Part 4. Examining Process

Chapter 31. Pass-Through Entity Handbook

Section 2. TEFRA Examinations - Field Office Procedures (Cont. 1)

4.31.2  TEFRA Examinations - Field Office Procedures (Cont. 1)

4.31.2.2 
Field Agent Key Case Procedures

4.31.2.2.12 
Affected Items Requiring Key Case and Investor Level Determinations

4.31.2.2.12.4  (06-01-2004)
Cancellation of Debt Income (COD)

  1. The partnership components would include:

    1. whether or not the partnership has COD income (for example on the foreclosure of real property with a related loan that is forgiven);

    2. the amount of the COD income; and

    3. the amount of the deemed distribution for the decrease in liabilities if the COD income is the result of a liability forgiven.

  2. The partner components would include:

    1. whether or not the partner qualifies to exclude the COD income from their income, e.g. IRC 108;

    2. whether or not the partner would have any tax attributes that could be offset under IRC 108.

4.31.2.2.13  (05-31-2005)
Report Preparation for Affected Items

  1. In General:

    1. Changes made to partnership components should be contained on Form 4605-A, Form 886-A and Form 886-Z For example, if distributions and contributions are changed from the information reported on Schedule M-1, the adjustment should be listed under "other adjustments" on the Form 4605-A and the correct allocation of these items should be shown on the Form 886-Z. If the item is a reclassification of a general partner to a limited partner, some adjustments, such as reallocations of distributive shares, or changing the characterization of a partner from general partner to limited, cannot easily be shown on the Form 4605-A . Utilize the Form 886-A to describe this adjustment. Reference the Form 886-A in the remarks section of the Form 4605-A as an attachment.

    2. Form 886-A should be prepared for any item, which has been changed or reclassified. Even when changes are not made to these items, they still constitute components of an overall partner level adjustment and may be included in the TEFRA Summary Report if an adjustment at the partner level is proposed to basis, at-risk, or passive loss limitations.

    3. If any adjusted partnership components are not included in the TEFRA entity Summary Report and are then not included in the FPAA and the partner's case is argued in court, the issue may have to be conceded if the disallowance of a partner's loss relies on:
      • a change to a distribution;
      • a change to a contribution;
      • a reclassification of a general to a limited partner; or
      • some other partnership level component.

    4. If the overall partner level adjustment contained in the Affected Items Report consists only of computational changes to the partnership level components, such partner level adjustment may be made as a computational adjustment. If such overall partner level adjustment requires a partner level determination (i.e. that the partner did not materially participate for purposes of IRC 469), the deficiency procedures of subchapter B of chapter 63 will apply and an Affected Item 30-day letter or Affected Item 90-day letter will be required.

4.31.2.2.13.1  (06-01-2004)
Basis and At-Risk

  1. If certain components of basis and at-risk are adjusted at the partnership level, while other components are accepted and it can be determined that partners' losses will be limited, the following procedures shall apply:

    1. Prepare a TEFRA key case Summary Report (Letter 1807, Form 4605-A, Form 886-A and Form 886-Z).
      • On Form 4605-A, list changes made to component parts under "Other Adjustments." Components of basis and at-risk that are accepted as filed should also be listed under " Other Adjustments" . Include any other proposed adjustments on the Form 4605-A.
      • On Form 886-A, explain the determination made regarding the partnership components of basis and at-risk. This is in addition to the Form 886-A for any other proposed adjustments.
      • On Form 886-Z , list each partner's share of corrected partnership components of basis and at-risk in addition to any other proposed adjustments.

    2. Prepare an Affected Items Report for basis and at-risk showing the limitations on partner losses.
      • On Form 4605-A, add the following information in the " remarks" section. This statement should only be included in the affected items report.

      "During the partnership unified proceeding, it was determined that components of the partners' basis and/or at-risk result in limitations on some of the losses which each partner may deduct in this year. Basis and/or at-risk limitations are considered affected items which are proposed to each partner upon the completion of the TEFRA unified proceedings."
      • On Form 886-A, explain the facts, law and argument. Include a detailed explanation as to how basis and/or at-risk amounts were determined; provide background on the issue(s)..
      • On Form 886-Z, include each partner's corrected share of partnership level components, any partner level components and each partner's corrected basis and/or at-risk prior to allowance of any partnership losses.

    3. If the components of basis and at-risk are accepted at the partnership level, the agent may still determine that a partner's losses will be limited because of partner level determinations. In this case, the TEFRA reports should be prepared in the same manner as described in (1) above except that the reports will show no changes to the partnership components. If there are no other issues on the partnership return, the partner's return will only be adjusted if losses were deducted in excess of basis and/or at-risk.

4.31.2.2.13.2  (06-01-2004)
Gain or Loss on Disposition of a Partnership Interest

  1. If at the partnership level, it is determined that partners were required to report gain or loss on the disposition of a partnership interest, the following procedures apply:

    1. Prepare TEFRA entity Summary Report (Letter 1807, Form 4605-A, Form 886-A and Form 886-Z).
      • On Form 4605-A, list the items that were used to determine the gain or loss (i.e. distributions, relief of liabilities, partner's capital account). If changes were made to any items, list the adjustments.
      • On Form 886-A, explain each partnership level component used to determine the gain/loss on the disposition of such interest.
      • On Form 886-Z, list the partnership items adjustments that were used to determine the gain or loss on the disposition of the partnership interest for each partner that it applies to.

    2. Prepare an Affected Items Report for basis and at-risk showing each partner's corrected gain or loss on disposition of their partnership interest. ,
      • On Form 4605-A, add the following information in the "remarks" section. This statement should only be included in the Affected Items Report.
      "During the partnership unified proceeding, determinations were made which resulted in the recognition of gain/loss by the partners on the disposition of their interest. This gain or loss is considered an affected item which will be proposed to each affected partner upon completion of the TEFRA unified proceedings."
      • On Form 886-A, explain the facts, law and argument. Include a detailed explanation as to how the gain or loss was determined. Explain the disposition issue as well.
      • On Form 886-Z, include each partner's share of all corrected components, as well as each partner's gain or loss on disposition of such interest.

4.31.2.2.13.3  (03-04-2008)
Passive Losses

  1. If, at the partnership level, it is determined that the partnership was engaged in a rental real estate activity rather than a trade or business, the following procedures shall apply:

    1. Prepare TEFRA entity Summary Report (Letter 1807, Form 4605-A, Form 886-A and Form 886-Z).
      • On Form 4605-A, list Trade or Business vs. Rental Real Estate Activity under "other adjustments" with the following statement in the "remarks" section:
      "During the TEFRA unified proceeding, it was determined that the partnership had $0 ordinary loss from a non-rental trade or business activity. The activity was determined to be a loss from a rental real estate activity. This classification may limit the loss which each partner may deduct in this year."
      • On Form 886-A, describe the basis for the determination.
      • On Form 886-Z, include corrected item.

    2. Prepare an Affected Items Report for passive losses showing the limitations on partner losses.
      • On Form 4605-A, add the following information in the " remarks" section. This statement should only be included in the affected items report.
      "During the TEFRA unified proceeding, it was determined that the partnership is engaged in a rental real estate activity. This classification may limit the passive losses which each partner may deduct in this year. Adjustments due to passive loss limitations are affected items which will be proposed to each partner upon the completion of the TEFRA unified proceedings."
      • On Form 886-A, explain the facts, law and argument. Include a detailed explanation regarding the passive loss rules and how losses may be limited to the partners. Explain the reclassification of the activity (if applicable).
      • On Form 886-Z, include all the corrected items as well as the amount of gain or loss which is subject to passive activity limitations.

4.31.2.2.13.4  (03-04-2008)
Cancellation of Debt Income

  1. If, at the partnership level, it is determined that the partnership has cancellation of debt income, the following procedures shall apply:

    1. Prepare TEFRA entity Summary Report (Letter 1807, Form 4605-A, Form 886-A, and Form 886-Z).
      • On Form 4605-A, list cancellation of debt income under "other adjustments"
      • On Form 886-A, describe the basis for the determination that the partnership had cancellation of debt income and how the amount of the income was computed. Explain the source and amount of the cancellation of debt income.
      • On Form 886-Z, include cancellation of debt income.

    2. Prepare an Affected Items Report for cancellation of debt income:
      • On Form 4605-A, add the following information in the "remarks" section. This statement should only be included in the affected items report.

      "During the TEFRA unified proceeding, it was determined that the partnership has cancellation of debt income. Cancellation of debt income is a separately stated item of income passed through to you as a partner. The inclusion in or exclusion from taxable income of the cancellation of debt income is determined at the partner level. Adjustments due to cancellation of debt income are affected items which will be proposed to each partner upon the completion of the TEFRA unified proceedings."
      • On Form 886-A, explain the facts, law and argument. Include a detailed explanation regarding the cancellation of debt income and its impact on the partners.
      • On Form 886-Z, include the cancellation of debt income.

