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Part 4. Examining Process

Chapter 31. Pass-Through Entity Handbook

Section 2. TEFRA Examinations - Field Office Procedures

4.31.2  TEFRA Examinations - Field Office Procedures

4.31.2.1  (06-01-2004)
How to Identify a TEFRA Entity

  1. The following subsections explain how to identify TEFRA entities.

4.31.2.1.1  (06-01-2004)
Identification of TEFRA Key Case Returns

  1. Identification of returns as TEFRA vs. nonTEFRA is necessary in order to have a valid assessment of tax, because the TEFRA partnership rules and the deficiency procedures are mutually exclusive. If the Service applies the wrong procedures, e.g., erroneously proceeds at the partnership level rather than at the partner level, or vice versa, barred deficiencies and/or refunds can result. See IRM 4.31.2.1.7 below for an explanation of a reasonable determination of whether TEFRA or nonTEFRA procedures apply.

  2. The examiner must determine, for each taxable year, whether TEFRA procedures apply. Comments on Form 4318, Examination Workpapers, are required from the examiner as to whether the return is TEFRA or nonTEFRA, and the reasons supporting this conclusion.

  3. TEFRA procedures do not apply to S corporations for tax years beginning after December 31, 1996.

4.31.2.1.2  (06-01-2004)
Identification of TEFRA Partnership

  1. IRC 6231(a)(1) provides that TEFRA rules apply to all partnerships required to file tax returns under IRC 6031(a) whose tax years begin on or after 9-3-82, except:

    1. Partnerships meeting the small partnership exception; and

    2. Partnerships electing out of partnership status pursuant to IRC 761(a). (See IRM 4.31.2.2.15.)

  2. The small partnership exception applies to partnerships consisting of 10 or fewer partners, each of whom is an individual, (other than a nonresident alien), a C corporation, or an estate of a deceased partner. See Exhibit 4.31.2-1., TEFRA Partnership Criteria flowchart.

    Note:

    The above definition applies to partnership tax years ending after August 5, 1997.

  3. The MF transcript, CC ACTRA, MFTRA and CFOL CC BMFOL"E" has a TEFRA indicator included that was to be utilized in determining if a partnership was covered by the TEFRA procedures. This TEFRA indicator is not accurate and should not be relied on in determining whether or not a partnership is TEFRA.

    Note:

    To access information using CC ACTRA, a CC MFTRD is required to be input first. The CC MFTRD is the CC that requests that an ACTRA output be available.

4.31.2.1.3  (09-22-2006)
Election to be Covered by the TEFRA Procedures - Partnership Tax Years Beginning on or after January 1, 2004.

  1. A partnership eligible to be excluded under the small partnership exception rules may elect to be covered by the TEFRA procedures. (See IRC 6231(a)(1)(B)(ii).)

  2. The requirements for making the election to have the TEFRA procedures apply are explained in Treas. Reg. section 301.6231(a)(1)-1(b)(2). A Form 8893 is available for taxpayers who wish to make an election. This form standardizes the statement required in the Regulations.

  3. If a partnership makes the election to be covered by the TEFRA procedures, it is binding for the year for which it is made and all subsequent years unless revoked with IRS consent.

  4. Beginning on 2004 Form 1065, Schedule B, Question 4 was changed to inquire as to whether taxpayers filed a TEFRA election or Form 8893 which is used to make the TEFRA election. If the taxpayer answers yes to this question, the return is forwarded to the Ogden CTF for review. If an election is attached to the return, the election is reviewed to determine if it is valid. The Ogden CTF will correspond with the partnership as needed in order to perfect the election.

  5. A systemic process exists to keep track of TEFRA elections filed for tax returns filed beginning January 1, 2006. The Ogden CTF will enter a transaction code 971 with an action code 334 on the module of taxpayers filing valid elections.

  6. There are several action codes (AC) that are used to identify actions taken on TEFRA elections filed by partnerships. They are as follows:

    • AC 334 TEFRA Election

    • AC 335 Revocation of TEFRA Election

    • AC 336 TEFRA Election erroneously input

    • AC 337 TEFRA Election has been denied

    • AC 338 TEFRA Revocation has been denied

  7. A partnership may revoke a previously filed election with the approval of the Commissioner. Form 8894 is to be used by a partnership requesting that their prior TEFRA election be revoked. The instructions on this form require the partnership to file the revocation at the Ogden campus. The Ogden CTF will review the revocation, and input the appropriate action codes. The Ogden CTF will also correspond with the partnership as needed.

4.31.2.1.4  (09-22-2006)
Election to be Covered by the TEFRA Procedures - Partnership Tax Years Beginning Before January 1, 2004.

  1. A partnership eligible to be excluded under the small partnership exception rules may elect to be covered by the TEFRA procedures. (See IRC 6231(a)(1)(B).)

  2. If a partnership makes the election to be covered by the TEFRA procedures, it is binding for the year for which it is made and all subsequent years unless revoked with IRS consent.

  3. The election is filed with the partnership return for the year the election is made.

  4. Currently there is no requirement that the partnership file a copy of the election to be covered by the TEFRA procedures with each subsequent year's partnership tax return. The examiner will inquire if an election was made in any prior year. If the partnership responds it has not made an election, it should be so noted in the examination workpapers.

  5. If the partnership has filed an election to have the TEFRA procedures apply, secure a copy of the election to determine if the election meets the requirements of the regulations. If the election is correct, staple the copy to the back of the front page of the partnership return. If the election is not correct, consult with the field TEFRA coordinator to determine if the election is valid as filed or what further action should be taken.

    Note:

    Provide a copy of the election with the linkage package that will be sent to the campus. If the election is not provided, there may be some confusion as to the partnership's TEFRA status.

  6. The requirements for making the election to have the TEFRA procedures apply are as follows: (See Treas. Reg. section 301.6231(a)(1)-1(b)(2).)

    1. The statement making the election should be attached to the partnership return for the first taxable year for which the election is to be effective.

    2. The statement should include the name and the employer's identifying number (EIN) of the partnership.

    3. The statement should say the partnership elects to be covered by IRC Sections 6221 through 6234 for the tax year ending 12/31/XX and all subsequent years. (If the partnership has a year end other than 12/31 (a fiscal year end), then that year end would be used instead of 12/31/XX.)

    4. The statement shall be identified as an election under IRC 6231(a)(1)(B)(ii), shall be signed by all persons who were partners of that partnership at any time during the partnership taxable year to which the return relates, and shall be filed at the time (determined with regard to any extension of time for filing) and place prescribed for filing the partnership return.

    5. For any partnership taxable year for which the due date of the return (determined without regard to extensions) is before January 2, 2002, the partnership may file the statement described in (d) on or before the date which is one year before the date specified in IRC 6229(a) for the expiration of the period of limitations with respect to that partnership (determined with regard to extensions of that period under IRC 6229(b)).

4.31.2.1.5  (09-22-2006)
Form 1065, Schedule B TEFRA Checkbox

  1. For tax years beginning in 2004, Schedule B, question (4) was removed. The question was replaced with another inquiring as to the taxpayers intent to file a TEFRA election and attach the Form 8893 to the return.

  2. In earlier years, the following applies. If the TMP thinks the partnership elected to have the TEFRA procedures apply to the partnership by checking "yes" in response to the question on Schedule B and/or designating a tax matters partner, but the partnership has not filed an election meeting the requirements of the regulations, contact the field TEFRA coordinator to determine if an election into TEFRA can still be made for the tax year under examination. The examiner should also check to see if the partnership making the election isn't already TEFRA by statute.

  3. Chief Counsel's position is that checking "yes" in response to the question on Schedule B, page 2 of the partnership tax return "Is this partnership subject to the consolidated audit procedures of section 6221 through 6233?" and/or designating a tax matters partner in the space provided on the partnership tax return, do not constitute an election to have the TEFRA procedures apply. The directions for completing the partnership return also state answering " yes" to this question does not constitute an election into TEFRA.

    Note:

    However, if the partnership appears to qualify for the small partnership exception, this may be an indication the partnership has previously elected to have the TEFRA procedures apply. The examiner should determine if the partnership filed an election to have the TEFRA procedures apply. If so, then follow the procedural instructions in IRM 4.31.2.1.3 above.

4.31.2.1.6  (05-31-2005)
Determining and Identifying the Number of Partners

  1. If at any time during the taxable year the number of partners exceeds the small partnership exception, the return will fall under the TEFRA provisions.

  2. A partnership may have more than 10 partners during the year, and still meet the small partnership exception, because the partnership never had more than 10 partners at any point in time. Sales of partnership interests will cause more than 10 Schedules K-1 to be filed, but there may never be more than 10 partners at any point in time.

  3. The small partnership exception does not apply to a partnership for the taxable year if any partner in the partnership during the taxable year is a pass-through partner. (Treas. Reg. section 301.6231(a)(1)-1(a)(2).) A partnership consisting of three partners, two individuals, and a partnership or S corporation, will not meet the small partnership exception.

    1. A grantor trust is a pass-through partner even though the trust is not required to file a return.

    2. A limited liability company (LLC) may be a pass-through entity. See IRM 4.31.2.2.17 for information on determining if the LLC is a pass-through entity.

