TEFRA was passed in 1982 to allow examinations and statutes to be controlled at the partnership level. This eliminated the need to control each individual partner statute. It also unified the litigation process whereby the tax matters partner or a notice partner may commence such litigation at the partnership level by filing a petition rather than each individual partner. The Pass-through Control System (PCS), formerly Partnership Control System, was created to establish an electronic linkage between the partnerships and their underlying partners. This helps ensure partners, no matter how complex the partnership structure, are issued notices and adjusted in a timely manner. PCS linkage allows the campus to work the partners so examiners can focus on partnership examinations. PCS also allows the campus to systemically generate notices, control statutes, and gather closing information.

Section 1101 of the Bipartisan Budget Act (BBA) of 2015 repealed TEFRA partnership and Electing Large Partnership (ELP) provisions beginning with tax years beginning 1/1/2018. BBA has replaced TEFRA and ELP with an entirely new partnership audit regime. The new regime provides for determination, assessment and collection of underpayments at the partnership level unless certain elections are made by the partnership.

Generally, all partnerships with tax years beginning 1/1/2018 will be subject to the BBA centralized partnership audit regime. Certain eligible partnerships may make an election out of the BBA regime. However, the law allows eligible partnerships with tax years that begin 11/3/2015 to 12/31/2017 to elect into the BBA regime when they are initially notified of selection for examination (Early Election). Temporary regulations (301.9100-22T) providing the time, form and manner for making the election were published on August 5, 2016 as Treasury Decision (TD) 9780. The final regulation (301.9100-22), was published on August 9, 2018 as T.D. 9839.

This IRM is still in effect for all TEFRA partnerships and remains in effect for partnership years beginning before January 1, 2018.

TEFRA policy was established in response to the partnership provisions of the Tax Equity and Fiscal Responsibility Act (TEFRA) of 1982 and remains in effect for partnership years beginning before January 1, 2018 and filed on or after September 3, 1982.

The Director, SB/SE, Headquarters Examination, Field and Campus Policy (SE:S:DCE:E:HQ:EFCP) is responsible for:

The SB/SE, Program Manager, Examination Field and Campus Policy, Campus Exam & Field Support (SE:S:DCE:E:HQ:EFCP:CEFS) is responsible for:

Field Territory Managers, Field Area Directors, Director over Large Business and International (LB&I) Ogden and Director, Examination - Brookhaven, are responsible for ensuring that TEFRA policies and procedures are followed.

Field Examination Managers are responsible for:

The Technical Services Pass-through Coordinator (TSPC) works with:

Program Reports: Each year an exam plan is created for partnership examinations.

Program Effectiveness: The exam plan is monitored to ensure the partnership examination objectives are met. Open examinations are monitored to ensure a TEFRA determination is made and that the TMP Notice of Beginning of Administrative Proceeding (NBAP) date is entered on Examination Returns Control System (ERCS).

Technical Services Pass-through Coordinators (TSPC) monitor a report to ensure TEFRA returns are identified in a timely manner. The Audit Inventory Management System (AIMS) provides a report for TEFRA one year statute dates, AMS 4940, that the field monitors to ensure field-controlled partner cases are worked timely.

There are several terms unique to TEFRA. Examples of these words:

The following IRM cross-references may be helpful:

Identification of returns as TEFRA is necessary 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 4.31.2.2.7, Making a Reasonable Determination of Whether the Partnership is Subject to the TEFRA Procedures, for an explanation of a reasonable determination of whether TEFRA or ILSC procedures apply. Throughout this IRM the term NonTEFRA refers to partnership determinations that are not TEFRA. Investor Level Statute Controls (ILSC) are the procedures used for partnership returns that meet the small partnership exception and do not elect TEFRA treatment for tax years prior to January 1, 2018 and after August 5, 1997. ILSC procedures are found in IRM 4.31.5.

TEFRA is applicable for partnership tax years beginning prior to January 1, 2018. Tax years beginning January 1, 2018 or later are subject to Bipartisan Budget Act (BBA) of 2015. See IRM 4.31.9, Centralized Partnership Audit Regime (BBA) Field Examination Procedures unless an election out of BBA is made under Code Section 6221(b).

The examiner must determine, for each taxable year, whether TEFRA procedures apply. Comments on Form 4318, Examination Workpapers Index, or Form 5606, Workpapers Cover Sheet, are required from the examiner as to whether the return is TEFRA or ILSC, and the reasons supporting this conclusion. The TEFRA determination needs to be recorded on the Form 15260, Determination of Pass-through Audit Regime, must be completed to ensure the correct regime is used. The Form 13813, TEFRA Partnership Procedures Check Sheet, is required for all TEFRA examinations.

IRC 6231(a)(1) provides that TEFRA rules apply to all partnerships required to file information returns under IRC 6031(a) whose tax years begin on or after 9-3-1982 and before 1-1-2018, except:

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.

A foreign corporation generally will be considered a C corporation for purposes of making a TEFRA/NonTEFRA determination. This includes a partner who files a Form 1120-F. However, because the foreign corporation filing an Form 1120-F could file Form 8832, Entity Classification Election, electing to be treated as a Disregarded Entity (DE).

The Form 15260 , Determination of Pass-through Audit Regime, is used to make the proper TEFRA determination.

Therefore, if at any time during the tax year there are more than 10 partners or if any of the following entities or persons are partners, then the partnership is not a small partnership and is subject to TEFRA procedures:

The Master File transcript, Command Code (CC) 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.

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

The requirements for making the election to be covered by the TEFRA procedures are explained in Treas. Reg. 301.6231(a)(1)-1(b)(2). A Form 8893, Election of Partnership Level Tax Treatment, is available for taxpayers who wish to make this election. This form standardizes the statement required in the Regulations.

If a partnership makes the election to be covered by the TEFRA procedures, it is binding for the partnership taxable year to which the return relates and all subsequent partnership taxable years unless revoked with IRS consent. It is important to note that when a TEFRA election is revoked, all years the TEFRA election was in effect remain TEFRA.

For years 2004-2007 Form 1065, Schedule B, Question 4 was changed to inquire as to whether the partnership filed a TEFRA election or Form 8893 which is used to make the TEFRA election. For years 2008 through 2017, Form 1065, Schedule B, Question 5 inquires whether the partnership filed a TEFRA election or Form 8893. If the partnership answers yes to this question, the return is flagged Audit Code 4.

A partnership may revoke a previously filed election with IRS consent. Form 8894, Request to Revoke Partnership Level Tax Treatment Election, is to be used by a partnership requesting that its prior TEFRA election be revoked. The instructions on this form require the partnership to file the revocation at the Ogden campus.

