AccessibilitySkip to Top NavigationSkip to Main ContentHome  |  Contact IRS  |  About IRS  |  Site Map  |  Español  |  Help  

Part 8. Appeals

Chapter 19. Appeals Pass-Through Entity Handbook

Section 1. Procedures and Authorities (Cont. 1)

8.19.1  Procedures and Authorities (Cont. 1)

8.19.1.6 
Overview of TEFRA Unified Audit and Litigation Procedures

8.19.1.6.8 
Controls and Processing of TEFRA Cases

8.19.1.6.8.2  (12-01-2006)
TEFRA Investor Case

  1. Generally the investor cases are suspended and controlled in the Campus TEFRA Function (CTF) at certain campuses. The appeals officer evaluates the case at the partnership level. The CTF is responsible for the tax computations and timely assessments at the investor level, except for CIC corporation, Joint Committee, and other corporate specialty cases.

  2. The computation and timely assessment of tax for investors who are CIC corporation, Joint Committee, and other corporate specialty taxpayers is the responsibility of the employee with jurisdiction of the investor case when the partnership items are converted to non-partnership items, the FPAA is defaulted, or the court decision is final. See IRM 8.19.6.17 , TEFRA Investor Coordinated Industry Cases (CIC) Corporations, Joint Committee or Other Corporate Specialty Cases, for details.

8.19.1.6.8.3  (12-01-2006)
Partnership Control System (PCS)

  1. The Partnership Control System (PCS) is a separate computer system that serves as a vital link between the key case return and the investor returns. It performs a number of tasks:

    1. Holds both pass-through entity and related investor records.

    2. Establishes a linking relationship (linkage) between a pass-through entity record and the related investor records.

    3. Distinguishes between TEFRA and non-TEFRA records.

    4. Places a freeze condition for each related investor on the investor’s corresponding AIMS record to prevent premature closing of the AIMS record (which would break all pending linkages).

    5. Generates TEFRA investor settlement letters.

    6. Generates notices to TEFRA investors.

    7. Provides IDRS terminal research capabilities for key case and investor records.

    8. Records the investor one-year statute date and provides reports to assist in the timely assessment of tax.

  2. IRM 4.29, Partnership Control System (PCS) Handbook gives a detailed description of the Partnership Control System.

8.19.1.6.8.4  (12-01-2006)
Examination Process

  1. The examination of the key case entity officially begins when the Notice of Beginning of Administrative Proceeding (NBAP) is presented to the TMP. When the case is linked on PCS, the Campus TEFRA Function (CTF) mails NBAPs to all notice partners. A duplicate copy of the NBAP should be mailed to the TMP at that time so that the certified mailing list can be used to show mailing to all relevant partners.

  2. The examiner conducts the audit and prepares a summary report that is given to the TMP for forwarding to the partners. A closing conference will be scheduled no earlier than 30 days after the issuance of the summary report to the TMP unless the right to the conference is waived in writing by the TMP.

  3. Unagreed cases are forwarded to the Quality Measurement Staff (QMS) for 60-day letter preparation. The 60-day letter is the equivalent of a 30-day letter in deficiency proceedings. It gives the investors the opportunity to appeal the findings of the examiner. QMS forwards the 60-day letter package to the key case CTF for mailing to the TMP and all notice partners.

  4. If no partner protests, QMS prepares a notice of Final Partnership Administrative Adjustment (FPAA) or notice of Final S Corporation Administrative Adjustment (FSAA) and forwards it to the key case CTF for mailing to the TMP and all notice partners/shareholders. For protested cases, QMS batches all of the protests together and forwards the key case file to Appeals for consideration.

  5. A detailed explanation of the examination process is given in IRM 4.31.2, TEFRA Examinations – Field Office Procedures and IRM 4.31.5, Non-TEFRA Examinations – Field Office Procedures. IRM Exhibit 4.31.2-2 provides a TEFRA Key Case Examination Time Chart and IRM Exhibit 4.31.2-1 provides a TEFRA Partnership Criteria Flow-Chart.

