8.19.1. Procedures and Authorities

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

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

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

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

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

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

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

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

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

(2) These are the duties performed by the TMP.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

1. Closing conference with the examining agent.

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

3. Time and place of any appeals conference.

4. Acceptance by the Service of any settlement offer.

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

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

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

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

9. Final judicial redetermination.

(7) The TMP does NOT have to inform the following:

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

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

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

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

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

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

(2) The following suggestions are recommended for completing Form 2848:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(4) The statute of limitations on converted partnership items is governed by IRC 6229(f).

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

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

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

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

(1) IRC 6229(b) provides that the period of limitations of IRC 6229(a) may be extended either at the partnership level (IRC 6229(b)(1)(B)) or the partner level (IRC 6229(b)(1)(A)). As a general rule, an extension should be secured at the partnership level.

(1) A notice partner is a partner in a partnership that is entitled to receive an NBAP and an FPAA directly from the Service.

1. All identified partners are notice partners if there are 100 or fewer partners in the partnership.

2. An identified partner is a partner whose name, address, and taxpayer identification number is furnished on the partnership return or who has furnished additional information to the Service according to Treas. Reg. 301.6223(c)-1(b).

(2) A notice partner may be a pass-thru partner.

1. A pass-thru partner is a partnership, estate, trust, S corporation, nominee, or other similar person through whom other persons hold an interest in the partnership. A single member LLC that is a disregarded entity for federal tax purposes is also a pass-thru partner.

2. An indirect partner is a partner who holds an interest in a partnership through one or more pass-thru partners.

(3) If a partnership has more than 100 partners, not all of them will receive a notice directly from the Service.

1. An identified partner having less than 1 percent profits interest is not entitled to receive notice from the Service. The partner is referred to as a non-notice partner.

2. Partners owning a total of 5 percent of the profits interest of the partnership may form a notice group. One member of the group will be designated as the representative to receive notices. An indirect partner may only join a notice group if the indirect partner has been identified as provided in IRC 6223(c) and Treas. Reg. 301.6223(c)-1 before joining the notice group. See Treas. Reg. 301.6223(b)-1.

(4) Non-notice partners should receive copies of the required notices, even though the Service does not send them directly.

1. The TMP is obligated to forward notices to non-notice partners.

2. Pass-thru partners are required to forward notices to indirect partners.

3. A representative of a notice group is required to forward notices to the members of the notice group.

(5) The Service may, at its discretion, send notices directly to non-notice or indirect partners. The mailing of such notice does not convert a non-notice partner to a notice partner, but may convert an indirect partner to a notice partner. IRC 6223(c)(3) and Treas. Reg. 301.6223(c)-1(f).

(1) The options available to a partner when notice requirements are not met depend on whether the partnership proceeding is still ongoing or has concluded.

1. If the proceeding is still ongoing, the partner becomes a party to the proceeding unless the partner either elects to accept a settlement agreement that is consistent with the agreement made with another partner or elects to have partnership items treated as nonpartnership items (IRC 6223(e)(3)).

2. If the proceeding has concluded, the partner’s partnership items are treated as nonpartnership items unless the partner elects to either accept a settlement agreement that is consistent with the agreement made with another partner or accept the terms of the FPAA or court decision (IRC 6223(e)(2)).

(2) Untimely notice letters are sent to the partner to describe the available options. The letters, Letter 3857 and Letter 3858, explain how a partner makes an election. See IRM 8.19.12.9 for detailed procedures on mailing untimely notices.

(1) The TEFRA partnership return (key case file) will be sent to Appeals, and the partner files are generally maintained at the Campus TEFRA Function (CTF) at the campuses.

(1) Generally the partner cases are suspended and controlled in the Campus TEFRA Function (CTF) at certain campuses. The AO evaluates the case at the partnership level. The CTF is responsible for the tax computations and timely assessments at the partner level, except for CIC corporation, Joint Committee, and other corporate specialty partner cases.

(2) The computation and timely assessment of tax for partners who are CIC corporation, Joint Committee, and other corporate specialty partner taxpayers are the responsibilities of the employee with jurisdiction of the partner case when the partnership items are converted to nonpartnership items, the FPAA is defaulted, or the court decision is final. See IRM 8.19.6.2, Partner Case Responsibility.

(1) The Partnership Control System (PCS) is a separate computer system that serves as a vital link between the key case return and the investor returns. It performs a number of tasks:

1. Contains both pass-thru entity and related investor records for both TEFRA and non-TEFRA key cases.

2. Establishes a linking relationship (linkage) between a pass-thru entity record and the related investor records.

3. Distinguishes between TEFRA and non-TEFRA records.

4. Places a freeze condition for each related investor on the investor’s corresponding AIMS record to prevent premature closing of the AIMS record (which would break all pending linkages).

