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Part 8. Appeals

Chapter 19. Appeals Pass-Through Entity Handbook

Section 1. Procedures and Authorities

8.19.1  Procedures and Authorities

8.19.1.1  (02-01-2008)
Overview

  1. The Appeals Pass-Through Entity Handbook describes the special considerations that must be taken into account in the resolution of tax controversies of pass-through entities.

  2. This handbook supplements other manual sections to provide special instructions for pass-through entity cases.

    Example:

    Procedures related to Joint Committee cases are described in IRM 8.7.9 , Joint Committee (JC) Cases. This handbook gives additional guidance when an investor in a pass-through entity subject to TEFRA rules (discussed in IRM 8.19.6.12, Closing Joint Committee Investor Cases) is subject to Joint Committee review.

  3. Any comments or suggestions regarding this Handbook should be directed to the Director, Technical Guidance, Office of Technical Services.

    Caution:

    Users are cautioned to seek guidance from the Appeals Technical Guidance Coordinator(s) for TEFRA if questions arise.

  4. All guidance concerning the Campus TEFRA Functions (CTFs) is for cases controlled on the Partnership Controlled System (PCS). The CTFs only work with key cases and investors controlled on the PCS.

8.19.1.2  (12-01-2006)
Pass-Through Entity Defined

  1. A pass-through entity is an entity that passes its income, loss, deductions, or credits to its owners. The owners may be partners, shareholders, beneficiaries, or investors. It usually does not have an entity level income tax liability. Pass-Through entities include the following:

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

    2. An S corporation;

    3. A joint venture;

    4. A REMIC (real estate mortgage investment conduit);

    5. A limited liability company (LLC) which has more than one member and has not elected to be classified as a corporation under Treasury Reg. section 301-7701-3 (effective January 1, 1997);

    6. Any other business entity that is not a trust or corporation and has not elected to be classified as a C corporation.

8.19.1.3  (12-01-2006)
Electing Large Partnerships

  1. The Taxpayer Relief Act of 1997 created a new class of partnership, the Electing Large Partnership.

  2. IRC 775 defines an electing large partnership and IRC 771 through IRC 777 provide guidance for the reporting of partnership transactions. The provisions of these sections apply to partnership tax years beginning after December 31, 1997.

  3. The procedures for making changes to electing large partnerships (either through an examination or through an administrative adjustment request) are described in IRC 6240 through IRC 6255.

  4. A partnership must have a minimum of 100 partners in the preceding tax year in order to make the election.

  5. Electing large partnerships use a simplified reporting format. Adjustments are either reported by the partnership in the year the examination results are determined, or the partnership can elect to pay an imputed underpayment.

  6. The partnership files Form 1065-B, U.S. Return of Income for Electing Large Partnerships.

    Note:

    Because of the unique nature of the entity and the lack of regulations, contact the Appeals Technical Guidance Coordinator(s) for TEFRA for guidance in processing adjustments for Electing Large Partnerships.

8.19.1.4  (12-01-2006)
Limited Liability Companies

  1. A limited liability company (LLC) is a legal entity created under state law or under the laws of another country. The entity is separate from its owners. It can own property, incur debts, enter into contracts, and sue or be sued. Owners (called members) are shielded from the entity’s liabilities. LLCs can be formed in all 50 states and the District of Columbia.

8.19.1.4.1  (12-01-2006)
Check-the-Box Regulations

  1. The proliferation of LLCs and the uncertainty of their federal tax classification inspired in part a change in the way that organizations are classified.

  2. Under the old rules, the federal tax classification of an entity was based on the substance of the entity, not the form. If a partnership had more corporate characteristics than partnership characteristics, it was classified as a corporation.

  3. Effective January 1, 1997, the state law treatment of an entity determines how it is classified (or may elect to be classified) for federal tax purposes. Entities other than "per se" corporations can elect their classifications.

8.19.1.4.2  (12-01-2006)
Determining Classification of Limited Liability Companies

  1. Treasury Reg. sections 301.7701-1 through 301.7701-4 explain the multi-step process for determining classification.

  2. An organization that is recognized for federal tax purposes as a separate entity is either a trust or a business entity, unless the Internal Revenue Code provides for special treatment for the entity.

