Part 4. Examining Process

Chapter 31. Pass-Through Entity Handbook

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

4.31.2  TEFRA Examinations - Field Office Procedures (Cont. 2)

4.31.2.4 
Field TEFRA Coordinator Duties

4.31.2.4.2 
Key Case Closure Procedures

4.31.2.4.2.5  (10-01-2010)
Petitioned FPAA

  1. When a petition is filed in response to the FPAA:

    1. The case should be closed through Technical Services to Appeals using disposal code 11. See IRM 8.19.5.

    2. The key case should be sent to appeals with a Form 3210, along with current AMDISA and TSUMY prints. Appeals will return the originators copy of the Form 3210 signed and date stamped.

    3. The key case file should be flagged with a Form 3198, Special Handling Notice, identifying it as a "TEFRA Key Case File" . All TEFRA key cases need to be clearly identified as such.

    4. All docketed cases should also include a copy of the FPAA, copy of the certified mailing list, and the petition(s).

    5. If available, include a copy of the docket sheet.

    6. The CTF should also be notified when a key case petition is filed. An e-mail to the appropriate CTF TEFRA Coordinator with the name, EIN and tax year is sufficient.

  2. A key case may be petitioned to the Tax Court, a district court for the district in which the partnership's principal place of business is located, or the Court of Federal Claims.

  3. The venue and the rules of the particular court chosen determine the procedures that must be followed.

4.31.2.4.2.5.1  (06-01-2004)
Petitioned Tax Court Cases

  1. The docket list and the taxpayers' correspondence should be monitored by the Technical Services to determine whether the TMP has filed a petition with the Tax Court.

  2. When the Technical Services receives notice that a petition was filed, either by an investor or by the TMP, the key case file will be prepared for closure to Appeals.

  3. The coordinator will ensure the docket number is input on the PCS using CC TSCHG, item number 28.

4.31.2.4.2.5.2  (10-01-2010)
Petitioned District Court and Court of Federal Claims Cases

  1. Under TEFRA proceedings, partners may file a petition directly with either a district court for the distirct in which the partnership's principal place of business is located or the U.S. Court of Federal Claims, gaining direct access to that court. However, if either of these courts is chosen, each partner filing a petition must make a deposit equal to the amount his/her tax liability would be increased if the adjustment(s) in the FPAA were fully sustained.

    1. The amount deposited is treated as a tax payment only for the purpose of computing interest.

    2. If jurisdiction to either court is dismissed because of the priority of a Tax Court action, the partner may request a refund of the deposit.

    3. If a 5-percent group files a petition, each member of the group must make the required deposit.

    4. The deposit must be made on or before the date the petition is filed.

    5. The deposit requirement is satisfied if there was a good faith attempt to deposit the correct amount and any shortfall is timely paid.

    6. The deposit amount need only include the tax. Interest and penalties do not need to be deposited.

  2. The petitioner may bring or mail in a deposit to any function within the Service. It does not matter if the deposit is sent to the field, the campus or Appeals. The check should include the TIN, tax period and a notification that it is a bond to go to district court. The petitioner may submit a letter with this information but such a letter is not required.

  3. If an action is brought in district court or the U.S. Court of Federal Claims, only the petitioning partner is required to make a deposit. The Service will assess and collect the tax deficiency against all partners who have an interest in the proceeding, including penalties and interest. The deposit may be applied to the assessment of the petitioning partner. No assessment may be made prior to the close of the 150th day after the day the FPAA was mailed to the TMP.

  4. When the Technical Services is notified of a petition filed with a district court, or the U.S. Court of Federal Claims, the key case is treated and processed as if the FPAA had defaulted.

  5. After the CTF is notified and the H freeze released, the key case will be closed on AIMS and updated to status code 90 to enable the investor assessments to be billed and collected. These procedures are similar to the refund litigation procedures applicable to refund claims. The AIMS database is closed because the case is forwarded to the Department of Justice, which handles the final closure.

  6. Partial assessments are made for all investors based on the corrected amounts for adjusted items shown on the FPAA for the key case entity. Investors are not closed, and linkages are maintained until litigation is complete.

  7. The Technical Services will forward the case to Counsel, and Counsel will coordinate the transferring to the Department of Justice. Counsel will write a explanatory memo to the Department of Justice stating the Service's position and requesting its assistance with the case.

  8. The key case Technical Services will prepare a key case closing package for the CTF. The closing package will include:

    1. A Form 3210 with a notation that the closing package is a district court or Court of Federal Claims closing package and clearly indicates the partnership name, tax year, EIN, and a "one-year" assessment statute date. The form must also specifically state that the investor cases are to be processed as partial assessments and must remain open pending the final outcome of the litigation.

      Note:

      It is recommended that a one-year date be input that is not more than 60 days from the date the closing packages are prepared to force the investor cases to appear on the PCS Report 4-4. The key case does not really have a one year date at this time, but the venue in which the partners has chosen to litigate the partnership issues, requires the investors to be assessed and the petitioning partner to make a deposit.


    2. A Form 886-Z with the corrected amount for each investor of each adjusted item of the key case return. This Form 886-Z is the same one that was included in the FPAA package.

    3. A complete copy of the revenue agent's or Appeals report including the Form 4605-A, the explanation of adjustments and any other attachment that may be included in the report. For tax years ending before August 5, 1997, proposed penalties determined at the partnership level and/or affected items must not be assessed at this time. For tax years ending after August 5, 1997, penalties determined at the partnership level must also be assessed at this time, but not affected items. Penalties determined at the partnership level must be assessed even if they are computed based on deficiencies subject to affected item deficiency procedures.

  9. See IRM 4.31.4 for the procedures for petitioned AARs.

  10. The PCS coordinator will ensure the docket number is input on the PCS using CC TSCHG, item number 28.

4.31.2.4.2.6  (03-04-2008)
Agreed Cases

  1. Agreements received for TEFRA key cases:

    1. These procedures should be used to process agreements received from the field with a closed case, even if not all of the partners have agreed at the time the case is closed. The TEFRA key case examiner may receive signed Form 870-PT or Form 870-LT from partners in the key case after the closing conference. The agreements will be transmitted via a Form 3210 to the CTF to be countersigned and processed for the partners.

    2. The key case is considered to be fully agreed if all partners have signed Form 870-PT or Form 870-LT

    3. Review the agreements to determine if the correct parties signed the agreement, no alterations have been made to the adjustment pages, and to be sure the Form 870-PT/ Form 870-LT was completed correctly. For an individual partner filing a joint return, both spouses must sign. For a C Corporation, an officer that can bind the corporation must sign. For a trust, the trustee of the trust must sign. See the instructions for signing included with the Form 870-PT/ Form 870-LT for a complete explanation of who is required to sign.

    4. The field TEFRA coordinator may only countersign the agreements if there are less than 90 days remaining on the statute of the key case. When the field TEFRA coordinator countersigns the agreements, the one-year assessment date will be input on the PCS. If all partners have agreed, the one-year assessment date may be input on the PCS using Form 8336 and the command code MSCHG. Otherwise, the one-year assessment date must be input on PCS using Form 8339 for each of the partners that have agreed. Form 8344 can be used to enter the one-year assessment date for multiple partners linked to the same partnership.

    5. If the field TEFRA coordinator countersigns the agreements, Letter 2513 and a list of the partners who settled with their settlement date will be sent to the TMP. The letter and list are used to notify the TMP which partners have agreed so the TMP can meet its legal obligation under Treas. Reg. 301.6223(g)-1(b)(iv). Use Letter 1908 to send a copy of the countersigned agreement back to the partner for their records.

      Note:

      The title of Letter 1908 is "Transmittal Letter Agreed Form 870-P" ; however, the language of the letter allows it to be used with any of the Form 870 agreements used in TEFRA.

      Note:

      If there are less than 90 days left on the statute and the field is not countersigning the agreement, then the shipment of the agreement package should be coordinated with the campus. It is important that the campus be aware that unexecuted agreements are being sent on a short statute case.

    6. The agreed package sent to the CTF should include the following:
      • A Form 3210, which includes the key case name, TIN, tax years, and a list of the items being sent to the CTF; (See Exhibit 4.31.2-10 for a sample Form 3210)
      • A copy of the Form 4605-A and Form 886-A, ;
      • A completed Form 886-Z showing the corrected amount for adjusted items of income, loss, or deduction of the key case entity return that will be used for computation of the assessment or overassessment on the investor returns;
      • The agreement Form 870-PT/Form 870-LT including the original schedule of adjustments; and
      • Penalty information, if applicable. Note on the Form 3210 if penalties apply.

    7. These Form 870-PT/Form 870-LT will be executed on behalf of the Commissioner by the CTF within 5 days of receipt from the field. The one-year assessment statute date will be input on the PCS within 10 days of receipt of the agreement package from the Technical Services.

    8. A copy of the executed agreement(s) will be returned to the Technical Services for association with the key case.

    9. If a fully agreed key case, the key case can be closed when the copy of the agreements is received, the "H " freeze is removed, and the one-year assessment date is input.

4.31.2.4.2.7  (10-01-2010)
H Freeze Release

  1. The campus will release the H freeze once a OYD is entered on all key case investors.

  2. On closing packages that impact all investors (i.e., court decisions, defaults, etc.) the H freeze will be released in 5 days.

  3. This process can take some time when agreements are being secured from taxpayers. Generally, the campus will execute agreements within 5 days and release the H freeze within 10 days. These time frames my not be met if the campus has questions about the validity of the agreement(s). If the execution of an agreement is delayed, the Field TEFRA Coordinator will be notified.

4.31.2.5  (10-01-2010)
Designation of Tax Matters Partner (TMP)

  1. The subsections below discuss one of the most important determinations in a TEFRA proceeding.

  2. Designation of TMP.

    Note:

    A Separate Determination Must Be Made For Each Tax Year

    ENTITY______________________________________________
    YEAR:_____________________________________________

    • The TMP is determined on a tax year-by-tax year basis.

    • The TMP is usually designated on the partnership return for that taxable year.

    • The designated TMP may be changed, if the new designation is provided in writing to the service center with which the partnership return was filed.

    • Where the investors cannot or will not designate a TMP, the Service may select a TMP pursuant to Treas. Reg.. 301.6231(a)(7)-1p).
    (1) The TMP is usually designated on Form 1065, Schedule B.
    (2) The TMP may also be designated in a statement filed by the partners.
    (3) The Service may select the TMP per IRC 6231(a)(7); however, if the Service selects the TMP, Letter 3205 must be sent to the selected partner, the partnership, and all partners eligible to receive notice. Selection of the TMP by the Service is performed as a last resort.
    (A) If there is no TMP or the TMP previously designated by the entity is no longer qualified, the agent should solicit the entity to designate a new qualified TMP.
    (B) Per IRC 6231(a)(7)(B), if the entity cannot or will not designate a TMP, the agent identifies the TMP using the Largest Profits Interest Rule. It is important to note that this is not considered a designation by the Service and Letter 3205 need not be sent. Only if steps A & B fail, should the agent consider selecting the TMP.
    (4) Any TMP designation made by the partners during the examination should be attached to the back of the front page of the partnership return
    5) If the Service identifies the TMP using the Largest Profits Interest Rule or selects a TMP using 301.6231(a)(7)-1(p), the facts considered in making the selection should be noted on Form 13827, TMP Designation Check Sheet

  3. Generally, the TMP is designated by the partners of the partnership; however, if the partners do not designate a TMP, the Service will determine one as provided by regulations. Use Form 13827 to make the determination. You must be aware of the following requirements when completing the form:

    Note:

    Whenever there is a change in TMP, the CTF must be notified so PCS can be updated.

