 were published in
the Federal Register (52 FR 6779) on March 5, 1987.
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, all states and several foreign
jurisdictions have enacted laws providing for the formation of limited
liability companies (LLCs). LLCs in most jurisdictions may be
classified for Federal tax purposes either as partnerships or
associations that are taxable as corporations. For LLCs that are
classified as partnerships for Federal tax purposes, it is necessary to
determine the tax matters partner for the LLC.
On October 30, 1995, a notice of proposed rulemaking (PS-34-92)
concerning section 6231(a)(7) was published in the Federal Register (60
FR 55228). The notice of proposed rulemaking amended proposed
regulations to consolidate certain guidance necessary to determine the
tax matters partner for partnerships. The notice of proposed rulemaking
also proposed guidance concerning the designation or selection of a tax
matters partner for limited liability companies classified as
partnerships. No public hearing was requested or held, and no written
comments were received.
Explanation of Provisions
The regulations concerning the designation or selection of tax
matters partners proposed by LR-205-82 and PS-34-92 are adopted, with
minor stylistic changes, by this Treasury decision. The corresponding
temporary regulations are removed.
Effect on Other Documents
Rev. Proc. 88-16 is obsolete as of December 23, 1996.
Special Analyses
It has been determined that this Treasury decision 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)
does not apply to these regulations, and because the notice of proposed
rulemaking preceding the regulations was issued prior to March 29,
1996, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not
apply.
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
26 CFR Part 301
Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income
taxes, Penalties, Reporting and recordkeeping requirements.
26 CFR Part 602
Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR parts 301 and 602 are amended as follows:
PART 301--PROCEDURE AND ADMINISTRATION
Paragraph 1. The authority citation for part 301 is amended by
removing the entry for Section 301.6231(a)(7)-1T and 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). * * *
Sec. 301.623(a)(7)-1T [Removed]
Par. 2. Section 301.6231(a)(7)-1T is removed.
Par. 3. Section 301.6231(a)(7)-1 is added to read as follows:
Sec. 301.6231(a)(7)-1 Designation or selection of tax matters partner.
(a) In general. A partnership may designate a partner as its tax
matters partner for a specific taxable year only as provided in this
section. Similarly, the designation of a partner as the tax matters
partner for a specific taxable year may be terminated only as provided
in this section. 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 another
general partner as the tax matters partner, the tax matters partner is
the partner determined under this section.
(b) Person who may be designated tax matters partner--(1) General
requirement. A person may be designated as the tax matters partner of a
partnership for a taxable year only if that person--
(i) Was a general partner in the partnership at some time during
the taxable year for which the designation is made; or
(ii) Is a general partner in the partnership as of the time the
designation is made.
(2) Limitation on designation of tax matters partner who is not a
United States person. If any United States person would be eligible
under paragraph (a) of this section to be designated as the tax matters
partner of a partnership for a taxable year, no person who is not a
United States person may be designated as the tax matters partner of
the partnership for
[[Page 67460]]
that year without the consent of the Commissioner. For the definition
of United States person, see section 7701(a)(30).
(c) Designation of tax matters partner at time partnership return
is filed. The partnership may designate a tax matters partner for a
partnership taxable year on the partnership return for that taxable
year in accordance with the instructions for that form.
(d) Certification by current tax matters partner of selection of
successor. If a partner properly designated as the tax matters partner
of a partnership for a partnership taxable year under this section
certifies that another partner has been selected as the tax matters
partner of the partnership for that taxable year, that other partner is
thereby designated as the tax matters partner for that year. The
current tax matters partner shall make the certification by filing with
the service center with which the partnership return is filed a
statement that--
(1) Identifies the partnership, the partner filing the statement,
and the successor tax matters partner by name, address, and taxpayer
identification number;
(2) Specifies the partnership taxable year to which the designation
relates;
(3) Declares that the partner filing the statement has been
properly designated as the tax matters partner of the partnership for
the partnership taxable year and that that designation is in effect
immediately before the filing of the statement;
(4) Certifies that the other named partner has been selected as the
tax matters partner of the partnership for that taxable year in
accordance with the partnership's procedure for making that selection;
and
(5) Is signed by the partner filing the statement.
