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Part 8. Appeals

Chapter 19. Appeals Pass-Through Entity Handbook

Section 3. Guidance for Appeals Officers (Cont. 1)

8.19.3  Guidance for Appeals Officers (Cont. 1)

8.19.3.9 
Settlement Agreements with Penalties or Other Affected Items

8.19.3.9.4 
Receiving/Accepting Agreements

8.19.3.9.4.1  (06-01-2007)
Agreements Received at Key Case CTF (Campus TEFRA Function)

  1. After the agreement forms are accepted by Appeals at the key case CTF, they should be segregated as stated in IRM 8.19.3.8.5.1. Specific instructions should be given to the CTF regarding processing the investor agreements. See Exhibit 8.19.4-1.

8.19.3.9.4.2  (06-01-2007)
Agreements Received at Appeals Office

  1. Generally, use the same procedures for cases with penalties as discussed in IRM 8.19.3.8.5.2 for cases without penalties. Segregate the agreements for those investors who have settled penalty issues from those who have not.

  2. The appeals officer is responsible for preparing the closing package to the key case CTF to send the settlement agreements to the CTF after acceptance by the appeals team manager. The appeals officer will include specific instructions on the Form 3210 for the key case CTF to prepare a report on any unagreed penalty issues. The appeals officer will instruct the CTF not to disclose penalty settlements to any unauthorized persons. The appeals officer is responsible for including the penalty issue instructions on the request for the tax computation specialist service. The appeals officer is ultimately responsible for the accuracy and completeness of the Form 3210, including the one-year assessment date.

8.19.3.10  (06-01-2007)
Notice of Final Partnership/S Corporation Administrative Adjustment

  1. The IRS must mail an FPAA/FSAA to every notice partner/shareholder who does not agree to the settlement, including a spouse who does not agree. The FPAA/FSAA is similar to a statutory notice of deficiency except that it shows only the determined treatment of partnership/S corporation items rather than a tax deficiency.

    Note:

    This does not apply to S corporation tax years beginning after December 31, 1996.

  2. For pass-through entity tax years ending before August 6, 1997, the appeals officer is responsible for determining which adjustments are partnership/S corporation items and for requesting the tax computation specialist to include only partnership/S corporation items in the FPAA/FSAA. The appeals officer is responsible for ensuring the tax computation specialist includes all partnership/S corporation items in the FPAA/FSAA and does not include nonpartnership/non-S corporation items as part of the FPAA/FSAA (for example, affected items such as penalties). However, for any FPAA/FSAA that is mailed by Appeals, Appeals Processing Services will mail information regarding affected items in the same envelope with the FPAA/FSAA. The appeals officer is ultimately responsible for the accuracy and completeness of the FPAA/FSAA.

  3. For partnership tax years ending after August 5, 1997, the tax computation specialist will include partnership items, and applicable penalties, additions to tax and additional amounts that relate to an adjustment to a partnership item in the FPAA. the tax computation specialist will not include affected items other than penalties. The appeals officer is responsible for determining which adjustments are partnership items and for requesting the tax computation specialist to include only partnership items and penalties in the FPAA. The appeals officer is also responsible for ensuring that partnership items and applicable penalties, additions to tax and additional amounts that relate to an adjustment to a partnership item are included in the FPAA and that affected items other than penalties are not included in the FPAA. However, for any FPAA that is mailed by Appeals, Appeals Processing Services will mail information regarding nonpenalty affected items in the same envelope with the FPAA/FSAA. See IRCs 6221, 6226 and 6230. The appeals officer is ultimately responsible for the accuracy and completeness of the FPAA.

  4. When the Appeals Office prepares the FPAA/FSAA for the notice investors, a duplicate notice will be prepared and mailed to each spouse for a joint return if both are unagreed.

    Caution:

    Issue an FPAA/FSAA with great care as neither party has a right to rescind an FPAA/FSAA.

8.19.3.10.1  (06-01-2007)
Preparation of FPAA/FSAA

  1. The appeals officer is responsible for requesting the tax computation specialist to prepare the Notice of Final Partnership Administrative Adjustment (FPAA) (Letter 1830(DO)) or the Notice of Final S Corporation Administrative Adjustment (FSAA) (Letter 1828(DO)) and other documents for the package. The notice consists of:

    1. Letter 1830(DO) or Letter 1828(DO).

    2. Form 870-P/PT/S with instructions for signing this agreement page.

    3. The schedule of adjustments showing the adjustments to the partnership/S corporation.

    4. A narrative explanation of adjustments stating the precise reason for the adjustments even when the case is no-changed. Unless otherwise instructed, the tax computation specialist will use the sample paragraphs for Notices of Deficiency as guides for explanatory paragraphs (including any paragraphs for penalties, if applicable) in the FPAA/FSAA. See Exhibit 8.17.4-1. The appeals officer is responsible for providing the language for the explanatory paragraphs if the language from one of sample paragraphs will not be used. The appeals officer is responsible for reviewing and revising these paragraphs, as necessary.