    • To determine the TMP, you must answer the questions in sequence unless directed otherwise.

    • One check sheet must be completed for each taxable year.

    • This check sheet should be completed concurrently with the interview of the identified TMP.

    • The Service will not go beyond the representations of the TMP unless facts and circumstances dictate.

    • The same standards as those used in accepting a POA or Consent will apply, and the same close scrutiny by the Service as to their completeness and in meeting the specific requirements of the statute, as detailed below, must be met.

      Note:

      For an LLC, only a member-manager is treated as a general partner. A member who is not a member-manager is treated as a partner other than a general partner. If there are no elected or designated member-managers, each member is treated as a member-manager.

  4. Whenever the TMP is designated by the partnership, it is the examiner's responsibility to verify that the partner designated qualifies to be the TMP. This should be done at the beginning of the examination and any time a new designation is made by the partnership.

4.31.2.5.1  (03-04-2008)
General

  1. The TMP is the general partner designated by a partnership (subject to TEFRA procedures) to represent the partners before the Service in all tax matters for a specific taxable year. (Treas. Reg. 301.6231(a)(7)-1.)

    1. If no general partner is so designated, either on the partnership return as filed, subsequent to the filing of the partnership return, or at the request of the Service at the time the examination is started, then the general partner with the largest profits interest in the partnership at the close of the taxable year is the TMP.

    2. In some cases, the Service can select the TMP.

    Note:

    Use Form 13827 to make the determination.

  2. In addition to facilitating administrative proceedings, the TMP has the authority to:

    1. Extend the statutory period for assessment of tax for all partners of the partnership. (See IRM 4.31.2.6.4 of this Handbook.);

    2. Choose the forum for judicial review of adjustments to partnership items; and

    3. Enter into an agreement, in certain situations, that may be binding for certain partners who, under IRC 6223, are not entitled to a notice of administrative proceedings (non-notice partners). (See IRM 4.31.2.2.8 of this Handbook.)

    Caution:

    The determination of the TMP is one of the most complicated and important areas of TEFRA. Consult with the local TEFRA coordinator for assistance in determining the TMP.

4.31.2.5.1.1  (06-01-2004)
"Tax Matters Partner" of an Electing Large Partnership

  1. The TMP is a position created as a result of the TEFRA statutes. The TMP position does not exist for Electing Large Partnerships. For Electing Large Partnerships, the partners in charge is referred to as the "Partner with Authority" .

  2. The partner with authority is given a broader ability to bind the partnership and partners of an electing large partnership. The partner with authority is the single point of contact for the Service. Generally, only the partner with authority must be notified of partnership proceedings and there is no obligation for the partner with authority to keep the other partners apprised of any partnership proceeding.

  3. The partnership must designate a partner with authority. If the partnership fails to designate a partner with authority, the Secretary may designate any partner to serve as the partner with authority.

  4. The partner with authority has the sole authority to act on behalf of the partnership. The partnership and all of the partners are bound by any actions that are taken by the partner with authority that fall with the scope of the electing large partnership rules.

4.31.2.5.2  (03-04-2008)
Persons Who May Be Designated TMP

  1. According to Treas. Reg. 301.6231(a)(7)-1(b), the person (or entity) designated as the TMP by the partnership must be:

    1. A general partner in the partnership at some time during the taxable year for which the designation is made; or

    2. A general partner in the partnership at the time the designation is made. (See the table of questions in (2) below to determine what qualifies someone to be the TMP.)

  2. Qualification of TMP. The designated TMP need not be an individual: the TMP may be an entity, i.e. an estate, trust (even a grantor trust), partnership, LLC, S corporation or C corporation. Use Form 13828, to make the determination of qualification. However, the TMP must meet all of the following requirements.

    Note:

    A Separate Determination Must Be Made For Each Tax Year

    1. In a partnership, the TMP must be a general partner.

    2. In an LLC, the TMP must be both a member and a manager pursuant to Treasury Reg. 301.6231(a)(7)-2 unless there are no member managers. If there are no member managers, a member may be designated as the TMP.

    3. The TMP cannot be in bankruptcy.

    4. If the TMP is an entity, it must be a going concern, i.e. it cannot have dissolved or liquidated.

    5. The TMP cannot have any of the following circumstances apply:

    1. Be under an IRS criminal investigation and have been sent a notice of our intent to convert their partnership items to non-partnership items.

    2. Have asked for a prompt assessment.

    3. Have an indirect method used to determine income on the TMP’s return and having a notice of deficiency issued based on the indirect method.

    4. Have been issued a termination or a jeopardy assessment.

  3. The partnership must select a general partner as the TMP for a specified taxable period. If the partnership designates a TMP for the partnership who is not a general partner, that partner cannot be the TMP. Letter 2700 and related Form 13798, Tax Matters Partner (TMP) Designation Form, are used to request that the partnership designate a new TMP.

  4. Personal liability for partnership debts distinguishes a general partner from a limited partner.

    1. Whether a partner with no profit, loss, or capital interest in the partnership may be considered a general partner, and thus, eligible to be designated as a TMP, may be governed by state law. (e.g., property interest and agency issues). Generally, status as a partner is governed by Federal law.

    2. Questions involving state law should be directed to Area Counsel.

  5. If a partner, who is the TMP (designated by the partnership or selected by the Service), sells his or her interest in the partnership and does not resign as TMP, the partner remains as the TMP for that taxable year if the partner meets all other requirements of the regulations.

    1. If this tax year is subsequently examined, the partner who sold his or her interest may represent the partnership as the TMP.

    2. Under the Largest Profits Interest Rule, the partner remains the TMP for the year even if the partner's interest is later sold. If the interest was sold before year end, the partner would not be eligible to be TMP.

  6. If an entity is a general partner and is the designated TMP, the person representing the entity TMP is determined under State law. The examiner should determine if the appointed person has the authority to bind the entity TMP. For example, if the entity TMP is a C corporation, an officer of the C corporation can generally bind the corporation.

  7. The partners can designate any United States general partner as the TMP. They cannot designate a non-United States person without the Service's consent if any United States person is eligible. However, when the only general partner is not a United States person (as defined by IRC 7701(a)(30)), this general partner automatically becomes the TMP under the Largest Profits Interest Rule. (Treas. Reg. 301.6231(a)(7)-1(b)(2).)

  8. Generally, the LLC statutes in the various states allow an LLC to choose management by one or more managers (whether or not members) or by all of the members. The TMP of an LLC classified as a partnership must be a member-manager as defined in Treas. Reg. 301.6231(a)(7)-2(b)(3). Letter 2700-L and related Form 13798-L, Limited Liability Tax Matters Partner Designation Form, are used to request that the LLC designate a new TMP.

  9. If none of the managers of the LLC are members (i.e., owners), all of the members will be treated as if they are member-managers. The member-managers are treated as general partners, and the members of an LLC that are not member-managers are treated as partners other than general partners. Any member-manager may be designated as the TMP of the LLC if he/she otherwise meets the qualifications of Treas. Reg. 301.6231(a)(7)-1.

  10. If the LLC chose one or more members as managers and the status of all of the selected members has terminated because Treas. Reg. 301.6231(a)(7)-1(l)(i) through (v) applies, the Service may designate a member as the TMP in accordance with Treas. Reg. 301.6231(a)(7)-1(p).

4.31.2.5.3  (06-01-2004)
Designation of TMP When Partnership Return Filed

  1. On a Form 1065, Schedule B, the partnership may designate the TMP.

  2. The partnership is not bound by the Largest Profits Interest Rule that applies to the selection of a TMP after the return is filed.

    1. The examiner should ask whether partnership procedures for making a qualified designation were followed, and

    2. Whether any events may have transpired to disqualify the TMP, such as, terminations, resignations, subsequent designations, or revocations.

4.31.2.5.4  (10-01-2010)
Designation of TMP After Partnership Return is Filed

  1. If the partnership did not designate a TMP at the time the partnership return was filed:

    1. Treas. Reg. 301.6231(a)(7)-1(e) states that the partnership may designate a TMP after the partnership return is filed by filing a statement with the campus with which the partnership return was filed.

    2. The statement will:
      • Certify the partnership and the designated TMP by name, address, and TIN;
      • Specify the partnership taxable year to which the designation realtes;
      • Declare that it is a designation of a TMP for the taxable year specified; and
      • Be signed by persons who were general partners at the close of the year and were shown on the tax return to hold more than 50 percent of the aggregate interest in the partnership profits held by all general partners at the end of the taxable year.

      Note:

      All limited partnership interests held by general partners are included in determining the aggregate interest in partnership profits held by those general partners.

  2. Letter 2700 and related Form 13798 are used to request that the partnership designate a new TMP. Similarly, Letter 2700-L and related Form 13798-L are used to request that the LLC designate a new TMP. The partnership should file a duplicate original copy of the designation form at the campus where it filed its returns in accordance with the Regulations.

  3. According to Treas. Reg. 301.6231(a)(7)-1(f), a TMP may be designated after the return is filed by persons who hold more than 50 percent of the aggregate interest in the partnership profits held by all general partners at the end of the taxable year, if each general partner at the end of the taxable year is described in one or more of the following events:

    1. Is deceased, or, if the general partner is an entity, was liquidated or dissolved;

    2. Was determined by a court to be incapable of handling his or her affairs;

    3. Had his/her partnership items converted to nonpartnership items, under conditions outlined in IRC 6231(b); or

    4. Is no longer a partner in the partnership.

      Note:

      Under these circumstances, the TMP designated by the partnership must be a general partner at the time of the designation. (See IRM 4.31.2.5.4)

  4. Limited partners may only select a general partner as the TMP. For example, a new general partner may join the partnership in a subsequent tax year. The limited partners could select the new general partner as the TMP for the years under examination but could not select a limited partner. Furthermore, if a general partner's partnership items converted to nonpartnership items other than under special enforcement regulations of IRC 6231(c) , the partner remains eligible to be designated as TMP.

  5. The regulations require that the designation be filed directly with the campus where the partnership return was filed, even if an NBAP was issued, not with the revenue agent.

    1. The agent should request a copy of the designation either from the campus or the entity.

    2. The copy of the designation secured by the agent will be attached to the back of the first page of the partnership return.