  3. Treasury Reg. section 301.7701-2(b) lists the business entities that are considered to be corporations.

  4. Any business entity that is not required to be treated as a corporation is an eligible entity and may choose its classification under the rules of Treasury Reg. section 301.7701-3.

  5. An eligible entity with at least two members can be classified either as a partnership or as an association taxable as a corporation.

  6. An eligible entity with a single member can be classified as an association taxable as a corporation or can be disregarded as an entity separate from its owner.

  7. The regulation sets out default rules so that most entities will not be required to file an election. An entity that does not want to follow the default classification must file Form 8832, Entity Classification Election.

    Note:

    If a business entity which is not a trust or corporation (including a partnership or an LLC with more than one member) elects to be classified as a corporation under Treasury Reg. section 301.7701-3 (effective January 1, 1997), it may also be eligible to make an S corporation election.

8.19.1.4.3  (12-01-2006)
Disregarded Entities

  1. A single member limited liability company (LLC) can be a disregarded entity. For state law purposes it is a separate entity. For federal income tax purposes it is disregarded as separate from its owner.

  2. If the owner is an individual, transactions will be reported on the owner’s individual income tax return.

  3. If the owner is a corporation, transactions will be reported as if the entity were a division or branch of the owner.

  4. There are no special processing instructions for disregarded entities. Examinations of disregarded entities will be done as part of an examination of the owner’s return.

  5. A disregarded entity is considered a viable pass-through entity for purposes of applying the small partnership exception.

8.19.1.5  (12-01-2006)
TEFRA

  1. The Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) established unified procedures for examining partnerships. The unified procedures set forth in IRC 6221 through IRM 6234 apply to partnership tax years that began after September 3, 1982.

  2. S corporations are covered under the TEFRA rules for certain tax years. Coverage under the TEFRA rules began for tax years beginning after December 31, 1982. Effective for tax years beginning after December 31, 1996, S corporations are no longer covered by the TEFRA rules, even though they may have up to 75 shareholders.

    Figure 8.19.1-1

    Differences Between TEFRA and Non-TEFRA Procedures

    TEFRA NON-TEFRA
    An investor is required to report the pass-through items as they are shown on the entity return, or the investor must notify the IRS of the inconsistency. There is no requirement to report pass-through items as they are shown on the entity return.
    The Service is required to notify investors of the beginning and ending of an entity examination. There is no requirement to notify the investors that the entity is being examined.
    Issues on an investor return are bifurcated. Items related to the TEFRA entity are processed independently of items that are not part of the TEFRA proceeding. An investor’s case cannot be closed until the examination of the pass-through entity and any investor items unrelated to the pass-through entity are complete. If a Statutory Notice of Deficiency is issued, it must include all issues.
    One person (the Tax Matters Partner or TMP) is designated to work with the IRS and communicate with the investors. There is no requirement for the entity to designate a person to work with the IRS and communicate with the investors.
    The TMP can extend the statute of limitations for all investors. Statute extensions must be secured from each investor.
    An investor agrees to the changes proposed to the entity return. Special forms have been developed for this purpose. The tax effect on the investor’s return is determined after the agreement to the entity changes is secured. An investor agrees to allow the assessment of the specific dollar amount of tax attributable to items flowing from the entity.
    An investor’s agreement to changes in entity items is final. The investor cannot file a claim for refund. An investor’s agreement to pass-through entity changes may not be final. The investor may file a claim for refund and petition District Court or the United States Court of Federal Claims.
    If agreement cannot be reached, the IRS sends a Notice of Final Partnership (or S Corporation) Administrative Adjustments to the TMP and the investors. The adjustment does not have to produce a deficiency in order for the Tax Court to gain jurisdiction. If agreement cannot be reached, the IRS sends a Statutory Notice of Deficiency to the investor. If the adjustments flowing from the entity do not produce a deficiency, the deficiency notice cannot be sent. (Oversheltered investors may receive a notice of adjustment.)