8.19.1.6.8.5  (12-01-2006)
Campus Processing

  1. A Campus TEFRA Function (CTF) is currently located at two campuses: Brookhaven and Ogden. The CTF may act as a key case CTF or an investor CTF or both.

8.19.1.6.8.5.1  (12-01-2006)
Key Case Campus TEFRA Function (CTF)

  1. The key case Campus TEFRA Function (CTF) services the Appeals office that controls the TEFRA key case return. The key case CTF sets up an administrative file for each key case and generates notices and settlement agreements to the TMP, notice investors and notice group representatives. Mailings include NBAPs, 60-day letters, settlement offers, and FPAA/FSAAs.

  2. Generally, the Brookhaven Campus is the key case campus for key cases generated by SBSE. Generally, the Ogden Campus is the key case campus for key cases generated by LMSB. To determine which CTF is the key case campus, follow these steps:

    1. Order IDRS Command Code TSINQP for each year of the key case.

    2. Look in the "CTF-CD" field for either " OSC" (Ogden) or "BSC" (Brookhaven).

    3. If the TSINQP shows Ogden, then Ogden is the key case campus.

    4. If the TSINQP show Brookhaven, then order IDRS Command Code TXMODC for each year of the key case. If there is no data, then Ogden is the key case campus. If there is data, look in the "Control Base and History Information" section. If the "Assign To" column has numbers that begin with 0179, then Brookhaven is the key case campus. If there are no numbers in the "Assign To" column, then Ogden is the key case campus.

8.19.1.6.8.5.2  (12-01-2006)
Investor CTF

  1. The investor CTF controls the partner/shareholder returns. The investor CTF receives the signed settlement agreements from the key case CTF, makes assessments, and generates audit reports ( Form 1902-C ) to the taxpayer showing the tax liability of each individual investor under its control. It also prepares and mails 30-day and 90-day letters for penalties and other affected items. It may be referred to as the "report campus."

  2. Generally, the investor and key case CTF are the same unit.

    1. Prior to 1998, the investor CTF was located in the campus where the investor tax return was filed (or the CTF which provided the services for that campus).

    2. After 1998, the key case CTF is also the investor CTF if there is no open AIMS database at the time the PCS controls are initiated, unless the case is a CIC corporation or other corporate specialty case (see IRM 8.19.6.17, TEFRA Investor Coordinated Industry Case (CIC) Corporations, Joint Committee or Other Corporate Specialty Investor Cases).

  3. If there is an open AIMS database at the time that the PCS controls are initiated and the case is not a CIC corporation or other corporate specialty case, the investor CTF will be the CTF that already controlled the investor return.

  4. If the investor return is a CIC corporation or other corporate specialty taxpayer, the CTF will open the AIMS database to the area that customarily does that examination. The CTF will notify the group that does that examination that the case is open on AIMS with the partnership linkage, and the group is responsible for the investor return.

8.19.1.6.9  (12-01-2006)
Partnership/Non-Partnership/Affected Items

  1. Items are generally classified as partnership items, non-partnership items, or affected items. The classification of an item governs whether the court has jurisdiction over a particular item in a particular proceeding. For example, if a partnership item is not raised in the partnership level proceeding, it cannot be raised by the Service, the partnership, or any of the partners in an affected item proceeding.

  2. A partnership item is any item more appropriately determined at the partnership level than at the partner level. See IRC section 6231(a)(3) and IRM 8.19.1.6.9.1.

  3. A non-partnership item is an item that is not (or is not treated as) a partnership item. See IRC 6231(a)(4) and IRM 8.19.1.6.9.2.

    1. For example, the Form 1040 of an investor in a TEFRA partnership may report both rental income and income from a TEFRA partnership. The rental income is a non-partnership item. Any adjustments in connection with this item will be made using deficiency procedures.

