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Part 8. Appeals

Chapter 19. Appeals Pass-Through Entity Handbook

Section 6. Investor Cases

8.19.6  Investor Cases

8.19.6.1  (06-01-2007)
Overview

  1. IRM 8.19.6 deals with investor cases in Appeals for consideration of non-TEFRA issues. These cases may be considered by one appeals officer before, after, or at the same time that the appeals officer or another appeals officer is considering the TEFRA partnership or S corporation key case.

  2. Although the investor case may be in Appeals at the same time as the key case, they are controlled as two separate and unrelated cases since the partnership items are considered in the unified proceeding.

  3. IRM 8.19.6 also deals with investor cases in Appeals for which Appeals has jurisdiction of the computation and assessment of the TEFRA adjustment.

8.19.6.2  (06-01-2007)
Campus Suspense Files

  1. Generally, the returns of investors in TEFRA partnerships and S corporations are not sent to Appeals with the TEFRA key case return for consideration of the partnership/subchapter S items. The investor cases are suspensed and controlled at the key case Campus TEFRA Function (CTF) if the investor cases are controlled on PCS.

    Note:

    For older cases, the investor returns may be suspensed and controlled at a CTF other than the key case CTF.

  2. The appeals officer will evaluate the TEFRA key case at the partnership level. The tax computations and assessments for investors are the responsibility of the investor CTF (also referred to as the report CTF) for investors who are not Coordinated Industry Cases (CIC) corporation, Joint Committee or other corporate specialty cases.

  3. For CIC corporation, Joint Committee or other corporate specialty cases, tax computations, assessments and statute controls are the responsibility of the Compliance function or Appeals, whichever has jurisdiction over the investor. This is true even if the key case return is in Appeals.

  4. The investor CTF also has the responsibility for TEFRA statute controls on investor returns for investors who are not CIC corporation, Joint Committee or other corporate specialty cases.

8.19.6.3  (06-01-2007)
Investor Case Statutes

  1. For any taxpayer who invests in a TEFRA entity, the Service has a minimum of two dates of expiration for the period of limitations for assessments on the taxpayer's tax return. IRC section 6501 provides the period of limitations for assessing all taxes assessed under the Code, while the period under IRC section 6501 for assessing any income tax attributable to partnership items (or affected items) for a partnership taxable year may be extended by IRC section 6229. The taxpayer will have additional expiration dates for the period of limitations if he/she is an investor in more than one TEFRA entity.

  2. Non-TEFRA issues on a taxpayer's return are always controlled by IRC section 6501. Generally, the period for assessment under IRC section 6501 is the later of three years from the date the return is due or filed, unless extended by consent. Other exceptions may apply to extend the time the IRS has to assess. See IRM 25.6.5 for more information.

  3. The limitations period for partnership items and affected items is controlled by the partner's statute under IRC section 6501, as extended by IRC section 6229(a) until such time as the partnership items become non-partnership items under IRC section 6231(b). The most common circumstance listed in subsection (b) is a TEFRA settlement executed by the Service. See IRM 8.19.1.6.9.2.1 for additional information.

  4. Once the conversion to non-partnership items occurs, the statute on the investor's return relative to such items becomes the one-year assessment statute period under IRC section 6229(f). This statute may be extended with either Form 872-F , Form 872-I or Form 872-IA.

  5. For defaulted FPAAs and entered court decisions, the statute on the investor's return is the one-year assessment statute period controlled by IRC section 6229(d). This statute may be extended with either Form 872-I or Form 872-IA. Form 872-F cannot be used in this situation.

  6. At least 180 days must remain on all one-year assessment dates for TEFRA investor cases which are CIC corporation, Joint Committee or other corporate specialty cases. Examination is responsible for computing and assessing the tax from all TEFRA linkages which have a one-year assessment date before the case reaches Appeals for CIC corporation, Joint Committee and other corporate specialty cases. It is at the discretion of the appeals team manager whether to accept an investor case with a one-year assessment date or to return the case to Examination for computation and assessment of the tax for TEFRA linkages with a one-year assessment date before returning the case to Appeals for consideration of the non-TEFRA issues. See See IRM 8.19.6.17 for an explanation of other corporate specialty cases.

8.19.6.3.1  (06-01-2007)
Securing Investor Case Consents

  1. Form 872-F, Consent to Extend the Time to Assess Tax Attributable to Items of a Partnership or S Corporation That Have Converted to non-partnership items under IRC section 6231(b), will extend the statute of limitations for partnership items and S corporation items that have converted to non-partnership items under IRC section 6231(b). Form 872-F will also extend the statute for affected items on these partnership or S corporation items. Form 872-F is limited to one partnership or S corporation, though multiple years may be included. The most common situation where items are converted under IRC section 6231(b) is a settlement agreement.

