Congress Tinkers with Family Partnership Rules

The recently enacted Bipartisan Budget Act of 2015 moves around the family partnership rules so as to clarify their application.

THE OLD RULE

Section 704(e)(1) provided that a person is recognized as a partner of a partnership if capital is a material income-producing factor, whether the partnership was obtained by purchase or gift. This was commonly referred to as the “family partnership rule.”

THE PURPOSE OF THE OLD RULE

A transfer of a partnership interest by gift (or even by sale) opens the door to an impermissible assignment of income. That is, income from property or a business can be transferred in a manner that would be a disrespected assignment of income if such a transfer was conducted outside of the partnership form. The family partnership rule is a safe harbor from IRS attack based on assignment of income principles when capital is a material income-producing factor in the partnership. Per the focus on capital, the safe harbor will not provide protection for service businesses or other businesses where capital is not a major requirement.

CONGRESSIONAL CONCERN

To be considered partners for federal income tax purposes, the legal partners must have joined together with an intent to conduct an active trade or business. Some taxpayers have argued that this rule does not apply if the family partnership rule applies. That is, they claim that the family partnership rule is an alternative way of being considered a partner, without the requirement of an active trade or business.

SO WHAT DID CONGRESS DO?

It moved the family partnership rule out of Section 704(e)(1) and into Section 761(b). As it now reads, Section 761(b) makes clear that one still has to meet the general requirements of being a member of a partnership. The family partnership rule is now only a qualification to the above general rule such that in testing whether one is a partner a gift transfer cannot be used as a challenge if capital is a material income-producing factor. Section 761(b) now reads:

(b) Partner. For purposes of this subtitle, the term “partner” means a member of a partnership. In the case of a capital interest in a partnership in which capital is a material income-producing factor, whether a person is a partner with respect to such interest shall be determined without regard to whether such interest was derived by gift from any other person.

MISC.

Code Sections 704(e)(2) (relating to special rules on allocation of income on gifted interests) and 704(e)(3) (relating to purchases of interests by family members being treated as a gift transaction) are left behind in Section 704(e), and are renumbered as (e)(1) and (e)(2) respectively.

EFFECTIVE DATE OF CHANGE

For partnership tax years beginning after 12/31/2015.

Power of Attorney Holder Cannot Sign for Another

Tax practitioners are familiar with Form 2848. With that form, a taxpayer authorizes an attorney, accountant, or other authorized representative to act as attorney-in-fact for the taxpayer as to the specified tax matter in dealing with the IRS.

When the form is prepared, the representative has to sign it. In a recent Chief Counsel Advice, the question was raised whether one duly authorized representative can sign for another representative on the Form 2848. Unsurprisingly, the advice provides that this is not permissible. The nature of the written declaration of the representative is for the signer to declare, under penalties of perjury, his status and that he is subject to the provisions of Circular 230. Allowing someone else to make that declaration is inconsistent with the purpose of the declaration.

Note that this is a different question from whether one named representative, as representative of the taxpayer, can appoint another representative for the taxpayer (i.e., to sign the Form 2848 on behalf of the taxpayer). But I hope I didn’t get your hopes up on that scenario – that is not permitted either, by the express terms of the Form 2848 - unless the taxpayer had specifically authorized it in Section 5a of the Form 2848 that named the original representative that is seeking to name an additional representative.

Chief Counsel Advice 201544024

Some 2015 Florida Law Changes

Below are some statutory changes enacted in Florida in 2015 that you may not have noticed:

GRANDPARENT VISITATION RIGHTS. In a major rewrite of Chapter 752, statutory rights of a grandparent to obtain visitation rights with a grandchild were substantially narrowed. Under new Fla.Stats. §752.011, these rights can be legally enforced only if (a) both parents of a minor grandchild are deceased, missing or in a persistent vegetative state, or (b) one parent is in such condition, and the other has been convicted of a felony or an offense of violence evincing behavior that poses a substantial threat of harm to the grandchild’s health or welfare.

The opportunities for visitation were broader under prior law, but most of them had been stricken down as unconstitutional under Florida law as violating the parents’ right of privacy, part of which is treated as including the parents’ freedom as to child-rearing.

A report on the problems with the older statutes is available here.

HEALTH CARE SURROGATE PROVISIONS. Chapter 765 has been revised to now allow an individual to name a surrogate to make health care decisions for them and/or to access their health information without the need for a determination of incapacity.

LIMITED LIABILITY COMPANIES. A provision in the articles of organization of an LLC that limits the authority of a person to transfer LLC real property is not effective to non-members and non-managers unless recorded in the public records in the county of the applicable real property.

CUSTODIAL GIFTS TO MINORS. Custodial gifts in the past had to terminate either by age 18 or 21, depending on the method of creation of the account. Some accounts now may be extended by the transferor to age 25.