    2. Partnership items may be converted to non-partnership items. For example, when the taxpayer enters into a settlement agreement for adjustments to the TEFRA partnership, the partnership items are converted to non-partnership items.

  4. An affected item is any item to the extent it is affected by a partnership item. There are two types of affected items—those that only require a direct assessment and those that require partner level determinations through a notice of deficiency. See IRC 6231(a)(5) and IRM 8.19.1.6.9.3.

  5. Any change to the tax liability of a partner that is attributable to a computation of adjustments of partnership items is directly assessed. The Service computes the tax effect of the adjustments and sends the partner a notice of the computational adjustment. See IRC 6231(a)(6) and IRM 8.19.1.6.9.7.

  6. An exception to both the TEFRA partnership rules and deficiency procedures is made for the correction of mathematical and clerical errors. See IRC 6230(b) and IRM 8.19.1.6.9.7.1.

8.19.1.6.9.1  (12-01-2006)
Partnership Items

  1. The term "partnership item" is used to describe both partnership items and S corporation items (for tax years beginning before January 1, 1997). The same general principles apply to the treatment of S corporation items, defined in former IRC 6245 and Temporary Treasury Reg. section 301.6245-1T. See IRM 8.19.1.6.9.1.1 for a description of partnership items under Treasury Reg. section 301.6231(a)(3)-1.

  2. In general, partnership items are items taken into account for the partnership’s taxable year under any provision of subtitle A that are more appropriately determined at the partnership level than at the partner level. Subtitle A includes code sections 1 through 1564. Subtitle A does not include the following:

    • Estate and Gift Taxes (Subtitle B)

    • Employment Taxes and Collection of Income Tax (Subtitle C)

    • Miscellaneous Excise Taxes (Subtitle D)

    • Alcohol and Tobacco and Certain Other Excise Taxes (Subtitle E)

    • Procedure and Administration (Subtitle F)

    • The Joint Committee on Taxation (Subtitle G)

    • Financing of Presidential Election Campaigns (Subtitle H)

    • Coal Industry Health Benefits (Subtitle I)

  3. The determination of whether a partnership engaged in sham transactions or whether the partnership transactions have economic substance is made at the partnership level.

  4. Statute of limitations defenses regarding the determination of partnership items are raised only at the partnership level.

  5. If a partnership return is filed by an entity for a taxable year, but it is determined that the entity is not a partnership for that year, the TEFRA partnership rules will apply. This issue, determining whether an entity is a partnership, is a partnership item that is to be raised in a partnership proceeding.

  6. If a partnership return is filed for a taxable year, but it is determined that there is no entity, the TEFRA partnership rules will apply. The issue of whether the entity exists is a partnership item to be raised in a partnership proceeding.

  7. Some issues combine a determination at the partnership level with a determination at the partner level. These are discussed in IRM 8.19.1.6.9.4, Issues With Both Partnership and Partner Level Elements.

8.19.1.6.9.1.1  (12-01-2006)
Treasury Reg. Section 301.6231(a)(3)-1

  1. Treasury Reg. section 301.6231(a)(3)-1 provides that partnership items include the partnership aggregate and each partner’s share of each of the following:

    1. Items of income, gain, loss, deduction, or credit of the partnership;

    2. Expenditures by the partnership that are not deductible in computing its taxable income, such as foreign taxes or charitable contributions;

    3. Any item that could be a tax preference item for any partner;

    4. Exempt income;

    5. The amount and type of any partnership liabilities (e.g., recourse or non-recourse);

    6. Other amounts determinable at the partnership level with respect to partnership assets, investments, transactions, and operations necessary to enable the partnership or the partners to determine the investment credit, recapture of the investment credit, amounts at risk in any activity to which IRC 465 applies, the depletion allowance under IRC 613A with respect to oil and gas wells, and the application of IRC 751(a) and IRM 751(b).

  2. In addition, Treasury Reg. section 301.6231(a)(3)-1 also provides that partnership items include:

    1. Guaranteed payments.

    2. Optional adjustments to the basis of partnership property pursuant to an IRC 754 election (including necessary preliminary determinations, such as the determination of a transferee partner’s basis in a partnership interest).

