4.31.2  TEFRA Examinations - Field Office Procedures

Manual Transmittal

June 20, 2013

Purpose

(1) This transmits revised IRM 4.31.2, Pass-Through Entity Handbook, TEFRA Examinations- Field Office Procedures.

Material Changes

(1) Various editorial changes made throughout the IRM.

(2) 4.31.2.1.2 - Identification of TEFRA Partnership. Added new paragraph (3) regarding the TEFRA Determination Job Aid.

(3) 4.31.2.1.3 - Election to be Covered by the TEFRA Procedures - Partnership Tax Years Beginning on or after January 1, 2004. Removed paragraph (5)

(4) 4.31.2.1.5 - Form 1065, Schedule B TEFRA Checkbox. Changes made to clarify the section.

(5) 4.31.2.1.8 - Key Cases Controlled as Both TEFRA and NonTEFRA. Added IRM references.

(6) 4.31.2.2.1 - Initiating Timely Examination of Key Case Returns. Added clarification about timely linkage a return.

(7) 4.31.2.2.2 - Risk Analysis. Added new section.

(8) 4.31.2.2.3 - Mandatory Completion of Check Sheets. Added information about electronic linkage to paragraph (3). Updated the section to clarify that managers signatures on the mandatory forms are required.

(9) 4.31.2.2.3.1 - ERCS (Examination Returns Control Indicator) TEFRA Indicator. Changed time frame for inputting the indicator from 90 to 60 days.

(10) 4.31.2.2.3.2 - Mandatory Specialist Referral. Added a new section.

(11) 4.31.2.2.4 - Identification of the Tax Matters Partner (TMP). Removed reference to a named TMP NBAP.

(12) 4.31.2.2.5 - Issuing the Notice of the Beginning of the Administrative Proceeding (NBAP) Letter to the Tax Matters Partner. Paragraph (4)(a) added statement that NBAPs mailed to foreign partners must be sent using registered mail. Paragraph 4(b) - added note that TMP TIN is not to be shown on the TMP NBAP.

(13) 4.41.2.2.5.1- 45 Day Rule. Remove reference to a named TMP NBAP in paragraphs (1) and (4).

(14) 4.31.2.2.6 - Power of Attorney (POA) Appointed by the Tax Matters Partner. Additional information added on the proper completion of a Form 2848 for TEFRA.

(15) 4.31.2.2.7.2 - Linking the Key Case on the PCS. Changed the requirement to link from 60 days to 90 after the case goes into status 12.

(16) 4.31.2.2.7.2.1 - Electronic TEFRA Linkage. Removed reference to a specific NBAP in paragraph (5)(a). Added paragraph (12) to provide guidance on the submission of large linkage packages.

(17) 4.31.2.2.7.2.2 - Transferring Work to the Campus Using a Share Drive. New section. Removed the section on submitting traditional linkage packages.

(18) 4.31.2.2.7.2.3 - Foreign Investors. Added new paragraphs (1) through (4) to better explain proper processing.

(19) 4.31.2.2.7.3 - Completing the Key Case Examination. Added note after paragraph (1)(e) to explain that a Form 886-S is not needed on a TEFRA case.

(20) 4.31.2.2.8.1 - Powers of Attorney (POA) for Partners in TEFRA Partnerships. Added additional information on the proper completion of a POA for TEFRA.

(21) 4.31.2.2.9 - Securing Agreements from the TMP and the Partners. Added a reminder to paragraph (1) to ensure reports are correct before securing agreements.

(22) 4.31.2.2.9.2 - Acceptance of Faxed Agreements. Threshold raised from $25,000 to $250,000.

(23) 4.31.2.2.9.4 - Securing Agreements Solely for Foreign Withholding. New section.

(24) 4.31.2.2.10 - Securing Agreements for Tax Assessments at the Partnership Level . Added paragraphs 6, 7, and 8 to help explain impact to the partners when the partnership agrees to pay the tax.

(25) 4.31.2.2.11- Unagreed Key Case - Added paragraph (3). There must be eight months on the key case partnership statute before closing a unagreed case to Tech Services.

(26) 4.31.2.2.12 - Closing the Key Case. Added a note after paragraph (1) to have the agent provide an alert to the campus when their case will be no changed. This will allow the campus to stop processing those related partners as early in the process as possible.

(27) 4.31.2.2.12.1- Imminent Statute Procedures. New section.

(28) 4.31.2.2.12.2- Fraud Cases. New Section.

(29) 4.31.2.2.13 - Affected Items Requiring Key Case and Investor Level Determinations. Added a reference to new Letter 4735, Notice of Computational Adjustment.

(30) 4.31.2.2.14.1 - Basis and At-Risk. Added clarification on when to insert additional language in the remarks section of Form 4605-A.

(31) 4.31.2.2.14.2 - Gain or Loss on Disposition of a Partnership Interest. Added clarification on when to insert additional language in the remarks section of Form 4605-A.

(32) 4.31.2.2.14.3 - Passive Loss. Added clarification on when to insert additional language in the remarks section of Form 4605-A.

(33) 4.31.2.2.14.4 - Cancellation of Debt Income. Added clarification on when to insert additional language in the remarks section of Form 4605-A.

(34) 4.31.2.2.16 - Foreign or Domestic Partnership With TMP or Books and Records Located in a Foreign Country. Paragraph (1)(a), added a reference to new Letter 4735, Notice of Computational Adjustment.

(35) 4.31.2.2.17 - Section 1441 - 1446 Foreign Withholding Tax. New section

(36) 4.31.2.2.17.1 - TEFRA Partnership - Examination Procedures. New section.

(37) 4.31.2.2.17.2 - Statute of Limitations - Foreign Withholding. New section.

(38) 4.31.2.2.17.2.1 - Statute Extensions for 1446 Withholding. New section.

(39) 4.31.2.2.17.2.1.1 - Form 872 - Foreign Withholding. New section

(40) 4.31.2.2.17.2.1.2 - Form 872-P - Foreign Withholding. New section.

(41) 4.31.2.2.17.2.2 - Statute Extensions for 1441 and 1442 WIthholding. New section.

(42) 4.31.2.2.17.2.3 - Expired Statutes. New section.

(43) 4.31.2.2.17.3 - PCS Linkage Procedures. New section.

(44) 4.31.2.2.17.4 - Substitute for Return (SFR) Procedures. New section.

(45) 4.31.2.2.17.5 - Delinquent Return Procedures. New section.

(46) 4.31.2.2.17.6 - Securing Agreements. New section.

(47) 4.31.2.2.17.7 - Dual Procedures When Case is Unagreed. New section.

(48) 4.31.2.2.17.8 - Closing Withholding Case out of the Group. New section.

(49) 4.31.2.2.17.8.1 - Withholding Tax is Agreed but Other Partnership Issues are NOT Agreed or Vice Versa. New section.

(50) 4.31.2.2.17.8.2 - Withholding Tax and Other Partnership Issues are Unagreed. New section.

(51) 4.31.2.2.17.8.3 - Withholding Tax and Other Partnership Issues are Agreed. New section.

(52) 4.31.2.2.17.8.4 - Withholding Tax is Agreed and There is NOT Other Partnership Issues. New section.

(53) 4.31.2.2.17.9 - Function of Technical Services. New section.

(54) 4.31.2.2.20.1 - LLCs that are Disregarded Entities. Added paragraph 5.

(55) 4.31.2.3.11 - No Designation of TMP by the Partnership. Added note to explain that a non resident partner is not eligible to be TMP.

(56) 4.31.2.3.12 - Selection of TMP by IRS. Added note that CTF must be notified of any change in TMP.

(57) 4.31.2.3.12.1 - Notification Requirement. Added clarification to paragraph (1)(a) on the use of Letters 2701 and 2701-L.

(58) 4.31.2.4.1.1 - Controlling Partner Statutes under a TEFRA Key Case. New section.

(59) 4.31.2.4.2 - Extension of Statute at the Partnership Level. Paragraph (7) - changed date to request a statute extension from 180 days to a minimum of one year.

(60) 4.31.2.4.6.2 - Conversion to Nonpartnership Items by Execution of Form 906 Closing Agreement. Removed reference to area PCS Coordinator. Added new paragraph 6 (a) and (b) and deleted 7(a) and (b).

(61) 4.31.2.4.6.3 - Conversion to Nonpartnership Items by Reason of Special Enforcement Areas. Removed reference to the area PCS Coordinator.

(62) 4.31.2.4.10 - Failure of a TEFRA Investor to File a Return. Removed reference to the area PCS Coordinator.

(63) 4.31.2.4.13 - Extension of Statute with Regard to TEFRA Related Carryback/Carryover Year Returns. Added sentence to the end of paragraph (1) that the section applies to carryback and carryover years as well.

(64) 4.31.2.5.1 - Initial Investor Actions. Added clarification to paragraph (4) on verifying a taxpayers identity.

(65) 4.31.2.5.2.2 - LB&I Investors. Removed reference to the Local PCS Coordinator.

(66) 4.31.2.5.2.3 - Partial Assessments/Partial Closures. Add a note after paragraph (4) to explain the best practice is to immediately make partial assessments.

(67) 4.31.2.5.3 - Closing a NonTEFRA Investor With an Open TEFRA Linkage. Added a reference to status code 14. Added info to paragraph (3) on processing a refund case. Removed reference to the PCS Coordinator. Removed paragraphs (4)(e) and (f). Added paragraphs (5)(c), (d) and (e) to explain the processing of returns protested to Appeals.

(68) 4.31.2.5.3.2 - Special Computation for Non-Oversheltered Returns (Munro Decision). Added text to paragraph (2)(b) and a new (2)(c) to add clarity.

(69) 4.31.2.6.1- General Responsibilities. Removed reference to the area PCS Coordinator.

(70) 4.31.2.6.2 - Key Case Closure Procedures. Removed reference to the specific NBAP in paragraph (1)(d).

(71) 4.31.2.6.2.1 - No Change within 45 Days. Change section title. Added (1)(e).to explain proper closing.

(72) 4.31.2.6.2.2 - Terminating the Audit After 45 Day Period. New section

(73) 4.31.2.6.2.3 - No Change After 45 Days - Relocated part of section 4.31.2.4.2.1.

(74) 4.31.2.6.2.4 - 60-Day Cases. Removed reference to specific TMP 60 day letter.

(75) 4.31.2.6.2.5 - Final Partnership Administrative Adjustment Cases. Removed references to the specific TMP FPAA.

(76) 4.31.2.6.2.5.1 - No Change FPAA. Removed references to the specific TMP No Change FPAA.

(77) 4.31.2.6.2.6 - Defaulted FPAA. Removed reference to area PCS Coordinator.

(78) 4.31.2.6.2.8 - Agreed Cases. Edited paragraph (d), (e) and (f) to allow for the execution of agreements by Local TEFRA Coordinators.

(79) 4.31.2.6.2.10 - Freeze Code 6. New section

(80) 4.31.2.6.2.11 - Closing a Fraud Case. New section.

(81) 4.31.2.6.2.12 - Closing a Case Agreed to at the Partnership Level. New section.

(82) 4.31.2.6.3 - Erroneous Refund. New section.

(83) Exhibit 4.31.2-2 - TEFRA Flow-Through Examination Time Chart. Removed reference to area PCS Coordinator. Updated for electronic processing.

(84) Exhibit 4.31.2-3 - TEFRA Key Case Procedures. Removed reference to area PCS Coordinator.

(85) Exhibit 4.31.2-4 - Partner Signatures for TEFRA Settlement Agreements - Form 870-PT/LT. New section.

(86) Exhibit 4.31.2-5 - Form 2424. New Exhibit

(87) Exhibit 4.31.2-6 - Form 14434, TEFRA Electronic Notice Package Check Sheet. New Exhibit

(88) Exhibit 4.31.2-7 - Formats for TMP Signatures When Signing Extensions. Added a more comprehensive table for signatures.

Effect on Other Documents

IRM 4.31.2, Pass-Through Entity Handbook, TEFRA Examinations - Field Office Procedures, dated October 1, 2010 is superseded.

Audience

Field and Technical Services personnel working TEFRA partnerships and/or their partners.

Effective Date

(06-20-2013)

Signed by Scott Prentky, Director, Campus Reporting Compliance, SB/SE

4.31.2.1  (06-20-2013)
Overview

  1. This section explains the field TEFRA procedures necessary for working a TEFRA key case entity and the related partners. These procedures include how to identify a TEFRA entity, their TMP, and the TEFRA statute, as well as the notices required to be sent to TEFRA partnerships and partners. The duties of the local TEFRA Coordinator are also outlined.

4.31.2.1.1  (06-01-2004)
Identification of TEFRA Key Case Returns

  1. Identification of returns as TEFRA versus nonTEFRA is necessary to have a valid assessment of tax, because the TEFRA partnership rules and the deficiency procedures are mutually exclusive. If the Service applies the wrong procedures, e.g., erroneously proceeds at the partnership level rather than at the partner level, or vice versa, barred deficiencies and/or refunds can result. See IRM 4.31.2.1.7 for an explanation of a reasonable determination of whether TEFRA or nonTEFRA procedures apply.

  2. The examiner must determine, for each taxable year, whether TEFRA procedures apply. Comments on Form 4318, Examination Workpapers Index, are required from the examiner as to whether the return is TEFRA or nonTEFRA, and the reasons supporting this conclusion.

