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

4.31.2.2 
Field Agent Key Case Procedures

4.31.2.2.14 
Report Preparation for Affected Items

4.31.2.2.14.3  (06-20-2013)
Passive Losses

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

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

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

4.31.2.2.14.4  (06-20-2013)
Cancellation of Debt Income

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

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

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

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

4.31.2.2.15  (03-04-2008)
Procedures for Certain Conversions Involving Partnerships

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

4.31.2.2.15.1  (03-04-2008)
Unusual Conversions Involving Partnership

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

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

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

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

      Note:

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

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

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

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

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

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

4.31.2.2.15.2  (03-04-2008)
Conversion of TEFRA Partnership to C Corporation

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

    1. If a partnership return is filed; and

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

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

4.31.2.2.15.3  (03-04-2008)
Conversion of S Corporation to C Corporation

  1. For more information, see IRM 4.31.5.15.2

4.31.2.2.15.4  (03-04-2008)
TEFRA Key Entity Return Filed but No Entity Found to Exist

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

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

4.31.2.2.16  (06-20-2013)
Foreign or Domestic Partnership With TMP or Books and Records Located in a Foreign Country

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

    1. Fails to file a return; and

    2. At any time after the close of that taxable year, either the TMP resides outside the United States or the books and records of the partnership are maintained outside the United States, then the Service may:
      • Mail a notice to the partner to advise him or her that the losses and credits arising from that partnership for that year will be disallowed to that partner, unless the partnership files a return within 60 days after the date on which the notice is mailed; and
      • If a partnership return is not subsequently filed, mail a notice of computational adjustment (Letter 4735) to that partner to reflect the disallowance of any loss (including a capital loss) or credit arising from that partnership for that year, without conducting a partnership level proceeding.

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

4.31.2.2.17  (06-20-2013)
Section 1441-1446 Foreign Withholding Tax

  1. An entity that is treated as a partnership for US tax purposes and has a foreign partner could be required to withhold tax under two separate withholding tax regimes (i.e., 1441, 1442 - Fixed Determinable Annual Periodical (“FDAP”) and 1446 - Effectively Connected Taxable Income (“ECTI”).

  2. The withholding tax regime under IRC 1441 and IRC 1442 requires:

    1. A domestic partnership to withhold tax on a foreign partner’s allocable share of U.S. source Fixed Determinable Annual Periodical (FDAP) income.

    2. Additionally, IRC 1441 and IRC 1442 require withholding any time a partnership makes a payment of FDAP income to a nonresident alien or foreign corporation regardless of whether this person is a partner in the partnership making the payment.

  3. The withholding tax regime under IRC 1446 requires any partnership engaged in a trade or business within the U.S. to withhold tax on a foreign partner’s allocable share of effectively connected taxable income (ECTI).

  4. Partnerships should also be aware of possible withholding obligations under 1443 (regarding effectively connected income allocable to Sec. 501(c) foreign tax exempt organizations) and IRC1445 (regarding the disposition of U.S. real property interest by foreign partners). See Treas. Reg. 1.1446-3(c).

  5. Taxes withheld on a foreign partner’s income under IRC 1441, 1442, and 1446 are considered Partnership items. An examination of a TEFRA partnership with respect to these withholding tax sections is subject to the TEFRA partnership procedures. IRC 6231(a) (3); Treas. Reg. 301.6231(a) (3)-1(a) (1) (v).

  6. This section provides examination procedures and instructions for securing statute extensions for TEFRA partnerships that are required to withhold taxes with respect to IRC 1441 thru 1446, case closing procedures and overall coordination of TEFRA Key Cases with withholding tax return cases. The relevant withholding tax return forms are Form 1042 and Form 8804.

4.31.2.2.17.1  (06-20-2013)
TEFRA Partnerships - Examination Procedures

  1. The examiner must determine and document if the partnership is/is not subject to TEFRA procedures. See IRM 4.31.2.1.2

  2. Revenue Agents encountering the foreign withholding tax issue on a TEFRA partnership should complete a TEFRA referral on the Specialist Referral System (SRS) and also consult with a member of the Withholding and Foreign Payments Technical Advisor team. Resources and contact information can be found at the Withholding on Foreign Payments Technical Guidance web page.