    5. An "information only" page, if applicable.

    Note:

    Prepare a separate FPAA/FSAA for each unagreed year.

  2. The tax computation specialist will show specific individual partner/shareholder allocations only when allocation of partnership/S corporation items is an issue. See Exhibits 8.19.4-19 and 8.19.4-20 for examples of presentations for allocation issues. The appeals officer is responsible for requesting the tax computation specialist to show allocations when appropriate.

  3. The appeals officer will determine if an inconsistent position as to allocation issues is necessary to avoid placing the government in a whipsaw position. Some examples are as follows:

    1. A partnership return showing two partners with equal percentage ownership that IRS determines really has three partners with equal percentage ownership.

    2. The appeals officer recommends a change in allocation among the partners.

    Note:

    If the FPAA/FSAA shows an inconsistent position and the key case CTF mails the FPAA/FSAA to the notice investors, envelopes addressed to the local Appeals Office will be included for each investor to ensure investors return agreements to the appeals officer. Include a statement on the Form 3210 instructing the key case CTF to return any agreements to the appeals officer without executing them. The appeals officer is responsible for including the envelopes or requesting the secretary, clerk or Appeals Processing Services to include the envelopes as determined locally. For further discussion of allocation issues, see IRM 8.19.3.6.4.

  4. For pass-through entity tax years ending before August 6, 1997, if Appeals sustains penalties or other affected items, the appeals officer will include instructions to the tax computation specialist as to which penalties and affected items apply. The appeals officer is responsible for requesting the tax computation specialist to prepare statutory notice language for investor level penalties as the campus may issue a statutory notice of deficiency at the investor level.

    1. The tax computation specialist will not include penalties or affected items in the FPAA/FSAA because the Court will not have jurisdiction over the penalties or other affected items during the key case proceeding.

    2. The tax computation specialist will prepare a separate sheet with an explanation to advise the investor that penalties or other affected items may be asserted at the completion of the partnership proceeding. This explanation is not a part of the FPAA/FSAA, but is for information only. See Exhibit 8.19.4-23.

    3. The appeals officer is responsible for requesting the tax computation specialist to prepare the separate sheet explaining the penalties or other affected items may be asserted at the completion of the partnership proceeding. The appeals officer is also responsible for reviewing the separate sheet. The appeals officer, secretary, clerk or Appeals Processing Services as determined locally will photocopy the separate sheet as needed. Appeals Processing Services will include the separate sheet in an FPAA/FSAA mailed by Appeals to any partner/shareholder.

  5. For partnership tax years ending after August 5, 1997, the appeals officer will include instructions to the tax computation specialist as to which penalties and affected items apply.

    1. The tax computation specialist will include in the FPAA the applicable penalties, additions to tax and additional amounts which relate to an adjustment to a partnership item.

    2. On a separate page, the tax computation specialist will include only the affected items other than penalties to advise the investor that affected items may be asserted at the completion of the partnership proceeding. This page is not a part of the FPAA, but is included in the mailing envelope for information only. See Exhibit 8.19.4-22.

    3. The appeals officer is responsible for requesting the tax computation specialist to include the penalties in the FPAA and to prepare the separate sheet explaining to the investor that affected items may be asserted at the completion of the partnership proceeding. The appeals officer is also responsible for reviewing the separate sheet. The appeals officer, secretary, clerk or Appeals Processing Services as determined locally will photocopy the separate sheet as needed. Appeals Processing Services will include the separate sheet in an FPAA mailed by Appeals to any partner.

  6. The tax computation specialist prepares a schedule of adjustments, Form 3210, revised Form 4605-A and a distribution schedule Form 886-Z (C) for inclusion with the FPAA/FSAA closing package showing the corrected income or loss amounts for each unagreed investor.

  7. See IRM 8.17.4.28, Notices of Deficiency, for when to send an FPAA/FSAA to associate area counsel for review.

  8. When partial agreements are obtained, the tax computation specialist will include appropriate language explaining this in the FPAA/FSAA. See Exhibit 8.19.4-24 for an example FPAA/FSAA of all investors agreeing to a partial settlement and Exhibit 8.19.4-25 for an example FPAA/FSAA when only some investors agreed to a partial settlement. The appeals officer is responsible for requesting the tax computation specialist to include appropriate partial agreement language in the FPAA/FSAA and for reviewing the language.

  9. When Appeals will be mailing the FPAA/FSAA to the notice investors, the appeals officer may request that the tax computation specialist prepare the FPAA/FSAA letters, including the entire agreement form (with a schedule of adjustments). In this situation, dialogue will be required between the ATM of both the appeals officer and the tax computation specialist as to specifically what the tax computation specialist will prepare. The appeals officer should identify any special circumstances on the Form 3608, including parent-subsidiary relationships. The appeals officer is ultimately responsible for the accuracy and completeness of the FPAA/FSAA letters and agreement forms.