4.31.2.1.2  (06-20-2013)
Identification of TEFRA Partnership

  1. IRC 6231(a)(1) provides that TEFRA rules apply to all partnerships required to file information returns under IRC 6031(a) whose tax years begin on or after 9-3-82, except:

    1. Partnerships meeting the small partnership exception; and

    2. Partnerships electing out of partnership status pursuant to IRC 761(a). (See IRM 4.31.2.2.16.)

  2. The small partnership exception applies to partnerships consisting of 10 or fewer partners, each of whom is an individual (other than a nonresident alien), a C corporation, or an estate of a deceased partner. Exhibit 4.31.2-1., TEFRA Partnership Criteria Flowchart.

  3. A foreign corporation generally will be considered a C corporation for purposes of making a TEFRA/nonTEFRA determination. This includes a partner who files a Form 1120F. However, because the foreign corporation filing an 1120F could file Form 8832, Entity Classification Election, electing to be treated as a Disregarded Entity (DE), the examiner should refer to: http://lmsb.irs.gov/hq/pftg/foreignpship/Resources/Law/CtB/Form8832Filed.asp for information on Form 8832 and the check-the-box election.

    Note:

    The above definition applies to partnership tax years ending after August 5, 1997.

  4. The TEFRA Determination Job Aid found on the TEFRA page can be used in addition to Form 13813. Additional TEFRA procedures can also be found on the TEFRA Web page.

  5. Therefore, if at any time during the tax year there are more than 10 partners or if any of the following entities or persons are partners, then the partnership is not a small partnership and is subject to TEFRA procedures:

    • Another partnership.

    • An LLC which files as a partnership or is treated as a single member LLC disregarded for federal tax purposes.

    • Any type of trust, even a grantor trust.

    • A nominee.

    • A nonresident alien individual.

    • An S corporation.

    Note:

    If the K-1 has llc in the name, further investigation should be done to see if the partner is a DE.

  6. The Masterfile transcript, CC MFTRA and CFOL CC BMFOL"E" has a TEFRA indicator included that was to be utilized in determining if a partnership was covered by the TEFRA procedures. This TEFRA indicator is not accurate and should not be relied on in determining whether or not a partnership is TEFRA.

4.31.2.1.3  (06-20-2013)
Election to be Covered by the TEFRA Procedures - Partnership Tax Years Beginning on or after January 1, 2004.

  1. A partnership eligible to be excluded from the TEFRA proceedings under the small partnership exception rules may elect to be covered by the TEFRA procedures. (See IRC 6231(a)(1)(B)(ii).)

  2. The requirements for making the election to be covered by the TEFRA procedures are explained in Treas. Reg. 301.6231(a)(1)-1(b)(2). A Form 8893, Election of Partnership Level Tax Treatment, is available for taxpayers who wish to make this election. This form standardizes the statement required in the Regulations.

  3. If a partnership makes the election to be covered by the TEFRA procedures, it is binding for the partnership taxable year to which the return relates and all subsequent partnership taxable years unless revoked with IRS consent. It is important to note that when a TEFRA election is revoked, all years the TEFRA election was in effect remain TEFRA.

  4. For years 2004-2007 Form 1065, Schedule B, Question 4 was changed to inquire as to whether the partnership filed a TEFRA election or Form 8893 which is used to make the TEFRA election. For years 2008 and on, Form 1065, Schedule B, Question 5 inquires whether the partnership filed a TEFRA election or Form 8893. If the partnership answers yes to this question, the return is flagged Audit Code 4.

    Note:

    Checking a box is not sufficient for the return to be treated as TEFRA. The agent needs to secure a copy of the election or Form 8893.

  5. A partnership may revoke a previously filed election with IRS consent. Form 8894, Request to Revoke Partnership Level Tax Treatment Election, is to be used by a partnership requesting that its prior TEFRA election be revoked. The instructions on this form require the partnership to file the revocation at the Ogden campus.

4.31.2.1.4  (09-22-2006)
Election to be Covered by the TEFRA Procedures - Partnership Tax Years Beginning Before January 1, 2004.

  1. A partnership eligible to be excluded from the TEFRA proceedings under the small partnership exception rules may elect to be covered by the TEFRA procedures. (See IRC 6231(a)(1)(B).)

  2. If a partnership makes the election to be covered by the TEFRA procedures, it is binding for the partnership taxable year to which the return relates and all subsequent partnership taxable years unless revoked with IRS consent.

  3. The election is filed with the partnership return for the year the election is made.

  4. Currently there is no requirement that the partnership file a copy of the election to be covered by the TEFRA procedures with each subsequent year's partnership tax return. The examiner will inquire if an election was made in any prior year. If the partnership responds it has not made an election, it should be so noted in the examination workpapers.

  5. If the partnership has filed an election to have the TEFRA procedures apply, secure a copy of the election to determine if the election meets the requirements of the regulations. If the election is correct, staple the copy to the back of the front page of the partnership return. If the election is not correct, consult with the local TEFRA coordinator to determine if the election is valid as filed or what further action should be taken.

    Note:

    Provide a copy of the election with the linkage package that will be sent to the campus. If the election is not provided, there may be some confusion as to the partnership's TEFRA status.

  6. The requirements for making the election to have the TEFRA procedures apply are as follows: (See Treas. Reg. 301.6231(a)(1)-1(b)(2).)

    1. The statement making the election should be attached to the partnership return for the first taxable year for which the election is to be effective.

    2. The statement should include the name and the employer's identifying number (EIN) of the partnership.

    3. The statement should say the partnership elects to be covered by IRC Sections 6221 through 6234 for the tax year ending 12/31/XX and all subsequent years. (If the partnership has a year end other than 12/31 (a fiscal year end), then that year end would be used instead of 12/31/XX).

    4. The statement shall be identified as an election under IRC 6231(a)(1)(B)(ii), shall be signed by all persons who were partners of that partnership at any time during the partnership taxable year to which the return relates, and shall be filed at the time (determined with regard to any extension of time for filing) and place prescribed for filing the partnership return.

    5. For any partnership taxable year for which the due date of the return (determined without regard to extensions) is before January 2, 2002, the partnership may file the statement described in (d) on or before the date which is one year before the date specified in IRC 6229(a) for the expiration of the period of limitations with respect to that partnership (determined with regard to extensions of that period under IRC 6229(b)).

4.31.2.1.5  (06-20-2013)
Form 1065, Schedule B TEFRA Checkbox

  1. For tax years 2004 - 2007, Schedule B, question (4) inquired as to the partnerships intent to file a TEFRA election and attach the Form 8893 to the return. For tax years after 2008 and on, this inquiry appears in Schedule B, Question (5).

  2. For tax years before 2004, there were no questions about an election. Schedule B, Question 4 asked if the partnership was subject to TEFRA. The tax matters partner (TMP) may think the partnership can elect to have the TEFRA procedures apply to the partnership by checking "yes" in response to the question on Schedule B and/or designating a TMP. However, this is not a valid election meeting the requirements of the regulations.

  3. The examiner needs to check to see if the partnership made an election, or if the partnership is subject to TEFRA by statute.

  4. Chief Counsel's position is that checking "yes" in response to question (4) on the Form 1065, Schedule B, for partnership tax years 2004 - 2007, and Question (5) on the Form 1065, Schedule B for partnership tax years 2008 and on, and/or designating a TMP in the space provided on the Form 1065, do not constitute an election to have the TEFRA procedures apply. The directions for completing the partnership return also state answering "yes" to this question does not constitute an election into TEFRA.

    Note:

    However, if the partnership appears to qualify for the small partnership exception, this may be an indication the partnership has previously elected to have the TEFRA procedures apply. The examiner should determine if the partnership filed an election to have the TEFRA procedures apply. If so, then follow the procedural instructions in IRM 4.31.2.1.3 above.

4.31.2.1.6  (10-01-2010)
Determining and Identifying the Number of Partners

  1. If at any time during the taxable year the number of partners exceeds the small partnership exception, the partnership will be subject to the TEFRA provisions.

  2. A partnership may have more than 10 partners during the year, and still meet the small partnership exception, because the partnership never had more than 10 partners at any point in time. Sales of partnership interests will cause more than 10 Schedules K-1 to be filed, but there may never be more than 10 partners at any point in time for the small partnership exception to apply.

  3. The small partnership exception does not apply to a partnership for the taxable year if any partner in the partnership during the taxable year is a pass-through partner. (Treas. Reg. 301.6231(a)(1)-1(a)(2).) A partnership consisting of three partners, two individuals and a partnership or S corporation, will not meet the small partnership exception.

    1. A grantor trust is a pass-through partner even though the trust is not required to file a return.

    2. A limited liability company (LLC) may be a pass-through entity. See IRM 4.31.2.2.18 for information on determining if the LLC is a pass-through entity.

    3. LLCs that are disregarded entities may be treated as pass-through entities when applying the small partnership exception. See Rev. Rul. 2004-88. Consult with the local TEFRA coordinator on any questions.

  4. IRC 6231(a)(1)(B)(i) provides that for the purposes of the small partnership exception "a husband and wife (and their estates) shall be treated as 1 partner." This provision is unqualified and thus should apply to a husband and wife regardless of the manner in which they hold their interests or file their returns. A grantor trust is counted as a partner in its own right.

  5. In general, an estate must file a return if the estate is not closed within one year. An estate may take several years to finalize and close. The estate will file a Form 1041, U.S. Income Tax Return for Estates and Trusts. IDRS research should be utilized to determine how long the estate has filed returns. To apply the small partnership exception, the examiner will have to determine if the estate is simply filing the returns while the estate is being closed out, or if a trust was established by the estate.

    Note:

    It is recommended that an INOLE be requested to determine the nature of the entity filing the Form 1041. For example, XYZ Trust or Estate of Mr. X.

  6. A partner must have a proprietary interest in profits or capital. Therefore, if a Schedule K-1 does not indicate an ownership interest, does not show a distribution of any partnership items, and does not show a capital account balance, the person in question may not be a partner for the taxable year involved. Consult Area Counsel about Federal law to determine if the partner is really a partner.

4.31.2.1.6.1  (10-01-2010)
Master Limited Partnerships (MLPs)

  1. Master Limited Partnerships (MLPs) are large, widely-held limited partnerships whose interests are not necessarily publicly traded.

  2. In general, the TEFRA procedures apply to MLPs. The TEFRA audit procedures do not apply to an MLP that is treated as a corporation, under the publicly traded partnership rules. (See IRC 7704.)

  3. MLP's pose a major compliance problem for the Service since the interests are often held by several thousand partners who are considered partners for purposes of the TEFRA procedures even though they own a very small interest. The Service has encountered difficulties in determining and assessing tax liabilities and collecting deficiencies from partners in a cost effective manner since the Service must control individual returns, make a computational adjustment, and issue a notice and demand for payment to each partner.

    Note:

    If planning on auditing an MLP, contact the TEFRA coordinator to discuss an audit strategy. Special provisions can be arranged to limit the number of partners that are linked. These arrangements need to be coordinated with the Headquarters Analyst and the key case campus.

  4. With very large MLPs, the campus will only link the notice partners unless advised otherwise by the field. This will prevent the securing of returns on which any partnership adjustment will have little effect.

  5. Amendments to the code have been made allowing MLPs to elect to be treated as "Electing Large Partnerships" , which will enable the Service to assess final tax determinations against partners of MLPs in an efficient manner.

4.31.2.1.6.2  (10-01-2010)
Electing Large Partnerships (ELPs)

  1. In general,

    1. An electing large partnership is a unique class of partnership established by the Taxpayer Relief Act of 1997 (TRA '97) for federal income tax reporting and auditing purposes only.

    2. TRA '97 added IRC Sections 771 through 777, 6241 through 6242, 6245 through 6248, 6251 through 6252, and 6255 on Electing Large Partnerships.

    3. Designation as an electing large partnership does not have an impact beyond the scope of federal taxation.

    4. Currently, the only guidance regarding electing large partnerships is the statutory language and the committee reports.

    5. The electing large partnership rules apply to tier returns as well as the key cases under examinations.

  2. Definition of an electing large partnership.

    1. The definition of an electing large partnership is in IRC 775.

    2. To qualify to make an election to be treated as an electing large partnership, the partnership must have had a minimum of 100 persons who were partners in the preceding partnership taxable year.

    3. A partnership will cease to be an electing large partnership for any partnership taxable year if in such taxable year fewer than 100 persons were partners in the partnership.

    4. Some partners are not counted for certain service partnerships. Individuals performing substantial services (or who formerly performed substantial services) for the partnership are not counted for purposes of determining the number of partners. (See IRC 775(b))

  3. Election required to be treated as an electing large partnership.

    1. The partnership must elect to be treated as an electing large partnership. Based on the instructions for filing a Form 1065, a partnership elects to be an electing large partnership by filing Form 1065-B, U.S. Return of Income for Electing Large Partnerships.

    2. If no election is made, but the Form 1065 treats the entity as an electing large partnership, the treatment on the partnership return is binding on the partnership and its partners, but not the Service.

    3. Once the election is made, it can only be revoked with IRS consent.

  4. Certain partnerships are excluded from electing to be covered by the electing large partnership rules. They are:

    1. Any partnership where the principal activity is the buying and selling of commodities (not described in IRC 1221(a)(1)), or options, futures, or forwards with respect to such commodities (commodity pools.)

    2. Partnerships in which substantially all of the partners provide (or formerly provided) substantial services to the partnership.

  5. Simplified flow-through to the partners.

    1. Generally the flow-through of partnership items will be simplified, with the partnership reporting net figures to the partners in a simplified format.

    2. Each partner will take into account separately the partner's distributive share of certain enumerated items. (See IRC 772(a))

    3. Taxable income of the partnership generally is computed in the same way.

    4. Limitations on deductions, credits, or losses generally are applied at the partnership level.

    5. The characterization of partnership items is determined as if realized directly by the partner under rules similar to those in IRC 702(b).