4.31.2.2.17.2  (06-20-2013)
Statute of Limitations - Foreign Withholding

  1. The statute of limitation on assessments related to the IRC 1446 withholding generally runs 3 years from the later of (1) the date the Form 8804 is filed or (2) April 15th if the Form 8804 is filed before April 15 of the calendar year succeeding the calendar year that the tax was incurred. IRC 6501(a) and (b)(2). If no return is filed, the tax may be assessed at any time. (IRC 6501(c) (3) and IRC 6229(c) (3)).

4.31.2.2.17.2.1  (06-20-2013)
Statute Extensions for 1446 Withholding

  1. In the case of extending the statute for the IRC 1446 withholding tax, the partnership entity is considered the taxpayer. A statute extension for the IRC 1446 withholding tax should therefore be secured using Form 872. The statute extension should be signed by a general partner or managing member in the case of an LLC, or any person with authority under state law to bind the entity.

4.31.2.2.17.2.1.1  (06-20-2013)
Form 872 - Foreign Withholding

  1. Line 1 (Kind of tax) of the Form 872 should be modified to read as follows:

    1. The amount of any Federal “withholding tax under sections 1441-1446” due on any return(s) made by or for the above taxpayer(s) for the period(s) ended.

    2. The wording in quotes should be included on the blank line on the Form 872, and the word “tax” after the blank line should be lined through.

4.31.2.2.17.2.1.2  (06-20-2013)
Form 872-P - Foreign Withholding

  1. In addition, to the extent the courts uphold the Service’s position that the partnership entity is considered a “partner” for purposes of the TEFRA partnership audit procedures and the withholding tax, a Form 872-P signed by the TMP of the partnership would extend the limitations period to assess against the partnership entity.

  2. The Form 872-P should be modified as follows:

    1. In the extension area after “may be assessed at any time on or before” add an asterisk at the end of the extension date (i.e. December, 31, 20XX).

    2. In the blank area on the first page of Form 872-P add:
      “* Including income and/or withholding tax required to be paid and/or withheld at source (under Chapter 3 of the Internal Revenue Code) due on Form 8804 or Form 1042 ( two separate forms are needed if both are being examined)”

  3. For a TEFRA partnership, where the withholding tax is being increased due to an increase in ECTI or for any other partnership item, it is recommended that the statute be extended using both Form 872 as well as Form 872-P.

4.31.2.2.17.2.2  (06-20-2013)
Statute Extensions for 1441 and 1442 Withholding

  1. Form 1042 and Form 8804 are income tax returns with unique statutes of limitations and are distinct from Form 1065. A separate Form 872 and Form 872-P should be secured for each of the distinct tax return forms. All three returns, however, must be coordinated if the partnership is subject to the TEFRA Audit Proceedings.

  2. Additional guidance on Form 1042 and securing the statute of limitations on Form 872 can be found in IRM 4.23.14.8.

  3. For situations where Form 1065 is a Fiscal Year and Form 1042 is a calendar year:

    1. A Form 1042 is a calendar year return regardless of the tax year of the TEFRA Form 1065.

    2. Form 1042 returns filed on or before April 15 of the year following the year payments are made will be considered filed on April 15 for statute of limitation purposes. IRC 6501(b) (2). (Coincides with 1065 Due Date)

    3. The amounts reflected on a Form 1065 as being withheld under IRC1441 and IRC1442 will not be reflected on a Form 1042 until several months later because of the difference in time between the two filing dates (Form 1042 – March 15th and Form 1065 April 15th).

4.31.2.2.17.2.3  (06-20-2013)
Expired Statutes

  1. TEFRA partnership statute is expired and Form 8804/1042 is still open or not filed:

    1. If the statute of limitations of a TEFRA Form 1065 has expired but the related corresponding withholding tax return(s) has not yet been filed, or its statute is still open, the withholding tax issue may still be addressed.

