[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
