8.19.1  Procedures and Authorities (Cont. 1)

8.19.1.6 
Overview of TEFRA Unified Audit and Litigation Procedures

8.19.1.6.6 
Statute of Limitations for TEFRA Partnerships

8.19.1.6.6.8  (12-01-2006)
Statute Extensions--Partnerships

  1. IRC 6229(b) provides that the period of limitations of IRC 6229(a) may be extended either at the partnership level (IRC 6229(b)(1)(B)) or the partner level (IRC 6229(b)(1)(A)). As a general rule, an extension should be secured at the partnership level.

8.19.1.6.6.8.1  (10-01-2013)
Partnership Level Extensions

  1. A consent to extend the IRC 6229(a) statute made at the partnership level extends the period of assessments on all partners .

  2. There are partnership level consent forms that allow the statute to be extended for an open-ended period or a date certain.

    1. Form 872-P, Consent to Extend the Time to Assess Tax Attributable to Partnership Items, is used to extend the partners' statutes for a specific time period.

    2. Form 872-O, Special Consent to Extend the Time to Assess Tax Attributable to Partnership Items, is an open-ended consent to extend the partners' statutes for an indefinite period of time.

  3. Appeals officers are authorized by Delegation Orders 25-2 and 4-19 to execute consent forms.

  4. AIMS and ACDS should be updated to show the revised statute date when a consent is secured. The Partnership Control System (PCS) is updated through AIMS. A copy of the consent should be scanned and emailed or faxed to both CTFs. Instructions for sending consents to the CTFs are found on the Appeals TEFRA website.

8.19.1.6.6.8.1.1  (10-01-2013)
When a TMP Executes Consents

  1. The preferred way to extend the IRC 6229(a) statute is for the TMP and the Service to execute the appropriate consent form.

  2. One of the most troublesome areas in dealing with TEFRA statutes is the determination of the properly authorized TMP. See IRM 8.19.1.6.5.3 (Designation of Partnership TMP) for the requirements for designation of the TMP.

  3. A partner's designation as TMP is terminated upon the filing of a petition in bankruptcy. The Service may be unaware of the bankruptcy filing, and the key case partnership may not realize it needs to select a new TMP. Prior to the Taxpayer Relief Act of 1997 (TRA 97), the validity of a consent signed by a bankrupt TMP was questionable. Effective for consents signed after August 5, 1997, an extension signed by a bankrupt TMP is valid unless the TMP informed the Service of the bankruptcy in accordance with Treas. Reg. 301.6223(c)-1(b).

  4. See Exhibit 8.19.1–6 (Tier Entity As TMP) for the correct signature element to be used when the TMP is an entity.

  5. For consolidated return tax years beginning before June 28, 2002, if a subsidiary in a consolidated filing group is the TMP of a partnership, both the signature of the parent (signing on behalf of the subsidiary TMP) and the signature of the subsidiary TMP are recommended on any statute extension by the TMP on behalf of the partners of the partnership. See Treas. Reg. 1.1502-77A(a). The signature blocks would appear as follows:

    • [Name of common Parent corporation] by [name of authorized representative of Parent corporation, title], as common parent of the [name of Parent corporation] and Subsidiaries consolidated group, on behalf of [name of Subsidiary corporation], Tax Matters Partner of [name of TEFRA partnership].

    • [Name of subsidiary corporation], Tax Matters Partner of [name of TEFRA partnership] by [name of authorized representative, title].

  6. For consolidated return tax years beginning on or after June 28, 2002, if a subsidiary in a consolidated filing group is the TMP of a partnership, the signature of the subsidiary TMP is recommended on any statute extension by the TMP on behalf of the partners of the partnership. See Treas. Reg. 1.1502-77(a)(3)(v). The signature block would appear as follows:

    • [Name of subsidiary corporation], Tax Matters Partner of [name of TEFRA partnership] by [name of authorized representative, title].

8.19.1.6.6.8.1.2  (10-01-2013)
When a Non-TMP Executes Consents

  1. Consents may be executed by persons other than the TMP. IRC 6229(b)(1)(B) also allows any other person authorized by the partnership in writing to extend the statute at the partnership level.

  2. Treas. Reg. 301.6229(b)-1 requires the partnership to file a statement with the Campus where the partnership return is filed. The statement must meet the following requirements:

    1. Provide that it is an authorization for a person other than the TMP to extend the assessment period with respect to all partners;

    2. Identify the partnership and person being authorized by name, address, and taxpayer identification number;

    3. Specify the partnership’s tax year or years for which the authorization is effective; and

    4. Be signed by all persons who were general partners at any time during the year or years for which the authorization is effective.

    Note:

    To the extent that a Form 2848, Power of Attorney and Declaration of Representative, authorized pursuant to Treas. Reg. 601.503(b)(1) duplicates or substantially complies with Treas. Reg. 301.6229(b)-1, the authorization to execute the consent should be valid if made or authorized by all general partners. As a general matter, however, do not rely on Form 2848 since use of the form will generate litigation hazards.

8.19.1.6.6.8.1.3  (02-10-2009)
Termination of Open-ended Consents

  1. Open-ended consents may be terminated unilaterally by either the Service or the partnership.

    1. If the Service executes the termination form, the statute of limitations will expire 90 days after the form is mailed to the TMP or Authorized Person.

    2. If the TMP or Authorized Person executes the form, the statute of limitations will expire 90 days after the form is received by the Service.

  2. Form 872-N, Notice of Termination of Special Consent to Extend the Time to Assess Tax Attributable to Partnership Items, is used to terminate the open-ended period for assessments specified in Form 872-O.

8.19.1.6.6.8.1.4  (12-01-2006)
Barred Statute Report

  1. If the TEFRA partnership return statute of limitations expires, the person with jurisdiction over the return at the time of the expiration is responsible for following Barred Statute Report procedures as outlined in IRM 8.21.7. Form 3999T, Statute Expiration Report (for TEFRA key cases), is completed for expired TEFRA partnership cases. Form 3999, Statute Expiration Report (for other than TEFRA key cases) is used to report expired cases other than TEFRA partnership cases. Notification of the barred statute is sent to the partnership and each partner .

  2. The key case Campus TEFRA Function (CTF) must be notified of the statute expiration.

8.19.1.6.6.8.2  (10-01-2013)
Partner Level Extensions of Partnership Items

  1. Partner level extensions of the statute for partnership items are not encouraged except in the case of CIC corporate taxpayers who may be involved in multiple TEFRA partnerships or where the identity of the TMP is uncertain, and in other limited circumstances. Generally, an extension of IRC 6229(a) should be secured at the partnership level.

    1. If a consent to extend the partnership statute is secured at the partner level, it will extend the period for assessment for that partner only. All consents, Form 872 and Form 872–A (revised October 2009 and later) contain the specific language extending the period for assessing partnership items. No modification is needed.

    2. Consents with a revision date prior to October 2009 are general extension agreements with the partner under IRC 6501(c)(4) and do not contain the specific language referencing partnership items. These consents should have been modified as shown below. If no modification is made to consents with revision dates prior to October 2009, the consents do not extend the period for assessing partnership items.

  2. The following specific language referencing partnership items should have been used on Form 872 or Form 872-A (with revision dates prior to October 2009) to extend the statute on partnership items secured at the partner level:

    "Without otherwise limiting the applicability of this agreement, this agreement also extends the period of limitations for assessing any tax (including additions to tax and interest) attributable to any partnership items (see IRC 6231(a)(3)), affected items (see IRC 6231(a)(5)), computational adjustments (see IRC 6231(a)(6)), and partnership items converted to nonpartnership items (see IRC 6231(b)). This agreement extends the period for filing a petition for adjustment under IRC 6228(b) but only if a timely request for administrative adjustment is filed under IRC 6227. For partnership items which have converted to nonpartnership items, this agreement extends the period for filing a suit for refund or credit under IRC 6532, but only if a timely claim for refund is filed for such items."

  3. If Form 872-A, with a revision date prior to October 2009 was used, the following additional language must be used:

    "The issuance of a notice of deficiency will not terminate this agreement under paragraphs (1) and/or (2) for the items described by this paragraph. In accordance with paragraph (1) above, an assessment attributable to a partnership shall not terminate this agreement for other partnerships or for items not attributable to a partnership. Similarly, an assessment not attributable to a partnership shall not terminate this agreement for items attributable to a partnership."

    Caution:

    If the Form 872-A, (all revision dates) includes this special language, DO NOT issue a Form 872-T at the conclusion of the non-TEFRA proceeding unless all assessments relating to all TEFRA proceedings affecting the partner have been made. When non-TEFRA issues are resolved before the TEFRA issues, the non-TEFRA agreement is processed as a partial assessment.

  4. If the language in paragraphs (2) and (3) above is used on the consent that extends the partner’s initial period of limitations, it may be used on subsequent consent forms. If the above language is not used on the initial consent, it should not be added to subsequent consents unless the IRC 6229 period is otherwise open at the time of the subsequent consents.

8.19.1.6.6.8.2.1  (12-01-2006)
Limitations Period--Partners

  1. The period of limitations for assessing a partner depends on whether there is a conversion of partnership items to nonpartnership items under IRC 6231(b) (see IRM 8.19.1.6.6.6), a defaulted FPAA, or a court decision.

    1. If partnership items are converted to nonpartnership items under IRC 6231(b), IRC 6229(f) provides that the period for assessing tax attributable to such items (or any item affected by such items) shall not expire before the date that is one year after the date on which the items become nonpartnership items.

    2. If there has been a defaulted FPAA, IRC 6229(d) suspends the IRC 6229(a) statute for one year plus 150 days after the FPAA is mailed to the TMP.

    3. If the FPAA is petitioned to a court and there is a decision of the court, the statute is suspended for one year after the decision of the court becomes final.

8.19.1.6.6.8.2.2  (10-01-2013)
Penalties and Affected Items

  1. The period for assessing penalties and affected items is the same as the period for assessing the tax relating to the partnership items.

  2. For partnership tax years ending after August 5, 1997, penalties are determined at the partnership level. This represents a significant change in procedures for assessment of penalties. However, there is no change to the statute of limitations.

  3. If an affected item determination must be made following completion of the TEFRA partnership proceeding, appropriate action should be completed before the statute for assessment expires. Before either the IRC 6229(f) or IRC 6229(d) statutes expire, the Service must:

    1. Secure an agreement pursuant to IRC 6213(d) and assess the penalty and tax from the affected items, or

    2. Send an affected item statutory notice of deficiency.

  4. If a notice of deficiency is issued for affected items during the one-year suspension period, the period of assessment will be further suspended pursuant to IRC 6503(a), for the time the Service is prohibited from assessing (90 days, plus any time while docketed in the Tax Court or until the Tax Court decision is final) and for 60 days thereafter.

    Note:

    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 affected items is required. Issuing a statutory notice of deficiency does not suspend the period for assessing the penalties.

  5. If the partner's statute is open for an indefinite period (Form 872-A with a revision date prior to October 2009) because of a non-TEFRA issue, an affected item statutory notice of deficiency which is issued because of a TEFRA item will terminate the statute. If there is an ongoing non-TEFRA examination of a partner's return at the same time as there is an affected item proceeding, the AO assigned to the non-TEFRA issues should closely monitor any TEFRA affected item actions to avoid an inadvertent termination of the non-TEFRA statute.

8.19.1.6.6.8.2.3  (12-01-2006)
Defaulted FPAA

  1. If no petition on an FPAA is filed during the 150 day period allowed by IRC 6226, the TEFRA case is defaulted. Under IRC 6229(d), assessments of partnership and affected items should be made before the expiration of 150 days plus one year from the date the FPAA was mailed to the TMP.

    Caution:

    The period for assessment cannot be extended using a Form 872-F.

  2. If any time remained on the three-year period for assessment under IRC 6229(a) at the time the FPAA was issued, the Service MAY be able to argue there is a tacking-on period. Do NOT rely on this tacking-on time when determining the time to assess partners. Always act as if there is no tacking-on period. If an assessment is not made within the appropriate period, and there was time remaining on the statute when an FPAA was issued, contact associate area counsel.

8.19.1.6.7  (10-01-2013)
Notices

  1. Partners must be told when the audit of the partnership (key case) has started, when it concludes, and the adjustments that are proposed, if any.

  2. IRC 6223 requires that the Service mail the TMP, all notice partners, and the designated representative of a notice group two types of notices when a unified proceeding is conducted: a Notice of Beginning of Administrative Proceeding (NBAP) and a Notice of Final Partnership Administrative Adjustment (FPAA).

    Note:

    The term "notice partner" is defined in IRM 8.19.1.6.7.1, below.

  3. When the examination of a TEFRA partnership begins, the examining agent presents the NBAP Letter 1787) to the TMP. IRM 4.31.2.2 explains the steps that the examining agent will take upon opening a TEFRA examination. IRM 4.31.2.2.7 tells how to link the return on the Partnership Control System (PCS).

    1. Once a return is linked on PCS, an NBAP is sent to each notice partner via certified mail to the address shown on Schedule K-1.

    2. If PCS is not used, the examining agent is responsible for the certified mailing of the NBAPs to all notice partners .

    Note:

    Delegation Order 4-19 authorizes revenue agents (grade GS-11 and higher) to sign the NBAP. Appeals personnel have no authority to sign the NBAP.

  4. The FPAA is the equivalent of a statutory notice of deficiency under deficiency procedures. It shows the changes to be made to partnership items and describes the partner's judicial rights. The tax effect on the partners is not computed in the FPAA. IRM 8.19.12 provides guidance for issuing the FPAA.

  5. IRC 6223(d) prescribes time frames for mailing the NBAP and the FPAA.

    1. The NBAP must be mailed at least 120 days before the FPAA is mailed to the TMP.

    2. The FPAA is mailed to the TMP and to each notice partner. The FPAA mailed to the notice partner must be mailed within 60 days after the date the FPAA is mailed to the TMP.

    3. IRM 8.19.1.6.7.2 describes the procedures that are used when notices are not mailed within the prescribed time frames.

    Note:

    Use command code TSINQP to see the 120 and 60 day dates.

  6. A copy of the certified mailing list should be included in the administrative file.

8.19.1.6.7.1  (10-01-2013)
Notice Partners and Non-Notice Partners

  1. A notice partner is a partner in a partnership that is entitled to receive an NBAP and an FPAA directly from the Service.

    1. All identified partners are notice partners if there are 100 or fewer partners in the partnership.

    2. An identified partner is a partner whose name, address, and taxpayer identification number is furnished on the partnership return or who has furnished additional information to the Service according to Treas. Reg. 301.6223(c)-1(b).

  2. A notice partner may be a pass-thru partner.

    1. A pass-thru partner is a partnership, estate, trust, S corporation, nominee, or other similar person through whom other persons hold an interest in the partnership. A single member LLC that is a disregarded entity for federal tax purposes is also a pass-thru partner.

    2. An indirect partner is a partner who holds an interest in a partnership through one or more pass-thru partners.

  3. If a partnership has more than 100 partners, not all of them will receive a notice directly from the Service.

    1. An identified partner having less than 1 percent profits interest is not entitled to receive notice from the Service. The partner is referred to as a non-notice partner.

    2. Partners owning a total of 5 percent of the profits interest of the partnership may form a notice group. One member of the group will be designated as the representative to receive notices. An indirect partner may only join a notice group if the indirect partner has been identified as provided in IRC 6223(c) and Treas. Reg. 301.6223(c)-1 before joining the notice group. See Treas. Reg. 301.6223(b)-1.

  4. Non-notice partners should receive copies of the required notices, even though the Service does not send them directly.

    1. The TMP is obligated to forward notices to non-notice partners.

    2. Pass-thru partners are required to forward notices to indirect partners.

    3. A representative of a notice group is required to forward notices to the members of the notice group.

    Note:

    Failure of the TMP or a pass-thru partner to forward a notice does not affect the validity of the TEFRA proceeding. (IRC 6230(f))

  5. The Service may, at its discretion, send notices directly to non-notice or indirect partners. The mailing of such notice does not convert a non-notice partner to a notice partner, but may convert an indirect partner to a notice partner. IRC 6223(c)(3) and Treas. Reg. 301.6223(c)-1(f).

8.19.1.6.7.2  (10-01-2013)
Untimely Mailing of Notices Under IRC 6223(d)

  1. The options available to a partner when notice requirements are not met depend on whether the partnership proceeding is still ongoing or has concluded.

    1. If the proceeding is still ongoing, the partner becomes a party to the proceeding unless the partner either elects to accept a settlement agreement that is consistent with the agreement made with another partner or elects to have partnership items treated as nonpartnership items (IRC 6223(e)(3)).

    2. If the proceeding has concluded, the partner’s partnership items are treated as nonpartnership items unless the partner elects to either accept a settlement agreement that is consistent with the agreement made with another partner or accept the terms of the FPAA or court decision (IRC 6223(e)(2)).

  2. Untimely notice letters are sent to the partner to describe the available options. The letters, Letter 3857 and Letter 3858, explain how a partner makes an election. See IRM 8.19.12.9 for detailed procedures on mailing untimely notices.

8.19.1.6.8  (12-01-2006)
Controls and Processing of TEFRA Cases

  1. The appeals proceeding is conducted at the key case level. Cooperation with other IRS functions is necessary to ensure that the tax effect of the adjustments is accurately and timely made at the partner level.

  2. Appeals personnel are encouraged to use the Campus TEFRA Function (CTF) and the Partnership Control System (PCS) to assist in all mailings to the partners, including correspondence, agreements, and notices. Refer to IRM 8.19.1.6.8.3 for discussion of the Partnership Control System.

8.19.1.6.8.1  (12-01-2006)
TEFRA Key Case

  1. The TEFRA partnership return (key case file) will be sent to Appeals, and the partner files are generally maintained at the Campus TEFRA Function (CTF) at the campuses.

8.19.1.6.8.2  (10-01-2013)
TEFRA Partner Case

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

  2. The computation and timely assessment of tax for partners who are CIC corporation, Joint Committee, and other corporate specialty partner taxpayers are the responsibilities of the employee with jurisdiction of the partner case when the partnership items are converted to nonpartnership items, the FPAA is defaulted, or the court decision is final. See IRM 8.19.6.2, Partner Case Responsibility.

8.19.1.6.8.3  (10-01-2013)
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. Contains both pass-thru entity and related investor records for both TEFRA and non-TEFRA key cases.

    2. Establishes a linking relationship (linkage) between a pass-thru 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 settlement letters for partners in TEFRA key cases.

    6. Generates notices to partners in TEFRA key cases. .

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

    8. Records the partner's one-year statute dates in TEFRA key cases 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  (10-01-2013)
Examination Process

  1. The examination of the key case partnership 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 Exam Technical Services for 60-day letter preparation. The 60-day letter is the equivalent of a 30-day letter in deficiency proceedings. It gives the partners the opportunity to appeal the findings of the examiner. Exam Technical Services 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, Exam Technical Services prepares a notice of Final Partnership Administrative Adjustment (FPAA) and forwards it to the key case CTF for mailing to the TMP and all notice partners. For protested cases, Exam Technical Services 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. Exhibit 4.31.2-2 provides a TEFRA Flow-Through Examination Time Chart.

8.19.1.6.8.5  (10-01-2013)
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 a partner CTF or both.

8.19.1.6.8.5.1  (10-01-2013)
Key Case Campus TEFRA Function (CTF)

  1. The key case 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 partners and notice group representatives. Mailings include NBAPs, 60-day letters, settlement offers, and FPAAs.

  2. Generally, the Brookhaven Campus is the key case campus for key cases generated by SB/SE. Generally, the Ogden Campus is the key case campus for key cases generated by LB&I. 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  (10-01-2013)
Partner CTF

  1. The partner CTF controls the partner returns. The partner CTF receives the signed settlement agreements from the key case CTF, makes assessments, and generates audit reports (Form 4549–A) showing the tax liability of each partner under its control. It also prepares and mails 30-day and 90-day letters for penalties (for tax years ending before August 6, 1997) and affected items. It may be referred to as the "report campus."

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

  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 partner CTF will be the CTF that already controlled the partner return.

  4. If the partner 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 partner return.

8.19.1.6.9  (10-01-2013)
Partnership/Nonpartnership/Affected Items

  1. Items are generally classified as partnership items, nonpartnership 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 6231(a)(3) and IRM 8.19.1.6.9.1.

  3. A nonpartnership 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 a partner in a TEFRA partnership may report both rental income from a building that the partner owns and income from a TEFRA partnership. The rental income is a nonpartnership item. Any adjustments in connection with this item will be made using deficiency procedures.

    2. Partnership items may be converted to nonpartnership items. For example, when the partner enters into a settlement agreement for adjustments to the TEFRA partnership, the partnership items are converted to nonpartnership 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  (10-01-2013)
Partnership Items

  1. In general, partnership items are any items that are more appropriately determined at the partnership level than at the partner level. See IRM 8.19.1.6.9.1.1 for a description of partnership items under Treas. Reg. 301.6231(a)(3)-1.

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

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

  4. If a partnership return is filed by an entity for a tax year, but it is determined that the entity is not a partnership for that year, the TEFRA partnership rules will apply. This issue is a partnership item that must be raised in a partnership proceeding.

  5. If a partnership return is filed for a tax year, but it is determined that no entity exists, the TEFRA partnership rules will apply. This issue is a partnership item that must be raised in a partnership proceeding.

  6. 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  (10-01-2013)
Treas. Reg. 301.6231(a)(3)-1

  1. Treas. Reg. 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 IRC 751(b).

  2. In addition, Treas. Reg. 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. Partnership items also include:

    1. Contributions to the partnership.

    2. Distributions from the partnership.

    3. Transactions to which IRC 707(a) applies (including the application of IRC 707(b)).

  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 they are not specified as such.

8.19.1.6.9.2  (10-01-2013)
Nonpartnership Items

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

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

  3. When a partner enters into a settlement agreement with the Service, partnership items are converted to nonpartnership 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 nonpartnership 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 nonpartnership 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 nonpartnership items on the date the petition is filed. The nonpartnership items will not revert back to partnership items if the bankruptcy case is dismissed.

8.19.1.6.9.2.1  (10-01-2013)
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 nonpartnership 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), IRC 6231(b)(2) , and IRC 6231(b)(3).

    2. The partner files suit under IRC 6228(b) after the Service fails to allow an administrative adjustment request (AAR) with respect to any of the items. See IRC 6231(b)(1)(B) and IRC 7422(e).

    3. The Service fails to provide notice under IRC 6223(a), and the partner elects to have partnership items treated as nonpartnership 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 Treas. Reg. 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). Treas. Reg. 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 Treas. Reg. 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 Treas. Reg. 301.6231(c)-7.

    8. A request for prompt assessment is filed (conversion occurs on the date the request is filed). See Treas. Reg. 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  (10-01-2013)
Affected Items 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 partner’s tax liability is different from the tax year that was adjusted.

    Example:

    As a result of the examination of the 2007 partnership tax return of Hydrangea Associates (a TEFRA partnership), the net operating loss deduction reported on Philip Phlox’s 2007 Form 1040 was reduced by $30,000. Phlox had carried the loss back to 2004. The Service will make a computational adjustment for 2004 that will reduce the net operating loss carryback by $30,000.

  3. The alternative minimum tax will be an affected item made with a directly assessed computational adjustment for any tax year where the partner 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 directly assessed 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  (10-01-2013)
Affected Items 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 v. Commissioner, 94 T.C. 853 (1990), page 860.

    Caution:

    Failing to conduct a partnership proceeding (or a partnership proceeding that results in the partnership return being accepted as filed) 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  (10-01-2013)
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 tax year. A partner may receive a statutory notice for nonpartnership 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 nonpartnership 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 tax 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 nonpartnership 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). Alternatively, the affected items can be combined into a single notice if statute of limitations considerations permit.

8.19.1.6.9.4  (10-01-2013)
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 deductible by the partnership and the allocation of the payment between partners 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 partnership engaged in rental activity, whether the partnership 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), basis of property that is subject to a IRC 754 election, 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 (if no IRC 754 election is made by the partnership for such cost), the basis at the time of acquisition by 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  (10-01-2013)
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 partnership 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 if they are unagreed.

  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 8.19.11.10.1.

8.19.1.6.9.6  (10-01-2013)
Appeals Consideration of Penalties and Affected Items

  1. Partner-level elements of penalties or affected items proposed by Compliance should be included in an Affected Item Report. The AO will evaluate the issues and develop a settlement position based on the facts at the key case level. See IRM 8.19.10.4.7.

8.19.1.6.9.7  (10-01-2013)
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; a computational adjustment is directly assessed 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. 301.6231(f)-1 are not met. This regulation applies to partnerships that do not file a partnership tax return and, at the close of a tax 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 directly assessed 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, which shows the adjustments made to the partner’s tax return and the change to tax liability, is sent to the partner. The form entitled "Notice of Income Tax Examination Changes" was formerly used for this purpose. Currently, Letter 4735 , Notice of Computational Adjustment, is used. If the notice of computational adjustment shows a tax liability that exceeds the amount reported by the partner, additional tax and accrued interest will be assessed. If the notice of computational adjustment shows less tax than reported by the partner, any excess tax and interest previously paid will be credited to the partner’s account.

  4. If a partner does not agree with the computational adjustment, IRC 6230(c)(2)(A) allows the partner to file a claim for refund within six months after the date the notice of computational adjustment is mailed to the partner. The adjustments to partnership items cannot be challenged.

  5. If the Service fails to allow a credit or refund resulting from an overpayment attributable to a computational adjustment, IRC 6230(c)(2)(B) allows a partner to file a claim within 2 years of the date that the settlement was entered into, the FPAA defaulted, or the decision of the court became final.

8.19.1.6.9.7.1  (10-01-2013)
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 appearing on the partnership return. See IRC 6230(b). Under IRC 6213(g)(2), 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.

  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. See IRC 6230(b)(2) and Treas. Reg. 301.6230(b)-1. If this request is filed, the IRS 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  (10-01-2013)
Agreement Forms

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

  2. The partner 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 partner unless the allocation of income is an issue raised in the examination. The tax effect at the partner 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 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 partnership adjustment are assessed.

    1. For partnership 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 directly assessed as a computational adjustment. Partner level defenses may be raised in a refund proceeding. See IRC 6230(c)(4) .

    3. Affected items other than penalties are assessed in the same manner regardless of the tax year. 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 partnership tax years ending before August 6, 1997 (see Figure 1–3 and for partnership tax years ending after August 5, 1997 (see Figure 1–4).

    Figure 8.19.1-3

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

    Type of Agreement Compliance Form Appeals Form
    Partnership items only 870-P 870-P(AD)
    Partnership items, penalties and certain affected items (Applies only to IRC 465, 469 and 704(d)) 870-L 870-L(AD)

    Figure 8.19.1-4

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

    Type of Agreement Compliance Form Appeals Form
    Partnership items with or without penalties 870-PT 870-PT(AD)
    Partnership items and all other affected items 870-LT 870-LT(AD)
  8. Transmittal Letter 3394 and Letter 3395 are used to transmit Appeals settlement agreement forms on non-docketed TEFRA partnership cases. Transmittal Letter 2606and Letter 2607 are used to transmit Appeals settlement agreement forms on docketed TEFRA partnership cases.

  9. Refer to the following exhibits for a sample Schedule of Adjustments page:

    1. Exhibit 8.19.1-4 Form 870-PT(AD)

    2. Exhibit 8.19.1-5 Form 870-LT(AD)

  10. Refer to IRM 8.19.11, for additional information on preparing settlement agreements.

8.19.1.6.10.1  (10-01-2013)
Special Features of Forms 870-LT, and 870-LT(AD)

  1. The Forms 870-LT and 870-LT(AD) have two parts.

  2. Part I resolves partnership items (and the applicability of penalties, additions to tax, and additional amounts for partnership tax years ending after August 5, 1997). The taxpayer accepts the adjustments proposed in Part I by signing the waiver in that section.

  3. Part II resolves all affected item issues for tax years ending after August 5, 1997. The taxpayer accepts the adjustments proposed in Part II by signing the waiver in that section.

  4. Part II – Affected Items are treated as follows:

    1. The affected item adjustments must be clearly labeled "Part II, Affected Items."

    2. The schedule of adjustments should be modified to describe a specific partner’s individual settlement of affected items.

    3. If the applicability of penalties has been determined at the partnership level (for partnership tax years ending after August 5, 1997), but a partner has raised partner level defenses that cause the AO to waive all or a portion of the penalty, Part II of the schedule of adjustments should show the reduction of the penalty that will apply to the partner with a notation that the penalty is reduced because of a partner level determination.

    4. If the CTF mails the settlement agreements, they must be uniform. They cannot be modified for different partners within the same partnership.

  5. If a partner agrees to the adjustments to partnership items but does not agree to the affected item adjustments, the partner signs Part I and does not sign Part II. A statutory notice of deficiency is issued for the affected items.

8.19.1.6.11  (02-10-2009)
Closing Agreements

  1. A closing agreement for a TEFRA partnership is made under the authority of IRC 6224(c) and IRC 7121.

    Note:

    Whenever possible, avoid the use of closing agreements in the settlement of partnership items or affected items.

  2. The closing agreement should identify both the partner and the partnership by name, address, and taxpayer identification number.

  3. Refer to IRM 8.13.1, Processing Closing Agreements in Appeals, for detailed instructions on closing agreements (including their use in TEFRA partnership cases)

8.19.1.6.11.1  (10-01-2013)
Consistent Settlement

  1. If the Service enters into a settlement agreement with any partner with respect to partnership items, IRC 6224(c)(2) requires the Service to offer the same settlement agreement to any other partner who requests it. The consistent settlement (also called consistent agreement or consistent treatment) requirement does not apply to affected items or to adjustments to non-TEFRA partnerships.

  2. By statute the request must be made no later than the 150th day after the FPAA is mailed to the TMP. The regulations have allowed an additional period for making such requests. This period is 60 days after the date the settlement was entered into by the Commissioner. See Treas. Reg. 301.6224(c)-3.

  3. A partner who receives a late NBAP or FPAA also has 45 days from the date the late notice was sent to request settlement terms consistent with any previous settlement. Treas. Reg. 301.6223(e)-2.

  4. A partner requests consistent settlement by filing a written statement with the IRS office that entered into the settlement. The request must identify the specific settlement to which consistent settlement is requested.

  5. When a consistent settlement is accepted by the Service, the agreement form should be marked "Consistent Settlement" to ensure that it is not treated as a new settlement, starting an additional 60 day period.

  6. Refer to IRM 8.19.10.4.8.1 for additional information regarding consistent settlements .

8.19.1.6.12  (10-01-2013)
Dissenter's Rights

  1. Every partner has the right to disagree with the Service's position.

  2. Notice partners may dissent by filing a protest to a 60-day letter or petitioning a court after issuance of an FPAA.

  3. Non-notice partners are bound by an agreement entered into by the TMP. See IRC 6224(c)(3)(A) and Treas. Reg. 301.6224(c)-1(a). However, non-notice partners may affirmatively deny the TMP the right to bind them by forming a notice group (see IRM 8.19.1.6.7.1) or filing a statement with the Campus or IRS office that mailed the NBAP to the TMP as described in IRC 6224(c)(3)(B) and Treas. Reg. 301.6224(c)-1(c). For these purposes, non-notice partners generally do not include indirect partners.

    Caution:

    The TMP may only bind non-notice partners to partnership items (and partnership level determinations as to penalties for partnership tax years ending after August 5, 1997). The TMP cannot bind non-notice partners to any other affected items for any tax year.

  4. Non-notice partners may form a 5-percent group for the sole purpose of filing a petition of an FPAA on behalf of the group.

    1. The 5-percent group is a group of partners who for the partnership tax year involved had profits interest that aggregated 5 percent or more. See IRC 6231(a)(11).

    2. A 5-percent group differs from a notice group. The designation of a partner as a representative of a notice group does not authorize that partner to petition an FPAA. A member of a notice group may choose not to join a 5-percent group formed by other members of the notice group. See Treas. Reg. 301.6226(b)-1 and Treas. Reg. 301.6223(b)-1(e).

    3. Indirect partners may join a 5-percent group, even if they have not been identified as provided in IRC 6223(c)(3) and Treas. Reg. 301-6223(c)-1.

  5. Indirect partners are bound by an agreement entered into by a pass-thru partner. See IRC 6224(c)(1) and Treas. Reg. 301.6224(c)-2(a). However, an indirect partner is not bound by the pass-thru partner if it has been identified as provided in IRC 6223(c)(3) and Treas. Reg. 301-6223(c)-1. Linking indirect partners to a pass-thru partner on PCS does not constitute being "identified" for purposes of IRC 6223(c)(3) and Treas. Reg. 301-6223(c)-1.

    Caution:

    A pass-thru partner may only bind an indirect partner to partnership items (and partnership level determinations as to penalties for partnership tax years ending after August 5, 1997). A pass-thru partner cannot bind an indirect partner to other affected items for any tax year.

8.19.1.7  (10-01-2013)
Special Interest Features for TEFRA Partners

  1. For partnership tax years beginning before August 6,1997, under IRC 6601(c) interest is not suspended after a partner enters into a TEFRA settlement. Interest continues until the deficiency is assessed. For partnership tax years beginning after August 5, 1997, interest is suspended 30 days after a partner enters into a TEFRA settlement; interest resumes after notice and demand.

  2. For tax years ending after July 22, 1998, interest is suspended for a timely filed individual return if the Service fails to provide notice of the liability and the reason for the liability within a 36-month period (18 months effective for tax years where the 18-month period ended on or before November 25, 2007) beginning with the due date of the return (without extensions) or the filing date of the return, whichever is later. See IRC 6404(g). The interest suspension period ends 21 days after notice is given. For TEFRA partnerships, notice is deemed given to all partners when notice is given to the TMP. The earliest of the following provide IRC 6404(g) notice if the reason for the liability is given:

    1. Form 5701

    2. Summary Report

    3. 60-day Letter

    4. Appeals Settlement Letter

    5. FPAA

    Note:

    Even though the liability is not given to the partner, the partner can compute the liability from the adjustments to the partnership in each of the notices named above.

  3. For purposes of IRC 6621(c) , a notice of computational adjustment is the first notice that notifies a partner of an assessment of tax within the meaning of Treas. Reg. 301.6621-3(c)(4). Accordingly, the additional 2% "hot interest" will be triggered 30 days after the mailing of the computational adjustment.

Exhibit 8.19.1-1 
Glossary

Administrative Adjustment Request (AAR) An AAR is a claim for refund or an amended return filed on Form 8082, Notice of Inconsistent Treatment or Amended Return notifying the IRS of a change to the treatment of a partnership item. The AAR may be filed by the TMP on behalf of the partnership generally as a substitute for return of the partnership, or it may be filed by a partner. The treatment of an item as requested in an AAR filed by a partner is not treated as a substitute return for the partnership. (I.R.C. §§ 6227 and 6228).
Affected Item An affected item is any item on a partner's return that requires an adjustment as a result of adjustments made to partnership items. Some affected item adjustments are made as computational adjustments. For example, a change to a partnership item may change deductions allowable based on a percentage of adjusted gross income, such as medical expenses and charitable contributions. Some affected item adjustments, such as a change to a partner's basis in the partnership interest, may only be made if deficiency procedures are followed after the partnership items are resolved. For partnership tax years ending before August 6, 1997, the assertion of penalties may only be made in a deficiency proceeding. For partnership tax years ending after August 5, 1997, the applicability of the penalty is determined at the partnership level. Penalties are assessed as computational adjustments. The partner may assert partner level defenses in a refund proceeding.
Computational Adjustment A computational adjustment is an adjustment to the tax liability of a partner in order to properly reflect the tax treatment of a partnership item. Computational adjustments can only be challenged on the computation and not the substance of the issue. The adjustments will usually arise from:
Adjustments made to bring the treatment of a partnership item on the partner's return consistent with the treatment of the item on the partnership return; or
Adjustments made to apply the results of a unified proceeding to a partner.
Final Partnership Administrative Adjustment (FPAA) An FPAA is the functional equivalent of a statutory notice of the results of a partnership proceeding. An FPAA is subject to judicial review at the partnership level. It does not reflect the changes to the partner's tax liability as a result of partnership adjustments.
Five Percent Group A five percent group is a group of partners collectively owning a five percent or more interest in the partnership. The group is formed solely for the purpose of filing a petition for judicial review. It may also seek appellate review of a court determination. A five percent group is distinct from a "notice group" which is also comprised of partners collectively holding a five percent interest.
Inconsistent Treatment All partners are required to report the treatment of a partnership item on their own return in a manner which is consistent with the treatment of such item on the partnership return unless the partner notifies the Secretary of the inconsistency. This notification is made by filing a Form 8082, Notice of Inconsistent Treatment when the partner's return is filed.
Indirect Partner An indirect partner is any person holding an interest in a partnership through one or more pass-thru partners.
Investor A partner, shareholder, or beneficiary that is not a pass-thru entity. A tax return of a non-pass-thru entity is referred to as an investor return. The investor return of a partner who is an individual is a Form 1040 (U.S. Individual Income Tax Return). The investor return of a partner that is a C corporation is a Form 1120 (U.S. Corporation Income Tax Return).
Key Case A tax return that results in pass-thru items to partners, shareholders, beneficiaries, or investors. The term includes Form 1065, Form 1120S, and Form 1041.
Non-notice Partner A partner to whom the Service is not required to send notices. For example, the Service is not required to mail notices to a partner who owns less than 1% interest in a partnership that has over 100 partners unless the partner is identified according to the regulations.
Nonpartnership Item A nonpartnership item is any item that is either not a partnership item or ceases to be a partnership item under circumstances identified in IRC 6231(b).
Notice of Beginning of Administrative Proceedings (NBAP) The NBAP is the required notice sent to the TMP and all notice partners or groups which officially begins the examination of the partnership return under the unified proceedings.
Notice Group A notice group is a group of partners collectively owning five percent or more of a partnership having more than 100 partners. The group is formed solely for the purpose of receiving the notices required by the statute directly from the Service (i.e., the NBAP and the FPAA).
Notice Partner A notice partner is any identified partner in a partnership with 100 or fewer partners. In a partnership with more than 100 partners, it is any partner (both direct and indirect ) with a one percent or more profit interest in a partnership whose interest in the partnership has been properly identified to the Service. Additionally, a representative from a notice group is treated as a notice partner.
Notice partners are entitled to receive notice of the beginning of partnership proceeding (NBAP) and the notice of final partnership administrative adjustment (FPAA) directly from the Service (rather than through the TMP or pass-thru partner).
Partner A person who owns an interest in a partnership and a person whose income tax liability is determined in whole or in part by taking into account directly or indirectly partnership items of the partnership.
Partnership A partnership is any syndicate, group, pool, joint venture or other unincorporated organization through or by means of which any business, financial operation, or venture is carried on, and which is not a corporation, trust, estate or small partnership. (Note, a joint undertaking of two or more persons merely to share expenses is not a partnership).
Partnership Item A partnership item is any item required to be taken into account for the partnership's tax year to the extent regulations provide that such item is more appropriately determined at the partnership level rather than at the partner level.
Pass-thru Partner A pass-thru partner is any partnership, estate, trust, electing small business corporation, nominee, or other similar person through whom other persons hold an interest in the partnership.
Real Estate Mortgage Investment Conduit (REMIC) A REMIC is an entity created by the Tax Reform Act of 1986 (see IRC 860A through IRC 860G) to which the unified partnership provisions under IRC 6221 etc., will apply (see IRC 860F(e)). In general, a REMIC is a fixed pool of mortgages with multiple classes of interests held by partners.
Tier A tier is a pass-thru entity that is a partner, shareholder, or beneficiary of a pass-thru entity. For example, a partnership that owns an interest in another partnership is a tier.

