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Who Qualifies as a Partner under the New BBA Regulations

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This is the first of a series of deeper dives into the newly finalized partnership audit regulations that cover who can elect out of the new centralized partnership audit regime. We have previously blogged about the regulations here.

In order for a partnership to elect out of the new centralized partnership audit regime (the “BBA regime”), there are several hurdles to overcome. The first of which is that the partnership wishing to elect out must be able to satisfy a two part test:  It must have 100 or fewer partners and those partners must be eligible partners

First, the partnership must have 100 or fewer partners. Treasury Regulation 301.6221(b)-1(b)(1)(i) states that a partnership has 100 or fewer partners if, under section 6031(b), it is required to issue 100 or fewer statements.

Who gets a statement?

While these rules seem straight forward, they could become problematic for partnerships with S corporations as partners.   Under new section 6221(b)(2)(A)(ii), the statements required to be furnished by an S Corp under section 6037(b) for its taxable year ending with or within the partnership’s taxable year will count towards the 100 or fewer partner threshold.  This is in addition to the statement that the S Corp partner received from the partnership.  The partnership must also provide the names and taxpayer identification numbers of each person to whom the S Corppartner was required to issue a statement under section 6037(b).  Thus, an S Corp partner and its shareholders will all count towards the 100 or fewer requirement.

A quick example:

A partnership has 50 partners, which are as follows:

  • 49 unmarried individuals
  • 1 S Corp which has 51 shareholders

At first blush, it would seem that this partnership qualifies. It has only 50 partners after all.  However, under the new rules,  the total number of partners for the 100-partner rule is 101 (49 individuals + 1 S Corp + 51 S Corp shareholders) and the partnership cannot elect out of the BBA regime.

So, while you may think you are under the 100 or fewer limit, you will want to make sure you tally and include the number of shareholders your S Corp partner has if you are attempting to elect out of the BBA regime. The presence of a single S Corp partner may defeat the election.

Who is an eligible partner?

Second, each of those partners must be an eligible partner.   Treasury Regulation 301.6221(b)-1(b)(3) describes the types of partners that are “eligible partners” as individuals, C corporations, foreign entities that would be a C corporation if domestic, S Corp, and estates of deceased partners. Partnerships, trusts, disregarded entities, nominees or other similar persons that hold an interest on behalf of another person, and estates other than the estate of a deceased partner are not considered eligible partners under the rules.   Drawing the rules so narrowly promotes the IRS’s goal of pushing as many partnerships as possible into the new regime.

To recap, when weighing the decision to elect out, be careful to ensure that your partnership has 100 or fewer partners (being mindful of the S Corp trap mentioned above), and that each of the partners are eligible partners under the regulations.

Lurking in the wings, however, is the potential for the IRS to use judicial doctrines to recognize constructive or de facto partners or partnerships.  We will discuss this other pitfall in greater detail next week.