Found in Subtitle F – Procedure and Administration, Chapter
63 – Assessment, Subchapter C – Tax Treatment of Partnership Items of the
Internal Revenue Code, the TEFRA provisions provide special IRS audit and tax
procedures for TEFRA partnerships. If a limited liability company files a Form
1065, U.S. Return of Partnership of Partnership Income, it will be regarded as a
partnership and subject to the application of these rules. I.R.C. § 6231(a).
The TEFRA rules apply broadly. Generally, a partnership with
eleven or more partners at any time during the tax year is a TEFRA partnership.
On the other hand, a small partnership – with ten or fewer partners, each of
whom is an individual (husband and wife partners count as one), a C corporation
or an estate of a deceased partner – is excepted. I.R.C. § 6231(a)(1)(B). The
narrow scope of the exception means many partnerships with smaller numbers of
partners may get caught in the TEFRA net. Further, the small partnership (non-TEFRA)
determination is one made for each taxable year.
To summarize, an LLC with ten or fewer members will be a
TEFRA partnership (and will not qualify as a small partnership) if it has a
member that is any one of the following:
Limited Liability Company that files a Form 1065
Trust (whether complex or grantor)
Nonresident alien individual
Given the breadth of the statute, it may be
reasonable to assume your operating business LLC is likely a TEFRA partnership
and then examine, for each tax year, whether the small partnership exception
applies. Ignore these rules at your peril.
The consequences of
being treated as a TEFRA partnership are numerous. For example, the position of “tax matters
partner” exists only for TEFRA partnerships. According to the IRS, a non-TEFRA
entity cannot have a tax matters partner.
Article © Fred Witt 2014. All Rights Reserved.
Disclaimer: This alert is
provided for general information purposes and is not intended to constitute
legal or tax advice. Please consult with your own legal or tax advisor before making
any decisions concerning your financial or business matters.