8.19.1.5.1  (12-01-2006)
Reference Material

  1. The following material may be used for information and guidance on TEFRA partnership and S corporation cases:

    1. IRM 4.29, Partnership Control System (PCS) Handbook

    2. IRM 4.31, Pass-Through Entity Handbook

    3. IRM 8.20, Appeals Case Processing Manual

    4. IRM 35, Chief Counsel Directives Manual – Tax Court Litigation

8.19.1.5.2  (12-01-2006)
TEFRA Inquiry

  1. When an appeals officer is unable to resolve a TEFRA question after researching all available information (statutes, regulations, court cases, handbooks, etc.) the appeals officer should discuss the problem with the area TEFRA coordinator.

  2. If the area TEFRA coordinator is unable to provide an answer, contact the Appeals Technical Guidance Coordinator(s) for TEFRA.

  3. The TEFRA web site on the Appeals home page of the IRS intranet has the list of area TEFRA coordinators. IRM Exhibit 8.19.3-6 lists telephone numbers and addresses of the Campus TEFRA Functions (CTF).

8.19.1.5.3  (12-01-2006)
Terminology

  1. Special terms and acronyms are used in this Handbook to describe processing requirements for TEFRA cases. See Exhibit 8.19.1-1. This exhibit contains a glossary of definitions of the most frequently used terms. Refer to the TEFRA web site on the Appeals home page of the IRS intranet for acronyms commonly used in TEFRA cases.

    1. The term "TEFRA" will be used interchangeably with the phrase "unified proceeding."

    2. The terms "partnership" and "S corporation " will refer to partnerships and S corporations that are not " small partnerships" or "small S corporations" excluded from the TEFRA provisions.

  2. When the Handbook describes procedures for partnerships, the procedures will also apply to S corporations that are subject to the unified proceeding.

  3. The terms key case, tier, and investor will be used in connection with pass-through entities. Definitions for these terms and additional frequently used terms with regard to TEFRA partnerships are found in Exhibit 8.19.1-1.

8.19.1.6  (12-01-2006)
Overview of TEFRA Unified Audit and Litigation Procedures

  1. The enactment of the TEFRA Unified Audit and Litigation Procedures created a new concept in the examination of pass-through entity returns. There is an emphasis on the coordination of activities by the Service, the key case entity, the investors, and the courts.

8.19.1.6.1  (12-01-2006)
Overview of TEFRA Unified Audit and Litigation Procedures Code Sections

  1. IRC 6221: In general, the tax treatment of partnership items is determined at the partnership level.

  2. IRC 6222: Partners should report their share of partnership items in the same manner as reported on the partnership return or notify the Service of the inconsistency. If notification isn’t made, the Service can directly access the difference without issuing a notice of deficiency.

  3. IRC 6223: Partners should receive certain notices regarding a partnership examination. This section describes the notices that must be sent, the partners entitled to receive the notice from the Service, the partners that receive their notice from others, and the effect of the Service’s failure to provide the notice.

  4. IRC 6224: All partners have the right to participate in the partnership proceeding. At any time, a partner may waive that right and any restriction on assessment. The Tax Matters Partner (TMP) may sign a settlement agreement for certain non-notice partners. A settlement agreement binds both the Service and the partner, absent a showing of fraud, malfeasance, or misrepresentation of fact. During specified time periods, all partners whose items have not previously converted have the right to the same settlement that the Service has already accepted. A pass-thru partner’s settlement binds indirect partners.

  5. IRC 6225: Assessment and collection can only occur when specifically authorized or after a partnership proceeding is completed.

  6. IRC 6226: Provisions are made for the judicial review of adjustments proposed by the Service.

  7. IRC 6227: A partner may request a change to the way an item was originally reported on the partnership return. The procedure is known as an administrative adjustment request.

  8. IRC 6228: Provisions are made for the judicial review of adjustments proposed by the partnership but not allowed by the Service.

  9. IRC 6229: Special periods of limitation for determining corrected partnership items and assessing investor returns are created.

  10. IRC 6230: Additional administrative provisions are described. These include coordination with deficiency proceedings, mathematical and clerical errors on the partnership return, claims arising from erroneous computations, special rules with respect to credits or refunds attributable to partnership items, and other miscellaneous administrative matters.

