The file will contain the documents included in a regular unagreed case, such as the examiners' report (RAR), tax returns, 60-day letter, (Letter 1827 TEFRA Partnership 60-Day Letter or Letter 1829 TEFRA Partnership 60-Day Letter for Penalties and Adjustments), etc. In addition, the following items should be included:

An acknowledgement letter will be sent to the Tax Matters Partner and investors who have filed protests or petitions. The Appeals Team Manager or his/her designee will generate and issue the acknowledgment letter. The acknowledgment letter procedures in IRM 8.2.1.7 apply to these cases.

The appeals officer will schedule the conference with the TMP. Send a conference letter to the TMP regardless of who files a protest. Exhibit 8.19.5-6 is a sample conference letter to notify the TMP of the scheduled conference. The TMP is required to notify all investors--notice or non-notice--of the scheduled conference.

If a partner other than or in addition to the TMP files a protest, send a letter to notify the protesting partner of the scheduled conference (see Exhibit 8.19.5-7).

The Service and the TMP will determine the time and place for all administrative proceedings. Arrangements will generally not be changed merely for the convenience of another partner. See Treas. Reg. 301.6224(a)-1.

Use the procedures above to notify shareholders. Notify the S corporation TMP and send a copy of the conference letter to protesting shareholders. A sample conference letter to the TMP is shown at Exhibit 8.19.5-8 and for the shareholders at Exhibit 8.19.5-9.

If the conference requires space to accommodate a large group of participants, the appeals officer should inquire if adequate government facilities are available. However, if it is necessary to rent conference space, the TMP should make the arrangements and be responsible for the cost.

For pass-through entity tax years ending before August 6, 1997, penalties related to pass-through entity adjustments are an investor level determination. The settlement position is based upon the facts as determined at the pass-through entity level for investors as a whole. Any unique circumstances of individual investors are considered in a separate proceeding after the pass-through entity issues are resolved.

For pass-through entity tax years ending before August 6, 1997, an affected item report and notice of deficiency may be issued to each separate investor by key case CTF after the completion of the pass-through entity level proceeding. An affected item report is prepared by the examiner and must include pro-forma statutory notice of deficiency language for the affected item issues.

For partnership tax years ending after August 5, 1997, the appeals officer will consider the penalties at the partnership level. The Taxpayer Relief Act of 1997 provides that the applicability of any penalty that relates to an adjustment to a partnership item is determined at the pass-through entity level. This section was amended by IRC 6221 as amended by section 1238(a) of the Taxpayer Relief Act of 1997, to include penalties determined in the partnership level proceeding.

For partnership tax years ending after August 5, 1997, the method of contesting penalties has changed. Deficiency procedures are no longer required. After the penalty assessment is made, the partner may raise partner-level defenses through a refund claim.

A refund claim based on such grounds must be filed within six months after the day on which the notice of computational adjustment is mailed to the partner. See IRC 6230(c)(2)(A) as amended by the Taxpayer Relief Act of 1997, section 1238(b)(5). Such a refund claim must be limited to partner level defenses (IRC 6230(c)(4)).

IRC 6224(c)(1) allows partners to enter into a settlement agreement to fix the correct treatment of partnership items with finality. IRC 6224(c)(2) gives other partners the right to request a settlement consistent with a partner’s initial settlement. Consistent agreement also applies to shareholders in S corporations subject to the unified proceedings for S corporation tax years beginning before January 1, 1997.

The request for consistent agreement must be made by the later of:

The investor must request the consistent agreement in writing and identify the specific settlement for which he/she is requesting consistent agreement.

The consistent agreement will be processed on Forms 870-P(AD), 870-PT(AD) (for partnership tax years ending after August 5, 1997), or Form 870-S(AD) and identified as "Consistent Agreement." Appeals personnel should stamp the appropriate form with the term "Consistent Agreement." See IRM 8.19.1.6.11.1, Exhibit 8.19.1-31. For docketed cases, also follow the procedures in IRM 8.19.3.14.2.

