8.19.6. Partner Cases

(1) IRM 8.19.6 deals with partner cases in Appeals for consideration of non-TEFRA issues. These cases may be considered by one AO before, after, or at the same time that the AO or another AO is considering the TEFRA partnership key case.

(2) Although the partner case may be in Appeals at the same time as the key case, they are controlled as two separate and unrelated cases since the partnership items are considered in the unified proceeding.

(3) IRM 8.19.6 also covers partner cases in Appeals for which Appeals has jurisdiction of the computation and assessment of the TEFRA adjustment.

(1) For CIC corporations, Joint Committee, or other corporate specialty cases, if there is a PICF 4 or 5, APS will card in the open TEFRA linkage from the TSUMYI on ACDS for the purposes of tracking the statute of limitations and assessment.

(2) If the one-year statute date on the TSUMYI is "11111111," this particular linkage is not an open TEFRA linkage. The entry "11111111" under the one-year statute date indicates that a TEFRA linkage was closed, and any computational adjustment and assessment was made for this partnership. Do not card in the key linkages with a one-year statute date of "11111111."

(3) A sample TSUMYI is shown below in Figure 8.19.6-1.

(4) TEFRA linkages are identified on a TSUMYI by the letter T to the right of the partnership statute date. In the sample TSUMYI in Figure 8.19.6-1, the partnership linkages with the name controls of PLUM, STRA, and RASP are TEFRA linkages, while the partnership linkage with the name control of WATE is a non-TEFRA linkage.

(5) In the sample TSUMYI in Figure 8.19.6-1, the TEFRA linkage to PLUM has an eight digit date (12-9-2009), the TEFRA linkage to STRA has a blank date, and the TEFRA linkage to RASP has 11111111. The TEFRA linkages to PLUM and STRA are therefore open TEFRA linkages and must be carded in on ACDS.

(6) When there is an open TEFRA linkage (the TSUMYI is either an eight-digit date or blank), the AO will verify that APS created a case summary card for each linked partnership and carded it into ACDS as a related non-key case as follows:

1. WUNO: WUNO of the partner case

2. TP: Name of the partnership. If necessary, research IDRS for the full name of the partnership (INOLE, NAMEE or NAMES).

3. TIN: Partnership TIN from TSUMYI, key linkage field

4. MFT: MFT of partnership (06) from TSUMYI, MFT field

5. TYPE: REF

6. FEATRCD: N/A

7. AO: Same as the partner case

8. ASNDATE: Actual date assigned

9. REQAPPL: N/A

10. RECDATE: Date case received

11. CREATED: Computer generated

12. SOURCE: Applicable source code of partner case

13. Location: Same as the partner case

14. KEYTP: Name of the partner case

15. KEYTIN: TIN of the partner case

16. KEYPER: Enter the earliest tax period of the partner case.

17. NOTE: "TEFRA LINKAGE"

(7) The AO will verify that APS input the following in the Case Return Information section:

1. A (AIMS): "E" since these cases will not be controlled on AIMS.

2. TAXPER: Enter all tax periods for which there’s an open TEFRA linkage for this partnership. Add a tax period modifier to each tax period. Usually, the modifier will be "N" (no return).

3. STATDATE: If the one-year statute date is blank on the TSUMYI, leave STATDATE blank and input TFINV in CODE (statute code). If the one-year statute date on the TSUMYI is an eight-digit date other than "11111111", input the one-year statute date from the TSUMYI as STATDATE and leave CODE (statute code) blank.

4. CODE (statute code): If the one-year statute date is blank on the TSUMYI, input TFINV. If the one-year statute date is an eight-digit date other than "11111111", leave CODE blank.

5. PropdTax/PropdPen: Leave blank.

6. RevsdTax/RevsdPen: Leave blank.

7. DUPLICAT: Do not enter any duplication.

(8) APS cards in each partnership case that shows an open TEFRA linkage to the partner in Appeals assigned to the AO. For example, if a CIC corporate partner has a PICF of 4 or 5 and the TSUMYI shows four open TEFRA linkages to this partner, APS inputs four different related non-key case summary cards following the instructions above. See Exhibit 8.19.6-5 for a sample related non-key case summary card.

(9) Each case summary card may have more than one year if the CIC corporation, Joint Committee, or other corporate specialty case has an open TEFRA linkage to that partnership in more than one of the years for which Appeals has jurisdiction of the partner. However, only one partnership may be shown on each case summary card.