    2. Agents must obtain approval from the Area Director (SBSE) or Director of Field Operations (LB&I) and the Technical Services Program Manager prior to opening a TEFRA partnership with an expired statute or a statute with less than 12 months.

    3. A pro-forma sample memorandum can be used to obtain approval and is included on the TEFRA website.

    4. The TEFRA partnership statute will be updated to alpha code AC (TEFRA-Entity Statute Protected at the Partner Level) using the month and year of the withholding return statute.

    5. If the withholding return is not filed, then the TEFRA partnership statute will be updated to reflect the month and year of statute expiration as if the withholding return had been filed (i.e., 3 years from due date of the return). The agents must make a referral to a TEFRA coordinator using the Specialist Referral System (SRS).

  2. The TEFRA partnership is open and Form 8804/1042 statutes are expired.

    1. If the statute of limitations is expired on the Form 1042 or Form 8804 but the TEFRA partnership statute is still open, the withholding tax issue can still be addressed.

    2. The statute of limitations should be updated for these forms using the statute of limitations of the TEFRA partnership.

  3. Special Circumstances

    1. When the TEFRA partnership return IRC 6229 statute is expired and the withholding tax return has not been filed or the statute is still open, the issue can still be addressed.

    2. In this instance, direct partners will be linked and notified.

    3. A Final Partnership Administrative Adjustment (FPAA) is necessary and can be issued to the TMP and the general partners but no other assessments can be made against the partners, unless the partner’s IRC 6501 statute is open.

    4. Assessment will occur against the MFT 08 (Form 8804) or MFT 12 (Form 1042) account.

4.31.2.2.17.3  (06-20-2013)
PCS Linkage Procedures

  1. PCS Linkage procedures are mandatory and should be used when examining a TEFRA partnership for the TEFRA withholding issue. PCS linkage procedures can be found on the PCS Electronic Linkage Process Web Page.

  2. If the TEFRA partnership IRC 6229 statute is expired, the agent will provide an explanation as well as the approval memorandum that was secured from the Territory Manager.

  3. See IRM 4.31.2.2.7.2.1 for more information.

4.31.2.2.17.4  (06-20-2013)
Substitute for Return (SFR) Procedures

  1. Form 8804 SFR

    1. To establish an SFR TC150 on Master File for a Form 8804 (MFT 08), the paper SFR procedures must be used. The systemic generation of the TC150 using AIMS and Push Code 036 will not be activated until January 2012.

    2. To establish AIMS/ERCS controls, the field must complete Form 5345-D (Examination Request-ERCS (Examination Returns Control System) using Push Code 021.

    3. An SFR should be prepared and signed by an individual with authority under Delegation Order 182 (Revenue Agent GS-9 or above). A paper SFR package must be prepared when the Form 8804 is not filed and a delinquent return cannot be secured from the taxpayer. IRM 4.4.9 must be followed using the revision date of 2003. See IRM 4.4.9.

    4. SFR packages will include:
      •Complete Form 5345-B (Examination Request Non ERCS Users)
      •Prepare a dummy SFR for each tax period.
      •Use a current year Form 8804 or the appropriate tax year. If using a current year form, cross out the year and write in red the SFR tax period in “MMYYYY” format. (A GS-9 Revenue Agent must sign the Form 8804, in the taxpayer signature area with their title.)
      •Include the EIN of the entity liable for the withholding tax.
      •Do not include an address.
      •Write "Exam SFR" across the top margin of the return in RED.
      •Attach Form 13133 (Rev. Date 7-2005) to the front of the return for each return submitted, check "Substitute for Return Box" .
      •Retain a copy of the SFR for the case file and send the SFR package to: Internal Revenue Service, 1973 N. Rulon White Blvd, MS 1124, Ogden, UT 84404

    5. Check IDRS for SFR TC 150 Posting. Ensure that the record is fully established on AIMS prior to closing.

  2. Form 1042 SFR

    1. IRM 4.4.9 (Revision date 2006) should be followed when processing an SFR for a Form 1042. A SFR for a 1042 can be systematically generated.