  2. Form 872-I, Consent to Extend the Time to Assess Tax As Well As Tax Attributable to Items of a Partnership, will extend the statute for partnership items, affected items, partnership items converted to non-partnership items under IRC section 6231(b), and items which cease to be partnership items under IRC section 6229(d). Form 872-I is not limited to one partnership and may include multiple years.

  3. Form 872-IA, Special Consent to Extend the Time to Assess Tax As Well As Tax Attributable to Items of a Partnership, is an open-ended version of Form 872-I.

  4. In Ginsburg, 127 T. C. 75 (2006), the Tax Court held that a consent that did not reference affected items was not sufficient to extend the statute for affected items. As a result of Ginsburg , either a Form 872-I or a Form 872-IA should be solicited from the taxpayer when a taxpayer is a direct or indirect partner in a TEFRA partnership that is under examination in the event there are affected items at issue.

    Note:

    As stated above, Form 872-F will also extend the statute for affected items, but is limited to one partnership or S corporation.

    1. If the partnership proceeding is still open as to the taxpayer, and the taxpayer declines to sign a Form 872-I or Form 872-IA (Form 872-F would not be applicable at this time), an affected item notice of deficiency should not be issued as it would be premature. The IRS employee who is considering the partnership case is responsible for the partnership's IRC section 6229(a) statute, which includes any affected items.

    2. If the partnership proceeding is closed as to the taxpayer (by defaulted FPAA, settlement agreement, or Court decision), and the taxpayer declines to sign a Form 872-I or Form 872-IA (or Form 872-F for each settled partnership or S corporation), an affected item notice of deficiency must be issued for any affected items (assuming that the taxpayer has not previously agreed to them) before the expiration of the applicable one-year statute date that was triggered by the closure of the partnership proceeding. Any additional tax resulting from the partnership item adjustments must be assessed by the one-year statute date that was triggered by the closure of the partnership proceeding.

    3. If the taxpayer declines to sign a statute extension, the case activity record should be documented accordingly.

8.19.6.3.1.1  (06-01-2007)
Executed by Power of Attorney

  1. The power of attorney must comply with Treas. Reg. section 301.6223(c)-1(e) when signing the extension for an individual partner on either Form 872-F, Form 872-I or Form 872-IA. Also, see See IRM 8.19.6.5.

8.19.6.3.1.2  (06-01-2007)
Consolidated Returns

  1. For consolidated corporate returns beginning before June 28, 2002, Treas. Reg. section 1.1502-77A(a) provides in part:

    "The common parent, for all purposes (other than the making of the consent required by paragraph (a)(1) of § 1.1502-75, the making of an election under section 936(e), the making of an election to be treated as a DISC under § 1.992-2, and a change of the annual accounting period pursuant to paragraph (b)(3)(ii) of § 1.991-1) shall be the sole agent for each subsidiary in the group, duly authorized to act in its own name in all matters relating to the tax liability for the consolidated return year. Except as provided in the preceding sentence, no subsidiary shall have authority to act for or to represent itself in any such matter" .

  2. For consolidated corporate returns beginning on or after June 28, 2002, Treas. Reg. section 1.1502-77(a)(1) sets forth essentially the same general rule as Treas. Reg. section 1.1502-77A(a) (quoted above), but in addition Treas. Reg. section 1.1502-77(a)(6)(iii) provides in part:

    "Members as partners in partnerships. The Commissioner generally will deal directly with any member in its capacity as a partner of a partnership that is subject to the provisions of sections 6221 through 6234 and the accompanying regulations (but see paragraph (a)(2)(ix) of this section regarding the mailing of a final partnership administrative adjustment to the common parent)" .

  3. The consent (Form 872-F, Form 872-I, or Form 872-IA, whichever is used), should be prepared in the name of (and for the signature of) the common parent corporation as agent for the consolidated group, even when a consolidated subsidiary was the partner in the TEFRA partnership, including corporate tax years beginning on or after June 28, 2002. In all cases, however, the name in the caption of the consent should reference both the common parent corporation and the affiliated companies. For example, where the common parent of the group is ABC Corporation, a proper caption would read: ABC Corporation and Subsidiaries.

  4. The name of the common parent should appear typed below the signature, followed by the signature and title of an officer who is empowered under state laws to sign for the common parent corporation.

8.19.6.4  (06-01-2007)
Investor Case Research

  1. The Partnership Control System (PCS) is a separate database for pass-through entity information. PCS interfaces with Master File and AIMS. The information in PCS includes TEFRA and non-TEFRA information for linked pass-through entities and their investors.

    1. Use the PCS database to assist in resolving an investor's case.

    2. See IRM section 8.19.5.19 for an overview of PCS and references to complete PCS information.

8.19.6.5  (06-01-2007)
Investor Power of Attorney

  1. An investor power of attorney for other tax matters such as non-TEFRA items does not cover partnership items and affected items unless the power of attorney so states. See Treas. Reg. section 301.6223(c)-1(e), in respect of partnership proceedings that began on or after January 2, 2002.