    6. Partners will receive a simplified Schedule K-1 (similar to the Forms W-2 currently received by wage earners.)

  6. Treatment of partnership items and adjustments.

    1. The treatment of items at the partnership level is controlling, both at the time of the filing of the return as well as when adjustments are made.

    2. Unlike the general TEFRA rules, with an electing large partnership, there is no computational adjustment of partnership items made to the returns of the partners.

    3. Adjustments flow through to the partners in the year the adjustments are made.

    4. Electing large partnerships are governed by the audit procedures contained in IRC 6240 through 6255.

    5. The return of a partner in an electing large partnership must be consistent with the return of the partnership, without exception (and regardless of disclosure). If a partner fails to file a consistent return, then:
      • Any underpayment resulting from an inconsistency between the partnership's return and partner's return can be assessed as a math error adjustment.
      • The disregard of the consistent filing requirement may subject the partner to penalties.

    6. Adjustments to any partnership items are given effect in the year in which the adjustments are made, not the tax year to which the adjustments relate. As a result:
      • Adjustments flow through to the partners in the year that the adjustment takes place.
      • Adjustments flow through to the partners who own interests in the partnership in the year in which the adjustments are made.
      • Any intervening, offsetting adjustment is taken into account when determining the final adjustment that is flowed through to the partner.

      Example:

      If a partnership claimed an expense of $1,000 in year 1, and it was determined in year 4 that the item should have been amortized ratably over 10 years, the adjustment in year 4 would be $700 (exclusive of any interest or penalties.) The adjustment would consist of the $1,000 disallowed deduction in year 1 plus an offset of $300 of additional amortization deductions for years one through three. The partners who own interests in the partnership in year 4 would be required to include their share of a net adjustment of $700 into income in year 4. The partnership would then be permitted to amortize the remaining $700 of expenses in years 4 through 10.

  7. Computing imputed underpayment.

    1. If adjustments are made to any partnership items, an imputed underpayment is calculated by taking into account all partnership adjustments and multiplying the net increase in taxable income by the highest marginal tax rate in effect (corporate or individual).

    2. Any adjustments to tax credits are also taken into account when computing the imputed underpayment.

  8. Partnership may be liable for imputed underpayment.

    1. A partnership may elect to pay the imputed underpayment rather than flow adjustments through to the partners.

    2. If a partnership does not elect to pay the imputed underpayment and fails to flow adjustments through to the partners, the partnership will be liable for the imputed underpayment.

    3. If a partnership adjustment results in a reduction of a tax credit and the credit in the year of the adjustment is not sufficient to offset the adjustment, the partnership must pay an imputed underpayment relating to the credit.

  9. Partnership liable for interest and penalties.

    1. If interest, penalties, or any other addition to tax applies, the partnership is liable for such amount, computed as if the partnership were a taxable individual.

    2. Both the statutory language and the Conference Report expressly state that any payment relating to federal income taxes, interest, or penalties that is made by the partnership is non-deductible.

  10. Partnership level adjustments.

    1. Generally, the limitations period for making adjustments to electing large partnerships (and for petitioning for a re-determination of such adjustments) are very similar to the TEFRA rules.

    2. The partner with authority controls the procedures and there is no requirement for keeping other partners informed of the partnership proceedings.

    3. The Secretary may issue a notice of partnership adjustment to a partnership by mailing such notice to the last known address of the partnership.

    4. Adjustments must be made to partnership items within three years of the later of the date of filing of the partnership return or the due date for filing the partnership return. The mailing of a notice of partnership adjustment suspends the running of this period, and extends the period for one additional year after proceedings are complete.

    5. Within 90 days of the issuance of a notice of partnership adjustment, the partnership may file a petition for re-adjustment with the Tax Court, the United States District Court for the district in which the partnership's principal place of business is located, or the United States Court of Federal Claims. (Before filing a petition for re-adjustment with a district court or the Court of Federal Claims, the amount asserted in the notice of partnership adjustment must be deposited with the Secretary.)

  11. If the partnership ceases to exist before an adjustment is to take effect, that adjustment will be passed through to the underlying partners.

  12. Requests for administrative adjustment.

    1. A partnership may request administrative adjustment of partnership items within three years of the later of the date of filing of the partnership return or the due date for filing the partnership return. The request for administrative adjustment also must be made prior to the mailing of a notice of partnership adjustment.

    2. If an administrative adjustment is not allowed, the partnership may petition the Tax Court, the United States District Court for the district in which the partnership's principle place of business is located, or the United States Court of Federal Claims for adjustment. Such petition must be filed more than six months and less than two years after the request for administrative adjustment.

  13. The partner with authority.

    1. The partner with authority is given a broader ability to bind the partnership and partners for an electing large partnership.

    2. The partner with authority is the single point of contact for the Service. For example, generally, only the partner with authority must be notified of partnership proceedings and there is no obligation for the partner with authority to keep 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.

    5. The partnership and all of the partners are bound by any actions that are taken by the partner with authority that fall within the scope of the electing large partnership regulations.

4.31.2.1.6.3  (03-04-2008)
Determining the Number of Indirect Partners

  1. The agent should try to determine the number of indirect partners involved in their partnership. The partnership being examined may only have three partners with those being partnerships. Those partnerships may have other partnerships as partners, which can expand the ultimate number of partners greatly. A large number of indirect partners will dilute any partnership adjustment.

  2. The agent should use yK1 data, if available, to determine the overall size of the partnership before making the determination of whether to proceed with the examination. Please consult with your Technical Advisor or local TEFRA Coordinator with questions regarding yK1.

4.31.2.1.7  (10-01-2010)
Making a Reasonable Determination of Whether the Partnership is Subject to the TEFRA Procedures

  1. IRC 6231(g) was added by TRA 1997.

  2. If, on the basis of a partnership return for a taxable year, the Service reasonably determines that the TEFRA procedures apply to the partnership for the tax year under examination but the determination is erroneous, then the TEFRA procedures will be extended to the partnership (and its items) and to partners of the partnership for the taxable year under examination. (See IRC 6231(g)(1).)

  3. If, on the basis of a partnership return for a taxable year, the Service reasonably determines that the TEFRA procedures do not apply to the partnership for the tax year under examination but the determination is erroneous, then the TEFRA procedures shall not apply to the partnership (and its items) for the taxable year under examination or to the partners of the partnership. (See IRC 6231(g)(2).)

  4. IRC 6231(g) should generally be relied upon when statute limitations prevent changing the audit procedures (changing from TEFRA procedures to nonTEFRA procedures, or vice versa). If the statute allows, then the examiner should switch audit procedures based upon the new determination.

4.31.2.1.8  (06-20-2013)
Key Cases Controlled as Both TEFRA and NonTEFRA

  1. These key cases are controlled as both TEFRA and nonTEFRA. This is done when it is unclear whether a key case is TEFRA or nonTEFRA to protect the government's interest.

  2. When a key case is controlled as both TEFRA and nonTEFRA, both sets of procedures must be followed. See IRM 4.31.2.2.7.2.1for TEFRA linkage procedures and IRM 4.31.5.9.3 for NonTEFRA linkage procedures. This ensures that both the TEFRA and nonTEFRA functions in the campus are aware of the dual controls on these key cases.

  3. For dual status cases, both the TEFRA and nonTEFRA statutes need to be protected. The nonTEFRA statute is controlled at the investor level, and should be extended using Form 872, Consent to Extend the Time to Assess Tax, if needed.

4.31.2.2  (06-01-2004)
Field Agent Key Case Procedures

  1. The following subsections explain the key case procedures as they relate to the field.

4.31.2.2.1  (06-20-2013)
Initiating Timely Examination of Key Case Returns

  1. Before initiating a TEFRA key case examination, the time frames and procedures outlined in Exhibit 4.31.2-2, TEFRA Flow-Through Examination Time Chart, and Exhibit 4.31.2-3, TEFRA Key Case Procedures, must be carefully reviewed. Unless sufficient time remains on the TEFRA key case statute of limitations, i.e., the IRC 6229(a) statute, the examination will not be started. At least one year is considered sufficient time.

  2. If there are less than 12 months remaining on the TEFRA key case statute of limitations, approval is required from the Area Director (SB/SE) or the Director of Field Operations (LB&I) to start an examination of the key case. A copy of the short statute memorandum to be used to secure approval is on the TEFRA web site at: http://tefra.web.irs.gov/m1/1a_home.asp

    Note:

    The issuance of a Notice of Beginning of Administrative Procedures (NBAP) to the TMP of the partnership is the only way to initiate a TEFRA examination. The mailing of an appointment letter does not start a TEFRA examination. There must be at least 12 months remaining on the statute of limitations for the key case when the examination is started. If the date on the NBAP to the TMP is less than 12 months, a memorandum from the appropriate Division Executive (i.e., either the SBSE Area Director or the LB&I Director of Field Operations) authorizing the beginning of the examination with less than 12 months left on the statute of the key case is required.

    1. The memorandum of approval must identify the key case entity and contain the original signature (facsimile stamp is not acceptable) of the Area Director (SB/SE) or Director of Field Operations (LB&I). The circumstances surrounding the late start of the examination will be stated. The explanation should state why it is beneficial to the government to initiate an examination (For example, compliance purposes or large, unusual or questionable deductions).

    2. The memorandum should be written to the Area Director (SB/SE) or Director of Field Operations (LB&I) from the Territory Manager.

    3. Additional approval is not required to start the examination of a second-tier flow-through entity where the examination is limited to making adjustments stemming from the examination of the first-tier flow-through entity; however, approval would be required for the second-tier flow-through entity where another issue (i.e., a partnership item and/or affected item that requires a partnership level determination) is examined.

  3. A TEFRA examination can be initiated with less than twelve (12) months remaining, if the following conditions are met:

    1. If Area Director (SB/SE) or Director of Field Operations (LB&I) approval is obtained with less than 12 months remaining on the TEFRA key case statute of limitations, the key case examiner is required to maintain close coordination with the Campus TEFRA Function to ensure all statutory requirements are met.

    2. If a case is opened and there is less than 7 months remaining on the TEFRA key case statute of limitations before a valid linkage package is sent to the campus, the case must be established and controlled in the field. The key case examiner is responsible for:
      • Contacting and Coordinating with their Local TEFRA Coordinator and the CTF
      • Coordination with the review function to ensure that there is timely issuance of all notices
      • Manual linkage on PCS using Form 6658, Notice of Special Investor Action
      • Protection of all statutes for the key case and the investors
      • Match Schedules K-1 to all direct and indirect partner returns.

  4. If the TEFRA procedures or the TEFRA linkage is not timely initiated (before there is less than seven months on the statute), as required above, then the examiner assumes all of the responsibilities of the CTF including administrative functions, issuances of all notices, the recognition of and the actions required within the proper time frames and the proper resolution of all of the related investor cases. In this event, the local TEFRA coordinator should be contacted immediately to determine appropriate action.

  5. Once all the returns are secured by the field, the statute is extended, and all administrative work is current, the agent should consult with the campus regarding the subsequent transfer of the cases to campus control.

  6. PCS linkage is mandatory for all TEFRA partnership examinations open in exam group after 90 days. The examiner must submit PCS controls for the pass through entity. In order to deviate from the mandatory linkage requirement, the agent's Director of Field Operations or Area Director much get agreement from the Technical Services Territory Manager.

4.31.2.2.2  (06-20-2013)
Risk Analysis

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4.31.2.2.3  (06-20-2013)
Mandatory Completion of Check Sheets

  1. These check sheets were designed to assist the examiner in completing the required TEFRA procedures. Manager involvement is required and their signature is required on all the mandatory forms.

  2. It is critical for the Service to follow TEFRA rules and procedures during examinations, since procedural errors can affect the validity of assessments, infringe on taxpayer rights, and result in improper disclosures of tax information.

  3. The following check sheets will be used when examining a partnership or a limited liability company filing as a partnership subject to the TEFRA procedures. The check sheets will serve as documentation to confirm the actions taken or decisions made in following the TEFRA procedures.

    • Partnership Procedures Check Sheet, Form 13813: The completion of the Partnership Procedures Check Sheet is mandatory for every partnership examined. The completed check sheet will be included in the audit file to document that the partnership is or is not subject to the TEFRA procedures. SB/SE examiners will file this check sheet and other TEFRA work papers under a separate line item in Section 600 on the Form 4318, Examination Workpapers Index. Industry Case examiners will file the TEFRA check sheets and work papers under SAIN number 724 on Form 4764, LB&I Examination Plan. The examiner’s manager is to review the Partnership Procedures Check Sheet and work papers to ensure that all appropriate TEFRA procedures have been completed. The manager’s signature on the Partnership Procedures Check Sheet is mandatory and indicates that the TEFRA procedures have been reviewed and have been correctly completed.

    • Form 14090 , TEFRA Electronic Linkage Check Sheet (LB&I) (for an LB&I key case), or Form 14091 , TEFRA Electronic Linkage Check Sheet (SBSE) (for an SBSE key case) provides guidance to the examiner in completing the information required for a complete TEFRA Linkage Package. This check sheet must be completed with attachments. The manager’s signature on the TEFRA Electronic Linkage Check Sheet is mandatory and indicates that the linkage package has been reviewed, is accurate and complete.

    • Tax Matters Partner (TMP) Qualification Check Sheet, Form 13828: The completion of the Tax Matters Partner (TMP) Qualification Check Sheet is mandatory where the partnership has been identified as TEFRA. The position of TMP is created by statute for TEFRA partnerships; therefore, the check sheet is not applicable and should not be used for nonTEFRA entities or tax periods. The check sheet must be completed to determine whether the TMP is legally qualified to be the TMP or whether a new TMP must be designated. The manager’s signature on the Tax Matters Partner (TMP) Qualification Check Sheet is mandatory and indicates that the TEFRA procedures have been reviewed and have been correctly completed.

