Congress has replaced the TEFRA partnership audit rules with a new regime that redistributes the burdens of the audit process between partnerships and partners on the one hand and the IRS on the other, and also eliminates many rights that individual partners might previously have had in the audit process. Even more troubling, these new rules create the possibility that absent careful attention and planning, the economic burden of partnership tax adjustments will be both increased and redistributed among the partners, both past and present, in a manner that does not reflect their economic agreement. While the changes aren’t effective for quite some time (returns for taxable years beginning after December 31, 2017) and while there are likely to be further changes before the rules become effective, these new rules alter the landscape so drastically that partnerships and their partners will need to determine how to address them long before they become effective.
On August 6, 2015, the Treasury and the IRS issued Notice 2015-54, which implements a Clinton-era tax provision intended to prevent U.S. taxpayers from using the partnership provisions of the Code to shift built-in gain on property contributed to a partnership to non-U.S. affiliates of the transferor that are partners in the transferee partnership. These rules were announced in reaction to Treasury’s and the IRS’s belief that U.S. taxpayers have been using partnership structures that adopt Section 704(c) methods, special allocations under Section 704(b) and inappropriate valuation techniques with a view towards shifting income to their foreign affiliates.