(e) Designation by general partners with majority interest. The
partnership may designate a tax matters partner for a partnership
taxable year at any time after the filing of a partnership return for
that taxable year by filing a statement with the service center with
which the partnership return was filed. The statement shall--
(1) Identify the partnership and the designated partner by name,
address, and taxpayer identification number;
(2) Specify the partnership taxable year to which the designation
relates;
(3) Declare that it is a designation of a tax matters partner for
the taxable year specified; and
(4) Be signed by persons who were general partners at the close of
the year and were shown on the return for that year to hold more than
50 percent of the aggregate interest in partnership profits held by all
general partners as of the close of that taxable year. For purposes of
this paragraph (e)(4), all limited partnership interests held by
general partners shall be included in determining the aggregate
interest in partnership profits held by such general partners.
(f) Designation by partners with majority interest under certain
circumstances--(1) In general. A tax matters partner may be designated
for a partnership taxable year under this paragraph (f) only if, at the
time the designation is made, each partner who was a general partner at
the close of such partnership taxable year is described in one or more
of paragraphs (f)(1)(i) through (iv) of this section as follows:
(i) The general partner is dead, or, if the general partner is an
entity, has been liquidated or dissolved;
(ii) The general partner has been adjudicated by a court of
competent jurisdiction to be no longer capable of managing his or her
person or estate;
(iii) The general partner's partnership items have become
nonpartnership items under section 6231(b); or
(iv) The general partner is no longer a partner in the partnership.
(2) Method of making designation. A tax matters partner for a
partnership taxable year may be designated under this paragraph (f) at
any time after the filing of the partnership return for such taxable
year by filing a written statement with the service center with which
the partnership return was filed. The statement shall--
(i) Identify the partnership and the designated tax matters partner
by name, address, and taxpayer identification number;
(ii) Specify the partnership taxable year to which the designation
relates;
(iii) Declare that it is a designation of a tax matters partner for
the partnership taxable year specified; and
(iv) Be signed by persons who were partners at the close of such
taxable year and were shown on the return for that year to hold more
than 50 percent of the aggregate interest in partnership profits held
by all partners as of the close of such taxable year.
(g) Designation of alternate tax matters partner. If an individual
is designated as the tax matters partner of a partnership under
paragraph (c), (d), (e), or (f) of this section, the document by which
that individual is designated may also designate an alternate tax
matters partner who will become tax matters partner upon the occurrence
of one or more of the events described in paragraph (l)(1) (i) or (ii)
of this section. The person designated as the alternate tax matters
partner becomes the tax matters partner as of the time the designation
of the tax matters partner is terminated under paragraph (l)(1) (i) or
(ii) of this section. The designation of a person as the alternate tax
matters partner shall have no effect in any other case.
(h) Prior designations superseded. A designation of a tax matters
partner for a partnership taxable year under paragraphs (d), (e), or
(f) of this section shall supersede all prior designations of a tax
matters partner for that year, including a prior designation of an
alternate tax matters partner under paragraph (g) of this section.
(i) Resignation of designated tax matters partner. A person
designated as the tax matters partner of a partnership under this
section may resign at any time by a written statement to that effect.
The statement shall specify the partnership taxable year to which the
resignation relates and shall identify the partnership and the tax
matters partner by name, address, and taxpayer identification number.
The statement shall also be signed by the resigning tax matters partner
and shall be filed with the service center with which the partnership
return was filed.
(j) Revocation of designation. The partnership may revoke the
designation of the tax matters partner for a partnership taxable year
at any time after the filing of a partnership return for that taxable
year by filing a statement with the service center with which the
partnership return was filed. The statement shall--
(1) Identify by name, address, and taxpayer identification number
the partnership and the general partner whose designation as tax
matters partner is being revoked;
(2) Specify the partnership taxable year to which the revocation
relates;
(3) Declare that it is a revocation of a designation of the tax
matters partner for the taxable year specified; and
(4) Be signed by the persons described in paragraph (e)(4) of this
section, or, if at the time that the revocation is made, each partner
who was a general partner at the close of the partnership taxable year
to which the revocation relates is described in one or more of
paragraphs (f)(1) (i) through (iv) of this section, by the persons
described in paragraph (f)(2)(iv) of this section.
(k) When designation, etc., becomes effective--(1) In general.