  10. The preferred method of mailing the FPAA/FSAA to the notice investors is to have the CTF prepare and mail them using PCS. The PCS system has current investor filing status and address information to ensure correct mailing. Appeals should generally be mailing the FPAA/FSAA to the notice investors only when there is a short statute or when there is a small number of investors.

8.19.3.10.2  (06-01-2007)
Who Receives FPAA/FSAA

  1. The IRS must mail the FPAA/FSAA to the TMP whether or not the TMP, as an investor, has agreed to the proposed adjustments. The mailing of the FPAA/FSAA to the TMP suspends the statute of limitations on the partnership/S corporation and establishes the time periods within which a petition may be filed by the TMP and any notice investor or 5 percent group.

    1. IRS will mail an FPAA/FSAA, prepared by the tax computation specialist, to the generic TMP at the partnership/S corporation address shown on the partnership/S corporation return. If the address of the partnership/S corporation was updated according to Treas. Reg. 301.6223 (c)-1, IRS will mail it to the updated partnership/S corporation address.

    2. Also, IRS will mail an FPAA/FSAA to the named TMP at the TMP's last known address and the address which will most likely reach the TMP (unless the identity of the named TMP is uncertain).

  2. The IRS must mail an FPAA/FSAA to every notice investor who remains a party to the unified proceeding and to every notice group representative. Although IRC 6223(d)(2) allows a period of 60 days after IRS mails an FPAA/FSAA to the TMP for IRS to mail the FPAAs/FSAAs to the notice investors, it is recommended that the FPAAs/FSAAs be mailed to both the TMP and notice investors on the same day. This reduces confusion when determining if a petition was filed within the required time period.

    Note:

    One exception to same day mailing is mailing the FPAA/FSAA to a TMP to protect the statute of limitations when it’s not practicable to mail notices to all notice investors and groups on the same day.

  3. When the Appeals Office prepares the FPAA/FSAA for the notice investors, a duplicate notice will be prepared and mailed to each spouse for a joint return if both are unagreed.

8.19.3.10.3  (06-01-2007)
Mailing FPAA/FSAA

  1. The tax computation specialist will complete the documents for the FPAA/FSAA package as shown in IRM 8.19.3.10.1. Letter 1828(DO) or Letter 1830(DO) will be addressed by the tax computation specialist to the individually named TMP at the last known address and the address that will most likely reach the TMP.

    1. The letter will show the TMP’s name followed by the following title: Tax Matters Partner (Person), and (partnership/S corporation name) unless the identity of the named TMP is uncertain.

    2. The tax computation specialist will also prepare a second notice addressed generically to: "The Tax Matters Partner" (or Person) at the partnership (or S corporation) address as shown on the key case return or the updated address if the partnership address was updated according to Treas. Reg. 301.6223(c)-1.

      Note:

      The FPAA/FSAA package will include complete FPAA/FSAAs prepared for the notice investors if Appeals will be issuing the FPAA/FSAAs to the notice investors. See IRM 8.19.3.10.1(9) and (10) and IRM 8.19.4.6(7) for preparation of the notice investor FPAA/FSAAs.

  2. The appeals officer is responsible for requesting the tax computation specialist to begin preparing the documents for the FPAA/FSAA closing package and for reviewing the tax computation specialist prepared documents. The appeals officer will submit the complete FPAA/FSAA closing package through the area TEFRA coordinator to the appeals team manager for approval and signature.

  3. After the appeals officer has received approval from the area TEFRA coordinator and approval and signature from the appeals team manager, the appeals officer will give the FPAA/FSAA closing package to Appeals Processing Services for mailing to the CTF. If more than 45 days remain on the statute, Appeals Processing Services will mail the signed, undated letters addressed to the TMP to the key case CTF by controlled mail.

    1. The key case CTF will mail the FPAA/FSAA to the TMP and prepare and mail the FPAA/FSAA to the notice investors generally on the same day but no later than 60 days thereafter.

    2. Generally, the key case CTF will send notices generated by PCS for the notice investors to the last known address on Master File.

    3. If a notice mailed to the last known address is returned undeliverable, a duplicate copy should be mailed to the Schedule K-1 address by certified mail by the appeals officer or Appeals Processing Services as determined locally.

  4. If 45 days or less remain on the statute, the appropriate appeals team manager will contact the TEFRA Coordinator at the CTF to determine who will mail the notices to the TMP (see Exhibit 8.19.3-6 for telephone numbers and addresses of the CTFs).

    1. If the CTF mails the notices, follow the instructions shown in paragraph (3) above.

    2. If the Appeals Office mails the TMP notices, Appeals Processing Services will issue the notices to the TMP as shown in IRM 8.19.5.9.2. Appeals Processing Services will forward a copy of the notice mailed to the TMP to the key case CTF by controlled correspondence, and the CTF will prepare and issue the FPAA/FSAA to the notice investors. See Exhibit 8.19.4-5.