  11. IRC 6231: This section contains definitions and special rules.

  12. IRC 6233: If an entity that is not a partnership files a partnership return, or if there is no entity, the TEFRA rules will still apply.

  13. IRC 6234: Oversheltered returns for partnership tax years ending after 8/5/97 may receive a notice of adjustment.

    Note:

    IRC 6241 through IRC 6245 provide additional rules that apply to S corporations. These sections have been repealed for tax years beginning after December 31, 1996.

8.19.1.6.2  (12-01-2006)
Consistent Reporting on Investor Return

  1. IRC 6222 requires each investor to either report partnership items consistently with the partnership return or notify the Service that he is not doing so.

  2. The notice of inconsistent treatment is made by completing Form 8082, Notice of Inconsistent Treatment or Amended Return (Administrative Adjustment Request (AAR)), and filing it with the investor’s income tax return. This is a dual purpose form. See IRM 8.19.7 for information on AARs.

  3. If an investor fails to notify the Service of an inconsistent reporting of partnership items, the Service may make a direct assessment to conform the investor’s return to that shown on the partnership return.

8.19.1.6.3  (12-01-2006)
Partnerships Affected by Unified Proceedings

  1. If a partnership is required by IRC 6031(a) to file a partnership tax return, it is subject to the unified proceeding (TEFRA rules), unless the small partnership exception applies. The TEFRA rules affect all partnership taxable years which begin after September 3, 1982.

  2. An entity continues to be subject to the TEFRA rules if it has filed a partnership return, even if it is later determined that it is not a separate entity or it is an entity other than a partnership for that tax year. See IRC 6233 and Treasury Reg. section 301.6233-1.

  3. Certain foreign partnerships are required to file a US partnership tax return. Treasury Reg. section 301.6031(a)-1, which is effective for taxable years beginning after December 31, 2000, describes the filing requirements for foreign partnerships.

8.19.1.6.3.1  (12-01-2006)
Small Partnership Exception

  1. Partnerships that qualify as small partnerships are excluded from the TEFRA rules, unless they elect to have the rules apply. "The small partnership exception" was amended effective for partnership taxable years ending after August 5, 1997.

  2. The determination of the applicability of the small partnership exception is critical because of the difference in the examination procedures of TEFRA and non-TEFRA partnerships. To alleviate problems caused when the partnership Schedules K-1 were inaccurate, the Taxpayer Relief Act of 1997 provided that the Service may rely on the partnership return to determine whether a partnership is subject to the TEFRA procedures for partnership taxable years ending after August 5, 1997, if such reliance is reasonable. This provision is primarily applicable in determining the number and type of partners in a partnership. The term "reasonable" is not defined. Note: more than 10 Schedules K-1 does not necessarily indicate that TEFRA applies if there were never more than 10 partners at one time.

  3. To qualify for the small partnership exception for the period which starts with taxable years beginning after September 3, 1982, and ends with tax years ending before August 6, 1997, the partnership must meet the following conditions. The determination is made annually.

    1. No more than ten partners at any time during the taxable year (a husband and wife (and their estates) are treated as one partner).

    2. Each partner is a natural person (other than a non-resident alien) or an estate.

    3. Each partner’s share of each partnership item is the same as his share of every other item (same share rule).

    4. The partnership has not made an election to have the TEFRA rules apply.

    Note:

    The method of determining whether the same share rule is met was decided in Harrell v. Commissioner, 91 T.C. 242 (1988) and Z-Tron v. Commissioner, 91 T.C. 258 (1988). Each partner must have the same interest in any one partnership item as any other partner, as shown on the partnership Schedules K-1. Certain special allocations and basis adjustments are not considered when determining whether the same share requirement is met. See Temporary Treasury Reg. section 301.6231(a)(1)-1T(a)(3).

  4. To qualify for the small partnership exception for taxable years ending after August 5, 1997, the partnership must meet the following conditions. The determination is made annually.

    1. No more than ten partners at any time during the taxable year (a husband and wife (and their estates) are treated as one partner).

    2. Each partner is an individual (other than a nonresident alien), a C corporation, or an estate of a deceased partner. (See IRM 8.19.1.6.3.1.1 below for more information on C corporation partners.)