Except as otherwise provided in paragraph (k)(2) of this section, a
designation, resignation, or revocation provided for in this section
becomes effective on the day that the statement required by the
[[Page 67461]]
applicable paragraph of this section is filed.
(2) Notice of proceeding mailed. If a notice of beginning of an
administrative proceeding with respect to a partnership taxable year is
mailed before the date on which a statement of designation,
resignation, or revocation provided for in this section with respect to
that taxable year is filed, the Service is not required to give effect
to such designation, resignation, or revocation until 30 days after the
statement is filed.
(l) Termination of designation--(1) In general. A designation of a
tax matters partner for a taxable year under this section shall remain
in effect until--
(i) The death of the designated tax matters partner;
(ii) An adjudication by a court of competent jurisdiction that the
individual designated as the tax matters partner is no longer capable
of managing the individual's person or estate;
(iii) The liquidation or dissolution of the tax matters partner, if
the tax matters partner is an entity;
(iv) The partnership items of the tax matters partner become
nonpartnership items under section 6231(c) (relating to special
enforcement areas); or
(v) The day on which--
(A) The resignation of the tax matters partner under paragraph (i)
of this section;
(B) A subsequent designation under paragraph (d), (e), or (f) of
this section; or
(C) A revocation of the designation under paragraph (j) of this
section becomes effective.
(2) Actions by the tax matters partner before termination of
designation. The termination of the designation of a partner as the tax
matters partner under paragraph (l)(1) of this section does not affect
the validity of any action taken by that partner as tax matters partner
before the designation is terminated. For example, if that tax matters
partner had previously consented to an extension of the period for
assessments under section 6229(b)(1)(B), that extension remains valid
even after termination of the designation.
(m) Tax matters partner where no partnership designation made--(1)
In general. The tax matters partner for a partnership taxable year
shall be determined under this paragraph (m) if--
(i) The partnership has not designated a tax matters partner under
this section for that taxable year; or
(ii) The partnership has designated a tax matters partner under
this section for that taxable year, that designation has been
terminated under paragraph (l)(1) of this section, and the partnership
has not made a subsequent designation under this section for that
taxable year.
(2) General partner having the largest profits interest is the tax
matters partner. The tax matters partner for any partnership taxable
year to which this paragraph (m) applies is the general partner having
the largest profits interest in the partnership at the close of that
taxable year (or where there is more than one such partner, the one of
such partners whose name would appear first in an alphabetical
listing). For purposes of this paragraph (m)(2), all limited
partnership interests held by a general partner shall be included in
determining that general partner's profits interest in the partnership.
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.
(3) Termination of designation. A designation of a tax matters
partner for a partnership taxable year under this paragraph (m) shall
remain in effect until the earlier of the occurrence of one or more of
the events described in paragraphs (l)(1) (i) through (iv) of this
section or the day on which a designation under paragraph (d), (e), or
(f) of this section becomes effective. If a designation of a tax
matters partner for a partnership taxable year is terminated under this
paragraph (m)(3) and the partnership has not subsequently designated a
tax matters partner for that taxable year under paragraph (d), (e), or
(f) of this section, the tax matters partner for that taxable year
shall be determined under paragraph (m)(2) of this section, and, for
purposes of applying paragraph (m)(2) of this section, the general
partner whose designation was so terminated shall be treated as having
no profits interest in the partnership for that taxable year.
(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) (i) through (iv) 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,
[[Page 67462]]
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) of this section
(designation by general partners with a majority interest) or paragraph
(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 December 23, 1996.
Par. 4. 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. 301.7701-3(b)(2)(ii); 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 December 23, 1996. Any other reasonable
designation or selection of a tax matters partner of an LLC is binding
for periods prior to December 23, 1996.
PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT
Par. 5. The authority citation for part 602 continues to read as
follows:
Authority: 26 U.S.C. 7805.
Sec. 602.101 [Amended]
Par. 6. In Sec. 602.101, paragraph (c) is amended by adding the
entry ``301.6231(a)(7)-1....1545-0790'' in numerical order to the
table.
[[Page 67463]]
Approved: November 8, 1996.
Michael P. Dolan,
Acting Commissioner of Internal Revenue.
Donald C. Lubick,
Acting Assistant Secretary of the Treasury.
[FR Doc. 96-32121 Filed 12-20-96; 8:45 am]
BILLING CODE 4830-01-U