    3. If the Appeals Office mails the notices to the TMP or any notice investors, Appeals Processing Services will forward copies to the key case CTF by controlled correspondence.

  5. In addition to the instructions in paragraphs (3) and (4) above, the appeals officer will ensure that the following are included by the tax computation specialist in the documents for the FPAA/FSAA closing package:

    1. An evaluation of the settlement position for proposed penalties or other affected items in the affected item ACM.

    2. Concise instructions on Form 3210 and Form 4605-A to be followed by the CTFs regarding any penalty or other affected item issues if the case is defaulted or the partnership proceedings are concluded. The appeals officer is ultimately responsible for the accuracy and completeness of the Form 3210.

    3. Proposed statutory notice of deficiency explanation paragraphs for penalties for pass-through entity tax years ending before August 6, 1997.

    4. Proposed statutory notice of deficiency explanation paragraphs for other affected items.

      Note:

      If at the time that the tax computation specialist prepares the FPAA/FSAA closing package and the Form 3210, some of the documents have not as yet been prepared by the appeals officer (for example, the ACM or Form 5402) or information is not as yet available, the appeals officer will complete the preparation of the closing package.

    5. See also IRM 8.19.5.9.2.1 and IRM 8.19.5.9.2.2.

8.19.3.10.4  (06-01-2007)
Untimely Mailing of Notice

  1. The IRS shall mail the Notice of Beginning of Administrative Proceeding (NBAP) to the notice investors 120 days before IRS mails an FPAA to the TMP.

  2. If IRS does not mail an NBAP to an investor, or if IRS mails the FPAA to the TMP less than 120 days from the mailing of the NBAP to an investor, the investors not receiving timely notices have the right to elect out of the partnership proceeding under IRC 6223(e). The Form 886-Z (C) shows the investors to whom an NBAP was mailed and the certified mailing date.

  3. Also, if the IRS does not mail an FPAA to investors within 60 days of the mailing of the FPAA to the TMP, the investors not receiving timely notices have the right to elect out of the partnership proceeding under IRC 6223(e).

    1. Proceeding still going on: If, at the date of mailing an FPAA, the notice requirement of IRC 6223(d) will not be met, a Letter 3857 must be mailed to those investors who will receive untimely notices. Letter 3857 will advise those investors of their right to elect out of the partnership proceeding. Refer to IRM 8.19.1.6.7.2 and Exhibit 8.19.1-16 for a sample Letter 3857. The appeals officer is responsible for preparing Letter 3857. The FPAA and the Letter 3857 will have the same date and will be mailed in the same envelope by Appeals Processing Services or the key case CTF.

    2. Proceeding finished: If IRS does not send a required notice until after the proceeding is finished, the investor receiving the late notice is removed from the TEFRA proceeding unless that investor elects to be bound by the proceeding, or requests an earlier offered settlement (IRC 6223(e)). If the investor does not elect to have the adjustment, decision or settlement agreement apply, the partnership/S corporation items of the investor for the key case taxable year shall be treated as nonpartnership/non S corporation items. Refer to IRM 8.19.1.6.7.2 and Exhibit 8.19.1-17 for a sample Letter 3858. The appeals officer is responsible for preparing Letter 3858. The FPAA and the Letter 3858 will have the same date and will be mailed in the same envelope by Appeals Processing Services or the key case CTF.

    Caution:

    If an NBAP will be included in the envelope with the FPAA and the Letter 3857 or Letter 3858, it cannot be signed by Appeals personnel. Delegation Order 4-19 authorizes revenue agents (Grade GS-11 and higher) to sign the NBAP.

8.19.3.10.5  (06-01-2007)
Monitoring FPAA/FSAA

  1. Appeals Processing Services will monitor the docket lists to determine if any petitions have been filed. If so, they will notify the appeals officer and forward the administrative file to associate area counsel for trial.

  2. If the case is not petitioned, Appeals Processing Services will prepare the defaulted FPAA closing package and mail the package to the CTF.

8.19.3.11  (06-01-2007)
No Change Cases

  1. When the appeals officer recommends no changes to the partnership/S corporation return, either obtain settlement agreements showing no change from all notice partners remaining in the proceeding or issue a no change FPAA/FSAA.

  2. Where no-change settlement agreements will be obtained, the tax computation specialist will prepare a schedule of adjustments but should not prepare a revised Form 4605-A or Form 886-Z(C). If the CTF will be mailing the settlement agreements, the appeals officer will request that the tax computation specialist begin preparing the closing package to the CTF (including the Form 3210) and for reviewing the closing package. If the Appeals Office will be mailing the settlement agreements, the appeals officer will prepare the closing package to the CTF (including the Form 3210) once the agreements are received in the Appeals Office. The Form 3210 will instruct the CTF to use the Form 1065 or Form 1120-S and Schedules K-1 for the distribution schedule. The appeals officer is ultimately responsible for the accuracy and completeness of the Form 3210. Refer to Exhibit 8.19.3-8 for a sample schedule of adjustments for a no change settlement agreement. See Exhibit 8.19.4-21 for the items required for a no change settlement agreement closing package. Follow the procedures in IRM 8.19.3.8 and IRM 8.19.3.9 for securing settlement agreements.

