From Len Douglas:

To summarize if you want to opt out of the new [draconian] IRS rules for
auditing partnerships there are steps that you must take. One significant
point is that if you have a trust as a partner your partnership can't opt
out of the new audit rules and that may have financial consequences for the
current partners in the event of an audit of past years.

The last part of the last sentence may be wrong. As I read the sentence originally, I thought Len was referring to audits of years prior to 2018. None of the new rules affect years which ended before January 1, 2018. The new rules only cover tax years which begin after December 31, 2018. Re-reading it now, while proof-reading what I've typed below, I think he may actually be referring to current "at the time of an audit" partners and past (2018 and later) years.

As to Scott's question below, there are very important reasons why the issue of the Partnership Representative needs to be addressed in the Partnership Agreement. The Representative has the sole authority to negotiate with the IRS and bind the club to any agreement reached without any consultation or input from the club. More specifically, the other members of the club are prohibited by statute from participating in the audit. In fact, the IRS doesn't even have to notify the other members that an audit is underway. Note that you don't name the PR in the Partnership Agreement, but you define what authorities and limits you place on the Representative. The PR for a given year will be named on the 1065 return.

Here is where the partnership agreement comes in, though: the agreement may require the PR to provide notice of and updates on audit proceedings, to obtain member votes on various issues and otherwise restrict the activities of the PR. A breach of an obligation under the partnership agreement by the PR may be pursued under contract law, or in some states, possibly as a breach of fiduciary duty. Note, the Representative doesn't have to be a member of the club - the only requirement is that the individual have "substantial presence" in the US. You could name an outside professional as your PR. If you do not name a Partnership Representative, the IRS can choose any member of the club as the Representative.

One of the other provisions of the change which may help a club under audit is that the PR may have the ability to "push out" any audit change to the members who were partners during the year under audit.

Here are some of the issues you need to consider:

• the designation and removal of the partnership representative;
  
• the requirements for the partnership representative and partners to obtain and provide information that may reduce the partnership's liability for the imputed underpayment;
  
• partner consent required, if any, for making elections or settlements by the partnership representative, including the election out and the push-out election;
• terms and conditions for amending the partnership agreement to deal with changes or updates to the new rules;
  
• restrictions on transfers of partnership interests to entities that are ineligible partners;
• partners' notice and participation rights in connection with IRS or state audits;
• appropriate indemnifications for and duties of the partnership representative; and
• how to ensure that the appropriate partners and former partners bear the actual costs of imputed underpayments, including cooperation requirements for former partners.

This last point bears further consideration. Under the new Consolidated Partnership Audit Regime, audit changes must be paid by the partnership and/or current members. There is no intrinsic mechanism to push the the changes out to the members during the year under audit. However, a club can modify its PA to include a clause that states that in the case of an audit, The PR has the authority to push out the assessment(s) to the partners during the year under audit. In order for this clause to be binding, it must be enacted before a member who might be subject to it withdraws from the club. In other words, you can't impose this on an ex-member who wasn't a member at the time it was adopted.

Another very important point for those clubs who are eligible and wish to opt-out of the new audit rules: the opt-out election must be made each year on a timely-filed return.

I hope this helps clarify what is a confusing subject.

Ira Smilovitz, EA

On Tue, Sep 25, 2018 at 4:55 PM Scott Freeman via bivio.com <user*1595500001@bivio.com> wrote:

Mr. Douglass seems spot on to me. I do not, however, begin
to understand why the Partnership Representative needs to be
addressed in the bylaws any more than the Tax Matters
Partner needed to be addressed. I can only speculate, since
the next year's return is not yet available, but I
anticipate that there will be a spot on the tax return for a
partner to sign, or be named, as the 'Partnership
Representative'. Do other partnerships have in their bylaws
who the 'Tax Matters' partner is? Our partnership agreement
has nothing about completing tax returns and which partner
will take care of this task.
Scott

Peter,

There aren't any IRS Publications yet that describe this. The details are in the text of the Bipartisan Budget Act of 2015. The IRS has issued several Proposed and Final Regulations including:

reg-136118-15 Centralized Partnership Audit Regime

TD 9829 Election Out of the Centralized Partnership Audit Regime

TD 9839 Partnership Representative Under the Centralized Partnership Audit Regime and Election To Apply the Centralized Partnership Audit Regime

and others not relevant to investment clubs

You can also search for articles in reputable accounting and legal journals and blogs.

