State Conformity Issues Loom Over Federal Partnership Audit Law

By Andrew M. Ballard

States and impacted businesses are running short on time to deal with complex changes as the new federal partnership audit regime is about to take effect, leading state and local tax practitioners said during a Nov. 7 session at the Paul J. Hartman State & Local Tax Forum in Nashville, Tenn.

Steve Wlodychak, a Washington-based principal with Ernst & Young LLP’s Indirect (State and Local) Tax Practice, said partnerships need to decide how they want to comply and pick a partnership representative before one is selected for them by the Internal Revenue Service. Perhaps one of the most significant impending changes, the partnership representative will have an enormous amount of power—but also must be indemnified and protected from liability, Wlodychak said.

The federal Bipartisan Budget Act of 2015 ( Pub. L. No. 114-74), signed in November 2015, ushered in a new centralized system for federal audits of partnership entities that’s set to take effect Jan. 1, 2018. The default regime generally provides for assessment and adjustments at the entity level, rather than among individual partners, and has generated questions and concerns over the flow-through impact at the state level. The IRS has released proposed regulations ( REG-136118-15, RIN:1545-BN77) to carry out the regime.

Wlodychak said the situation creates a conformity issue for states, which will have to decide whether a nonresident representative will be able to act on behalf of in-state partners and on other related partnership issues. The issue already is significant at the federal level, as partners don’t always agree on who should fill that role, he said.

Model Legislation

The partnership representative and other state conformity issues are part of deliberations before the Multistate Tax Commission (MTC) and a coalition of business groups, which are working toward crafting model state legislation.

The MTC released an Oct. 25 report reviewing a model uniform statute and regulation pitched by a coalition of industry groups, or “interested parties.” The groups include the Council On State Taxation, the Tax Executives Institute Inc., the Institute for Professionals in Taxation, the American Institute of CPAs, and a task force of the American Bar Association tax section’s State and Local Tax Committee.

Bruce P. Ely, senior partner at Bradley Arant Boult Cummings LLP in Birmingham, Ala., and co-chair of the American Bar Association task force, told meeting attendees that they “are in active negotiations with the MTC and the states” in an effort to craft a single model bill for state Legislatures to consider during their upcoming sessions.

“We would like to avoid dueling model acts next Spring,” Ely said. Efforts to reach a compromise are important, because otherwise, “we’re going to wind up killing each other’s bills.”

The MTC has made certain changes to the business groups’ model bill, which are under discussion, according to Ely. Tiered partnerships “is the major issue right now,” among a few others, he said.

To contact the reporter on this story: Andrew M. Ballard in Nashville, Tenn., at aballard@bna.com

To contact the editor responsible for this story: Cheryl Saenz at csaenz@bna.com

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