  3. Where a no-change FPAA/FSAA will be issued, the tax computation specialist will prepare a schedule of adjustments but should not prepare a revised Form 4605-A or Form 886-Z(C). The appeals officer is responsible for requesting the tax computation specialist to begin preparing the documents for a no change FPAA/FSAA closing package to the CTF (including the Form 3210) and for reviewing the closing package. On the Form 3210, the tax computation specialist will instruct the CTF to use the Form 1065 or Form 1120-S and Schedules K-1 for the distribution schedule. The appeals officer is ultimately responsible for the accuracy and completeness of the Form 3210. Refer to Exhibit 8.19.3-7 for a sample schedule of adjustments for the settlement agreement for a no change FPAA. See Exhibit 8.19.4-7 for the items required for a no change FPAA/FSAA package. Follow the procedures in IRM 8.19.3.10 for issuing FPAA/FSAAs.

  4. Generally if the CTF is not able to use the Form 1065 or Form 1120-S and Schedules K-1 for a no change case, the case is not a true no change. In this situation, follow the procedures for cases with changes.

    Note:

    If at the time that the tax computation specialist prepares the no change closing package and the Form 3210, some of the documents have not as yet been prepared by the appeals officer (for example, the ACM or Form 5402) or information is not as yet available (for example, the one-year assessment date has not as yet been triggered), the appeals officer will complete the preparation of the closing package.

8.19.3.11.1  (06-01-2007)
No Change with Affected Items

  1. The schedule of adjustments page of the Form 870-P, Form 870-PT or Form 870-S will show no adjustments and contain a statement that there are no changes to the Form 1065 or Form 1120-S. If the CTF cannot use the Form 1065 or Form 1120-S and Schedules K-1 as the distribution schedule, then do not follow no change procedures to complete the key case proceeding. See Exhibit 8.19.3-7 for a no change FPAA schedule of adjustments or Exhibit 8.19.3-8 for a no change settlement agreement schedule of adjustments.

  2. The no change FPAA/FSAA gives notice of the completion of the administrative proceeding to all notice partners still participating in the proceedings, and allows the Service to assess inconsistent filing partners and to issue a notice of deficiency on the affected items requiring partner level determinations. Furthermore, the issuance of an FPAA/FSAA will prevent any partner from later filing an Administrative Adjustment Request with respect to the partnership items.

  3. Be careful to use the no change procedure only if no partnership/S corporation level item is changed. Some determinations may appear to be a no change to the key case but are not. Changes to entity level components of basis, at risk and passive losses are not no change situations. See paragraphs (4), (5) and (6) below for details.

  4. Changes to entity level components of basis are not no change situations. Some entity level components for basis are:

    1. Amount of the initial capital contribution to the entity.

    2. Amount of each distribution from the entity.

    3. Amount of all subsequent capital contributions to the entity.

    4. Amount of investor’s share of nontaxable income.

    5. Taxable income.

    6. Losses.

    7. Deductions.

    8. Treatment of characterization of liabilities under Treas. Reg. 301.752-6.

  5. Changes to entity level components of at risk are not no change situations. Some entity level components of at risk are:

    1. Whether the loans or notes are recourse, nonrecourse, or contingent.

    2. Whether the partner is a limited or a general partner.

    3. Whether the lender has an interest other than as a creditor.

  6. Changes to entity level components of passive losses are not no change situations. Some entity level components of passive losses are:

    1. Whether the entity was engaged in a rental activity.

    2. Whether the entity was engaged in a trade or business for purposes of IRC 162.

    3. Whether a partner should be treated as a limited partner.

    4. Whether income is portfolio income.

  7. In addition to paragraphs (4), (5) and (6) above, the following also should not receive a no change settlement agreement or a no change FPAA/FSAA:

    1. Changing the character of partnership/S corporation level items even if there are no changes in the amount shown on the return.

    2. Any other change to a partnership/S corporation item determination which changes affected items at the investor level.

8.19.3.12  (06-01-2007)
Docketed Case Procedures

  1. The Appeals Office receives TEFRA key cases in docketed status after the TMP or an investor files a petition in the U.S. Tax Court. The petition may be a request for:

    1. a readjustment of partnership items with respect to an FPAA/FSAA. The TMP, a notice partner, or a representative for a 5 percent group (IRC 6226) may file such a petition; or

    2. an adjustment of partnership items with respect to an AAR. Only the TMP on behalf of the key case can file such a petition (IRC 6228).

  2. Generally, conference proceedings and settlement negotiations will be the same as those for nondocketed cases. However, do not mail the agreement forms for the petitioning and participating investors who are represented by counsel directly to the investors.