4.31.2.2.17.5  (06-20-2013)
Delinquent Return Procedures

  1. IRM 4.4.9 provides procedures for establishing control on delinquent returns as well as providing guidance for closing a delinquent return.

    Note:

    If a delinquent Form 8804 or Form 1042 is secured and accepted as filed and relates to withholding on a TEFRA partnership, the agent should examine the related partnership and secure Form 870-LT from the partnership. See Item 8 under Report Writing procedures for further information.

4.31.2.2.17.6  (06-20-2013)
Securing Agreements

  1. When other issues, including the withholding tax, are proposed on the TEFRA partnership return, the case is not considered fully agreed unless a Form 870-PT or 870-LT is secured from all partners for all other issues. In addition, a Form 870-LT must be secured for the withholding tax and penalty from a general partner/member manager.

  2. Prior to securing agreements, the Revenue Agent should contact the TEFRA Coordinator assigned to the case to ensure agreements are properly prepared.

4.31.2.2.17.7  (06-20-2013)
Dual Procedures When Case is Unagreed

  1. Dual procedures are necessary when Form 8804 or Form 1042 is filed (delinquent or timely) and the case is unagreed. In this instance, it is necessary for the examiner to follow TEFRA procedures as well as regular examination procedures. In addition to following the TEFRA report writing procedures discussed, examination must also:

    1. Issue a 30-Day Letter or statutory notice of deficiency (SNOD)

  2. Reference Form 8804 or Form 1042 in the 30-Day Letter or SNOD.

    Note:

    If the statute is only open at the TEFRA partnership level or only open at the Form 8804/Form 1042 level, you should contact the withholding Technical Advisor as well as the local TEFRA Coordinator for advice to determine whether the withholding issue should still be pursued. The Technical Advisor can assist you in determining whether the issue should be pursued and the TEFRA Coordinator can provide procedural guidance.

4.31.2.2.17.8  (06-20-2013)
Closing Withholding Case out of the Group

  1. There are a variety of situations that may occur when closing these cases. Each is processed a little differently.

  2. Both the Withholding Tax Case and the TEFRA partnership return are closed to Technical Services status 21.

4.31.2.2.17.8.1  (06-20-2013)
Withholding Tax is Agreed but Other Partnership Issues are NOT Agreed or Vice Versa

  1. Partial Assessment procedures apply. Contact your local TEFRA Coordinator for further instructions.

4.31.2.2.17.8.2  (06-20-2013)
Withholding Tax and Other Partnership Issues are Unagreed

  1. There will be two separate folders, one for the partnership issues and one for the withholding on foreign payments. A Form 3198 must be prepared for both case files.

  2. For the TEFRA key case file (Form 1065) complete the Form 3198 by completing the following in the Forward to Technical Services section:

    1. Check the "Other" box and write: "TEFRA Partnership Foreign Withholding Tax Case with other Partnership Issues" ; and

    2. Check the "TEFRA or Non TEFRA Key Case" box and write: "Issue 60 Day Letter if more than 12 months remain on the statute OR Issue FPAA if less than 12 months remain on the statute" .

  3. For the Withholding on Foreign Payments file complete the Form 3198 by completing the following in the Forward to Technical Services section:

    1. If withholding forms have been filed, dual procedures apply. Check the "Unagreed for Statutory Notice or the Unagreed to Appeals" box (if valid protest received). Otherwise leave blank.

    2. Check the "Other" box and write: "TEFRA Partnership Foreign Withholding Tax Case. See related Form 1065 file" .

  4. Important. When dual procedures apply and the examiner must issue a 30-day letter for the withholding taxes:

    1. Assuming the statute is not imminent, the examiner should wait to close the TEFRA partnership until the 30 day letter period is expired or a protest has been received. Both files should be closed as one package and sent to Technical Services.