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

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

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

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.

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 TSPC to determine if the election is valid as filed or what further action should be taken.

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

For tax years 2004 - 2007, Schedule B, question (4) inquired as to the partnerships intent to file a TEFRA election and attach the Form 8893 to the return. For tax years after 2008 and prior to January 1, 2018 , this inquiry appears in Schedule B, Question (5).

For tax years before 2004, there were no questions about an election. Schedule B, Question 4 asked if the partnership was subject to TEFRA. The TMP may think the partnership can elect to have the TEFRA procedures apply to the partnership by checking "yes" in response to the question on Schedule B and/or designating a TMP. However, this is not a valid election meeting the requirements of the regulations.

The examiner needs to check to see if the partnership made an election, or if the partnership is subject to TEFRA by statute.

Chief Counsel's position is that checking "yes" in response to question (4) on the Form 1065, Schedule B, for partnership tax years 2004 - 2007, and Question (5) on the Form 1065, Schedule B for partnership tax years 2008 through 2017, and/or designating a TMP in the space provided on the Form 1065, 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.

If at any time during the taxable year the number of partners exceeds the small partnership exception, the partnership will be subject to the TEFRA provisions.

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 for the small partnership exception to apply.

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. 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.

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 1 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. A grantor trust is counted as a partner in its own right.

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, U.S. Income Tax Return for Estates and Trusts. IDRS research should be utilized to determine how long the estate has filed returns. 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 if a trust was established by the estate.

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.

IRC 6231(g) was added by TRA 1997.

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

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

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

There are occasions where both the TEFRA and NonTEFRA statute must be protected. 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.

When a key case is controlled as both TEFRA and NonTEFRA, both sets of procedures must be followed. See IRM 4.31.2.3.9.2.1. TEFRA Linkage, and IRM 4.31.5.12.3, Linking the Key Case and Investors on PCS. This ensures that both the TEFRA and ILSC functions in the campus are aware of the dual controls on these key cases.

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, Consent to Extend the Time to Assess Tax, if needed.

If both procedures must be followed coordination is necessary with the TSPC and Campus TEFRA Coordinator.

If you need to contact a taxpayer designated as Potentially Dangerous Taxpayers (PDT) or Caution Upon Contact (CAU), please refer to IRM 25.4, Employee Protection, for the most current guidance.

The Letter 2205-D, Initial Contact to Schedule Appointment, must be mailed to the partnership as the initial contact with all partnership examinations. The initial contact letter is provided to all partnerships. For tax years beginning after November 2, 2015, the partnership has an opportunity to file an early election into BBA.

Before initiating a TEFRA key case examination, the time frames and procedures outlined in Exhibit 4.31.2-2, TEFRA Pass-Through Examination Time Chart, and Exhibit 4.31.2-3, TEFRA Key Case Procedures, must 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.

If there are less than 12 months remaining on the TEFRA key case statute of limitations, approval is required from the Area Director (SB/SE) or the Director of Field Operations (LB&I) to start an examination of the key case. A copy of the short statute memorandum to be used to secure approval is on the TEFRA web site at: LBI-SBSE_ShortStatuteAuthorizationMemo.docx (irsnet.gov)

A TEFRA examination can be initiated with less than twelve (12) months remaining, if the following conditions are met:

If the TEFRA procedures or the TEFRA linkage is not timely initiated (before there is less than seven months on the statute), as required above, then the examiner assumes all of the responsibilities of the CPF 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 TSPC should be contacted immediately to determine appropriate action.

Once all the returns are secured by the field, the statute is extended, and all administrative work is current, the agent should consult with the campus regarding the subsequent transfer of the cases to campus control.

PCS linkage is mandatory for all TEFRA partnership examinations.

The campus may delay linkage beyond the notice partners until firm adjustments are identified.

Delinquent return procedures are used when the partnership files a return which is past the due date for filing including extensions to file. SFR procedures are used when the partnership fails to file a return when a return is due.

For delinquent return and non-filer cases, confirm the entity exists on Master File. If the entity exists and there is a filing requirement, ensure it is consistent with the return filed or due.

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IRC 708(b)(1) provides that a partnership terminates if "within a 12-month period there is a sale or exchange of 50 percent or more of the total interest in partnership capital and profits" . Analytically, two basic questions arise when applying IRC 708(b)(1):

A partnership meeting the definition of a small partnership may for any taxable year elect to have TEFRA apply. The election applies for the taxable year of election and all subsequent taxable years unless revoked with the consent of the Secretary. There is no definitive answer or guidance on whether or not a technical termination under IRC 708 terminates a TEFRA election under IRC 6231(a)(1)(B)(ii). If the TEFRA key case entity under examination has made a TEFRA election, you should contact your local Area Counsel for advice.

Whether a technical termination is recognized by the partnership and the proper returns are filed or whether the issue is being proposed during your examination, properly processing the partnership returns is challenging. Below, in no particular order, are four possible scenarios with instructions and procedures to assist you when a technical termination has taken place.

The examples assume the partnership is a calendar year taxpayer.

These check sheets were designed to assist the examiner in completing the required TEFRA procedures. Manager involvement is required and their signature is required on all the mandatory forms.

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.

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.

Each mandatory check sheet is required to be completed separately for each year in a multi-year audit.

SB/SE examiners will file these check sheets and other TEFRA work papers under a separate line item in Section 600 on the Form 4318, Examination Workpapers Index. LB&I examiners will file the TEFRA check sheets and work papers under SAIN number 724 on Form 4764, LB&I Examination Plan.

The TMP is the person identified to represent the partnership during an examination.

The Form 13828, Tax Matters Partner (TMP) Qualification Check Sheet, should be completed as early as possible. The completion of the check sheet will ensure the person identified as TMP meets the qualifications prior to securing any statute consents or Powers of Attorney. If the person does not meet the qualifications, Form 13827, Tax Matters Partner (TMP) Designation Check Sheet, should be completed to designate a new TMP.

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

The examiner will initiate a TEFRA examination on a partnership return by issuing a NBAP (Letter 1787-F) to the TMP. A separate NBAP should be sent for each year under examination. (See Form 13828, TMP Qualification Check Sheet, or the interactive tool on the TEFRA web site.)

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

Examiners should issue NBAP letters as follows:

During many examinations, a Form 2848, Power of Attorney and Declaration of Representative, may be provided by the taxpayer.

It is important to know that just because the TMP cannot be verified, identified, or designated in a timely manner, you don’t need to delay the examination of the TEFRA key case.

