The IRS clarified, in emailed counsel advice,[1] that it does not matter if a partner is a for profit or exempt organization to determine if that partner will bar the partnership from electing out of the regime under IRC §6221(b).

The email is written in response to a question that is not disclosed in the document. However, it’s fairly certain the question that was asked was whether a partnership that had a tax exempt partner could opt out of the BBA partnership audit regime when filing its return using the procedures found at IRC §6221(b)(1).

IRC §6221(b)(1) provides:

(b) Election out for certain partnerships with 100 or fewer, etc.

(1) In general

This subchapter shall not apply with respect to any partnership for any taxable year if—

(A) the partnership elects the application of this subsection for such taxable year,

(B) for such taxable year the partnership is required to furnish 100 or fewer statements under section 6031(b) with respect to its partners,

(C) each of the partners of such partnership is an individual, a C corporation, any foreign entity that would be treated as a C corporation were it domestic, an S corporation, or an estate of a deceased partner,

(D) the election—

(i) is made with a timely filed return for such taxable year, and

(ii) includes (in the manner prescribed by the Secretary) a disclosure of the name and taxpayer identification number of each partner of such partnership, and

(E) the partnership notifies each such partner of such election in the manner prescribed by the Secretary.

The email provides the following answer in response to the inquiry:

Whether an entity is tax-exempt/not-for-profit or not has nothing to do with whether an entity is an eligible partner for purposes of election out under BBA. It solely depends on what type of entity the partner is. A tax-exempt/not-for-profit entity still has an entity type (e.g., C corp, etc).[2]

[1] IRS Emailed Counsel Advice 202147012, November 26, 2021, https://www.irs.gov/pub/irs-wd/202147012.pdf (retrieved November 29, 2021)

[2] IRS Emailed Counsel Advice 202147012, November 26, 2021