Toolkit · Tax

The Partnership Representative Designation, Imputed Underpayment Model, and Push-Out Statement Toolkit

26 U.S.C. § 701

Type
Toolkit
Jurisdiction
National
Date
2024-09-02
Topic
Tax

This toolkit supplies the documents a partnership audit matter runs on, each keyed to the authority it implements. Drafting materials include the four partnership agreement provisions the regime requires — representative designation with notice and consent thresholds, a cooperation covenant reaching former partners, an imputed underpayment allocation clause, and a push-out covenant — plus transfer restrictions and conforming redemption language. Operational materials include an opt-out eligibility tracker run annually, a partner data request, a modification submission outline, a push-out statement checklist, and a tiered partnership notification. Defense materials include a reasonable cause file index built at the partnership level, where the statute requires it. Diligence materials cover buying, selling, and redeeming interests. Each template states the failure it prevents.

The Partnership Representative Designation, Imputed Underpayment Model, and Push-Out Statement Toolkit

Tax > Partnership Audits, the Centralized Regime, and Push-Out Elections | Published 2 September 2024 - Updated 19 May 2026 | UpLaw - uplaw.us

Authority reference card

Question Authority
Is a partnership subject to income tax? 26 U.S.C. § 701
How is character determined for partners? 26 U.S.C. § 702
How is partnership taxable income computed? 26 U.S.C. § 703
What governs allocations? 26 U.S.C. § 704
What is a partner's adjusted basis? 26 U.S.C. § 705
What governs taxable years and distributive shares? 26 U.S.C. § 706
What is a partnership, and what elects out of subchapter K? 26 U.S.C. § 761
Where are adjustments determined, and how does opt-out work? 26 U.S.C. § 6221
What requires consistent reporting? 26 U.S.C. § 6222
Who is the partnership representative, and who is bound? 26 U.S.C. § 6223
How is the imputed underpayment computed and modified? 26 U.S.C. § 6225
What is the push-out election? 26 U.S.C. § 6226
What is an administrative adjustment request? 26 U.S.C. § 6227
What notices issue? 26 U.S.C. § 6231
How is the imputed underpayment assessed and collected? 26 U.S.C. § 6232
Where is judicial review? 26 U.S.C. § 6234
Where are the definitions? 26 U.S.C. § 6241
What returns are required? 26 U.S.C. § 6031
What penalty applies to late filing? 26 U.S.C. § 6698
What accuracy penalties apply, and what is the defense? 26 U.S.C. § 6662, 26 U.S.C. § 6664
What is the Tax Court's jurisdiction and appeal route? 26 U.S.C. § 7442, 26 U.S.C. § 7482
Where are the regulations? 26 C.F.R. Part 301, 26 C.F.R. Part 1

Case anchors. United States v. Woods · United States v. Home Concrete & Supply, LLC · Commissioner v. Culbertson · Commissioner v. Tower · Gregory v. Helvering · Frank Lyon Co. v. United States · Knetsch v. United States · Moline Properties, Inc. v. Commissioner · Cottage Savings Assn. v. Commissioner · Arkansas Best Corp. v. Commissioner · Mayo Foundation for Medical Education & Research v. United States · Loper Bright Enterprises v. Raimondo · Boechler, P.C. v. Commissioner.

Tool 1: Partnership representative provisions

Designation. [Name] is designated as the Partnership Representative under 26 U.S.C. § 6223 for each taxable year until a successor is designated as provided below. If the Partnership Representative is an entity, [Name] is designated as the designated individual. The Partnership Representative shall at all times maintain a substantial presence in the United States.

Successor. The Partnership Representative may be removed, with or without cause, and a successor designated, by [vote/consent standard]. The Partnership Representative shall resign upon ceasing to satisfy the eligibility requirements.

Notice to Partners. The Partnership Representative shall deliver to each Partner and each Person who was a Partner during the reviewed year, within [10] Business Days of receipt, a copy of any notice of administrative proceeding, notice of proposed partnership adjustment, notice of final partnership adjustment, or other notice under 26 U.S.C. § 6231, together with a summary of the deadlines then running.