4.31.2.2.14  (03-04-2008)
Procedures for Certain Conversions Involving Partnerships

  1. The following subsections pertain to certain conversions involving partnerships.

4.31.2.2.14.1  (03-04-2008)
Unusual Conversions Involving Partnership

  1. A nonTEFRA examination is started if a return is examined with an IRC 761(a) election issue. If during the nonTEFRA examination it is determined that the IRC 761(a) election is not valid and the partnership meets the TEFRA requirements, then a TEFRA examination is started and the procedures outlined in text 4.31.2.2.7 and 4.31.2.2.9 of this Handbook are followed.

  2. A partnership, as defined in IRC 761(a), must file a tax return under IRC 6031(a). For Federal tax purposes, the term "partnership" not only includes partnerships, as they are known in common law, but also syndicates, groups, pools, financial operations, or joint ventures.

    1. If the existence of a partnership is an issue, the examiner must thoroughly investigate the status of the "entity " before initiating TEFRA or nonTEFRA procedures, because if it is later determined that a partnership does not exist, a barred deficiency on the investor return may result; or

    2. If a nonTEFRA proceeding is pursued on a TEFRA entity, the TEFRA entity statute may expire and a TEFRA proceeding for the investors in the entity may not be available to be pursued.

      Note:

      If either situation occurs, consult with the local TEFRA Coordinator or Area Counsel. IRC 6231(g) allows the Service to rely on a reasonable determination in deciding the correct procedures to follow. For example, if a reasonable determination was made that TEFRA applied and it was later determined that the partnership was nonTEFRA, then IRC 6231(g) would extend the TEFRA provisions to the partnership based upon the reasonable determination.

  3. If an examiner discovers that an entity should have filed, but did not file a partnership return, or an investor failed to properly report partnership items, then it needs to be determined whether:

    1. The partners reported a TEFRA partnership item(s) on a Schedule C, E, or F;

    2. A court subsequently determined in a TEFRA partnership level proceeding that a partnership was in existence. If so, then the Service will make computational adjustments to the partners' individual returns to reflect the court's allowance or disallowance of partnership items.

    3. A partner who improperly reported partnership items is nevertheless subject to the computational adjustments, because he or she is treated as a party to the judicial proceeding and is, therefore, bound by its determination.

  4. A partner who failed to report an item of partnership loss (which is subsequently allowed in whole or in part) may be issued a refund as a computational adjustment under IRC 6230(d)(5) or file a claim for refund under IRC 6230(c)(2).

4.31.2.2.14.2  (03-04-2008)
Conversion of TEFRA Partnership to C Corporation

  1. Under IRC 6233(a) (See Treas. Reg. 301.6233-1):

    1. If a partnership return is filed; and

    2. If it is subsequently determined that the entity is an association taxable as a corporation; then

    3. The findings of the unified partnership proceeding will determine taxable income or loss of the C corporation, and will provide the basis for a computational adjustment reflecting the disallowance of any loss or credit claimed by a taxpayer. (See IRM 4.4, AIMS/Processing Handbook, on how to convert a Form 1065 to a Form 1120.)

4.31.2.2.14.3  (03-04-2008)
Conversion of S Corporation to C Corporation

  1. For more information, see IRM 4.31.5.15.2

4.31.2.2.14.4  (03-04-2008)
TEFRA Key Entity Return Filed but No Entity Found to Exist

  1. If a partnership return is filed and the small partnership exception does not apply under IRC 6233, the TEFRA partnership procedures are mandatory even if no entity actually existed.

  2. Under Treas. Reg. 301.6233-1(b), when a partnership return is filed any final partnership administrative adjustment determination resulting from a proceeding may also include a determination that there is no entity.

4.31.2.2.15  (03-04-2008)
Foreign or Domestic Partnership With TMP or Books and Records Located in a Foreign Country

  1. If a partnership, whether domestic or foreign, that is required to file a return under IRC 6031:

    1. Fails to file a return; and

    2. At any time after the close of that taxable year, either the TMP resides outside the United States or the books and records of the partnership are maintained outside the United States, then the Service may:
      • Mail a notice to the partner to advise him or her that the losses and credits arising from that partnership for that year will be disallowed to that partner, unless the partnership files a return within 60 days after the date on which the notice is mailed; and
      • If a partnership return is not subsequently filed, mail a notice of computational adjustment to that partner to reflect the disallowance of any loss (including a capital loss) or credit arising from that partnership for that year, without conducting a partnership level proceeding.

  2. According to Treas. Reg. 301.6231(f)-1(d), if the person to whom the notice was mailed establishes to the satisfaction of the Service that the losses and credits arising from the partnership for the year are proper, and that the partner has made a good faith effort to have the partnership file the required return, then the Service may allow the losses and credits, in whole or in part.

4.31.2.2.16  (03-04-2008)
IRC Section 761(a) Elections

  1. This election allows the electing entity to no longer follow the provisions of Subchapter K of the IRC.

4.31.2.2.16.1  (03-04-2008)
General

  1. IRM 4.19.11 requires mandatory classification of all returns claiming the election under IRC 761(a). All returns, which are not accepted as filed with a valid election, are to be selected for examination.

  2. Form 3198, Special Handling Notice, must be completed with the "Other" box checked and the following statement made in regard to all IRC 761(a) returns received from classification that are surveyed or closed with a valid election: "IRC section 761(a) Valid Election - Form 1065 filing requirement is no longer necessary. Form 2363, Master File Entity Change, required to delete Form 1065 filing requirement." The completed Form 3198, attached to the surveyed or closed return (with proper stamps and/or supervisory signatures), is forwarded to Centralized Case Processing (CCP) for final processing.

  3. If the case being worked is established as nonTEFRA due to an IRC 761(a) election and it is determined that the entity should still be filing as a partnership that does not meet the small partnership exception or they have previously elected TEFRA, the case can still be worked as originally established for tax years ending after 8-5-97. This is due to the TRA'97 change that allows a TEFRA/NonTEFRA determination based on a reasonable evaluation of the entity's tax return. In these situations, consult with the local TEFRA Coordinator or Area Counsel for guidance.

4.31.2.2.16.2  (03-04-2008)
Area Office Procedures

  1. Upon receipt of the IRC 761(a) returns selected for examination, Technical Services will further screen these returns. Based on local knowledge, returns reflecting a valid IRC 761(a) election or known to have low examination potential, are surveyed before assignment.

  2. Surveyed returns are processed prior to the subsequent year return's due date. This should curtail or eliminate delinquency notices issued on the subsequent year's return.

  3. Returns selected for examination are put in process prior to the due date of the subsequent year return.

    1. When time limitations prevent the starting or closing of these returns prior to the due date of the subsequent year return, the filing requirement is still intact thus causing the computer to generate a failure to file notice when the subsequent year return is not timely filed.

    2. The taxpayer should be informed that if such notice is received, the response should include a statement that the IRC 761(a) election was made on the prior year's return and the election was deemed valid during an examination, or the prior year's return is still under examination.

  4. When it is determined that the election is valid, the examiner will prepare a written report per IRM 4.10.8, including Form 3198 as outlined in text 4.31.2.2.4.1:(2) of this Handbook.

  5. When it is determined that the election is not valid, the examiner will notify the partnership: that the IRC 761(a) election is invalid; that the return is incomplete; and that a full return is required under IRC 6031.

    1. If the partnership return is a TEFRA return, the examiner will initiate a TEFRA examination as outlined in text 4.31.2.2.7 and 4.31.2.2.9 of this Handbook.

    2. The examiner will prepare a written report per IRM 4.10.8 and process the return as an amended return, or follow the delinquency and/or substitute for return procedures as outlined in IRM 4.12.

    3. Based on the facts and circumstances of each case, absent a showing of reasonable cause, the examiner should consider the IRC 6698 penalty.

4.31.2.2.17  (06-01-2004)
Formation of a Partnership

  1. The date on which the partnership taxable year commences is considered the date it is formed.

    1. A partnership is formed, for federal income tax purposes, when the parties to a venture join together capital and services with the intent of presently conducting an enterprise or business for profit.

    2. The solicitation of capital from prospective partners does not create a partnership.

  2. The formation date of the partnership may be determined by:

    1. Examining the partnership agreement;

    2. Examining the prospectus; or

    3. Ascertaining the effective date of the certificate of limited partnership.

    Note:

    With regard to the partnership agreement, it may state that the partnership commences as of a date which is later than the date of the agreement; the later date may be the partnership formation date. Absent a formal partnership agreement, the formation date is the date business commenced, which is a factual determination. Business may actually have commenced prior to the date on which the partnership earned income or incurred any deductible expense. (Treas. Reg. 1.6031-1(a).)