Ira Smilovitz, EA

On Tue, Sep 25, 2018 at 6:19 PM Peter Dunkelberger via bivio.com <user*26984900001@bivio.com> wrote:

Me. Smilovitz: in which IRS publication does one find the appointment of the PR and the audit rules?

Thanks,

Peter Dunkelberger

On Tue, Sep 25, 2018 at 6:00 PM ira smilovitz via bivio.com <user*2883400001@bivio.com> wrote:

From Len Douglas:

To summarize if you want to opt out of the new [draconian] IRS rules for
auditing partnerships there are steps that you must take. One significant
point is that if you have a trust as a partner your partnership can't opt
out of the new audit rules and that may have financial consequences for the
current partners in the event of an audit of past years.

The last part of the last sentence may be wrong. As I read the sentence originally, I thought Len was referring to audits of years prior to 2018. None of the new rules affect years which ended before January 1, 2018. The new rules only cover tax years which begin after December 31, 2018. Re-reading it now, while proof-reading what I've typed below, I think he may actually be referring to current "at the time of an audit" partners and past (2018 and later) years.

As to Scott's question below, there are very important reasons why the issue of the Partnership Representative needs to be addressed in the Partnership Agreement. The Representative has the sole authority to negotiate with the IRS and bind the club to any agreement reached without any consultation or input from the club. More specifically, the other members of the club are prohibited by statute from participating in the audit. In fact, the IRS doesn't even have to notify the other members that an audit is underway. Note that you don't name the PR in the Partnership Agreement, but you define what authorities and limits you place on the Representative. The PR for a given year will be named on the 1065 return.

Here is where the partnership agreement comes in, though: the agreement may require the PR to provide notice of and updates on audit proceedings, to obtain member votes on various issues and otherwise restrict the activities of the PR. A breach of an obligation under the partnership agreement by the PR may be pursued under contract law, or in some states, possibly as a breach of fiduciary duty. Note, the Representative doesn't have to be a member of the club - the only requirement is that the individual have "substantial presence" in the US. You could name an outside professional as your PR. If you do not name a Partnership Representative, the IRS can choose any member of the club as the Representative.

One of the other provisions of the change which may help a club under audit is that the PR may have the ability to "push out" any audit change to the members who were partners during the year under audit.

Here are some of the issues you need to consider:

• the designation and removal of the partnership representative;
  
• the requirements for the partnership representative and partners to obtain and provide information that may reduce the partnership's liability for the imputed underpayment;
  
• partner consent required, if any, for making elections or settlements by the partnership representative, including the election out and the push-out election;
• terms and conditions for amending the partnership agreement to deal with changes or updates to the new rules;
  
• restrictions on transfers of partnership interests to entities that are ineligible partners;
• partners' notice and participation rights in connection with IRS or state audits;
• appropriate indemnifications for and duties of the partnership representative; and
• how to ensure that the appropriate partners and former partners bear the actual costs of imputed underpayments, including cooperation requirements for former partners.

This last point bears further consideration. Under the new Consolidated Partnership Audit Regime, audit changes must be paid by the partnership and/or current members. There is no intrinsic mechanism to push the the changes out to the members during the year under audit. However, a club can modify its PA to include a clause that states that in the case of an audit, The PR has the authority to push out the assessment(s) to the partners during the year under audit. In order for this clause to be binding, it must be enacted before a member who might be subject to it withdraws from the club. In other words, you can't impose this on an ex-member who wasn't a member at the time it was adopted.

Another very important point for those clubs who are eligible and wish to opt-out of the new audit rules: the opt-out election must be made each year on a timely-filed return.

I hope this helps clarify what is a confusing subject.

Ira Smilovitz, EA

On Tue, Sep 25, 2018 at 4:55 PM Scott Freeman via bivio.com <user*1595500001@bivio.com> wrote:

Mr. Douglass seems spot on to me. I do not, however, begin
to understand why the Partnership Representative needs to be
addressed in the bylaws any more than the Tax Matters
Partner needed to be addressed. I can only speculate, since
the next year's return is not yet available, but I
anticipate that there will be a spot on the tax return for a
partner to sign, or be named, as the 'Partnership
Representative'. Do other partnerships have in their bylaws
who the 'Tax Matters' partner is? Our partnership agreement
has nothing about completing tax returns and which partner
will take care of this task.
Scott