Limits on authority. Notwithstanding 26 U.S.C. § 6223, the Partnership Representative shall not, without [consent standard]: (a) extend any period of limitations; (b) enter into any settlement resulting in a partnership adjustment exceeding $[__]; (c) make or decline an election under 26 U.S.C. § 6226; or (d) file a petition under 26 U.S.C. § 6234.

Affirmative duties. The Partnership Representative shall use commercially reasonable efforts to (i) pursue every available modification under 26 U.S.C. § 6225, (ii) request from Partners and former Partners the information required for modification, and (iii) maintain the reasonable cause and good faith record required by 26 U.S.C. § 6664 at the Partnership level.

Standard of care and indemnity. The Partnership Representative shall act in good faith and shall be indemnified by the Partnership except for fraud, willful misconduct, or gross negligence.

Failure this prevents. Without these provisions, one person can extend limitations periods, settle, and decline a push-out election without telling anyone, and every partner and former partner is bound.

Tool 2: Cooperation covenant

Partner cooperation. Each Partner and each Person who was a Partner during any reviewed year (each, a "Covered Partner") shall, within [30] days of written request from the Partnership Representative, provide (a) documentation of the Covered Partner's federal tax classification for the reviewed year; (b) documentation of any exemption from tax on Partnership income; (c) the Covered Partner's applicable marginal rate; (d) information concerning the Covered Partner's utilization of character and any partner-level limitation; (e) a statement whether the Covered Partner will file an amended return for the reviewed year and pay the resulting tax if requested; and (f) current contact information.

Amended returns. If the Partnership Representative determines that a modification under 26 U.S.C. § 6225 requires amended returns, each Covered Partner shall cooperate in filing them and shall pay the tax attributable to the Covered Partner's share.

Tiered partners. A Covered Partner holding through another entity shall cause that entity, and each entity above it, to comply with this Section.

Remedy. If a Covered Partner fails to comply, the Covered Partner shall indemnify the Partnership for the increase in the imputed underpayment attributable to that failure, together with associated penalties and interest, and the Partnership may offset the amount against any distribution otherwise payable and may pursue any other remedy.

Survival. This Section survives the transfer, assignment, redemption, or withdrawal of any interest and the dissolution of the Partnership, and binds successors and assigns.

Failure this prevents. The single most expensive gap in partnership audit practice. Without a covenant reaching former partners, a non-responder's share stays in the imputed underpayment at the highest rate under 26 U.S.C. § 6225 and current partners pay it.

Tool 3: Imputed underpayment allocation clause

Allocation of imputed underpayments. Any imputed underpayment, and any associated penalty, addition to tax, or interest, paid by the Partnership under 26 U.S.C. § 6225 shall be allocated among, and borne by, the Persons who were Partners during the reviewed year to which the adjustment relates, in proportion to their distributive shares of the adjusted items for that year.

Mechanism. Amounts so allocated shall be (a) treated as a distribution to, and charged against the Capital Account of, each Person who is then a Partner; and (b) with respect to any Person who is no longer a Partner, payable by that Person to the Partnership on demand pursuant to the indemnity in [Cooperation Covenant].

Withholding. The Partnership may withhold from any distribution otherwise payable to a Partner any amount allocated to that Partner under this Section.

No reallocation to new Partners. No portion of an imputed underpayment relating to a reviewed year shall be borne by a Person who was not a Partner during that reviewed year, except to the extent of amounts the Partnership is unable to collect after commercially reasonable efforts.

Failure this prevents. The statutory default charges the adjustment-year partners — the people who own the entity when the audit ends. This clause puts it back on the people who received the income.

Tool 4: Push-out covenant

Election under 26 U.S.C. § 6226. The Partnership Representative shall make the election under 26 U.S.C. § 6226 with respect to any imputed underpayment, and shall furnish statements to each reviewed-year Partner, unless [supermajority] of the Partners (determined by reviewed-year interests) direct otherwise in writing before the election deadline.