  3. Use the transmittal letters shown in Exhibits 8.19.1-27 through 8.19.1-30 to transmit settlement agreement forms in docketed cases. Generally, use the TMP’s name and address as the partnership contact person in the last paragraph of the transmittal letter. If the CTF mails the agreement forms, PCS will automatically generate the TMP’s name and address as the partnership contact person.

  4. The Tax Court Rules for actions filed with the Tax Court in TEFRA cases require special notifications to the court, the TMP, and unagreed parties. Carefully coordinate the processing of settlement documents with the associate area counsel attorney, as set out in IRM 8.19.3.14.4, IRM 8.19.3.14.5 and IRM 8.19.3.14.6.

  5. Appeals Processing Services will notify the CTF that a key case is docketed. Appeals Processing Services will instruct the CTF to mark the key case administrative file to show the docket number and to insert the statement that no agreements should be executed without contacting the appeals officer first. Also, instruct the CTF to add the docket number to the PCS database.

  6. The appeals officer will tell the appeals officer assigned to execute agreements at the campus that any agreements received there should be returned to the appeals officer before they are executed. These instructions will be added to the Form 3210.

  7. See IRM 8.19.3.6.4 for instructions on allocation issues. Use caution on docketed case settlements since allocation is often a whipsaw issue.

8.19.3.13  (06-01-2007)
Judicial Review of an FPAA

  1. The following explains the procedure for judicial review of an FPAA.

8.19.3.13.1  (06-01-2007)
Filing Actions

  1. IRC 6226 establishes rules for the judicial review of an FPAA. The time for filing a petition is different for the TMP than for the other partners.

  2. The TMP has the exclusive right to file a petition with the Tax Court, the district court for the district where the key case entity’s principal place of business is located, or the U.S. Court of Federal Claims within 90 days from the date IRS mailed the FPAA to the TMP. No other partner may file an action within this 90-day period.

  3. If the TMP does not file a petition, any notice partner or 5-percent group may file a petition with any of the courts within 60 days after the expiration of the 90 day period.

  4. The TMP may file a petition during the first 90 days in the capacity as TMP or during the remaining 60 day period as a notice partner (Barbados #6 Ltd., 85 T.C. 900 (1985)). If a 5-percent group is formed to file a petition for readjustment, all members of the group must join in filing the petition.

  5. If a notice partner or 5-percent group files a petition within 90 days from the date IRS mailed the FPAA to the TMP, but the TMP and no other investors file a petition, the premature petition is deemed filed on the last day of the 60 day period (IRC 6226(b)).

  6. For pass-through entity tax years ending before August 6, 1997, penalties and other affected items are not considered by the Tax Court during the key case entity proceeding except those elements of the penalty arising at the key case level, e.g. overvaluation of a partnership asset. Investors who wish to contest penalties and other affected items may do so by filing a petition to the Tax Court after a statutory notice of deficiency is issued for the penalty and/or other affected items. The investor's case will be limited to components of the penalty arising at the investor level.

  7. For partnership tax years ending after August 5, 1997, penalties are considered by the Tax Court during the partnership proceeding except for partner level defenses. Partners who wish to contest penalties based on partner level defenses must do so by filing a refund claim. The refund claim must be filed within six months after the day on which the notice of computational adjustments is mailed to the partner. The partner’s case will be limited to components of the penalty arising at the partner level and errors in computing the penalty.

  8. For partnership tax years ending after August 5, 1997, affected items other than penalties are not considered by the Tax Court during the partnership proceeding except those elements of the affected items arising at the partnership level. A partner may contest affected items by filing a petition with the Tax Court after a statutory notice of deficiency is issued for the affected items.

8.19.3.13.2  (06-01-2007)
Priority of Actions

  1. The TMP has first priority to select the court where the petition for readjustment will be filed. The TMP must file the petition in the capacity as TMP during the 90 day period described above.

  2. If the TMP does not file during the 90 day period, any notice partner or 5-percent group may file a petition during the following 60 day period. If more than one petition is filed during the 60 days, the first petition filed in the Tax Court will control and all other petitions will be dismissed. If no petition is filed in Tax Court, the first petition in any other court will go forward and the remaining petitions will be dismissed.

  3. For purposes of determining which district court will have jurisdiction, the partnership’s principal place of business will be the location on the date the petition is filed.

    Example:

    The TMP files a petition with a district court during the 90 day period. Partner A files a petition to the Tax Court. Partner A’s petition will be dismissed and the action in district court will go forward.

    Example:

    The TMP does not file a petition during the 90 day period. Partner A files a petition in the district court on the 92nd day. Partner B files a petition to the Tax Court on the 140th day. The petition to the district court will be dismissed even though it was filed earlier. Any petition to the Tax Court by a notice partner will have priority over notice partner or five-percent group petitions to the other two courts.

8.19.3.13.3  (06-01-2007)
Actions in a District Court or the U.S. Court of Federal Claims

  1. Under the unified proceedings, partners may file a petition directly with either a district court or the U.S. Court of Federal Claims and gain direct access to that court. However, if either of these courts is used, each partner who files the petition must make a deposit equal to the amount their tax liability would be increased if the adjustment in the FPAA were fully sustained.