4.31.2.2.18  (03-04-2008)
Pass-Through Entity Defined

  1. A pass-through entity as defined by IRC 6231(a)(9) and Treas. Reg. 301.6231(a)(1)-1(a)(2) includes, but is not limited to, the following:

    1. A partnership, which has not elected to be classified as a corporation per Treas. Reg. 301.7701-3 (effective January 1, 1997);

    2. An S corporation;

    3. A business entity which is not a trust or corporation may be treated as a partnership or corporation (if as a corporation, an S corporation election may be made);

    4. A joint venture;

    5. A similar type entity; REMICS (real estate mortgage investment conduit) and LLCs (limited liability company) are examples;

    6. An LLC, which has more than one member and has not elected to be classified as a corporation under Treas. Reg. 301.7701-3 (effective January 1, 1997);

    7. a disregarded entity (See Rev. Rul. 2004-88);

    8. a nominee; or

    9. other similar person through whom other persons hold an interest in the partnership.

  2. A pass-through entity:

    1. May not file a tax return;

    2. May not even be required to file a return (i.e., a Schedule C or F syndication or promotion reported directly on each investor's Form 1040); and

    3. In general, has no tax liability for itself, but passes the tax consequences to its partners, shareholders, beneficiaries, or investors.

4.31.2.2.18.1  (03-04-2008)
LLCs that are Disregarded Entities

  1. An LLC that has only one member may be treated as a disregarded entity. The agent must determine whether the LLC is filing as a pass-through entity (Forms 1065, 1120-S or 1041), an individual, a C corporation, or the estate of a deceased partner. Ask the taxpayer if they filed Form 8832, Entity Classification Election, to elect the form of entity they would file as. Research on IDRS may help determine the filing requirements of the LLC.

  2. If a disregarded entity erroneously files a partnership return, the LLC will be considered a partnership for purposes of applying the small partnership exception. For example, if the one member of the LLC is another pass-through entity, such as an 1120S, the partnership will be covered by the TEFRA procedures. One of the issues raised as part of the examination will be whether or not the LLC may file a partnership return.

  3. If a disregarded entity is an investor in a partnership, the examiner should make sure the Schedule K-1 has the proper EIN of the entity listed on the form. It is not unusual for the TIN of the owner to be listed on the Schedule K-1. If this is the case, the EIN of the disregarded entity must be secured for proper linkage. If this information is not provided, the campus may contact the examiner and request that the correct EIN be secured.

  4. If a key case partnership, that has not filed a Form 1065, is 100% owned by single member disregarded entity LLCs that are ultimately owned entirely by one taxpayer, then the key case partnership entity is itself a disregarded entity and not subject to TEFRA procedures. This is only true where the key case partnership return has not filed, and no Forms 8832, Entity Classification Election, were filed by the key case or any of the underlying single member disregarded entity LLCs.

4.31.2.2.18.2  (03-04-2008)
Entities Acting as Agents for Investors

  1. Examiners may encounter situations where an entity such as a corporation is acting as an agent for investors. The agent-investor arrangement may be identified as a result of the examination of the agent-promoter or the examination of the investor. In either instance, the examiner will determine whether it should be controlled using the PCS or manual procedures.

  2. If the agent-investor arrangement is identified as a result of the examination of the agent-promoter and there is an adjustment affecting the investors, or a determination is made to control the arrangement, the PCS procedures should be used to control the investor returns. A copy of the substitute Schedule K-1 or other similar document provided by the agent to the investors showing distributive shares of income, loss, etc. will be used in lieu of Schedule K-1.

  3. If the agent-investor arrangement is identified as a result of the examination of an investor, nominee, etc. and it is determined that controlling the arrangement would be beneficial, the examiner of the investor's return will prepare and submit a collateral examination request to the agent's district. The procedures discussed in (2) above for controlling the investor's returns will be followed.

  4. If it is determined, as a result of the examination of the agent, that a partnership return should have been filed, the return will be secured from a responsible party. The procedures in this Handbook, including the use of the PCS, will then be followed.

  5. When a promoter of a Schedule C or F type promotion is identified, obtain a dummy taxpayer identification number (TIN) for the specific shelter by using the procedures outlined in IRM 4.4, AIMS/Processing Handbook. Create the dummy entity on AIMS as a non-Master File entity. Input Form 8341 to control all investor returns that are identified. As additional investors are identified, use Form 8341 to control the additional investors. All existing instructions for PCS are then applicable including case closing instructions. Before the Form 8341 is input, the key district examiner must insure that the NMF TIN, MFT Code, tax period, and PBC code shown on AIMS are consistent with the input information on the Form 8341.

4.31.2.3  (03-04-2008)
Field Agent Investor Case Procedures

  1. There are two ways an examiner may be involved with a TEFRA linked investor. They are:

    1. As the examiner of an investor in a key case in which the examiner is examining; or

    2. As the examiner of an investor in a key case being examined by someone else.

4.31.2.3.1  (05-31-2005)
Initial Investor Actions

  1. Form 5546, with the literals "FLOW THROUGH NOTIFICATION" and with the investor Schedule K-1 attached, will be received from the key case CTF by the examining agent, via Form 3210.

  2. The agent in control of a key case investor must review the investor's return for nonTEFRA issues and Schedule K-1 inconsistencies.

  3. If it is determined that no nonTEFRA issues exist, the investor's return should be forwarded to the key case campus for suspense as long as the return is not an LMSB CIC, or other corporate specialty case. If the return is one of the latter, then the case must be suspended in the field.

  4. If a Schedule K-1 discrepancy is identified, the return should be checked for a statement of inconsistency. If no such statement was filed, the taxpayer will be contacted to explain the discrepant item(s).

  5. When the taxpayer responds, the following action will be taken after a review by the agent:

    1. If the taxpayer provides an allowable explanation for all discrepant item(s), no other action related to the discrepant item(s) is necessary. For example, the income per the Schedule K-1 may be greater than that reported on the return. If the taxpayer responds and explains that the difference was caused by a passive loss carryover, then no Schedule K-1 discrepancy issue would exist.

    2. If discrepant item(s) create a decrease in tax, the refund will not be processed until the TEFRA proceedings are completed. The decrease in tax will not be processed immediately to provide the maximum interest offset to the taxpayer. If the taxpayer wants the decrease in tax processed, the taxpayer should make the request in writing. As part of the request, the taxpayer should acknowledge that it is understood that any future assessment as a result of the TEFRA examination may result in more interest than would be charged had the refund not been currently allowed.

    3. If the taxpayer filed a statement identifying the inconsistency with the return in accordance with IRC 6222(b), the issues raised must be considered as part of the examination of the key case. The statement identifying the inconsistencies should be on Form 8082. If the Form 8082 is not utilized contact the TEFRA coordinator to determine if the statement may be considered to meet the criteria of IRC 6222(b). The agent examining the key case should be contacted and provided the necessary information from the investor return to consider the issues raised by the investor.

    4. If discrepant item(s) create an increase in tax and are not identified on the investor's Form 8082, the tax will immediately be assessed, via a computational adjustment. Treas. Reg. 301.6222(a)-2(c)(2) allows the Service to adjust the taxpayer's return via a computational adjustment in order to bring the taxpayer's return in line with Schedule K-1.

    5. Computational adjustments are made directly to the taxpayer's return with no agreement necessary. The taxpayer is given an opportunity to review the audit report prior to assessment or any tax due. The investor may only raise issues with the computation of the additional tax due not the substantive issues of the key case examination.

4.31.2.3.2  (06-01-2004)
TEFRA Issues are Resolved Prior to NonTEFRA Issues

  1. When the TEFRA key case issues are resolved, the field examination or Appeals will be notified by the campus.

4.31.2.3.2.1  (10-01-2010)
SB/SE Investors

  1. If the TEFRA partnership examination is completed prior to Examination or Appeals completing action on the nonTEFRA issues, the investor CTF will make a partial assessment based on the copy of the return.

  2. If the CTF does not have a copy of the investor return at the time the assessment must be made, a copy will be requested from the examining agent or appeals officer. If the examiner or appeals officer would rather make the TEFRA related adjustments, the examiner or appeals officer should notify the CTF at that time.

  3. A copy of the examination report, any other work papers relating to the flow-through adjustment, and Form 5344 will be forwarded to the function working the nonTEFRA issues via Form 3210.

  4. The examiner or appeals officer must use the examination report for the TEFRA related adjustments as the starting point when computing the nonTEFRA tax deficiency or overassessment resulting from the nonTEFRA adjustments.

  5. If the field determines it wants to include the TEFRA adjustments in their examination, the field needs to send a copy of the RAR, reflecting the TEFRA assessment, to the local TEFRA Coordinator and the appropriate CTF for their records. This will ensure that the campus knows the assessment was made and does not re-link the investor. The campus needs verification that the TEFRA assessments were made in full in order to ensure the statute is protected.