5. Generates settlement letters for partners in TEFRA key cases.

6. Generates notices to partners in TEFRA key cases. .

7. Provides IDRS terminal research capabilities for key case and investor records.

8. Records the partner's one-year statute dates in TEFRA key cases and provides reports to assist in the timely assessment of tax.

(2) IRM 4.29, Partnership Control System (PCS) Handbook gives a detailed description of the Partnership Control System.

(1) The examination of the key case partnership officially begins when the Notice of Beginning of Administrative Proceeding (NBAP) is presented to the TMP. When the case is linked on PCS, the Campus TEFRA Function (CTF) mails NBAPs to all notice partners. A duplicate copy of the NBAP should be mailed to the TMP at that time so that the certified mailing list can be used to show mailing to all relevant partners.

(2) The examiner conducts the audit and prepares a summary report that is given to the TMP for forwarding to the partners. A closing conference will be scheduled no earlier than 30 days after the issuance of the summary report to the TMP unless the right to the conference is waived in writing by the TMP.

(3) Unagreed cases are forwarded to the Exam Technical Services for 60-day letter preparation. The 60-day letter is the equivalent of a 30-day letter in deficiency proceedings. It gives the partners the opportunity to appeal the findings of the examiner. Exam Technical Services forwards the 60-day letter package to the key case CTF for mailing to the TMP and all notice partners.

(4) If no partner protests, Exam Technical Services prepares a notice of Final Partnership Administrative Adjustment (FPAA) and forwards it to the key case CTF for mailing to the TMP and all notice partners. For protested cases, Exam Technical Services batches all of the protests together and forwards the key case file to Appeals for consideration.

(5) A detailed explanation of the examination process is given in IRM 4.31.2, TEFRA Examinations – Field Office Procedures. Exhibit 4.31.2-2 provides a TEFRA Flow-Through Examination Time Chart.

(1) A Campus TEFRA Function (CTF) is currently located at two campuses: Brookhaven and Ogden. The CTF may act as a key case CTF or a partner CTF or both.

(1) In general, partnership items are any items that are more appropriately determined at the partnership level than at the partner level. See IRM 8.19.1.6.9.1.1 for a description of partnership items under Treas. Reg. 301.6231(a)(3)-1.

(2) The determination of whether a partnership engaged in sham transactions or whether the partnership transactions have economic substance is made at the partnership level.

(3) Statute of limitations defenses regarding the determination of partnership items are raised only at the partnership level.

(4) If a partnership return is filed by an entity for a tax year, but it is determined that the entity is not a partnership for that year, the TEFRA partnership rules will apply. This issue is a partnership item that must be raised in a partnership proceeding.

(5) If a partnership return is filed for a tax year, but it is determined that no entity exists, the TEFRA partnership rules will apply. This issue is a partnership item that must be raised in a partnership proceeding.

(6) Some issues combine a determination at the partnership level with a determination at the partner level. These are discussed in IRM 8.19.1.6.9.4, Issues With Both Partnership and Partner Level Elements.

(1) IRC 6231(a)(4) provides that a nonpartnership item is an item that is not (or is not treated as) a partnership item.

(2) A partnership item may be converted to a nonpartnership item under certain circumstances.

(3) When a partner enters into a settlement agreement with the Service, partnership items are converted to nonpartnership items. Deficiency procedures do not apply to these conversions. The tax attributable to the adjustments is assessed by means of a computational adjustment.

(4) Some conversions of partnership items to nonpartnership items, other than by settlement, will require the Service to use deficiency procedures in the resolution of any controversy. See IRM 8.19.1.6.9.2.1.

(5) Once partnership items have been converted to nonpartnership items for a partnership tax year, they cannot regain status as partnership items. For example, if a partner files a petition in bankruptcy, partnership items become nonpartnership items on the date the petition is filed. The nonpartnership items will not revert back to partnership items if the bankruptcy case is dismissed.

(1) An affected item is defined in IRC 6231(a)(5) as any item to the extent such item is affected by a partnership item.

(2) There are two types of affected items:

1. those that may be directly assessed as purely computational adjustments once the partnership level proceeding is complete, and

2. those that require one or more partner level determinations to be made once the partnership level proceeding is complete.