    2. The form 4665 for both the withholding file and partnership file should clearly explain the relationship between the two files.

    3. The following language should also be inserted on the Form 4665 transmittal: "The TEFRA partnership foreign tax withholding issue is a TEFRA partnership item. However, when the withholding returns are filed, the Service is following dual procedures which require the issuance of a 60-day letter/ FPAA at the TEFRA partnership level as well as 30-day letter/Statutory Notice of Deficiency at the withholding tax return level."

    4. The related return taxpayer identification number and tax years should be listed on the transmittal.

4.31.2.2.17.8.3  (06-20-2013)
Withholding Tax and Other Partnership Issues are Agreed

  1. The examiner will process all agreed withholding assessments as partial assessments. The assessment for the withholding tax and related penalties will be assessed against the MFT 08 (Form 8804) or MFT 12 (Form 1042) account.

  2. Examiners should refer to IRM 4.10.8.5 Report Writing Guide and IRM 4.4.12.2, Examined Closings, Surveyed Claims, and Partial Assessments for partial assessment procedures including the preparation of Form 5344.

  3. Examiners should ensure that a TC 150 is posted and the record is fully established on AIMS prior to submitting the case for closure to Technical Services.

  4. There will be two separate folders, one for the partnership issues and one for the withholding on foreign payments. A Form 3198 must be prepared for both case files.

  5. For the TEFRA key case file (Form 1065) complete the Form 3198 by completing the following in the Forward to Technical Services section:

    1. Check the "TEFRA or Non TEFRA Key Case" box; and

    2. Check the "Other" box and write: "TEFRA Partnership Foreign Withholding Tax Case with other Partnership Issues" and "Agreements secured and signed from all partners. With regards to the foreign withholding tax, Form 870-LT secured from the partnership in the name of the partnership" .

  6. For the Withholding on Foreign Payments file complete the Form 3198 by completing the following in the Forward to Technical Services section:

    1. Check the "Other" box and write: "TEFRA Partnership Foreign Withholding Tax Case.” “Withholding tax agreed and assessed against MFT XX. “ “See Form 870-LT, enclosed" .

4.31.2.2.17.8.4  (06-20-2013)
Withholding Tax is Agreed and There are NOT Other Partnership Issues

  1. The examiner will process all agreed withholding assessments as partial assessments. The assessment for the withholding tax and related penalties will be assessed against the MFT 08 (Form 8804) or MFT 12 (Form 1042) account.

  2. Examiners should refer to IRM 4.10.8.5 Report Writing Guide and IRM 4.4.12.2, Examined Closings, Surveyed Claims, and Partial Assessments for partial assessment procedures including the preparation of Form 5344.

  3. Ensure that a TC 150 is posted and the record is fully established on AIMS prior to submitting the case for closure to Technical Services.

  4. There will be two separate folders, one for the partnership issues and one for the withholding on foreign payments. A Form 3198 must be prepared for both case files.

  5. For the TEFRA key case file (Form 1065) complete the Form 3198 by completing the following in the Forward to Technical Services section:

    1. Check the "TEFRA or Non TEFRA Key Case" box; and

    2. Check the "Other" box and write: "TEFRA Partnership Foreign Withholding Tax Case, Withholding Tax Agreed and assessed against MFT XX. There are NOT any other Partnership issues, please remove H-Freeze and close to CCP agreed."

  6. For the Withholding on Foreign Payments file complete the Form 3198 by completing the following in the Forward to Technical Services section:

    1. If unagreed, check the "Unagreed for Statutory Notice or the Unagreed to Appeals" box (if valid protest received) (This is applicable only when the Form 8804 or Form 1042 are filed)

    2. Check the "Other" box and write: "TEFRA Partnership Foreign Withholding Tax Case, withholding tax agreed and assessed against MFT XX. See Form 870-LT, enclosed"

    Note:

    See IRM 4.31.2.2.10 for further details regarding closing a TEFRA Key Case.