    Note:

    Whenever a new TMP is designated, the CTF must be notified of the changes so PCS can be updated.

4.31.2.5.5  (06-01-2004)
Designation of Successor TMP

  1. If a properly designated TMP for a partnership taxable year certifies that another partner was selected as the TMP for that taxable year, the successor partner is considered the designated TMP for that year. The certification is filed with the campus where the partnership return was filed. (Treas. Reg. 301.6231(a)(7)-1(d).)

  2. The regulations require that the designation be filed directly with the campus where the partnership return was filed, not through the revenue agent, even if an NBAP was issued.

    1. The agent should request a copy of the designation from either the campus or the entity.

    2. The copy of the designation secured by the agent will be attached to the back of the first page of the partnership return.

4.31.2.5.6  (06-01-2004)
Designation of Alternate TMP

  1. If an individual (not an entity) is designated as the TMP at the time the return is filed, after the return is filed, or as a successor TMP, then an alternate TMP may also be designated.

  2. The person designated as the alternate TMP will become the TMP at the time the designation is terminated by death or the adjudicated incompetency of the TMP.

4.31.2.5.7  (06-01-2004)
Prior Designations Superseded

  1. If a person is certified as a successor TMP or is designated as the TMP under the procedures for general partners with a majority of interests, the certification or designation supersedes all prior designations for that year.

  2. The above certification or designation for that year also supersedes a prior designation as the alternate TMP. (Treas. Reg. 301.6231(a)(7)-1(h).)

4.31.2.5.8  (03-04-2008)
Resignation of Designated TMP

  1. A person designated as the TMP may resign at any time by filing a signed written statement with the campus where the partnership return was filed. The examiner should request a copy from the campus or the entity. (Treas. Reg. 301.6231(a)(7)-1(i).)

  2. If a TMP resigns but had previously signed a consent to extend the statute of limitations for the partnership, that extension remains valid (if co-executed by the Service before the resignation) even after termination of the designation. (Treas. Reg. 301.6231(a)(7)-1(e)(2))

4.31.2.5.9  (06-01-2004)
Revocation of Designation of TMP

  1. The partnership may revoke the designation of a TMP at any time after the filing of a partnership return by filing a statement with the campus where the return was filed. The examiner should request a copy from the campus or the entity.

  2. The statement must be signed by the same persons who are permitted to designate a TMP. (Treas. Reg. 301.6231(a)(7)-1(e) or (f))

4.31.2.5.10  (03-04-2008)
When Designation, Resignation, or Revocation Becomes Effective

  1. The designation of a TMP remains in effect until:

    1. The death of the designated TMP;

    2. An adjudication by a court of competent jurisdiction that the individual designated as the TMP is no longer capable of managing the his/her person or estate;

    3. The liquidation or dissolution of the TMP, if the TMP is an entity;

    4. The partnership items of the TMP become nonpartnership items under IRC 6231(c), relating to special enforcement areas;

    5. The day on which the resignation of the TMP becomes effective;

    6. The day on which a subsequent designation as a successor TMP, a designation by general partners with a majority of interests, or a designation by partners with a majority of interests under certain circumstances becomes effective; or

    7. The day on which a revocation of the designation becomes effective.

  2. The termination of the designation of a partner as the TMP does not affect the validity of any action taken before the day on which the designation is terminated. For example, if that TMP had previously consented to an extension of the period for assessments under IRC 6229(b)(1)(B), that extension remains valid (if co-executed by the Service before the resignation) even after termination of the designation.

  3. The designation of the TMP is not terminated by the TMP signing an agreement with respect to the partnership items, and the TMP may continue to represent the partnership until the proceedings are complete.

  4. Special enforcement activities under IRC 6231(c) that terminate a designation include, but are not limited to:

    1. Being notified of an investigation by Criminal Investigation and being notified in writing that the partnership items are being treated as nonpartnership items as a result of the criminal investigation; (Treas. Reg. 301.6231(c)-5);

    2. Being assessed income tax under IRC 6851 (relating to termination assessments), or IRC 6861 (relating to jeopardy assessments)

    3. A request for prompt assessment under IRC 6501(d);

    4. Being named a debtor in a bankruptcy proceeding (see discussion in Computer Programs Lambda, Ltd. v. Commissioner., 89 TC 198 (1987));

    5. Having a receiver appointed in a receivership hearing; or

    6. Mailing of a deficiency notice based upon an indirect method of proof of income.

  5. If the TMP's individual return is examined and unreported income is identified, by using an indirect method of proof, and a notice of deficiency is mailed to the TMP, as of the date the notice is mailed, the TMP's designation is terminated. Thus, whenever an examiner is performing an examination on an investor return that is linked to a TEFRA key case and the above situation arises, the examiner should contact the key case examiner to coordinate the closing of the case. (Treas. Reg. 301.6231(c)-6)

  6. If the Service determines that the TMP should be removed because of special enforcement activities, there are circumstances where it may not be possible to disclose the reason for such removal to the partners, as this may be an unauthorized disclosure of the TMP's return information; for instance, removal as a result of a criminal investigation. In these circumstances, it should be sufficient for the Service to indicate to the partners that the TMP has been removed pursuant to IRC 6231(c) and the regulations thereunder.

  7. If the TMP, who is an individual, is under joint investigation, this does not remove the partnership from the TEFRA proceedings.

    1. A new TMP may be designated by the partnership or the Service.

    2. If there are no remaining partners, general or limited, or the TMP refuses to execute the necessary notices and/or documents to continue the proceedings, the Service may issue the FPAA or take other appropriate legal action.

4.31.2.5.11  (06-01-2004)
No Designation of TMP by the Partnership

  1. IRC 6231(a)(7)(B) provides that if there is no general partner who has been designated as the TMP, or prior designations have been terminated, and the partnership has not made a subsequent designation, the TMP is the general partner having the largest profits interest in the partnership at the close of the taxable year involved. If there are two or more general partners with equal profits interests, the TMP whose name appears first alphabetically is selected:

    1. In computing the largest profits interest, all limited partnership interests held by a general partner will be included in determining the general partner's profits interest in the partnership; (Treas. Reg. 301.6231(a)(7)-1(m)(2).)

    2. The Service will determine the general partner with the largest profits interest based on the year-end profits interests reported on the Schedules K-1 filed with the partnership income tax return for the taxable year for which the selection is made; (IRC 6223(c)(1).)

    3. Each general partner whose selection as TMP would immediately terminate because of the occurrence of one or more of the events enumerated in Treas. Reg. 301.6231(a)(7)-1(e)(i) through (iv), is treated as having a zero profits interest for that taxable year for purposes of applying the largest profits interest rules. (Treas. Reg. 301.6231(a)(7)-1(m)(3).)

    4. The regulations do not require the Service to notify the partner who would be the TMP under the Largest Profits Interest Rule or any other partner who is the TMP when the Largest Profits Interest Rule is used. However, it may be in the best interests of the Service to do so for good customer relations.

  2. If a partner who has no profit, loss or capital interest in the partnership is considered a general partner under state law, the partner would only be the TMP if all other general partners had either resigned, had their designations revoked by the partnership, or their designations were terminated by means of Treas. Reg. 301.6231(a)(7)-1(l).

4.31.2.5.12  (09-22-2006)
Selection of TMP by IRS

  1. A partnership may designate a person as the TMP for a taxable year only if that person was a general partner in the partnership at some time during the taxable year for which the designation is made, or is a general partner in the partnership as of the time the partnership makes the designation.

  2. If the partnership fails to designate a TMP or a prior designation has been terminated; the partnership has failed to make a subsequent designation; and the Service determines that it is impracticable to apply the largest profits interest rule, then the Service may select as the TMP for the taxable year any person who was a partner (whether general or limited) at some time during the taxable year.

    1. The Service will first determine if there is another general partner who is eligible. If there is another eligible partner, the Service must notify the partnership in writing that the partnership must select a TMP within 30 days or the Service will select the TMP. The Service will notify the partnership using Letter 3205.

    2. If there is no other eligible (consider Barbados #7 Ltd. v. Commissioner, 92 T.C. 804 (1989)) general partner, the Service may select a person who was a limited partner at the end of the taxable year under examination as the TMP. The Service must notify, within 30 days, the partner selected, the partnership, and all other notice partners of the selection, effective as of the date specified in the notice.

    3. If there are no general or limited partners available for selection, the Service may issue the FPAA (to the TMP at the partnership address on the return) to timely conclude the examination. Treas. Reg 301.6223(a)-1(a)(1).

  3. Examiners will identify a TMP as early as possible in an examination. Since the TMP executes statute extensions with the Service and, under certain circumstances, enters into agreements that may be binding on other partners in the partnership, it is essential that the TMP be correctly identified.

    1. If the TMP is not designated as prescribed by the regulations, either by the partnership or by the Service, the designation may be invalid. The designation must be perfected before proceeding with the examination.

    2. If the examiner finds that the partnership has attempted to designate a TMP pursuant to the regulations but has not met all of the requirements, consult Area Counsel.

    3. The examiner will document on Form 4318, Examination Workpapers Index, or supplemental work papers the criteria used to identify the TMP and any designation or selection made. It is the examiner's responsibility to determine if the designated TMP qualifies, based on the regulations, to be the TMP. Any written designation, other than that appearing on the return, will be stapled behind the first page of the partnership return.

      Note:

      It is the intent of the Service to have the partnership designate its own TMP, whenever practical.

  4. Delegation Order 4-19 (as revised) delegates authority to select a TMP for a TEFRA partnership to the Appeals Team Managers, Appeals Team Case Leaders (as to their respective cases), LMSB Team Managers, and SBSE Group Managers when it is impracticable to apply the Largest Profits Interest Rule.

4.31.2.5.12.1  (03-04-2008)
Notification Requirement

  1. Before the Group Manager (SB/SE) or Team Manager (LMSB) selects a general partner as TMP as outlined in (See IRM 4.31.2.5.12) this Handbook, the following notification requirements must be followed:

    1. Upon approval by the Group Manager (SB/SE) or Team Manager (LMSB), the agent will notify the partnership or LLC by mail using Letter 2700 or 2700-L that after 30 days from the date of such notice, the Service will determine that it is impracticable to apply the Largest Profits Interest Rule and will select the TMP unless the partnership or LLC makes a designation. This delay in making the determination will permit the partnership or LLC to designate a TMP under the regulations, thereby avoiding a selection by the Service.

    2. If the Group Manager (SB/SE) or Team Manager (LMSB) selects a TMP, the agent will notify the applicable partner, the partnership, and all other notice partners of the selection, effective as of the date specified in the notice. Under IRC 6231(a)(7), within 30 days of selecting a TMP, the Service will notify all partners required to receive notice under IRC 6223(a) of the name and address of the person selected to be the TMP using Letter 3205.

    3. During the 30 day period and prior to a TMP designation by the partnership, the agent will communicate with the partnership by sending all correspondence or notices to "Tax Matters Partner," in care of the partnership, at the partnership's address.