The appeals officer should consider any effect the settlement will have on the ability of the CTF to process the investor returns. When a settlement has been formulated in a large project case, the key case CTF should be provided the terms of the settlement and pro forma copies of the documents that they will be required to process.

If closing agreements (Forms 906) are required, the appeals officer is responsible for preparing all closing agreements and securing agreements from the investors. The key case CTF will, upon request, provide updated Forms 886-Z (C) that will reflect the name of the investor and spouse (if a joint return was filed) and the most current mailing address available on AIMS. The appeals officer should request current investor information (current mailing addresses, spouse's names, etc.).

If partial agreements are required, the appeals officer is responsible for preparing all partial agreements and securing the agreements from all investors.

Refer to the following for additional information on closing agreements.

Avoid settlements based upon a net cash investment unless the examining agent has already substantiated the amount of each investor's cash investment. The key case CTF will not have the means to verify cash investments.

If the correct allocation of the partnership interest is an issue being considered, do not accept any settlement offers unless all investors agree to the allocation by executing appropriate agreement forms. See IRM 8.19.2.10.2 and Exhibits 8.19.4-19 and 8.19.4-20.

If the key case CTF is mailing the agreement forms, include instructions on Form 3210 to alert the key case CTFs to return the agreement forms to the appeals officer without executing them. The appeals officer should include envelopes to ensure that the CTF returns the agreements to the appeals officer.

Notify the appeals officer assigned to execute agreements at the CTF that any agreements received there should be returned to the appeals officer before they are executed.

The determination of the portion of an investors' adjusted basis which is not properly determinable at the partnership level is an affected item. The correct treatment of an affected item must be determined after the partnership case is concluded. See IRM 8.19.1.6.9.3 for a discussion of adjusted basis as an affected item.

When changes are made at the partnership level which affect basis, clearly explain the change in the Form 3210 and in the remarks section of the Form 4605-A. The partner's basis should be shown on the Form 886-Z(C).

The procedures discussed below apply to penalty and other affected item cases for pass-through entity years ending before August 6, 1997 and affected item cases for partnership tax years ending after August 5, 1997.

If a TEFRA key case is fully agreed or defaulted in Compliance and penalties or other affected item issues are asserted, Appeals will evaluate the merits of the penalties or other affected item issues at the partnership level.

The Compliance function will retain the administrative file for cases which are either fully agreed or defaulted and notify the Appeals Office that penalties or other affected item issues have been proposed.

Local practices dictate whether the case file is forwarded to the Appeals Office for consideration or an appeals officer goes to the Compliance field office to review the file. In either case the Appeals Office will not establish AIMS controls on the case.

A key case evaluation is necessary at the earliest opportunity. Penalty and other affected item issues will generally be subject to a one-year assessment date after the partnership agreements are executed or after the FPAA defaults.

Follow the usual format in preparing appeals case memos for TEFRA key cases.

Include an evaluation of each penalty and other affected item at issue in the abbreviated Affected Item ACM. The proposal for settlement of the affected items will become the key case position for all investors. The abbreviated Affected Item ACM should discuss the facts of the case in terms of the average investor or group of investors. See Exhibit 8.19.3-1.

For partnership tax years ending after August 5, 1997, the applicability of any penalty that relates to an adjustment to a partnership item is determined at the partnership level. The appeals officer will consider the penalties at the partnership level and follow the usual format for the appeals case memo. All other affected items should be discussed in the Affected Item ACM.

Each of the following agreement forms contains a schedule of adjustments that is a continuation of the agreement form. This is used to show the adjustments to the pass-through entity items reported on the return.

The amounts shown on the schedule of adjustments page represent the total adjustments to the pass-through entity items reported on the return. Investors may determine the amounts allocable to them by applying their percentage interest in the partnership/S corporation.

In a settled case, the agreement fixes the treatment of an item with finality. Therefore, set out the treatment carefully to avoid ambiguity (see Exhibit 8.19.3-2).

In an FPAA/FSAA, the amounts and explanations in the schedule of adjustments establish the basis on which the Service will defend its case (see Exhibits 8.19.4-22 and 8.19.4-23).