Statements. The Partnership shall furnish each reviewed-year Partner with the statement required by 26 U.S.C. § 6226, together with the computation of that Partner's share.

Tiered Partners. The Partnership shall notify each Partner that is itself a partnership of that Partner's own election deadline, in writing, promptly upon furnishing statements.

Tax distributions. [Optional: The Partnership shall make a distribution to each reviewed-year Partner sufficient to fund the tax shown on that Partner's statement, to the extent of available cash, prior to any other distribution.]

Failure this prevents. A short, irrevocable election window arriving with no prior decision made and no consent obtained. The default is that the partnership pays at the highest rate.

Tool 5: Transfer restriction (opt-out preservation)

Restricted transferees. No Partner may transfer any interest, and no Person may be admitted as a Partner, if as a result the Partnership would cease to be eligible to elect out of the centralized partnership audit regime under 26 U.S.C. § 6221. Without limiting the foregoing, no interest may be transferred to or held by a partnership, a trust, a disregarded entity, or a nominee without the prior written consent of [the General Partner / a specified vote].

Representation. Each transferee shall represent its federal tax classification and shall notify the Partnership of any change.

Failure this prevents. One trust, one single-member limited liability company, or one tiered partner destroys opt-out eligibility for the year — usually unnoticed until a return is filed.

Tool 6: Redemption and transfer agreement provisions

Audit regime obligations survive. Notwithstanding any release contained herein, the [Departing Partner / Transferor] remains subject to the cooperation covenant and the imputed underpayment indemnity in Sections [] and [] of the Partnership Agreement with respect to each taxable year during which the [Departing Partner / Transferor] held an interest, and acknowledges that a statement under 26 U.S.C. § 6226 may be furnished to it after the date hereof.

Costs. [The Partnership / The Departing Partner] shall bear the cost of preparing any amended return requested for modification purposes under 26 U.S.C. § 6225.

Transferee assumption. The Transferee assumes and agrees to be bound by the cooperation covenant and the allocation provisions with respect to periods from and after the date hereof, and acknowledges that the Transferor retains the obligations described above for prior periods.

Holdback. [$__] of the purchase price shall be held in escrow until [date/event] to secure the Transferor's obligations under this Section.

Failure this prevents. The most common gap in practice: a general release that says nothing about the audit regime, leaving remaining partners to absorb an adjustment attributable to the departed partner's income.

Tool 7: Opt-out eligibility tracker

Run before every return is filed.

Partner Classification Eligible? Statements required Notes
Individual / C corp / S corp / foreign corp / estate ✔ 1
Partnership ✖ — disqualifying
Trust ✖ — disqualifying
Disregarded entity ✖ — disqualifying
Nominee ✖ — disqualifying
Total statements must be ≤ 100
Determination Answer
All partners eligible?
Statement count ≤ 100?
Election available?
Election made on a timely filed return?
Each partner's name and TIN disclosed?
Partners notified?
Transfer restriction in the agreement?

Note. An S corporation partner is eligible, but its shareholders count toward the statement total. Where the election is unavailable, record the conclusion in the file so nobody assumes otherwise next year.

Tool 8: Partner data request

To: [Reviewed-year Partner] Re: [Partnership] — tax year [] examination; request under Section [] of the Partnership Agreement

The Partnership's [] tax year is under examination. Under 26 U.S.C. § 6225, information about each reviewed-year partner may substantially reduce the amount the Partnership must pay, and may reduce what you ultimately bear. Section [] of the Partnership Agreement obligates you to provide the following within [30] days.

  1. Federal tax classification for [__] (individual, C corporation, S corporation, partnership, trust, exempt organization, estate, other).
  2. If exempt from tax on Partnership income, the basis and documentation.
  3. Marginal federal rate applicable to your share for [__].
  4. Whether you used capital gain or qualified dividend character from the Partnership for [__].
  5. Whether passive activity or other partner-level limitations applied.
  6. Whether you will file an amended return for [__] and pay the resulting tax if requested.
  7. If you held through another entity, that entity's name, classification, and contact information — and please forward this request to it.
  8. Current address, telephone, and email.

