Monday, May 14, 2012

Simple Partnerships, TEFRA and the Tax Matters Partner

Simple Partnerships, TEFRA and the Tax Matters Partner

            While each partnership is obligated to file a return for each taxable year beginning in that in which it receives income or incurs expenditures allowable as deductions (Treas. Reg. § 1.6031-1(a)(1)), certain “small partnerships” are exempt from this requirement provided each partner reports his share partnership income and deductions. See also Rev. Proc. 84-35, 1984-1 C.B. 509 (exempting certain small partnerships from penalty imposed by Code Sec. 6698).  Admittedly saying small partnerships are “exempt” from the return filing obligation is beyond the express wording of the guidelines, but when you are exempt from a penalty for non-compliance, is compliance mandatory?

In addition, “small partnerships” are exempt from the partnership rules of The Tax Equity and Fiscal Responsibility Act of 1982 (“TEFRA”) and as well the requirement that the partnership maintain a “tax matters partner.”  In order to satisfy these requirements, the partnership, in addition to the requirement that at no point in the year may it have more than 10 partners, it may only have natural persons, estates or C corporations as partners, and each partner’s share of each partnership item must be the same as the share of every other item. Code § 6231(a)(1)(B). Where the partnership has a disregarded entity as a partner, it is no longer a “small partnership” and in consequence is subject to the rules of TEFRA and is outside the scope of Revenue Procedure 84-35. See Rev. Rul. 2004-88, 2004-2 C.B. 165; see also ECC 201219022 (May 11, 2012) (“The existence of a disregarded entity as a partner takes the partnership out of the small partnership exemption of TEFRA under Rev. Rul. 2004-88.”) 

In what would otherwise be a “small partnership,” the desire of a partner to hold their interest through an SMLLC significantly alters the partnerships operations.

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