    • Tax Matters Partner (TMP) Designation Check Sheet, Form 13827: This check sheet must only be completed when a new TMP is designated during the examination. Certain procedures are required when a TMP is designated and must be documented in the audit file. If the TMP is designated by the Service, the manager must complete Part III and sign in block 1.

4.31.2.2.3.1  (06-20-2013)
ERCS (Examination Returns Control Indicator) TEFRA Indicator

  1. There is a TEFRA indicator on ERCS that must be entered for all Forms 1065. The return cannot be updated beyond status 12 until the TEFRA indicator is entered. Technical Services monitors the Examination Returns Control System (ERCS) and reviews the TEFRA Indicator field during their mandatory IVLs. It is reported out on the Related Returns Report issued to the field groups each month and points out Potential Errors (PE).

  2. The TEFRA indicator should be entered on the system as soon as the TEFRA determination is made, but no later than 60 days of the case updating to status 12.

  3. The Revenue Agent should request that the manager and/or secretary set the TEFRA indicator through the "correct and display" screen on ERCS. The TEFRA indicator can be set or changed on this screen. See IRM 4.7 for further information.

  4. The TEFRA indicator is required on all partnership records with a Master File Transaction (MFT) Code of 06 or a Non Master File Transaction (NMFT) Code of 35. The Field Values are as follows:

    1. Y (Yes) = Subject to TEFRA procedures;

    2. N (No) = Not subject to TEFRA procedures; and

    3. S (Survey) = Surveyed without determining if subject to TEFRA procedures.

      Note:

      S can be used on status 12 returns because the revenue agent may charge time and survey after assignment without making a TEFRA determination.

  5. Timely linkage of a TEFRA partnership is important in that it maximizes the time the campus has to secure and perfect the partner returns. This becomes even more important when the partnership has tier partners. The revenue agent has 45 days from the beginning of the audit to withdraw the NBAP and close the case without further action.

4.31.2.2.3.2  (06-20-2013)
Mandatory Specialist Referral

  1. A mandatory referral is required if the key case partnership involves the following:

    1. Publicly Traded Partnership (PTP), a Master Limited Partnership (MLP),

    2. an Electing Large Partnership (ELP),

    3. a highly tiered partnership,

    4. CIC related partnership,

    5. Partnership or tier requesting to settle and pay tax at the entity level

    6. Examiner wants to examine the partnership using an investor IRC 6501 statute,

    7. Tax Matters Partner (TMP) is not a United States Person (includes natural persons and foreign entities),

    8. Administrative Adjustment Request (AAR), or

    9. Where the examiner has received approval to deviate from mandatory linkage.

  2. Referrals are made using the Specialist Referral System (SRS). The SRS link is https://srs.web.irs.gov/Default.asp.

  3. The requirement to refer a case to a specialist can be found on the TEFRA web site at http://tefra.web.irs.gov/m1/alerts/TEFRA%20MANDATORY%20REFERRAL%20MEMO%2010-2010.pdf.

4.31.2.2.4  (06-20-2013)
Identification of the Tax Matters Partner (TMP)

  1. Prior to issuing the Notice of Beginning of Administrative Proceeding (NBAP), the examining agent must complete the Form 13828 , Tax Matters Partner (TMP) Qualification Check Sheet. The completion of the check sheet will ensure the person identified as TMP meets the qualifications prior to securing any statute consents or Powers of Attorney. If the person does not meet the qualifications, Form 13827, Tax Matters Partner (TMP) Designation Check Sheet, can be completed to designate a new TMP.

4.31.2.2.5  (06-20-2013)
Issuing the Notice of the Beginning of the Administrative Proceeding (NBAP) Letter to the Tax Matters Partner

  1. The examiner will initiate a TEFRA examination on a partnership return by issuing a Notice of Beginning of Administrative Proceeding (NBAP) (Letter 1787) to the Tax Matters Partner (TMP). A separate NBAP should be sent for each year under examination. (See Form 13828, TMP Qualification Check Sheet, or the interactive tool on the TEFRA web site.)

  2. The NBAP is required by statute to be mailed. (IRC 6223)

  3. There must be one year remaining on the TEFRA key case statute of limitations before starting the examination.

  4. Examiners should issue NBAP letters as follows:

    1. The generic NBAP will be sent via certified mail. Generic NBAPs to foreign partnership addresses must be sent using registered mail.

    2. The generic NBAP letter will be addressed "TAX MATTERS PARTNER" c/o key case entity name and address listed on the Form 1065, or a more current address if known. If using a more current address, ensure our systems reflect that address. Document the case file that the letter is being sent in accordance with Treas. Reg. 301.6223(a)-1(b). Generic means the name of the TMP is not specified. This protects the government in the event the designated TMP is subsequently determined to not qualify to be the TMP. The generic NBAP is addressed:
      • "The Tax Matters Partner"
      • C/O Partnership Name
      • Partnership Street Address (or PO Box) per Form 1065, or a more current address
      • Partnership City, State, Zip per Form 1065, or a more current address

      Note:

      The TIN of the TMP is not entered on the generic TMP NBAPs.

      Note:

      It is important that the IRS return address information is added to the upper left side of the NBAP.

    3. In general, unless a new address is furnished as specified by IRC 6223(c) and Treas. Reg. 301.6223(c)-1, the NBAP should be mailed to the address as provided on the partnership return. The Regulations are specific as to what qualifies as notification under IRC 6223(c). The 120 day statutory notification period begins with the issuance of the NBAP to the last identified notice partner.

    4. While the information on the Form 1065 is the legal information base for addresses, the Service is not precluded from using other information in its possession in administering TEFRA procedures. The Service is not obligated to search its records but if it is known at the time of the issuance of the NBAP that the partnership address on the return is no longer valid, the generic NBAP may be sent to that address by certified mail. The agent needs to ensure that if using an address other then the one on the return, that the address is updated on our systems. The case file should be documented to show that the NBAP was issued in accordance with Treas. Reg. 301.6223(a)-1(b).

    5. Further investigation for the proper address should be made whenever the examiner determines there is a reasonable basis to question any representation on the return or whenever inconsistencies become apparent.

    6. If the NBAP is mailed to an address other than the address shown on the return and it is returned as undeliverable, an NBAP should be mailed by certified mail to the address reflected on the partnership return, which is the address required under IRC 6223(c).

4.31.2.2.5.1  (06-20-2013)
45 Day Rule

  1. Per Treas. Reg. 301.6223(a)-2(a), the NBAP may be withdrawn and the TEFRA examination stopped. To withdraw the NBAP, forward the request to the Local TEFRA Coordinator. The Local TEFRA Coordinator will review the case, and if appropriate, they will mail a letter to the TMP stating that the NBAP is being withdrawn. If the NBAP is withdrawn within the 45 day period, neither the Service nor the TMP is required to give the other partners notice. The 45 day period begins with the mailing of the generic NBAP to the TMP. The 45 day period includes all days including weekends and holidays.

  2. A linkage package should not be submitted to the campus before the 45 day period has expired. The NBAP cannot be withdrawn if a linkage package was submitted and the partners have already received notice. Premature linkage can also result in unnecessary work at the campus. Contact your local TEFRA coordinator if you have questions about the linkage process or the 45 day rule.

  3. The NBAP is required by statute to be mailed. (IRC 6223) This poses an administrative problem when trying to maximize the 45 day window.

  4. It is best to initially send a standard contact letter along with an IDR prior to the initial appointment, and send the generic TMP NBAP via certified mail to the TMP on the day of the appointment. The generic NBAP must be mailed before the start of the examination. An examination begins when the examiner begins reviewing the books and records. This maximizes the use of the 45 day period.

4.31.2.2.6  (06-20-2013)
Power of Attorney (POA) Appointed by the Tax Matters Partner

  1. A TMP may appoint a power of attorney (POA) to represent the partnership before the Service and to perform all acts for the partnership except for the execution of "legally significant documents" . The term "legally significant documents" includes, but is not limited to:

    1. A settlement agreement entered into pursuant to IRC 6224(c)(3) when the TMP is binding certain other partners (e.g., non-notice partners), including a formal closing agreement pursuant to IRC 7121; and

    2. An extension of the limitation period for assessment with respect to partnership items. The appointment of a POA may not meet the requirements of Treas. Reg. 301.6229(b)-1 for purposes of the POA being a person authorized in writing to sign a statute extension.

  2. Other situations in which it is necessary to deal directly with the duly designated TMP rather than the POA include, but are not limited to, mailing of required notices, such as NBAPs or FPAAs. However, a copy of the notice will also be mailed to the POA, but it should not be sent using certified mail.

  3. Form 2848, Power of Attorney and Declaration of Representative, should be completed as follows:

    1. The TMP should execute the POA in his or her capacity as TMP;

    2. The name and address of the entity should be clearly set forth;

    3. Under section 3, on one line, under the heading "Description of Matter" , the TMP should insert "TEFRA partnership proceedings" ; under the heading "Tax Form Number" , enter "Form 1065" , and under "Year(s) or Period(s)" enter the covered tax year(s).

      Note:

      Each tax period should be reflected on the POA form. It is important to remember that the TMP is a position designated separately for each tax period; therefore, the TMP for one tax period may not be the TMP for the next. If you are securing a Form 2848 for more than one tax period, you must ensure that the TMP has remained the same.

    4. On a second line under Description of Matter, if the TMP is authorizing the representative to bind the TMP personally, that is not through the TEFRA proceeding, the TMP should insert Income, including TEFRA Partnership Items. Under Tax Form Number, the TMP should insert the form number of the TMP's return and under Year(s) or Period(s) the TMP should enter the covered tax year(s) of the TMP's return.

      Note:

      If the Form 2848 is not completed as above, it will be rejected by the CAF Unit in the campus.

  4. The POA for a TEFRA partnership becomes null and void upon the death of the duly designated TMP. A new TMP must be designated and a new POA executed.

4.31.2.2.7  (06-01-2004)
Conducting and Completing the Key Case Examination

  1. The following subsections cover key case examination procedures.

4.31.2.2.7.1  (10-01-2010)
No Change Within 45 Days

  1. The examiner will have 45 calendar days from the date the NBAP is issued to the TMP to determine if the case will be a No-Change.

  2. Procedures for key cases No-Changed within 45 days:

    1. If the key case is No-Changed within 45 days from the date the NBAP is issued to the TMP, no NBAPs will be issued to the partners.

    2. If the key case is No-Changed within 45 days, the NBAP issued to the TMP is withdrawn when the TEFRA entity No-Change Letter 1864 is issued by the Local TEFRA Coordinator within the 45 day period. The NBAP is treated as if it had never been mailed; however, any subsequent examination would be subject to re-opening procedures.

    3. Complete a Form 3198, Special Handling Notice for Examination Case Processing, by writing "TEFRA - No Change within 45 days, Issue Letter 1864" . Attach the Form 3198 to the front of the key case file.

    4. Use Disposal Code 2 on Form 3198 and ERCS.

      Note:

      Disposal Code 01 does not apply to TEFRA.

    Note:

    The letter must be issued within the 45-Day period or a short no change case closure must be initiated. That means writing a no change Revenue Agents Report (RAR).

4.31.2.2.7.2  (06-20-2013)
Linking the Key Case on the PCS

  1. If the key case examination is completed and is a No-Change after 45 days, contact the Local TEFRA Coordinator to determine if the key case should be established on the PCS.

  2. If the key case examination is still in process 60 days after case goes into status 12, the examiner will initiate linking the key case on the PCS. The case will be linked at this time whether or not the examiner has determined if there will be adjustments proposed.

  3. There are two options to establish the key case on the PCS that is still in process after the 45 day period.

4.31.2.2.7.2.1  (06-20-2013)
TEFRA E-Linkage

  1. To initiate an e-linkage, the agent must complete Form 14090, TEFRA Electronic Linkage Check Sheet (LB&I), or Form 14091, TEFRA Electronic Linkage Check Sheet (SBSE) and submit the linkage package to the CTF within 60 days of the case updating to status 12, or as soon as adjustments are known, if earlier. If no changed within 45 days, then a linkage package is not required.

    Note:

    If the linkage package is being submitted in less than 45 days from the date the TMP NBAPs were issued, have audit issues been identified? If no, please consider delaying issuance of the linkage package until the 45 day period has expired, or explain why linkage is needed before any issues are identified.

  2. A separate package must be completed for each year.

  3. If the partnership is being linked for withholding issues only. Check the appropriate box on the check sheet so the campus will only link the direct partners for notice purposes.

  4. There needs to be at least 7 months on the partnership statute when submitting the electronic linkage package.

  5. If there are not 7 months remaining, see IRM 4.31.2.2.1 for the responsibilities the field assumes.

  6. For LB&I key cases, the agent must also include the LB&I Imaging Network (LIN) link.

  7. If the return is not imaged, the return can be scanned or faxed.

  8. If faxed, the check sheet and attachments should be sent via secure E-mail at the same time. Attachments include:

    1. Electronic version of the generic NBAP.

    2. A spreadsheet with a reconciliation of the Schedules K-1. All attempts should be made to secure any missing Schedules K-1.

    3. The agent must answer the question on the check sheet regarding foreign investors and trusts.

    4. A copy of Form 872-P, Consent to Extend the Time to Assess Tax Attributable to Partnership Items, or other authority used to extend the partnership return (may be scanned or faxed)

      Note:

      DFO/Area Director approval is still required to open a return with less than 12 months on the statute, but does not need to be included in the package. The approval memo must be included in the case file. A signed copy of the memo must be forwarded to the Technical Service Program Manager.