    Note:

    It is important to note that the TEFRA and NonTEFRA adjustments must be made on separate reports. Taxpayers are not afforded appeal rights with agreed TEFRA adjustments.

  6. A Form 8339 must be included as part of any partial or full closing package being sent to CCP. If SB/SE, is full closing a PCS linked investor, the package must be routed through Technical Services. A PCS linkage can be identified by reviewing an AMDISA or ERCS print by looking for a PICF Code of 5.

4.31.2.3.2.2  (03-04-2008)
LMSB Investors

  1. The field will work any flow-through TEFRA adjustments for TEFRA LMSB investors open or suspensed in the field. Due to the complexity of the returns, all investor's cases being examined for nonTEFRA issues will also be examined for the TEFRA issues.

  2. Appeals will prepare flow-through adjustments for corporate returns with an activity code of 219 or above, CIC corporate, and corporate specialty returns, which are any corporate return filed with a Form 1120 followed by a letter (for example, Form 1120L life insurance company) except Form 1120A, Form 1120S or Form 1120X. Appeals will also prepare flow-through adjustments for Joint Committee returns. Non-corporate returns, and corporate returns with activity codes below 219, with flow-through adjustments, will have to be computed by the campus and forwarded to Appeals. Appeals should not be sent the returns of TEFRA investors with the TEFRA key case, if the flow-through TEFRA adjustments are the only issue. The TEFRA investors should be suspensed in the field or the campus pending a final determination on the key case. See IRM 8.19.5.18.5.3.

  3. The CTF will contact examination Team Managers or appeals before a package is sent to the field to determine if the investor is still in their control. The case may have already been physically transferred to another area. If the case cannot be located, contact the local TEFRA Coordinator to locate the case.

  4. When the TEFRA adjustments are known, a package of information on the flow-through adjustment will be sent to the examining agent or appeals officer. The package will indicate what the one-year date is for the flow-through adjustments.

  5. The package from the CTF will include:

    1. Copy of an agreement form, defaulted FPAA, or Court Decision, if any;

    2. Form 886-Z;

    3. Copy of Schedule K-1;

    4. Form 4605-A

  6. The tax from the TEFRA flow-through adjustments will be assessed prior to the expiration of the one-year date. If the one-year assessment statute date for the partner is extended, complete Form 8339. Parts A and C of the Form 8339 need to be completed. Part B does not have to be completed when only updating the statute to a new date. Form 8344 can also be used if inputting the one-year date on more than one investor in the same key case. Send the completed form to the local TEFRA Coordinator to be processed locally or by the campus.

  7. Once the package is sent to the field and the campus receives an acknowledgment from the field on a Form 3210, the field will assume the responsibility for having any assessment made prior to the expiration of the one-year assessment date. See IRM 4.31.2.6.3 for an explanation of extending the time for making the assessments.

  8. The field needs to send a copy of the RAR, reflecting the TEFRA assessment, to the local TEFRA Coordinator and the appropriate CTF for their records. This will ensure that the campus knows the assessment was made and does not re-link the investor. The campus needs verification that the TEFRA assessments were made in full in order to ensure the statute is protected.

  9. A Form 8339 must be included as part of any partial or full closing package being sent to CCP. If LMSB, is full closing a PCS linked investor, the package must be routed through Technical Services. Technical Services will review the package and sign off on the Form 3198.

  10. A PCS linkage can be identified by reviewing an AMDISA or ERCS print by looking for a PICF Code of 5.

4.31.2.3.2.3  (10-01-2010)
Partial Assessments/Partial Closures

  1. This section includes instructions on how to process partial assessments or closures when the TEFRA adjustments are being made by the field.

  2. SB/SE, LMSB and CCP have all issued memos regarding the processing of partial assessments or closures. Refer to the appropriate web site for guidance until the appropriate IRMs are updated.

  3. Partial assessments or closures should be faxed to the CCP Field Office Resource Team (FORT) Manager. The package should include:

    • Fax cover sheet with the return fax number;

    • Revenue Agent Report (RAR) (Form 4549 or Form 4549-A;

      Note:

      TEFRA and NonTEFRA adjustments need to be included in separate reports.

    • Any schedules containing tax and/or penalty computations. (It is not necessary to include the revenue agent's "Explanation of Adjustments" );

    • Form 5344;

    • Form 3198.

  4. Once confirmation is received that the assessments have been made, contact your local TEFRA Coordinator to have the linkage removed. CCP will fax back a Form 5344 stamped "request completed" as confirmation. In the event of a quick assessment, CCP may fax Form 2859 instead.

  5. If the adjustments result in no deficiency or refund, the linkage still needs to be removed. A copy of the RAR and completed Form 8339 should be forwarded to the local TEFRA Coordinator.

  6. The TEFRA Coordinator will coordinate with the CTF to have the linkage removed.

  7. The local TEFRA Coordinator needs to send a copy of the RAR, reflecting the TEFRA assessment, to the appropriate CTF for their records. This will ensure that the campus knows the assessment was made and does not re-link the investor. The campus needs verification that the TEFRA assessments were made in full in order to ensure the statute is protected.

4.31.2.3.2.4  (10-01-2010)
Tier Partner Requesting Partnership Level Settlement

  1. A tier partner may request to pay that tax due at the partnership level. This can only be agreed to using a Form 906 Closing Agreement. Also, all underlying partners must be subject to an assessment.

  2. The field must coordinate such requests with local counsel.

  3. If the tier is controlled in the CTF, the campus will send the tier return to the field to accommodate the partnership's request. The CTF does not have the counsel support needed to create Form 906 language.

  4. If all tier partners are not subject to a deficiency, then a partnership level agreement cannot be secured.

  5. The highest marginal tax rate should be used when calculating the amount the tier partnership will pay. The tier partnership must also pay all additions to tax including penalties and interest.

4.31.2.3.2.5  (09-22-2006)
Completion of Form 8339

  1. This section includes instructions for the completion of Form 8339.

  2. In general, IRM 4.29.2 includes instructions for completing the Form 8339 and other related Partnership Control System (PCS) forms.

4.31.2.3.3  (10-01-2010)
Closing a NonTEFRA Investor With an Open TEFRA Linkage

  1. When the examiner is ready to close the nonTEFRA examination, the examiner should check a current transcript to be sure that the TEFRA issues were not already assessed. The examiner should also verify that the investor is still linked by checking a TSUMYI print. The TEFRA coordinator or the PCS coordinator can check the TSUMYI information. The TSUMYI print will show what key cases the investor is linked to, if any.

  2. If the investor is no longer linked, consult with the local TEFRA coordinator to determine if the investor should be re-linked to the key case.

  3. If the nonTEFRA issues are resolved before the TEFRA issues, the nonTEFRA issues will be closed using normal closing procedures; however, any assessments or refunds are processed as a partial assessment. Any nonTEFRA assessments should be made prior to suspensing the case for any reason.

  4. If the nonTEFRA issues are agreed, then:

    1. The examiner secures an agreement in the format prescribed in IRM 4.10.8, Examination of Returns, Report Writing.

    2. The examiner forwards the investor case file through Centralized Case Processing (CCP) for a partial assessment on the nonTEFRA issues, with the exception of, CIC corporate, and other corporate specialty cases.

    3. After the partial assessment, CCP forwards the case to the CTF with control of the investor return for suspense until resolution of the TEFRA issues. (See IRM 4.31.3.4.8.2 for instructions regarding the processing of corporate LMSB, CIC corporate , and/or other corporate specialty cases; these types of case are suspensed in the field group in Status 14 instead of the CTF.)

    4. If the investor is a corporate LMSB, CIC corporate or other corporate specialty case, any deficiency or refund due to the investor for the agreed nonTEFRA adjustments will be assessed or refunded prior to suspensing the investor case awaiting the results of the TEFRA issues. A partial assessment package will be prepared and sent to Centralized Case Processing. The package will include the audit report, Form 5344, and the first four pages of the investor tax return which will be in a folder. Form 3198 will be put on the front of the folder; complete the taxpayer identifying information at the top and check the "Partial Assessment" and " Other" blocks. Under other include the following statement: "After processing the partial assessment (or refund) enclosed, return all documents to exam group [employee group code], Stop XXXX" or other appropriate information such that the partial assessment documents will be returned to the group for association with the investor case file.

    5. Any tax from resolved TEFRA linkages should be computed and assessed before the investor case is sent to Appeals, especially for settlement agreements for partnership tax years ending after August 5, 1997 as interest is suspended under IRC 6601(c) 30 days after the settlement agreement is signed on behalf of the IRS

    6. If the examiner determines that the tax from resolved TEFRA linkages will not be assessed before sending the case to Appeals, the statute should be extended such that there are at least 180 days remaining on the one-year statute. Appeals will not accept an investor case with less than 180 days left on the one-year statute. IRM 8.21.2.3.