    3. LLC's that are disregarded entities may be treated as pass-through entities when applying the small partnership exception. See Rev. Rul. 2004-88. Consult with the field TEFRA coordinator on any questions.

  4. IRC 6231(a)(1)(B)(i) provides that for the purposes of the small partnership exception "a husband and wife (and their estates) shall be treated as one partner." This provision is unqualified and thus should apply to a husband and wife regardless of the manner in which they hold their interests or file their returns. The grantor trust is counted as a partner in its own right.

  5. In general, an estate must file a return if the estate is not closed within one year. An estate may take several years to finalize and close. The estate will file a Form 1041 like a trust. IDRS research should be utilized to determine how long the estate has filed returns. In order to apply the small partnership exception, the examiner will have to determine if the estate is simply filing the returns while the estate is being closed out, or that a trust was established by the estate. .

    Note:

    It is recommended that an INOLE be requested to determine the nature of the entity filing the Form 1041. For example, XYZ Trust or Estate of Mr. X.

  6. A partner must have a proprietary interest in profits or capital. Therefore, if a Schedule K-1 does not indicate an ownership interest, does not show a distribution of any partnership items, and does not show a capital account balance, the person in question may not be a partner for the taxable year involved. Consult Area Counsel about Federal law to determine if the partner is really a partner.

4.31.2.1.6.1  (05-31-2005)
Master Limited Partnerships

  1. Master Limited Partnerships (MLP's) are large, widely-held limited partnerships whose interests are not necessarily publicly traded.

  2. In general, the TEFRA audit rules apply to MLP's. The TEFRA audit procedures do not apply to an MLP which is treated as a corporation, under the publicly traded partnership rules. (See IRC 7704.)

  3. MLP's pose a major compliance problem for the Service since the interests are often held by several thousand partners who are considered partners for purposes of the TEFRA unified partnership audit rules even though they own a very small interest. The Service has encountered difficulties in determining and assessing tax liabilities and collecting deficiencies from partners in a cost effective manner since the Service must control individual returns, make a computational adjustment, and issue a notice and demand for payment to each partner.

    Note:

    If planning on auditing an MLP, contact the TEFRA coordinator to discuss an audit strategy. Special provisions can be arranged to limit the number of partners that are linked. These arrangements need to be coordinated with the Headquarters Analyst and the key case campus.

  4. Amendments to the code have been made allowing such partnerships to elect to be treated as "Electing Large Partnerships" which will enable the Service to assess final tax determinations against partners of MLPs in an efficient manner.

4.31.2.1.6.2  (05-31-2005)
Electing Large Partnerships

  1. In general,

    1. An electing large partnership is a unique class of partnership established by the Taxpayer Relief Act of 1997 (TRA '97) for federal income tax reporting and auditing purposes only.

    2. TRA '97 added IRC Sections 771 through 777, 6241 through 6242, 6245 through 6248, and 6251 through 6252 and 6255 on Electing Large Partnerships.

    3. Designation as an electing large partnership does not have an impact beyond the scope of federal taxation.

    4. Currently, the only guidance regarding electing large partnerships is the statutory language and the committee reports.

  2. Definition of an electing large partnership.

    1. The definition of an electing large partnership is in IRC 775.

    2. To qualify to make an election to be treated as an electing large partnership, the partnership must have had a minimum of 100 partners in the preceding taxable year.

    3. A partnership will cease to be an electing large partnership for any partnership taxable year if fewer than 100 partners were partners in the partnership.

    4. Some partners are not counted for certain service partnerships. Individuals performing substantial services (or who formerly performed substantial services) for the partnership are not counted for purposes of determining the number of partners. (See IRC 775(b) .)

  3. Election required to be treated as an electing large partnership.

    1. The partnership must elect to be treated as an electing large partnership. Based on the instructions for filing partnership returns, a partnership elects to be an electing large partnership by filing Form 1065-B.

    2. If no election is made, but the partnership return treats the entity as an electing large partnership, the treatment on the return is binding on the partnership and its partners, but not the Service.

    3. Once the election is made, it can only be revoked with the consent of the Secretary.

  4. Certain partnerships are excluded from electing to be covered by the electing large partnership rules. They are:

    1. Any partnership where the principal activity is the buying and selling of commodities (not described in IRC 1221(1)), or options, futures, or forwards with respect to such commodities (commodity pools.)

    2. Partnerships in which all of the partners provide (or formerly provided) substantial services to the partnership.

  5. Simplified flow-through to the partners.

    1. Generally the flow-through of partnership items will be simplified, with the partnership reporting net figures to the partners in a simplified format.

    2. Each partner will take into account separately the partner's distributive share of certain enumerated items. (See IRC 772(a).)

    3. Taxable income of the partnership generally is computed in the same way.

    4. Limitations on deductions, credits, or losses generally are applied at the partnership level.

    5. The characterization of partnership items is determined as if distributed directly to the partner.

    6. Partners will receive a simplified Schedule K-1 (similar to the Forms W-2 currently received by wage earners.)

  6. Treatment of partnership items and adjustments.

    1. The treatment of items at the partnership level is controlling, both at the time of the filing of the return as well as when adjustments are made.

    2. Unlike the general TEFRA rules, with an electing large partnership, there is no computational adjustment of partnership items made to the returns of the partners.

    3. Adjustments flow through to the partners in the year the adjustments are made.

    4. Electing large partnerships are governed by the audit procedures contained in IRC Sections 6240 through 6255.

    5. The return of a partner in an electing large partnership must be consistent with the return of the partnership, without exception (and regardless of disclosure.) If a partner fails to file a consistent return, then:
      • Any underpayment resulting from an inconsistency between the partnership's return and partner's return can be assessed as a math error adjustment.
      • The disregard of the consistent filing requirement may subject the partner to penalties.

    6. Adjustments to any partnership items are given effect in the year in which the adjustments are made, not the tax year to which the adjustments relate. As a result,
      • Adjustments flow through to the partners in the year that the adjustment takes place.
      • Adjustments flow through to the partners who own interests in the partnership in the year in which the adjustments are made.
      • Any intervening, offsetting adjustment is taken into account when determining the final adjustment that is flowed through to the partner.

      Example:

      If a partnership claimed an expense of $1,000 in year 1, and it was determined in year 4 that the item should have been amortized ratably over 10 years, the adjustment in year 4 would be $700 (exclusive of any interest or penalties.) The adjustment would consist of the $1,000 disallowed deduction in year 1 plus an offset of $200 of additional amortization deductions for years two and three. The partners who own interests in the partnership in year 4 would be required to include their share of a net adjustment of $700 into income in year 4. The partnership would then be permitted to amortize the remaining $700 of expenses in years 4 through 10.

  7. Computing imputed underpayment.

    1. If adjustments are made to any partnership items, an imputed underpayment is calculated by taking into account all partnership adjustments and multiplying the net increase in taxable income by the highest marginal tax rate in effect (corporate or individual.)

    2. Any adjustments to tax credits are also taken into account when computing the imputed underpayment.

  8. Partnership may be liable for imputed underpayment.

    1. A partnership may elect to pay the imputed underpayment rather than flow adjustments through to the partners.

    2. If a partnership does not elect to pay the imputed underpayment and fails to flow adjustments through to the partners, the partnership will be liable for the imputed underpayment.

    3. If a partnership adjustment results in a reduction of a tax credit and the credit in the year of the adjustment is not sufficient to offset the adjustment, the partnership must pay an imputed underpayment relating to the credit.

  9. Partnership liable for interest and penalties.

    1. If interest, penalties, or any other addition to tax applies, the partnership is liable for such amount, computed as if the partnership were a taxable individual.

    2. Both the statutory language and the Conference Report expressly state that any payment relating to federal income taxes, interest, or penalties that is made by the partnership is non-deductible.

  10. Partnership level adjustments.

    1. Generally, the limitations period for making adjustments to electing large partnerships (and for petitioning for a re-determination of such adjustments) are very similar to the TEFRA rules.

    2. The partner with authority controls the procedures and there is no requirement for keeping other partners informed of the partnership proceedings.

    3. The Secretary may issue a notice of partnership adjustment to a partnership by mailing such notice to the last known address of the partnership.

    4. Adjustments must be made to partnership items within three years of the later of the date of filing of the partnership return or the due date for filing the partnership return. The mailing of a notice of partnership adjustment suspends the running of this period, and extends the period for one additional year after proceedings are complete.

    5. Within 90 days of the issuance of a notice of partnership adjustment, the partnership may file a petition for re-adjustment with the Tax Court, the United States District Court for the district in which the partnership's principal place of business is located, or the United States Court of Federal Claims. (Before filing a petition for re-adjustment with a district court or the Court of Federal Claims, the amount asserted in the notice of partnership adjustment must be deposited with the Secretary.)

  11. Requests for administrative adjustment.

    1. A partnership may request administrative adjustment of partnership items within three years of the later of the date of filing of the partnership return or the due date for filing the partnership return. The request for administrative adjustment also must be made prior to the mailing of a notice of partnership adjustment.

    2. If an administrative adjustment is not allowed, the partnership may petition the Tax Court, the United States District Court for the district in which the partnership's principle place of business is located, or the United States Court of Federal Claims for adjustment. Such petition must be filed more than six months and less than two years after the request for administrative adjustment.