    3. The partnership has not made an election to have the TEFRA rules apply.

  5. Partnerships that qualify for the small partnership exception may elect to be subject to the unified proceedings. See IRC 6231(a)(1)(B)(ii) and Treasury Reg. section 301.6231(a)(1)-1(b). An election is valid for the taxable year in which the election is made and for all subsequent years of the partnership unless revoked with the consent of the Commissioner.

    Caution:

    The IDRS Transcript commands BMFOLE, ENMOD, and ACTRA have a TEFRA election indicator. Unfortunately, this indicator is not always accurate. The examining agent should be consulted if the TEFRA election indicator is positive but the TEFRA rules have not been followed.

  6. See Exhibit 8.19.1-2. This exhibit presents a flow-chart to assist in the identification of returns that qualify for the small partnership exception.

8.19.1.6.3.1.1  (12-01-2006)
C Corporation and Unincorporated Entity Partners

  1. Because C corporation partners no longer prevent a partnership from qualifying for the small partnership exception for taxable years ending after August 5, 1997, the Service must make an inquiry as to the filing status of a partner. The Service cannot rely on the name shown on the Schedule K-1 to determine whether the entity is a C corporation.

  2. If the partner is a corporation, the Service must determine whether the entity has made an S corporation election.

  3. Unincorporated entities present a different problem because of the "Check-the-Box" regulations. Most partnerships and multi-member limited liability companies (LLCs) will be taxed as partnerships. But, nothing in the name of the entity will tell an examiner whether an unincorporated business entity is actually a C corporation.

    Note:

    An unincorporated entity that elects to be a corporation and does not make an S corporation election is considered to be a C corporation for purposes of the small partnership exception. A disregarded entity is a pass-thru partner because it is not an individual or a C corporation.

8.19.1.6.3.1.2  (12-01-2006)
Identifying the Filing Status of a Partner

  1. The Master File Transaction (MFT) Code and the Document Code will identify the filing status of a partner.

  2. The MFT Code identifies an entity as a partnership (06) or a corporation (02). The fourth and fifth digits of the Document Locator Number (DLN) contain the Document Code for the type of return filed.

    1. If the DLN of an investor’s return has MFT code 02 and Document Code 10 or 11, the investor has generally filed Form 1120.

    2. If the investor’s return has MFT Code 02 and Document Code 16, the partner has generally filed Form 1120S.

  3. See Exhibit 8.19.1-4. This exhibit is entitled Identification of Corporate Partner Filing S Corporation Return by DLN.

8.19.1.6.4  (12-01-2006)
S Corporations Affected by Unified Proceedings

  1. The Subchapter S Revision Act of 1982 added IRC 6241 through IRC 6245. These sections make the partnership unified procedures apply to S corporations except to the extent modified by regulations.

  2. The TEFRA rules apply to S corporations during the 14 year period which starts with tax years beginning after December 31, 1982. The TEFRA rules do not apply to any S corporations for tax years beginning after December 31, 1996.

  3. The Small Business Job Protection Act of 1996 repealed IRC 6241 through IRC 6245 for taxable years beginning after December 31, 1996.

8.19.1.6.4.1  (12-01-2006)
Small S Corporation Exception

  1. An exception to the TEFRA provisions applies to any S corporation qualifying as a small S corporation. See Temporary Treasury Reg. section 301.6241-1T(c)(2). S corporations that qualify as small S corporations will not be subject to the TEFRA rules.

  2. An S corporation, with a return due on or after January 30, 1987 (determined without regard to extensions), is a small S corporation if the corporation has 5 or fewer shareholders, each of whom is a natural person or estate.

    1. Stock owned by a trust, nominee, or similar pass-thru persons is not considered as owned by a natural person.

    2. For purposes of determining the number of shareholders, a husband and wife (and their estates) are treated as one shareholder.

    3. If stock (owned other than by a husband and wife) is owned by tenants in common or joint tenants, each tenant is considered a shareholder.

  3. A small S corporation may elect to be subject to the TEFRA rules. See Temporary Treasury Reg. section 301.6241-1T(c)(2)(v).