      Note:

      For all such cases, Form 3198 (Special Handling Notice) is prepared as appropriate and attached to the front of the investor case file. The "PARTIAL AGREEMENT" and "OTHER" blocks will be checked with the following statement added: " TEFRA linked investor with unresolved TEFRA flow-through issues – forward case file to CTF after assessment of the nonTEFRA issues and issuance of Letter 987" . Cases selected for the Technical Services follow normal review procedures before forwarding to CCP for assessment.

  5. If the nonTEFRA issues are unagreed, then:

    1. The examiner prepares a report in the format prescribed in IRM 4.10.8, Examination of Returns, Report Writing.

    2. The investor case file is forwarded following nonTEFRA closing procedures.

    3. If a protest is filed on the nonTEFRA issues before the TEFRA issues are resolved, the case is forwarded from the Technical Services, through CCP, to Appeals.

    4. Appeals forwards the case to the CTF with control of the investor return for suspense if the TEFRA issues remain unresolved after Appeals consideration. (See IRM 4.31.3.4.8.2 for instructions regarding to processing of corporate LMSB, CIC corporate, Joint Committee and/or other corporate specialty cases.)

      Note:

      For all unagreed nonTEFRA issue cases Form 3198 is prepared as appropriate and attached to the front of the investor case file. The "OTHER " block is checked with the following statement added: "NOTE TO APPEALS: If unresolved TEFRA issues remain after nonTEFRA issues are resolved in Appeals, forward the case to the CTF" . If the investor is a LMSB, CIC corporate, or other corporate specialty case, the statement to be added is: "NOTE TO APPEALS: If unresolved TEFRA issues remain after nonTEFRA issues are resolved in Appeals, forward case to the appropriate Technical Services Unit, which will forward the case to the Group for suspense" . Processing instructions are outlined in IRM 4.4, Aims/Processing Handbook.

  6. If the nonTEFRA issues are no changed, then:

    1. The examiner prepares a report in the format prescribed in IRM 4.10.8, Examination of Returns, Report Writing.

    2. The examiner forwards the investor case file through CCP to the investor CTF for suspense until resolution of the TEFRA issues.

    3. If the case is an LMSB CIC corporate, or other corporate specialty, the no change letter for nonTEFRA cases will be issued and the case suspensed by the LMSB group in Status 14 until the TEFRA flow-through examination is resolved.

    Note:

    For all SB/SE linked investors, Form 3198 is prepared as appropriate and attached to the front of the investor case file. The "OTHER " block is checked with the following statement added: "TEFRA linked investor with unresolved TEFRA flow-through issues – forward the case file to the CTF after issuance of a no change letter for nonTEFRA issues" .

  7. If the investor case is suspensed in the field awaiting a Joint Committee resolution:

    1. Any agreed deficiencies relating to nonTEFRA issues will be assessed prior to placing a Joint Committee case in suspense, and the case will be forwarded to the Joint Committee key area for a procedural and technical review under the general provisions of IRM 4.36, Joint Committee Procedures.

    2. Upon completion of the review and resolution of any questions raised by the Joint Committee reviewer, the case will be returned to the group (without the preparation of a Joint Committee report) and suspensed in Status 14 until notification is received from the CTF that the TEFRA issues are resolved.

    3. When notified, any deficiencies will be assessed following area partial assessment procedures.

    4. Upon the areas receipt of the Form 5344 and an examination report, the examining area office will forward the completed Joint Committee case to the key area Technical Services for final processing and preparation of the Joint Committee report.

4.31.2.3.3.1  (03-04-2008)
Special Procedures for Oversheltered Returns (IRC Section 6234)

  1. Special computations exist for oversheltered returns related to a partnership return with a taxable year ending after August 5, 1997.

  2. An oversheltered return is an income tax return which will have no tax due after applying the proposed adjustments.

  3. A notice of adjustment, Letter 4151, may be sent to the taxpayer if:

    1. the taxpayer files an oversheltered return,

    2. adjustments are proposed (for other than partnership items) for the taxable year, and

    3. the adjustments being proposed do not create a deficiency, but would create a deficiency if there were no net partnership losses.

  4. A notice of adjustment must be sent to the taxpayer via certified or registered mail.

  5. The law allows the taxpayer to petition the Tax Court even though no deficiency exists.

  6. If the taxpayer does not petition the Court, or the court upholds the adjustments, the adjustments will be taken into account in determining the amount of any computational adjustment in connection with a subsequent partnership proceeding.

4.31.2.3.3.2  (03-04-2008)
Special Computation for Non-Oversheltered Returns (Munro Decision)

  1. Non-oversheltered returns (and oversheltered returns related to partnership returns with tax years ending before August 6, 1997) are returns that will have a taxable amount owing after the proposed adjustments (for other than partnership items).

  2. For non-oversheltered returns, Munro computations will continue to be used. See IRM 35.2.1.1.16 .

    1. When adjusting a taxpayers return for nonTEFRA flow-through issues and the Form 4549 results in a reduced deficiency because of large TEFRA partnership losses, the report writer will prepare a report without consideration of any TEFRA partnership income or losses.

    2. Prepare a report starting with the original return, or as amended, and remove all TEFRA issues from open TEFRA proceedings. Label this report as: "Information Only – Do Not Process" . Using this report as the starting point, prepare a report making the nonTEFRA flow-through adjustment.

  3. When there is an open TEFRA proceeding, the following paragraph should be used on the statutory notice of deficiency:

    In computing the deficiency attributable to the adjustments in this notice, which adjustments are neither partnership items nor affected items, as defined by IRC 6231, all TEFRA partnership items subject to an open TEFRA proceeding, whether income, loss, deduction or credits have been ignored exclusively for the purpose of computing the deficiency which is attributable to the adjustments set forth herein. All TEFRA partnership items subject to an open TEFRA proceeding have been ignored in this notice of deficiency for computational purposes only and this notice is not a substitute for any Notices of Final Partnership Administrative Adjustment (FPAA) which may be issued in regard to the TEFRA partnerships. This computation is being made pursuant to the Tax Court decision in Munro v. Commissioner, 92 T.C. 71 (1989).

  4. The following sample paragraph should be included in the explanation of items:

    The following TEFRA partnerships are subject to partnership level proceedings pursuant to the partnership audit and litigation procedures of IRC section 6221 through 6234 with respect to the taxable year(s) and accordingly, all partnership items, whether income, loss, deductions or credits, have been disregarded for purposes of computing a deficiency attributable to the adjustments in this notice:

      ABC Partnership $(30,000.00)
      XYZ Partnership (7,000.00)
      HIJ Partnership (27,700.00)
      Total $(64,7000.00)

  5. A Munro computation may result in an inflated deficiency due to a change in tax bracket until treatment of the TEFRA items is finally determined.

4.31.2.3.3.3  (03-04-2008)
Accelerated TEFRA Investor Closing Procedure (formerly known as De-Linking)

  1. Circumstances arise when the nonTEFRA examination of a TEFRA investor is completed, but the TEFRA linkage prevents the case from closing. In some cases, primarily LMSB CIC taxpayers, the nonTEFRA adjustments are substantial compared to the potential TEFRA adjustments. Generally, the investor case is partially closed and suspensed in the group until the TEFRA examination is completed. However in some cases, the investor may be closed early before the examination of the key case is complete. This was commonly known as "De-Linking" . When requesting and working with an accelerated closure, the examiner should consult their local TEFRA coordinator.

  2. In order to resolve the investor’s share of the TEFRA examination before the TEFRA key case partnership proceeding is complete, there must be coordination with the key case agent. Failing to consult with the key case agent could jeopardize their examination.

  3. As part of the accelerated closing process, a settlement agreement (Form 870_PT or Form 906) must be secured from the TEFRA investor. The agreement removes the investor from the TEFRA proceedings for all years covered by the agreement. The key case agent must provide the examiner working the investor with the key case adjustments used in the agreement. IRC 6224(c)(2) requires that all partners be treated consistently; therefore, a settlement to one partner is a settlement to all. This is why it is critical that the key case examiner be involved with any settlement issued to an investor before completion of the key case examination. Any accelerated settlement proposal for an investor will be approved by the key case examiner and their Territory Manager/Director of Field Operations, and agreed to by the Territory Manager/Director of Field Operations that has control over the investor.

    Note:

    TM/DFO approval is not needed if a summary report has already been provided to the TMP of the key case. The key case examiner may provide the examiner of the investor return a copy of the key case RAR.

  4. The key case examiner will provide the terms for settlement agreement. To avoid the risk of consistent settlement problems, it is recommended that the investor wanting an accelerated settlement understand they must concede 100% of all potential adjustments.