If the key case CTF generates the agreement forms, a separate schedule of adjustments must be prepared for each year. When the key case CTF generates the agreement form on PCS, the schedule of adjustments page may be photocopied and attached to the computer generated form.

If the Appeals Office generates the agreement forms, do not include more than one year on the schedule of adjustments unless the partners (including spouses for individuals filing a joint return and parent corporations for subsidiary corporate partners) are the same for all years.

For partnership tax years ending before August 6, 1997, if penalties are shown on the Form 870-L(AD) schedule of adjustments, they should be separated from the partnership items to avoid misconceptions that the penalties are subject to a request for consistent agreement. See Exhibit 8.19.1-21.

The Taxpayer Relief Act of 1997 allows for partial agreements on TEFRA cases. A partial agreement can be secured on any settlements entered into after August 5, 1997. Partial agreements can be made for any tax year. A partial agreement does not start the running of the one-year assessment date.

The standard settlement letter is not acceptable for a partial settlement. Contact the Appeals Technical Guidance Coordinator(s) for TEFRA for assistance with a partial agreement settlement letter.

If the appeals officer solicits a partial agreement, add the annotation "Partial Agreement" (typed or stamped) to each page of the Form 870-P(AD), Form 870-PT(AD), Form 870-L(AD), Form 870-LT(AD) or Form 870-S(AD) agreement form. Also mark "Partial Agreement" on the Form 4605-A and Form 886-Z (C). Be sure "Partial Agreement" is marked on each page of multi-page Forms 886-Z (C).

Add the following statement to both pages of Form 870-S(AD) and the schedule of adjustments page(s) of Form 870-P(AD), Form 870-PT(AD), Form 870-L(AD) and Form 870-LT(AD). See Exhibit 8.19.3-3.

When transmitting the closing package to the CTF, use Form 3210 to identify the package as a partial agreement. See Exhibit 8.19.4-4.

The appeals officer should notify the TMP of any partial agreements. The key case CTF will not send the TMP notification.

If the appeals officer solicits a partial agreement with the TMP for non-notice partners, the special language to bind the non-notice partners should also be used on the Form 870-P(AD) or Form 870-L(AD) for partnership tax years ending before August 6, 1997 or Form 870-PT(AD) or Form 870-LT(AD) for partnership tax years ending after August 5, 1997. See Exhibit 8.19.3-4.

Upon receipt of the executed partial agreements, the CTF will enter a five month statute date for the investors signing the partial agreements. The agreement will receive expedited and high priority treatment. After the tax is assessed, the CTF will change the statute date to 11111111 and enter the other information that is required when investor assessments are made. It will then remove the statute date so that the investor file is held in suspense with a blank statute date.

The statute of limitations on the pass-through entity must have at least 10 months remaining when the partial agreements are secured to allow time to assess the partial agreements and prepare and mail the FPAA.

The FPAA/FSAA package will address all issues both agreed and unagreed. The schedule of adjustments page will include all of the issues. See IRM 8.19.4.6 and Exhibits 8.19.4-24 and 8.19.4-25.

After preparation of Form 5402, ACM and agreement forms, the appeals officer should submit the case through the area TEFRA coordinator to the appeals team manager (depending upon local procedures) for review and approval.

All settlements must be reviewed and approved by the manager before they are mailed to the TMP or to the investors. This is especially important because of the consistent agreement provisions of the unified proceedings. If just one investor agreement is erroneously executed, the Service may be bound to the same settlement for all unagreed investors.

It is recommended that the appeals officer share a copy of the schedule of adjustments with the TMP before mailing agreement forms to the investors. The reason for this is to ensure that the amounts shown on the schedule of adjustments accurately reflect the negotiated settlement. Procedures for mailing the agreement forms to the investors are shown in IRM 8.19.3.8 and IRM 8.19.3.9. Generally Appeals will not mail an 870-type agreement form to the TMP as TMP; instead Appeals will generally share a copy of the schedule of adjustments. This is different from the procedures for the FPAA/FSAA.

