This internal revenue manual (IRM) section provides guidance on field office procedures related to examinations of partnerships subject to provisions of the Tax Equity and Fiscal Responsibility Act (TEFRA) of 1982. This section is valid for partnership returns with tax years beginning before January 1, 2018.

Section 1101 of the Bipartisan Budget Act (BBA) of 2015 repealed TEFRA partnership and Electing Large Partnership (ELP) provisions beginning with tax years beginning 1/1/2018.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 centralize 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).

For rules relating to partnerships filing bankruptcy with tax years beginning 1/1/2018 and those partnerships who have early elected into BBA, you must contact the BBA POC.

The TEFRA code sections cited in this IRM section relate to the years prior to 1/1/2018.

In enacting the TEFRA partnership audit and litigation procedures, Congress contemplated that the tax consequences of "partnership items" would be determined at the partnership level through a unified administrative or judicial proceeding, even though the tax liability that results from such a determination is imposed on the individual partners. Partnership items include any item that the partnership is required to determine under subtitle A, to the extent the Service has determined by regulation that the item is more appropriately determined at the partnership level than at the partner level.

Pursuant to IRC 6231(c), the Service has the authority to determine, by regulation, that certain items that would otherwise be treated as partnership items may be treated as nonpartnership items to the extent that their treatment as partnership items will interfere with the effective and efficient enforcement of the tax laws. The Internal Revenue Code and the regulations have identified bankruptcy as one of the special enforcement areas that allow the Service to proceed separately against a partner with respect to converted partnership items. See IRC 6231(c)(1)(E) and Treas Regs 6231(c)-7(a).

TEFRA was replaced by the Centralized Partnership Audit Procedures contained in the Bi-Partisan Budget Act (BBA) passed in 2015. TEFRA and this IRM section as written no longer applies for all tax years that started after December 31, 2017.

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

The SB/SE, Program Manager, Examination Field and Campus Policy, Campus Exam & Field Support (SE:S: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 and Campus Field Support Operations managers are responsible for:

The campus TEFRA/Pass-Through Coordinator works with:

The campus PTE Bankruptcy Coordinator is charged with:

Following are specific campus TEFRA/Pass-Through Coordinator responsibilities:

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 (TS) monitors 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, AMS4940, that the field monitors to ensure field controlled partner cases are worked timely.

See Exhibit 4.31.7-1.

The following IRM cross-references may be helpful:

For bankruptcy petitions filed prior to October 22, 1994, the Service may not make assessments on pre-petition tax years during the automatic stay provided by the U.S. Bankruptcy Code 11 USC 362. The automatic stay against most actions automatically terminates as to all creditors upon the earliest of the time the case is closed, the time the case is dismissed, or the time a discharge is granted or denied. The automatic stay against acts to collect estate property continues, however, until property is no longer property of the estate. 11 USC 362(c).

IRC 6503(h) suspends the statute of limitations while the Service is prohibited from making any assessments during the Automatic Stay and for 60 days after. For this reason, proposed assessments (whether agreed or unagreed) in all bankruptcy cases commenced before October 22, 1994, required suspense until the automatic stay was lifted. Although some cases governed by the pre-1994 law are still in bankruptcy suspense, any new cases would be worked under the new rules that follow.

(1) The Bankruptcy Reform Act of 1994 created an exception to the automatic stay, specifically permitting the assessment of pre-petition taxes when a bankruptcy petition was filed on or after October 22, 1994. For these bankruptcy cases, the statute of limitations on assessment continues to run since the Service is no longer prohibited from making the assessment. In order to protect the assessment statute the Service must make an assessment within the normal statute period, send out a statutory notice of deficiency, or get protection in the form of a waiver.

Under BAPCPA, the bankruptcy stay that prohibits the commencement or continuation of a Tax Court case with regard to a debtor only applies to an individual debtor’s pre-petition taxes in a case filed on or after October 17, 2005. The indirect suspension of the statute of limitations that occurs as a result of the stay against Tax Court proceedings will therefore not occur with regard to individuals in cases after October 17, 2005. The stay against Tax Court cases continues to apply to both pre-petition and post-petition corporate liabilities, so long as it is a liability the bankruptcy court can determine.

Partnership items of a partner arising in any partnership taxable year ending on or before the last day of the latest taxable year of the partner with respect to which the United States could file a claim for income tax due in the bankruptcy case shall be treated as nonpartnership items as of the date the petition naming the partner as debtor is filed in bankruptcy.

There are two overlapping requirements that must be met before partnership items will convert:

This can be further reduced to a three part test:

Exception: When the debtor is an individual in a Chapter 7 or 11 case, partnership items for post-petition years do not convert if the debtor’s partnership interest is held by the bankruptcy estate when the partnership year closes. See Katz v. Commissioner, 335 F.3d 1121 (10th Cir. 2003). This is because the bankruptcy estate is a separate taxable entity from the debtor under IRC 1398 and the partnership items pass through to the bankruptcy estate unless the estate has abandoned the debtor’s interest in the partnership before the close of the partnership year, when the items pass through. Though perhaps unintended, the language of Treas. Reg. 301.6231(c)-7 does not provide for the conversion of items that affect only the estate’s tax year. Thus, even though the partnership items affect the estate’s liability, and the Service could file an administrative expense claim in the bankruptcy case for the estate’s liability, the items do not convert in this situation.