  3. The character of an amount received from a partner, the amount of money contributed, and the basis to the partnership of contributed property are considered partnership items.

    1. To the extent that a determination of an item relating to a contribution can be made from determinations that the partnership is required to make, that item is a partnership item.

    2. To the extent that the above-mentioned determination requires other information, that determination is not a partnership item.

  4. It is not necessary for the regulations to specifically identify an item as a partnership item. For example, tax benefit items have been determined to be partnership level items, even though not specified in the regulation.

8.19.1.6.9.2  (12-01-2006)
Non-Partnership Items

  1. IRC 6231(a)(4) provides that a non-partnership item is an item that is not (or is not treated as) a partnership item.

  2. A partnership item may be converted to a non-partnership item under certain circumstances.

  3. When an investor enters into a settlement agreement with the Service, partnership items are converted to non-partnership items. Deficiency procedures do not apply to these conversions. The tax attributable to the adjustments is assessed by means of a computational adjustment.

  4. Some conversions of partnership items to non-partnership items, other than by settlement, will require the Service to use deficiency procedures in the resolution of any controversy. See IRM 8.19.1.6.9.2.1.

  5. Once partnership items have been converted to non-partnership items for a partnership tax year, they cannot regain status as partnership items. For example, if a partner files a petition in bankruptcy, partnership items become non-partnership items on the date the petition is filed. The non-partnership items will not revert back to partnership items if the bankruptcy case is dismissed.

8.19.1.6.9.2.1  (12-01-2006)
Conversion Events Requiring Use of Deficiency Procedures

  1. The following conversion events require the use of deficiency procedures in resolution of any controversy.

    1. The Service sends the partner a notice that partnership items will be treated as non-partnership items, but only if it is sent before an NBAP is mailed to the TMP and only if the partner has filed a Form 8082. See IRC 6231(b)(1)(A) and IRC 6231(b)(3).

    2. The partner files suit under IRC section 6228(b) after the Service fails to allow an administrative adjustment request (AAA) with respect to any of the items. See IRC 6231(b)(1)(B).

    3. The Service fails to provide notice under IRC 6223(a) , and the partner elects to have partnership items treated as non-partnership items (by taking no action if the partnership proceeding is finished or by making an election, if the proceeding is ongoing).

    4. A termination or jeopardy assessment is made (conversion occurs the moment before the assessment is made). See Treasury Reg. section 301.6231(c)-4.

    5. A partner is the subject of a criminal income tax investigation (conversion occurs on the date that a written notice of conversion is mailed to a taxpayer). Treasury Reg. section 301.6231(c)-5.

    6. An indirect method of proof is used to determine a partner’s tax liability (conversion occurs on the date that a statutory notice of deficiency is mailed). See Treasury Reg. section 301.6231(c)-6.

    7. A petition in bankruptcy is filed or a receiver is appointed (conversion occurs on the date the petition is filed or the receiver is appointed). See Treasury Reg. section 301.6231(c)-7.

    8. A request for prompt assessment is filed (conversion occurs on the date the request is filed). See Treasury Reg. section 301.6231(c)-8.

8.19.1.6.9.3  (12-01-2006)
Affected Items

  1. An affected item is defined in IRC 6231(a)(5) as any item to the extent such item is affected by a partnership item.

  2. There are two types of affected items.

    1. those that may be directly assessed as purely computational adjustments once the partnership level proceeding is complete, and

    2. those that require one or more partner level determinations to be made once the partnership level proceeding is complete.

8.19.1.6.9.3.1  (12-01-2006)
Affected Items, Other Than Penalties, Not Requiring Partner Level Determinations

  1. A direct computational assessment is only appropriate where the effect of the partnership item on the partner’s tax liability can be computed mathematically without further determinations at the partner level. If an additional factual determination is required, the adjustment cannot be made as a computational adjustment. See IRM 8.19.1.6.9.7 for additional discussion regarding computational adjustments.