  2. For a Form 2848 to cover both partnership items and non-partnership items, the partner should state in the power of attorney that authority for both matters is granted to the representative. Authority to represent a partner for penalties and other affected items is granted to the representative in the same way as is representation on partnership items.

  3. On the Form 2848 a partner may indicate his intent to delegate representation on his partnership items. The Form 2848 should show the following:

    • Type of tax: "Partnership items" and Tax form number: "Form 1065" or

    • "The acts authorized by this power of attorney include representation for the purposes of subchapter C of Chapter 63 of the Internal Revenue Code. "

    If the partnership items and Form 1065 or the authorization language are not included on the power of attorney, the representative may not be authorized to discuss partnership items, penalties, and other affected item issues.

8.19.6.6  (06-01-2007)
Receiving Investor Cases

  1. Investor cases will be established as separate work units on ACDS and will be closed separately when a decision is reached on the non-TEFRA issues.

  2. If the investor's case is received in Appeals after the partnership examination is started, the file will contain the following documents:

    1. Form 5546 (Notification Charge Out) and/or Form 6658 (Notice of Special Investor Action) stamped "TEFRA."

    2. Schedule K-1.

  3. If the investor's case is received in Appeals before the partnership examination is started, the key case CTF will notify Appeals when the partnership examination is started. They will mail to Appeals Processing Services the documents shown in paragraph (2) above, and the CTF may also request a copy of the return. The appeals officer will send a copy of the requested return as soon as it is requested.

8.19.6.7  (06-01-2007)
Settlement Computations and Agreement Forms

  1. For investor cases linked on PCS which are not CIC corporation, Joint Committee or other corporate specialty cases:

    1. The CTF has the responsibility to prepare computations on investor cases to reflect TEFRA key case adjustments.

    2. Appeals will prepare computations of the non-TEFRA adjustments only for these investor cases.

    3. In the event that Appeals does a courtesy computation for the investor to show the tentative tax from TEFRA adjustments before the CTF completes its calculations, no assessment of the tax should be made by Appeals.

  2. For investor cases which are CIC corporation, Joint Committee or other corporate specialty cases:

    1. Appeals prepares computations and makes assessments if the investor is in Appeals jurisdiction.

    2. If the case is in Compliance jurisdiction, the Compliance function makes the computations and assessments on the investor cases to reflect TEFRA key case adjustments.

8.19.6.7.1  (06-01-2007)
TEFRA Issues Resolved Before Non-TEFRA Issues

  1. If the TEFRA partnership or S corporation key case is settled, the CTF will process the partnership or S corporation adjustments for the investors who are not CIC corporation, Joint Committee or other corporate specialty cases. The CTF will send a copy of the computations ( Form 5344 and Form 1902-C to Appeals Processing Services. Appeals Processing Services will forward these documents to the appeals officer. The appeals officer will associate these documents with the investor file for use in preparing settlement computations.

  2. If Appeals did not receive the Form 5344 and Form 1902-C, and there are indications in the case file that the taxpayer is a party to a TEFRA proceeding, the appeals officer or tax computation specialist will request a transcript for that investor prior to preparation of the audit statement or closing documents for the non-TEFRA adjustments. If necessary, request copies of the TEFRA computations from the taxpayer or the CTF.

    Note:

    In the very rare instance when Appeals will assess the TEFRA deficiency for an investor which is not a CIC corporation, Joint Committee or other corporate specialty case, see See IRM 8.19.6.9(3)for the IRC section 6601(c) comment for the Form 5402.

  3. If the TEFRA adjustments have been made and assessed before the non-TEFRA adjustments, as noted in paragraphs (1) and (2) above, the tax computation specialist will combine the TEFRA examination results with taxable income to produce the corrected taxable income when the non-TEFRA adjustments are computed.

  4. If unagreed, follow normal procedures for preparation and issuance of a statutory notice of deficiency. The notice will show only non-TEFRA adjustments. Include TEFRA issues in taxable income as previously adjusted and tax as previously adjusted.

  5. If the taxpayer has an IRC section 6405(a) refund in excess of $2,000,000 and the criteria of IRM 8.9.1 are met, an expedited refund report should be submitted to the Joint Committee. See See IRM 8.19.6.12.

8.19.6.7.2  (06-01-2007)
Non-TEFRA Issues Finalized Prior to Resolution of TEFRA Issues

  1. If non-TEFRA issues are settled when the TEFRA proceeding remains open and the case is in non-docketed status, take the following actions:

    1. Secure the normal closing documents ( Form 870 or Form 870-AD).

    2. Calculate the partial computations taking into account TEFRA items as reported on the return.

    3. Type on the reverse side of the Form 870 or Form 870-AD language to the effect that any change to the deficiency caused by resolution of the TEFRA proceeding can be assessed at the conclusion of the TEFRA proceeding as a computational adjustment. See IRM Exhibit 8.19.4-27 for approved language.