  12. The partner with authority.

    1. The partner with authority is given a broader ability to bind the partnership and partners for an electing large partnership.

    2. The partner with authority is the single point of contact for the Service. For example, generally, only the partner with authority must be notified of partnership proceedings and there is no obligation for the partner with authority to keep partners apprised of any partnership proceeding.

    3. The partnership must designate a partner with authority. If the partnership fails to designate a partner with authority, the Secretary may designate any partner to serve as the partner with authority.

    4. The partner with authority has the sole authority to act on behalf of the partnership.

    5. The partnership and all of the partners are bound by any actions that are taken by the partner with authority that fall within the scope of the electing large partnership regulations.

4.31.2.1.6.3  (03-04-2008)
Determining the Number of Indirect Partners

  1. The agent should try to determine the number of indirect partners involved in their partnership. The partnership being examined may only have three partners with those being partnerships. Those partnerships may have other partnerships as partners, which can expand the ultimate number of partners greatly. A large number of indirect partners will dilute any partnership adjustment.

  2. The agent should use YK1 data, if available, to determine the overall size of the partnership before making the determination of whether to proceed with the examination. Please consult with your Technical Advisor or local TEFRA Coordinator with questions regarding YK1.

4.31.2.1.7  (06-01-2004)
Making a Reasonable Determination of Whether the Partnership is Subject to the TEFRA Procedures

  1. IRC 6231(g) was added by TRA 1997.

  2. If, on the basis of a partnership return for a taxable year, the Service reasonably determines that the TEFRA unified audit procedures apply to the partnership for the tax year under examination, but the determination is erroneous, then the TEFRA unified audit procedures will be extended to the partnership (and its items) and to partners of the partnership for the year under examination. (See IRC 6231(g)(1) .)

  3. Determination that the TEFRA procedures do not apply. If, on the basis of a partnership return for a taxable year, the Service reasonably determines that this subchapter does not apply to such partnership for such year but such determination is erroneous, then the provisions of this subchapter shall not apply to such partnership (and its items) for such taxable year or to partners of such partnership. (See IRC 6231(g)(2).)

  4. IRC 6231(g) should only be relied upon when statute limitations prevent changing the audit procedures (changing from TEFRA procedures to nonTEFRA procedures, or vice versa). If the statute allows, then the examiner should switch audit procedures based upon the new determination.

4.31.2.1.8  (03-04-2008)
Key Cases Controlled as Both TEFRA and NonTEFRA

  1. These key cases are controlled as both TEFRA and nonTEFRA. This is done when it is unclear whether a key case is TEFRA or nonTEFRA to protect the government's interest.

  2. When a key case is controlled as both TEFRA and nonTEFRA, both sets of procedures must be followed. This requires that both a Form 13814,TEFRA Linkage Package Check Sheet and a Form 13824, NonTEFRA Linkage Package Check Sheet be completed and submitted to the campus. This ensures that both the TEFRA and NonTEFRA functions in the campus are aware of the dual controls on these key cases.

  3. For dual status cases, both the TEFRA and nonTEFRA statutes need to be protected. The nonTEFRA statute is controlled at the investor level, and should be extended using Form 872-I if needed.

4.31.2.2  (06-01-2004)
Field Agent Key Case Procedures

  1. The following subsections explain the key case procedures as they relate to the field.

4.31.2.2.1  (06-01-2004)
Initiating Timely Examination of Key Case Returns

  1. Before initiating a TEFRA key case examination, the time frames and procedures outlined in Exhibit 4.31.2-2. ( See Exhibit 4.31.2-2.) TEFRA Flow-Through Examination Time Chart and Exhibit 4.31.2-3. ( See Exhibit 4.31.2-3. ) TEFRA Key Case Procedures, will be carefully reviewed. Unless sufficient time remains on the TEFRA key case statute of limitations, i.e., the IRC 6229(a) statute, the examination will not be started. At least one year is considered sufficient time.

  2. If there are less than 12 months (but at least 7 months) remaining on the TEFRA key case statute of limitations, Area Director (SB/SE) or Director of Field Operations (LMSB) approval is required to start an examination of the key case.

    Note:

    The issuance of an NBAP to the TMP of the partnership (or S corporation if TEFRA) is the only way a TEFRA examination may be initiated. The mailing of an appointment letter does not start a TEFRA examination. There must be at least 12 months remaining on the statute of limitations for the key case when the examination is started. If the date on the NBAP to the TMP is less than 12 months, a memorandum from the appropriate Division Executive is required authorizing the beginning of the examination with less than 12 months left on the statute of the key case.

    1. The memorandum of approval must identify the key case entity and contain the original signature (facsimile stamp is not acceptable) of the Area Director (SB/SE) or Director of Field Operations (LMSB). The circumstances surrounding the late start of the examination will be stated. The explanation should state why it is beneficial to the government to initiate an examination. For example compliance purposes, or large, unusual or questionable deductions.

    2. The memorandum should be written to the Area Director (SB/SE) or Director of Field Operations (LMSB) from the Territory Manager.

    3. Additional approval is not required to start the examination of a second-tier flow-through entity where the examination is limited to making adjustments stemming from the examination of the first-tier flow-through entity; however, approval would be required for the second-tier flow-through entity where another issue (a partnership item and/or affected item that requires a partnership level determination) is examined.

    4. A copy of the Area Directors (SB/SE) or Director of Field Operations (LMSB) approval must be attached to the Form 8340 when the PCS linkage is requested.

  3. A TEFRA key case examination should not be initiated on PCS if there are less than seven (7) months remaining on the TEFRA key case statute of limitations. However, a TEFRA examination can be initiated with less than twelve (12) months remaining, if the following conditions are met:

    1. If Area Director (SB/SE) or Director of Field Operations (LMSB) approval is obtained with 7-12 months remaining on the TEFRA key case statute of limitations, the key case examiner is required to maintain close coordination with the Campus TEFRA Function to ensure all statutory requirements are met.

    2. If a case was erroneously controlled as a nonTEFRA and less than 7 months remain on the TEFRA key case statute of limitations, the case will be established and controlled in the field. The key case examiner is responsible for:
      • Coordination with the review function to ensure that there is timely issuance of all notices
      • Manual linkage on PCS using Form 6658, Notice of Special Investor Action
      • Protection of all statutes for the key case and the investors

  4. If the TEFRA procedures or the TEFRA linkage is not timely initiated, as required above, then the examiner assumes all of the responsibilities of the CTF including administrative functions, issuances of all notices, the recognition of and the actions required within the proper time frames and the proper resolution of all of the related investor cases. In this event, the local TEFRA coordinator should be contacted immediately to determine appropriate action.

  5. Once all the returns are secured by the field, the local TEFRA coordinator should consult with the campus regarding the linkage and subsequent transfer of the cases to their control.

4.31.2.2.2  (03-04-2008)
Mandatory Completion of Check Sheets

  1. These check sheets were designed to assist the examiner in completing the required TEFRA procedures. Manager involvement is required at the completion of the TEFRA Linkage Package Check Sheet, Form 13814 and upon completion of the Partnership Procedures Check Sheet, Form 13813.

  2. It is critical for the Service to follow TEFRA rules and procedures during examinations, since procedural errors can affect the validity of assessments, infringe on taxpayer rights, and result in improper disclosures of tax information.

  3. The following check sheets will be used when examining a partnership or a limited liability company filing as a partnership subject to the TEFRA procedures. The check sheets will serve as documentation to confirm the actions taken or decisions made in following the TEFRA procedures.

    • Partnership Procedures Check Sheet, Form 13813: The completion of the Partnership Procedures Check Sheet is mandatory for every partnership examined. The completed check sheet will be included in the audit file to document that the partnership is or is not subject to the TEFRA procedures. SB/SE examiners will file this check sheet and other TEFRA work papers under a separate line item in Section 600 on the Form 4318. Industry Case examiners will file the TEFRA check sheets and work papers under SAIN number 703 on Form 4764. The examiner’s manager is to review the Partnership Procedures Check Sheet and work papers to ensure that all appropriate TEFRA procedures have been completed. The manager’s signature on the Partnership Procedures Check Sheet indicates that the TEFRA procedures have been reviewed and have been correctly completed.

    • TEFRA Linkage Package Check Sheet, Form 13814: The TEFRA Linkage Check Sheet provides guidance to the examiner in completing the information required for a complete TEFRA Linkage Package. This check sheet must be completed with attachments and submitted with a Form 8340. The manager’s signature on line 13 of the TEFRA Linkage Check Sheet indicates that the linkage package has been reviewed, is accurate and complete. The manager’s signature on the Form 8340 continues to be used to authorize the establishment of linkage on the Partnership Control System.

    • Tax Matters Partner (TMP) Qualification Check Sheet, Form 13828: The completion of the Tax Matters Partner (TMP) Qualification Check Sheet is mandatory where the partnership has been identified as TEFRA. The position of TMP is created by statute for TEFRA pass-through entities; therefore, the check sheet is not applicable and should not be used for nonTEFRA entities or tax periods. The check sheet must be completed to determine whether the TMP is legally qualified to be the TMP or whether a new TMP must be designated. The manager’s signature on the Tax Matters Partner (TMP) Qualification Check Sheet indicates that the TEFRA procedures have been reviewed and have been correctly completed.