    Caution:

    The IDRS Transcript commands BMFOLE, ENMOD, and ACTRA have a TEFRA election indicator. Unfortunately, this indicator is not always accurate. The examining agent should be consulted if the TEFRA election indicator is positive but the TEFRA rules have not been followed.

  4. See Exhibit 8.19.1-3. This exhibit contains a flow-chart to assist in the identification of returns that qualify for the small S corporation exception.

8.19.1.6.4.2  (12-01-2006)
Taxable S Corporations

  1. An S corporation may be subject to an entity level tax. The following code sections impose a tax on the S corporation, not on the shareholders:

    1. IRC 1363(d)(2) - (Recapture of LIFO benefits)

    2. IRC 1371(d)(2) - (Investment credit recapture)

    3. IRC 1374 - (Built-in gains)

    4. IRC 1375 - (Tax on certain passive investment income)

  2. The following two interrelated proceedings are required for protective purposes since the government’s primary position is that corporate level taxes under subtitle A of the Internal Revenue Code are determined under the TEFRA procedures:

    1. Unified S corporation proceeding to make a determination regarding the S corporation items, and

    2. Corporate deficiency proceeding to determine the S corporation’s deficiency.

  3. Two different settlement documents will be used:

    1. Form 870-S(AD) showing the determination of the S corporation items secured from each shareholder and a corporate officer on behalf of the corporation, and

    2. Form 870 or Form 870-AD showing the determination of the corporate deficiency signed by a corporate officer.

  4. Both the shareholder’s statute of limitation under IRC 6229 and the corporation’s statute under IRC 6501 should be protected.

8.19.1.6.4.3  (12-01-2006)
Invalid S Corporation Elections

  1. The unified proceedings apply to any S corporation return ( Form 1120S) filed for tax years beginning after December 31, 1982 through tax years ending before January 1, 1997.

  2. If an entity files an S corporation return (during the time that the unified proceedings applied to S corporations), it is subject to the TEFRA rules unless it qualifies as a small S corporation. This is true even if it is later determined that the entity was not an S corporation or that the entity did not exist for the taxable year. See IRC 6233.

  3. Form 870-S(AD) will be solicited from each shareholder on settlements covering these situations. If, however, the S corporation qualifies as a small S corporation, IRC 6233 will not cause the TEFRA procedures to apply.

8.19.1.6.5  (12-01-2006)
Tax Matters Partner or Tax Matters Person (TMP)

  1. Under the TEFRA unified proceedings, a statutory representative acts as the liaison between the partners (or shareholders), the Service, and the courts. That person is referred to as Tax Matters Partner (TMP) in the case of a partnership or Tax Matters Person (TMP) in the case of an S corporation.

  2. The TMP plays a pivotal role in any partnership or S corporation proceeding for a specific taxable year.

    Note:

    The TEFRA partnership provisions are generally made applicable to S corporations by former IRC 6244 .

8.19.1.6.5.1  (12-01-2006)
Duties and Responsibilities of the TMP

  1. The TMP works with the Service and the courts during a unified proceeding. Failure of the TMP to fulfill responsibilities regarding notices or other acts does not affect the applicability of the proceeding or adjustment to any partner. See IRC 6230(f).

  2. These are the duties performed by the TMP. When considering the duties of the TMP of an S corporation, substitute S corporation for partnership and shareholder for partner.

    1. Furnishes to the Service the name, address, profits interest, and taxpayer identification number of each partner during the taxable year for which a Notice of Beginning of Administrative Proceeding (NBAP) is issued and provides revisions and additional information as may be necessary. See IRC 6230(e).

    2. Sets the time and place for meetings with the Service regarding partnership matters. See Treasury Reg. section 301.6224(a)-1.

    3. Executes a consent on behalf of the partnership which extends the statute of limitations on the income tax returns of the partners. See IRC 6229(b).

    4. Binds non-notice partners to any settlement negotiated with the Commissioner by stating the intention to bind non-notice partners in the executed agreement form, unless a non-notice partner has filed a statement in accordance with Treasury Reg. section 301.6223(b)-1(c)(4). See IRM Exhibit 8.19.3-4 for language to be included on the settlement agreement. See also Treasury Reg. section 301.6224(c)-1(a).