If the partnership includes non-notice partners, the appeals officer should send an agreement form to the TMP. The form should be directed to the TMP and should include language that will bind the non-notice partners (See Exhibit 8.19.3-4). The TMP may sign the form if the TMP agrees to bind non-notice partners.

For investor tax years ending after July 22, 1998, individual taxpayers filing timely returns may receive a suspension of interest when IRS fails to give notice of liability and the basis for the liability within the time frames established by IRC 6404(g).

Although partnerships and other flow-through entities are not explicitly mentioned in either IRC 6404(g) or in the legislative history, many adjustments to the income tax liabilities reported on individual income tax returns result from adjustments to the income and other partnership items of such entities during partnership level proceedings under the TEFRA provisions of IRCs 6221 through 6234. The notice requirements of IRC 6404(g) are met if notice is provided to the TMP under the TEFRA provisions. A partner's individual share should be computable from the notice to the TMP. A report, which contains sufficient information for a partner to calculate its portion of the partnership adjustments (and thus its liability and the reason therefore) meets the notice requirements of IRC 6404(g).

Generally, the following reports meet the notice requirements of section 6404(g) or are referred to as 6404(g) notices:

The following comments should be included in the remarks sections of the Form 5402, the Form 3210, and the Form 4605-A for all TEFRA key entities:

For partnership cases without penalties or other affected items, prepare Form 870-P(AD) for partnership tax years ending before August 6, 1997 or Form 870-PT(AD) for partnership tax years ending after August 5, 1997. See Exhibits 8.19.1-19 and 8.19.1-20. Procedures for partnership cases with penalties or other affected item issues are shown at IRM 8.19.3.9.

For S corporation cases with S corporation tax years beginning before January 1, 1997, with or without penalties, the appeals officer will prepare Form 870-S(AD). A sample is shown in Exhibit 8.19.1-23. Procedures for S corporations with penalty issues are shown in IRM 8.19.3.9.

When assessing IRC 6621(c) interest as a computational adjustment (for pass-through entity returns due before January 1, 1990 (determined without regard to extensions)), the tax computation specialist will show IRC 6621(c) interest on the schedule of adjustments under the remarks section. See Exhibit 8.19.1-21.

Avoid the use of closing agreements if possible. On the date a closing agreement is executed the one-year assessment period under IRC 6229(f) is triggered for those years covered in the closing agreement.

For detailed instructions on closing agreements, refer to the following sources:

Every partner in a partnership with 100 or fewer partners and every shareholder in an S corporation must sign an agreement form to end the unified proceedings.

In partnerships with more than 100 partners, the TMP may be able to bind the non-notice partners to the settlement of partnership items. See Treas. Reg. 301.6224 (c) -1.

An indirect partner may be bound by a settlement agreement entered into by his pass-thru partner, unless the Service has been notified of the indirect partner’s name, address and beneficial interest in the partnership, in accordance with IRC 6223(c)(3) and Treas. Reg. 301.6223(c)-1, at least 30 days before the settlement agreement was entered into with the pass-thru partner (IRC 6224(c)(1)).

After the appeals officer has shared a copy of the schedule of adjustments with the TMP, prepare the case for mailing settlement agreements to the investors.

The procedures will vary depending upon who distributes the settlement offers. Use one of the two methods discussed in IRM 8.19.3.8.4.1 and IRM 8.19.3.8.4.2.

The execution by the Service of a settlement binds the treatment of the partnership items with finality, converts the partnership items to nonpartnership items, and starts the one-year assessment period for converted partnership and affected items. In addition, the acceptance also gives other partners the right to request consistent agreement.

The procedures for processing agreements received at the key case CTFs differ from procedures for processing agreements received at the Appeals Office.

Unique issues arise in the context of the TEFRA provisions when applied to persons who file a joint return. Generally the signatures of both spouses, or an authorized representative for both, are needed. If the partnership penalty and affected item adjustments are settled, both signatures are needed in Parts I and II of the Form 870-L(AD) or Form 870-LT(AD) to settle both spouses. If only one spouse signs the settlement agreement, the other spouse may or may not remain a party to the proceeding.