    • Tax Matters Partner (TMP) Designation Check Sheet, Form 13827: This check sheet must only be completed when a new TMP is designated during the examination. Certain procedures are required when a TMP is designated and must be documented in the audit file. If the TMP is designated by the Service, the manager must complete Part III and sign in block 1.

4.31.2.2.3  (03-04-2008)
Identification of the Tax Matters Partner (TMP)

  1. Prior to issuing the Notice of Beginning of Administrative Proceeding (NBAP), the examining agent must complete the Form 13828, Tax Matters Partner (TMP) Qualification Check Sheet. The completion of the check sheet will ensure the person identified as TMP meets the qualifications prior to issuing the NBAP. If the person does not meet the qualifications, a generic TMP NBAP can be issued and Form 13827, Tax Matters Partner (TMP) Designation Check Sheet, can be completed to designate a new TMP.

4.31.2.2.4  (03-04-2008)
Issuing the Notice of the Beginning of the Administrative Proceeding (NBAP) Letter to the Tax Matters Partner

  1. The examiner will initiate a TEFRA examination on a partnership return by issuing a Notice of Beginning of Administrative Proceeding (NBAP)( Letter 1787(DO)) to the Tax Matters Partner (TMP). ( See Exhibit 4.31.2-4., Determination of TMP)

  2. The NBAP is required by statute to be mailed. ( IRC 6223)

  3. There must be one year remaining on the TEFRA key case statute of limitations before starting the examination.

  4. Examiners should issue NBAP letters as follows:

    1. All NBAPs will be sent via certified mail.

    2. The generic NBAP letter will be addressed "TAX MATTERS PARTNER " c/o key case entity name and address. Generic means the name of the TMP is not specified. This protects the government in the event the designated TMP is subsequently determined to not qualify to be the TMP.

    3. A second NBAP letter will be issued to the designated TMP c/o key case entity name and address as shown on the return. It is important that the entity name be included to distinguish this NBAP from the one sent to the TMP as a partner. The TMP receives an NBAP as the TMP of the partnership and as a partner in the partnership.

    4. A copy of the NBAP letter will also be mailed to the designated TMP if the TMP that has been designated on the key case return has a different address than the key case.

      Note:

      It is important that the IRS return address information is added to the upper left side of the NBAP.

    5. Unless a new address is furnished as specified by IRC 6223(c), the NBAP must be mailed to the address as provided on the partnership return, or if a second NBAP is issued to the person who is the TMP, the address as provided on the partner's or entity's return in order to have a valid notification. The 120 day statutory notification period begins with the issuance of the NBAP to the last identified notice investor.

    6. While the information on the Form 1065 is the legal information base for addresses, the Service is not precluded from using other information in its possession in administering TEFRA procedures. It is not obligated to search its records but if it is known at the time of the issuance of the NBAP that the partnership address on the return is no longer valid, a copy of the NBAP may be issued to the new address.

    7. Further investigation for the proper address should be made whenever the examiner determines there is a reasonable basis to question any representation on the return or whenever inconsistencies become apparent.

    8. If the NBAP is inadvertently mailed to an address other than the address shown on the return (except in the case of (e) above), an NBAP should be mailed to the address reflected on the partnership return, which is the address required under IRC 6223(c).

    9. If an NBAP is issued to the original TMP and, in the meantime, a new TMP is appointed upon the death (or the other circumstances identified in Treas. Reg. section 301.6231(a)(7)-1(l)(1)) of the original TMP, the new TMP will not have to re-initiate the 120 day notification procedures to the non-notice partners.

    10. The termination of the designation of the TMP by death does not affect the validity of any action taken by the TMP prior to his or her death (or the other circumstances identified in Treas. Reg. section 301.6231(a)(7)-1( l)(1)).

4.31.2.2.4.1  (09-22-2006)
45 Day Rule

  1. Per Treas. Reg. section 301.6223(a)-2(a), the NBAP may be withdrawn and the TEFRA examination stopped if the NBAP is withdrawn by mailing a letter to the TMP stating that the NBAP is being withdrawn. If the NBAP is withdrawn within the 45 day period, neither the Service nor the TMP is required to give the other partners notice. The 45 day period begins with the earlier of the mailing of the generic or named NBAP to the TMP. The 45 day period includes all days including weekends and holidays.

  2. The NBAP is required by statute to be mailed. ( IRC 6223) This poses an administrative problem when trying to maximize the 45 day window.

  3. It is best to initially send a standard contact letter along with an IDR prior to the initial appointment, and send the generic TMP NBAP via certified mail to the TMP on the day of the appointment. Also send a named TMP NBAP once the TMP is determined. This maximizes the use of the 45 day period.

4.31.2.2.5  (09-22-2006)
Power of Attorney Appointed by the Tax Matters Partner

  1. A TMP may appoint a power of attorney to represent the partnership before the Service and to perform all acts for the partnership except for the execution of legally significant documents. The term legally significant documents includes, but is not limited to:

    1. A settlement agreement entered into pursuant to IRC 6224(c)(3) when the TMP is binding certain other partners (e.g., non-notice partners), including a formal closing agreement pursuant to IRC 7121; and

    2. An extension of the limitation period for assessment with respect to partnership items. The appointing of a power of attorney may not meet the requirements of Treas. Reg. section 301.6229(b)-1 for purposes of the power of attorney being a person authorized in writing to sign a statute extension.

  2. Other situations in which it is necessary to deal directly with the duly designated TMP rather than the power of attorney include, but are not limited to, mailing of required notices, such as NBAPs or FPAAs. However, a copy of the notice will also be mailed to the power of attorney, but it should not be sent using certified mail.

  3. Form 2848, Power of Attorney and Declaration of Representative, should be completed as follows:

    1. The TMP should execute the power of attorney in his or her capacity as TMP.

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

    3. Under the heading "Type of Tax" , insert "TEFRA partnership proceedings" ; and

    4. Under the heading "Federal Tax Form Number" , enter "Form 1065 and consequential adjustments " .

  4. The POA for a TEFRA partnership becomes null and void upon the death of the duly designated TMP. A new TMP must be designated and a new POA executed.

4.31.2.2.6  (06-01-2004)
Conducting and Completing the Key Case Examination

  1. The following subsections cover key case examination procedures.

4.31.2.2.6.1  (05-31-2005)
No Change Within 45 Days

  1. The examiner will have 45 calendar days from the date the NBAP is issued to the TMP to determine if the case will be a No-Change.

  2. Procedures for key cases No-Changed within 45 days:

    1. If the key case is No-Changed within 45 days from the date the NBAP is issued to the TMP, no NBAPs will be issued to the investors.

    2. If the key case is No-Changed within 45 days, the NBAP issued to the TMP is withdrawn when the No-Change Letter 1864(DO) is issued by the Field TEFRA Coordinator within the 45 day period. The NBAP is treated as if it had never been mailed; however, any subsequent examination would be subject to re-opening procedures.

    3. Complete a Form 3198, Special Handling Notice for Examination Case Handling, by writing " TEFRA - No Change within 45 days, Issue Letter 1864" . Attach the Form 3198 to the front of the key case file.

4.31.2.2.6.2  (03-04-2008)
Linking the Key Case on the PCS

  1. To establish the key case on the PCS for a key case still in process after the 45 day period:

    1. If the key case examination is completed and is a No-Change after 45 days, contact the Field TEFRA Coordinator to determine if the key case should be established on the PCS.

    2. If the key case examination is still in process 60 days after the NBAP is issued to the TMP, the examiner will initiate linking the key case on the PCS. The case will be linked at this time whether or not the examiner has determined if there will be adjustments proposed.

    3. The key case will be established on the PCS by completing the linkage package. Establishing the key case on the PCS will cause the NBAPs to be issued to the investors by the Campus TEFRA Function.

    4. To establish the key case on the PCS, the examiner needs to provide the following items to the PCS coordinator :
      • Form 8340 - PCS TEFRA Establish or Add, completed by the examiner and signed by the Manager;
      • A complete copy of the TEFRA key case return, including the Schedules K-1 and all attachments to the return and the Schedules K-1;

      Note:

      If the return is on the LMSB Image Network (LIN), for LMSB key cases, it is acceptable for the return information to be submitted on CD or accessed electronically.


      • A second complete copy of all Schedules K-1 (including all attached schedules) properly annotated on the top with the MFT of the investor in red ink;
      • An adding machine tape or spreadsheet reflecting the reconciliation of the income or loss on the Schedules K-1 to the total income or loss on the key case return;
      • A current AMDISA print to verify that the key case is on AIMS;
      • Dated and signed (by the Service) copies of the NBAPs sent to the TMP including copies of the returned certified receipts (both generic and named NBAPs, if available);
      • BMFOLT and BMFOLR IDRS prints if the examiner is working from a copy of a return; and
      • A copy of the Form 13814, TEFRA Linkage Package Check Sheet.

    5. The PCS Coordinator will check the package for completeness, and forward to Technical Services for a technical review to resolve any problems before forwarding to the appropriate campus.