Failure to respond may increase the Partnership's liability and, under Section [__], may result in an indemnity obligation and an offset against distributions.

Timing rule. Send this on the notice of administrative proceeding, not on the proposed adjustment. The modification window is too short to start collecting then.

Tool 9: Modification submission outline

  1. Identification. Partnership, reviewed year, notice date, proposed adjustments.
  2. Computation of the imputed underpayment as proposed, showing groupings and subgroupings under 26 U.S.C. § 6225 and the netting applied.
  3. Modification 1 — tax-exempt partners. Schedule of exempt partners, allocable shares, and documentation of exempt status.
  4. Modification 2 — rate. Schedule of C corporation partners and the differential; schedule of capital gain and qualified dividend character allocable to individuals.
  5. Modification 3 — amended returns. List of partners filing, amounts paid, and copies of returns or the alternative-procedure statements.
  6. Modification 4 — partner-level limitations. Passive activity and similar, with support.
  7. Modification 5 — tiered structures. Organizational chart and information obtained from each tier.
  8. Non-cooperating partners. Identify them and the resulting increase, and state the efforts made.
  9. Revised imputed underpayment computation.
  10. Penalty position. 26 U.S.C. § 6662 analysis and the 26 U.S.C. § 6664 reasonable cause showing, at the partnership level.
  11. Exhibits index.

Tool 10: Push-out statement checklist

  • [ ] Election made in the form and within the period required by 26 U.S.C. § 6226.
  • [ ] Reviewed-year partner roster confirmed, including mid-year changes under 26 U.S.C. § 706.
  • [ ] Each partner's share of each adjustment computed by grouping and character.
  • [ ] Statements furnished to every reviewed-year partner and filed with the government.
  • [ ] Statements identify the reviewed year, the adjustment, the partner's share, penalties, and interest.
  • [ ] Tiered partners notified in writing of their own election deadline.
  • [ ] Basis effects under 26 U.S.C. § 705 documented for each partner.
  • [ ] Intervening-year effects identified.
  • [ ] Partnership records retain proof of furnishing and filing.
  • [ ] Tax distribution made, if the agreement requires it.

Tool 11: Reasonable cause file index

Built at the partnership level, because 26 U.S.C. § 6664 requires it there. Individual partner reliance does not help.

Item Present? Location
Written advice relied upon, with date
Adviser's qualifications and independence
Evidence that all relevant facts were disclosed to the adviser
Contemporaneous memoranda on uncertain positions
Valuation reports and appraiser qualifications
Substantiation for deductions and credits, organized
Minutes or memoranda showing the manager considered the issue
Any disclosure statement filed with the return
Allocation support under 26 U.S.C. § 704 (substantial economic effect analysis)
Evidence of real capital, risk, activity, and participation (partnership-existence defense under Commissioner v. Culbertson)

What fails. A post-hoc opinion obtained after the examination began; an adviser who was not given the actual facts; a valuation from someone without relevant expertise; and reconstruction generally.

Tool 12: Transfer diligence request

Send to the partnership before buying an interest.

  1. All open taxable years and their limitations periods, including any extension granted by the partnership representative.
  2. Copies of any notice under 26 U.S.C. § 6231 received for any year.
  3. Whether an election out under 26 U.S.C. § 6221 has been made for each open year, and the eligibility analysis.
  4. Whether the buyer's classification would destroy eligibility for future years.
  5. The identity of the partnership representative and the agreement provisions governing that role.
  6. The agreement's cooperation covenant, allocation clause, and push-out covenant.
  7. Any administrative adjustment request filed or contemplated under 26 U.S.C. § 6227.
  8. Any modification request or push-out election made for any year.
  9. The reviewed-year partner roster for each open year.
  10. Confirmation whether any prior transferee or redeemed partner was released from cooperation or indemnity obligations.

Deal terms that follow. A holdback or specific indemnity for pre-closing adjustments; a representation that the allocation clause charges reviewed-year partners; and confirmation that the sellers remain bound to cooperate.

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