  5. It is also very important to ensure the investor understand that by executing a settlement agreement that the agreement is a final determination on the tax affect of the partnership and affected items and they may not later file an Administrative Adjustment Request (AAR) nor may they request to go to Appeals or court on the settled issues.

  6. A copy of the executed settlement agreement must be sent to the appropriate Campus TEFRA Function (CTF) controlling the key case linkage. The campus keeps track of all investor linkages to ensure they are properly assessed. If the investor is closed and the campus does not have any substantiation to support the investor being de-linked and closed, the campus will reopen and relink the investor to the key case assuming the case was closed improperly. All linked investor cases must be closed through a TEFRA Coordinator in SB/SE Technical Services to ensure all procedures are properly followed.

4.31.2.3.4  (05-31-2005)
Schedule K-1 True-Up

  1. The Schedule K-1 true-up issue occurs during the examination of an unlinked TEFRA investor's return. The investor filed their return using estimates for the partnership flow-through items because they had not received their Schedule K-1 prior to filing.

  2. During the examination, the investor will disclose that their return is not consistent with the Schedule K-1 filed by a related flow-through entity. The agent should verify whether the flow-through entity in question is a TEFRA entity.

  3. If the disclosed Schedule K-1 discrepancy results in either an increase or decrease to tax to the investor, and the flow-through entity is a nonTEFRA entity, the agent should make any necessary adjustments as part of the nonTEFRA examination of the investor. IRC 6501 controls the assessment statute.

  4. If the flow-through entity is a TEFRA entity and the disclosed Schedule K-1 discrepancy would result in additional tax to the investor, the tax must be assessed before the IRC 6229 statute has expired on the flow-through entity.

  5. If the flow-through entity is a TEFRA entity and the disclosed Schedule K-1 discrepancy would result in a refund, the Service may issue the refund or wait for the investor to file a timely AAR. To be timely, the AAR must be filed before the expiration of the IRC 6229 statute (including extensions) or no refund can be allowed. The AAR should be filed using the Form 8082. If no Form 8082 is utilized, but the information required by that form is included on the claim filed, consult with your TEFRA coordinator to determine if the information provided is adequate to consider it an AAR for TEFRA purposes.

4.31.2.3.5  (10-01-2010)
Special Processing for Tax Changes over $10 Million

  1. IRM 4.4.18.5 should be followed when adjustments result in a Balance Due (this includes interest and penalties) over $10 million.

  2. Each year stands alone when determining the $10 million threshold.

  3. For each tax period, where the Balance Due (this includes interest and penalties) is $10 million or more, a copy of the Form(s) 4318, or Form(s) 4700, and the examination report(s) is to be sent to the Office of Unpaid Assessment Analysis. This information will be sent by Centralized Case Processing after the case has been closed.

4.31.2.4  (05-31-2005)
Field TEFRA Coordinator Duties

  1. The following subsections explain the duties of the Field TEFRA Coordinator.

4.31.2.4.1  (09-22-2006)
General Responsibilities

  1. The Field TEFRA Coordinator responsibilities include but aren't limited to the following:

    1. Main contact for LMSB and SB/SE field agents and their managers to explain and clarify the TEFRA unified audit procedures.

    2. Give advice on the preparation and signing of statute extensions.

    3. Prepare 60-day and FPAA packages for issuance on key cases.

    4. Be the liaison with the campus TEFRA functions on:
      • PCS linkage and any related linkage problems if requested by the PCS coordinator
      • Issuance of applicable closing letters (Letter 1864(DO) , 60-day letters, FPAAs, Letter 2621(DO))
      • Process Agreed key cases (TMP and all partners have signed agreements)
      • Verifying that the CIC group timely writes the RAR and requests removal of PCS controls by completing item 5 of Form 8339, PCS Change, for CIC TEFRA investors (See IRM 4.29.2)
      • Transfer of TEFRA linked investors to the field to be examined for nonTEFRA issues including the updating of the AIMS database to the field group
      • Referral of investor cases back to the field for report write-up due to complex issues

    5. Coordinate with Area Counsel on key case technical questions involving TEFRA code sections.

    6. Coordinate with the local or CTF PCS Coordinator on processing of Form 8339, and other PCS related issues.

    7. On site case visitations/consultations for key cases with technical TEFRA problems.

    8. Monitor field controlled investor statutes using the PSC 4-4 extract provided by the campuses.

    9. Assisting the agent in determining the correct IRC 6404(g) notification date to be included on the Form 4605-A.

    10. Distributing the PCS 4-4, Statute Reports, that are received from the campus, to the appropriate field group.

    11. Ensure a Form 8339 is in the closing package with an Item 08 entry reflecting the partnership adjustment amount. This amount should be the same as that entered on the Form 5344, line 34 - Adjustment Amount.

4.31.2.4.2  (10-01-2010)
Key Case Closure Procedures

  1. Upon receipt of a closed TEFRA key case, the Field TEFRA Coordinator should review the following areas of the case file:

    1. Determine whether the case is TEFRA;

    2. Determine if Chief Counsel Notice 2009-11 applies. If affected items need to be stat noticed and assessed prior to the expiration of the OYD, then that must be stated clearly on the closing package. The campus will establish an 8 month assessment date on PCS to ensure the case is worked timely.

    3. Tax Matters Partner - Determine if the examiner verified that the TMP qualifies to be the TMP. If it is an unusual determination, is there an explanation of how the determination was made? If a new designation was made, is it proper? Was the Service required to notify the notice partners who the new TMP was, etc?;

    4. NBAP - Was the NBAP issued to the named TMP and to the generic TMP? Was the NBAP addressed correctly?;

    5. If the key case is closed after 45 days, did the examiner link the investors on PCS?;

    6. Power of Attorney (POA) - Determine if the POA is completed correctly:
      • Item #3 - Tax Matters, Type of Tax - TEFRA Partnership Proceedings, Tax Form Number - 1065 and Consequential Adjustments;
      • Item #9 - The signature block should be signed by the tax matters partner. If the TMP is an entity, the signature needs to include the name of the entity that is the TMP and identify it as the TMP, as well as identifying the person who signed for the entity; what their title is, etc. This is essential if a tiering situation exists for the TMP and there are several tiers to describe. Consult Area Counsel for help in styling the signature in this situation;
      • If the POA is not completed correctly, take the necessary steps to get it perfected. If it cannot be perfected, include the POA's copy of any letter issued with the letter sent to the TMP;
      • If there is a TEFRA investor who wants to grant the power of attorney permission to represent them for the TEFRA partnership, then A general statement must be added to the POA relating to its validity to TEFRA. The statement should read as follows: "The acts authorized by this power of attorney include representation for the purposes of Subchapter C of Chapter 63 of the Internal Revenue Code" .

    7. Statute Extensions - Review any consents to determine they have been prepared and signed correctly. This is important when there is a subsidiary as the TMP, entity TMPs or a tiered situation. If there are any errors, and the normal statute is still open, a new consent can be secured. If the normal statue is gone, consult with Area Counsel on the validity of the consent and if it can be defended.

    8. If there is an unusual case closure or other unusual situation, which is not covered in these procedures, consult with the Campus TEFRA coordinator on how to proceed.

      Note:

      All packages should be placed in an "Open by Addressee Only" envelope before mailing. This will help ensure that the package gets to the proper unit intact.

4.31.2.4.2.1  (05-31-2005)
No Change Cases

  1. Procedures for a No Change in 45 days or less:

    1. Issue Letter 1864(DO), No Change Letter, to the TMP at the key case address using certified mail.

    2. If the TMP has a different address than the key case, send a copy of the Letter 1864(DO) to the TMP at their address using certified mail.

    3. If there is a properly completed POA, send a copy of the Letter 1864(DO) to the POA using the cover Letter 937 using regular mail.

    4. If it is unclear if the TMP qualifies to be the TMP, issue Letter 1864(DO) to " Tax Matters Partner" (i.e. generic TMP) at the key case address using certified mail.

  2. Procedures for a No Change After 45 Days using Letter 2621, No Adjustments Letter (Short No Change Procedure):

    1. Use this procedure if the TMP has indicated agreement with the no change. If there is no indication in the case file regarding the TMP's agreement or disagreement, consult with the examiner. If there are fewer than 60 days remaining on the statute, consideration needs to be given on whether to send a Letter 2621 or an FPAA.

      Note:

      If an NBAP was issued and not withdrawn, but no audit work was completed, the Service is not required to issue an FPAA or Letter 2621. See Treas. Reg. 301.6223(a)-2(a).

    2. In general, use this procedure if the TMP indicates they agree, the TMP did not raise any affirmative issues, and an Administrative Adjustment Request (AAR) has not been filed by either the TMP or any partner. If the TMP disagrees or has not indicated agreement, See IRM 4.31.2.2.11 for procedures on the issuance of a 60-day letter or a Notice of Final Partnership Administrative Adjustment letter (FPAA).