    4. If the taxpayer will not sign the agreement form with this language, issue a statutory notice of deficiency, and, if issued, compute the deficiency using a Munro computation. See IRM 8.19.4.11 and IRM Exhibit 8.19.4-28.

    5. For partnership tax years ending after August 5, 1997, if the non-TEFRA adjustments do not create a deficiency because the return was over-sheltered under IRC section 6234, issue a notice of adjustment for over-sheltered returns. See IRM 8.19.4.11 and IRM Exhibit 8.19.4-30.

      Note:

      If the return is over-sheltered but the non-TEFRA adjustments create a deficiency, use a Munro computation instead of a notice of adjustment.

  2. If the non-TEFRA issues are settled when the TEFRA proceeding remains open and the case is in docketed status, take the following actions:

    1. Calculate the deficiency taking into account TEFRA items as reported on the return.

    2. Include in a stipulated decision document language to the effect that any change to tax liability caused by resolution of the TEFRA proceeding can be assessed at the conclusion of the TEFRA proceeding as a computational adjustment. IRM Exhibit 8.19.4-29 for the approved language.

    3. Secure an agreement from the taxpayer to use the Munro stipulation early in the proceeding. If the taxpayer does not agree, area counsel may need to move for an increased deficiency unless a Munro computation was used in the notice of deficiency.

  3. If the non-TEFRA issues are unagreed and it is necessary to issue a statutory notice of deficiency prior to the resolution of the TEFRA issues, prepare the notice of deficiency as discussed in IRM 8.19.4.10 and IRM 8.19.4.11.

    1. For partnership taxable years ending after August 5, 1997, if the return is over-sheltered, and the unagreed non-TEFRA adjustments do not create a deficiency, IRC section 6234 provides for issuance of a notice of adjustment. If the return is over-sheltered and the unagreed non-TEFRA adjustments create a deficiency, prepare a Munro computation as shown in IRM Exhibit 8.19.4-28 .

    2. For partnership taxable years ending after August 5, 1997, if the return is not over-sheltered, prepare a Munro computation as shown in IRM Exhibit 8.19.4-28.

    3. For pass-through entity taxable years ending before August 6, 1997, prepare a Munro computation as shown in Exhibit 8.19.4-28.

  4. If the case is closed because the statutory notice (discussed in paragraph (3) above) has defaulted, take the following actions:

    1. Appeals Processing Services will prepare a Form 3198 as discussed in IRM 8.19.5.18.4(1)(d) or IRM 8.19.5.18.4(2)(d) , depending on the type of case. The tax computation specialist will clearly mark the Form 5278 in the audit statement or statutory notice as containing a Munro computation.

    2. Because we wish to retain unaltered copies of the documents sent to the taxpayers, the tax computation specialist will write the word Munro in large red letters on a separate slip of paper that then should be attached to the lower right-hand corner of the Form 5278 in the audit statement or statutory notice.

8.19.6.8  (06-01-2007)
Penalties on Investor Cases

  1. When a taxpayer is in Appeals for a penalty issue and the taxpayer remains a party to an open TEFRA proceeding, the appeals officer must consider the potential TEFRA adjustments to determine whether or not the penalty meets any required floor for assertion. In the ACM, the appeals officer will explain the consideration of potential TEFRA adjustments in computing the required floor for assertion of the penalty. When considering the hazards to litigation of the penalty, take into account the potential TEFRA adjustments in determining the floor for assertion.

  2. If the substantial valuation misstatement ( IRC section 6662(b)(3)) or the substantial understatement of income tax ( IRC section 6662(b)(2)) penalty applies but is mathematically zero for the partial audit statement, the tax computation specialist will make the necessary statement on the first page of the audit statement. See IRM 8.19.4.12(2) for the necessary statement.

  3. If the penalty does not apply to all the adjustments, the tax computation specialist will list the adjustments to which the penalty is attributable for future recomputation by the CTF when the TEFRA issues are resolved.

  4. Tax computation specialists will generally prepare the schedule of items to which the penalty will apply. See Treas. Reg. section 301.6231(a)(5)-1(e).

  5. For partnership tax years ending after August 5, 1997, the penalties determined at the partnership level must be assessed within the one-year period even if an affected item notice of deficiency to assess the deficiency resulting from partnership adjustments is required. Issuing a statutory notice of deficiency does not suspend the period for assessing the penalties.