(1) The classification of an item as a partnership item or an affected item can be complicated when elements of both are contained within the issue. There may be an initial determination made at the partnership level, with additional factual development required at the partner level. For example, both partnership and partner level determinations are found in such issues as disguised sales, guaranteed payments, transactions to which IRC 707(a) applies, passive loss limitations, at-risk limitations, income from cancellation of indebtedness, the basis of a partner’s interest in the partnership, and the limitation on partnership losses under IRC 704(d).

(2) The following examples are intended to assist in understanding the interrelationship of partnership items and affected items that require a partner level determination. They are not intended as a complete list of all issues that have both partnership and affected item components.

1. Guaranteed Payments – The amount of the guaranteed payment deductible by the partnership and the allocation of the payment between partners are partnership items. The deductibility of business expenses incurred by the partner in the course of earning the guaranteed payment is an affected item if the business expenses are not deducted by the partnership.

2. Transactions to Which IRC 707(a) Applies – The amount and character of amounts transferred from the partnership to the partner or from a partner to the partnership in a transaction to which IRC 707(a) applies are partnership items. A partner’s gain or loss on the transaction requires a partner level determination. For example, if a partner sells office supplies to the partnership, the amount and character of the sale are partnership items, but the computation of the gain recognized by the partner may require a partner level determination of the basis of the supplies sold to the partnership.

3. Passive Loss Limitations – Partnership level determinations include whether the partnership engaged in rental activity, whether the partnership engaged in a trade or business under IRC 162, and whether a partner in a limited partnership is a general or a limited partner for passive loss purposes. A partner level determination must be made to determine whether the partner materially participated in the trade or business of the partnership.

4. At-Risk Limitations – The nature and extent of partnership liabilities (for example, whether a loan is recourse or non-recourse) is determined at the partnership level. The determination of whether a partner has protection from loss can only be resolved by looking to the existence of third party agreements entered into by the individual partners. The determination of whether the partner is a related party under IRC 465(b)(3) is also determined at the partner level.

5. Income from Cancellation of Indebtedness - Issues at the partnership level include whether partnership property was repossessed, whether partnership debt was recourse or nonrecourse, the fair market value of partnership property at the time of repossession, the amount of partnership debt, the adjusted basis of partnership property, whether the debt is Qualified Real Property Business Indebtedness under IRC 108(c)(3), and whether the debt is qualified acquisition indebtedness. Issues at the partner level include whether the partner is an entity other than a C corporation, whether the partner is bankrupt or insolvent, and whether the partner has made a proper election to reduce basis in depreciable property.

6. Basis of a Partner’s Interest in a Partnership – Issues at the partnership level include the basis of property contributed to the partnership (including money), basis of property that is subject to a IRC 754 election, the total and distributive share of taxable income of the partnership, exempt income, partnership losses, and expenditures not deductible, not capitalized, increases and decreases in a partner’s share of partnership liabilities (for example, the nature and amount of the partnership loans), and the amount of cash distributed and the adjusted basis of property distributed to a partner. Issues at the partner level include the cost to purchase the partnership interest (if no IRC 754 election is made by the partnership for such cost), the basis at the time of acquisition by gift, bequest, transfer, or exchange, and the basis in the partner’s interest in the partnership immediately before a distribution.

7. Limitation of Partnership Losses Under IRC 704(d) – The amount of the partnership loss distributed to the partner is a partnership item. The limitation of the loss, measured by a partner’s basis in the partner’s interest in the partnership, is an affected item because it requires a partner level determination.

(1) Penalty issues have both partnership and partner level elements. For example, the determination of the value of partnership property is made at the partnership level. If there is a substantial misstatement of valuation, a partner may not be subject to the penalty if it is shown that the partner acted in good faith and had reasonable cause for the actions taken.

(2) For partnership tax years ending before August 6, 1997, the assessment of penalties is accomplished in the same manner as other affected items that require a determination at the partner level. Penalties are asserted in a deficiency procedure if they are unagreed.

(3) For partnership tax years ending after August 5, 1997, the applicability of penalties is determined at the partnership level. Penalties will be assessed as a computational adjustment regardless of whether partner level determinations are required for the penalty or underlying deficiency. The partner must pay the penalty and file a claim for refund within six months of the date that the notice of computational adjustment is mailed. See IRC 6230(c)(2)(A). See also IRM 8.19.2.10.3(3) and IRM 8.19.11.10.1.

(1) Partner-level elements of penalties or affected items proposed by Compliance should be included in an Affected Item Report. The AO will evaluate the issues and develop a settlement position based on the facts at the key case level. See IRM 8.19.10.4.7.