  9. The copying of tax returns and Schedules K-1 are no longer required at the field level when the return is imaged or scanned. The Taxpayer Relief Act of 1997 requires partnerships with more than 100 partners to file their Forms 1065, Schedules K-1, and related schedules electronically.

    Note:

    A return is Modified E-File (MEF) or Legacy E-File if there are more than 500 partners. The agent needs to provide an alert to the campus in the secure E-mail that the return must be accessed using the Employee User Portal (EUP) or a TRPRT print.

  10. Schedules K-1 filed electronically can be accessed via the EUP or via a TRPRT print. LB&I does not image Schedules K-1 on the LIN if the partnership has more than 500 partners. In that case, LB&I must use EUP or TRPRT.

  11. An analysis of the entire partnership structure using yK1, if available, should be completed before submitting the linkage package. Partnership structures with many layers and thousands of partners dilute potential adjustments to the point it results in de minimis tax to the taxable partners.

  12. A copy of the electronic check sheet must be included in the audit file.

  13. The group manager must review the package and electronically sign the Form 14090 or 14091 before submission to the CTF. Once signed, the agent can forward the package via secured E-mail to the CTF. The E-mail address is provided on the appropriate form.

  14. The local PCS coordinator is no longer used. The package is sent directly to the CTF via secure email. Each email should contain data specific to one tax year. Multiple years should not be submitted in one email. The campus may reject packages that contain multiple years or are incomplete.

  15. If the return is too big to email or fax, the required documentation can be upload on a shared drive. Coordinate with the Campus TEFRA Coordinator. All information should be sent electronically except for that which must be mailed.

  16. Once the key case has been established on the PCS by the campus, the examiner will receive Form 886-Z, TEFRA Partners' Shares of Income, and a copy of the certified mailing list.

    1. The Form 886-Z should be reviewed to determine that all notice investors are listed and the percentages shown are correct. The Campus TEFRA Function will input the Schedule K-1 percentage for profits or loss. If percentages are not available on the Schedule K-1, then they will be left blank.

    2. If an investor is not listed on Form 886-Z, the examiner should contact the. If a Form 886-Z is not received within 4 weeks, the ampus .

    3. After review and following up on any problems, associate the Form 886-Z with the key case file.

    4. Form 886-Z may serve as secondary evidence of mailing the NBAP to each investor as required by law.

    5. The certified mail listing with the date the NBAPs were mailed to the identified notice partners serves as the starting date for the running of the 120 day period before an FPAA can be sent to a TEFRA entity.

      Note:

      The investors listed on the Form 886-Z or certified mailing list may not match the number of investors linked on PCS. There are a variety of things that can keep an investor from being linked on PCS initially. The Form 886-Z and the certified mailing list are the examiner's proof that the campus has issued an NBAP and will get the investors linked as soon as possible.

4.31.2.2.7.2.2  (06-20-2013)
Transferring Work to the Campus Using a Share Drive

  1. Large files cannot be emailed. As a result, a shared drive was created to allow these large files to be transferred electronically.

  2. Each file should contain data specific to a given year. Tax years should not be combined within a file. It takes the campus too much time to rebuild a proper package. The campus may reject packages that are not complete or submitted correctly.

  3. In order to transfer files via the shared drive, a network pathway must be established.

  4. To map to the drive:

    1. Right click the My Network Places icon on the desktop

    2. Left click Map Network Drive

    3. A window will open with two fill in boxes. One for Drive and one for Folder.

    4. The Drive box displays the first available drive letter for the connection. You can click on the arrow and scroll down until you see the drive letter that you want to use or you can use the drive letter listed.

    5. In the Folder box, cut in paste the following link:
      ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    6. Also, make sure to check the box Reconnect at Login. This will ensure your computer reconnects to the drive each time you log on.

  5. Check to see if the mapping was successful. Right click on the Start button on the lower left hand corner of your computer. Left click on Explore. The newly mapped drive will appear in the list. You should see the specified drive, followed by EX TEFRA Elect Notice followed by the drive name.

  6. Left click on that drive and there will be two folders. One folder entitled LB&I OSC Notices and the other entitled SBSE BSC Notices.

    Note:

    All nonTEFRA related documents need to be loaded in the SBSE BSC Notices folder.

  7. Once you have mapped the drive, you will then be able to double click to the folders that you have access to. You can also create a shortcut to put on your desktop.

  8. A new folder needs to be created to send to the campus. To create a new folder in your case folder, left click on the appropriate folder. Left click on "File" in the top menu. Left click on "New" in the drop down menu, and then on "Folder" . A new folder icon with highlighted name "New Folder" will appear in your data folder.

  9. With the name of the folder highlighted, left click on the folder and enter a name. If the name of the folder is no longer highlighted, then right click on the folder and left click on "Rename" .

  10. The folder should be named as follows:

    1. XXXX-Type of Package-FL-East/West
      XXXX = Last four digits of the TIN
      Type of Package = NBAP
      FL = First and last name of sender
      East or West applies to the Ogden Campus only. The Mississippi River is used as the dividing line between East and West.

  11. Save all taxpayer files to be sent to the campus in the file folder named above.

  12. To add the folder to the shared drive, right click on the folder being sent. Bring the cursor to the WinZip option and left click on "Add to foldername.zip" in the submenu. This will create a WinZip folder.

  13. Right click on the .zip folder and left click on cut. Left click on the short cut folder on your desktop for the campus, or go through the network drive (long way).

  14. Left click to open the campus folder where the package will be attached.

  15. Right click on paste to attach the folder. When you click paste, an error message will appear to alert you that encrypted data cannot be copied or moved. Click ignore all.

  16. The folder will not be posted to the campus folder. No password is needed because special access is required for the shared drive.

  17. Each TEFRA campus will have personnel assigned to review the shared folder who will copy and save the package externally and then delete it from the shared drive.

  18. The Local TEFRA Coordinator should also monitor the shared drive to confirm that the package was deleted.

4.31.2.2.7.2.3  (06-20-2013)
Foreign Investors

  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. The withholding tax regime under IRC 1441 and IRC 1442 requires a domestic partnership to withhold tax on a foreign partner’s allocable share of U.S. source Fixed Determinable Annual Periodical (FDAP) income. 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. 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).

  2. Partnerships should also be aware of possible withholding obligations under IRC 1443 (regarding effectively connected income allocable to Sec. 501(c) foreign tax exempt organizations) and IRC 1445 (regarding the disposition of U.S. real property interest by foreign partners). See Treas. Reg. 1.1446-3(c), for the rule that a domestic partnership that is subject to both IRC 1445 and IRC 1446 withholding on the gain from the disposition of a U.S. real property interest will be subject to the payment and reporting requirements of IRC 1446 only and not IRC 1445(e)(1).

  3. 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).

  4. If a partnership is being worked only for foreign withholding issues, the linkage package must be clearly marked to let the campus know. If foreign withholding is the only issue, then the campus will only link the direct investors. No indirect investors will be linked. Failing to notify the campus will result in the campus expending resources to unnecessarily link indirect investors.

    Note:

    If the ONLY issue being addressed on the partnership is foreign withholding tax; alert the campus when submitting the package by writing in the body of the email for electronic PCS linkage the following: "The only issue being addressed on this partnership is the Foreign Withholding Tax; link only direct partners."

    Note:

    The team should be absolutely sure that there are no other partnership issues. Linkage of partners late in the process can lead to cycle time delays and blown statutes.

  5. If the campus identifies foreign investors when establishing the linkages of the partners, they will establish a NMF linkage for notice purposes. The agent is responsible for adjustments related to foreign investors in tier investors also.

  6. The campus will send a memo to the agent to notify them of the foreign partner when they mail out the Form 886-Z showing the linkage of all partners. Foreign investors discovered in tiers should be forwarded to the key case examining agent as they are identified.

  7. The agent must pursue the withholding of tax on nonresident aliens and foreign corporations pursuant to IRC 1441 and IRC 1442 for NonResident Aliens (NRAs) with withholding issues related to the key case adjustment. Any assessment to the foreign partner must be made at the key case level through NRA withholding. The campus cannot make any assessments at the partner level. IRM 4.31.2.2.16

  8. Assistance should be requested from an international examiner.

4.31.2.2.7.2.4  (10-01-2010)
Field Control of Partners

  1. The examiner is responsible for reviewing the partner returns related to partnership audits for large, unusual or questionable items. If it is determined that the partner return warrants further examination, then AIMS controls should be requested.

  2. PCS linkage is mandatory for all TEFRA partnership examinations open in exam group after 60 days. The examiner must submit PCS controls for the pass through entity.

  3. If AIMS controls exist on any partner prior to linking the pass through entity on PCS, then it is important that the partner returns remain in the group until linkage is fully established. The partner return can be closed after PCS linkage is established and also when the non-pass through entity adjustments are resolved before the partnership examination is complete. A TSUMYP secured through AIMS will indicate if PCS linkage exists along with a listing of partners linked. Once linkage exists the case can be closed from the group.

    Note:

    Returns that are CIC corporation, Joint Committee, or other corporate specialty cases (Forms 1120, U.S. Corporation Income Tax Return, with letters after the 1120 other than A, S, or X) must be held in the field.

  4. Do not close the partner returns off AIMS if a key case linkage package is being submitted. This creates added work for the campus as they have to reopen those partner returns before a linkage can be established.

  5. Once linkage is established, partner returns can be transferred to the campus through Technical Services and updated to Status 21. In addition to the normal case information, the Form 3198, Special Handling Notice for Examination Case Processing, should be completed as follows:

    1. On page one, in the Forward to Technical Services Box, check TEFRA Investor.

    2. On the bottom of page one, check Forward to Technical Services.

    3. On page two, in the TEFRA Investor Instructions Box, check Survey.

    4. On page two, in the instructions for CCP - Investor and/or Key Case Information Box, check forward to CTF and check the CTF to receive the return (Brookhaven (SBSE) or Ogden (LB&I)).

4.31.2.2.7.3  (06-20-2013)
Completing the Key Case Examination

  1. Once the key case examination is completed, the examiner issues a Summary Report to the TMP. The summary report will include:

    1. Form 4605-A, Examination Changes – Partnerships, Fiduciaries, Small Business Corp, and Domestic Inter. Sales Corp (Agreed and accepted agreed). The Form 4605-A must include the items changed as a result of the examination.

    2. Some adjustments, such as reallocations of distributive shares, or changing the characterization of a partner from general partner to limited partner, cannot easily be shown on the Form 4605-A. Utilize the Form 886-A, Explanation of items, to describe this adjustment. Then reference the Form 886-A in the remarks section of the Form 4605-A as an attachment.

    3. Form 886-A. This form will provide a detailed explanation of each proposed adjustment for each examined year, including facts, law, argument and conclusion for each proposed adjustment to a partnership item and affected item whether agreed or unagreed.

    4. Form 886-A, Explanation of Adjustments - Affected Items Report. If affected items are being adjusted, a separate report will be written. See IRM 4.31.2.2.13 and IRM 4.31.2.2.14 for a detailed explanation of what affected items are and how to prepare a report for affected items.

    5. Letter 1807 is used for partnership returns as a cover letter for the Summary Report.

    Note:

    The Form 886-S is not needed with a TEFRA case. The Form 886-Z should be printed for the case file only. The local TEFRA coordinator will send this to the campus TEFRA function. Form 886-Z contains the percentages of ownership which are not on the Form 886-S. (See IRM 4.10.8, Examination of Returns, Report Writing, for detailed instructions on completing these forms.)

  2. If the key case examination results in a No Change, the Summary Report will include the overall results in a single paragraph; however, the Summary Report must follow the format explained in (1) above.

  3. If during the key case examination the TMP or his authorized representative provides additional issues for consideration with the Service, such as affirmative issues, and/or an administrative adjustment request (Form 1065X or Form 8082, Notice of Inconsistent Treatment or Administrative Adjustment Request (AAR)) , whether prior to or after issuance of the NBAP, the Summary Report will include a detailed explanation of these additional issues, including facts, law, argument and conclusions.

  4. The TMP is required by statute to provide notice and non-notice partners with a copy of the Summary Report. (IRC 6223(a) and Treas. Reg. 301.6223(g)-1(b)(1)(ii).) However, the Service may furnish a copy to a partner upon request by such partner.

  5. The first report issued to the TMP that contains sufficient information for the partner to calculate his or her portion of the partnership liability and the reason for the adjustments will act as notification for purposes of IRC 6404(g). Generally, this will be the earlier of the date the TMP was provided with the 60-day letter or the FPAA.

  6. The IRC 6404(g) date must be notated on the Form 4605-A by the examiner if the 60-day letter or FPAA is issued by the LTC to ensure the proper date is applied when the CTF computes the partner's interest assessment.

  7. See IRM 4.31.2.2.12, Closing the Key Case for more information.

4.31.2.2.8  (06-01-2004)
Closing Conference

  1. A closing conference will be offered whether the key case examination results in an Agreed, Unagreed, or No Change case.

    Note:

    A closing conference is not required if a key case is no changed within 45 days and the NBAP is withdrawn.

    1. A closing conference will be scheduled no earlier than 30 days after the issuance of the Summary Report to the TMP unless waived in writing by the TMP. The Service and the TMP will determine the time and place for all administrative proceedings. (See Treas. Reg. 301.6224(a)-1.)

    2. Although the TMP may waive the closing conference, if any notice partner requests the closing conference, it will be held. Treas. Reg. 301.6224(b)-1 explains how a partner may waive his or her rights to a closing conference or any other rights granted in the unified audit procedures of a partnership proceeding. The TMP cannot waive the rights of any notice partner.