    Example:

    A change to the threshold for the medical expense deduction under IRC 213 is an affected item that is adjusted in a computational adjustment. No further factual determination is required.

  2. Changes to carryovers and carrybacks of credits and net operating losses are affected items made as computational adjustments, even when the year in which the loss or credit has an effect on the investor’s tax liability is different from the tax year that was adjusted.

    Example:

    As a result of the examination of the 1997 partnership tax return of Hydrangea Associates, the net operating loss deduction reported on Philip Phlox’s 1997 Form 1040 was reduced by $30,000. Phlox had carried the loss back to 1994. The Service will make a computational adjustment for 1994 that will reduce the net operating loss carryback by $30,000.

  3. The alternative minimum tax will be an affected item made with a computational adjustment for any tax year where the taxpayer has partnership items because adjusted gross income, the starting point for calculating the AMT, will include partnership items.

  4. Affected items that do not require partner level determinations should not be raised in either an FPAA or a statutory notice of deficiency. Instead, changes are included in a computational adjustment subsequent to the partnership proceeding and/or the entry of a final decision of a court.

8.19.1.6.9.3.2  (12-01-2006)
Affected Items, Other Than Penalties, Requiring Partner Level Determinations

  1. Deficiency procedures apply to affected items that require factual development at the partner level.

  2. The statute for affected items requiring a partner level determination is the same as the statute for partnership items. For example, in the case of a settlement of partnership items, IRC 6229(f) is the controlling statute for the assessment of adjustments attributable to partnership items, computational affected items, and affected items requiring a partner level determination.

  3. The Service is not required to conduct a partnership proceeding before it examines an affected item issue that requires a partner level determination. If there is no partnership proceeding, the IRS accepts the partnership return as filed. See Roberts, 94 TC, 853 (1990) page 860.

    Caution:

    Failing to conduct a partnership proceeding will bind the Service to all partnership items as reflected on the partnership books and records for purposes of determining affected items.

  4. Some issues combine a determination at the partnership level with a determination at the partner level. These are discussed in IRM 8.19.1.6.9.4, Issues With Both Partnership and Partner Level Elements.

8.19.1.6.9.3.3  (12-01-2006)
Affected Item Notice of Deficiency

  1. If the affected item issue is unagreed, an affected item notice of deficiency is issued.

  2. Affected item notices of deficiency are an exception to IRC 6212(c), which restricts the number of deficiency notices that may be sent to a taxpayer for a taxable year. An investor may receive a statutory notice for non-partnership items and a statutory notice for affected items of a TEFRA partnership.

  3. The affected item notice of deficiency is treated in the same way as a deficiency notice issued for non-partnership items. The taxpayer may petition the Tax Court or pay the asserted deficiency, file a claim for refund, and bring a refund action if the claim is not allowed.

  4. An affected item notice of deficiency generally includes only the affected items of one partnership. Separate notices generally are sent for each partnership for each taxable year. See IRC 6230(a)(2)(B).

    Example:

    Marilyn Anemone is a partner in 2 TEFRA partnerships, Calla Lily Partners and Foxglove Associates. She has petitioned a statutory notice of deficiency that was issued for non-partnership items. She enters into settlement agreements for partnership items of both partnerships but does not agree to affected item adjustments that require a partner-level determination. The Service may issue two separate affected item notices of deficiency (one for each partnership).

8.19.1.6.9.4  (12-01-2006)
Issues With Both Partnership and Partner Level Elements

  1. The classification of an item as a partnership item or an affected item can be complicated when elements of both are contained within the issue. There may be an initial determination made at the partnership level, with additional factual development required at the partner level. For example, both partnership and partner level determinations are found in such issues as disguised sales, guaranteed payments, transactions to which IRC 707(a) applies, passive loss limitations, at risk limitations, income from cancellation of indebtedness, the basis of a partner’s interest in the partnership, and the limitation on partnership losses under IRC 704(d).