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

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

    3. If members of a 5-percent group file a petition, each partner must make the required deposit.

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

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

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

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

  3. If a valid petition is filed with one of these courts, Appeals Processing Services will prepare the Form 3210 and compile the documents needed for the TEFRA key entity petitioned to district court or U.S. Court of Federal Claims closing package. Appeals Processing Services will then return the case to the appeals officer. The appeals officer will review the closing package and is ultimately responsible for the accuracy and completeness of the Form 3210, including the one-year assessment date. Appeals Processing Services will mail the closing package to key case CTF and will notify the CTF by remark on Form 3210 to make assessments against all investors based on the adjustments in the FPAA/FSAA. In addition, on the Form 3210, Appeals Processing Services will instruct the CTF to hold the investor files at the CTF pending a final court determination and not to close the PCS linkages. When the court enters a final decision, the CTF will make any appropriate adjustments to the tax liability. See IRM 8.19.5.17 and Exhibit 8.19.5-15.

  4. For control purposes, Appeals Processing Services will enter a one-year assessment date on the Form 3210 instructing the CTF to enter the one-year assessment date on PCS. For timely processing, Appeals Processing Services will use a one-year date that is 60 days after the package is mailed to the CTF.

  5. Appeals will not acquire jurisdiction of a case for which a petition is filed in a district court or the U.S. Court of Federal Claims. If an Appeals Office issues an FPAA/FSAA and an action is filed with a district court or the U.S. Court of Federal Claims, the Appeals Office will transfer the case file to associate area counsel for processing to the Department of Justice. See IRM 8.19.5.17 for these procedures.

    Note:

    IRS may not issue affected item notices of deficiency until the TEFRA proceeding is completed.

8.19.3.14  (06-01-2007)
Tax Court Rules of Practice and Procedure

  1. The Tax Court adopted special Tax Court Rules to conclude partnership proceedings when the parties to the action have entered into a settlement agreement or consistent agreement.

  2. The importance of the rules is underscored by the fact that the Tax Court considers it likely that a substantial majority of partnership actions will be settled by the parties prior to trial.

  3. The Tax Court Rules include comprehensive procedures for settlement agreements, service of papers, duties of the TMP, definitions, and other areas relating to partnership actions.

8.19.3.14.1  (06-01-2007)
Definitions

  1. The Tax Court defined certain terms related to the unified proceedings in the Tax Court Rules as follows:

    1. Tax Matters Partner: Per Tax Court Rule 240(b)(4), the person who is the tax matters partner under IRC 6231 (a)(7) and who under these rules is responsible for keeping each partner fully informed of the partnership action.

    2. Party to the Action: Per Tax Court Rule 247, each person who was a partner at any time during the partnership taxable year provided that partner has an interest in the outcome of the action and whose partnership items haven’t been converted to nonpartnership items.

      The TMP is treated as a party to every partnership action whether or not the TMP has an interest in the proceeding. The TMP is still a party to the action even if the TMP executed a settlement agreement converting his partnership items to nonpartnership items.

    3. Participating Partners: Partners who filed the petition and other partners who filed a notice of election to intervene or a notice of election to participate. The TMP, by filing a notice of election to intervene, becomes a participating partner.

    4. Intervenor: The TMP may file a notice of election to intervene within 90 days from the date the petition was served on the Commissioner by the court’s clerk. This election establishes the TMP as a participating partner.

8.19.3.14.2  (06-01-2007)
Settlement Agreements

  1. The appeals officer should not accept any settlement agreements within 75 days of the calendared trial date, unless the case will be fully agreed or unusual circumstances exist. Since any partner may request consistent agreement of any settlement agreement within 60 days of execution, the 75 day procedure should eliminate consistent agreement requests after a trial has started by providing an additional 15 days hedge for processing delays. (See IRM 8.19.3.6.1 for consistent agreement procedures.)

  2. Within 75 days of the trial date, the associate area counsel attorney or appeals officer will withdraw any outstanding settlement offers. Therefore, only consistent agreements may be processed during the 60 days following acceptance of the last agreement.

  3. All settlement agreements received from investors must be coordinated with the associate area counsel attorney before they are executed. Associate area counsel is responsible for notifying the Tax Court if any settlement agreements are executed. Also, certain documents must be served on the TMP within 7 days of settlement agreements being executed for the Commissioner. See IRM 8.19.3.14.5.2. Therefore, the appeals officer is responsible for keeping the attorney apprised of any settlement offers received.

8.19.3.14.3  (06-01-2007)
Settlement with Partners of Docketed TEFRA Entities

  1. Tax Court Rule 248 establishes comprehensive procedures for settlement agreements. Those procedures are affected by the mandatory service requirements of Tax Court Rule 246 and the TMP’s responsibility to keep each partner informed.

