General Managers as Partnership Representatives: Key Considerations Before Taking on the RoleBy Christopher A. Cacace | March 4, 2019
A new Centralized Partnership Audit Regime (“CPAR”) was introduced in the Bipartisan Budget Act of 2015. Marks Paneth issued a full analysis of the audit rules last month, which included information on the new required Partnership Representative (“PR”).
How does this PR role differ from the Tax Matters Partner (“TMP”) that it replaced, and why should you care about it now – more than three years after the law was passed?
Although the originating legislation was passed in 2015, there were postponements and revisions in the regulations. The resulting final regulations for the new CPAR are generally effective for tax years beginning January 1, 2018.
The regulations are just now becoming effective for 2018 partnership tax returns, which is why every member of a partnership needs to understand and thoughtfully assign the PR role as soon as possible.
By definition, the TMP was a partner and had the power to direct the positions taken on a partnership tax return. A PR, by comparison, has similar powers but does not need to be a partner. What they do need to be – and here’s what’s really new – is a person who has a substantial presence in the U.S. Substantial presence exists if the designated person makes themselves available to meet in person with the IRS in the U.S. and has a U.S. tax identification number, domestic U.S. street address and telephone number.
Also new under the CPAR is the requirement that the PR designation must be made or renewed annually on the partnership’s tax return.
What are the unknowns?
Anyone who meets the substantial presence criteria can be a PR. Moreover, the PR may appoint a Power of Attorney (i.e. CPA or attorney) to represent the partnership in the event of an audit.
What’s unknown is whether partners, or members of an LLC, can bring any action against a PR for acts they deem inappropriate. Remember, the PR may bind the partnership. There may or may not be liability policies to insure a PR against such actions or to insure partnerships against the consequences of poor decisions by a PR – whether made by them or through a Power of Attorney. And since a PR does not need to be a general partner or managing member, investors theoretically have unlimited exposure to people with whom they have no connection.
The partnership could presumably specify by agreement that the PR must consult with the partners on certain issues, etc. and that if the PR did not act accordingly, the partnership would have a cause of action against the PR, but at this point, it is uncertain whether restrictions can be placed on a PR, and if so, what form those restrictions could take.
Should the General Manager serve as PR?
Especially as it relates to the theater industry, general managers with substantial presence in the U.S. would certainly qualify as PRs – but is it a good idea for them to take on this role?
There is no doubt that a PR has liability exposure beyond what a general manager customarily assumes. How much additional liability is unknown, but it is theoretically boundless since no litigation exists in this area yet.
The obvious time a general manager may be asked to take on this role is when the general partner does not have substantial presence in the U.S. However, if the general partner is a U.S. nonresident, can any indemnification they provide be enough to put the general manager’s mind at ease? Practically speaking, that is unlikely if the partner’s assets are overseas.
Arguably, a general manager would be as informed about the partnership’s accounting as anyone, if not more. However, while the tax return flows from the accounting, it is an entirely different matter to sign off on tax positions that often result from circumstances unforeseen when a general management contract was signed.
A PR must be appointed annually and is named on the annual tax return. Although a general manager may refuse the designation in any given year, that decision could leave them open to a disagreement with the producer, and arguably at the worst possible time – when investors are seeking their K-1s.
Thoughts on Partnership Agreements
Given the above, new partnership or operating agreements should address these issues as well as the risks, and we recommend that existing agreements be reviewed and amended as necessary. Some of our suggestions for consideration in the agreements include:
- Because of the substantial authority vested in the PR, it might be wise to include provisions naming the PR or, at a minimum, providing clear procedures for appointing the PR. This would reduce both investor risk as well as PR risk, most notably in circumstances where the PR is removed, resigns or becomes incapable of acting as such.
- Consideration should be given to whether any decisions made by the PR need to be pre-approved by the partners, or perhaps by the general partners.
- Indemnification provisions may be made so that the partnership indemnifies the PR from claims made by those who disagree with decisions or are unhappy with any particular outcome.
While we’re at it
Agreements should also be reviewed to determine whether adequate notice has been given to partners of audit liability. This has been our ongoing recommendation for any assignment agreement since the passage of the law, but older partnership, operating and assignment agreements would not have taken this into consideration.
To wrap it up
Certain partnerships are eligible to opt out of the CPAR, though very few of our theatrical industry clients qualify under the eligibility rules. For those that are eligible, and wish to maintain eligibility, they may want to consider imposing restrictions on the type and number of partners.
For ineligible partnerships, which covers most members of the theater industry, the new PR designation brings some uncertainty, not just for members and partners but potentially for general managers or third-party contractors. Anyone considering the PR role should review their contracts carefully to ensure any additional risk they agree to take on is acceptable.
About Christopher A. Cacace
Christopher A. Cacace, CPA, is the Partner-in-Charge of the Theater, Media and Entertainment Group at Marks Paneth LLP and the leader of the firm's Westchester office. He has a deep expertise serving theater and entertainment clients and has done so for more than 30 years. He started his career in accounting at Pinto Winokur & Pagano CPAs (PWP), which was then the pre-eminent theatrical accounting firm. He is a trusted business adviser and advises his... READ MORE +