The TMP, a general partner, a limited partner, a member manager and a non-managing member can execute a POA in a partnership proceeding.

A valid POA can be secured from any direct or indirect partner or member in order to exchange information.

An Office of Chief Counsel Generic Legal Advice Memorandum (GLAM) AM2015-004 was issued March 25, 2015, which explains this in detail. However, it is important to understand that this type of POA, i.e., one not executed by the TMP, may not be authorized to sign partnership level statute extensions.

The following subsections cover key case examination procedures.

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

Consider the impact of an agreement on all other partners in view of their right to consistent settlement.

The examiner may solicit agreements as part of the closing conference. Be sure to verify that there are no report writing errors. Once an agreement is executed, the Service is bound to the adjustments shown on the Schedule of Adjustments.

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.

The notice partners and/or their representatives (See IRM 4.31.2.3.10, Closing Conference, for proper completion of the POA form) who are at the closing conference should be offered an opportunity to enter into a settlement with the Service by signing:

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 of a partnership with more than 100 partners (and not a member of a notice group), is bound by any settlement agreement that is entered into by the TMP, and in which the TMP agreement expressly states that such agreement will bind the other partners.

Actions taken should be documented in the work papers.

Some partnerships request to settle and pay tax deficiencies on behalf of their partners. When such a request is made, you should consult with your TSPC, local counsel and the CPF. A referral on the Specialist Referral System should be made if one has not already been submitted. It is important the TSPC be involved early in the process to ensure all reports are correctly prepared and local Area Counsel has been involved in the preparation of the Form 906. This will also ensure timely case closure from the exam group through Technical Services.

It is legally permissible to have the key case partnership or pass-through partners pay tax on the net adjustments passing through it at the highest marginal tax rather than passing the adjustments to the hundreds of direct and indirect partners. The partnership or pass-through partner must sign a Form 906, Closing Agreement On Final Determination Covering Specific Matters, and full pay the amount due. The agreement will provide that each partner’s share of the increased partnership income will increase that partner’s capital account and outside basis. The payments will be treated as proportionate distributions to all partners in the year the actual payment is made. The distributions will reduce the partner capital accounts and outside basis. A partner who was a partner in the year under audit and not a partner in the year the tax is paid is generally not affected. Economically, this will put both the partners and the Service in the same position as if the Campus passed through all of the adjustments and the partners had paid the assessments individually.

Generally, these rules apply when there is a deficiency. However, all options should be explored if the partnership structure is very large.

Settlement by the key case partnership or a pass-through partner is not the norm. Local Area Counsel must be involved in the initial stages and local Area Counsel must be involved up-front in the drafting of the Form 906. The purpose of the settlement is efficiency and ease of processing. As a result, the Field will be responsible for assisting with requests to settle TEFRA adjustments which are outside of the normal process.

The details of a partnership level settlement are explained in a Form 906, Closing Agreement on Final Determination Covering Specific Matters. A partnership level agreement can only be secured when the adjustments passing through to all underlying partners will result in a deficiency. If any partner is subject to a refund, then a partnership level agreement cannot be secured. All partners must be adjusted individually.

The highest effective tax rate should be used when calculating the amount of tax owed. The partnership must also pay all additions to tax including interest and penalties.

The Form 906 should be executed by the DFO for LB&I or Technical Service Manager for SBSE before sending a copy to the CPF.

The payment made by the partnership is considered a distribution to the partners of record in the year paid, or the year when the payment became fixed and determinable. A partnership's payment of IRC 1446 tax on behalf of a foreign partner is treated as a deemed distribution of money to the partner on the earliest of: the day on which the partnership paid the tax; the last day of the partnership's taxable year for which the amount was paid; or the last day on which the partner owned an interest in the partnership during the taxable year for which the tax was paid. However, a deemed distribution of money under IRC 1446(d) resulting from a partnership's installment payment of IRC 1446 tax on behalf of a partner is treated as an advance or drawing of money under Treas. Reg. 1.731-1(a)(1)(ii) to the extent of the partner's distributive share of income for the partnership taxable year. The rule treating a deemed distribution as an advance or drawing of money under this paragraph (d)(2)(v) applies only for purposes of IRC 6655 (as applied through this section) or the date a foreign partner is deemed to have paid estimated tax by reason of such installment payment. See Treas. Reg. 1.1446-3(d)(2)(v).

The impact of the payment as a distribution to the partners should be included in the Form 906 settlement agreement.

The payment made by the partnership will impact the basis of all partners of record at year end. The partners' capital accounts and basis should be increased by the amount of income that should have been reported, and then reduce it by their share of the tax paid by their partnership. That share is treated as a distribution in the year paid and will generate additional tax to the extent it exceeds the partner's outside basis or increases income (by reducing basis) on the sale of his partnership interest. Please see IRM 4.31.2.3.19, Foreign Withholding Tax, for specific rules for the partnership's payment of IRC 1446 tax.

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 20.1, Penalty Handbook, will be followed. The report writing procedures for penalties are also in IRM 4.10.8, Examination of Returns, Report Writing.

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.

Any alternative positions that should be considered in the event of an Appeal, should be included on a Form 886-A. The alternative positions should not be included in the summary report or reflected on the Form 4605-A.

There must be 600 days (twenty months) on the key case partnership statute before closing an unagreed case to Tech Services for the issuance of a 60 day letter. If there are less than twenty months but at least eight months the case can be closed to Tech Services for issuance of an FPAA. If there are less than eight months see IRM 4.31.2.3.14.1, Imminent Statute Procedures.

The examiner will forward the key case file to Technical Services 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. Technical Services will prepare and mail out all closing letters to the TMP. Letter 1807 and a copy of the summary report should be included for all cases except no changes within 45 days.

Statutory notice language is provided by the examiner for every case along with the Form 4665, Report Transmittal, of the key case. It is the responsibility of the TSPC for the key case to further develop this language. Concurrence by the key case Area Counsel is mandatory.

An affected item is any item to the extent such item is affected by a partnership item under IRC 6231(a)(5).

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.

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

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.

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.

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 108, for example, because they are insolvent.