Example: A partner that is a corporation files a Chapter 11 bankruptcy on December 1, 1986. The plan is confirmed on May 15, 1988. The plan provides that all property of the estate revests in the debtor upon confirmation and no provision of the plan allows for the filing of a claim for post confirmation taxes. The partnership’s taxable year ends on December 31, 1988. As of May 15, 1988, the 1987 taxable years and prior years have converted. The partnership items for the 1988 taxable year would not convert, as neither of the two requirements set forth in Treas. Reg. section 301.6231(c)-7(a) have been satisfied:

If a bankruptcy is currently ongoing, then it may be possible that the partnership items in the year which the petition was filed will not convert until some time later. For example, if a partner files a bankruptcy petition is filed on September 15, 1990, the partnership items for 1990 will not convert on that date because no claim could be filed in the bankruptcy case for those items, and the partnership’s 1990 taxable year has not ended on or before September 15, 1990. However, if the bankruptcy estate is in existence throughout 1991, then 1991 becomes the latest year for which a claim could be filed, and all prior years will convert, including 1990.

This section covers the different types of individual bankruptcy filings.

The Service has taken the position that the bankruptcy of a partnership has no bearing on a TEFRA partnership proceeding. When a partnership files for bankruptcy, the automatic stay does not prevent the Service from issuing a notice of final partnership administrative adjustments (FPAA), since during a bankruptcy case the Service is permitted to issue a statutory notice of deficiency. 11 USC 362(b)(9).

IRC 701 provides that for income tax purposes, partnerships are not taxable entities. Instead, a partnership is a conduit, in which the items of partnership income, deduction, and credit are allocated among the partners for inclusion in their respective income tax returns; therefore, a TEFRA partnership proceeding should not be stayed simply because the partnership is in bankruptcy.

The bankruptcy of a partnership does not stay the commencement or continuation of a TEFRA partnership proceeding nor does it prevent the individual partners of a bankrupt partnership from filing petitions for redetermination of the partnership adjustments determined by the respondent in FPAA.

In many large partnerships, at least one of the partners is a pass-thru partner. The term "pass-thru partner" is defined in IRC 6231(a)(9) as a partnership, estate, trust, S corporation, nominee, or other similar person through whom other persons hold an interest in the partnership with respect to which unified proceedings are conducted. The pass-thru partner is commonly referred to as a tier and the partnership in which it holds an interest is called the source partnership. A person holding an interest in a partnership through one or more pass-thru partners is an indirect partner as defined in IRC 6231(a)(10).

The bankruptcy of a tier should generally be treated the same as the bankruptcy of a partnership. Since a partnership is separate and distinct from its partners, the indirect partners should not be affected by the bankruptcy of a tier.

In spite of the fact that a tier is a partner and the bankruptcy of a partner will normally convert the partner/debtors partnership items into nonpartnership items, the tier should be disregarded under the circumstances and that the bankruptcy of a tier will not convert the partnership items of the indirect partners into nonpartnership items. Only the occurrence of an event personal to an indirect partner will convert the indirect partner’s partnership items relating to the source partnership into nonpartnership items. The bankruptcy of a tier should not adversely affect the TEFRA partnership proceeding regarding the source partnership.

Corporations are taxable entities. When a corporation that is a partner files a bankruptcy petition, all its partnership items convert to nonpartnership items.

The campus will be concerned with the taxable portion of a trust for bankruptcy purposes. Non-taxable trusts are pass-thru entities and will be treated as tier partnerships. The bankruptcy of a tier or pass-thru partner will have its own partnership items converted to nonpartnership items while any items of income, gain, losses, deductions and credits that flow through the trust will remain partnership items. The bankruptcy of a tier or pass thru will only affect its own taxable partnership items.

Under Treas. Reg. section 301.6231(c)-7(a), partnership items convert to nonpartnership items for a partner if the United States could file a claim for income taxes due in the bankruptcy case. Generally, the filing of a bankruptcy in a foreign jurisdiction by a foreign entity who is a partner in a TEFRA proceeding will not necessarily convert its partnership items to nonpartnership items since the Service may be prohibited from filing a claim for income taxes in the foreign bankruptcy case. Counsel’s opinion should be sought on a case by case basis.

Pink folders will be used for all bankruptcy cases. Form 13959, TEFRA Bankruptcy Check Sheet, will be used to communicate the necessary actions to be taken. A Form 3210 will be used when transferring the bankruptcy return between functions.