  2. The following examples are intended to assist in understanding the interrelationship of partnership items and affected items that require a partner level determination. They are not intended as a complete list of all issues that have both partnership and affected item components.

    1. Guaranteed Payments – The amount of the guaranteed payment and the allocation of the payment are partnership items. The deductibility of business expenses incurred by the partner in the course of earning the guaranteed payment is an affected item if the business expenses are not deducted by the partnership.

    2. Transactions To Which IRC 707(a) Applies – The amount and character of amounts transferred from the partnership to the partner or from a partner to the partnership in a transaction to which IRC 707(a) applies are partnership items. A partner’s gain or loss on the transaction requires a partner level determination. For example, if a partner sells office supplies to the partnership, the amount and character of the sale are partnership items, but the computation of the gain recognized by the partner may require a partner level determination of the basis of the supplies sold to the partnership.

    3. Passive Loss Limitations – Partnership level determinations include whether the entity engaged in rental activity, whether the entity engaged in a trade or business under IRC 162, and whether a partner in a limited partnership is a general or a limited partner for passive loss purposes. A partner level determination must be made to determine whether the partner materially participated in the trade or business of the partnership.

    4. At Risk Limitations – The nature and extent of partnership liabilities (for example, whether a loan is recourse or non-recourse) is determined at the partnership level. The determination of whether a partner has protection from loss can only be resolved by looking to the existence of third party agreements entered into by the individual partners. The determination of whether the partner is a related party under IRC 465(b)(3) is also determined at the partner level.

    5. Income from Cancellation of Indebtedness - Issues at the partnership level include whether partnership property was repossessed, whether partnership debt was recourse or nonrecourse, the fair market value of partnership property at the time of repossession, the amount of partnership debt, the adjusted basis of partnership property, whether the debt is Qualified Real Property Business Indebtedness under IRC 108(c)(3), and whether the debt is qualified acquisition indebtedness. Issues at the partner level include whether the partner is an entity other than a C corporation, whether the partner is bankrupt or insolvent, and whether the partner has made a proper election to reduce basis in depreciable property.

    6. Basis of a Partner’s Interest in a Partnership – Issues at the partnership level include the basis of property contributed to the partnership (including money), the total and distributive share of taxable income of the partnership, exempt income, partnership losses, and expenditures not deductible, not capitalized, increases and decreases in a partner’s share of partnership liabilities (for example, the nature and amount of the partnership loans), and the amount of cash distributed and the adjusted basis of property distributed to a partner. Issues at the partner level include the cost to purchase the partnership interest, the basis at the time of acquisition by purchase, gift, bequest, transfer, or exchange, and the basis in the partner’s interest in the partnership immediately before a distribution.

    7. Limitation of Partnership Losses Under IRC 704(d) – The amount of the partnership loss distributed to the partner is a partnership item. The limitation of the loss, measured by a partner’s basis in the partner’s interest in the partnership, is an affected item because it requires a partner level determination.

8.19.1.6.9.5  (12-01-2006)
Affected Items - Penalties

  1. Penalty issues have both partnership and partner level elements. For example, the determination of the value of partnership property is made at the partnership level. If there is a substantial misstatement of valuation, a partner may not be subject to the penalty if it is shown that the partner acted in good faith and had reasonable cause for the actions taken.

  2. For pass-through entity tax years ending before August 6, 1997, the assessment of penalties is accomplished in the same manner as other affected items that require a determination at the partner level. Penalties are asserted in a deficiency procedure.

  3. For partnership tax years ending after August 5, 1997, the applicability of penalties is determined at the partnership level. Penalties will be assessed as a computational adjustment regardless of whether partner level determinations are required for the penalty or underlying deficiency. The partner must pay the penalty and file a claim for refund within six months of the date that the notice of computational adjustment is mailed. See IRC 6230(c)(2)(A). See also IRM 8.19.2.10.3(3) and IRM 8.19.3.9.1(7).

