19 September 2017
As of January 1, 2018 owners of General Partnerships, Limited Partnerships or multi-member Limited Liability Companies may soon find themselves economically liable for the unpaid tax of former partners/members of those entities. JMBM Tax Attorney Jamie Ogden briefly describes the new audit regime, who it affects, and what you need to do to protect yourself from uncertainties.
Important tax news for owners of
Partnerships and LLCs
Jamie Ogden, Tax Lawyer
On June 13, 2017, the Treasury Department republished Proposed Treasury Regulations regarding the new partnership audit regime enacted as part of the Bipartisan Budget Act of 2015. Generally, the new partnership audit rules will be effective January 1, 2018.
As a result of the new partnership audit regime: (1) individuals and/or entities that were formerly owners of General Partnerships, Limited Partnerships and multi-member Limited Liability Companies (together “Partnerships”) during prior, audited tax years may escape liability for unpaid tax, and correspondingly (2) the existing owners of such Partnership (i.e., the owners of the Partnership at the time of the IRS collection process) will bear the economic burden entirely. Thus, in the absence of properly drafted Partnership and Operating Agreements, any existing owner of a Partnership may be economically liable for the unpaid tax of former partners/members of the Partnership. It is therefore critical that Partnerships and their owners review and modify their existing partnership and operating agreements immediately.
More specifically, under existing law, the IRS must generally audit a Partnership for a particular tax year, and to the extent of any tax deficiency, seek to collect the payments from those individuals and/or entities that were owners of the Partnership during the audited tax year. In contrast, under the new audit regime, the IRS may collect such unpaid tax from the Partnership itself at the highest tax rate in effect for the year under examination.
Under certain circumstances, however, Partnerships composed of 100 or fewer owners (and whose owners do not include any Partnerships or certain Trusts) may elect-out of the new audit regime, which election must be filed annually with the IRS. In addition, if certain strict requirements are met, many Partnerships can essentially revert back to the collection process under existing law by imposing liability on those individuals and/or entities that were owners of the Partnership during the audited tax year. Under the new regime, these critical elections are made by the “Partnership Representative” (in lieu of the “Tax Matters Partner”), which if not designated properly by the Partnership (and subject to the new rules on which individuals/entities can serve in that capacity), can be selected unilaterally by the IRS itself.
Accordingly, Partnerships that desire to comply with, or alternatively, elect-out of the economic uncertainties caused by the new audit regime should modify immediately their existing partnership and operating agreements, so that these documents are consistent with the new law.
This is Jim Butler, author of www.HotelLawBlog.com and hotel lawyer, signing off. Please contact us if you would like to discuss any issues that affect your hotel interests or see how our experience might help you create value and avoid unnecessary pitfalls. Who’s your hotel lawyer?
Jim Butler is a founder of the JMBM law firm and chairman of its Real Estate Department. He founded and chairs the Firm’s Global Hospitality Group® and its EB-5 Finance Group which provide business and legal advice to owners, developers and investors of commercial real estate, particularly hotels, resorts, restaurants, spas and senior living. This advice covers purchase, sale, development, financing, franchise, management, labor & employment, litigation, ADA, IP, and EB-5 matters for such properties.
Jim is recognized as one of the top hotel lawyers in the world and has led the Global Hospitality Group® in more than $71 billion of hotel transactions and more than 3,800 hotel properties located around the globe. They have helped clients with more than 1,000 hotel management agreements, 1,000 hotel franchise agreements and more than 100 hotel mixed-use projects.
JMBM’s EB-5 Finance Group has advised on more than 100 EB-5 projects, closed more than $1.5 billion of EB-5 financing, and sourced more than half of that for our clients. EB-5 Investors Magazine named Jim one of the top 25 EB-5 lawyers in the United States, and Jim serves on the Public Policy Committee of the IIUSA, the EB-5 industry’s trade group for regional centers.
Contact Jim at +1-310-201-3526 or JButler@jmbm.com
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