For consolidated return tax years beginning before June 28, 2002, where the common parent corporation was the partner, Treas. Reg. 1.1502-77A(a) provides that the common parent corporation in a consolidated group is the sole agent for the group and is the one authorized to execute settlements with respect to the tax liability for the consolidated return year. Thus, the common parent corporation for the year to be settled must execute the settlement agreement with respect to the consolidated group. The signature block would appear as follows:

For consolidated return tax years beginning on or after June 28, 2002, where the common parent corporation was the partner, Treas. Reg. 1.1502-77(a)(6)(iii) provides that the Service will deal directly with any member in its capacity as a partner of a TEFRA partnership. The common parent corporation is a member of its consolidated group. The common parent corporation partner is the one authorized to execute settlements with respect to the partnerships for which the common parent corporation is a partner. The common parent corporation for the year to be settled must execute the settlement agreement with respect to the consolidated group. The signature block would appear as follows:

For consolidated return tax years beginning before June 28, 2002, where a subsidiary corporation was the partner, Treas. Reg. 1.1502-77A(a) provides that the common parent corporation in a consolidated group is the sole agent for the group and is the one authorized to execute settlements with respect to the tax liability for the consolidated return year. Thus, the common parent corporation for the year to be settled must execute the settlement agreement with respect to the consolidated group. The signature block would appear as follows:

For consolidated return tax years beginning on or after June 28, 2002, where a subsidiary corporation was the partner, Treas. Reg. 1.1502-77(a)(6)(iii) provides that the subsidiary corporation partner is the one authorized to execute settlements with respect to the partnerships for which the subsidiary is a partner. The signature block would appear as follows:

The common parent corporation should also sign as only the common parent corporation can bind the other members of the group. The signature block would appear as follows:

If a subsidiary corporation in a consolidated group is the tax matters partner and the agreement is for a consolidated return year beginning before June 28, 2002, the common parent corporation must execute the settlement agreement with respect to the consolidated group. The signature block would appear as follows:

If the agreement is also intended to bind non-notice partners, then an authorized officer of the subsidiary corporation should also sign the settlement agreement. The signature block would appear as follows:

If a subsidiary corporation in a consolidated group is the tax matters partner and the agreement is for a consolidated return year beginning on or after June 28, 2002, a current officer of the subsidiary corporation should sign the agreement in the name of the subsidiary corporation. See Treas. Reg.s 1.1502-77(a)(3)(v) and 1.1502-77(a)(6)(iii). The signature block would appear as follows:

The common parent corporation should also sign as only the common parent corporation can bind the other members of the group. The signature block would appear as follows:

For partnership tax years ending before August 6, 1997, indirect partners are bound by a Form 870-P(AD) executed by a pass-thru partner with respect to the determination of partnership items but not with respect to affected items requiring partner level determinations. For partnership tax years ending after August 5, 1997, indirect partners are bound by a Form 870-PT(AD) executed by a pass-thru partner with respect to the determination of partnership items and penalties but are not bound to the settlement of affected items, including partner-level defenses to penalties.

See IRM 8.19.3.8.3 for details of who may bind non-notice partners.

All Appeals agreement forms must be accepted by an authorized Appeals person per Delegation Order 4-19). The Appeals forms will generally reflect a settlement based upon hazards. Therefore, Compliance personnel have not been designated the authority to accept such settlements. Delegation Order 4-19 authorizes appeals team managers and appeals team case leaders as to their respective cases to accept a settlement agreement.

Appeals personnel will execute agreements secured in nondocketed and docketed cases (see IRM 8.19.3.12 for docketed procedures).

If a key case settlement for a partnership includes a penalty (for partnership tax years ending before August 6, 1997) or other affected items, solicit an agreement using Form 870-L(AD) or Form 870-LT(AD) and the transmittal Letter 3394.

When assessing IRC 6621(c) interest as a computational adjustment (for pass-through entity returns due before January 1, 1990 (determined without regard to extensions)), the tax computation specialist as requested by the appeals officer will show IRC 6621(c) interest on the schedule of adjustments under the remarks section. See Exhibit 8.19.1-21.