In cases where a TEFRA key case has pass-through partners that are also TEFRA entities, noncomputational affected items may require a partnership proceeding at the TEFRA tier partnership. If the campus controls the tier partnership, AIMS controls must be requested from the campus. Consult with Counsel if there are noncomputational affected items flowing from the key TEFRA partnership to the TEFRA tier partnership, when the TEFRA tier partnership is unagreed. An FPAA will need to be issued to the tier partner if facts are required at the TEFRA tier partnership level to determine the amount or nature of a noncomputational affected item. Care needs to be taken when an FPAA is used at the tier level for affected items. As a general rule only one FPAA may be issued to a TEFRA partnership as a key case. An FPAA must include any affected items that require additional determinations at the TEFRA tier partnership level, as well as, any adjustments that are sourced from that TEFRA tier partnership. Remember that the FPAA an investor receives is a copy of the key case partnership FPAA and is not a partnership FPAA in its own right. An investor may receive copies of many FPAAs if they are directly invested in multiple TEFRA partnerships that are being examined.

Treas. Reg. 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.

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).

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.

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

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 Letter 4735, Notice of Computational Adjustment, or by the issuance of a 30/90 day letter.

In General:

The following subsections pertain to certain conversions involving partnerships.

If a partnership, whether domestic or foreign, that is required to file a return under IRC 6031:

According to Treas. Reg. 301.6231(f)-1(d), if the person to whom the notice was mailed establishes to the satisfaction of the Service that the losses and credits arising from the partnership for the year are proper, and that the partner has made a good faith effort to have the partnership file the required return, then the Service may allow the losses and credits, in whole or in part.

An entity that is treated as a partnership for US tax purposes and has a foreign partner could be required to withhold tax under two separate withholding tax regimes (i.e., IRC 1441, IRC 1442 - Fixed Determinable Annual Periodical (FDAP) and IRC 1446 - Effectively Connected Taxable Income (ECTI). Beginning in tax year 2014, a partnership may also be required to withhold under FATCA (IRC 1471-1474) on withholdable payments that are allocable to foreign partners or are made to certain foreign entities.

The withholding tax regime under IRC 1441, IRC 1442 and 1471-1474 requires:

The withholding tax regime under IRC 1446 requires any partnership engaged in a trade or business within the U.S. to withhold tax on a foreign partner’s allocable share of effectively connected taxable income (ECTI).

Partnerships should also be aware of possible withholding obligations under IRC 1443 (regarding effectively connected income allocable to Sec. 501(c) foreign tax exempt organizations) and IRC 1445 (regarding gain from the disposition of a US Real Property Interest when a portion of the gain is allocable to a foreign partner). See Treas. Reg. 1.1446-3(c). The partnership may have a separate withholding obligation under IRC 1445 as a transferee of a U.S. Real Property Interest.

Taxes withheld on a foreign partner’s income under IRC 1441, IRC 1442, IRC 1446 and 1471-1474 are considered Partnership items. An examination of a TEFRA partnership with respect to these withholding tax sections is subject to the TEFRA partnership procedures. IRC 6231(a) (3); Treas. Reg. 301.6231(a) (3)-1(a) (1) (v).

This section provides examination procedures and instructions for securing statute extensions for TEFRA partnerships that are required to withhold taxes with respect to IRC 1441-1446 and 1471-1474, case closing procedures and overall coordination of TEFRA Key Cases with withholding tax return cases. The relevant withholding tax return forms are Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons, and Form 8804, Annual Return for Partnership Withholding Tax (Section 1446).

This election allows the electing entity to no longer follow the provisions of Subchapter K of the IRC.

The date on which the partnership taxable year commences is considered the date it is formed.

The formation date of the partnership may be determined by:

A pass-through entity as defined by IRC 6231(a)(9) and Treas. Reg. 301.6231(a)(1)-1(a)(2) includes, but is not limited to, the following:

A pass-through entity:

The TMP is a position created as a result of the TEFRA statutes. The TMP is the general partner designated by a partnership (subject to TEFRA procedures) to represent the partners before the Service in all tax matters for a specific taxable year. (Treas. Reg. 301.6231(a)(7)-1.)

In addition to facilitating administrative proceedings, the TMP has the authority to:

According to Treas. Reg. 301.6231(a)(7)-1(b), the person (or entity) designated as the TMP by the partnership must be:

Qualification of TMP. The designated TMP need not be an individual: the TMP may be an entity, i.e., an estate, trust (even a grantor trust), partnership, LLC, S corporation or C corporation. Use Form 13828, to make the determination of qualification. However, the TMP must meet all of the following requirements.

The partnership must select a general partner as the TMP for a specified taxable period. If the partnership designates a TMP for the partnership who is not a general partner, that partner cannot be the TMP. Letter 2700, Designation of Tax Matters Partner Request, and related Form 13827, Tax Matters Partner (TMP) Designation Check Sheet, are used to request that the partnership designate a new TMP.

Personal liability for partnership debts distinguishes a general partner from a limited partner.

If a partner, who is the TMP (designated by the partnership or selected by the Service), sells his or her interest in the partnership and does not resign as TMP, the partner remains as the TMP for that taxable year if the partner meets all other requirements of the regulations.

If an entity is a general partner and is the designated TMP, the person representing the entity TMP is determined under State law. The examiner should determine if the appointed person has the authority to bind the entity TMP. For example, if the entity TMP is a C corporation, an officer of the C corporation can generally bind the corporation.

The partners can designate any United States general partner as the TMP. They cannot designate a non-United States person without the Service's consent if any United States person is eligible. However, when the only general partner is not a United States person (as defined by IRC 7701(a)(30)), this general partner automatically becomes the TMP under the Largest Profits Interest Rule. (Treas. Reg. 301.6231(a)(7)-1(b)(2).)

Generally, the LLC statutes in the various states allow an LLC to choose management by one or more managers (whether or not members) or by all of the members. The TMP of an LLC classified as a partnership must be a member-manager as defined in Treas. Reg. 301.6231(a)(7)-2(b)(3). Letter 2700-L, Designation of Tax Matters Partner Request-LLC, and related Form 13798-L, Limited Liability Tax Matters Partner Designation Form, are used to request that the LLC designate a new TMP.

If none of the managers of the LLC are members (i.e., owners), all of the members will be treated as if they are member-managers. The member-managers are treated as general partners, and the members of an LLC that are not member-managers are treated as partners other than general partners. Any member-manager may be designated as the TMP of the LLC if he/she otherwise meets the qualifications of Treas. Reg. 301.6231(a)(7)-1.

If the LLC chose one or more members as managers and the status of all of the selected members has terminated because Treas. Reg. 301.6231(a)(7)-1(l)(i) through (v) applies, the Service may designate a member as the TMP in accordance with Treas. Reg. 301.6231(a)(7)-1(p).