(10) Appeals Officers will do the following:

1. Verify the AMDIS/AMDISA and if necessary TSUMYI against the case summary cards when a case is received.

2. Submit corrections to the case summary cards to APS. If the TSUMYI shows a one-year statute date of "11111111," verify that the assessment was made.

3. At least every quarter, research all cases assigned that have TEFRA linkages controlled on ACDS and CODE (statute code) = TFINV to determine if a one-year statute date appears on the TSUMYI. The AO should request that APS generate an Ad Hoc report based on CODE (statute code) = TFINV to assist in this determination.

Note: The research can be done more often than every quarter at the discretion of the AO, and is highly recommended when there are several open linkages.

4. If a one-year statute date appears on the TSUMYI, and the one-year statute date is not on ACDS, submit an ACDS related non-key case summary card update to APS. Also, secure a copy of the closing package from the CTF to ensure timely assessment of partnership adjustments.

(1) As noted in IRM 8.19.6.2, Appeals is not responsible for making the computational adjustments and assessments for partners in a TEFRA partnership for these types of cases.

(2) The procedures in IRM 8.19.6.4.1 for carding in any open TEFRA linkage on these cases do not apply. However, the TYPE code on ACDS should be "TEFRAI." This will allow instructions for sending these cases to TEFRA suspense (if applicable) to be generated using the customized Form 5402.

(1) Form 872-F, Consent to Extend the Time to Assess Tax Attributable to Items of a Partnership That Have Converted Under Section 6231(b) of the Internal Revenue Code, will extend the statute of limitations for partnership items that have converted to nonpartnership items under IRC 6231(b). Form 872-F will also extend the statute for affected items on these partnership items. Form 872-F is limited to one partnership, though multiple years may be included. The most common situation where items are converted under IRC 6231(b) is a settlement agreement. A defaulted FPAA or entered court decision does not result in the conversion of partnership items to nonpartnership items. Thus, Form 872-F cannot be used in these situations.

(2) Form 872, Consent to Extend the Time to Assess Tax, will extend the statute for partnership items, affected items, partnership items converted to nonpartnership items under IRC 6231(b) (including such items arising from defaulted FPAAs and entered court decisions during the statute period under IRC 6229(d)). Form 872 is not limited to one partnership and may include multiple years.

(3) Form 872-A, Special Consent to Extend the Time to Assess Tax, is an open-ended version of Form 872.

(4) In Ginsburg v. Commissioner, 127 T. C. 75 (2006), the Tax Court held that a consent that did not reference tax attributable to partnership items was not sufficient to extend the statute for affected items. As a result of Ginsburg, the Form 872 and Form 872-A now contain such language. Either a Form 872 or a Form 872-A should be solicited from the taxpayer when the taxpayer is either a direct or indirect partner in one or more entities that file (or should file) a Form 1065 (including a limited liability company), in the event that there are affected items at issue.

1. If the partnership proceeding is still open as to the taxpayer, and the taxpayer declines to sign a Form 872 or Form 872-A (Form 872-F would not be applicable at this time), an affected item notice of deficiency should not be issued as it would be premature. The IRS employee who is considering the partnership case is responsible for the partnership's IRC 6229(a) statute, which includes any affected items.

2. If the partnership proceeding is closed as to the taxpayer (by defaulted FPAA, settlement agreement, or Court decision), and the taxpayer declines to sign a Form 872 or Form 872-A (or Form 872-F for each settled partnership), an affected item notice of deficiency should be issued for any affected items (assuming that the taxpayer has not previously agreed to them) before the expiration of the applicable one-year statute date that was triggered by the closure of the partnership proceeding.

3. If the partnership proceeding is closed as to the taxpayer (because a proceeding was never opened or was closed as a no-change), and the taxpayer declines to sign a Form 872 or Form 872-A, an affected item notice of deficiency should be issued for any affected items (assuming that the taxpayer has not previously agreed to them) before the expiration of the IRC 6229(a) statute date of the partnership.

(5) Any additional tax resulting from the partnership item adjustments must be assessed by the one-year statute date that was triggered by the closure of the partnership proceeding.

(6) If the taxpayer declines to sign a statute extension, the case activity record should be documented accordingly in addition to taking any appropriate action to protect the statute of limitations.

(7) The following are IRM references for more information on securing and processing consents:

1. IRM 8.21.3 - Appeals Technical Employees Statute Responsibility

2. IRM 8.21.6 - Statute Information on TEFRA Cases

3. IRM 25.6.22.3 - Notification of Taxpayer's Rights

4. IRM 25.6.22.3.1 - Separate Notification of Each Spouse

5. IRM 25.6.22.8 - Restricted Consents

(1) After securing and signing the consent, the AO will update the non-key case statute on ACDS (Normal Update) with the new one-year statute date using the AIVP Statute Validation System (SVS). A validation will be submitted confirming that the statute critical data fields are accurate in ACDS.