For partnership tax years ending before August 6, 1997, use Form 870-P(AD) plus Form 870-AD for affected items not listed on Form 870-L(AD). Affected items that may be agreed to by using Form 870-L(AD) are:

For partnership tax years ending after August 5, 1997, agreement Form 870-LT(AD) covers all affected items.

If a key case settlement for an S corporation includes penalties or other affected items, the appeals officer should solicit a Form 870-S(AD) showing S corporation item adjustments and a Form 870-AD showing penalty or other affected item adjustments. A Form 870 may be used if the investor is fully conceding the penalty or other affected items.

See Exhibit 8.19.1-18 for an example of the language to be used to settle penalty or other affected item adjustments for an S corporation. See Exhibit 8.19.3-5 for an example of a transmittal letter to use for S corporation settlements with penalties or other affected items.

For partnership tax years ending after August 5, 1997, the appeals officer will consider the penalties at the partnership level. If a key case settlement for a partnership includes a penalty, the appeals officer will solicit an agreement using Form 870-PT(AD) and transmittal letter 3395. If the key case settlement includes other affected items either with or without a penalty, the appeals officer will solicit an agreement using Form 870-LT(AD) and transmittal Letter 3394. (See Exhibit 8.19.1-20 for a presentation of penalties on the Form 870-PT(AD) schedule of adjustments. See Exhibit 8.19.1-22 for a presentation of penalties and other affected items on the Form 870-LT(AD) schedule of adjustments.)

For partnership tax years ending after August 5, 1997, investors who wish to contest penalties must do so by filing a refund claim. The refund claim must be filed within six months after the notice of computational adjustment is mailed. The refund consideration will be limited to the partner level defenses against the penalty or a challenge to the amount of the computational adjustment. See IRC 6230(c)(4).

For partnership tax years ending after August 5, 1997, affected items other than penalties are either agreed on a Form 870-LT(AD) or are covered by deficiency procedures.

For pass-through entity tax years ending before August 6,1997, both penalties and affected items are either agreed on a Form 870-L(AD) or are covered by deficiency procedures.

The TMP may bind non-notice partners for the partnership adjustments by signing an agreement that expressly states he/she agrees to bind them (see Exhibit 8.19.3-4). However, the TMP may not bind non-notice partners for penalty or affected item adjustments for pass-through entity tax years ending before August 6, 1997.

For partnership tax years ending before August 6, 1997, if the TMP signs a Form 870-P(AD) to bind the non-notice partners to partnership items, the appeals officer may use either a Form 870-L(AD) or a Form 870-AD for the separate agreement of the penalty adjustments by non-notice partners. A special transmittal letter should be prepared which explains that only Part II of the Form 870-L(AD) should be signed to agree to the settlement. The Form 870-AD, if used, should be prepared for the partner as shown in IRM 8.19.1.6.10(8).

If the TMP does not agree to bind the non-notice partners, or if there are affected item adjustments, the appeals officer should direct the key case CTF to send the agreement forms directly to each non-notice partner.

Each shareholder must sign a Form 870-S(AD) to settle S corporation adjustments and Form 870-AD to settle the penalties and affected items.

If the pass-thru partner signs a settlement, he binds the indirect partners to the partnership items unless the indirect partner identified himself under IRC 6223(c)(3). See IRC 6224(c)(1). No special language needs to be added to the agreement to bind the indirect partners.

For pass-through entity tax years ending before August 6, 1997, the pass-thru partner cannot bind an indirect partner to penalties or other affected items. See IRC 6224(c)(1).

Except as indicated below, the procedures shown in IRM 8.19.3.8.4 will be used to mail agreements with penalties and affected items.

For partnership tax years ending after August 5, 1997 when a penalty is asserted, unless all partners remaining in the proceeding sign a settlement agreement for the partnership items and the penalty, an FPAA must be issued. If the only unagreed issue is a determination of the applicability of the penalty at the partnership level, an FPAA must be issued for the applicability of the penalty at the partnership level.

Only key case CTFs or Appeals offices should receive and accept agreements.