When an LLC is the TMP of a key case partnership, the LLC manager under state law acts as TMP, not the LLC's own TMP. Per Rev. Rul. 2004-88, if the pass-through partner "is a limited liability company, then a manager of the LLC, under State law, must sign, regardless of whether the LLC is subject to the TEFRA partnership procedures" .

On a Form 1065, U.S. Return of Partnership Income, Schedule B, the partnership may designate the TMP.

The partnership is not bound by the Largest Profits Interest Rule that applies to the selection of a TMP after the return is filed.

If the partnership did not designate a TMP at the time the partnership return was filed:

Letter 2700 and related Form 13798 are used to request that the partnership designate a new TMP. Similarly, Letter 2700-L and related Form 13798-L are used to request that the LLC designate a new TMP. The partnership should file a duplicate original copy of the designation form at the campus where it filed its returns in accordance with the Regulations. The agent should send a copy to the Campus TEFRA/Pass-Through Coordinator to ensure the campus is aware of the TMP change.

According to Treas. Reg. 301.6231(a)(7)-1(f), a TMP may be designated after the return is filed by persons who hold more than 50 percent of the aggregate interest in the partnership profits held by all general partners at the end of the taxable year, if each general partner at the end of the taxable year is described in one or more of the following events:

Limited partners may only select a general partner as the TMP. For example, a new general partner may join the partnership in a subsequent tax year. The limited partners could select the new general partner as the TMP for the years under examination but could not select a limited partner. Furthermore, if a general partner's partnership items converted to nonpartnership items other than under special enforcement regulations of IRC 6231(c), the partner remains eligible to be designated as TMP.

The regulations require that the designation be filed directly with the campus where the partnership return was filed, even if an NBAP was issued, not with the revenue agent.

If a properly designated TMP for a partnership taxable year certifies that another partner was selected as the TMP for that taxable year, the successor partner is considered the designated TMP for that year. The certification is filed with the campus where the partnership return was filed. (Treas. Reg. 301.6231(a)(7)-1(d).)

The regulations require that the designation be filed directly with the campus where the partnership return was filed, not through the revenue agent, even if an NBAP was issued.

If an individual (not an entity) is designated as the TMP at the time the return is filed, after the return is filed, or as a successor TMP, then an alternate TMP may also be designated when the statement is filed.

The person designated as the alternate TMP will become the TMP at the time the designation is terminated by death or the adjudicated incompetency of the TMP.

If a person is certified as a successor TMP or is designated as the TMP under the procedures for general partners with a majority of interests, the certification or designation supersedes all prior designations for that year.

The above certification or designation for that year also supersedes a prior designation as the alternate TMP. (Treas. Reg. 301.6231(a)(7)-1(h).)

A person designated as the TMP may resign at any time by filing a signed written statement with the campus where the partnership return was filed. The examiner should request a copy from the campus or the entity. (Treas. Reg. 301.6231(a)(7)-1(i).)

If a TMP resigns but had previously signed a consent to extend the statute of limitations for the partnership, that extension remains valid (if co-executed by the Service before the resignation) even after termination of the designation. (Treas. Reg. 301.6231(a)(7)-1(e)(2))

The partnership may revoke the designation of a TMP at any time after the filing of a partnership return by filing a statement with the campus where the return was filed. The examiner should request a copy from the campus or the entity.

The statement must be signed by the same persons who are permitted to designate a TMP. (Treas. Reg. 301.6231(a)(7)-1(e) or (f))

The designation of a TMP remains in effect until:

The termination of the designation of a partner as the TMP does not affect the validity of any action taken before the day on which the designation is terminated. For example, if that TMP had previously consented to an extension of the period for assessments under IRC 6229(b)(1)(B), that extension remains valid (if co-executed by the Service before the resignation) even after termination of the designation.

The designation of the TMP is not terminated by the TMP signing an agreement with respect to the partnership items, and the TMP may continue to represent the partnership until the proceedings are complete.

Special enforcement activities under IRC 6231(c) that terminate a designation include, but are not limited to:

If the TMP's individual return is examined and unreported income is identified, by using an indirect method of proof, and a notice of deficiency is mailed to the TMP, as of the date the notice is mailed, the TMP's designation is terminated. Thus, whenever an examiner is performing an examination on a partner return that is linked to a TEFRA key case and the above situation arises, the examiner should contact the key case examiner to coordinate the closing of the case. (Treas. Reg. 301.6231(c)-6)

If the Service determines that the TMP should be removed because of special enforcement activities, there are circumstances where it may not be possible to disclose the reason for such removal to the partners, as this may be an unauthorized disclosure of the TMP's return information; for instance, removal as a result of a criminal investigation. In these circumstances, it should be sufficient for the Service to indicate to the partners that the TMP has been removed pursuant to IRC 6231(c) and the regulations thereunder.

If the TMP, who is an individual, is under joint investigation, this does not remove the partnership from the TEFRA proceedings.

IRC 6231(a)(7)(B) provides that if there is no general partner who has been designated as the TMP, or prior designations have been terminated, and the partnership has not made a subsequent designation, the TMP is the general partner having the largest profits interest in the partnership at the close of the taxable year involved. If there are two or more general partners with equal profits interests, the TMP whose name appears first alphabetically is selected:

If a partner who has no profit, loss or capital interest in the partnership is considered a general partner under state law, the partner would only be the TMP if all other general partners had either resigned, had their designations revoked by the partnership, or their designations were terminated by means of Treas. Reg. 301.6231(a)(7)-1(l).

A partnership may designate a person as the TMP for a taxable year only if that person was a general partner in the partnership at some time during the taxable year for which the designation is made, or is a general partner in the partnership as of the time the partnership makes the designation.

If the partnership fails to designate a TMP or a prior designation has been terminated; the partnership has failed to make a subsequent designation; and the Service determines that it is impracticable to apply the largest profits interest rule, then the Service may select as the TMP for the taxable year any person who was a partner (whether general or limited) at some time during the taxable year.

Examiners will identify a TMP as early as possible in an examination. Since the TMP executes statute extensions with the Service and, under certain circumstances, enters into agreements that may be binding on other partners in the partnership, it is essential that the TMP be correctly identified.

Delegation Order 4-19 (as revised) delegates authority to select a TMP for a TEFRA partnership to the Appeals Team Managers, Appeals Team Case Leaders (as to their respective cases), LB&I Team Managers, and SB/SE Group Managers when it is impracticable to apply the Largest Profits Interest Rule.

For a partnership, the Largest Profits Interest Rule is deemed impracticable if on the date that the rule is applied, the general partner with the largest profits interest is not apparent from the Schedules K-1 and is not otherwise readily determinable.