  2. Any subsequent designation of a TMP by the partnership after the 30 day period will become effective as provided under Treas. Reg. 301.6231(a)(7)-1(k)(2).

4.31.2.5.13  (10-01-2010)
Largest Profits Interest Rule Impractical

  1. For a partnership, the Largest Profits Interest Rule is deemed impracticable if on the date that the rule is applied, the general partner with the largest profits interest is not apparent from the Schedules K-1 and is not otherwise readily determinable.

    1. In the event this occurs, the Group Manager (SB/SE) or Team Manager (LMSB) will select the TMP. See IRM 4.31.2.5.12.1

  2. The Largest Profits Interest Rule is also impracticable, it each general partner is deemed to have a zero profits interest because of the occurrence of one or more of the events described in Treas. Reg. 301.6231(a)(7)-1(l)(i) through (iv). In the event this occurs, the Group Manager (SB/SE) or Team Manager (LMSB) will select a limited partner as the TMP. However, a limited partner will only be selected as the TMP if that partner was a partner in the partnership at the close of the taxable year under examination.

    Note:

    The partnership cannot designate a limited partner to serve as TMP in lieu of a limited partner selected by the Service. As a general guideline, if the Group Manager (SB/SE) or Team Manager (LMSB) determines that more than one limited partner meets the criteria to perform the duties of the TMP, all things being equal, strong consideration should be given to the limited partner with the largest profits interest.

    1. The Group Manager (SB/SE) or Team Manager (LMSB) will notify the partner selected and the partnership of the selection, effective as of the date specified in the notice.

    2. In selecting a limited partner as the TMP, the Group Manager (SB/SE) or Team Manager (LMSB) may consider the following criteria:
      • The views of all partners having a majority of interests in the partnership regarding the selection,
      • The general knowledge of the limited partner in tax matters and the administrative operation of the partnership,
      • The limited partner's access to the books and records of the partnership
      • The profits interest held by the limited partner,
      • Whether the limited partner is a member of the partnership at the time the TMP selection is made, and
      • Whether the limited partner is a United States person.

    3. Lack of cooperation with the Service by a general partner with the largest profits interest is not a basis for finding that the partner cannot perform the functions of a TMP. If the partner cannot perform the function of the TMP, the Group Manager (SB/SE) or Team Manager (LMSB) will treat each general partner who fits the criteria as having a zero profits interest for the taxable year, and select a TMP from the remaining persons who were general partners at any time during the taxable year.

    Note:

    Also, See IRM 4.31.2.5.12.1for the notification requirements.

  3. The Largest Profits Interest Rule is impracticable if the general partner with the largest profits interest has been:
    • notified of suspension from practice before the Service,
    • incarcerated,
    • residing outside the United States, its possessions, or territories,
    • not able to be located, or
    • not able to perform the functions of a TMP for any reason.

    1. If all such general partners are either treated as having a zero profits interest for the taxable year under Treas. Reg. 301.6231(a)(7)-1(m)(3) or described in (c) above, the Group Manager (SB/SE) or Team Manager (LMSB) will select a limited partner as the TMP under the procedures described in this Handbook. See IRM 4.31.2.5.12.

4.31.2.5.14  (10-01-2010)
General Audit Tips for the Examiners and the TMP Aspects of the Proceeding

  1. It is the examiner's responsibility:

    1. to determine, at the beginning of the examination, that the designated TMP qualifies to be the TMP;

    2. to note the steps taken to verify the designated TMP qualifies to be the TMP, as well as all steps taken in the TMP designation process;

    3. to determine that any subsequent designation made meets the requirements of the regulations;

    4. to take the necessary steps to perfect any subsequent designation that does not meet the requirements of the regulations or have a new designation completed; and

    5. to consult with the TEFRA coordinator for help in the above.

  2. The examiner's work papers must reflect all determinations made in identifying the proper TMP.

  3. In cases where the TMP is a pass-through entity, a signing official must be identified. The following procedures should be followed for a multi-tiered entity. For example, if the designated TMP is also a partnership, the examiner must determine if the TMP partnership is TEFRA or nonTEFRA. If the TMP partnership is TEFRA, the examiner must determine the TMP; if nonTEFRA, the examiner must determine the general partner(s). In a multi-tier situation, this will continue until the general partner or TMP in the lower tier is not a flow-through entity, e.g. it is an individual, a trust, or a C corporation.

  4. When the partner is a C corporation, S corporation, or LLC, the examiner should determine the signing official who can bind that entity under state law.

  5. A trustee should sign on behalf of a trust. If the trustee is an entity, it is necessary to determine what kind of entity the trustee is and who could bind it. A Form 56, Notice Concerning Fiduciary Relationship, and the trust documents should be reviewed to verify the correct trustee is signing.

  6. When an LLC is the TMP, the examiner should review the operating agreement in light of the applicable state law to determine the signing official. In general, LLCs may be member managed or manager managed. In these situations, the signing official may be a manager that is not a member of the LLC. If the LLC is manager managed, the manager is the binding official and must sign on the LLC's behalf. A manager under state law must sign for the TMP regardless of whether the TMP is itself a TEFRA entity. The TMP of an entity only has certain powers with respect to the partners of that entity but has no power to bind the TEFRA entity itself unless the TMP is a manager under state law.

    Note:

    The examiner should consult his/her TEFRA coordinator when these situations arise. It is important to determine not only the correct individual to sign, but also how to style the language to describe the relationship from that individual up to the partnership or LLC that is being examined.

  7. To apply Treas. Reg. 301.6231(a)(7)-2 (Designation or selection of tax matters partner for a limited liability company) when examining an LLC filing as a partnership, the examiner must review the operating agreement to determine who the managers and members are for the LLC. Once it is determined who the member-managers are, as defined in Treas. Reg. 301-6231(a)(7)-2(b)(3), the regulation is then applied to determine if the designated TMP qualifies. The work papers must document how the managers and members were determined. A best practice would be to retain a copy of the operating agreement in the audit file.

  8. When reviewing the partnership agreement or LLC operating agreement, the agent needs to look for any restrictions to the powers of the TMP. The partnership agreement or LLC operating agreement may restrict the TMP's ability to sign consents. The work papers must document any restriction to the TMP's ability to sign consents. A best practice would be to retain a copy of the operating agreement in the audit file. Consult with your TEFRA Coordinator if a restriction exists.

  9. When a grantor trust is the investor in a partnership or LLC, the beneficiary cannot be designated the TMP. The trust itself must be designated. A fiduciary must be designated as the responsible party by using Form 56.

  10. Currently, a single member LLC that is a disregarded entity will be considered to be the investor in a partnership or LLC. The disregarded entity may be designated as the TMP. (See Revenue Ruling 2004-88.)

4.31.2.6  (06-01-2004)
Statutes

  1. Statute control is usually the number one priority in all programs. In TEFRA, the TMP provisions have a slightly higher priority because the TMP can extend the statute for the partnership items of all partners.

  2. If the designated TMP is not qualified, a statute extension signed by that TMP may not be valid. It is extremely important that the examiner has made a correct determination of the identity of the TMP. It is also recommended that the agent redetermine the eligibility of the TMP at the time of signing as the TMP may have become ineligible due to bankruptcy or other events described in the TMP section of this IRM. (IRM 4.31.2.5)

4.31.2.6.1  (05-31-2005)
TEFRA Statute of Limitations

  1. IRC 6229(a) sets forth a minimum period of limitations for assessing tax attributable to partnership items (or affected items) for all partners. The general rule states that the statute of limitations for these items will not expire before the date that is three years after the later of:

    1. The date on which the partnership return for such taxable year was filed; or

    2. The last day for filing such return for such year (determined without regard to extensions).

  2. The Tax Reform Act of 1986 amended IRC 6229 by adding IRC 6229(g) to clarify that the period of limitations for assessment with respect to partnership or affected items also applies to penalties and additions to tax imposed by IRC 6662. For tax years ending after August 5, 1997, penalties are determined at the partnership level and assessed in the same manner as partnership items (even though they remain affected items).

    Caution:

    The procedures in a) through d) below only apply to tax years ending on or before August 5, 1997, the day of enactment of the Taxpayer Relief Act of 1997.

    1. Partner level penalties are treated as affected items, which are subject to the IRC 6229(a) statute of limitations governing partnership items.

    2. Under IRC 6230(a)(2), deficiency procedures must be followed before any penalties can be assessed.

      Note:

      For tax years ending after August 5, 1997, penalties determined at the partnership level are not subject to deficiency procedures (IRC 6230(a)(2)(A)(i)) and must be assessed within the one year period, even if the underlying deficiency is subject to deficiency procedures.

    3. A statutory notice of deficiency must be issued with respect to the penalties within one year after the expiration of the time for commencing a judicial proceeding regarding the FPAA, or if a judicial proceeding is commenced, the decision of the court becomes final.

    4. IRC 6229(g) was made retroactive to September 3, 1982.

  3. The IRC 6229(a) statute of limitations is the earliest date on which the partnership or affected item assessment period expires with respect to the partners' returns. IRC 6501 will not shorten this period with respect to partnership or affected items, but may extend the time period for assessing individual partners.

    1. Under IRC 6229(b), the IRC 6229(a) statute of limitations may be extended for partnership or affected items at the partnership level by executing a Form 872-O, Special Consent to Extend the Time to Assess Tax Attributable to Partnership Items, or a Form 872-P, Consent to Extend the Time to Assess Tax Attributable to Partnership Items. (See IRM 4.31.2.6.2.)

    2. Therefore, a partner in three different partnerships could have three different IRC 6229(a) statute dates in addition to the normal IRC 6501 statute date.

  4. If partnership and/or affected items are converted to nonpartnership items (See IRM 4.31.2.6.6), the one-year statute (the one-year assessment date) of IRC 6229(f) applies. The IRC 6229(f) statute is used for all TEFRA issues. This includes affected items that require statutory notice procedures.

  5. Other subsections of IRC 6229 come into play depending on the particular circumstances involved:

    1. The issuance of an FPAA (See IRM 4.31.2.4.2.3);

    2. The failure to issue the NBAP to a partner entitled to such notice;

    3. Fraud or failure to file a return (See IRM 4.31.2.6.7 or IRM 4.31.2.6.9); and

    4. An unidentified partner as described in IRC 6223(e).

  6. The statute for an AAR is not discussed here. See IRM 4.31.4.2.2 for a discussion of statue dates for an AAR and for the procedures and correct forms to extend the statutes for petitioning or processing of refunds.

4.31.2.6.2  (03-04-2008)
Extension of Statute at the Partnership Level

  1. The IRC 6229(a) statute of limitations may be extended with respect to all partners by a consent executed at the entity level. The TMP or an authorized person (authorized in writing by all general partners and meeting the requirements provided in Treas. Reg. 301.6229(b)-1) may extend the period of limitations for the assessment of partnership and affected items for all partners by signing a consent before the expiration of the statutory period. It is preferred that the TMP or authorized person sign rather than have their POA sign.