    5. Chooses the forum in which the partnership adjustments will be litigated by petitioning the Tax Court, United States Court of Federal Claims Court, or a U. S. District Court within the first 90 days after the Final Partnership Administrative Adjustment (FPAA) is mailed. See IRC 6226(a).

    6. Intervenes in court action brought by a partner other than the TMP. See IRC 6226(b)(6).

    7. Executes a stipulated decision under Tax Court Rule 248(a) that binds all parties to the action in a judicial proceeding before the Tax Court. See Tax Court Rule 248(a).

    8. Files an Administrative Adjustment Request (AAR) on behalf of the partnership and petitions Tax Court, U. S. District Court, or the United States Court of Federal Claims if the AAR is not allowed in whole or in part. See IRC 6227(c) and IRC 6228(a)(1) .

    9. Executes a consent which extends the time for filing suit with regard to an AAR. See IRC 6228(a)(2)(D).

  3. The TMP of a pass-thru partner which is a TEFRA entity has the following additional duties:

    1. Binds unidentified indirect partners to any settlement agreement negotiated with the Commissioner. See Treasury Reg. section 301.6224(c)-2.

    2. Forwards a copy of any notice or other information received regarding the partnership to the person(s) holding an interest through the pass-thru entity within 30 days of receipt. See Treasury Reg. section 301.6223(h)-1.

  4. The Tax Court sets out certain additional TMP responsibilities on cases in its jurisdiction.

    1. Notifies partners of the filing of a petition by the TMP within 5 days of receiving the Notification of Receipt of Petition from the court. Tax Court Rule 241(f)(1) sets out the items to be included in the notice.

    2. Provides partners a copy of the petition by the TMP or any other partner within 10 days of the receipt of a request from a partner. See Tax Court Rule 241(g).

    3. Provides all partners (except participating partners) with a copy of the respondent’s motion for entry of decision, proposed decision, certificate of service, and a copy of Rule 248 within 3 days of receipt. See Tax Court Rule 248(b)(3).

    4. Within 7 days of receipt of a statement from the Service disclosing a settlement agreement, provides a copy to all parties to the action. See Tax Court Rule 248(c)(2).

  5. The TMP works with the partners during a unified proceeding.

    1. The TMP must provide all non-notice partners with copies of any official IRS notice. The NBAP must be furnished to non-notice partners within 75 days of the date it was mailed by the Service. The FPAA must be furnished to such partners within 60 days of the date it was mailed by the Service. See Treasury Reg. sections 301.6223(g)-1(a)(1) for NBAP, 301.6223(g)-1(a)(2) for FPAA, and 301.6223(g)-1(a)(3) for exceptions.

    2. The TMP is required to keep partners informed of all administrative and judicial proceedings relating to the adjustments at the partnership level of partnership items ( IRC 6223(g)).

    3. The partners that the TMP must keep informed include all notice partners, notice group representatives, and all other partners (except those listed in Treasury Reg. Section 301.6223(g)-1) within 30 days of taking the action or receiving the information with respect to the matter.

  6. The information that should be furnished to partners is described in Treasury Reg. section 301.6223(g)-1(b).

    1. Closing conference with the examining agent.

    2. Proposed adjustments, appeal rights, and requirements for filing the protest.

    3. Time and place of any appeals conference.

    4. Acceptance by the Service of any settlement offer.

    5. Consent to the extension of the period of limitations with respect to all partners.

    6. Filing of a request for administrative adjustment on behalf of the partnership.

    7. Filing of a petition for judicial review of FPAA or AAR filed on behalf of the partnership.

    8. Filing of any appeal to any judicial determination.

    9. Final judicial determination.

  7. The TMP does NOT have to inform the following:

    1. Partners whose partnership items became non-partnership items before 30 days after taking the action or receiving the information.

    2. Any indirect partners who have not been identified to the TMP at least 30 days before the TMP is required to provide the information.

    3. Any spouse (other than one who is separately listed or has a separate interest in the partnership) who filed a joint return with a partner who received the notice/information.