The Largest Profits Interest Rule is also impracticable if each general partner is deemed to have a zero profits interest because of the occurrence of one or more of the events described in Treas. Reg. 301.6231(a)(7)-1(l)(i) through (iv). In the event this occurs, the Group Manager (SB/SE) or Team Manager (LB&I) will select a limited partner as the TMP. However, a limited partner will only be selected as the TMP if that partner was a partner in the partnership at the close of the taxable year under examination.

The Largest Profits Interest Rule is impracticable if the general partner with the largest profits interest has been:

It is the examiner's responsibility:

The examiner's work papers must reflect all determinations made in identifying the proper TMP.

If a TMP is a partnership or a limited liability company, the Service must determine who has authority under State law to sign for the TMP entity. See IRM 4.31.2.5.4(2), Persons Empowered to Sign A Consent.

Consider, for example, partnership X. For tax year A, partnership X has designated as its TMP Y LLC. Z corporation is Y LLC’s sole member-manager and, under State law, has authority to bind Y LLC. John is Z’s chief financial officer and, under State law, has authority to bind Z corporation. John should sign the consent to extend the limitations period for tax year A for partnership X as follows: Y LLC, Tax Matters Partner of X, by Z Corporation, Manager of Y LLC, by John, CFO.

When the partner is a C corporation, S corporation, or LLC, the examiner should determine the signing official who can bind that entity under state law.

A trustee should sign on behalf of a trust. If the trustee is an entity, it is necessary to determine what kind of entity the trustee is and who could bind it. A Form 56, Notice Concerning Fiduciary Relationship, and the trust documents should be reviewed to verify the correct trustee is signing.

When an LLC is the TMP, the examiner should review the operating agreement in light of the applicable state law to determine the signing official. In general, LLCs may be member managed or manager managed. In these situations, the signing official may be a manager that is not a member of the LLC. If the LLC is manager managed, the manager is the binding official and must sign on the LLC's behalf. A manager under state law must sign for the TMP regardless of whether the TMP is itself a TEFRA entity. The TMP of an entity only has certain powers with respect to the partners of that entity but has no power to bind the TEFRA entity itself unless the TMP is a manager under state law.

To apply Treas. Reg. 301.6231(a)(7)-2 (Designation or selection of tax matters partner for a limited liability company) when examining an LLC filing as a partnership, the examiner must review the operating agreement to determine who the managers and members are for the LLC. Once it is determined who the member-managers are, as defined in Treas. Reg. 301-6231(a)(7)-2(b)(3), the regulation is then applied to determine if the designated TMP qualifies. The work papers must document how the managers and members were determined. A best practice would be to retain a copy of the operating agreement in the audit file.

When reviewing the partnership agreement or LLC operating agreement, the agent needs to look for any restrictions to the powers of the TMP. The partnership agreement or LLC operating agreement may restrict the TMP's ability to sign consents. The work papers must document any restriction to the TMP's ability to sign consents. A best practice would be to retain a copy of the operating agreement in the audit file. Consult with your TSPC if a restriction exists.

When a grantor trust is the partner in a partnership or LLC, the beneficiary cannot be designated the TMP. The trust itself must be designated. A fiduciary must be designated as the responsible party by using Form 56.

Currently, a single member LLC that is a disregarded entity will be considered to be the partner in a partnership or LLC. The disregarded entity may be designated as the TMP. (See Revenue Ruling 2004-88.)

IRC 6229(a) sets forth a minimum period of limitations for assessing tax attributable to partnership items (or affected items) for all partners. The general rule states that the statute of limitations for these items will not expire before the date that is three years after the later of:

The Tax Reform Act of 1986 amended IRC 6229 by adding IRC 6229(g) to clarify that the period of limitations for assessment with respect to partnership or affected items also applies to penalties and additions to tax imposed by IRC 6662. For tax years ending after August 5, 1997, penalties are determined at the partnership level and assessed in the same manner as partnership items (even though they remain affected items).

The IRC 6229(a) statute of limitations is the earliest date on which the partnership or affected item assessment period expires with respect to the partners' returns. IRC 6501 will not shorten this period with respect to partnership or affected items, but may extend the time period for assessing individual partners.

If partnership and/or affected items are converted to nonpartnership items (See IRM 4.31.2.5.7, Items Becoming Nonpartnership Items), the one-year statute (the one-year assessment date) of IRC 6229(f) applies. The IRC 6229(f) statute is used for all TEFRA issues. This includes affected items that require statutory notice procedures.

PCS Report 4-4 lists TEFRA key case records and investor records with a pending one-year statute date. The report is broken down for distribution to area groups and functions. (See text of IRM 4.29.4.4.3, TEFRA One-Year Assessment Statute Date Listing, Report 4–4.) This report should be reviewed by the group manager.

Other subsections of IRC 6229 come into play depending on the particular circumstances involved:

The statute for an AAR is not discussed here. See IRM 4.31.4.2.2, TEFRA AAR Statutes, for a discussion of statute dates for an AAR and for the procedures and correct forms to extend the statutes for petitioning or processing of refunds.

The IRC 6229(a) statute of limitations may be extended with respect to all partners by a consent executed at the entity level. The TMP or an authorized person (authorized in writing by all general partners and meeting the requirements provided in Treas. Reg. 301.6229(b)-1) may extend the period of limitations for the assessment of partnership and affected items for all partners by signing a consent before the expiration of the statutory period. It is preferred that the TMP or authorized person sign rather than have their POA sign.

The statute of limitations also may be extended with respect to any partner by an agreement entered into with the partner (IRC 6229(b)(1) and IRC 6229(b)(3)). An unrestricted consent entered into by an investor extends the statute of limitations for assessment of any additional tax attributable to all partnership items or affected items for that investor only.

It is strongly recommended that the TMP or authorized person (Treas. Reg. 301.6229(b)-1) sign all statute extensions. If someone other than the TMP or authorized person is signing the extension, for example the POA, it is advised to contact your Area Counsel.

The partnership agreement or LLC operating agreement must be reviewed to determine if there are any restrictions on the powers of the TMP. For example, the partnership agreement or LLC operating agreement may restrict the TMP's ability to sign consents. Consult with your TSPC if a restriction exists.

It is unclear as to what TMP duties are assignable to a POA. Work with your TSPC if the POA wishes to assume some duties of the TMP.