  2. The Tax Court rules and amendments were generally effective as of September 1, 1988.

  3. Exhibit 8.19.3-9 shows documents and signatures required for the specific provisions of Tax Court Rule 248.

8.19.3.14.3.1  (06-01-2007)
Responsibilities

  1. The procedures outlined apply to the appeals officer, associate area counsel attorney, or to both jointly, depending upon the circumstances of the case.

  2. The specific responsibilities for preparing certain documents such as correspondence to partners and the TMP, and decision documents may vary depending upon local office policy. In addition, responsibilities may vary depending upon whether Appeals or Counsel has jurisdiction. However, follow the procedures established in this text carefully due to the strict time constraints placed on the Service and the TMP for the notification requirements.

8.19.3.14.4  (06-01-2007)
Tax Court Rule 248(a)

  1. When the TMP signs a stipulated decision to bind all investors in the key case to a settlement, follow Rule 248(a). The TMP may or may not be a participating partner.

  2. The TMP will sign a stipulation which will certify that no party objects to entry of the decision. This stipulation effectively binds all parties to the settlement and closes the case fully agreed.

8.19.3.14.4.1  (06-01-2007)
Appeals Officer Responsibilities

  1. If the TMP agrees to bind all parties to the settlement, the appeals officer will notify associate area counsel that a stipulated decision must be prepared.

  2. When the stipulated decision documents are received from associate area counsel, the appeals officer will prepare the case file for the manager’s approval, as shown in the IRM 8.19.3.7.4. The appeals officer will send the stipulated decision to the TMP for signature. The TMP is required to sign the stipulation; the signature of the TMP’s counsel is not acceptable by itself, but may be added in addition to the TMPs signature. If the TMP is a corporation, an officer of the corporation must sign the stipulation.

  3. The appeals officer will immediately forward the signed decision to the associate area counsel attorney.

  4. After the decision is entered, the appeals officer will receive a copy of the entered decision. The date the decision becomes final (generally 90 days after the Tax Court has entered the decision unless an appeal is filed) will control for determining the one-year assessment date.

  5. If revised tax computations are needed based on the decision, the tax computation specialist is responsible to begin preparing documents for the final court decision closing package and Form 3210 to transmit the final decision to the CTF during the 90-day period so Appeals Processing Services can mail the final court decision closing package to the CTF as quickly as possible after the 90-day period expires. The appeal officer is responsible for requesting preparation of the documents for the final court decision closing package from the tax computation specialist. The appeals officer is also responsible for reviewing the tax computation specialist prepared documents.

    Note:

    If at the time that the tax computation specialist prepares the closing package and the Form 3210, some of the documents have not as yet been prepared by the appeals officer (for example, the ACM or Form 5402) or information is not as yet available (for example, the one-year assessment date has not as yet been triggered), the appeals officer will complete the preparation of the closing package.

  6. If revised tax computations are not needed based on the decision, the appeals officer is responsible for preparing the documents for the final court decision closing package and Form 3210.

  7. The appeals officer, secretary, clerk or Appeals Processing Services as determined locally will prepare a Form 5402 and make photocopies of the documents to make a final court decision package. After the appeals officer reviews the final court decision closing package, the appeals officer will transfer the package to Appeals Processing Services. Appeals Processing Services will ensure all attachments are present according to the Form 3210 and send the Form 3210 and contents to the CTF by controlled mail. The appeals officer is ultimately responsible for the accuracy and completeness of the Form 3210, including the one-year assessment date.

  8. The appeals officer will have the tax computation specialist prepare the Form 886-Z(C) and Form 4605-A showing the settlement amounts.

  9. After the final court decision closing package is prepared (by either the tax computation specialist or by the appeals officer) and the appeals officer reviews it, Appeals Processing Services will mail the following documents to CTF under controlled correspondence:

    1. Form 5402 marked "INFORMATION ONLY-DO NOT MAIL TO TAXPAYER "

    2. Appeals Case Memorandum and marked "INFORMATION ONLY-DO NOT MAIL TO TAXPAYER"

    3. Form 886-Z (C) showing the settlement position and "decision entered" and "date" and marked "INFORMATION ONLY-DO NOT MAIL TO TAXPAYER"

    4. Form 4605-A showing the settlement position and "decision entered" and "date" and marked "INFORMATION ONLY-DO NOT MAIL TO TAXPAYER"

    5. Copy of entered decision

    6. Form 3210 with instructions to the key case CTF stating the investors are bound by the agreement stipulated by the TMP and the date of the entry of the decision. See Exhibit 8.19.4-9. The tax computation specialist will include on the Form 3210 appropriate instructions for penalties and other affected items, if applicable. The appeals officer is responsible for requesting the tax computation specialist to include the instructions for penalties and other affected items, if applicable, on the Form 3210 and the appeals officer is responsible for reviewing the Form 3210.

  10. After the appeals officer receives an acknowledged Form 3210 from CTF, the appeals officer will prepare the administrative file for closing as shown in IRM 8.19.3.14.7.1.