    Note:

    See Exhibit 4.31.2-11, Formats for TMP Signatures When Signing Extensions, for signature formats on signing extensions.

  2. The statute of limitations also may be extended with respect to any partner by an agreement entered into with the partner (IRC 6229(b)(1) and IRC 6229(b)(3)). A consent entered into by an investor extends the statute of limitations for assessment of any additional tax attributable to all partnership items or affected items for that investor only.

  3. It is strongly recommended that the TMP or authorized person (Treas. Reg. 301.6229(b)-1) sign all statute extensions. If someone other that the TMP or authorized person is signing the extension, for example the POA, it is advised to contact your TEFRA Coordinator.

  4. The partnership agreement or LLC operating agreement must be reviewed to determine if there are any restrictions on the powers of the TMP. For example, the partnership agreement or LLC operating agreement may restrict the TMP's ability to sign consents. Consult with your TEFRA Coordinator if a restriction exists.

  5. It is unclear as to what TMP duties are assignable to a POA. Work with your local TEFRA Coordinator if the POA wishes to assume some duties of the TMP.

  6. The examiner charged with the partnership return is responsible for the IRC 6229(a) statute for all partners. All regular statute extension request procedures must be followed when soliciting Form 872-O, Form 872-P, Form 872, Consent to Extend the Time to Assess Tax, or Form 872-A, Special Consent to Extend the Time to Assess Tax, including requests for restricted consents. If the examiner receives a return letter with a signed consent that places conditions on the extension, the examiner should include these terms in a revised Form 872, if they are approved by counsel, and re-mail to the taxpayer for signature. (See IRM 25.6 Statute of Limitations, for examples of approved language.)

    Note:

    An older version of Form 872, without modifying language, will not extend the TEFRA statute for the partner or the partnership. An older version of Form 872 or Form 872-A with modifying language, or a now obsolete Form 872-I or Form 872-IA had to be used to extend the TEFRA statute for the partner or the partnership.

  7. The case file must be documented that managerial approval has been obtained to solicit a consent to extend the statute of limitations. The consent should be solicited from the taxpayer 180 days prior to the statute expiration date.

  8. The Restructuring and Reform Act of 1998 (RRA '98) section 3461(b), imposed provisions that must be followed in soliciting a consent to extend the statute of limitations. The provision requires the Service to provide the taxpayer(s) or their authorized representatives with an explanation of their rights to decline to extend the assessment statute of limitations, or to request that any extension be limited to a specific period of time or to specific examination issues. In order to meet the provisions of RRA '98, the IRM has established the following procedures whenever an extension to the statute of limitations is solicited:

    1. Letter 907 and Publication 1035, Extending the Tax Assessment Period, must be provided to both the taxpayer and authorized representative. A copy of Letter 907 must be attached to the Form 872 or Form 872-A in the file and the fact of its mailing documented in the case activity record.

    2. Examiners should ensure that the proper extension form is transmitted to the taxpayer and representative.

    3. Upon receipt of the executed copy from the taxpayer or authorized representative, the consent should be date stamped received and forwarded to the manager for execution. All requests for restricted consents must be considered. If the examiner receives a return letter with a signed consent that places conditions on the extension, the examiner should include these terms in a revised consent, if they are acceptable to the Service, and re-mail to the taxpayer for signature. A copy of the executed consent must be returned to the taxpayer and/or authorized representative with the original attached to the tax return. The examiner should ensure that both the AIMS and ERCS databases are properly updated to reflect the new statute of limitations date.

  9. If the taxpayer or authorized representative does not wish to execute a consent, they should be notified that the case will be evaluated to determine whether an FPAA will need to be issued.

  10. Further guidance on the control of statutes can be found at IRM 25.6, Statute of Limitations Handbook.

  11. TEFRA partnership level consent and consent termination forms are as follows:

    1. Form 872-P is a closed-end consent for TEFRA partnership returns (it is preferred to the Form 872-O.)

    2. Form 872-O is an open-end consent for TEFRA partnership returns. (Soliciting this form is not recommended as the Form 872-N, described in paragraph (12)(b) below will terminate the agreement leaving only 90 days to complete the examination.);

    3. Form 872-N, Notice of Termination of Special Consent to Extend the Time to Assess Tax Attributable to Partnership Items, is used to terminate a Form 872-O.

    4. Form 872-O or Form 872-P Attachment (Allows room for restricted language). The Form 872-O and Form 872-P should have the statement "Restricted Consent, See Attached Statement" typed on page 1.

  12. The key case examiner is ultimately responsible for the IRC 6229(a) statute as it pertains to the TEFRA key case and its related investors while the key case is in his or her possession. Although the CTFs maintain control of the investor files, they are only responsible for the assessment of tax and penalties once the IRC 6229(d) or (f) one-year assessment periods begin running and for the investor statutes that are extended under IRC 6501 for returns that may be in their possession.

    1. Execution of a Form 872-P or Form 872-O by the TMP or authorized person extends the IRC 6229(a) statute with respect to partnership and affected items for all partners.

      Note:

      For tax years beginning on or after June 28, 2002, TEFRA entity-level consents to extend the IRC 6229 period for a consolidated group where a subsidiary is the TMP, the TMP must sign. The TMP’s parent does not need to co-sign the consent. For tax years beginning before June 28, 2002, both the subsidiary TMP and the parent must sign.

    2. An open-ended consent on a Form 872-O can be terminated by execution of a Form 872-N. The 90 day period begins when the Form 872-N is delivered to the office shown on the Form 872-O or Form 872-U, Change of Address to Submit Notice of Termination of Special Consent to Extend the Time to Assess Tax; therefore, the Form 872-N must be date stamped when received by that office. If the Form 872-N is received by other than the key case office, it should be forwarded to the key case examiner immediately. The examiner should date stamp the Form 872-N and forward a copy to the CTF for association with its administrative file.

  13. The key case examiner is responsible for updating AIMS when an extension is secured for the key case. A copy of that extension should be forwarded to the appropriate campus.

    Note:

    Appeals sends a copy to both campuses.

  14. PCS Report 4-4 lists TEFRA key case records and investor records with a pending one-year statute date. The report is broken down for distribution to area groups and functions. (See text of IRM 4.29.4.4.3, Partnership Control System (PCS) Handbook.) This report should be reviewed by the group manager.

  15. If the key case return statute of limitations expires, the key case area is responsible for following Barred Deficiency Report procedures as outlined in IRM 25.6.1.13, Barred Assessments, Barred Statute Cases, for the key case return. The key case area must notify the key case CTF so that the investor CTF's may be notified.

  16. A barred statute package including a Form 3999-T, Statute Expiration Report (for TEFRA key cases), will be prepared by the key case area for the key case CTF. The package will include a copy of Pattern Letter P-430 for the CTF key case administrative file. (See (17) below for the P-430 requirements below.) A pro-forma Pattern Letter P-431 will also be included in the barred statute package. (See (18) below for the P-431 requirements below.)

  17. The pro-forma Pattern Letter P-430 is as follows:

    • [Use appropriate salutation]:

    • We have discontinued our examination of your [tax year] Federal income tax return, because the statutory period in which we could legally have scheduled any refund or assessed any deficiency for the tax returns of your partners relating to the partnership items, as provided by IRC 6229(a) of the Internal Revenue Code, has expired.

    • Sincerely yours,

    • [Signature]

    • [Title]

  18. The pro-forma Pattern Letter P-431 is as follows:

    • [Use appropriate salutation]:

    • We have discontinued our examination of the [tax year] Federal income tax return of [name of partnership], because the statutory period in which we could legally have scheduled any refund or assessed any deficiency on your returns relating to partnership items, as provided by IRC 6229(a) of the Internal Revenue Code, has expired.

    • Sincerely yours,

    • [Signature]

    • [Title]

4.31.2.6.3  (03-04-2008)
Extension of Investor Statute for TEFRA and NonTEFRA Items

  1. The Service may extend the IRC 6229(a) statute by agreement under IRC 6229(b)(1)(B) for the assessment of partnership and affected items for all partners and/or extend the statute for the assessment of partnership and affected items for an individual partner.

  2. Extending the TEFRA statute at the individual partner's level is not the usual approach and, except for CIC cases, should only be used in mitigating circumstances, e.g., the TMP is not readily determinable. Individual partners cannot execute Form 872-P or Form 872-O consents, since they are designed for use by the TMP to extend the statute at the partnership level.

  3. An extension under IRC 6229(b)(1)(A) for a partner can be included in an extension of the IRC 6501 statute under IRC 6501(c)(4), using Form 872 or Form 872-A. Use of Form 872 or Form 872-A at the partner level to extend the partnership statute is not encouraged (except in CIC audits) because of the administrative issues this creates. However, if a consent to extend the partnership statute is secured at the partner level, the consent must retain the TEFRA paragraphs to expressly provide that it extends the period to assess tax attributable to partnership items.

    1. Older versions of Form 872 or Form 872-A, which extends the IRC 6501 statute, could be used to extend the IRC 6229(b)(1)(A) statute; however, the Form 872 or Form 872-A had to be modified to include the following paragraph to include TEFRA partnerships: "Without otherwise limiting the applicability of this agreement, this agreement also extends the period of limitations for assessing any tax (including additions to tax and interest) attributable to any partnership items (see IRC 6231(a)(3)), affected items (see IRC 6231(a)(5)), computational adjustments (see IRC 6231(a)(6)), and partnership items converted to nonpartnership items (see IRC 6231(b)). This agreement extends the period for filing a petition for adjustment under IRC 6228(b), but only if a timely request for administrative adjustment is filed under IRC 6227. For partnership items that have converted to nonpartnership items, this agreement extends the period for filing a suit for refund or credit under IRC 6532, but only if a timely claim for refund is filed for such items. In accordance with paragraph (1) above, an assessment attributable to a partnership shall not terminate this agreement for other partnerships or for items not attributable to a partnership. Similarly, an assessment not attributable to a partnership shall not terminate this agreement for items attributable to a partnership."

      Note:

      If a Form 872-A was used instead of a Form 872, the following additional language had to be used: The issuance of a notice of deficiency will not terminate this agreement under paragraphs (1) and/or (2) for the items described by this paragraph.

    2. For all cases where the taxpayer is a direct or indirect investor in pass-through entities that file (or should file) a Form 1065, the Forms 872 and 872-A (10-2009 revisions) should be used with TEFRA paragraphs intact. As an example, a large corporate taxpayer may be invested in hundreds of partnerships or LLCs subject to TEFRA procedures. In this situation, it may not be known which of these pass-through entities are subject to TEFRA. If a significant TEFRA partnership adjustment is picked up during an examination of a taxpayer/investor, the period of assessment will be held open by the executed Form 872 or Form 872-A. It is very important to note that a TEFRA partnership proceeding is still required to make this adjustment even though the taxpayer who has executed the Form 872 or 872-A consent may be the only partner adjusted as a result of the TEFRA partnership proceeding unless other partners or the TMP have also extended the period for assessing partnership items.