The examiner charged with the partnership return is responsible for the IRC 6229(a) statute for all partners. All regular statute extension request procedures must be followed when soliciting Form 872-O, Form 872-P, Form 872, Consent to Extend the Time to Assess Tax, or Form 872-A, Special Consent to Extend the Time to Assess Tax, including requests for restricted consents. If the examiner receives a return letter with a signed consent that places conditions on the extension, the examiner should include these terms in a revised Form 872, if they are approved by counsel, and re-mail to the taxpayer for signature. (See IRM 25.6, Statute of Limitations, for examples of approved language.)

The case file must be documented that managerial approval has been obtained to solicit a consent to extend the statute of limitations. The consent should be solicited from the taxpayer a minimum of one year prior to the statute expiration date to allow for processing.

The Restructuring and Reform Act of 1998 (RRA '98) section 3461(b), imposed provisions that must be followed in soliciting a consent to extend the statute of limitations. The provision requires the Service to provide the taxpayer(s) or their authorized representatives with an explanation of their rights to decline to extend the assessment statute of limitations, or to request that any extension be limited to a specific period of time or to specific examination issues. In order to meet the provisions of RRA '98, the IRM has established the following procedures whenever an extension to the statute of limitations is solicited:

If the taxpayer or authorized representative does not wish to execute a consent, they should be notified that the case will be evaluated to determine whether an FPAA will need to be issued.

Further guidance on the control of statutes can be found at IRM 25.6, Statute of Limitations Handbook.

TEFRA partnership level consent and consent termination forms are as follows:

The key case examiner is ultimately responsible for the IRC 6229(a) statute as it pertains to the TEFRA key case and its related partners while the key case is in his or her possession. Although the CPFs maintain control of the investor files, they are only responsible for the assessment of tax and penalties once the IRC 6229(d) or (f) one-year assessment periods begin running and for the investor statutes that are extended under IRC 6501 for returns that may be in their possession.

The key case examiner is responsible for updating AIMS when an extension is secured for the key case. A copy of that extension should be forwarded to the appropriate campus email box.

The Service may extend the IRC 6229(a) statute by agreement under IRC 6229(b)(1)(B) for the assessment of partnership and affected items for all partners and/or extend the statute for the assessment of partnership and affected items for an individual partner.

Extending the TEFRA statute at the individual partner's level is not the usual approach and, except for CIC cases, should only be used in mitigating circumstances, e.g., the TMP is not readily determinable. Individual partners cannot execute Form 872-P or Form 872-O consents, since they are designed for use by the TMP to extend the statute at the partnership level. If the investors statute is being extended beyond the one year assessment statute date period, the OYD needs to be updated to match the extended statute date.

An extension under IRC 6229(b)(1)(A) for a partner can be included in an extension of the IRC 6501 statute under IRC 6501(c)(4), using Form 872 or Form 872-A. Use of Form 872 or Form 872-A at the partner level to extend the partnership statute is not encouraged (except in CIC audits) because of the administrative issues this creates. However, if a consent to extend the partnership statute is secured at the partner level, the consent must retain the TEFRA paragraphs to expressly provide that it extends the period to assess tax attributable to partnership items.

Partnership and affected items that are converted to nonpartnership items are no longer subject to the period for assessment under IRC 6229(a). They must be assessed within the one year period provided for converted partnership items (nonpartnership items) under IRC 6229(f). Consents secured under the instructions in (3) also extend this one year period.

There may be situations where an unrestricted extension of the IRC 6501 statute using a Form 872-A was used to provide a longer period for assessment than under IRC 6229(f).

An extension using earlier versions of Form 872-A terminates upon the issuance of any notice of deficiency. To prevent the termination of a Form 872-A with respect to converted partnership and affected items (nonpartnership items), a Form 872-A, paragraph 1, may have been modified as indicated above in the note, see IRM 4.31.2.5.3(3)(a), Extension of Investor Statute for TEFRA and NonTEFRA Items.

However, Form 872-A is subject to termination by the execution of a Form 872-T, Notice of Termination of Special Consent to Extend the Time to Assess Tax, by the partner or the Service. If the situation arises where a Form 872-A was used to extend the statute for affected items, request advice from Area Counsel.

The Technical and Miscellaneous Revenue Act of 1988 (TAMRA) provided that the IRC 6229(f) statute may be extended by agreement between the taxpayer and the Service. The Taxpayer Relief Act of 1997 provides that partial agreements may be secured, because the one-year date (IRC 6229(f)) that controls all assessments is the one-year date applicable to the last item to be resolved.

The TMP may sign an agreement to extend the statute of limitations for assessment for partnership and affected items for all partners. See Exhibit 4.31.2-5, Format for TMP Signatures when Signing Extensions.

When the TMP is not a natural person (individual), it is important that the examiner correctly analyze the entity TMP to determine the correct individual that can legally sign for the entity. If the designated TMP is also a partnership or an LLC filing as a partnership, the examiner must determine who is the general partner(s) or member manager(s). If that pass-through partner is itself a TEFRA partnership, the TMP of that pass-through partner is not necessarily the person authorized under state law to sign the consent. Care should be taken to ensure the correct person is signing the consent. The authorized person will most likely be a general partner or a manager if an LLC.

When the partner is not a pass-through entity or an individual, the examiner should determine who can bind that entity. For example, for a C corporation it would be an officer; for an S corporation, it would be an officer; for a trust, it would be the trustee. The examiner should be consulting with his/her TSPC and/or Area Counsel when this situation arises. It is important to determine not only the correct individual to sign at the bottom tier, but also how to style the language to describe the relationship from the bottom tier up to the partnership or LLC that is being examined.

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

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

In addition, Treas. Reg. 301.6229(b)-1 provides that a partnership may authorize any other person to extend the period described in IRC 6229(a), with respect to all partners, by filing a statement with the campus where the partnership return is filed (or with the examiner who will forward a copy to the key case campus).

If a POA substantially complies with the criteria outlined in IRC 6229(b)(1)(B) and Treas. Reg. 301.6229(b)-1, consents executed by the POA would be valid. As a general rule, a POA designated on Form 2848, Power of Attorney and Declaration of Representative, may not meet these criteria and the extension signed by the POA may not be valid. If this situation exists, request advice from Area Counsel.

Consents to extend the statute of limitations for assessing tax (Form 872, Form 872-P, and other consent forms) 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 extension by fax.

Faxed documents must be legible and not condensed.

The IRC 6229(a) statutory period, i.e., the original 3 year period, is suspended once the FPAA is issued for 150 days plus one year. (IRC 6229(d).)