(1) IRC 6231(a)(6) defines a computational adjustment as the change in the tax liability of a partner that properly reflects the treatment of a partnership item. A computational adjustment may be directly assessed without resorting to deficiency procedures if no partner-level determinations are required; a computational adjustment is directly assessed in three circumstances.

1. To conform the partner’s return to the treatment of partnership items on the partnership return when the partner does not notify the Service of an inconsistent treatment of the partnership items.

2. To apply the results of a partnership determination, such as a settlement agreement, a defaulted FPAA, or a court decision.

3. To disallow the losses and credits claimed by a partner when the provisions of Treasury Reg. 301.6231(f)-1 are not met. This regulation applies to partnerships that do not file a partnership tax return and, at the close of a tax year, have a TMP residing outside of the United States or maintain books and records outside of the United States. The Service may make a computational adjustment to eliminate the losses and credits if no return is filed within 60 days of the date the Service mails a notice to the partner.

(2) The directly assessed computational adjustment may include a change in tax liability that reflects a change in an affected item where that change is necessary to reflect the treatment of a partnership item and the affected item does not require a partner level determination.

(3) The computational adjustment may be assessed without following deficiency procedures if no partner-level determinations are required. A notice of computational adjustment, which shows the adjustments made to the partner’s tax return and the change to tax liability, is sent to the partner. The form entitled "Notice of Income Tax Examination Changes" was formerly used for this purpose. Currently, Letter 4735 , Notice of Computational Adjustment, is used. If the notice of computational adjustment shows a tax liability that exceeds the amount reported by the partner, additional tax and accrued interest will be assessed. If the notice of computational adjustment shows less tax than reported by the partner, any excess tax and interest previously paid will be credited to the partner’s account.

(4) If a partner does not agree with the computational adjustment, IRC 6230(c)(2)(A) allows the partner to file a claim for refund within six months after the date the notice of computational adjustment is mailed to the partner. The adjustments to partnership items cannot be challenged.

(5) If the Service fails to allow a credit or refund resulting from an overpayment attributable to a computational adjustment, IRC 6230(c)(2)(B) allows a partner to file a claim within 2 years of the date that the settlement was entered into, the FPAA defaulted, or the decision of the court became final.

(1) The Forms 870-LT and 870-LT(AD) have two parts.

(2) Part I resolves partnership items (and the applicability of penalties, additions to tax, and additional amounts for partnership tax years ending after August 5, 1997). The taxpayer accepts the adjustments proposed in Part I by signing the waiver in that section.

(3) Part II resolves all affected item issues for tax years ending after August 5, 1997. The taxpayer accepts the adjustments proposed in Part II by signing the waiver in that section.

(4) Part II – Affected Items are treated as follows:

1. The affected item adjustments must be clearly labeled "Part II, Affected Items."

2. The schedule of adjustments should be modified to describe a specific partner’s individual settlement of affected items.

3. If the applicability of penalties has been determined at the partnership level (for partnership tax years ending after August 5, 1997), but a partner has raised partner level defenses that cause the AO to waive all or a portion of the penalty, Part II of the schedule of adjustments should show the reduction of the penalty that will apply to the partner with a notation that the penalty is reduced because of a partner level determination.

4. If the CTF mails the settlement agreements, they must be uniform. They cannot be modified for different partners within the same partnership.

(5) If a partner agrees to the adjustments to partnership items but does not agree to the affected item adjustments, the partner signs Part I and does not sign Part II. A statutory notice of deficiency is issued for the affected items.

(1) If the Service enters into a settlement agreement with any partner with respect to partnership items, IRC 6224(c)(2) requires the Service to offer the same settlement agreement to any other partner who requests it. The consistent settlement (also called consistent agreement or consistent treatment) requirement does not apply to affected items or to adjustments to non-TEFRA partnerships.

(2) By statute the request must be made no later than the 150th day after the FPAA is mailed to the TMP. The regulations have allowed an additional period for making such requests. This period is 60 days after the date the settlement was entered into by the Commissioner. See Treas. Reg. 301.6224(c)-3.

(3) A partner who receives a late NBAP or FPAA also has 45 days from the date the late notice was sent to request settlement terms consistent with any previous settlement. Treas. Reg. 301.6223(e)-2.

(4) A partner requests consistent settlement by filing a written statement with the IRS office that entered into the settlement. The request must identify the specific settlement to which consistent settlement is requested.

(5) When a consistent settlement is accepted by the Service, the agreement form should be marked "Consistent Settlement" to ensure that it is not treated as a new settlement, starting an additional 60 day period.

(6) Refer to IRM 8.19.10.4.8.1 for additional information regarding consistent settlements .