The campus Bankruptcy Coordinator will send the case file to the field for preparation of the report and the issuance of the statutory notice. A Form 4549-A will be prepared using the current settlement position closing document supplied by the campus Bankruptcy Coordinator. A statutory notice will be prepared and mailed to the taxpayer. The case will then be returned to the field Bankruptcy Coordinator to be suspended and monitored until assessments can be made based on either an agreement to the statutory notice or the finalization of the bankruptcy as applicable.

The Bankruptcy Coordinator will give specific instructions of when the report and statutory notice must be completed by. The dates given by the Bankruptcy Coordinator must be strictly adhered to due to the statute date of each case. There will not be more than 30 days to work each case.

Each bankruptcy case will have a Form 13959, TEFRA Bankruptcy Check Sheet, attached. The check sheet will have instructions from the Bankruptcy Coordinator. The Bankruptcy Check Sheet will also include instructions for completing Form 4549-A, issuing the statutory notice, and the due date for a proof of claim report.

After the report is completed and the statutory notice is mailed, review Form 13959, TEFRA Bankruptcy Check Sheet, to ensure all other instructions have been completed. Once all instructions are completed, update AIMS to EGC 5839 which reflects that a statutory notice on the bankrupt TEFRA investor has been issued. Also update to alpha statute KK. The case file is then ready to be sent back to the Campus TEFRA Bankruptcy Coordinator.

The following is a general guideline for placing a case into bankruptcy suspense: Verify the bankruptcy status through AIS and PACER. AIS and PACER should be monitored monthly for finalization of the bankruptcy. If there are any discrepancies between the two systems, call Insolvency for clarification. Verify that the statutory notice was issued, defaulted, and that the case requires suspension. Update the statute, EGC and status.

The following is a general guideline for removing a case from bankruptcy suspense:

This section is applicable to unagreed cases only. The taxpayer is entitled to petition the Tax Court and may do so until the end of the unexpired portion of the 90 or 150 day statutory notice period. Determine how many days of the 90 or 150 days (IRC 6213(a)) the taxpayer was allowed to petition the Tax Court and how many days were unused, plus 60 days under IRC 6213(f)(1). Using a Julian calendar, complete the second section of the worksheet to calculate the Tax Court petition date. Keep in mind that there are two Julian calendars, one for leap year and one for a regular calendar year. The deficiency cannot be assessed until the taxpayer has had the benefit of the full "90 + 60 days" or "150 + 60 days" . Simply put, the case is removed from the "bankruptcy suspense" cabinet and then held in the Tax Court "petition suspense" cabinet, if applicable, until this date.

The Service is prohibited by law under IRC 6213(a) from assessing a deficiency against a taxpayer during the 90 or 150 period during which the taxpayer has to file a petition with the United States Tax Court. Under IRC 6213(f), when a taxpayer in bankruptcy is issued a statutory notice, the time for filing a petition is suspended for the period taxpayer is prohibited from filing a Tax Court petition by the provisions of the Bankruptcy Code, plus 60 days. In effect, IRC 6213(f) extends the time for filing a Tax Court petition.

The bankruptcy stay also prevents the commencement or continuation of a Tax Court case with regards to the debtor. 11 USC 362(a)(8). If the stay on Tax Court cases applies, the mailing of a notice of deficiency to a taxpayer in bankruptcy suspends the statute of limitations on assessment until the bankruptcy case has been resolved. For cases filed before October 17, 2005, the stay on Tax Court cases applies to both pre-petition and post-petition tax years of the debtor. For cases filed on or after October 17, 2005, the stay on Tax Court cases applies to an individual debtor’s pre-petition tax years only, and to a corporate debtor’s pre-petition and post-petition tax years, so long as the year involves a tax the bankruptcy court may determine.

The docket list should be reviewed to ensure that the taxpayer has not filed a petition in Tax Court. To review the docket list the Bankruptcy Coordinator would have to access the Disclosure Information Management System (DIMS). This list is of all the newly petitioned Tax Court Cases.

Bankruptcy Filed On or After October 22, 1994. Agreed pre-petition and post-petition audit deficiencies must be assessed.

Bankruptcy Filed Before October 22, 1994. Agreed pre-petition audit deficiencies cannot be assessed. The case must be suspended until the bankruptcy stay is lifted. Agreed post-petition audit deficiencies must be assessed.

The administrative file will be held in suspense for two years. This will allow the Bankruptcy Coordinator to answer any questions related to the case. Due to the age of the cases, the returns are often destroyed and are not available if questions come up at a later date. Retaining the administrative file enables the Service to prove actions were made timely.

The field will assist the campus in the event the campus needs assistance with TEFRA bankruptcy cases. The cases need to be transferred to the key case agent in status 09.

If there is more than one key case agent, the campus will need to pick one.

A contact through e-mail should be sent to the key case agent, CC to agent's manager, Technical Services TEFRA/Pass Through Coordinator and the Field Bankruptcy Coordinator, stating the investor case is being sent directly to them.

The case will be forwarded along with Form 13959, TEFRA Bankruptcy Check Sheet.

The key case agent will coordinate with local field Bankruptcy Coordinator to ensure adjustments are made timely.