If the FPAA is mailed to the TMP prior to the expiration of the IRC 6229(a) statute (but the FPAAs are mailed to the partners after the expiration of the statute), the statute for the investors is suspended from the date the FPAA was mailed to the TMP. The FPAAs must be mailed to the notice partners within 60 days after the FPAA is mailed to the TMP. (IRC 6229(d)(2).)

When partnership items or affected items are converted to nonpartnership items, the statute of limitations with respect to these items is governed by IRC 6229(f) instead of IRC 6229(a). Under IRC 6229(f), the statute of limitations does not expire before one year after the date the items become nonpartnership items. The Technical Corrections Act of 1988 provides that the IRC 6229(f) statute may be extended by agreement entered into between the Secretary and a partner. An extension pursuant to IRC 6229(f) cannot be entered into at the partnership level but a partner can extend the statute using a Form 872-F, Consent to Extend the Time to Assess Tax Attributable to Items of a Partnership that have Converted Under IRC 6231(b) of the Internal Revenue Code, current Form 872, Consent to Extend the Time to Assess Tax, or Form 872-A, Special Consent to Extend the Time to Assess Tax. A partner can only extend the separate one year period under IRC 6229(d) created by a decision being entered in any court or due to an FPAA defaulting by executing a current Form 872 or Form 872-A.

The entry of a court decision is not a conversion event. Under IRC 6231(b), items become nonpartnership items as of the date:

Under IRC 6229(f), if an agreement with respect to partnership items was accepted on behalf of the Service, the statutory period for assessing partnership items and affected items (related penalties, etc.) would be extended to one year from the acceptance of the agreement by the Service. For tax years ending after August 5, 1997, penalties are assessed in the same manner as partnership items.

Under IRC 6229(c)(1), if any partner, with the intent to evade tax, signs or participates directly or indirectly in the preparation of a partnership return that includes a false or fraudulent item:

If any partnership omits from gross income an amount in excess of 25 percent of the amount of gross income stated on its return (IRC 6501(e)(1)(A), the IRC 6229(a) statute is extended from three to six years for all partners. (IRC 6229(c)(2)) IRC 6501(e)(1)(B) defines the gross income for purposes of IRC 6501(e)(1)(A). Gross income includes income from the sale of goods or services and an understatement of gross income by reason of an overstatement of unrecovered cost or basis in an omission from gross income.

Under Treas. Reg. 301.6231(c)-6, a partner's partnership items, with respect to a partner whose taxable income is determined by use of an indirect method of proof of income, convert to nonpartnership items on the date a deficiency notice, based upon an indirect method of proof of income, is mailed to the partner. The notice must include any adjustments from the partnership(s).

In the case of a failure to file a return by a partnership for any taxable year, any tax attributable to a partnership item or attributable to an affected item arising in the year may be assessed at any time. (IRC 6229(c)(3))

If a partnership return is not filed but Schedules K-1 are issued to the partners, TEFRA procedures will be followed, if it is determined that a partnership exists.

IRM 20.1.2.4, Failure to File a Partnership Return—IRC 6698, explains the application of the failure to file penalty.

A substitute for return filed by the Service (See IRM 4.4.9, Delinquent and Substitute for Return Processing.) is treated as if no partnership return has been filed so the period for assessment is open indefinitely.

A situation may arise where TEFRA partnership proceedings are instituted, and it is subsequently determined that the partnership is the second (or lower) tier partnership of another TEFRA partnership. The second (or lower) tier partnership is a pass-through partner, and the second (or lower) tier partnership's partners are indirect partners of the first tier. (IRC 6231(a)(9) and IRC 6231(a)(10))

As such, the partners are governed by the first tier proceeding (IRC 6231(a)(2)(B)), and adjustments may be made to the second (and lower) tier indirect partners' returns through the first tier TEFRA partnership proceeding. Absent partnership adjustments to the second (or lower) tier return which are independent of the first tier partnership proceeding, a separate statute extension for the second (or lower) tier partnership is unnecessary. (IRC 6231(a)(2)(B))

IRC 6229(a)(1)(B) authorizes the TMP to execute a statute extension for all partners, and a statute extension executed by the first tier TMP will protect the statute with respect to the second tiers (and lower) indirect partners.

If a partnership item impacts an NOL or credit carryback or carryover, the NOL or credit carryback or carryover is treated as an affected item. As an affected item, the NOL or credit carryback is subject to the partnership's statute of limitations under IRC 6229(a) for the taxable year generating the loss or credit. This applies to a capital loss carryback as well.

Form 5546, Examination Return Charge-out Sheet, with the literals "FLOW THROUGH NOTIFICATION" and with the investor Schedule K-1 attached, will be received from the key case CPF by the examining agent, via Form 3210, Document Transmittal.

The agent in control of a key case investor must review the investor's return for NonTEFRA issues and Schedule K-1 inconsistencies.

If it is determined that no NonTEFRA issues exist, the investor's return should be forwarded to the key case campus for suspense as long as the return is not an LB&I CIC/LCC, or other corporate specialty case. If the return is one of the latter, then the case must be suspended in the field.

If a Schedule K-1 discrepancy is identified, the return should be checked for a statement of inconsistency. If no such statement was filed, the taxpayer will be contacted to explain the discrepant item(s). When contacting a taxpayer, their identity must be verified. See IRM 21.1.3.2.3, Required Taxpayer Authentication, for authentication language and IRM 21.1.3.9, Mailing and Faxing Tax Account Information, for fax language guidelines.

When the taxpayer responds, the following action will be taken after a review by the agent:

When the TEFRA key case issues are resolved, the field examination or Appeals will be notified by the campus.

If the NonTEFRA issues are resolved before the TEFRA issues, the NonTEFRA issues will be closed using normal closing procedures; however, any assessments or refunds are processed as a partial. When the examiner is ready to close the NonTEFRA examination, the examiner should check a current transcript to be sure that the TEFRA issues were not already assessed. The examiner should also verify that the investor is still linked by checking a TSUMYI print. The TSUMYI print will show what key cases the investor is linked to, if any.

If the investor is no longer linked, consult with the TSPC to determine if the investor should be re-linked to the key case.

A refund processed as a partial closure will not generate the refund. The refund is frozen to provide the maximum interest offset to the taxpayer should the TEFRA examination result in an assessment. The refund can be released by submitting Form 3870, Request for Adjustment, and/or a written statement from the taxpayer. The taxpayer should state that they are aware of the pending TEFRA examination and understand that releasing this refund may result in additional interest accruals. Any NonTEFRA assessments should be made prior to suspending the case for any reason.

If the NonTEFRA issues are agreed, then:

If the NonTEFRA issues are unagreed, then: