8.19.1  Procedures and Authorities

Manual Transmittal

October 01, 2013

Purpose

(1) This transmits revised IRM 8.19.1, Procedures and Authorities.

Material Changes

(1) Revised IRM to add information about the Appeals TEFRA Team (ATT).

(2) Added a paragraph to state that most of the information about tax years prior to August 6, 1997 has been removed.

(3) Added information about the signature element for LLCs. Replaced Figure 8.19.1–2 with updated and revised information in Exhibit 8.19.1–6.

(4) Updated IRM references for the new sections being published.

(5) Deleted Exhibits 8.19.1–4 and 1–6 because they refer to years before August 6, 1997.

(6) Revised recommendations for completing Form 2848 with regard to TEFRA cases.

(7) Added references to the Appeals TEFRA website.

Effect on Other Documents

IRM 8.19.1 dated October 05, 2012 is superseded.

Audience

All Appeals employees working with TEFRA partnership returns and TEFRA partners.

Effective Date

(10-01-2013)


Nancy C. Wright
Acting Director, Specialty Operations

8.19.1.1  (10-01-2013)
Overview

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

  2. This handbook supplements other manual sections to provide special instructions for pass-thru entity cases, including TEFRA partnerships.

  3. Any comments or suggestions regarding this Handbook should be directed to the Director, Specialty Operations.

    Caution:

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

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

8.19.1.1.1  (10-01-2013)
Appeals TEFRA Team (ATT)

  1. In July 2010, Appeals centralized the processing of all TEFRA key cases in a newly created unit called the Appeals TEFRA Team (ATT). The ATT is based in Laguna Niguel, CA. The ATT's services include reviewing cases coming to Appeals for accuracy and completeness of TEFRA administrative procedures; addressing routine TEFRA questions from field appeals officers (AO) and their managers; the preparation of the agreement and closing packages; assist in issuing Final Partnership Administrative Adjustments (FPAA); and interaction with SB/SE Technical Services and the two Campus TEFRA Functions (CTF).

  2. A TEFRA AO in the ATT is automatically assigned as a team member (TM). The field AO assigned to the key case can choose to use the ATT or decline to use the ATT. Use of the ATT is recommended and encouraged. Generally, TEFRA key cases, regardless of whether or not the ATT is used, are received and closed through Laguna Niguel Account and Processing Support (APS).

  3. The complete and detailed procedures for using the ATT are found on their sharepoint site. A link to the site is found on the Appeals TEFRA website.

  4. The procedures discussed in this section provide guidance to the AO, APS, and tax computation specialists (TCS) for those cases where the ATT is not utilized. The ATT follows the guidance in these procedures.

8.19.1.1.2  (10-01-2013)
Partnership Tax Years Ending Before August 6, 1997

  1. These procedures are written for partnership tax years ending after August 5, 1997. There are some references to the years ending before August 6, 1997 throughout but if you have a partnership whose tax year ends before August 6, 1997, please contact the TEFRA Technical Specialists or the TEFRA AO assigned to your case for guidance.

8.19.1.2  (10-01-2013)
Pass-Thru Entity Defined

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

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

    2. An S corporation;

    3. A joint venture;

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

    5. A limited liability company (LLC) which has more than one member and has not elected to be classified as a corporation under Treas. Reg. 301.7701-3 (effective January 1, 1997);

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

8.19.1.3  (10-05-2012)
Electing Large Partnerships

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

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

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

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

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

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

    Note:

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

8.19.1.4  (10-01-2013)
Limited Liability Companies

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

8.19.1.4.1  (10-01-2013)
Check-the-Box Regulations

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

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

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

8.19.1.4.2  (10-01-2013)
Determining Classification of Limited Liability Companies

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

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

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

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

  5. An eligible entity with at least two members may elect to be classified as either a partnership or an association taxable as a corporation. If an eligible entity with at least two members does not make an election, the default classification is a partnership.

  6. An eligible entity with a single owner may elect to be classified as either an association taxable as a corporation or to be disregarded as an entity separate from its owner. If an eligible entity with a single owner does not make an election, the default classification is a disregarded entity.

  7. As a result of these default rules, most entities will not be required to file an election. An entity that does not want to follow the default classification must file Form 8832, Entity Classification Election.

    Note:

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

8.19.1.4.3  (10-01-2013)
Disregarded Entities

  1. A single member LLC can be a disregarded entity. For state law purposes it is a separate entity. For federal income tax purposes it is disregarded as separate from its owner if it has not elected to be classified as an association taxable as a corporation.

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

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

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

  5. A disregarded entity is considered a viable pass-thru partner for purposes of applying the small partnership exception to the TEFRA rules.

8.19.1.5  (10-01-2013)
TEFRA

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

    Figure 8.19.1-1

    Differences Between TEFRA and Non-TEFRA Procedures

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

8.19.1.5.1  (12-01-2006)
Reference Material

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

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

    2. IRM 4.31, Pass-Through Entity Handbook

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

8.19.1.5.2  (10-01-2013)
TEFRA Inquiry

  1. When an AO is unable to resolve a TEFRA question after researching all available information (statutes, regulations, court cases, handbooks, etc.), the AO should discuss the issue with the TEFRA AO assigned as a team member.

  2. If the TEFRA AO is unable to provide an answer, contact the Appeals Technical Specialist(s) for TEFRA.

  3. The Appeals TEFRA website has a list of the Appeals TEFRA Resource Persons. The Appeals TEFRA website also has contact information for the Campus TEFRA Functions (CTF).

8.19.1.5.3  (10-01-2013)
Terminology

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

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

    2. The term "partnership" refers to partnerships that are not "small partnerships" excluded from the TEFRA provisions.

  2. The terms "key case" , "tier" , and "partner" will be used in connection with TEFRA partnerships. Definitions for these terms and additional frequently used terms with regard to TEFRA partnerships are found in Exhibit 8.19.1-1.

8.19.1.6  (10-01-2013)
Overview of TEFRA Unified Audit and Litigation Procedures

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

8.19.1.6.1  (10-01-2013)
Overview of TEFRA Unified Audit and Litigation Procedures Code Sections

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

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

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

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

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

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

  7. IRC 6227: A partner may request a change to the way an item was originally reported on the partnership return. The procedure is known as an Administrative Adjustment Request (AAR).

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

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

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

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

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

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

8.19.1.6.2  (10-01-2013)
Consistent Reporting on Partner Return

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

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

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

8.19.1.6.3  (10-01-2013)
Partnerships Affected by Unified Proceedings

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

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

  3. Certain foreign partnerships are required to file a US partnership tax return. Treas. Reg. 301.6031(a)-1, which is generally effective for partnership tax years beginning after December 31, 1999, describes the filing requirements for foreign partnerships.

8.19.1.6.3.1  (10-01-2013)
Small Partnership Exception

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

  2. The determination of the applicability of the small partnership exception is critical because of the difference in the examination procedures of TEFRA and non-TEFRA partnerships. To alleviate problems caused when the partnership Schedules K-1 were inaccurate, the Taxpayer Relief Act of 1997 provided that the Service may rely on the partnership return to determine whether a partnership is subject to the TEFRA procedures for partnership tax years ending after August 5, 1997, if such reliance is reasonable. See IRC 6231(g). This provision is primarily applicable in determining the number and type of partners in a partnership. The term "reasonable" is not defined. More than 10 Schedules K-1 does not necessarily indicate that TEFRA applies if there were never more than 10 partners at one time.

  3. To qualify for the small partnership exception for tax years ending after August 5, 1997, the partnership must meet the conditions below. The determination is made annually.

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

    2. Each partner is an individual (not a nonresident alien), a C corporation, or an estate of a deceased partner. (See IRM 8.19.1.6.3.1.1 below for more information on C corporation partners.)

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

  4. Partnerships that qualify for the small partnership exception may elect to be subject to the unified proceedings. See IRC 6231(a)(1)(B)(ii) and Treas. Reg. 301.6231(a)(1)-1(b). An election is valid for the tax year in which the election is made and for all subsequent years of the partnership unless revoked with the consent of the Secretary. The election may be made on Form 8893 (Election of Partnership Level Tax Treatment) and a revocation requested on Form 8894 (Request to Revoke Partnership Level Tax Treatment Election).

    Caution:

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

  5. Exhibit 8.19.1-2 is a flow-chart to assist in the identification of returns that qualify for the small partnership exception.

8.19.1.6.3.1.1  (10-01-2013)
C Corporation and Unincorporated Entity Partners

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

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

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

    Note:

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

8.19.1.6.3.1.2  (10-01-2013)
Identifying the Filing Status of a Partner

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

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

    1. If the DLN of a partner's return has MFT code 02 and Document Code 10 or 11, the partner has generally filed Form 1120.

    2. If the DLN of a partner's return has MFT Code 02 and Document Code 16, the partner has generally filed Form 1120S.

  3. Exhibit 8.19.1-3 is an example and explanation of the DLN.

8.19.1.6.4  (02-10-2009)
S Corporations Affected by Unified Proceedings

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

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

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

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

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

  2. The TMP plays a pivotal role in any partnership proceeding for a specific tax year.

8.19.1.6.5.1  (10-01-2013)
Duties and Responsibilities of the TMP

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

  2. These are the duties performed by the TMP.

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

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

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

    4. Binds non-notice partners to any settlement negotiated with the commissioner by stating the intention to bind non-notice partners in the executed agreement form, unless a non-notice partner has filed a statement in accordance with Treas. Reg. 301.6224(c)-1(c). See IRM 8.19.11.2 for language to be included on the settlement agreement.

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

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

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

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

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

  3. The TMP, if he is a general partner of a pass-thru partner which is a TEFRA partnership, has the following additional duties:

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

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

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

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

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

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

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

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

    1. The TMP must provide all non-notice partners (other than indirect partners) with copies of any official IRS notice. The Notice of Beginning of Administrative Proceeding (NBAP) must be furnished to non-notice partners within 75 days of the date it was mailed by the Service. The Final Partnership Administrative Adjustment (FPAA) must be furnished to such partners within 60 days of the date it was mailed by the Service. See Treas. Reg. 301.6223(g)-1(a)(1) for NBAP, Treas. Reg. 301.6223(g)-1(a)(2) for FPAA, and Treas. Reg. 301.6223(g)-1(a)(3) for exceptions.

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

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

  6. The information that the TMP should furnish to partners is described in Treas. Reg. 301.6223(g)-1(b).

    1. Closing conference with the examining agent.

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

    3. Time and place of any appeals conference.

    4. Acceptance by the Service of any settlement offer.

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

    6. Filing of an Administrative Adjustment Request (AAR) on behalf of the partnership.

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

    8. Filing of any appeal to any judicial determination of an FPAA or AAR filed on behalf of the partnership.

    9. Final judicial redetermination.

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

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

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

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

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

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

8.19.1.6.5.2  (10-01-2013)
Appointing an Attorney-in-Fact

  1. The TMP may appoint an attorney-in-fact by use of Form 2848 (Power of Attorney and Declaration of Representative).

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

    1. The TMP should execute the form noting his status as the TMP.

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

    3. Section 3, Matters, under the heading, "Description of Matter," insert "TEFRA partnership proceedings."

    4. Section 3, Matters, under the heading, "Tax Form Number," insert "1065."

  3. It is recommended that the TMP, not a representative, sign legally significant documents, such as consents on behalf of the partnership. See Treas. Reg. 301.6229(b)-1 for conditions under which a consent may be signed by a person other than the TMP. Also see IRM 8.19.2.16.

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

  5. See Treas. Reg. 301.6223(c)-1(e) and IRM 8.19.6.5 for instructions regarding power of attorney designations by a partner.

8.19.1.6.5.3  (10-01-2013)
Designation of Partnership TMP

  1. The rules for the designation of the TMP of a partnership are set forth in Treas. Reg. 301.6231(a)(7)-1.

    Caution:

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

  2. A partnership may designate a general partner, but not a limited partner, as its TMP.

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

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

8.19.1.6.5.3.1  (10-01-2013)
TMP - Limited Liability Company (LLC)

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

  2. Treas. Reg. 301.6231(a)(7)-2 treats member managers of an LLC as general partners solely for the purpose of the designation or selection of a TMP. For purposes of this section only:

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

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

8.19.1.6.5.3.2  (10-01-2013)
Who May Be a Partnership TMP

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

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

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

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

      Note:

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

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

    Caution:

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

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

8.19.1.6.5.3.3  (10-01-2013)
Methods of Partnership Designation of TMP

  1. When the partnership return is filed, it may designate a TMP in accordance with the instructions on the form.

  2. A properly selected TMP may designate a successor by filing certification of the successor with the Campus with which the partnership return is filed. Treas. Reg. 301.6231(a)(7)-1(d) describes the information to be included in the certification.

  3. The general partners with over 50 percent of the aggregate interests in partnership profits held by all general partners as of the close of the tax year may designate the TMP by filing a statement with the Campus with which the partnership return was filed. Treas. Reg. 301.6231(a)(7)-1(e) describes the information to be included in the statement. For purposes of the designation, all limited partnership interests held by general partners are included in determining the aggregate interests held by all general partners.

  4. Under limited circumstances all partners (including limited partners) with over 50 percent of the aggregate interest in partnership profits held by the partners as of the close of the tax year may designate the TMP by filing a statement with the Campus with which the partnership return was filed. Treas. Reg. 301.6231(a)(7)-1(f) describes the information to be included in the statement. This method may only be used if each general partner meets at least one of the following four circumstances:

    1. The general partner is dead, or if the general partner is an entity, it has been liquidated or dissolved, or

    2. The general partner has been adjudicated incompetent, or

    3. The general partner’s partnership items have become nonpartnership items under IRC 6231(b), or

    4. The general partner is no longer a partner in the partnership.

    Caution:

    This provision does not permit the designation of a limited partner as TMP.

8.19.1.6.5.3.4  (10-01-2013)
Termination of TMP Designated by Partnership

  1. The designation of the TMP is terminated under the following conditions (Treas. Reg. 301.6231(a)(7)-1(l)):

    1. The TMP dies

    2. The TMP is declared legally incompetent

    3. The TMP is liquidated or dissolved (if it is an entity)

    4. The TMP’s partnership items become nonpartnership items under IRC 6231(c) (relating to special enforcement areas - including bankruptcy). See Note below.

    5. A new TMP is designated by the partnership.

    6. The TMP resigns.

    7. A TMP designation by the partnership is revoked.

    Note:

    Regarding IRM 8.19.1.6.5.3.4 (1)d, see IRC 6231(c) and Treas. Reg. 301.6231(c)-4, 301.6231(c)-5, 301.6231(c)-6, 301.6231(c)-7, and 301.6231(c)-8 for a description of the special enforcement areas and the timing of a conversion.

    Also see Transpac Drilling Venture 1982-12 v. Commissioner, 147 F.3d 221 (2nd Cir. 1998). The court determined that a TMP under investigation for income tax crimes had a conflict of interest that automatically disqualified him from acting as the tax matters partner, even though the government had not sent the letter required by Temp. Treas. Reg. 301.6231(c)-5T.

    A different conclusion was reached in Phillips v. Commissioner, 114 TC 115 (2000), aff’d 9th Cir. 2002, 272 F.3d 1172. The court determined that Treas. Reg. 301.6231(c)-5 was a valid regulation. The court found that the criminal investigation did not create a disabling conflict of interest that would require the Service to notify the TMP that his partnership items would be treated as nonpartnership items. See also Martinez, 564 F.3d 719, 752 (5th Cir. 2009).

8.19.1.6.5.3.5  (10-01-2013)
Largest Profits Interest Rule

  1. If the partnership does not designate a TMP for a particular tax year, or a prior partnership designation has been terminated without the designation of a new TMP, the largest profits interest rule of Treas. Reg. 301.6231(a)(7)-1(m) may apply.

  2. Under this rule, the TMP is the general partner with the largest profits interest in the partnership at the close of the tax year. If more than one general partner has the largest profits interest, then the TMP is the general partner whose name appears first alphabetically.

    Caution:

    The general partner determined under the largest profits rule cannot resign, and the partnership cannot revoke the designation. All other termination actions will apply. See IRM 8.19.1.6.5.3.4, Termination of TMP Designated by Partnership.

  3. General partners whose previous designation as TMP was terminated will be treated as if they had no profits interest in the partnership for a tax year.

8.19.1.6.5.3.6  (10-01-2013)
Selection by the Commissioner - Largest Profits Interest Rule Impracticable

  1. The Commissioner (Service) may select a partner, including a limited or indirect partner, to be the TMP if the partnership does not designate a TMP (or the TMP is terminated, and the partnership does not make a new designation), and the Service determines it is impracticable to apply the largest profits interest rule. See Treas. Reg. 301.6231(a)(7)-1(n) through (r). The regulation incorporates the procedures first published in Rev. Proc. 88-16, 1988-1 CB 691.

  2. Before a TMP is selected, the following notification requirements must be followed:

    1. Thirty days before selection, the Service will notify the partnership (or LLC) by mail that the largest profits interest rule is impracticable and the Service will select a TMP unless the partnership makes a proper designation. See Treas. Reg. 301.6231(a)(7)-1(r)(2). Letter 2700 (Designation of Tax Matters Partner Request) with Form 13798 (Tax Matters Partner (TMP) Designation Form) may be used to request that the partnership designate a new TMP. Similarly, Letter 2700-L (Designation of Tax Matters Partner Request-LLC) and related Form 13798-L (Tax Matters Partner (TMP) Designation Form-LLC) may be used to request that an LLC designate a new TMP. A duplicate original copy of the designation form should be filed by the partner at the Campus where they filed their return in accordance with the Regulations.

    2. If the partnership does not designate a TMP, the Service makes the selection and notifies the partner selected, the partnership, and all notice partners. Letter 3205, Notice of Change in Tax Matters Partner, is used to notify the partner selected, the partnership, and all notice partners of the TMP selected. For cases in Appeals, Delegation Order No. 4-19, IRM 1.2.43.17, delegates the authority to select a TMP to appeals team managers and to appeals team case leaders as to their respective cases.

  3. The circumstances under which the Service would consider it "impracticable" to apply the largest profits interest rule are found in Treas. Reg. 301.6231(a)(7)-1(o). Merely being difficult does not rise to the level of "impracticable."

  4. The partnership may not revoke the selection of the TMP by the Service. The partnership may, however, designate a new TMP after the Service has made its selection. The new designation by the partnership must follow Treas. Reg. 301.6231(a)(7)-1(a) through (f). The Service is not required to give effect to the designation until 30 days after the statement is filed. See Treas. Reg. 301.6231(a)(7)-1(r)(2)(iii).

  5. The TMP may be an entity, such as a partnership or a corporation. Carefully select the person authorized to act for the tier entity.

  6. Exhibit 8.19.1–6 provides more information and examples of signature elements for a tier entity that is the TMP.

8.19.1.6.6  (12-01-2006)
Statute of Limitations for TEFRA Partnerships

  1. The enactment of the TEFRA partnership rules resulted in a new code section relating to the statute of limitations for partners in TEFRA partnerships. IRC 6229 provides a minimum period for assessment of any deficiencies resulting from partnership items.

8.19.1.6.6.1  (10-01-2013)
Comparison of TEFRA and Non-TEFRA Statutes

  1. Partnerships are not taxable entities. Assessments are made at the partner level. Before the TEFRA unified proceedings were enacted, it was necessary to secure statute extensions for each partner. This created a heavy administrative burden for the Service, especially for returns that had more than ten partners or had pass-thru partners.

  2. The TEFRA unified proceedings did not alter the principle that the assessments were made at the partner level. It created a means to reduce the administrative burden caused by the need for individual statute extensions. IRC 6229 allows for a single extension to be secured from the TEFRA partnership TMP. In contrast, a statute extension must still be secured from each investor in a non-TEFRA key case.

8.19.1.6.6.2  (10-01-2013)
Role of IRC 6229

  1. The general assessment provisions of IRC 6501 continue to control the statute of limitations for partners. IRC 6229 enhances the IRC 6501 statute by setting forth a minimum period during which no partners' IRC 6501 period will expire with respect to partnership items or affected items. IRC 6229 provides:

    1. A minimum period for assessment based upon the filing of the key case return;

    2. Rules for the extension by agreement of the minimum period for assessment;

    3. A minimum period for assessment after the conversion of partnership items to nonpartnership items;

    4. Rules for the suspension of the period of assessment; and

    5. Rules that extend the minimum period for assessment in special circumstances (i.e., fraud, substantial omission, no return, or unidentified partner).

  2. The IRC 6229 statute should be used as if it were the only statute. This fosters protection against expired statutes. If the IRC 6229(a) statute has expired with respect to partnership items, but the IRC 6501 period remains open for one or more partners, contact associate area counsel to determine whether the proceeding may continue.

    Caution:

    IRC 6229(b)(3) requires that any agreement to extend the statute under IRC 6501(c)(4) must expressly provide that the agreement applies to tax attributable to partnership items. The Service should rely on the IRC 6501 statute only when the partner return is in its original unextended statute period, unless the extension includes special language specifically including the adjustments flowing through from TEFRA partnerships. Form 872 (Rev. 10-2009 and later) and Form 872–A (Rev. 10-2009 and later) contain the special language.

    Note:

    The TEFRA unified procedures must still be followed if the statute is open under IRC 6501 but not under IRC 6229. For example, a Notice of Beginning of Administrative Proceeding (NBAP) must be issued, and a Notice of Final Partnership Administrative Adjustment (FPAA) will be issued if the partners do not enter into settlement agreements.

8.19.1.6.6.3  (10-01-2013)
Responsibility for Statute

  1. The AO is responsible for controlling the statutory period of limitations at the TEFRA partnership level.

  2. The person with possession of the partner's return is responsible for protecting the statutory period of limitations for non-TEFRA assessments on the partner's return. The Campus TEFRA Function (CTF) is generally responsible for the statutory period of limitations for TEFRA assessments on the partner's return, except for CIC corporations, Joint Committee, and other corporate specialty cases. See IRM 8.19.6.2, Partner Case Responsibility and IRM 8.19.6.5, Partner Case Statutes.

  3. The person with possession of the partner's return in CIC corporations, Joint Committee, and other corporate specialty cases is responsible for protecting the assessments related to the TEFRA adjustments after TEFRA partnership issues are resolved. See IRM 8.19.6.2 for an explanation of other corporate specialty cases.

8.19.1.6.6.4  (02-10-2009)
IRC 6229(a) Statutory Period of Limitations - TEFRA Partnership Key Case

  1. In general, the statutory period of limitations under IRC 6229(a) for assessment of tax attributable to partnership and affected items is three years after the later of:

    1. The due date of the return (without regard to extensions), or

    2. The date the partnership's tax return is filed.

  2. The due date of a partnership return is 31/2 months after the end of the tax year. The due date for filing a return for a calendar year partnership is April 15.

8.19.1.6.6.4.1  (10-01-2013)
Exceptions to General Rule in IRC 6229(a)

  1. IRC 6229 provides for an extended statute in special circumstances.

    1. IRC 6229(c)(2) extends the statutory period of limitations for assessments from 3 years to 6 years if the TEFRA partnership omits from gross income more than 25 percent of the amount that should have been reported. IRC 6229(c)(2) also applies when the taxpayer omits from gross income assets for which information is required to be reported under IRC 6038D and the amount exceeds $5,000. See IRC 6501(e)(1)(A).

    2. If no partnership return is filed, the tax attributable to that year’s partnership items may be assessed against the partners at any time pursuant to IRC 6229(c)(3).

    3. If the Service files a substitute for return for the partnership under IRC 6020(b), it is treated as if no return was filed pursuant to IRC 6229(c)(4).

  2. In case of fraud, IRC 6229(c)(1) sets out two different statutes.

    1. If any partner has, with the intent to evade tax, signed or participated directly or indirectly in the preparation of a TEFRA partnership return that includes a false or fraudulent item, any assessment for partnership items may be made at any time with respect to that partner .

    2. In the case of all other partners in that partnership, the statutory period of limitations will be 6 years instead of the normal 3 years.

8.19.1.6.6.5  (10-01-2013)
Unidentified Partner

  1. An unidentified partner is a partner whose name, address, and taxpayer identification number are not furnished on the partnership return. The partner can be identified by following the procedure described in Treas. Reg. 301.6223(c)-1(b).

    Example:

    Gardenia Associates has 3 partners. One of its partners is Begonia Partners. The Gardenia Associates return gives the name and address of Begonia Partners but does not provide information regarding the tier’s partners. Even if the partner information is included on the partnership return of Begonia Partners, they are considered unidentified partners unless they follow the procedure described in Treas. Reg. 301.6223(c)-1(b).

  2. Under certain conditions, the statute of limitations to assess an unidentified partner remains open until one year after the date the Service is furnished the partner’s name, address, and taxpayer identification number. This provision applies if a timely FPAA was issued, or if the partner filed inconsistently with the partnership return and failed to file a notice of inconsistent treatment. See IRC 6229(e).

8.19.1.6.6.6  (10-01-2013)
Partnership Items Converted to Nonpartnership Items

  1. In certain situations, partnership items are converted to nonpartnership items. IRC 6231(b) and IRC 6231(c) describe the circumstances that cause the conversion. The conversion removes the assessment of tax attributable to partnership items from the purview of IRC 6229(a) (See IRM 8.19.1.6.6.4, IRC 6229(a) Statutory Period of Limitations - TEFRA Partnership Key Case).

  2. Under IRC 6231(b), partnership items are converted to nonpartnership items as of the date of the following events:

    1. The Secretary mails the partner a notice that such items shall be treated as nonpartnership items (limited to situations specified);

    2. The partner files suit under IRC 6228(b) after the Secretary fails to allow an AAR (Administrative Adjustment Request);

    3. The Secretary or the Attorney General enters into a settlement agreement with the partner;

    4. The partner elects to have his items convert when the Secretary fails to provide proper notice under IRC 6223(e), or the items automatically convert under certain circumstances, based on the failure to provide notice;

    5. Special enforcement actions are taken under IRC 6231(c).

    Note:

    Under Delegation Order 4-19, IRM 1.2.43.17, the Appeals Director, Specialty Operations and Appeals Directors, Field Operations are authorized to mail the notice to convert partnership items to nonpartnership items. Such notices are authorized only as provided by IRC 6231(b)(2) (inconsistent filing and AAR’s) and from criminal cases under Treas. Reg. 301.6231(c)-5.

  3. The special enforcement actions under IRC 6231(c) are termination and jeopardy assessments, issuing a conversion notice based on criminal investigation of income tax law violations, indirect method of proof of income, bankruptcy or receivership, and a request for prompt assessment. The time of conversion for special enforcement actions depends on the reason the items are converted. Treas. Reg. 301.6231(c)-4 through Treas. Reg. 301.6231(c)-8.

    Figure 8.19.1-2

    Time for Conversion of Special Enforcement Actions

    In the case of… The conversion takes place...
    Termination and jeopardy assessments, At the moment before the assessment is made. Treas. Reg. 301.6231(c)-4
    A criminal investigation of income tax law violations, On the date that the partner is notified of the criminal investigation and is sent written notification that the partnership items are treated as nonpartnership items. Treas. Reg. 301.6231(c)-5
    The use of an indirect method of proof of income, On the date that the deficiency notice is mailed to the partner. Treasury Reg. 301.6231(c)-6
    Bankruptcy or receivership, On the date that the bankruptcy petition is filed or the receiver is appointed. Treas. Reg. 301.6231(c)-7
    A request for prompt assessment, On the date that the request is filed. Treasury Reg. 301.6231(c)-8
  4. The statute of limitations on converted partnership items is governed by IRC 6229(f).

    1. The period for assessing any tax attributable to partnership items or any affected items will not expire before one year from the date of the conversion. This statute may be extended. See IRC 6229(f)(1).

    2. For partial settlements executed after August 5, 1997, the period for assessment shall be determined as if the agreement had not been entered into. See IRC 6229(f)(2).

    Caution:

    Regarding 4(a) above, a defaulted FPAA or a court decision does not convert partnership items to nonpartnership items. The statute on the partner return is governed by IRC 6229(d).

8.19.1.6.6.7  (12-01-2006)
Suspension of the Statute by FPAA

  1. The statutory period of limitations for assessments of tax attributable to partnership items is suspended when the Secretary mails an FPAA to the TMP. IRC 6229(d). The statute is suspended for the period in which a petition may be filed (150 days) and, if a petition is filed, until the decision of the Court is final (including the period for appeal), and for one year thereafter.

  2. Prior to the Taxpayer Relief Act of 1997 (TRA 97), the IRC 6229(a) statute was not suspended in the case of untimely petitions. TRA 97 changed IRC 6229(d) to provide for suspension of the statute in the case of an untimely petition. The amendment is effective for partnership tax years for which the statute had not expired as of August 5, 1997.


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