    4. Members of a notice group which receive the notice on his/her behalf.

    5. Partners who have received the information from another person.

8.19.1.6.5.2  (12-01-2006)
Appointing an Attorney-in-Fact

  1. The TMP may appoint an attorney-in-fact by use of Form 2848 (Power of Attorney and Declaration of Representative). See Treasury Reg. section 301.6223(c)-1(e) and IRM 8.19.6.5 , Investor Power of Attorney, for instructions regarding power of attorney designations by an investor.

  2. The following suggestions are recommended for completing Form 2848:

    1. The TMP should execute the form in his capacity as the TMP.

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

    3. Under the heading, "Type of Tax" insert " TEFRA partnership proceeding."

    4. Under "Federal Tax Form Number" insert " 1065 and consequential adjustments" .

  3. It is recommended that the TMP, not a representative, sign legally significant documents, such as consents on behalf of the partnership. See Treasury Reg. section 301.6229(b)-1 for conditions under which a consent may be signed by a person other than the TMP.

  4. The TMP may not be able to delegate to a representative the authority to bind non-notice partners to a settlement agreement under IRC 6224, or, under certain circumstances, to bind all partners to a stipulated decision under Tax Court Rule 248.

8.19.1.6.5.3  (12-01-2006)
Designation of Partnership TMP

  1. The rules for determination of the TMP of a partnership are given in Treasury Reg. section 301.6231(a)(7)-1. See IRM 8.19.1.6.5.3.1 for a discussion of limited liability companies (LLC).

    Caution:

    If a petition has been filed with the Tax Court, only the court may appoint or remove the TMP (Tax Court Rule 250).

  2. A partnership may designate a general partner, but not a limited partner, as its Tax Matters Partner (TMP).

  3. If the partnership does not designate a TMP or if the prior designation of the TMP has been terminated without subsequent designation, the TMP will be determined according to Treasury Reg. section 301.6231(a)(7)-1(m) (largest profits interest rule) or selected pursuant to Treasury Reg. section 301.6231(a)(7)-1(n) (selection where largest profits interest rule is impracticable). See IRM 8.19.1.6.5.3.5 for discussion of largest profits interest rule. See IRM 8.19.1.6.5.3.6 for discussion of selection where largest profits interest rule is impracticable.

  4. The TMP must be determined for each taxable year.

8.19.1.6.5.3.1  (12-01-2006)
TMP - Limited Liability Company (LLC)

  1. Treasury Reg. section 301.6231(a)(7)-1 must be adapted for a limited liability company (LLC) classified as a partnership because the LLC has members, not general or limited partners.

  2. Treasury Reg. section 301.6231(a)(7)-2 designates the members of an LLC that are treated as general partners for purpose of the selection of a TMP as a:

    1. Member-manager who, alone or with others, is vested with the continuing exclusive authority to make the management decisions necessary to conduct the business for which the LLC was formed.

    2. If no member-managers have this authority, each member is treated as a member-manager (general partner).

8.19.1.6.5.3.2  (12-01-2006)
Who May Be a Partnership TMP

  1. The person or entity that is allowed to be the TMP depends on whether the partnership designates its TMP.

  2. If the partnership makes a designation, the person/entity eligible to become the TMP is either

    1. a general partner in the partnership at some time during the tax year for which the designation is made, or

    2. a general partner in the partnership at the time the designation is made.

  3. If the partnership does NOT make a designation, the person/entity eligible under Treasury Reg. section 301.6231(a)(7)-1(m) (largest profits interest rule) must be a general partner at the close of the taxable year. See IRM 8.19.1.6.5.3.5 for discussion of largest profits interest rule.

    Caution:

    A general partner whose designation as TMP was terminated as a result of its filing for bankruptcy cannot be reselected as TMP under the largest profits interest rule.

  4. If the partnership does NOT make a designation, the eligible person/entity selected by the Service under Treasury Reg. section 301.6231(a)(7)-1(n) (selection where largest profits interest rule is impracticable) is ANY partner during the tax year for which the designation is made. Only the Service may select a limited or indirect partner to be TMP. See IRM 8.19.1.6.5.3.6 for discussion of selection where largest profits interest rule is impracticable.

    Note:

    Commissioner consent is required to designate a non-US person as TMP, unless there is no eligible US person.