    3. The TMP is required by statute to provide information to notice partners and non-notice partners with respect to the closing conference with the examiner. (Treas. Reg. 301.6223(g)-1(b)(1)(i).) The Service is not required to notify each partner of the closing conference. The results of the proceeding apply to all partners even if the TMP does not provide the required information.

    4. The examiner will explain the proposed adjustments in the Summary Report to the TMP and the partners or their representatives who are at the closing conference.

    5. Only those representatives with a valid POA on file for the taxable year(s) under discussion are permitted to participate in the closing conference. (See IRM 4.31.2.2.6)

    6. The information presented at the closing conference may require additional examination work, and it may be necessary to hold a second conference. Another Letter 1807 must be issued if it is determined that a revised Summary Report must be issued.

4.31.2.2.8.1  (06-20-2013)
Powers of Attorney (POA) for Partners in TEFRA Partnerships

  1. Only those representatives with a valid POA on file for the taxable year(s) under discussion are permitted to participate in the closing conference.

    1. A new POA for a TEFRA investor does not need to specifically name the TEFRA partnership before the service can deal with the POA for the TEFRA partnership issues. However, it does need to meet specific requirements.

    2. Under section 3, on one line, under the heading "Description of Matter" , the partner should insert "Income, Including TEFRA Partnership Items"

    3. Under the heading "Tax Form Number" , the partner should enter the form number of the partner's return and "Form 1065"

    4. Under "Year(s) or Period(s)" the partner should enter the covered tax year(s).

      Note:

      Each tax period should be reflected on the POA form.

      Note:

      If the Form 2848 is not completed as above, it will be rejected by the CAF Unit in the campus.

    5. If an existing POA does not have the proper language, a new POA, with the above statement included, should be secured.

    6. The Summary Report transmittal letter (Letter 1807) explains that the POAs must be submitted to the examiner at least 10 days before the closing conference. The original POA should be expeditiously faxed to the CAF unit in the campus.

    7. Note on the Form 3198, Special Handling Notice for Examination Case Processing, whether any POAs were secured for any partner in the key case. The LTC will forward all original POAs to the CTF where the partner is linked. A copy will be kept with the key case file.

    8. The number of partners planning to attend the closing conference must also be conveyed to the examiner.

4.31.2.2.9  (06-20-2013)
Securing Agreements from the TMP and the Partners

  1. The examiner may solicit agreements as part of the closing conference. Be sure to verify that there are no report writing errors. Once an agreement is executed, the Service is bound to the adjustments shown on the Schedule of Adjustments.

    Note:

    All TEFRA agreements must be executed by a Technical Services TEFRA Coordinator or other employee delegated by Delegation Order 4-19.

  2. A TMP agreement will only be solicited when there are non-notice partners. When the TMP is a notice partner, an agreement will be solicited from the TMP in the TMP's capacity as a notice partner only.

  3. The notice partners and/or their representatives (See IRM 4.31.2.2.8 for proper completion of the POA form) who are at the closing conference may be offered an opportunity to enter into a settlement with the Service by signing:

    1. Form 870-PT, Agreement for Partnership Items and Partnership Level Determinations as to Penalties, Additions to Tax, and Additional Amounts. This agreement form allows the partner to agree to adjustments proposed to partnership items. Penalties are determined at the partnership level for partnership tax years ending after 8/5/1997. Use this agreement if proposing adjustments to partnership items and not to affected items.

    2. Form 870-LT, Agreement for Partnership Items and Partnership Level Determinations as to Penalties, Additions to Tax, and Additional Amounts and Agreement for Affected Items. This form permits the partner to agree to both partnership adjustments and affected items or only partnership adjustments.
      • Part I of the form, subtitled Offer of Agreement to Partnership Items and Partnership Level Determinations as to Penalties, Additions to Tax, and Additional Amounts and Waiver of Restrictions on Assessment for Partnership Items, Penalties, Additions to Tax, and Additional Amounts is identical to the Form 870-PT. By signing this part of the form, the partner is agreeing to the partnership item adjustments (and penalties) as stated in the schedule of adjustments attached to the Form 870-LT. These penalties include negligence (IRC 6662(b)(1)), and substantial understatement of income tax (IRC 6662(b)(2))), and overvaluation (IRC 6662(b)(3)).
      • Part II of the form is subtitled Offer of Agreement for Affected Items and Waiver of Restrictions on Assessment. Part II of the form allows the partner to agree to partner level determinations for affected items and the related penalties, additions to tax as well as to the assessment of the tax, penalties, and interest due without following the normal deficiency proceedings (30-day letter or statutory notice).

      Note:

      Penalties determined at the partnership level must be directly assessed and are not subject to deficiency procedures, even when the underlying deficiency upon which they are based is subject to deficiency procedures.

    3. Brackets are placed around dollar amounts when an adjustment is in the taxpayer's favor, e.g., an increase in income is shown as a positive number and a reduction of income is in brackets, as opposed to an increase in expenses in brackets and a decrease reflected as a positive number.

    4. Each notice partner (and spouse if they filed jointly), including the TMP in his or her capacity as a partner in the partnership, must individually sign a Form 870-PT or Form 870-LT. The TMP is only authorized to bind the non-notice partners if specific language is added. (See (4) below.) See Exhibit 4.31.2-4 for further detail on who must sign agreements.

    5. If a pass-through partner enters into a partnership item settlement agreement with the Service, that agreement binds all indirect partners holding an interest in that partnership through the pass-through partner except those indirect partners that have been identified in accordance with Treas. Reg. 301.6223(c)-1. Indirect partners identified at least 30 days prior to the date the agreement is entered into are entitled to their own settlement agreement and are not bound by a pass-through partner settlement agreement.

  4. According to IRC 6224(c)(3), a partner who is a non-notice partner, i.e., a partner who has a less than one percent interest in profits of a partnership with more than 100 partners (and not a member of a notice group), is bound by any settlement agreement that is entered into by the TMP, and in which the TMP agreement expressly states that such agreement will bind the other partners.

    1. The following statement must be inserted by the examiner or reviewer immediately preceding the signature line on the Form 870-PT for the TMP who executes an agreement intending to bind non-notice partners: "The undersigned Tax Matters Partner is signing this offer on behalf of himself (herself) (itself) and all other partners whom he (she) (it) has the authority to bind; under section 6224(c)(3) of the Internal Revenue code; a final agreement resulting from the signature of the Commissioner of Internal Revenue will be binding on all such other partners."

    2. The TMP cannot bind the non-notice partners for any affected items or the related penalties (except for penalties attributable to partnership items) when partner level factual development is required. Therefore, Form 870-PT, not Form 870-LT should be presented to the TMP. If the TMP erroneously signs Part II of the Form 870-LT, the error will not invalidate the agreement for partnership items and partnership level determination of penalties. However, in both cases the Campus TEFRA Function must subsequently issue a 30-day letter or statutory notice to the non-notice partners for these items. Similarly, a pass-through partner cannot bind indirect partners to such items.

    3. The TMP may not bind a non-notice partner if the non-notice partner has affirmatively notified the Service that the TMP is not authorized to act on his or her behalf pursuant to Treas. Reg. 301.6224(c)-1(c).

    4. Whenever a key case examiner secures a Form 870-PT or Form 870-LT at the closing conference, the case must be closed out of the group within 15 days of the closing conference.

      Note:

      A pass-through partner cannot bind its underlying investors by signing Part II of a Form 870-LT. Each taxable partner must be issued a statutory notice of deficiency individually. A pass-through partner agreeing to Part I does bind all partners to partnership item adjustments and penalties determined at the partnership level.

    5. If agreements are not received at the closing conference, the field examiner will suspense the closing of the key case for no more than 30 days to allow the investors time to return their agreements. At that time, the key case will be closed. The appropriate statement must be added to the Form 3198. See IRM 4.31.2.2.12.

4.31.2.2.9.1  (10-01-2010)
Signing and Receipt of an Agreement or Settlement Agreement

  1. The effects resulting from the partner or TMP signing an agreement or settlement agreement:

    1. Allows any TMP or notice partner to agree to the examination results of the key case.

    2. The investor is removed from the partnership proceeding once a delegated Service employee countersigns the agreement on behalf of the Commissioner. At that time, the investor's partnership items convert to nonpartnership items.

    3. The TMP or partner agrees to all proposed adjustments unless "Partial Agreement" has been noted on the settlement agreement before it is signed.

    4. No subsequent claim may be filed.

    5. The TMP can agree and bind all non-notice partners who are direct partners if the Form 870-PT is modified to specifically state that the TMP is binding such non-notice partners.

    6. All notice partners must sign their own separate agreements.

    7. Non-notice partners may elect NOT to be covered by an agreement entered into by the TMP. (See IRM 4.31.2.2.8 (4)(c) above.)

  2. With any agreements received by mail, care should be taken not to place the date stamp anywhere near the signature/date field on the form.

4.31.2.2.9.2  (06-20-2013)
Acceptance of Faxed Agreements

  1. Consents to assess additional tax (Form 4549, Form 870, and others) of $250,000 or less can be accepted by fax if taxpayer contact has been made and the case history documents the date of contact and the desire of the taxpayer to submit the consent by fax.

  2. Closing agreements involving tax amounts of $250,000 or less can be accepted by fax if taxpayer contact has been made and the case history documents the date of contact and the desire of the taxpayer to submit the consent by fax.

  3. Consents to assess tax or closing agreements involving tax amounts in excess of $250,000 should be secured with original signatures and delivered by mail or in person.

  4. For purposes of estimating tax for flow-through adjustments, the tax is figured by multiplying the partner's share of the adjustment by the highest tax bracket percentage. The estimated tax figure will be used for figuring the $250,000 tolerance for the acceptance of faxed agreements.

4.31.2.2.9.3  (10-01-2010)
Securing Partial TEFRA Agreements

  1. The Taxpayer Relief Act of 1997, passed by Congress on July 31, 1997 and signed into law on August 5, 1997, changed portions of the TEFRA examination process. One notable change provides that partial agreements can be secured for any settlements entered into after August 5, 1997. Partial agreements may be made for any tax year. By law, a partial agreement does not start the running of the one year assessment date.

    Note:

    If a partial agreement is being considered, contact your local TEFRA Coordinator immediately.

  2. In the normal processing of an agreed TEFRA case, once the investor has signed a settlement agreement form, the partnership items convert to nonpartnership items. The conversion of items from partnership items to nonpartnership items starts the running of the one-year assessment statute date. The statute of limitations for assessment of the newly converted nonpartnership items will not expire before the date which is one year after the date on which the conversion occurs.

  3. Since partial agreement cases do not have "one-year" statute dates, report writing may be delayed due to processing of cases that have established "one-year" statute dates. However, the idea behind a partial agreement is to have that portion of the deficiency assessed as soon as possible. TEFRA partial agreements may be secured by agents in the field or by an Appeals Officer during the appeals process.

    Note:

    It is very important to remember when securing partial agreements and forwarding them for processing, they MUST be readily identifiable as a TEFRA partial agreement. This is critical.

  4. If the field negotiates a partial agreement with the TMP, partial agreements will be secured from all of the notice partners. If there are non-notice partners, the special language will be used on the Form 870-PT signed by the TMP to bind all of the non-notice partners.

  5. TEFRA partial agreements must have the annotation "Partial Agreement" (hand written, typed or stamped) on all pages of the Form 870-PT with the following statement added to the Schedule of Adjustments:

    This partial agreement becomes effective upon execution by the Commissioner of Internal Revenue or his delegate. It does not settle all of the partnership items. The remaining unsettled partnership items as well as any unsettled penalty, addition to tax, or additional amount that relates to an adjustment to a partnership item will remain subject to determination under the partnership-level administrative and judicial procedures. The period of limitations for assessing any tax attributable to the settled items shall be determined as if such agreement had not been entered into. To the extent this paragraph conflicts with any other paragraph in this agreement, this paragraph controls.

  6. The statement above will also be entered on the schedule of adjustments page. The Form 886-Z (or equivalent) will also be identified and marked as a partial agreement. The Form 3210 used to transmit the package will also be identified and clearly marked, "TEFRA Partial Agreement" and "Special Processing Required" to reflect that the attached package is for a partial agreement.

  7. The agent will monitor the receipt of the signed partial agreements and retain them until all are received. The local TEFRA Coordinator, per Delegation Order 4-19, will sign for the Commissioner and send all of the partial agreements to the key case CTF for processing at one time. The LTC will sign the agreements and not the CTF, since the area is fully aware of the agreed issues. Prior to signing for the Commissioner, the LTC will ensure both the notation "Partial Agreement" and the statement above are on all of the forms and attachments as required.

  8. When the partial agreements are submitted to the CTF unit for processing, a 60-day package will be included that includes all agreed and unagreed items. The CTF will send the all inclusive 60-day package to all of the partners, whether partially agreed or not, because all adjustments must be included in the schedule of adjustments.

    1. When the signed partial agreement forms are received by the CTF, they will be processed as normal, but after photocopying, the "Partial Agreement" notation and the statement at the bottom will be highlighted (preferably in yellow). If the agreements have not been signed for the Commissioner by the LTC and have not been marked "Partial Agreement" ; but it is known that they are in fact partial agreements, the agreement forms will not be signed by the CTF. The agreement forms will be returned to the originator for reissuance. Subsequent modifications to agreement forms already signed by the taxpayer cannot be made. The CTF will give the partial agreement forms expedited handling. In lieu of entering a "one-year" date, the CTF will input a date that is 5 months from the acceptance date on the agreement forms. This will be done to ensure timely processing. Instead of inputting a Package Received Indicator of "Y" on the PCS, a Package Received Indicator of "M" will be input. This ensures better control over these cases and will be used until a unique code can be obtained to indicate a partial agreement. There is currently an informal procedure in place to utilize the "M" as an indicator for partial agreements as well as for manual assessments.