  7. Form 3198 should address any unique statute concerns. For example, if the TEFRA partnership statute is expired and the withholding return statutes are open, indicate this on both the partnership and withholding files.

4.31.2.2.17.9  (06-20-2013)
Function of Technical Services

  1. Technical Services will review the case, and if the case is correct the LTCs executes agreements or issues closing letters to the TMP. Once the partnership level review is complete, the LTC will submit a closing package to the Campus TEFRA Function (CTF).

  2. If a 60 Day Letter is issued and the issue(s) are protested, both the Key Case Partnership File and related withholding tax file is sent to Appeals for consideration.

  3. If dual procedures are applicable, the TEFRA partnership file and the withholding tax file should remain together. The reviewer should ensure that the file contains the following explanation when forwarding the case to appeals or court: "The TEFRA partnership foreign tax withholding issue is a TEFRA partnership item. However, when the withholding returns are filed, the service is following dual procedures which require the issuance of a 60-day letter/ FPAA at the TEFRA partnership level as well as 30-day letter/Statutory Notice of Deficiency at the withholding tax return level."

4.31.2.2.18  (03-04-2008)
IRC Section 761(a) Elections

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

4.31.2.2.18.1  (03-04-2008)
General

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

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

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

4.31.2.2.18.2  (03-04-2008)
Area Office Procedures

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

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

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

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

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

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

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

    1. If the partnership return is a TEFRA return, the examiner will initiate a TEFRA examination as outlined in text IRM 4.31.2.2.8 and IRM 4.31.2.2.10 of this Handbook.

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

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

4.31.2.2.19  (06-01-2004)
Formation of a Partnership

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

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

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

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

    1. Examining the partnership agreement;

    2. Examining the prospectus; or

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

    Note:

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

4.31.2.2.20  (03-04-2008)
Pass-Through Entity Defined

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

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

    2. An S corporation;

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

    4. A joint venture;

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

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

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

    8. a nominee; or

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

  2. A pass-through entity:

    1. May not file a tax return;

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

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

4.31.2.2.20.1  (06-20-2013)
LLCs that are Disregarded Entities

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

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

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

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

  5. If a Schedule K-1 is issued with the name and TIN of the single member and does not list the name of the disregarded LLC, the single member may be linked directly to the key case. We can do this because IRC 6223(c) provides we should use the names and addresses as provided on the partnership return unless that information is updated under the regulations. Although the single member was issued the Schedule K-1, the existence of the disregarded entity still will cause the key case partnership to fall under TEFRA.

4.31.2.2.20.2  (03-04-2008)
Entities Acting as Agents for Investors

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

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

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

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

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

4.31.2.3  (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 a 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 partners 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.

4.31.2.3.1  (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 4.31.2.4.4 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 4.31.2.2.9 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.

4.31.2.3.1.1  (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.

4.31.2.3.2  (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).

  11. When an LLC is the TMP of a key case partnership, the LLC manager under state law acts as TMP, not the LLC's own TMP. Per Rev. Rul. 2004-88, if the pass-thru partner “is a limited liability company, then a manager of the LLC, under State law, must sign, regardless of whether the LLC is subject to the TEFRA partnership procedures.”

    Note:

    It is important to note that the examiner must continue to drill down through each LLC to determine what natural person can sign on behalf of the final LLC manager. An officer does not automatically qualify as a manager. The manager, that is a natural person, under state law has to sign for each of the tiers since the tiers TMP has no authority. For example: For tax year A, partnership X has designated as its TMP Y LLC. The manager of Y LLC is Z LLC. The manager of Z LLC is C LLC. The operating agreement for C LLC states John Doe, Chief Financial Officer is the manager. In the example, John Doe will sign for all intervening tiers. The signature would appear as follows: Y LLC, Tax Matters Partner of X, by John Doe, CFO, C LLC, Manager of Z LLC, Manager of Y LLC.

4.31.2.3.3  (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.

4.31.2.3.4  (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. The agent should send a copy to the campus TEFRA coordinator to ensure the campus is aware of the TMP change.