    6. Once the key case has been established on the PCS by the campus, the examiner will receive Form 886-Z(C) and a copy of the certified mailing list.
      • The Form 886-Z(C) should be reviewed to determine that all notice investors are listed and the percentages shown are correct. The Campus TEFRA Function will input the Schedule K-1 percentage for profits or loss. If percentages are not available on the Schedule K-1, then they will be left blank.
      • If an investor is not listed on Form 886-Z(C), the examiner should contact their PCS Coordinator. The PCS Coordinator will contact the key case Campus TEFRA Function who will input Form 8341 for those missing investors. If a supplemental Form 886-Z(C) is not received within 4 weeks, contact the PCS Coordinator to follow-up with the Campus PCS Coordinator.
      • After review, and following up on any problems, associate the Form 886-Z(C) with the key case file.
      • Form 886-Z(C) may serve as secondary evidence of mailing the NBAP to each investor as required by law.
      • The certified mail listing with the date the NBAPs were mailed to the identified notice partners serves as the starting date for the running of the 120 day period before an FPAA can be sent to a TEFRA entity.

      Note:

      The investors listed on the Form 886-Z(C) or certified mailing list may not match the number of investors linked on PCS. There are a variety of things that can keep an investor from being linked on PCS initially. The Form 886-Z(C) and the certified mailing list are the examiner's proof that the campus has issued an NBAP and will get the investors linked as soon as possible.

4.31.2.2.6.2.1  (05-31-2005)
Foreign Investors - Return Not Filed

  1. If the campus identifies foreign investors when establishing the linkages of the partners, they will establish a NMF linkage for notice purposes. The agent is responsible for adjustments related to foreign investors in tier investors also.

  2. The campus will send a memo to the agent to notify them of the foreign partner when they mail out the Form 886-Z(C) showing the linkage of all partners. Foreign investors discovered in tiers may be sent separately.

  3. The agent must pursue the IRC 1441 and IRC 1442 for NonResident Alien withholding issues related to the key case adjustment. Any assessment to the foreign partner must be made at the key case level through NRA withholding. The campus cannot make any assessments at the partner level.

  4. Assistance should be requested from an international examiner.

4.31.2.2.6.3  (09-22-2006)
Completing the Key Case Examination

  1. Once the key case examination is completed, the examiner issues a Summary Report, to the TMP. The summary report will include:

    1. Form 4605-A, Examination Changes – Partnerships, Fiduciaries, S Corporations, and Interest Charge Domestic International Sales Corporations. The Form 4605-A must include the items changed as a result of the examination.

    2. Some adjustments, such as reallocations of distributive shares, or changing the characterization of a partner from general partner to limited, cannot easily be shown on the Form 4605-A . Utilize the Form 886-A to describe this adjustment. Then reference the Form 886-A in the remarks section of the Form 4605-A as an attachment.

    3. Form 886-S, Partners' Share of Income, Deductions and Credits.

    4. Form 886-A, Explanation of Adjustments. This form will provide a detailed explanation of each proposed adjustment for each examined year, including facts, law, argument and conclusion for each proposed adjustment to a partnership item and affected item whether agreed or unagreed.

    5. Form 886-A, Explanation of Adjustments - Affected Items Report. If affected items are being adjusted, a separate report will be written. See IRM 4.31.2.2.11. and See IRM 4.31.2.2.12. for a detailed explanation of what affected items are and how to prepare a report for affected items.

    6. Letter 1807(DO) is used for partnership returns as a cover letter for the Summary Report.

    7. The Form 886-Z(C) should be printed for the case file only. The field TEFRA coordinator will send this to the campus TEFRA function along with a Form 886-S if one was sent to the TMP. Form 886-Z(C) contains the percentages of ownership which are not on the Form 886-S. (See IRM 4.10.8, Examination of Returns, Report Writing for detailed instructions on completing these forms.)

  2. If the key case examination results in a No Change, the summary report will include the overall results in a single paragraph; however, the "Summary Report" must follow the format explained in (1) above.

  3. If during the key case examination the TMP or his authorized representative presents additional issues, i.e., affirmative issues, and/or an administrative adjustment request (AAR; Form 8082) was filed by the TMP with the Service for consideration, whether prior to or after issuance of the NBAP, the summary report will include a detailed explanation of these additional issues, including facts, law, argument and conclusions.

  4. The TMP is required by statute to provide notice and non-notice partners with a copy of the Summary Report. (Treas. Reg. section 301.6223(g)-1(b)(1)(ii).) However, the Service may furnish a copy to a partner upon request by such partner.

  5. The first report issued to the TMP that contains sufficient information for the partner to calculate his or her portion of the partnership liability and the reason for the adjustments will act as notification for purposes of IRC 6404(g). Generally, this will be the earlier of the date the TMP was provided with the 60-day letter or the FPAA.

  6. The IRC 6404(g) date must be notated on the Form 4605 if the 60-day letter or FPAA is issued by the field to ensure the proper date is applied when the CTF computes the partner's interest assessment.

4.31.2.2.7  (06-01-2004)
Closing Conference

  1. A closing conference will be offered whether the key case examination results in an Agreed, Unagreed, or No Change case.

    Note:

    A closing conference is not required if a key case is no changed within 45 days and the NBAP is withdrawn.

    1. A Closing Conference will be scheduled no earlier than 30 days after the issuance of the summary report to the TMP unless waived in writing by the TMP. The Service and the TMP will determine the time and place for all administrative proceedings. (See Treas. Reg. section 301.6224(a)-1.)

    2. Although the TMP may waive the closing conference, if any notice partner requests the conference, it will be held. Treas. Reg. section 301.6224(b)-1 explains how a partner may waive their rights to a closing conference or any other rights granted them in the unified audit procedures of a partnership proceeding. The TMP cannot waive the rights of any notice partner.

    3. The TMP is required by statute to provide information to notice and non-notice partners with respect to the closing conference with the examiner. (Treas. Reg. section 301.6223(g)-1(b)(1)(i).) The Service is not required to notify each partner of the conference. The results of the proceeding applies to all partners even if the TMP does not provide that information.

    4. The examiner will explain the proposed adjustments in the Summary Report to the TMP and the investors or their representatives who are at the closing conference.

    5. Only those representatives with a valid POA on file for the taxable year(s) under discussion are permitted to participate in the closing conference. ( See IRM 4.31.2.2.5.)

    6. The information presented at the conference may require additional examination work, and it may be necessary to hold a second conference. Another Letter 1807(DO) must be issued if it is determined that a revised Summary Report must be issued.

4.31.2.2.7.1  (09-22-2006)
Powers of Attorney (POA) for Partners in TEFRA Partnerships

  1. Only those representatives with a valid POA on file for the taxable year(s) under discussion are permitted to participate in the closing conference.

    1. A new POA for a TEFRA investor does not need to specifically name the TEFRA partnership before the service can deal with the POA for the TEFRA partnership issues. Treas. Reg. section 301.6223(c)-1 only refers to subsection (b)(2) for where a Form 2848 may be filed. A general statement must be added to the POA relating to its validity to TEFRA. The statement should read as follows: "The acts authorized by this power of attorney include representation for the purposes of Subchapter C of Chapter 63 of the Internal Revenue Code" .

    2. If an existing POA does not have the proper language, a new POA, with the above statement included, should be secured.

    3. The Summary Report transmittal letter ( Letter 1807(DO)) explains that the POAs must be submitted to the examiner 10 days before the conference. The original POA should be expeditiously faxed to the CAF unit in the campus.

    4. Note on the Form 3198, Special Handling Notice, if any POAs were secured for any partner in the key case. The original POAs will be forwarded to the Campus TEFRA Function where the partner is linked by the Field TEFRA Coordinator. A copy will be kept with the key case file.

    5. The number of partners planning to attend the conference must also be conveyed to the examiner.

4.31.2.2.8  (03-04-2008)
Securing Agreements from the TMP and the Partners

  1. The examiner may solicit agreements as part of the closing conference.

  2. A TMP agreement will only be solicited when there are non-notice partners. When the TMP is a notice partner, an agreement will be solicited from the TMP in the TMP's capacity as a notice partner only.

  3. The notice investors and/or their representatives ( See IRM 4.31.2.2.7. for proper completion of the POA form) who are at the closing conference may be offered an opportunity to enter into a settlement with the Service by signing:

    1. Form 870-PT, Agreement for Partnership Items and Partnership Level Determinations as to Penalties, Additions to Tax, and Additional Amounts. This agreement form allows the partner to agree to adjustments proposed to partnership items. Penalties are determined at the partnership level for partnership tax years ending after 8/5/1997. Use this agreement if proposing adjustments to partnership items and not to affected items.