    3. In the case of consolidated corporate returns where the subsidiary is a partner in a TEFRA partnership, consent to extend the statute using Forms 872 or 872-A (10-2009 revision) must be in the name of the parent and the subsidiary. The parent of the consolidated group and the subsidiary partner(s) will sign the partner-level Forms 872 or 872-A pursuant to the consolidated return rules under Treas. Reg. 1.1502- 77. In situations where the parent wishes to restrict the Form 872 or 872-A or have the subsidiary, who is the actual partner under state law, be the sole signatory on the waiver, the examiner should contact local area Counsel before executing the waiver. If any other subsidiary is known to be a partner in another TEFRA partnership, it is best practice to secure a separate signature from that subsidiary. This can be done on an attachment to the Form 872 or 872-A using Form 13924 or 13923.

    4. In the case of consolidated corporate returns where the parent is partner, the consent should be in the name of the parent and subsidiaries and signed by the parent. In situations where the parent wishes to restrict the Form 872 or 872-A, the examiner should contact local area Counsel before executing the waiver. If any other subsidiary is known to be a partner in another TEFRA partnership, it is best practice to secure a separate signature from that subsidiary. This can be done on an attachment to the Form 872 or 872-A using Form 13924 or 13923.

      Note:

      It may not be practical to know if all subsidiary partners are part of another TEFRA partnership. In that case, ensure the parent signs the waiver.

    5. Any time the statute is extended at the partner level, a copy of the extension must be sent to the controlling campus.

    6. In those cases where it is appropriate to solicit a partner level extension but the partner refuses to sign the consent, the examiner should document the refusal in the case file.

  4. Partnership and affected items that are converted to nonpartnership items are no longer subject to the period for assessment under IRC 6229(a). They must be assessed within the one year period provided for converted partnership items (nonpartnership items) under IRC 6229(f). Consents secured under the instructions in (3) also extend this one year period.

  5. There may be situations where an unrestricted extension of the IRC 6501 statute using a Form 872-A was used to provide a longer period for assessment than under IRC 6229(f).

  6. An extension using earlier versions of Form 872-A terminates upon the issuance of any notice of deficiency. To prevent the termination of a Form 872-A with respect to converted partnership and affected items (nonpartnership items), a Form 872-A, paragraph 1, may have been modified as indicated above in the note, see IRM 4.31.2.6.3(3)a).

  7. However, Form 872-A is subject to termination by the execution of a Form 872-T, Notice of Termination of Special Consent to Extend the Time to Assess Tax, by the partner or the Service. If the situation arises where a Form 872-A was used to extend the statute for affected items, request advice from Area Counsel.

  8. The Technical and Miscellaneous Revenue Act of 1988 (TAMRA) provided that the IRC 6229(f) statute may be extended by agreement between the taxpayer and the Service. The Taxpayer Relief Act of 1997 provides that partial agreements may be secured, because the one-year date (IRC 6229(f)) that controls all assessments is the one-year date applicable to the last item to be resolved.

4.31.2.6.4  (10-01-2010)
Persons Empowered to Sign a Consent

  1. The TMP may sign an agreement to extend the statute of limitations for assessment for partnership and affected items for all partners. This method is preferred for TEFRA partnerships.

  2. When the TMP is not a natural person (individual), it is important that the examiner correctly analyze the entity TMP to determine the correct individual that can legally sign for the entity. If the designated TMP is also a partnership or an LLC filing as a partnership, the examiner must determine who is the general partner(s) or member manager(s). This will continue down through the tiers until the general partner(s) or member manager(s) under state law in the lower tier is not a flow-through entity, e.g. it is an individual, a trust, or a C corporation. When the partner is not a flow-through entity or an individual, the examiner should determine who can bind that entity. For example, for a C corporation it would be an officer; for an S corporation, it would be an officer; for a trust, it would be the trustee. The examiner should be consulting with his/her TEFRA coordinator and/or area counsel when this situation arises. It is important to determine not only the correct individual to sign at the bottom tier, but also how to style the language to describe the relationship from the bottom tier up to the partnership or LLC that is being examined.

  3. For consolidated tax years beginning before June 28, 2002, if a subsidiary in a consolidated filing group is the TMP of a partnership, both the signature of the parent (signing on behalf of the subsidiary TMP) and the signature of the subsidiary TMP are recommended on any statute extension by the TMP on behalf of the partners of the partnership. The signature blocks would appear as follows:

    • [Name of common Parent corporation] by [name of authorized representative of Parent corporation, title], as common parent of the [name of Parent corporation] and Subsidiaries consolidated group, on behalf of [name of Subsidiary corporation], Tax Matters Partner of [name of TEFRA partnership].

    • [Name of Subsidiary corporation], Tax Matters Partner of [name of TEFRA partnership] by [name of authorized representative, title].

  4. For consolidated tax years beginning on or after June 28, 2002, if a subsidiary in a consolidated filing group is the tax matters partner of a partnership, the signature of the subsidiary TMP is required on any statute extension signed by the TMP on behalf of the partners of the partnership. See Treas. Reg. 1.1502-77(a)(3)(v). The signature block would appear as follows:

    • [Name of Subsidiary corporation], Tax Matters Partner of [name of TEFRA partnership] by [name of authorized representative, title].

  5. In addition, Treas. Reg. 301.6229(b)-1 provides that a partnership may authorize any other person to extend the period described in IRC 6229(a) , with respect to all partners, by filing a statement with the campus where the partnership return is filed (or with the examiner who will forward a copy to the key case campus).

    1. The examiner will attach the original authorization to the back of the first page of the return and will note in red on the top of the copy, "Campus Copy" .

    2. The examiner will insure that the authorization:
      • Provides that it is an authorization for a person other than the TMP to extend the assessment period with respect to all partners;
      • Identifies the partnership and the person being authorized by name, address, and TIN;
      • Specifies the partnership's taxable year(s) for which the authorization is effective; and
      • Is signed by all persons who were general partners at any time during the year(s) for which the authorization is effective.

  6. If a POA substantially complies with the criteria outlined in IRC 6229(b)(1)(B) and Treas. Reg. 301.6229(b)-1, consents executed by the POA would be valid. (See IRM 4.31.2.2.7.1 for the proper language to include on the Form 2848.) As a general rule, a POA designated on Form 2848, Power of Attorney and Declaration of Representative, may not meet these criteria and the extension signed by the POA may not be valid. If this situation exists, request advice from Area Counsel.

4.31.2.6.5  (05-31-2005)
Suspension of Statute With Issuance of FPAA

  1. The IRC 6229(a) statutory period, i.e., the original 3 year period, is suspended once the FPAA is issued for 150 days plus one year. (IRC 6229(d).)

    1. The statutory period is suspended for the 150 day period during which an action may be brought under IRC 6226. The 150 day period for bringing suit consists of 90 days for the TMP to file a petition in court plus another 60 days for the notice partners or notice group to file a petition in court. (The 90th and 60th days are subject to the Saturday, Sunday, and legal holiday rule.) The Service cannot make an assessment against any of the partners during this 150 day suspension period unless their partnership items were previously converted to nonpartnership items. (See IRM 4.31.2.6.6)

    2. The one year statutory period in which assessments can be made begins to run on the 151st day.

    3. If during this 150 day period the TMP or a notice partner files a petition for judicial review, the statutory period for assessment is suspended until the court decision becomes final. (See IRC 7481). After the decision is final, the Service has one year to assess the tax. The decision becomes final:
      • For Tax Court cases, 90 days after the decision is entered if an appeal is not filed by either party during that time.
      • For District Court, Court of Federal Claims, U.S. Court of Appeals and the United States Supreme Court, 60 days after the decision is entered if an appeal is not filed by either party during that time.

  2. If the FPAA is mailed to the TMP prior to the expiration of the IRC 6229(a) statute (but the FPAAs are mailed to the partners after the expiration of the statute), the statute for the investors is suspended from the date the FPAA was mailed to the TMP. The FPAAs must be mailed to the notice partners within 60 days after the FPAA is mailed to the TMP. (IRC 6229(d)(2).)

4.31.2.6.6  (10-01-2010)
Items Becoming Nonpartnership Items

  1. When partnership items or affected items are converted to nonpartnership items, the statute of limitations with respect to these items is governed by IRC 6229(f) instead of IRC 6229(a). Under IRC 6229(f), the statute of limitations does not expire before one year after the date the items become nonpartnership items. The Technical Corrections Act of 1988 provides that the IRC 6229(f) statute may be extended by agreement entered into between the Secretary and a partner. An extension pursuant to IRC 6229(f) cannot be entered into at the partnership level but a partner can extend the statute using a Form 872-F, Consent to Extend the Time to Assess Tax Attributable to Items of a Partnership that have Converted Under Section 6231(b) of the Internal Revenue Code, Form 872 or Form 872-A (10-2009 revision). A partner can only extend the separate one year period under IRC 6229(d) created by a decision being entered in any court or due to an FPAA defaulting by executing a Form 872 or Form 872-A (10-2009 revision).

    Note:

    The entry of a court decision is not a conversion event.



    Under IRC 6231(b), items become nonpartnership items as of the date:

    1. A notice is mailed to the partner advising treatment of such items as nonpartnership items, but only if this notice is sent before the NBAP;

    2. The partner files suit under IRC 6228(b) after the Service fails to allow an AAR;

    3. A settlement agreement is entered into with the partner. (See IRM 4.31.2.6.6.1);

    4. An untimely notice letter (Letter 3857 or 3858) is sent under IRC 6223(d) and the partner's partnership items convert to nonpartnership items under IRC 6223(e);

    5. Certain special enforcement events occur under IRC 6231(c). (See IRM 4.31.2.6.6.3)

  2. Under IRC 6229(f), if an agreement with respect to partnership items was accepted on behalf of the Service, the statutory period for assessing partnership items and affected items (related penalties, etc.) would be extended to one year from the acceptance of the agreement by the Service. For tax years ending after August 5, 1997, penalties are assessed in the same manner as partnership items.

    Note:

    For tax years ending before August 6, 1997, in determining the applicable limitations period for assessment of penalties where partnership items have been settled, the statute date is computed taking any applicable IRC 6229(f) extensions into account.

4.31.2.6.6.1  (06-01-2004)
Conversion to Nonpartnership Items by Execution of Agreements, Forms 870-PT and 870-LT

  1. When a settlement agreement is executed, the IRC 6229(f) one-year period is one year from the date the Form 870-PT/ Form 870-LT settlement agreement is signed and accepted on behalf of the Service. For example, if the agreement is signed and accepted on behalf of the Service on 5-18-02, the one-year statute date starts running 5-19-02 and the last day for assessment will not expire before 5-18-03. This example is based on advice from Chief Counsel.