8.19.6.9  (06-01-2007)
Investor Case Closings

  1. The appeals officer will determine the proper routing of the investor case file by researching PCS. The appeals officer will note the proper routing in the remarks of the Form 5402 for Appeals Processing Services. After closing, Appeals Processing Services will forward cases with an open TEFRA linkage to the appropriate destination as follows:

    1. CIC corporation, Joint Committee or other corporate specialty case files should be sent to the appropriate Examination Technical Services unit based on the location of the originating Examination group.

    2. All other case files should be sent to the key case CTF.

      Note:

      Appeals Processing Services will determine the CTF to forward the case with a PICF code of 5 as follows: Order a TSINQP on each year of the key case. If the TSINQP shows OSC in the CTF-CD, then the CTF is Ogden. If the TSINQP shows BSC in the CTF-CD, then order a TXMODC on the key case. 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 the CTF is Brookhaven. If there are no numbers in the " Assign to" column, then Ogden is the CTF.

  2. If a TEFRA audit remains open, the assessments to the non-TEFRA issues must be done as partials. However, the ACDS closings will be done as a full closure. For details on closing procedures, refer to IRM 8.19.5.18.

  3. For partnership tax years beginning after August 5, 1997, in the case of a partner's settlement under IRC section 6224(c) , interest is suspended under IRC section 6601(c) starting 30 days after the settlement agreement is executed by the Commissioner's delegate and ending with notice and demand. See IRC section 6601(c). In the case of a CIC corporation, Joint Committee or other corporate specialty case, when the taxpayer enters into a TEFRA settlement, the appeals officer assigned the partner return will secure a computation and assessment of the deficiency as quickly as possible in order to minimize the loss of interest. If the appeals team case leader or appeals team manager deems it necessary to extend the one-year assessment date to avoid the expense of time consuming computations while the investor case is in Appeals for non-TEFRA consideration, the appeals officer will encourage an advance payment of tax.

    Note:

    The appeals officer will include a comment in the remarks of the Form 5402 asking Appeals Processing Services to use restricted interest when interest suspension under IRC section 6601(c) applies. The comment will include the amount of deficiency from each TEFRA linkage to be assessed, the name of the TEFRA key case, and the date the settlement agreement accepted on behalf of the Commissioner. If multiple TEFRA linkages will be assessed, there must be an IRC section 6601(c) comment for each TEFRA linkage to which IRC section 6601(c) suspension of interest applies. The tax computation specialist may assist in the preparation of the IRC section 6601(c).

  4. In a very rare instance, Appeals will make the computation and assessment of a deficiency from TEFRA adjustments when the partner is not a CIC corporation, Joint Committee or other corporate specialty case. For timely filed individual returns for tax years ending after July 22, 1998, interest is suspended if IRS did not give a 6404(g) notice within 18 months of the filing date or due date (without regard to extensions), whichever is later. The interest suspension ends 21 days after 6404(g) notice is given. For TEFRA partnerships, 6404(g) notice is the earlier of the Form 5701, summary report, 60-day letter, Appeals Settlement Letter, or FPAA. Notice is deemed given to the partners when the notice is given to the TMP provided the notice includes the reason for the liability. Even though the TEFRA notice does not include the partner's liability, the partner can compute the liability from the adjustments to the partnership return. For timely filed individual returns with tax years ending after July 22, 1998, the appeals officer will note on the Form 5402 in remarks that 6404(g) applies and refer Appeals Processing Services to the 6404(g) worksheet attached. The worksheet will include the following information in respect to the TEFRA partnership:

    1. Name of TEFRA partnership

    2. Section 6404(g) notice date and form of notice ( Form 5701, summary report, 60-day letter, Appeals Settlement Letter, or FPAA)

    3. Amount of deficiency to which 6404(g) applies for this TEFRA partnership

      Note:

      If multiple TEFRA partnership linkages will be assessed on a timely filed individual taxpayer with a tax year ending after July 22, 1998, a 6404(g) worksheet must be included for each partnership.

8.19.6.10  (02-05-2008)
Use of Closing Agreements

  1. When a closing agreement is entered into for non-TEFRA issues, the closing agreement should contain language which states that the taxpayer is an investor in a TEFRA partnership or S corporation, and that the closing agreement does not cover adjustments concerning the tax treatment of the TEFRA partnership or S corporation.

  2. For additional information refer to IRM 8.13.1 , Processing Closing Agreements in Appeals, IRM 8.19.1.6.11, and IRM 8.19.2.10.4.

8.19.6.10.1  (02-05-2008)
Form 866 - Agreement as to Final Determination of Tax Liability

  1. Final determinations of tax liability pursuant to IRC section 7121 are ordinarily reflected on Form 866, Agreement As To Final Determination of Tax Liability.