    2. Form 870-LT, Agreement for Partnership Items and Partnership Level Determinations as to Penalties, Additions to Tax, and Additional Amounts and Agreement for Affected Items. This form permits the partner to agree to both partnership adjustments and affected items or only partnership adjustments.
      • Part I of the form, subtitled Offer of Agreement to Partnership Items and Partnership Level Determinations as to Penalties, Additions to Tax, and Additional Amounts and Waiver of Restrictions on Assessment for Partnership Items, Penalties, Additions to Tax, and Additional Amounts is identical to the Form 870-PT. By signing this part of the form, the partner is agreeing to the partnership item adjustments (and penalties) as stated in the schedule of adjustments attached to the Form 870-LT. These penalties include negligence ( IRC 6662(b)(1)), and substantial understatement of income tax ( IRC 6662(b)(2) )), and overvaluation ( IRC 6662(b)(3)).
      • Part II of the form is subtitled Offer of Agreement for Affected Items and Waiver of Restrictions on Assessment. Part II of the form allows the partner to agree to partner level determinations for affected items and the related penalties, additions to tax as well as to the assessment of the tax, penalties, and interest due without following the normal deficiency proceedings (30-day letter or statutory notice).

      Note:

      Form 870-P and Form 870-L are used for tax years ending before August 6, 1997. Please consult with the local TEFRA Coordinator about the use of these forms.

      Note:

      Penalties determined at the partnership level must be directly assessed and are not subject to deficiency procedures, even when the underlying deficiency upon which they are based is subject to deficiency procedures.

    3. Brackets are placed around dollar amounts when an adjustment is in the taxpayer's favor, e.g., an increase in income is shown as a positive number and a reduction of income is in brackets, as opposed to an increase in expenses in brackets and a decrease reflected as a positive number.

    4. Each notice partner (and spouse if they filed jointly), including the TMP in his or her capacity as a partner in the partnership, must individually sign a Form 870-PT or Form 870-LT. The TMP is only authorized to bind the non-notice partners if specific language is added. (See (4) below.)

    5. If a pass-through partner enters into a partnership item settlement agreement with the Service, that agreement binds all indirect partners holding an interest in that partnership through the pass-through partner except those indirect partners that have been identified in accordance with Treas. Reg. section 301.6223(c)-1. Indirect partners identified at least 30 days prior to the date the agreement is entered into are entitled to their own settlement agreement and are not bound by a pass-through partner settlement agreement.

  4. According to IRC 6224(c)(3) , a partner who is a non-notice partner, i.e., a partner who has a less than one percent interest in profits in a partnership with more than 100 partners (and not a member of a notice group), is bound by any settlement agreement which is entered into by the TMP, and in which the TMP agreement expressly states that such agreement will bind the other partners.

    1. The following statement must be inserted by the examiner or reviewer immediately preceding the signature line on the Form 870-PT for the TMP who executes an agreement intending to bind non-notice partners: "The undersigned Tax Matters Partner is signing this offer on behalf of himself (herself) and all other partners whom he (she) has the authority to bind; a final agreement resulting from the signature of the Commissioner of Internal Revenue will be binding on all such other partners."

    2. The TMP cannot bind the non-notice partners for any affected items or the related penalties (except for penalties attributable to partnership items) when partner level factual development is required. Therefore, Form 870-PT, not Form 870-LT should be presented to the TMP. If the TMP erroneously signs the Part II of the Form 870-LT the error will not invalidate the agreement for partnership items and partnership level determination of penalties. However, in both cases the Campus TEFRA Function must subsequently issue a 30-day letter or statutory notice to the non-notice partners for these items. Similarly, a pass-through partner cannot bind indirect partners to such items.

    3. The TMP may not bind a non-notice partner if the non-notice partner has affirmatively notified the Service that the TMP is not authorized to act on his or her behalf pursuant to Treas. Reg. section 301.6224(c)-1(c).

    4. Whenever a key case examiner secures a Form 870-PT or Form 870-LT at the conference, the case must be closed out of the group within 15 days after the closing conference.

    5. If agreements are not received at the closing conference, the field examiner will suspense the closing of the key case for no more than 30 days to allow the investors time to return their agreements. At that time, the key case will be closed. The appropriate statement must be added to the Form 3198. See IRM 4.31.2.2.10..

4.31.2.2.8.1  (09-22-2006)
Signing and Receipt of an Agreement or Settlement Agreement

  1. The effects of the partner or TMP signing an agreement or settlement agreement:

    1. Allows any TMP or notice partner to agree to the examination results of the key case.

    2. The investor is removed from the partnership proceeding once a delegated IRS employee countersigns the agreement on behalf of the Commissioner. At that time, the investor's partnership items convert to nonpartnership items.

    3. The TMP or partner will be agreeing to all proposed adjustments unless "Partial Agreement" has been noted on the settlement agreement before it is signed.

    4. No subsequent claim may be filed.

    5. The TMP can agree and bind all non-notice partners who are direct partners if the Form 870-PT is modified to specifically state that the TMP is binding such non-notice partners.

    6. All notice partners must sign their own separate agreements.

    7. Non-notice partners may elect NOT to be covered by an agreement entered into by the TMP. (See IRM 4.31.2.2.8 (4)(c) above.)

4.31.2.2.8.2  (06-01-2004)
Acceptance of Faxed Agreements

  1. Consents to assess additional tax ( Form 4549 , Form 870, and others) of $25,000 or less can be accepted by fax if taxpayer contact has been made and the case history documents the date of contact and the desire of the taxpayer to submit the consent by fax. Consents to assess tax in excess of $25,000 should be secured with original signatures and delivered in person or by mail.

  2. For purposes of estimating tax for flow-through adjustments, the tax is figured by multiplying the partners share of the adjustment by the highest tax bracket percentage. The estimated tax figure will be used for figuring the $25,000 tolerance for the acceptance of faxed agreements.

4.31.2.2.8.3  (03-04-2008)
Securing Partial TEFRA Agreements

  1. The Taxpayer Relief Act of 1997 passed by Congress on July 31, 1997 and signed into law on August 5, 1997 changed portions of the TEFRA examination process. One notable change provides that partial agreements can be secured for any settlements entered into after August 5, 1997. Partial agreements may be made for any tax year. By law, a partial agreement does not start the running of the one year assessment date.

  2. In the normal processing of an agreed TEFRA case, once the investor has signed a settlement agreement form, the partnership items convert to nonpartnership items. The conversion of items from partnership items to nonpartnership items starts the running of the one-year assessment statute date. The statute of limitations for assessment of the newly converted nonpartnership items will not expire before the date which is one year after the date on which the conversion occurs.

  3. Since partial agreement cases do not have "one-year" statute dates, report writing may be delayed due to processing of cases that have established "one-year" statute dates. However, the idea behind a partial agreement is to have that portion of the deficiency assessed as soon as possible. TEFRA partial agreements may be secured by agents in the field or by an Appeals Officer during the appeals process.

    Note:

    It is very important to remember when securing partial agreements and forwarding them for processing, they MUST be readily identifiable as a TEFRA partial agreement. This is critical.

  4. If the Area negotiates a partial agreement with the TMP, partial agreements will be secured from all of the notice partners. If there are non-notice partners, the special language will be used on the Form 870-P or Form 870-PT ( Form 870-S for S corporations) signed by the TMP to bind all of the non-notice partners (not applicable for S corporations)

  5. TEFRA partial agreements must have the annotation "Partial Agreement" (hand written, typed or stamped) on all pages of the Form 870-P or Form 870-PT with the following statement added to the Schedule of Adjustments:

    This partial agreement becomes effective upon execution by the Commissioner of Internal Revenue or his delegate. It does not settle all of the partnership items. The remaining unsettled partnership items as well as any unsettled penalty, addition to tax, or additional amount that relates to an adjustment to a partnership item will remain subject to determination under the partnership-level administrative and judicial procedures. The period of limitations for assessing any tax attributable to the settled items shall be determined as if such agreement had not been entered into. To the extent this paragraph conflicts with any other paragraph in this agreement, this paragraph controls.

    Note:

    If examining a TEFRA S Corporation that requires a partial agreement, please contact the local TEFRA Coordinator for assistance.

  6. The statement above will also be entered on the schedule of adjustments page. The Form 886-Z (or equivalent) will also be identified and marked as a partial agreement. The Form 3210 used to transmit the package will also be identified and clearly marked, "TEFRA Partial Agreement " and "Special Processing Required" to reflect that the attached package is for a partial agreement.

  7. The area will monitor the receipt of the signed partial agreements and retain them until all are received. The area will sign for the Commissioner and send all of the partial agreements to the key case CTF for processing at one time. The area will sign the agreements and not the CTF, since the area is fully aware of the agreed issues. Prior to signing for the Commissioner, the area will ensure both the notation " Partial Agreement" and the statement above are on all of the forms and attachments as required.

  8. When the partial agreements are submitted to the CTF unit for processing, a 60-day package will be included that includes all agreed and unagreed items. The CTF will send the all inclusive 60-day package to all of the investors, whether partially agreed or not, because all adjustments must be included in the schedule of adjustments.

    1. When the signed partial agreement forms are received by the CTF, they will be processed as normal, but after photocopying, the "Partial Agreement" notation and the statement at the bottom will be highlighted (preferably in yellow). If the agreements have not been signed for the Commissioner by the area and have not been marked " Partial Agreement" ; but it is known that they are in fact partial agreements, the agreement forms will not be signed by the CTF. The agreement forms will be returned to the originator for reissuance. Subsequent modifications to agreement forms already signed by the taxpayer cannot be made. The CTF will give the partial agreement forms expedited handling. In lieu of entering a "one-year" date, the CTF will input a date that is 5 months from the acceptance date on the agreement forms. This will be done to ensure timely processing. Instead of inputting a Package Received Indicator of "Y" on the PCS a Package Received Indicator of " M" will be input. This ensures better control over these cases and will be used until a unique code can be obtained to indicate a partial agreement. There is currently an informal procedure in place to utilize the " M" as an indicator for partial agreements as well as for manual assessments.