Exhibit 8.19.1-2 
Identification of TEFRA Partnership and Small Partnership Exception Flowchart

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Exhibit 8.19.1-3 
Document Locator Number (DLN)

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Exhibit 8.19.1-4 
Form 870-PT(AD) Schedule of Adjustments

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Exhibit 8.19.1-5 
Form 870-LT(AD) Schedule of Adjustments

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Exhibit 8.19.1-6 
Tier Entity as TMP

Type of Entity Who Performs TMP Duties Signature Element Example
TEFRA partnership TMP of TEFRA partnership [Tier Name], Tax Matters Partner of [Key Case Name], by [name of person], TMP of [Tier Name] Y Partnership, Tax Matters Partner of X Partnership, by John Doe, Tax Matters Partner of Y Partnership
LLC classified as a TEFRA partnership Manger of LLC under state law [Tier Name], Tax Matters Partner of [Key Case Name] by [Name of Person], Manager of [Tier Name] Y LLC, Tax Matters Partner of X Partnership, by John Doe, Manager of Y LLC
LLC classified as non-TEFRA partnership Manager of LLC who is authorized under state law to act on behalf of the LLC [Tier Name], Tax Matters Partner of [Key Case Name], by [Name of Person], Manager of [Tier Name] Y LLC, Tax Matters Partner of X Partnership, by John Doe, Manager of Y LLC
LLC classified as corporation Manager of LLC who is authorized under state law to act on behalf of the LLC [Tier Name], Tax Matters Partner of [Key Case Name], by [Name of Person], Title, [Corporation Name], Manager of [Tier Name] Y LLC, Tax Matters Partner of X Partnership, by John Doe, CFO of Z Corporation, Manager of Y LLC
LLC classified as a disregarded entity Manager of LLC who is authorized under state law to act on behalf of the LLC [Tier Name], Tax Matters Partner of [Key Case Name], by [Name of Person], Manager and Sole-owner of [Tier Name] Y LLC, Tax Matters Partner of X Partnership, by John Doe, Manager and Sole-owner of Y LLC
Non-TEFRA partnership General partner of partnership who is authorized to act on behalf of the partnership [Tier Name], Tax Matters Partner of [Key Case Name], by [name of person], General Partner of [Tier Name] Y Partnership, Tax Matters Partner of X Partnership, by John Doe, General Partner of Y Partnership
Corporation Officer of corporation [Name of Corporation], Tax Matters Partner of [Key Case Name], by [Name of Person], Title of [Name of Corporation] Y Corporation, Tax Matters Partner of X Partnership, by John Doe, CFO of Y Corporation
Trust Trustee [Trust Name], Tax Matters Partner of [Key Case Name], by [Name of Person], Trustee of [Trust Name] Y Trust, Tax Matters Partner of X Partnership, by John Doe, Trustee of Y Trust

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