  2. If the taxpayer is an investor in a TEFRA pass-through entity, the Form 866 should include the following statement in the Determination section:

    "This agreement does not cover a deficiency or overassessment resulting from adjustments made under Subchapters C and D of Chapter 63 in Subtitle F of the Internal Revenue Code concerning the tax treatment of partnership and Subchapter S items determined at the partnership and corporate level. "

8.19.6.10.2  (02-05-2008)
Form 906 - Closing Agreement on Final Determination Covering Specific Matters

  1. Final determinations of specific matters pursuant to IRC section 7121 are ordinarily reflected on Form 906, Closing Agreement on Final Determination Covering Specific Matters.

  2. If the taxpayer is an investor in a TEFRA pass-through entity, Form 906 should include the following statement in the Determination section:

    "This agreement does not cover adjustments made under Subchapters C and D of Chapter 63 in Subtitle F of the Internal Revenue Code concerning the tax treatment of partnership and Subchapter S items at the partnership and corporate level."

8.19.6.11  (06-01-2007)
Innocent Spouse Relief

  1. A taxpayer may claim relief from joint and several liabilities under IRC section 6015 (sometimes called "Innocent Spouse Relief" ) as a defense to an adjustment.

  2. Unique issues arise in the context of the TEFRA provisions when applied to persons who file a joint return. The appeals officer may encounter a situation where a spouse of an investor in the TEFRA case seeks relief from joint and several liability. This situation may arise in any number of scenarios such as when an appeals officer is considering a claim filed for innocent spouse relief or a Collection Due Process case.

  3. For innocent spouse Appeals procedures, see generally IRM 25.15.12 (Relief from Joint and Several Liability, Appeals Procedures). For innocent spouse procedures relating to TEFRA closing agreements, see IRM 25.15.1.2.8 (Relief from Joint and Several Liability, TEFRA Settlement Agreements).

8.19.6.11.1  (06-01-2007)
Post Assessment Requests for Innocent Spouse Relief

  1. The Restructuring and Reform Act of 1998 (RRA 98) gave taxpayers the right to a due process hearing with Appeals when they receive a Notice of Federal Tax Lien Filing or a Notice of Intent to Levy. A taxpayer may raise any relevant issue related to the unpaid tax or proposed levy including spousal defenses, such as relief under IRC section 6015.

  2. Upon receipt of the computational adjustments, a spouse or former spouse of an investor in a TEFRA partnership or S corporation may request innocent spouse relief by filing Form 8857, Request for Innocent Spouse Relief. If the claim is denied it will be forwarded to an appeals officer for consideration of the innocent spouse issue.

  3. The appeals officer may find that the unpaid liabilities relate to adjustments of TEFRA partnership or S corporation items, including penalties, additions to tax, and affected items.

    Caution:

    The treatment of partnership items must be resolved before innocent spouse relief is granted. The appeals officer and appeals team manager must never propose to change the partnership item determination. The appeals officer will address only the innocent spouse issue.

  4. If the taxpayer entered into a specific matters closing agreement, innocent spouse relief is available unless the closing agreement addressed the innocent spouse issue. If the taxpayer entered into an agreement for final determination of tax liability, innocent spouse relief may or may not be available depending on whether the agreement was signed pursuant to IRC section 6224(c). See Treas. Reg. section 1.6015-1(c)(2).

8.19.6.11.2  (02-05-2008)
Pre-assessment Requests for Innocent Spouse Relief

  1. Innocent spouse relief cannot be granted prior to the assessment of the tax relating to TEFRA partnership or S corporation adjustments.

  2. Taxpayers requesting innocent spouse relief prior to the assessment of the deficiency should be directed to contact the IRS employee with jurisdiction of the pass-through entity return to resolve the issues raised in the TEFRA examination. Form 8857, Request for Innocent Spouse Relief, should be filed after the assessment is made.

  3. The existence of an open TEFRA linkage should not prevent resolution of the innocent spouse relief issue regarding non-TEFRA issues and TEFRA issues that have been assessed. If a taxpayer wants to obtain innocent spouse relief from potential liability due to the open TEFRA linkage, the taxpayer may file another Form 8857 to request innocent spouse relief from the TEFRA liability after the assessment for the open TEFRA linkage is made.

8.19.6.12  (02-05-2008)
Closing Joint Committee Investor Cases

  1. Special procedures have been developed to supplement the Joint Committee on Taxation reporting requirements of IRM 8.7.9 in situations where the return of one taxpayer involves both TEFRA and nonTEFRA issues.

  2. Also, see Delegation Order 4-18 (formerly D.O. No. 154), as revised in Delegation of Authorities for the Examining Process, IRM 1.2.43.4.