  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 4.31.2.3.4)

  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.

4.31.2.3.5  (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.

4.31.2.3.6  (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 when the statement is filed.

  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.

4.31.2.3.7  (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).)

4.31.2.3.8  (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))

4.31.2.3.9  (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))

4.31.2.3.10  (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 partner 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.

      Note:

      If a claim is filed in a bankruptcy proceeding by a TMP that is a flow through entity, the items convert under Treas. Reg. 301.6231(c)-7 and its status as TMP terminates under 301.6231(a)(7)-1(L). But its indirect partners stay in the TEFRA proceeding under Third Dividend Dardanos v. Commissioner, 88 F.3d 821 (9th Cir. 1996). In other words, the bankruptcy of the agent through whom you hold your partnership interest takes your agent out of the proceeding, but does not take you, an "indirect partner" out.

4.31.2.3.11  (06-20-2013)
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).

    Note:

    A partner residing outside the US, it's possessions or territories is not eligible to be selected as TMP under the largest profits interest rule.

4.31.2.3.12  (06-20-2013)
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.

    Note:

    The CTF must be notified any time there is a change in the TMP, because the CTF is required to send the TMP copies of executed agreements. Notification should be sent encrypted to the CTF using the group email box. The notification should include the key case name, name of the new and old TMP, effective date and copies of the Form 13828, TMP Qualification and Form 13827, TMP Designation Check Sheets.

    1. The agent will first determine if there is another general partner who is eligible. If there is another eligible partner, the agent must notify the partnership in writing that the partnership must select a TMP within 30 days or the Service will select the TMP. The agent 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), LB&I Team Managers, and SBSE Group Managers when it is impracticable to apply the Largest Profits Interest Rule.

4.31.2.3.12.1  (06-20-2013)
Notification Requirement

  1. Before the Group Manager (SB/SE) or Team Manager (LB&I) selects a general partner as TMP as outlined in (See IRM 4.31.2.3.12) this Handbook, the following notification requirements must be followed:

    1. Upon approval by the Group Manager (SB/SE) or Team Manager (LB&I), 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. The agent will notify the partnership of the Service's selection of a new TMP by mail using Letter 2701 or 2701-L.

    2. If the Group Manager (SB/SE) or Team Manager (LB&I) selects a TMP, the agent will notify the applicable partner 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 agent 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).

4.31.2.3.13  (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 (LB&I) will select the TMP. See IRM 4.31.2.3.12.1

  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 (LB&I) 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 (LB&I) 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 (LB&I) 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 (LB&I) 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 (LB&I) 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 4.31.2.3.12.1 for 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 (LB&I) will select a limited partner as the TMP under the procedures described in this Handbook. See IRM 4.31.2.3.12.

4.31.2.3.14  (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. If a TMP is a partnership or a limited liability company, the Service must determine who has authority under State law to sign for the TMP entity. See IRM 4.31.2.4.4(2), Persons Empowered to Sign A Consent.

  4. Consider, for example, partnership X. For tax year A, partnership X has designated as its TMP Y LLC. Z corporation is Y LLC’s sole member-manager and, under State law, has authority to bind Y LLC. John is Z’s chief financial officer and, under State law, has authority to bind Z corporation. John should sign the consent to extend the limitations period for tax year A for partnership X as follows: Y LLC, Tax Matters Partner of X, by Z Corporation, Manager of Y LLC, by John, CFO.

  5. 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.

  6. 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.

  7. 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.

  8. 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.

  9. 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.

  10. When a grantor trust is the partner 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.

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

4.31.2.4  (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)

4.31.2.4.1  (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 4.31.2.4.2.)

    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 4.31.2.4.6), 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 4.31.2.6.2.5);

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

    3. Fraud or failure to file a return (See IRM 4.31.2.4.7 or IRM 4.31.2.4.9); 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 statute dates for an AAR and for the procedures and correct forms to extend the statutes for petitioning or processing of refunds.


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