  2. If an examiner secures Form 870-PT or Form 870-LT (the Form 870-P/ Form 870-L is not used for tax years ending after August 5, 1997) from TEFRA investors at the closing conference, the settlement agreements will be associated with the key case when closed to the Technical Services. The Technical Services will forward these agreements to the CTF where they will be signed for the Service and the one-year assessment statute date entered on PCS. This is the date the CTF will use to monitor the assessment statute.

  3. If the key case statute expires in 90 days or less, the agreements may be signed by the TEFRA coordinator in the local Technical Services. If a revenue agent (reviewers, grade GS-11 and higher) signs a Form 870-PT or a Form 870-LT on behalf of the Service, a Form 8339, PCS Change, will be completed and forwarded to the campus, who is responsible for entering the one-year assessment date on PCS. If all investors have agreed, use Form 8336, Mass Change, to update the one-year dates for all investors at one time. (See IRM 4.29.2.3.3 for more information on Mass Change.) If all investors did not agree, then Form 8344 can be used to enter one-year dates on selected partners. (See IRM 4.31.2.3.4 for more information.)

    1. This is necessary to notify the campus that the IRC 6229(f) one-year period for assessment has begun.

    2. All pertinent documents should be forwarded to the CTF by the reviewer. See IRM 4.31.2.4 Field TEFRA Coordinator section.

    3. Execution of Form 870-PT and Form 870-LT by the area will only occur in close coordination with the CTF or when the area is controlling all investor returns.

4.31.2.6.6.2  (03-04-2008)
Conversion to Nonpartnership Items by Execution of Form 906 Closing Agreement

  1. A Form 906, Closing Agreement on Final Determination Covering Specific Matters, is a settlement agreement referred to in IRC 6224(c). The execution of the closing agreement converts partnership items to nonpartnership items for the tax years covered by the Form 906.

  2. In other words, the investor is removed from the TEFRA proceedings with respect to partnership years covered by the Form 906 and for the agreed partnership items in any future years, the tax consequences of which must be determined with reference to the Form 906 (e.g., basis computations or treatment of future income).

  3. The statute of limitations for the assessment of tax is the IRC 6229(f) one-year period from the date of execution of the Form 906 by the Service.

    1. The Technical and Miscellaneous Revenue Act of 1988 (TAMRA) removed the requirement to issue a statutory notice of deficiency prior to the assessment of the tax for all years covered by a Form 906; therefore, any settled returns can be assessed without the issuance of a statutory notice except for affected items requiring partner level determinations unless the Form 906 waives such deficiency procedures. The Service may need to issue a statutory notice of deficiency prior to the assessment of the tax for years covered by the agreement and filed after the Form 906 was executed if the deficiency results from the taxpayer's failure to report partnership items consistently with the treatment agreed to in a specific matters closing agreement (Form 906) entered into when a previous year was under examination and the adjustment is not purely a computational matter.

    2. Thus, if the Form 906 is secured for a partner for a pre-TEFRA year and deductions are claimed in a subsequent TEFRA year that are not allowable under the closing agreement, a statutory notice will be issued. These items are now considered nonpartnership items for the years filed after the Form 906 was executed. A computational adjustment will be made for all years in which the assessment is a purely computational matter.

    3. If there are items on a subsequent year return that are not covered by the closing agreement but may be affected by the treatment of those covered items, the adjustments mandated by the closing agreement should be treated as nonpartnership items. Any additional adjustments that are required would either be partnership item or affected item adjustments.

    4. If a TMP signs a closing agreement (See section 6.07(7) of Rev. Proc. 68-16, 1968-1, C.B. 770) that states it will be binding on non-notice partners pursuant to IRC 6224(c)(3), the closing agreement is binding on the non-notice partners who have not previously filed a statement stating that the TMP does not have authority to bind them. This notice from the non-notice partners must be received by the Service at least 30 days before the closing agreement (Treas. Reg. 301.6224(c)-1(a)(2)). Each notice partner must individually sign a Form 906 in order to be covered.

  4. A Form 906 should not be executed for an investor by Examination or Appeals in those instances where a related key case examination is ongoing for a subsequent year until contact is made with the key case examiner.

    1. If a TEFRA key case examination has been started on a subsequent year, the examining agent with control of the investor return will coordinate his or her actions with the agent conducting the partnership proceeding.

    2. This is imperative because under IRC 6224(c)(2), any partner can request a consistent agreement. The settlement reached on the Form 906 may result in a settlement which other partners in the TEFRA years may wish to accept.

  5. If a Form 906 is executed, the examiner should ensure that all appropriate nonTEFRA years are adjusted based on the information on the Form 906 or, if the return is in a TEFRA status, the examiner will forward a copy of the Form 906 to the Area Field TEFRA coordinator who will forward a copy to the CTF.

  6. When the Form 906 is transmitted to the Area Field TEFRA coordinator or the CTF, a Form 3210, Document Transmittal, is used, and it is clearly stamped "TEFRA" and "1 year assessment date" . The Form 3210 must also note the name, tax year, and EIN of the key case and if any penalties apply.

  7. The Area or CTF should ensure that prompt follow-up action is taken on the taxpayer's subsequent year returns to insure compliance and consistency.

    1. The one-year assessment date should be entered on the PCS by the PCS Coordinator at the CTF or by the Area PCS Coordinator for all affected years. The examiner forwards a completed Form 8339 (PCS Change) and a copy of the Form 906 to the CTF or the Area PCS Coordinator who updates the one-year statute.

    2. A copy of the Form 906 with a completed Form 5346, Examination Information Report, (see IRM 4.4.23, AIMS/Processing Handbook - Openings), is forwarded to the campus Classification function for information purposes when the subsequent year's returns are not filed or do not appear on AIMS.

4.31.2.6.6.3  (06-01-2004)
Conversion to Nonpartnership Items by Reason of Special Enforcement Areas

  1. When an investor files for bankruptcy, his/her partnership items convert to nonpartnership items. The conversion applies with respect to any partnership taxable year ending on or before the last day of the latest taxable year of the partner with respect to which the United States could file a claim for income tax due in the bankruptcy proceeding. (Treas. Reg. 301.6231(c)-7(a).)

  2. The filing of a bankruptcy petition naming a partner as debtor does not adversely affect the partnership proceeding because, pursuant to Treas. Reg. 301.6231(c)-7(a), the partnership items of such partner are treated as nonpartnership items as of the date the bankruptcy petition is filed. Consequently, the debtor is no longer a party to the partnership proceeding and the proceeding may continue as if the partner's bankruptcy had not occurred.

  3. The IRC 6229(f) one year assessment period begins to run on the date the petition naming the partner as a debtor in bankruptcy is filed. In general, the Centralized Insolvency Operations is responsible for ascertaining the filing date of bankruptcy cases and recording it in the Automated Insolvency System (AIS).

    1. Examiners should promptly notify Collection upon learning that a taxpayer under examination is involved in a bankruptcy proceeding for which there is no bankruptcy freeze on the Master File (TC 520 CC 85, account frozen from refunding and offsetting) and Examination was not previously notified of the filing.

    2. Collection (Bankruptcy Section) notifies Examination, of all bankruptcy proceedings by sending a computerized listing of new bankruptcy cases. Areas that use the court notice option send copies of the notice, a copy of the bankruptcy log, or other means instead. Procedures outlined in IRM 4.27 should then be followed.

    3. The examiner should contact their Area TEFRA coordinator to have the one-year assessment date input on PCS to insure that the tax is assessed within the one-year period. The user special message field may be updated by the PCS Coordinator as follows: "BNKRPT-OYDMMDDYYYY " . The final assessment of tax will be performed in the Area.

  4. The bankruptcy of a TEFRA partnership should have no effect upon the partnership proceeding. Since the tax liability determination is for the partners rather than the tax liability of the partnership, the proceeding will not result in the assessment or collection of tax, or creation or perfection of a tax lien against the partnership, in contravention of the automatic stay provided in section 362 of the Bankruptcy Code. Likewise, the bankruptcy of a TEFRA partnership should not have any impact upon the initiation of a Tax Court proceeding by a TMP or by a "notice partner" , if appropriate.

  5. In the situations described in paragraphs (1) through (4) above, the Service may issue, under section 362(b)(9) of the Bankruptcy Code, the appropriate statutory notice to the debtor without violating the automatic stay.

  6. Partnership items, arising in any partnership taxable year ending on or before the last day of the latest taxable year of the partner with respect to which the United States could file a claim for income tax due in the receivership proceeding, are treated as nonpartnership items as of the date a receiver is appointed in any receivership proceeding before any court of the United States, or of any State, or the District of Columbia.

  7. Partnership items of a partner, arising in any partnership taxable year ending with or within any taxable year of the partner with respect to which a request for a prompt assessment of tax under IRC 6501(d) is filed, are treated as nonpartnership items as of the date the request is filed. Thus, the IRC 6229(f) one-year assessment period would begin to run as well as the IRC 6501(d) statutory period for assessment. (See IRM 4.5 regarding prompt assessment requests under IRC 6501(d).)

  8. Partnership items of a partner, arising in any partnership taxable year ending with or within any taxable year of the partner for whom a deficiency notice based upon an indirect method of proof of income is mailed to the partner, are treated as nonpartnership items as of the date on which that deficiency notice is mailed to the partner. The adjustments from the TEFRA partnership(s) should be included in the notice of deficiency.

  9. Partnership items of a partner, arising in any partnership taxable year ending with or within any taxable year of the partner for whom an assessment of income tax under IRC 6851 (termination assessment) or IRC 6861 (jeopardy assessment) is made, are treated as nonpartnership items as of the moment before such assessment is made. (See IRM 4.15, Examining Processing, Jeopardy/Terminations Assessments Handbook.)

  10. Partnership items may convert to nonpartnership items with respect to a partner under criminal investigation for violation of the internal revenue laws. See Treas. Reg 301.6231(c)-5. If this situation arises, contact your local TEFRA coordinator for assistance. A partner may be subject to a criminal investigation without the Service converting their partnership items to nonpartnership items.

4.31.2.6.6.4  (03-04-2008)
Election to Treat Partnership Items as Nonpartnership Items

  1. The Service may elect to treat a partnership item as a nonpartnership item in the following two situations:

    1. The partner has reported the item on a return inconsistently with its treatment by the partnership, has properly notified the Service of the inconsistency, and has not subsequently requested that the return be conformed to the partnership return. IRC 6231(b)(2)(A).

    2. Subsequent to the filing of the original return, the partner has filed an AAR, that would result in the treatment of the item being inconsistent with its treatment by the partnership. IRC 6231(b)(1)(A) and IRC 6231(b)(2)(B).

  2. In either case, the Service must notify the partner of its election to convert the items to nonpartnership items prior to the beginning of any partnership administrative proceeding with respect to such items. IRC 6231(b)(3).