    3. Letter 2621 states that the key case is being closed no change, and that an FPAA will not be issued. It also requires the TMP notify all partners of the no change within 30 days.

    4. If no investors are linked, no CTF notification is necessary.

    5. For any partner linked on PCS, a copy of Letter 2621 will be sent in the closing package to the appropriate campus.

    6. Prepare a Letter 2621 (No Adjustments Letter) for the TMP of the TEFRA key case; mail the letter to the key case address.

    7. If the address of the TMP is different from the key case address, mail a copy of the Letter 2621 to the TMP at their address.

    8. If there is a POA, send a copy of the Letter 2621 to the POA using the cover Letter 937 and send regular mail.

    9. If it is unclear if the TMP qualifies to be the TMP, issue Letter 2621 to "Tax Matters Partner" (i.e. generic TMP) at the key case address.

    10. Forward a copy of the dated Letter 2621 and the final examination report to the key case campus TEFRA function using a Form 3210 which clearly reflects the key case name, tax years(s), EIN, statute date, and lists the items included in the package. (RAR (only needed if partners are linked), Form 886-Z clearly labeled "no adjustment " on the top of the form, number of TMP letters, POA letter, etc.)

    11. Input the one-year assessment date, using the date that is the shorter of the statute date of the key case or one year from the date the Letter 2621 was issued. Use Form 8336, PCS Mass Change, Item No. 4 in section 7, Change.

      Note:

      More than one-year should remain on the key case statute before this procedure is used. Shorter time frames place an undue burden on the campus.

    12. Monitor the key case AIMS record for the " H" freeze to be removed and the input of the one-year assessment date for the investors on TSUMY.

    13. Close the key case with a no change disposal code when the certified mail receipt is returned (Letter 1864 (DO)), the " H" freeze removed, and the one-year assessment date is input.

      Note:

      The "no change with adjustment " disposal code will not work with TEFRA key cases.

4.31.2.4.2.2  (10-01-2010)
60-Day Cases

  1. The procedures for issuing a 60-day letter (either a Letter 1827(DO) in conjunction with a Form 870-PT or a Letter 1829(DO) in conjunction with a Form 870-LT) are as follows: (A Form 870-P with a Letter 1827(DO), or Form 870-L with a Letter 1829(DO), is used for tax years ending before August 6, 1997.)

    1. When the TEFRA key case examination is completed, the case is forwarded to the Technical Services for preparation of the 60-day letter package.

    2. The 60-day procedures must be followed on a key case if at least one investor did not execute a Form 870-PT or Form 870-LT, and there are at least 12 months remaining on the statute.

    3. If the key case is a no change or agreed, consider if an FPAA should be issued instead of a 60-day letter. The advantage of issuing an FPAA now, is that no further letters would have to be issued if the investors have not all agreed when the FPAA defaults.

    4. If the examiner received agreements for all but a few partners, consider soliciting agreements from the remaining partners instead of issuing a 60 letter or an FPAA. Verify the mailing address for the partner(s) in the Master File.

    5. The Technical Services will prepare a 60-day letter for the TMP with a copy of the 60-day letter and Letter 937 for the TMP's POA, if applicable. A 60-day letter should be sent to the designated TMP at the key case address and to the designated TMP at his address, if different from the key case address, and be signed on behalf of the Technical Support Manager. In general, a 60-day letter is not required to be issued to a "generic TMP" unless the TMP cannot be identified.

    6. Use Letter 1827(DO) and Form 870-PT if there are no affected items subject to deficiency procedures. Complete a Form 870-PT with the key case name and addressed to the attention of the TMP, using the key case EIN as the taxpayer identifying number, including the schedule of adjustments showing only the flow-through items adjusted in the examination.

    7. Use Letter 1829(DO) and Form 870-LT when there are affected items requiring deficiency procedures. Complete a Form 870-LT with the key case name and addressed to the attention of the TMP, using the key case EIN as the taxpayer identifying number, including the schedule of adjustments showing only the flow-through items adjusted in the examination, including affected items. The TMP cannot bind any partner for affected items requiring partner level determinations or defenses and does not need to agree to affected items for the partnership. Part II of the Form 870-LT allows the partner to agree to affected items, penalties, additions to tax, and additional amounts, if any, that would otherwise be subject to deficiency proceedings.

    8. If there are affected item issues for basis, at-risk, passive losses, cancellation of debt income, etc., consider including items on the Form 870-LT schedule of adjustments even when they are not adjusted. The acceptance as filed of this type of item may be important in an affected item proceeding for a partner.

    9. After updating the key case to status code 22, the package will be forwarded to the key case CTF using Form 3210. (See Exhibit 4.31.2-5 for an example of how to prepare the Form 3210, and the elements that must be listed on the Form 3210 and included in the 60-day letter package.)

    10. The CTF will review the package for completeness and acknowledge the Form 3210 within 3 days of receipt. If there are minor errors, the CTF will contact the Field TEFRA Coordinator, otherwise the package will be returned to the Field TEFRA Coordinator to be perfected. The CTF will note what additional information is needed or other errors that need to be corrected.

    11. Verify that the investors are linked on the PCS. If any investors are not linked, notify the campus TEFRA function so they can be linked before the letters are issued.

  2. The 60-Day Package must contain the following (See Exhibit 4.31.2-6):

    1. Original and one copy of the undated Letter 1827(DO) (60-day letter) when there are no affected items requiring partner level determinations where a 30/90-day would be issued, for each TMP address ;

    2. Original and one copy of the undated Letter 1829(DO) (60-day letter) when there are affected items requiring partner level determinations where a 30/90-day would be issued, for each TMP address;

    3. If Letter 1827(DO) is sent, include a Form 870-PT. Prepare a separate Form 870-PT for each different TMP address;

    4. If Letter 1829(DO) is sent, include Form 870-LT. Prepare a separate Form 870-LT for each different TMP address;

    5. A complete copy of the revenue agent's report including the Form 4605-A, Form 886-A, , and Form 886-Z showing the corrected distributive shares of all flow-through items;

    6. If there is a POA, a copy of the 60-day letter and Letter 937 addressed to the POA;

    7. Two additional copies of the 60-day letter addressed to the TMP for each TMP address. One for the CTF's administrative file and one to be dated and returned to the Technical Services for the key case file;

    8. A field office return address envelope addressed to the TMP;

    9. A field office return address envelope addressed to the POA, if applicable;

    10. A Form 886-Z with correct distributive shares completed for each flow-through item adjusted. The CTF wants the Form 886-Z because it shows the percentages of profit/loss from the Schedules K-1. If percentages are not available on the Schedules K-1, then they will be left blank;

    11. A return address envelope or address labels with the Technical Services return address. The CTF will use this to mail back to the Technical Services the dated copies of the TMP 60-day letter(s) for the key case file;

    12. Note on the Form 3210 if penalties are applicable; and

    13. A Form 3210, annotated as a 60-day letter package, clearly reflecting the key case name, tax years(s), EIN, statute date, RAR, Form 886-Z, number of TMP letters, POA letter, affected items report, and penalties. (See Exhibit 4.31.2-6)

    14. Form 8339, with completion of item 8, partnership adjustment amount. The amount to enter as the adjustment amount will vary. As a rule, all adjustments should be combined to arrive at one net adjustment. Adjustments to credits will be divided by 30% (credit amount / 30% = credit adjustment amount). This will allow credits and ordinary income/expense adjustments to be combined without skewing the results due to the credits.

  3. It would be helpful to clip the following items together:

    • Original and copy of the 60-Day Letter(s) and Form 870-PT/ Form 870-LT to the mailing envelope for each different TMP address.

    • Letter 937 and POA copies of the 60-day letter(s) and Form 870-PT/ Form 870-LT to the mailing envelope for the POA.

    • Copies of the 60-day letter(s) to be dated by the CTF and returned to the field TEFRA coordinator for the key case file.

      Note:

      The package should be placed in an "Open by Addressee Only" envelope before mailing. This will help ensure that the package gets to the proper unit intact.

4.31.2.4.2.3  (05-31-2005)
Final Partnership Administrative Adjustment Cases

  1. Procedures for Issuing a Final Partnership Administrative Adjustment Letter (FPAA) (See IRM 4.31.2.4.2.1, No Change Cases, for when to use Letter 2621(DO) instead of the Letter 1830).