  4. For partnership tax years ending after August 5, 1997, the partnership level elements of each penalty applicable to the partners should be clearly described on the schedule of adjustments for all settlement agreements and FPAAs.

8.19.1.6.9.6  (12-01-2006)
Appeals Consideration of Penalties and Other Affected Items

  1. If penalties or other affected items are proposed by Compliance, they should be included in an Affected Item RAR. The appeals officer will evaluate the issues and develop a settlement position based on the facts at the key case level. See IRM 8.19.3.1 and IRM 8.19.3.9.1.

8.19.1.6.9.7  (12-01-2006)
Computational Adjustments

  1. IRC 6231(a)(6) defines a computational adjustment as the change in the tax liability of a partner that properly reflects the treatment of a partnership item. A computational adjustment may be directly assessed without resorting to deficiency procedures if no partner-level determinations are required; such a computational adjustment is used in three circumstances.

    1. To conform the partner’s return to the treatment of partnership items on the partnership return when the partner does not notify the Service of an inconsistent treatment of the partnership items.

    2. To apply the results of a partnership determination, such as a settlement agreement, a defaulted FPAA, or a court decision.

    3. To disallow the losses and credits claimed by a partner when the provisions of Treasury Reg. section 301.6231(f)-1 are not met. The regulation applies to partnerships that do not file a partnership tax return and, at the close of a taxable year, have a TMP residing outside of the United States or maintain books and records outside of the United States. The Service may make a computational adjustment to eliminate the losses and credits if no return is filed within 60 days of the date the Service mails a notice to the partner.

  2. The computational adjustment may include a change in tax liability that reflects a change in an affected item where that change is necessary to reflect the treatment of a partnership item and the affected item does not require a partner level determination.

  3. The computational adjustment may be assessed without following deficiency procedures if no partner-level determinations are required. A notice of computational adjustment is sent to the taxpayer which shows the adjustments made to the partner’s tax return and the change to tax liability. The form entitled "Notice of Income Tax Examination Changes" is used for this purpose. If the notice of computational adjustment shows a tax liability that exceeds the amount reported by the taxpayer, additional tax and accrued interest will be assessed. If the notice of computational adjustment shows less tax than reported by the taxpayer, any excess tax and interest previously paid will be credited to the taxpayer’s account.

  4. If a partner does not agree with the computational adjustment, IRC 6230(c) allows the partner to file a claim within six months after the date the notice of computational adjustment is mailed to the taxpayer. The substance of the transaction cannot be challenged.

  5. If the Service fails to pay a credit or refund resulting from a computational adjustment, the partner may file a claim within 2 years of the date that the settlement was entered into, or the FPAA defaulted, or the decision of the court was final.

8.19.1.6.9.7.1  (12-01-2006)
Correction of Mathematical and Clerical Errors

  1. The Secretary is generally not required to follow deficiency proceedings to make tax liability adjustments that result from the correction of mathematical and clerical errors. The term "mathematical and clerical error " generally refers to:

    1. an error in addition, subtraction, multiplication or division shown on the return;

    2. an incorrect use of any table provided by the IRS with respect to any return if such incorrect use is apparent from the existence of other information on the return;

    3. an entry on a return of an item which is inconsistent with another entry of the same or another item on such return;

    4. an omission of information which is required to be supplied on the return to substantiate an entry on the return, and

    5. an entry on a return of a deduction or credit in an amount which exceeds a statutory limit ( IRC 6213(g)(2) and IRC 6230(b)(1)).

  2. If the TMP requests substituted return treatment on an Administrative Adjustment Request (AAR) filed on behalf of the partnership, the Secretary may treat the changes shown on the AAR as corrections of mathematical or clerical errors appearing on the partnership return. IRC 6227(c)(1)(B) .

