Is Your Operating Agreement "BBA Compliant"?03 / 15 / 2019
IS YOUR OPERATING AGREEMENT "BBA COMPLIANT"?
What does "BBA Compliant" mean?
For anyone interacting with LLCs, or other entities treated under the Federal Tax law as a partnership (i.e., more than one partner, member, owner), they will be surprised to learn that the concept of a "tax matters partner" (TMP) has come to an end under the 2015 Bipartisan Budget Act, effective January 1, 2018 ("BBA"). CPAs and tax return preparers can see from the new IRS Forms 1065, 1065X, and Forms 8082 that the term "BBA" is upon us. But what does the BBA now do?
The BBA is focused on how the IRS will audit LLC and other partnership entities with many members (over a 100) or those with two or more members or partners not otherwise electing to be taxed as a C or S corporation having a certain tiered structure, where one of the members/partners is another partnership or LLC, a revocable living trust, a disregarded entity, or nominee.
When a day comes that the IRS wishes to pursue any "understatement" arising in any LLC, the IRS will ask first--is this entity subject to the BBA? The IRS will look at the representations on the Form 1065, and inquire further. If it is, the IRS will now know that they will no longer have to pursue or chase down indirect partners using the arcane TEFRA audit rules. More importantly, a TMP does not exist under the BBA. Instead, there must be a "partnership representative" designated and it is the LLC entity itself that may be charged with a proposed assessment of tax liability due and owing to the Department of the Treasury.
As practitioners look at the new IRS Form 1065 (2018), question 25 prompts them to then consider how best to analyze whether their particular entity can "opt out" of these new audit rules, using Schedule B-2 (Form 1065). If they cannot, or there is risk that a "non-eligible" partner/member can become a "partner" (member), then they will have to proceed with the designation of a Partnership Representative (and if that representative is an entity, an individual who will speak for that Partnership Representative entity). Who is best able to serve in this role? What fiduciary duties might that person have? Does a Statement of Authority need to be filed with the Secretary of State in Florida to announce the role? What rights to indemnification or reimbursement or advancement are to be afforded to this Partnership Representative when serving in this role? What are the procedures to be employed when reviewing K-1s and other financial information when preparing returns?
This change in the manner in which partnership entities are to be audited at the Federal level mandates that a "partnership representative" be appointed who need not be a partner/owner/member. The audits may focus on prior years of a partnership entity in which there were different partners (reviewed year partners) when compared to the current year. How the partnership entity addresses these new rules and the elections that may be made, mandate careful drafting.
Is your operating agreement ready for this change in the manner in which LLC and other partnership entities are going to be audited by the IRS? What due diligence is being employed to know if your agreement is BBA Compliant? Is it critical to prevent transfers by individuals to disregarded entities like a revocable living trust, or require written consent, if that transfer will then mandate compliance with the BBA and designation of a "Partnership Representative"? These and so many other questions now arise under the BBA. It is imperative that practitioners act now to make sure that their operating agreement is BBA Compliant.
If you have any questions about the BBA, or whether your operating agreement is BBA Compliant, please contact Scott Tufts at CPLS, P.A., 407-647-7887.