Selection of Tax Matters Partner for Limited Liability Companies

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]

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