  3. A partner has 60 days from the date the service mails the partner a notice of the mathematical or clerical error to request that the correction not be made. If this request is filed, the service has two options:

    1. Make no assessment to that partner with respect to the partnership items. This alternative would be appropriate where it is determined that the adjustment of that partner's distributable share of partnership items would not result in a material change to tax liability, e.g., the partner's Form 1040 reflects a negative taxable income which does not result in a net operating loss.

    2. Start a unified partnership proceeding. This alternative is appropriate where the change in tax liability is material and/or a large number of partners file objections.

8.19.1.6.10  (12-01-2006)
Agreement Forms

  1. Special agreement forms have been developed for TEFRA entities because of the unique nature of TEFRA agreements.

  2. The investor agrees to the adjustments that should be made at the partnership level. The agreement form does not show the amount that is allocable to the investor unless the allocation of income is an issue raised in the examination. The tax effect at the investor level is determined after the agreement is secured (when a computational adjustment is made).

  3. Once the agreement is accepted for the Commissioner, the treatment of partnership or S corporation items will not be reopened in the absence of fraud, malfeasance, or misrepresentation of fact; and no claim for refund or credit based on any change in the treatment of partnership items may be filed or prosecuted. The authority for this is found in IRC 6224(c).

  4. The specific circumstances in each case will determine which agreement form is used.

  5. Separate agreement forms have been developed to distinguish Appeals settlements from agreements secured during the examination. Appeals agreement form numbers end with the suffix "(AD)."

  6. The Taxpayer Relief Act of 1997 (TRA 97) changed the way that penalties resulting from a TEFRA entity adjustment are assessed.

    1. For pass-through entity tax years ending before August 6, 1997, penalties and other affected items that cannot be made through a computational adjustment are determined separately from the partnership item determination. A separate agreement is secured to allow the assessment, or a statutory notice of deficiency is issued.

    2. For partnership tax years ending after August 5, 1997, the applicability of penalties is determined at the partnership level. The penalty is assessed as a computational adjustment. Investor level defenses may be raised in a refund proceeding. See IRC 6230(c)(4).

    3. There is no change to the way that affected items other than penalties are assessed. A separate agreement is secured to allow the assessment, or a statutory notice of deficiency is issued.

  7. As a result of the change to the method of assessing penalties, different agreement forms are used for tax years ending before August 6, 1997 (see Figure 1-4) and for tax years ending after August 5, 1997 (see Figure 1-5).

    Figure 8.19.1-4

    Agreement Forms Used for Tax Years Ending Before August 6, 1997

    Entity Type of Agreement Examination Form Appeals Form
    Partnership Partnership items only 870-P 870-P(AD)
    Partnership Partnership items, penalties and certain affected items (Applies only to IRC sections 465, 469 and 704(d)) 870-L 870-L(AD)
    S Corporation S corporation items only 870-S 870-S(AD)
    Exception: When Appeals issues an FPAA or an FSAA, Forms 870-P and 870-S will be used instead of Forms 870-P(AD) and 870-S(AD).

    Figure 8.19.1-5

    Agreement Forms Used for Tax Years Ending After August 5, 1997

    Entity Type of Agreement Examination Form Appeals Form
    Partnership Partnership items and applicability of penalties 870-PT 870-PT(AD)
    Partnership Partnership items and all other affected items 870-LT 870-LT(AD)
    Exception: When Appeals issues an FPAA, Form 870-PT will be used instead of Form 870-PT(AD).

  8. When an S corporation case involves penalties, two agreement forms are required; a Form 870-S(AD) covering the S corporation items and a Form 870-AD with additional language. See Exhibit 8.19.1-18.

  9. Transmittal Letter 3394, Letter 3395, and Letter 2344 are used to transmit Appeals settlement agreement forms on non-docketed cases. Transmittal Letter 2606, Letter 2607, Letter 2608, and Letter 2609 are used to transmit Appeals settlement agreement forms on docketed cases.

  10. Refer to the following exhibits for samples of the forms and letters described above:

    1. See Exhibit 8.19.1-18. Penalty language for S Corporation

    2. See Exhibit 8.19.1-19. Form 870-P(AD)