8.19.6.12.1  (06-01-2007)
Source of Refunds

  1. Prepare a report to the Joint Committee when any one of the following sources result in a refund to a taxpayer in excess of $2,000,000:

    1. Audit of a TEFRA partnership/S corporation return in which the taxpayer is an investor.

    2. Audit of the investor's return.

    3. AAR filed by a TMP on behalf of a partnership/S corporation in which the taxpayer is an investor.

    4. AAR filed by any partner/shareholder.

    5. Refund claim based on non-TEFRA items.

8.19.6.12.2  (06-01-2007)
Referral of Investor Cases to the Joint Committee When the Investor's TEFRA Issues are Completed Before the NonTEFRA Issues

  1. The Appeals or Compliance employee with jurisdiction of the investor case is responsible for ensuring that a report is made to the Joint Committee when the TEFRA adjustments result in a refund in excess of $2,000,000 to the taxpayer. See See Exhibit 8.19.6-3. and See Exhibit 8.19.6-4. for sample Joint Committee on Taxation letters when the refund results from TEFRA partnership adjustments.

  2. The appeals officer who considered the appeal of the partnership, if applicable, should cooperate as much as possible with the employee preparing the Joint Committee on Taxation report for the investor, if so requested.

  3. When the investor case is in Appeals jurisdiction, the appeals officer should determine the need for a Joint Committee referral on TEFRA issues when the tax computations are made at the investor level. The appeals officer will not suspend a report to the Joint Committee for a refund from TEFRA issues waiting on the outcome of the non-TEFRA issues.

    Note:

    See IRM 8.19.6.17.1., Statute for Investor's Case, describes the Appeals Office responsibilities for statute protection.

  4. Do not add the refund from TEFRA adjustments to the refund from non-TEFRA adjustments to determine if a Joint Committee referral is needed. These are separate refunds and, if a referral to the Joint Committee is necessary, report the TEFRA refund to the Joint Committee separately from the report of the nonTEFRA refund.

    Example:

    If a case results in a refund due to TEFRA issues of $1,400,000 and a refund due to non-TEFRA issues of $800,000, do not refer the case to the Joint Committee. Both the TEFRA refund and the non-TEFRA refund are less than $2,000,001.

    Example:

    If a case results in a refund due to TEFRA issues of $300,000 and a refund due to non-TEFRA issues of $2,500,000, refer the non-TEFRA issues to the Joint Committee. Do not refer the TEFRA issues to the Joint Committee. It does not matter whether the TEFRA issues or the non-TEFRA issues are completed first for determining whether to refer to the Joint Committee.

    Example:

    If a case results in a refund due to non-TEFRA issues of $300,000 and a refund due to TEFRA issues of $2,500,000, refer the TEFRA issues to the Joint Committee. Do not refer the non-TEFRA issues to the Joint Committee. It does not matter whether the TEFRA issues or the non-TEFRA issues are finished first for determining whether to refer to the Joint Committee.

    Example:

    If a case results in a refund due to TEFRA issues of $2,500,000 and a refund due to non-TEFRA issues of $3,000,000, do not combine the TEFRA and non-TEFRA issues in the same report to the Joint Committee. Issue two separate reports, one for the TEFRA issues and one for the non-TEFRA issues.

    Note:

    If a case results in a refund due to TEFRA issues of $2,000,001 and a deficiency due to non-TEFRA issues of $3,000,000, refer the TEFRA issues to the Joint Committee. Do not net the TEFRA issues with the non-TEFRA issues for determining whether to refer to the Joint Committee.

8.19.6.12.2.1  (06-01-2007)
Closing Procedures for Investor Cases When the Investor's TEFRA Issues are Completed Before the NonTEFRA Issues

  1. The Appeals or Compliance employee with jurisdiction over the investor will be responsible for seeing that a Joint Committee report is made when the TEFRA adjustments result in a refund in excess of $2,000,000 to the investor.

  2. The settlement agreement Form 870-P, Form 870-PT, Form 870-S, Form 870-P(AD), Form 870-PT(AD), Form 870-L(AD) , Form 870-LT(AD), or Form 870-S(AD), showing the correct treatment of the partnership (S corporation) items, will have been secured from the partner (shareholder) and executed by the appeals team manager or appeals team case leader. Do not add the qualifying language referred to in IRM 8.9.1.2.5 to the agreements. Close the partnership case following established procedures.

  3. When the non-TEFRA issues are resolved (settled or litigated), the appeals officer will prepare an ACM and Form 5402 to close the case. Appeals Processing Services will prepare a Form 5403.

  4. If the final determination on the investor's non-TEFRA issues results in a refund to the investor in excess of $2,000,000, prepare a report to the Joint Committee for the non-TEFRA issues. Also the appeals officer will secure from the investor the appropriate agreements (Form 870 or Form 870-AD ) with the qualifying language typed on the agreement as required by IRM 8.9.1.2.5.

  5. The procedures in IRM 8.7.9 will then be followed in submitting the report to the Joint Committee and closing the case. If the non-TEFRA issues do not create a refund in excess of $2,000,000, do not send a report to the Joint Committee for the non-TEFRA issues.