    2. For these partial agreements only, the CTF will only be required to process packages for the investors and to notify the area. No TMP notification ( Letter 2513 or Letter 2514) will be required since the TMP is fully aware of who accepted the partial agreements. However, the taxpayer should receive their copy with Letter 1908 or Letter 1909 if the area did not already send the taxpayer an executed copy of their agreement.

  9. When the area submits the 60-day package for processing and the area has solicited partial agreements, the CTF cannot and will not process the package until all investors have signed and agreed to the partial report unless the area specifically instructs the CTF to do so. Advance coordination with the CTF in this situation is required. Keep in mind that an undue burden is placed on the CTF if not all of the partial reports have been signed and agreed. PCS won't generate a 60-day letter with a "one-year " date still remaining on the investor. The CTF will request the 60-day letters prior to inputting the "one-year" date for the partial agreements. If a 60-day package is not included with the partial agreements, the partial agreement package will be returned to the area.

  10. The 60-day package the area prepares and submits to the CTF will address all issues, i.e. both agreed and unagreed. The schedule of adjustments page will include all of the issues. The package will include all of the items listed in subsection 4.31.3.5.1 of this Handbook. The CTF cannot prepare a separate Form 870-P, Form 870-PT or Form 870-S to reflect the remaining flow-through items for those investors who previously agreed and a different, all inclusive, Form 870-P, Form 870-PT or Form 870-S for those investors who did not agree to the partial report. See IRM 4.31.3.8(11) also.

4.31.2.2.9  (06-01-2004)
Unagreed Key Case

  1. After the closing conference, if the TMP or any notice partner did not agree, the examiner will prepare an Unagreed Revenue Agent Report (RAR) in the format prescribed in IRM 4.10.8 , Examination of Returns, Report Writing. If penalties are proposed, the procedures in IRM 20, Penalty Handbook, will be followed. The report writing procedures for penalties are also in IRM 4.10.8.

  2. The unagreed RAR will incorporate the taxpayer's position. If agreed or no changed, the Summary Report may be substituted for the RAR. A Form 4665, Report Transmittal, must be used as the transmittal for all RARs.

4.31.2.2.10  (05-31-2005)
Closing the Key Case

  1. The examiner will then forward the key case file to the TS function in status 21. A Form 3198 (Special Handling Notice for Examination Case Processing) will be attached to the front of the key case and the appropriate statements added.

    1. If the TEFRA key case is a mandatory review case, the "Mandatory Review" block will be checked and the criteria in IRM 4.8.4 will be added.

    2. If the TEFRA key case is not a mandatory review case and is No Changed, the "Other" block under the "Special Handling" section will be marked and one of the following applicable statements will be made:
      • TEFRA No Change Determination Made Within 45 Calendar Days, Route to the TS; the examiner recommends issuing Letter 1864(DO).
      • TEFRA No Change Determination Not Made Within 45 Calendar Days, Route to the TS; the examiner recommends issuing Letter 2064(DO) for Partnerships. (All investor linkages are established.)

      Note:

      Use this statement if the TMP has not indicated agreement to the no change, an Administrative Adjustment Request has been filed and disallowed in full and no other adjustments are proposed by the examiner, or the TMP raised affirmative issues which are not allowed by the examiner and no other adjustments are proposed by the examiner. Issuing the Letter 2064(DO) allows the taxpayer to petition to raise the affirmative issues. Letter 2064(DO) is a no-change FPAA.

    3. If the TEFRA key case is not a mandatory review case and is unagreed, no partners signed Form 870-PT or Form 870-LT, the " Other" block under the "Special Handling" section will be marked, and the applicable statement "TEFRA Key Case File, Issue 60-Day Letter, Route to the TS" or "TEFRA Key Case File, Issue 150-Day Letter (FPAA), Route to the TS" will be added.

      Note:

      The examiner should recommend the 150-Day Letter (FPAA) when there is less than twelve months left on the statute and the taxpayer will not extend the statute.

    4. If the TEFRA key case is agreed and a Form 870-PT or Form 870-LT is included in the file, state in the "Other" block "Agreed TEFRA Key Case File, Unexecuted Investor Agreements Enclosed, Route to the TS."

    5. If the TEFRA key case is unagreed but one or more partners have signed a Form 870-PT or Form 870-LT, state in the Other block either:
      • TEFRA Key Case File, 60-Day Letter, and Unexecuted Investor Agreements Enclosed, Route to the TS.
      • TEFRA Key Case File, Issue 150-Day Letter (FPAA), and Unexecuted Investor Agreements Enclosed, Route to the TS.

    6. The TMP is required to notify the partners or shareholders and all notice group representatives with respect to any appeal, court action, or other matter listed in Treas. Reg. section 301.6223(g)-1(b)(1).
      • The requirement does not apply to those partners whose partnership items have become nonpartnership items, e.g., have executed Form 870-PT or Form 870-LT.
      • The Service must notify the TMP of the partners who have agreed. A list of the partners who executed the Form 870-PT or Form 870-LT will be sent to the TMP by the examiner if the examiner secured the agreements, or the Campus TEFRA Function when they receive the agreements. Copies of the signed Form 870-PT or Form 870-LT will not be furnished to the TMP. See Treas. Reg. section 301.6223(g)-1(b)(2) for other partners excepted from the notification requirements.

  2. Statutory notice language is provided by the examiner for every case along with the "T" letter ( Form 4665) of the key case. It is the responsibility of the TS for the key case to further develop this language. Concurrence by the key case Area Counsel is mandatory.

4.31.2.2.11  (06-01-2004)
Affected Items Requiring Key Case and Investor Level Determinations

  1. Court decisions have caused the Service's position on some issues to evolve. Certain sub-determinations, i.e., entity and investor components, are required for passive loss, at-risk, and basis issues. Determinations at the key case level and the investor level are required. Generally, all entity and investor component determinations must be made by the key case examiner.

  2. Often, the determination of which of the components of basis are partnership or affected items is unclear. In those complex situations, the local TEFRA Coordinator or Area Counsel should be consulted when affected items involving entity components and investor components are an issue (or are issues) in the case.

  3. The following is a discussion of the proper classification of partnership items, affected items, and nonpartnership items as well as the proper audit procedures necessary to make adjustments to a partner's return.

  4. Certain affected items are computational adjustments, such as any percentage limitation based on adjusted gross income. If the changes to the partnership items change adjusted gross income, items such as medical itemized deductions will be adjusted. If a net operating loss of a partner was reduced, it would be a computational adjustment to change the net operating loss deduction in a carryback or carryforward year. Since they are computational, no factual development is required by the key case examiner.

  5. Other affected items are subject to deficiency proceedings. Either a 30-day or 90-day letter will be issued to allow facts to be developed at the partner level. For example whether or not a partnership has cancellation of debt income is a partnership item. Once that is determined, the partner's income will be adjusted for their share of the cancellation of debt income via a 30/90 day letter. This will allow the partner to raise any facts which would allow them to exclude this income under IRC section 108, for example, because they are insolvent.

  6. Treas. Reg. section 301.6231(a)(5)-1(b) and (c) provide that a partner's basis and at-risk amounts are considered affected items to the extent that they are not partnership items. While this may suggest that the overall issue of the correct amount of a partner's basis or at-risk can be a partnership item, case law has indicated that these overall determinations will always be affected item determinations.

  7. For example, the amount of a partner's initial contribution to capital would be a fact developed at the partnership level, that would be the partnership item, but the utilization of that amount in the computation of basis and any disallowance of a loss at the partner level would be the affected item subject to deficiency procedures (30-day or 90-day letter).

  8. In a TEFRA examination, most of the component items of overall basis, at-risk, and passive loss determinations are more appropriately determined at the partnership level. If any of these component items are changed during a TEFRA examination they must of course be included in the examiner's TEFRA entity Summary Report. However, if the overall change to a partner's basis, at-risk amount or passive loss limitation is proposed, all partnership level components of such determinations can be included in the TEFRA Summary Report even if they are not being adjusted. While inclusion of such unchanged components in the TEFRA entity Summary Report is not required, it may be a good idea to include them in order to foreclose any later arguments by the taxpayer that such components are incorrectly stated in the partnership return.

  9. The adjustments for affected items will be computed after the conclusion of the partnership proceeding. The proceeding is concluded for each partner by:

    • the partner agreeing to adjustments proposed in the Summary Report;

    • the partner agreeing to an appeals settlement;

    • a final determination of the court; or

    • a defaulted FPAA.

  10. The following outlines some of the partnership and partner level components that the revenue agent should look for during the examination of the partnership. In general the partnership components would be partnership items included in the partnership proceeding. The partner level components would be affected items and would be decided at the end of the partnership proceeding either through computational adjustments or by the issuance of a 30/90 day letter.

4.31.2.2.11.1  (06-01-2004)
Basis

  1. Partnership components would be the amounts of:

    1. the initial contribution to the partnership;

    2. all subsequent contributions to the partnership;

    3. distributions from the partnership;

    4. the partner's share of non-taxable income, taxable income, losses and deductions; and

    5. the partner's share of partnership liabilities.

  2. A partner level component, which may be necessary to determine basis, occurs when a partner buys his partnership interest from another partner (and it is not subject to an IRC 754 election). In such case, the purchase price of the partnership interest is a component of the partner's basis, but there is no requirement that the purchase price of the partnership interest be taken into account for the partnership's taxable year.

4.31.2.2.11.2  (06-01-2004)
At-Risk

  1. The partnership level components for at-risk include:

    1. whether a particular loan was recourse or non-recourse;

    2. whether the partner bears the ultimate economic risk of loss with respect to a particular partnership liability;

    3. what was the amount of the note;

    4. whether a partner is a limited or general partner;

    5. whether a lender has an interest other than as a creditor; and

    6. all the partnership level basis items listed above.

  2. Partner level determinations for at-risk:

    1. whether there are any third party side agreements (stop-loss agreements);

    2. whether the partner borrowed the money contributed to the partnership from another person.

4.31.2.2.11.3  (06-01-2004)
Passive Losses

  1. The partnership components for passive activity losses include:

    1. whether the partnership is engaged in a rental activity;

    2. whether the partnership is engaged in a trade or business for purposes of section 162;

    3. whether a partner is limited; and

    4. whether income is portfolio income.

  2. Partner level determinations include:

    1. whether a partner materially participated in a non-rental activity; and

    2. whether such partner actively participated in a rental activity.

  3. If determinations are made during the TEFRA unified proceeding regarding partnership components of passive losses, then those components must be addressed in the TEFRA entity Summary Report. Any limitation of the passive losses will be treated as an affected item. The partner's basis limitations and amounts for which the partner is at-risk should always be considered prior to the allowance of any passive losses.

4.31.2.2.11.4  (06-01-2004)
Cancellation of Debt Income (COD)

  1. The partnership components would include:

    1. whether or not the partnership has COD income (for example on the foreclosure of real property with a related loan that is forgiven);

    2. the amount of the COD income; and

    3. the amount of the deemed distribution for the decrease in liabilities if the COD income is the result of a liability forgiven.

  2. The partner components would include:

    1. whether or not the partner qualifies to exclude the COD income from their income, e.g. IRC 108;

    2. whether or not the partner would have any tax attributes that could be offset under IRC 108.

4.31.2.2.12  (05-31-2005)
Report Preparation for Affected Items

  1. In General:

    1. Changes made to partnership components should be contained on Form 4605-A, Form 886-A and Form 886-Z(C) For example, if distributions and contributions are changed from the information reported on Schedule M-1, the adjustment should be listed under " other adjustments" on the Form 4605-A and the correct allocation of these items should be shown on the Form 886-Z(C). If the item is a reclassification of a general partner to a limited partner, some adjustments, such as reallocations of distributive shares, or changing the characterization of a partner from general partner to limited, cannot easily be shown on the Form 4605-A . Utilize the Form 886-A to describe this adjustment. Reference the Form 886-A in the remarks section of the Form 4605-A as an attachment.

    2. Form 886-A should be prepared for any item, which has been changed or reclassified. Even when changes are not made to these items, they still constitute components of an overall partner level adjustment and may be included in the TEFRA Summary Report if an adjustment at the partner level is proposed to basis, at-risk, or passive loss limitations.

    3. If any adjusted partnership components are not included in the TEFRA entity Summary Report and are then not included in the FPAA and the partner's case is argued in court, the issue may have to be conceded if the disallowance of a partner's loss relies on:
      • a change to a distribution;
      • a change to a contribution;
      • a reclassification of a general to a limited partner; or
      • some other partnership level component.

    4. If the overall partner level adjustment contained in the Affected Items Report consists only of computational changes to the partnership level components, such partner level adjustment may be made as a computational adjustment. If such overall partner level adjustment requires a partner level determination (i.e. that the partner did not materially participate for purposes of IRC 469), the deficiency procedures of subchapter B of chapter 63 will apply and an Affected Item 30-day letter or Affected Item 90-day letter will be required.

4.31.2.2.12.1  (06-01-2004)
Basis and At-Risk

  1. If certain components of basis and at-risk are adjusted at the partnership level, while other components are accepted and it can be determined that partners' losses will be limited, the following procedures shall apply:

    1. Prepare a TEFRA key case Summary Report ( Letter 1807(DO), Form 4605-A , Form 886-A and Form 886-Z(C)).
      • On Form 4605-A , list changes made to component parts under "Other Adjustments." Components of basis and at-risk that are accepted as filed should also be listed under "Other Adjustments" . Include any other proposed adjustments on the Form 4605-A.
      • On Form 886-A, explain the determination made regarding the partnership components of basis and at-risk. This is in addition to the Form 886-A for any other proposed adjustments.
      • On Form 886-Z(C), list each partner's share of corrected partnership components of basis and at-risk in addition to any other proposed adjustments.

    2. Prepare an Affected Items Report for basis and at-risk showing the limitations on partner losses.
      • On Form 4605-A, add the following information in the " remarks" section. This statement should only be included in the affected items report.

      "During the partnership unified proceeding, it was determined that components of the partners' basis and/or at-risk result in limitations on some of the losses which each partner may deduct in this year. Basis and/or at-risk limitations are considered affected items which are proposed to each partner upon the completion of the TEFRA unified proceedings."
      • On Form 886-A, explain the facts, law and argument. Include a detailed explanation as to how basis and/or at-risk amounts were determined; provide background on the issue(s)..
      • On Form 886-Z(C) , include each partner's corrected share of partnership level components, any partner level components and each partner's corrected basis and/or at-risk prior to allowance of any partnership losses.

    3. If the components of basis and at-risk are accepted at the partnership level, the agent may still determine that a partner's losses will be limited because of partner level determinations. In this case, the TEFRA reports should be prepared in the same manner as described in (1) above except that the reports will show no changes to the partnership components. If there are no other issues on the partnership return, the partner's return will only be adjusted if losses were deducted in excess of basis and/or at-risk.

4.31.2.2.12.2  (06-01-2004)
Gain or Loss on Disposition of a Partnership Interest

  1. If at the partnership level, it is determined that partners were required to report gain or loss on the disposition of a partnership interest, the following procedures apply:

    1. Prepare TEFRA entity Summary Report ( Letter 1807(DO), Form 4605-A , Form 886-A and Form 886-Z(C)).
      • On Form 4605-A , list the items that were used to determine the gain or loss (i.e. distributions, relief of liabilities, partner's capital account). If changes were made to any items, list the adjustments.
      • On Form 886-A, explain each partnership level component used to determine the gain/loss on the disposition of such interest.
      • On Form 886-Z(C), list the partnership items adjustments that were used to determine the gain or loss on the disposition of the partnership interest for each partner that it applies to.

    2. Prepare an Affected Items Report for basis and at-risk showing each partner's corrected gain or loss on disposition of their partnership interest. ,
      • On Form 4605-A, add the following information in the "remarks" section. This statement should only be included in the Affected Items Report.
      "During the partnership unified proceeding, determinations were made which resulted in the recognition of gain/loss by the partners on the disposition of their interest. This gain or loss is considered an affected item which will be proposed to each affected partner upon completion of the TEFRA unified proceedings."
      • On Form 886-A, explain the facts, law and argument. Include a detailed explanation as to how the gain or loss was determined. Explain the disposition issue as well.
      • On Form 886-Z(C), include each partner's share of all corrected components, as well as each partner's gain or loss on disposition of such interest.

4.31.2.2.12.3  (03-04-2008)
Passive Losses

  1. If, at the partnership level, it is determined that the partnership was engaged in a rental real estate activity rather than a trade or business, the following procedures shall apply:

    1. Prepare TEFRA entity Summary Report ( Letter 1807(DO), Form 4605-A , Form 886-A and Form 886-Z(C)).
      • On Form 4605-A , list Trade or Business vs. Rental Real Estate Activity under "other adjustments" with the following statement in the "remarks" section:
      "During the TEFRA unified proceeding, it was determined that the partnership had $0 ordinary loss from a non-rental trade or business activity. The activity was determined to be a loss from a rental real estate activity. This classification may limit the loss which each partner may deduct in this year."
      • On Form 886-A, describe the basis for the determination.
      • On Form 886-Z(C), include corrected item.

    2. Prepare an Affected Items Report for passive losses showing the limitations on partner losses.
      • On Form 4605-A, add the following information in the " remarks" section. This statement should only be included in the affected items report.
      "During the TEFRA unified proceeding, it was determined that the partnership is engaged in a rental real estate activity. This classification may limit the passive losses which each partner may deduct in this year. Adjustments due to passive loss limitations are affected items which will be proposed to each partner upon the completion of the TEFRA unified proceedings."
      • On Form 886-A, explain the facts, law and argument. Include a detailed explanation regarding the passive loss rules and how losses may be limited to the partners. Explain the reclassification of the activity (if applicable).
      • On Form 886-Z(C), include all the corrected items as well as the amount of gain or loss which is subject to passive activity limitations.


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