    2. For these partial agreements only, the CTF will only be required to process packages for the investors and to notify the field. No TMP notification ( Letter 2513, TMP Settlement Letter) will be required since the TMP is fully aware of who accepted the partial agreements. However, the taxpayer should receive their copy of the partial agreement with Letter 1908 if the LTC did not already send the taxpayer an executed copy of their agreement.

      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 870 agreement forms used in TEFRA.

  9. When the TS submits the 60-day package for processing and the field has solicited partial agreements, the CTF cannot and will not process the package until all partners have signed and agreed to the partial report unless the LTC specifically instructs the CTF to do so. Advance coordination with the CTF in this situation is required. An undue burden is placed on the CTF if not all of the partial reports have been signed and agreed. PCS will not generate a 60-day letter with a "one-year" date still remaining on the partner. The CTF will request the 60-day letters prior to inputting the "one-year" date for the partial agreements. If a 60-day package is not included with the partial agreements, the partial agreement package will be returned to the LTC.

  10. The 60-day package the LTC prepares and submits to the CTF will address all issues, i.e. both agreed and unagreed. The schedule of adjustments page will include all of the issues. The package will include all of the items listed in subsection 4.31.3.5.1 of this Handbook. The CTF cannot prepare a separate Form 870-PT to reflect the remaining flow-through items for those partners who previously agreed and a different, all inclusive, Form 870-PT for those partners who did not agree to the partial report. See IRM 4.31.3.8(11) also.

4.31.2.2.9.4  (06-20-2013)
Securing Agreements Solely for Foreign Withholding

  1. If agreements are for cases with the sole issue of section 1441-1446 withholding maintain a copy of the unexecuted agreements. If an agreement is for other than a general partner, notate in the case file not to execute the agreements, and that they are to be used for closing purposes only.

4.31.2.2.10  (06-20-2013)
Securing Agreements for Tax Assessments at the Partnership Level

  1. Some partnerships request to settle and pay tax deficiencies on behalf of their partners. When such a request is made, you should consult with your LTC, local counsel and the CTF. A referral on the Specialist Referral System should be made if one has not already been submitted. It is important the local TEFRA coordinator be involved early in the process to ensure all reports are correctly prepared and local area counsel has been involved in the preparation of the Form 906. This will also ensure timely case closure from the exam group through Technical Services.

  2. It is legally permissible to have the key case partnership or pass-through partners pay tax on the net adjustments passing through it at the highest marginal tax rather than flowing the adjustments to the hundreds of direct and indirect partners. The partnership or pass-through partner must sign a Form 906, Closing Agreement On Final Determination Covering Specific Matters, and full pay the amount due. The agreement will provide that each partner’s share of the increased partnership income will increase that partner’s capital account and outside basis. The payments will be treated as proportionate distributions to all partners in the year the actual payment is made. The distributions will reduce the partner capital accounts and outside basis. A partner who was a partner in the year under audit and not a partner in the year the tax is paid is generally not affected. Economically, this will put both the partners and the Service in the same position as if the Campus flowed through all of the adjustments and the partners had paid the assessments individually.

  3. Generally, these rules apply when there is a deficiency. However, all options should be explored if the partnership structure is very large.

  4. Settlement by the key case partnership or a pass-through partner is not the norm. Local Area Counsel must be involved in the initial stages and Local Area Counsel must be involved upfront in the drafting of the Form 906. The purpose of the settlement is efficiency and ease of processing. As a result, the Field will be responsible for assisting with requests to settle TEFRA adjustments which are outside of the normal process.

  5. The details of a partnership level settlement are explained in a Form 906, Closing Agreement on Final Determination Covering Specific Matters. A partnership level agreement can only be secured when the adjustments passing through to all underlying partners will result in a deficiency. If any partner is subject to a refund, then a partnership level agreement cannot be secured. All partners must be adjusted individually.

  6. The highest effective tax rate should be used when calculating the amount of tax owed. The partnership must also pay all additions to tax including interest and penalties.

  7. The Form 906 should be executed in the field before sending a copy to the CTF.

  8. The payment made by the partnership is considered a distribution to the partners of record in the year paid, or the year when the payment became fixed and determinable. A partnership's payment of IRC 1446 tax on behalf of a foreign partner is treated as a deemed distribution of money to the partner on the earliest of: the day on which the partnership paid the tax; the last day of the partnership's taxable year for which the amount was paid; or the last day on which the partner owned an interest in the partnership during the taxable year for which the tax was paid. However, a deemed distribution of money under IRC 1446(d) resulting from a partnership's installment payment of IRC 1446 tax on behalf of a partner is treated as an advance or drawing of money under Treas. Reg. 1.731-1(a)(1)(ii) to the extent of the partner's distributive share of income for the partnership taxable year. The rule treating a deemed distribution as an advance or drawing of money under this paragraph (d)(2)(v) applies only for purposes of IRC 6655 (as applied through this section) or the date a foreign partner is deemed to have paid estimated tax by reason of such installment payment. See Treas. Reg. 1.1446-3(d)(2)(v).

  9. The impact of the payment as a distribution to the partners should be included in the Form 906 settlement agreement.

  10. The payment made by the partnership will impact the basis of all partners of record at year end. The partners' capital accounts and basis should be increased by the amount of income that should have been reported, and then reduce it by their share of the tax paid by their partnership. That share is treated as a distribution in the year paid and will generate additional tax to the extent it exceeds the partner's outside basis or increases income (by reducing basis) on the sale of his partnership interest. Please see 4.31.2.2.10(6) for specific rules for the partnership's payment of IRC 1446 tax.

4.31.2.2.10.1  (06-20-2013)
Key Case Partnership 906 Agreement

  1. Forms 4549-A and 4605-A will be prepared. The 4549-A is prepared to show the adjustments and calculations. The reports can be prepared manually if necessary. The reports will include:

    1. examination adjustment(s),

    2. tax at the highest marginal rate,

    3. penalties, if applicable, and

    4. interest which will be identified as the time value of money with regard to the agreed adjustment(s) and penalties.
      •The payment will be grossed up to include both tax and interest due.
      •Refer to Interest Computation for Payoffs: http://mysbse.web.irs.gov/AboutSBSE/aboutccs/ccsprog/casepro/cp/restrictedint/22184.aspx.
      •Fax or e-mail the request to CCP. The request will identify the interest computation date along with the total balance due. CCP has a 2-3 day turnaround. Be sure to include the return fax number or e-mail address.

    5. Form 4549-A will include the following statement on the top of the first page: "Do Not Process-Used for Computational Purposes Only" .

  2. Preparation of Form 906 will be coordinated with local TEFRA Counsel.

    1. Prepare a Form 906 for the key case partnership TMP and a separate Form 906 for each notice partner.

    2. Local Counsel will designate the signing official having authority to bind a notice partner which is a pass-through partner (nonTEFRA partnership, TEFRA partnership or Limited Liability Company) when applicable.

  3. Continue with number 4 below.

4.31.2.2.10.2  (06-20-2013)
Pass-Through Partner 906 Agreement

  1. 1.Secure controls for the pass-through partner proposing to settle. The controls will need to be transferred from the Campus TEFRA Function, CTF, when linkage is in place and the partner is controlled by CTF.

    1. The examiner will prepare CAMPUS AIMS DATABASE TRANSFER/LIN LINK REQUEST, Exhibit 1.

    2. Forward the request to the local TEFRA Coordinator. The local TEFRA Coordinator will contact the appropriate CTF TEFRA Coordinator through e-mail or fax. The CTF TEFRA coordinator will request an “H” freeze be added to the pass-through partner return. The CTF TEFRA coordinator will work with the campus staff to have the return transferred direct to the field. The partner return must be included in the partner case file before closure.

  2. Prepare an examination report using Forms 4549-A and 4605-A for the tier partner. The 4549-A is used to show the adjustments and calculations. The reports can be prepared manually if necessary. The report will include:

    1. examination adjustment(s),

    2. tax at the highest marginal rate,

    3. penalties, if applicable, and

    4. interest which will be identified as the time value of money with regard to the agreed adjustment(s) and penalties.
      •The payment will be grossed up to include both tax and interest due.
      •Refer to Interest Computation for Payoffs: http://mysbse.web.irs.gov/AboutSBSE/aboutccs/ccsprog/casepro/cp/restrictedint/22184.aspx.
      •Fax or e-mail the request to CCP. The request will identify the interest computation date along with the total balance due. CCP has a 2-3 day turnaround. Be sure to include the return fax number or e-mail address.

    5. Form 4549-A will include the following statement on the top of the first page: "Do Not Process-Used for Computational Purposes Only" .

  3. Preparation of a Form 906 for the tier partner will be coordinated with local TEFRA counsel.

    1. When a pass through partner is agreeing and full paying, Form 906 will include a statement indicating the agreement only applies to the flow-through partner and not the other partners in the partnership.

    2. Local Counsel will designate the signing official having authority to bind the pass-through partner (nonTEFRA partnership, TEFRA partnership or Limited Liability Company) when applicable.

  4. Local counsel will forward the final draft to Chief Counsel TSS4510 for final review.

  5. Revenue Procedure 68-16 provides guidelines addressing the number of required copies for signatures. Forward the reports and required original copies, at a minimum 3 original copies, of the approved Form 906 to the taxpayer:

    1. All of the direct partners with more than a one percent interest should sign a Form 906 when the key case is agreeing and paying the tax.

    2. The tier will sign the Form 906 when agreeing and paying the tax.

  6. When the signed Form 906 agreements are received from the taxpayer, review the agreements. If the taxpayer has not returned all of the original closing agreements, make the appropriate copies for original signature. Review the 906 and ensure:

    1. Changes have not been made to the settlement agreements.

    2. The 906 agreements have been properly signed.

    3. Date stamp the last page of each executed original Form 906 agreement. Do not date stamp in any signature area.

  7. The revenue agent will sign all original copies as the Receiving Officer.

  8. The group manager will sign all original copies as the Reviewing Official.

  9. Submit the 906 agreements for signature.

    1. Delegation Order 4-19 states that authority to enter into and approve a written TEFRA settlement agreement with one or more partners, a Tax Matters Partner, a partner with authority (in the case of an electing large partnership), and shareholders, with respect to the determination of partnership items and any items affected by such items is delegated to GS-12 revenue agent reviewers and above. The TEFRA Technical Services Program Manager will sign on behalf of the Commissioner.
      •Forward the original 906 agreements, Form 4549, Form 4605 and a copy of counsel’s approval of the 906 agreement to the local TEFRA coordinator.
      •The local TEFRA coordinator will forward the documents to the TEFRA Program Manager for signature.
      •The countersigned documents will be returned to the field group through the local TEFRA coordinator.

  10. The examiner will process the payment to the local Field Office Teller by submitting Form 3244-A, Payment Posting Voucher Examination. Record the amount under TC 640, Advance payment on Deficiency. The TC 640 will freeze the refund.

  11. The examiner is responsible for monitoring the posting of the payment. A TC640 will post showing the full amount paid. A copy of the Form 3244-A and the check should be maintained in the case file. The examiner must include a copy of the transcripts with the TC640 posting.

  12. Prepare Letter 1595-E (Exam), Executed Closing Agreement Transmittal Letter. Return an original countersigned 906 with letter 1595-E to the taxpayer. Place a copy of the signed letter inside the case folder on the top right side.

  13. Prepare Form 2424, Accounting Adjustment Voucher.

  14. Prepare Form 8339, PCS Change for the partnership/partner.

4.31.2.2.10.3  (06-20-2013)
Case closure

  1. Key Case Partnership

    1. Unagreed: When a flow-through partner has agreed and the remaining direct partners have not agreed to the adjustments. Follow regular TEFRA unagreed procedures.

    2. Agreed: When the key case has signed a 906 agreeing to all of the adjustments and has paid the tax or when all of the partners have agreed to the adjustments by signing 906 agreements, Form 870-PTs or page 1 of Form LTs. Follow regular TEFRA agreed procedures.

  2. Pass-Through Partner 906 Agreement

    1. The audit for the flow-through adjustments from the key case is treated as fully agreed.

  3. All of the required reports, the executed original 906(s), Letter 1595-E, Form 2424, Form 3198, Form 5344 (with TEFRA written at the top of the form) and Form 8339 will be included with the case file.

    1. Form 3198
      •Indicate the case is to be forwarded to Technical Services. Identify the case as a TEFRA Key Case or TEFRA Partner.
      •Form 3198, page 2 under Instructions for CCP - Investor and/or Key Case Information include the statement, "Close TC-300 for $0 with Hold Code 2 and transfer the TEFRA payment to the Miscellaneous Revenues Account, 6400-2320, per Form 906 Agreement" .

    2. Form 5344, item 12 will show TC 300 $0. Under "Comments" (bottom right side) enter "Please transfer TC 640 to the Miscellaneous Revenues Account, 6400-2320" .

      Caution:

      It is important to note that the payment will be refunded to the taxpayer if the required language is not included on Form 2424, the Form 3198 and the Form 5344.

  4. Close the case using the proper disposal code based on the type of case closure for mandatory review.

    Reminder:

    The examiner will ensure the payment has properly posted before closing the case to Technical Services.