  6. If the taxpayer had an IRC section 6405(a) refund and the criteria of IRM 8.9.1.5.1.1 are met, an expedited refund report should be submitted to the Joint Committee.

    Note:

    Closing Agreements, if applicable, must not be executed on behalf of the Service until after the "Report and Wait" requirements of IRC section 6405 have been meet. Thus, the Service must not execute the Closing Agreement until the case clears Joint Committee.

8.19.6.12.3  (06-01-2007)
Referral of Investor Cases to the Joint Committee When the Investor's Non-TEFRA Issues are Completed Before the TEFRA Issues

  1. On all potential Joint Committee cases the appeals officer should secure an AMDISA and TSUMY to determine whether the taxpayer is a party to a TEFRA proceeding before making a report to the Joint Committee on Taxation on the non-TEFRA issues. If the taxpayer is a party to a TEFRA proceeding, the Joint Committee on Taxation report must be modified as discussed in IRM 8.19.6.12.3.1 . See also See Exhibit 8.19.6-1. and See Exhibit 8.19.6-2..

  2. Appeals officers will not suspend Joint Committee referrals on investor cases under Appeals jurisdiction for non-TEFRA issues to wait for the results of a TEFRA proceeding.

8.19.6.12.3.1  (02-05-2008)
Closing Procedures for Investor Cases When the Investor's NonTEFRA Issues are Completed Before the TEFRA Issues

  1. The appeals officer will secure from the partner a signed agreement ( Form 870 or Form 870-AD), as appropriate, for the non-TEFRA issues with the qualifying language typed on the agreement as required by IRM 8.7.9.5.5 . Prepare an appeals case memorandum on the investor's case and complete all other documents necessary to close the case.

  2. Prepare a Joint Committee report, similar to See Exhibit 8.19.6-1. or See Exhibit 8.19.6-2, and forward to the Joint Committee for review of the non-TEFRA issues even though the review of the TEFRA partnership case has not been completed. Exhibit 8.19.6-1 may be used if the taxpayer has requested an expedited refund. See IRM 8.7.9 and IRC section 6405(a). The report for the expedited refund must include a brief explanation for the early submission.

    Example:

    The partner's subsequent year return is affected by the year under Appeals consideration.

    Example:

    The partner is awaiting an expedited refund and there are no expected collection problems.

    Example:

    The closing of the partnership case will be delayed because of litigation, a criminal investigation, bankruptcy, or for some other reason.

  3. After the unified TEFRA proceedings are completed, do not make a further Joint Committee report on the investor's case to cover these TEFRA proceedings unless the adjustments to the investor from the partnership case results in an additional refund to the investor in excess of $2,000,000. Follow this procedure even if the partnership items are treated as nonpartnership items with respect to the investor.

    Note:

    Closing Agreements, if applicable, must not be executed on behalf of the Service until after the "Report and Wait" requirements of IRC section 6405 have been met. Thus, the Service must not execute the Closing Agreement until the case clears Joint Committee.

8.19.6.13  (06-01-2007)
Failure to File Return – Investor

  1. If an investor does not file a return, it will be the responsibility of Compliance to take necessary action to secure the delinquent return. Local procedures may vary. See IRM 4.31.2.6.10 for information about procedures taken by the Compliance function when an investor fails to file a return.

  2. The filing date of an investor’s return starts the three-year assessment limitation period under IRC section 6501 . The unextended IRC section 6501 statute and IRC section 6229(a) govern the period for assessment for any tax attributable to partnership items or affected items with respect to any partners.

  3. Adjustments made to an investor’s return for partnership items are computational, and the Service has one year to make the assessment. This one-year assessment period begins with one of the following events (whichever is applicable):

    1. The date of conversion to a non-partnership item (for example, by settlement, prompt assessment or jeopardy assessment).

    2. 150 days after an FPAA is mailed to a TMP if the FPAA defaults.

    3. The date a court decision becomes final.

  4. Failure to file allows the Service to assess at any time (i.e., after we generate a substitute for return and issue a notice of deficiency).

  5. An investor who contests a computational assessment may file a claim for refund under IRC section 6230(c).

8.19.6.14  (06-01-2007)
Working Investor Cases When Key Case File Is Destroyed

  1. The statute for collection of tax is 10 years and the retention period for key case administrative files is less. Because of this, investor cases (for example, offers in compromise and claims) may come to Appeals after IRS destroyed the key case administrative file under the retention period guidelines.

  2. To assist appeals officers with appeals of such investor cases, guidelines are provided for situations when part of the records needed are destroyed with the key case administrative file.

8.19.6.14.1  (06-01-2007)
Source of Investor Cases

  1. After tax from the adjustment of TEFRA partnership items is assessed, Appeals may receive the investor case for consideration from any of the following sources:

    1. Protest of 30-day letter adjusting affected items or penalties.

    2. Counsel referral of a Tax Court petition of a statutory no