    1. Issue an FPAA for:
      • Any key case with a short statute (less than 12 months on the statute); or
      • A key case where a 60-day letter was issued, no protest was received, and not all of the investors have agreed; or
      • A No Change after 45 days;

    2. Prepare one original FPAA addressed to the TMP by name and send to the partnership address; one original FPAA addressed to the TMP by title only (i.e., Tax Matters Partner) and send to the partnership address per the original return; prepare one original FPAA for every other known TMP address, including any addresses per Master File;

    3. Prepare an explanation of all adjustments (statutory notice language). This must include a statement regarding the affirmative issues raised by the TMP or the AAR filed by the TMP or a partner in addition to any other issues. If this is a no change FPAA, include a statement that the TMP must protest the FPAA to raise the affirmative issues or AAR issues. If there are non-notice investors, type the following on the Form 870-PT for the TMP directly above the signature line:

      " The undersigned Tax Matters Partner is signing this offer on behalf of himself (herself) and all other partners whom he (she) has the authority to bind; a final agreement resulting from the co-signature of the Commissioner of Internal Revenue will be binding on all such other partners." (There must be more than 100 partners for this to apply.)

    4. Area Counsel must approve all FPAAs before issuance. SB/SE key case administrative files will be forwarded to SB/SE Area Counsel and LMSB key case administrative files will be forwarded to LMSB Area Counsel.

    5. If less than 120 days remain after issuance of the NBAP, the Service will be considered to have not given timely notice. Since the investor is entitled to an election under IRC 6223(e)(2) or IRC 6223(e)(3), an "Untimely Notice Letter" (Lettter 3857, if TEFRA proceedings are ongoing; Letter 3858, if TEFRA proceedings are complete) is sent with the FPAA informing the investor of his/her right to make an election and the time period for exercising that right. Upon issuance of the FPAA to the TMP, the statute of limitations is held open for a minimum of 150 days plus one year from the date of the FPAA. See IRC 6229(d).

    6. Verify that the investors are linked on the PCS. If any investors are not linked, notify the Campus TEFRA Function so they can be linked before the FPAAs are issued.

    7. If there are less than 45 days remaining on the key case statute, Technical Services will issue the FPAA to the TMP. The FPAA must be issued to each notice partner no later than the 60th day after the day the FPAA was issued to the TMP. The Technical Services will immediately notify the CTF TEFRA Coordinator that the FPAA was issued to the TMP by the Technical Services. The Technical Services will mail a dated copy of the TMP FPAA and a Form 3210 with the other items required for an FPAA package to the CTF within five days of the date the FPAA was issued to the TMP.

    8. If investor FPAAs are issued locally, forward the copy of the FPAA and the original certified mailing documents (if signed and returned) to the CTF. Certified mailing documents will consist of either:
      • A certified mailing list signed by a Postmaster, or
      • The Certified Mail Receipt (PS Form 3800) and the related green card (PS Form 3811, Domestic Return Receipt), if received.

  2. The key case FPAA package should contain the following:

    1. FPAA package check sheet (See Exhibit 4.31.2-7) (Appeals does not use this check sheet);

    2. A Letter 1830 signed on behalf of the Technical Support Manager for each TMP address;

    3. A Form 870-PT addressed to the TMP, including a schedule of adjustments that shows the corrected amount for each adjusted item;

    4. An explanation of all adjustments (statutory notice language);

    5. One copy of each original FPAA to be mailed to the POA with Letter 937, if applicable, and also include a copy of the generic TMP letter (Appeals does not use Letter 937);

    6. Three additional copies of each original FPAA;

    7. An envelope addressed to the TMP by name to his/her address;

    8. An envelope addressed to the TMP by title to the partnership address;

    9. An envelope addressed to the TMP by name for each address for which a letter was prepared;

    10. An envelope addressed to the POA, if applicable;

    11. A Form 886-Z with corrected amount for each adjusted item for each investor with correct percentages. If percentages are not available on the Schedules K-1, then they will be left blank;

      Note:

      Appeals does not use Form 886-Z for a no-change FPAA.

    12. Two return addressed envelopes with the address or address labels of Technical Services. The envelopes will be used to return the dated letters to Technical Services for the key case file;

    13. A complete copy of the RAR including Form 4605-A, the explanation of adjustments, and the appropriate distribution schedule. This will be sent even if a 60-day letter was issued;

      Note:

      Appeals does not use Form 4605-A or Form 886-Z.


      and

    14. A Form 3210 noted as an FPAA package and listing all the items (RAR, Form 886-Z, number of TMP letters, POA letter, affected items report, and penalties) included in the package and clearly reflecting the key case name, tax years(s), EIN, and statute date. (See Exhibit 4.31.2-8 for sample Form 3210 for FPAA packages.)

      Note:

      The package should be placed in an "Open by Addressee Only" envelope before mailing. This will help ensure that the package gets to the proper unit intact.

    15. Form 8339, with completion of item 8, partnership adjustment amount, if one was not submitted with a 60-Day Letter Package. The amount to enter as the adjustment amount will vary. As a rule, all adjustments should be combined to arrive at one net adjustment. Adjustments to credits will be divided by 30% (credit amount / 30% = credit adjustment amount). This will allow credits and ordinary income/expense adjustments to be combined without skewing the results due to the credits.

  3. The key case CTF will date the letters for the TMP with the same date as the investor letters and mail them the same day the letters are mailed to the investors.

  4. The CTF will review the package for completeness and acknowledge the Form 3210 within 3 days of receipt. If there are minor errors, the CTF will contact the Field TEFRA Coordinator, otherwise the package will be returned to the Field TEFRA Coordinator to be perfected. The CTF will note what additional information is needed or other errors that need to be corrected.

  5. The key case file remains with Technical Services until the FPAA is either petitioned or defaulted.

  6. The key case is suspensed for 180 days from the date on the FPAA issued to the TMP. If no notification has been received that a petition has been filed, contact Area Counsel. Counsel should be able to verify whether or not the court's records have received a petition for the key case.

4.31.2.4.2.3.1  (05-31-2005)
No Change FPAA

  1. FPAA for a No Change after 45 days: Use this procedure if the TMP disagrees with the no change, there are filing inconsistencies at the investor level, or the no change is on a case in Appeals. If there is no indication in the case file regarding the TMP's agreement or disagreement or of a partner's agreement or disagreement if the partner filed the AAR, consult with the examiner. In general, use this procedure if the TMP raised any affirmative issues or the TMP or any partner has filed an AAR, the Service is not allowing any of the affirmative adjustments, and/or disallowing the AAR in full. Issuing the FPAA allows the TMP or any partner to raise these issues by petitioning the court of their choice and prevents either from petitioning the AAR.

  2. If Letter 2064 is used, the FPAAs will have to be prepared and issued locally for the TMP and the partners. PCS is not yet programmed to print out this letter. Letter 2064 is specifically a no change FPAA and does not include the Form 870-PT.

    Note:

    Appeals does not use Letter 2064.

  3. Verify that 120 days have elapsed since the issuance of the last NBAP to any investor. The 120 day date can be determined by looking at a TSINQP print for the key case.

  4. If the key case has a large number of investors, consider consulting the campus TEFRA coordinator to see if he/she would issue the FPAAs to the investors.

4.31.2.4.2.4  (05-31-2005)
Defaulted FPAA

  1. When no petition is filed in response to the FPAA:

    1. The Technical Services defaults the FPAA and forwards the default package to the CTF. The field PCS Coordinator is notified to input the one-year assessment date on PCS using CC MSCHG.

    2. The one-year assessment date is 149 days plus one year, minus one day, from the date the TMP FPAA was dated. The CTF uses one day less than the full year to be conservative in making sure assessments are made timely.

    3. The Technical Services will forward a default package to the key case CTF to initiate the closure of the investor cases. The default package will include the following:
      • A Form 3210 marked "Default Package" clearly showing the key case name, EIN, tax period, and the one-year assessment statute date. (See Exhibit 4.31.2-9);
      • A Form 886-Z stamped "Default" on all pages, showing the corrected amounts for each adjusted item of the key case entity return, with correct percentages for each investor;

      Note:

      Appeals does not use Form 886-Z on no changes.


      • A completed Form 4605-A, Form 886-A, Explanation of Items, and Form 886-Z showing the corrected distributive shares of all flow-through items. Even though this information may be the same as that sent previously, the information should be sent again to avoid confusion;

      Note:

      Appeals does not use Form 4605-A or Form 886-Z on no changes.


      • Note on the Form 3210 and in the package whether penalties are applicable;
      • Note on the Form 3210 whether MSCHG was done so that the CTF does not try to load the one year assessment date on PCS a second time; and
      • Note on the Form 3210 whether there are affected items and include the affected items report. If adjustments are complicated or difficult to apply, consult with the campus TEFRA coordinator on how to handle the package.

    4. The key case is closed when the " H" freeze has been removed from the key case AIMS database. The "H" freeze will be removed by the CTF after they verify the one-year assessment date has been entered in the PCS for all partners. Use disposal code 10 for a defaulted FPAA and close the key case.


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