4.31.2.2.11  (06-01-2004)
Unagreed Key Case

  1. After the closing conference, if the TMP or any notice partner did not agree, the examiner will prepare an unagreed Revenue Agent Report (RAR) in the format prescribed in IRM 4.10.8 , Examination of Returns, Report Writing. If penalties are proposed, the procedures in IRM 20.1, Penalty Handbook, will be followed. The report writing procedures for penalties are also in IRM 4.10.8.

  2. The unagreed RAR will incorporate the taxpayer's position. If agreed or no changed, the Summary Report may be substituted for the RAR. A Form 4665, Report Transmittal, must be used as the transmittal for all RARs.

  3. There must be eight months on the key case partnership statute before closing a unagreed case to Tech Services.

4.31.2.2.12  (06-20-2013)
Closing the Key Case

  1. The examiner will forward the key case file to Technical Services in status 21. A Form 3198 (Special Handling Notice for Examination Case Processing) will be attached to the front of the key case and the appropriate statements added.

    Note:

    If the key case will result in a no change, the agent should notify the CTF through the appropriate email box. Include the name, EIN and tax year of the key case that is being closed as a no change. This will alert the campus to stop processing the underlying partners so they can shift their resources to other cases. If Tech Services returns the case for further development, please remember to contact the campus and let them know that the case may not longer be a no change so they can continue processing the partner returns.

    1. TEFRA key cases are mandatory review. The "TEFRA or NonTEFRA Key Case" block under Forward to Technical Services will be checked and the criteria in IRM 4.8.4 will be followed.

    2. If the TEFRA key case is No Changed, the "Other" block under the "Special Handling" section will be marked and one of the following applicable statements will be made:
      • TEFRA No Change Determination Made Within 45 Calendar Days, Route to the Technical Services; the examiner recommends issuing Letter 1864.
      • TEFRA No Change Determination Not Made Within 45 Calendar Days, Route to the Technical Services; prepare Letter 2064 or Letter 2621. (All investor linkages are established.)

      Note:

      Use Letter 2064 if the TMP does not agree to the no change, an Administrative Adjustment Request has been filed and disallowed in full and no other adjustments are proposed by the examiner, or the TMP raised affirmative issues which are not allowed by the examiner and no other adjustments are proposed by the examiner. Issuing the Letter 2064 allows the taxpayer to petition to raise the affirmative issues. Letter 2064 is a no-change FPAA.

    3. If the TEFRA key case is unagreed, no partners signed Form 870-PT or Form 870-LT, the "Other" block under the "Special Handling" section will be marked, and the applicable statement "TEFRA Key Case File, Issue 60-Day Letter, Route to the Technical Services" or "TEFRA Key Case File, Issue 150-Day Letter (FPAA), Route to the Technical Services" will be added.

      Note:

      The examiner should recommend the 150-Day Letter (FPAA) when there is less than twelve months left on the statute and the taxpayer will not extend the statute.

    4. If the TEFRA key case is agreed and a Form 870-PT or Form 870-LT is included in the file, state in the "Other" block "Agreed TEFRA Key Case File, Unexecuted partner Agreements Enclosed, Route to the Technical Services."

    5. If the TEFRA key case is unagreed but one or more partners have signed a Form 870-PT or Form 870-LT, state in the Other block either:
      • TEFRA Key Case File, 60-Day Letter, and Unexecuted partner Agreements Enclosed, Route to the Technical Services.
      • TEFRA Key Case File, Issue 150-Day Letter (FPAA), and Unexecuted partner Agreements Enclosed, Route to the Technical Services.

    6. The TMP is required to notify the partners or shareholders and all notice group representatives with respect to any appeal, court action, or other matter listed in Treas. Reg. 301.6223(g)-1(b)(1).
      • The requirement does not apply to those partners whose partnership items have become nonpartnership items, e.g., have executed Form 870-PT or Form 870-LT.
      • The Service must notify the TMP of the partners who have agreed. A list of the partners who executed the Form 870-PT or Form 870-LT will be sent to the TMP by the examiner if the examiner secured the agreements, or the Campus TEFRA Function when they receive the agreements. Copies of the signed Form 870-PT or Form 870-LT will not be furnished to the TMP. See Treas. Reg. 301.6223(g)-1(b)(2) for other partners excepted from the notification requirements.

    7. Update the disposal code on the Form 3198 and ERCS to the following when closing the key case:
      • No-change after 45 days - Disposal Code 02 - Use for TEFRA partnerships closed either before or after the 45 day period where the tax return and K-1s are all accepted as reported.

      Note:

      Disposal Code 01 does not apply to TEFRA


      • Agreed - Disposal Code 03 applies to an agreed case that will result in partner adjustments and an agreement is obtained from all partners, or an agreement from the partnership which binds all partners.
      • Appealed - Disposal Code 07 - Returns forwarded to Technical Services where the TMP or a notice partner has requested an appeal before issuance of the FPAA.
      • Other - Use Disposal Code 08 when all of the partners did not sign a report and those partners who did not sign a report did not request an Appeals conference.

  2. Statutory notice language is provided by the examiner for every case along with the "T" letter (Form 4665) of the key case. It is the responsibility of the Technical Services for the key case to further develop this language. Concurrence by the key case Area Counsel is mandatory.

4.31.2.2.12.1  (06-20-2013)
Imminent Statute Procedures

  1. Statute IRM 25.6.23.8.1 set the minimum time frame for closing a TEFRA partnership to Technical Services as follows:
    • Agreed and No Change - 12 months on the key case partnership statute
    • Unagreed - 8 months on the key case partnership statute

  2. IRM 25.6.23.8.3 requires the imminent statute procedures listed in IRM 25.6.23.8.2 to be followed for TEFRA partnerships. A TEFRA partnership with less than 240 days remaining on the IRC 6229 statute of limitations is considered imminent. These procedures include:

    1. Discussion between the group manager and his/her immediate manager concerning the circumstances surrounding the imminent statute.

    2. Documentation on the Activity Record of the discussion. For unagreed cases, the Form 4665, Report Transmittal, should also be documented to note the discussion.

    3. Contacting and advising the appropriate TEFRA manager in Technical Services of the imminent statute case. Both the field manager and the Technical Services TEFRA manager will determine whether the unagreed case will be closed to TS or remain in the exam group.

    4. If agreement has been reached to close the case to TS, then the group will hand carry or overnight mail the case. The group manager is to follow-up with the receiving unit's manager to ensure receipt of the case.

    5. A Final Partnership Administrative Adjustment is required in an unagreed case. The revenue agent will conduct all of the required short statute notice procedures:
      • Preparation of the FPAA with the assistance of the TEFRA Coordinator
      • Coordinate with counsel to review the FPAA before issuance
      • Preparation of Letter 1830 to the Tax Matters Partner
      • Preparation of the Certified Mailing List, and
      • Physical mailing of the required documents.

    The TEFRA Coordinator will provide direction and assistance to the RA; however, the RA is responsible for all required work.

4.31.2.2.12.2  (06-20-2013)
Fraud Cases

  1. The examiner will prepare Form 3999T for key cases where CI allowed the key case IRC 6229 and IRC 6501 statute to expire. The 3999T is needed even if the case is a no change.

  2. For linked key cases with an expired IRC 6229 statute and at least one partner under investigation with an open IRC 6501 statute, the examiner will prepare a Form 3999 for all linked partners with expired statutes. In these situations, the examiner should use one Form 3999 for partners with expired IRC 6501 statutes. Use "see statement" in the entity area. Attach a statement listing the partners with expired statutes. Also attach CI's authorization allowing the statutes to expire.

  3. For linked key cases with an open IRC 6229 statute with at least one partner remaining under CI investigation with an open IRC 6501, and where at least one partner's statute will expire with CI’s authorization, the field will send a copy of CI’s notification allowing statutes for partners not under investigation to expire to the local TEFRA Coordinator for processing to the CTF.

4.31.2.2.13  (06-20-2013)
Affected Items Requiring Key Case and Investor Level Determinations

  1. Court decisions have caused the Service's position on some issues to evolve. Certain sub-determinations, i.e., entity and investor components, are required for passive loss, at-risk, and basis issues. Determinations at the key case level and the investor level are required. Generally, all entity and investor component determinations must be made by the key case examiner.

  2. Often, the determination of which of the components of basis are partnership or affected items is unclear. In those complex situations, the local TEFRA Coordinator or Area Counsel should be consulted when affected items involving entity components and investor components are an issue (or are issues) in the case.

  3. The following is a discussion of the proper classification of partnership items, affected items, and nonpartnership items as well as the proper audit procedures necessary to make adjustments to a partner's return.

  4. Certain affected items are computational adjustments, such as any percentage limitation based on adjusted gross income. If the changes to the partnership items change adjusted gross income, items such as medical itemized deductions will be adjusted. If a net operating loss of a partner was reduced, it would be a computational adjustment to change the net operating loss deduction in a carryback or carryforward year. Since they are computational, no factual development is required by the key case examiner.

  5. Other affected items are subject to deficiency proceedings. Either a 30-day or 90-day letter will be issued to allow facts to be developed at the partner level. For example whether or not a partnership has cancellation of debt income is a partnership item. Once that is determined, the partner's income will be adjusted for their share of the cancellation of debt income via a 30/90 day letter. This will allow the partner to raise any facts which would allow them to exclude this income under IRC 108, for example, because they are insolvent.

  6. Treas. Reg. 301.6231(a)(5)-1(b) and (c) provide that a partner's basis and at-risk amounts are considered affected items to the extent that they are not partnership items. While this may suggest that the overall issue of the correct amount of a partner's basis or at-risk can be a partnership item, case law has indicated that these overall determinations will always be affected item determinations.

  7. For example, the amount of a partner's initial contribution to capital would be a fact developed at the partnership level, that would be the partnership item, but the utilization of that amount in the computation of basis and any disallowance of a loss at the partner level would be the affected item subject to deficiency procedures (30-day or 90-day letter).

  8. In a TEFRA examination, most of the component items of overall basis, at-risk, and passive loss determinations are more appropriately determined at the partnership level. If any of these component items are changed during a TEFRA examination they must of course be included in the examiner's TEFRA entity Summary Report. However, if the overall change to a partner's basis, at-risk amount or passive loss limitation is proposed, all partnership level components of such determinations can be included in the TEFRA Summary Report even if they are not being adjusted. While inclusion of such unchanged components in the TEFRA entity Summary Report is not required, it may be a good idea to include them in order to foreclose any later arguments by the taxpayer that such components are incorrectly stated in the partnership return.

  9. The adjustments for affected items will be computed after the conclusion of the partnership proceeding. The proceeding is concluded for each partner by:

    • the partner agreeing to adjustments proposed in the Summary Report;

    • the partner agreeing to an appeals settlement;

    • a final determination of the court; or

    • a defaulted FPAA.

  10. The following outlines some of the partnership and partner level components that the revenue agent should look for during the examination of the partnership. In general the partnership components would be partnership items included in the partnership proceeding. The partner level components would be affected items and would be decided at the end of the partnership proceeding either through computational adjustments (Letter 4735) or by the issuance of a 30/90 day letter.

4.31.2.2.13.1  (06-01-2004)
Basis

  1. Partnership components would be the amounts of:

    1. the initial contribution to the partnership;

    2. all subsequent contributions to the partnership;

    3. distributions from the partnership;

    4. the partner's share of non-taxable income, taxable income, losses and deductions; and

    5. the partner's share of partnership liabilities.

  2. A partner level component, which may be necessary to determine basis, occurs when a partner buys his partnership interest from another partner (and it is not subject to an IRC 754 election). In such case, the purchase price of the partnership interest is a component of the partner's basis, but there is no requirement that the purchase price of the partnership interest be taken into account for the partnership's taxable year.

4.31.2.2.13.2  (06-01-2004)
At-Risk

  1. The partnership level components for at-risk include:

    1. whether a particular loan was recourse or non-recourse;

    2. whether the partner bears the ultimate economic risk of loss with respect to a particular partnership liability;

    3. what was the amount of the note;

    4. whether a partner is a limited or general partner;

    5. whether a lender has an interest other than as a creditor; and

    6. all the partnership level basis items listed above.

  2. Partner level determinations for at-risk:

    1. whether there are any third party side agreements (stop-loss agreements);

    2. whether the partner borrowed the money contributed to the partnership from another person.

4.31.2.2.13.3  (06-01-2004)
Passive Losses

  1. The partnership components for passive activity losses include:

    1. whether the partnership is engaged in a rental activity;

    2. whether the partnership is engaged in a trade or business for purposes of IRC 162 ;

    3. whether a partner is a limited partner; and

    4. whether income is portfolio income.

  2. Partner level determinations include:

    1. whether a partner materially participated in a non-rental activity; and

    2. whether such partner actively participated in a rental activity.

  3. If determinations are made during the TEFRA unified proceeding regarding partnership components of passive losses, then those components must be addressed in the TEFRA entity Summary Report. Any limitation of the passive losses will be treated as an affected item. The partner's basis limitations and amounts for which the partner is at-risk should always be considered prior to the allowance of any passive losses.

4.31.2.2.13.4  (06-01-2004)
Cancellation of Debt Income (COD)

  1. The partnership components would include:

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

    2. the amount of the COD income; and

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

  2. The partner components would include:

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

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

4.31.2.2.14  (05-31-2005)
Report Preparation for Affected Items

  1. In General:

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

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

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

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

4.31.2.2.14.1  (06-20-2013)
Basis and At-Risk

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

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

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

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

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

4.31.2.2.14.2  (06-20-2013)
Gain or Loss on Disposition of a Partnership Interest

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

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

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

    3. If the partner is itself a partnership independently subject to TEFRA procedures, then TEFRA procedures need to be followed at that level to assess the gain against the indirect partners.


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