  3. TEFRA returns must disclose all reportable transactions under IRC 6501(c)(10). If a taxpayer fails to include on any return or statement for any taxable year any information with respect to a listed transaction (as defined in IRC 6707A(c)(2)) that is required under IRC 6011 to be included with such return or statement, the time for assessment will not expire before one year after the earlier of:

    1. the date the required information is furnished, or

    2. the date a material advisor meets requirements of IRC 6112 with respect to a request under IRC 6112(b) relating to the transaction and taxpayer.

  4. The partner may elect to have the item treated as a nonpartnership item if the Service fails to make timely notification of:

    1. the commencement of a partnership administrative proceeding, or

    2. the FPAA, as required by IRC 6231(b)(1)(D), IRC 6231(e)(2), and IRC 6231(e)(3).

4.31.2.6.7  (06-01-2004)
TEFRA Return with a False or Fraudulent Item

  1. Under IRC 6229(c)(1), if any partner, with the intent to evade tax, signs or participates directly or indirectly in the preparation of a partnership return that includes a false or fraudulent item:

    1. In the case of partners so signing or participating in the preparation of the return, the statute of limitations is unlimited. For consideration of the impact of the conversion on the period under IRC 6229(c)(1), (otherwise applicable to partners participating in fraud) contact Area Counsel.

    2. In the case of all other partners, even though they did not sign or participate in the purported fraud, the IRC 6229(a) statute is extended from three to six years.

4.31.2.6.8  (06-01-2004)
Omission of Income by a TEFRA Entity

  1. If any partnership omits from gross income an amount in excess of 25 percent of the amount of gross income stated on its return, the IRC 6229(a) statute is extended from three to six years for all partners. (IRC 6229(c)(2) .)

  2. Under Treas. Reg. 301.6231(c)-6, a partner's partnership items, with respect to a partner whose taxable income is determined by use of an indirect method of proof of income, convert to nonpartnership items on the date a deficiency notice, based upon an indirect method of proof of income, is mailed to the partner. The notice must include any adjustments from the partnership(s).

    1. The period for assessment of tax under IRC 6229(f) applies.

    2. The one-year assessment period starts (but is immediately suspended by the notice of deficiency) since the partnership items converted to nonpartnership items.

4.31.2.6.9  (06-01-2004)
Failure to File a TEFRA Return

  1. In the case of a failure to file a return by a partnership for any taxable year, any tax attributable to a partnership item or attributable to an affected item arising in the year may be assessed at any time. (IRC 6229(c)(3))

  2. If a partnership return is not filed but Schedules K-1 are issued to the partners, TEFRA procedures will be followed, if it is determined that a partnership exists.

4.31.2.6.10  (06-01-2004)
Failure of a TEFRA Investor to File a Return

  1. If an investor does not file a return, the CTF will attempt to secure one from the taxpayer. The CTF may have to refer the case to the area in which the investor resides to take necessary action to secure the delinquent return. The filing date of an investor's return is the beginning of the three year IRC 6501 statute. The IRC 6501 statute will not be shortened by the earlier running of the IRC 6229 statute.

    1. The key case CTF will perform the basic research, i.e., IMFOL/BMFOL, and issue Letter 729 attempting to obtain an income tax return from the taxpayer, before establishing the case on NMF and forwarding the research to the investor CTF, if different from the key case CTF.

    2. Upon receipt of the research by the investor CTF, the PCS Coordinator for the CTF will request that Form 2209, Courtesy Investigation, is issued on each investor for whom there is no filing record. The request will be sent to the campus Collection Operation and will include the following documents:
      • A copy of the Schedule K-1;
      • Copies of the AIMS and PCS requests;
      • Output that was generated from the requests;
      • Account research from the CTF; and
      • Other information or additional steps taken to locate the taxpayer and secure the tax return.

    3. When Collection secures an investor's tax return or TIN, they will forward the information to the PCS Coordinator for the CTF.

    Note:

    Do not transfer the NMF data base. It is used when closing the key case if no return is secured by anyone.

4.31.2.6.11  (05-31-2005)
TEFRA Substitute for Return

  1. A substitute for return filed by the Service (See IRM 4.5) is treated as if no partnership return has been filed so the period for assessment is open indefinitely.

4.31.2.6.12  (06-01-2004)
Extension of Statute of Tiered Returns

  1. A situation may arise where TEFRA partnership proceedings are instituted, and it is subsequently determined that the partnership is the second (or lower) tier partnership of another TEFRA partnership. The second (or lower) tier partnership is a pass-through partner, and the second (or lower) tier partnership's partners are indirect partners of the first tier. (IRC 6231(a)(9) and IRC 6231(a)(10))

  2. As such, the partners are governed by the first tier proceeding (IRC 6231(a)(2)(B)), and adjustments may be made to the second (and lower) tier indirect partners' returns through the first tier TEFRA partnership proceeding. Absent partnership adjustments to the second (or lower) tier return which are independent of the first tier partnership proceeding, a separate statute extension for the second (or lower) tier partnership is unnecessary. (IRC 6231(a)(2)(B))

  3. IRC 6229(a)(1)(B) authorizes the TMP to execute a statute extension for all partners, and a statute extension executed by the first tier TMP will protect the statute with respect to the second tiers (and lower) indirect partners.

4.31.2.6.13  (06-01-2004)
Extension of Statute with Regard to TEFRA Related Carryback/Carryover Year Returns

  1. If a partnership item impacts an NOL or credit carryback or carryover, the NOL or credit carryback or carryover is treated as an affected item. As an affected item, the NOL or credit carryback or carryover is subject to the partnership's statute of limitations under IRC 6229(a) for the taxable year generating the loss or credit.

4.31.2.6.14  (10-01-2010)
TEFRA Statutes Secured at the Partner Level

  1. Generally, the TEFRA statute is secured at the partnership level with a Form 872-O or 872-P. However, there are some occasions where it is not possible to secure an extension at the partnership level. When this happens, it may be necessary to secure the TEFRA statute at the partner level before the TEFRA partnership statute expires.

  2. It is recommended that the TEFRA proceedings be finalized prior to the expiration of the key case statute whenever possible. It is recommended that an FPAA be issued, if possible, to avoid the need to control investor level statutes. It may be necessary to quickly issue an NBAP, FPAA and untimely notice letter in some cases.

  3. If concluding the TEFRA proceeding is not an option, the TEFRA statutes must be protected by securing a Form 872 from (Rev. 10-2009 or subsequent, which includes TEFRA-related wording) each partner.

Exhibit 4.31.2-1 
TEFRA Partnership Criteria Flowchart

This flow chart is a decision chart to determine the next action to take to determine if the Partnership is TEFRA or Non-TEFRA.

Note:

A separate Determination must be made for each tax year.

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Exhibit 4.31.2-2 
TEFRA Flow-Through Examination Time Chart

This exhibit outlines a step list of the actions, responsibilities, IRM, Time Frame in days, cumulative time elapsed, and correspondence for Form 1065.

Note:

Actions a and b below are controlled by IRC 6223(a)(1). Actions q and r are controlled by IRC 6223(a)(2)

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Exhibit 4.31.2-3 
TEFRA Key Case Procedures

This flow chart is helpful to determine if the Form 1065 is a TEFRA return.

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Exhibit 4.31.2-4 
Determination of TMP Flowchart

This flow chart provides a yes and no format to help determine the TMP for Forms 1065.

Note:

(1) This flowchart covers the most common issues with identifying the TMP. Issues regarding a limited or foreign partner being designated as TMP should be referred to Counsel or the local TEFRA Coordinator. (2) If the Service designates the TMP, the Service must notify the designated partner, the partnership, and all partners eligible to receive notice with Letter 3205, see Treas. Reg. 301.6231(a)(7)-1(r)

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Exhibit 4.31.2-5 
Form 3210, Document Transmittal, for 60-Day Letter Package

The exhibit version of the Form 3210 contains the information required. Additional information should be added as needed. If any of the required information is omitted, provide an explanation.

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Exhibit 4.31.2-6 
Field TEFRA Coordinator 60-Day Letter Check Sheet

This exhibit provides the information necessary for the Field TEFRA Coordinator - 60-Day Letter Check Sheet as well as the 14 steps to be done for each case.

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Exhibit 4.31.2-7 
Field TEFRA Coordinator FPAA Package Check Sheet

This exhibit provides the information necessary for the Field TEFRA Coordinator - FPAA Package Check Sheet.

It would be helpful to clip the following items together in the FPAA package:

1. The original and one copy of the FPAA and Form 870-PT to the mailing envelope for each different TMP address.

2. Letter and POA copies of the FPAA and Form 870-PT to the mailing address of the POA.

3. Copies of the FPAA, to be dated by the CTF and returned to the field TEFRA coordinator for the key case file, along with a return envelope for mailing back to the Technical Services.

4. Package into an "Open by Addressee Only" envelope, prior to mailing.

At the time of preparation, comment on other items that may be of interest to the campus:

1. Any items not included in the FPAA package as noted on the Form 3210. Tell the Campus why items were not included.

2. Other TMP addresses considered but not utilized.

3. Invalid POA in the file, so no copies were sent to the POA.

4. What was done to try to perfect the POA either by the local TEFRA Coordinator or by the examining agent.

5. Any other unusual aspects of the case.

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Exhibit 4.31.2-8 
Form 3210, Document Transmittal, for FPAA Package

The exhibit version of the Form 3210 contains the information required. Additional information should be added as needed. If any of the required information is omitted, provide an explanation.

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Exhibit 4.31.2-9 
Form 3210, Document Transmittal, for Defaulted FPAA Package

The exhibit version of the Form 3210 contains the information required. Additional information should be added as needed. If any of the required information is omitted, provide an explanation.

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Exhibit 4.31.2-10 
Form 3210, Document Transmittal, for Agreed Settlement Package

The exhibit version of the Form 3210 contains the information required for agreed packages. Additional information should be added as needed. If any of the required information is omitted, provide an explanation.

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Exhibit 4.31.2-11 
Formats for TMP Signatures When Signing Extensions

The exhibit version of the formats for TMP signatures when signing extensions provide examples for subsidiary corporation TMP (example 1) and for Partnership TMP with a Trust as it's TMP (example 2).

In example 1, the ABC Corp is the TMP of XYZ Partnership. Joe Smith is the CFO of ABC Corp. DEF Corp is the parent of ABC Corp, and Jon Doe is the CFO of DEF Corp. The signature should read as follows: Recommended- ABC Corp, Tax Matters Partner of XYZ Partnership by Joe Smith, CFO. Acceptable, with Counsel review- DEF Corp, on behalf of ABC Corp subsidiary and DEF Consolidated Group, by Jon Doe, CFO.

In example 2, P/S B is the TMP for P/S A. Ocean Trust is the TMP for P/S B. Mr. Sandy is the Trustee for Ocean Trust. The Signature should read as follows: Ocean Trust, as Tax Matters Partner of Partnership B, As Tax Matters Partner of Partnership A, By Mr. Sandy, Trustee

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