1. If Form 872 or Form 872-A were secured, APS will update the statute on AIMS within 5 workdays of the receipt of the update request from the AO.

(2) In addition to updating ACDS, the new one-year statute date must also be updated on PCS. The AO should complete either Form 8339 or Form 8344. A sample Form 8339 is found in Exhibit 8.19.6-11.

1. Instructions for completing and processing Forms 8339 and 8344 may be found on the Appeals TEFRA website. Also see Exhibit 8.19.6–11.

(1) If the TEFRA partnership key case is resolved, the CTF will process (including computing and assessing any tax) the partnership adjustments for the partners who are not CIC corporation, Joint Committee, or other corporate specialty cases. The CTF will send a copy of the computations (Form 5344 andForm 4549–A) to APS. APS will forward these documents to the AO. The AO will associate these documents with the partner file for use in preparing settlement computations.

(2) If Appeals did not receive the Form 5344 and Form 4549–A, and there are indications in the case file that the taxpayer is a party to a TEFRA proceeding, the AO or TCS will request a transcript for that partner prior to preparation of the settlement computation or closing documents for the non-TEFRA adjustments. If necessary, request copies of the TEFRA computations from the taxpayer or the CTF.

(3) If the TEFRA adjustments have been made and assessed before the non-TEFRA adjustments, as noted in paragraphs (1) and (2) above, the TCS will combine the TEFRA examination results with taxable income to produce the corrected taxable income when the non-TEFRA adjustments are computed.

(4) If unagreed, follow normal procedures for preparation and issuance of a statutory notice of deficiency. The notice will show only non-TEFRA adjustments. Include TEFRA issues in taxable income as previously adjusted and tax as previously adjusted.

(5) If the taxpayer has an IRC 6405(a) refund in excess of $2,000,000 and the criteria of IRM 8.7.9.7.1.1 are met, an expedited refund report should be submitted to the Joint Committee. See IRM 8.19.6.14.

(1) If non-TEFRA issues are agreed when there is a TEFRA proceeding open and the case is in non-docketed status, take the following actions:

1. The TCS will calculate the partial computations taking into account the TEFRA partnership items as reported on the return.

2. The AO will secure the normal closing documents (Form 870 or Form 870-AD).

3. The AO will include language on the reverse side of the Form 870 or Form 870-AD to the effect that any change to the deficiency caused by resolution of the TEFRA proceeding can be assessed at the conclusion of the TEFRA proceeding as a computational adjustment. See Exhibit 8.19.6-6 for the approved language.

4. If the taxpayer will not sign the agreement form with this language, issue a statutory notice of deficiency, and, if issued, compute the deficiency using a Munro computation. See IRM 8.19.6.9.3.1 and Exhibit 8.19.6-7.

5. For partnership tax years ending after August 5, 1997, if the non-TEFRA adjustments do not create a deficiency because the return was oversheltered under IRC 6234, issue a Notice of Adjustment. See IRM 8.19.6.9.3.2.

   Note: If the return is oversheltered but the non-TEFRA adjustments create a deficiency, use a Munro computation instead of a Notice of Adjustment.

(2) If the non-TEFRA issues are agreed when there is a TEFRA proceeding open and the case is in docketed status, take the following actions:

1. The TCS will calculate the deficiency taking into account the TEFRA partnership items as reported on the return.

2. The AO will Include in a stipulated decision document language to the effect that any change to tax liability caused by resolution of the TEFRA proceeding can be assessed at the conclusion of the TEFRA proceeding as a computational adjustment. See Exhibit 8.19.6-8 for the approved language.

3. Secure an agreement from the taxpayer to use the Munro stipulation early in the proceeding. If the taxpayer does not agree, area counsel may need to move for an increased deficiency unless a Munro computation was used in the notice of deficiency.

(1) There are two separate procedures that may apply when preparing a statutory notice of deficiency for non-TEFRA issues.

1. For partnership tax years ending before August 6, 1997, all TEFRA items are removed from the computations, resulting in deficiencies attributable only to the non-TEFRA adjustments. (Munro v. Commissioner, 92 T.C. 71 (1989)). See IRM 8.19.6.9.3.1.

2. For partnership tax years ending after August 5, 1997, whether the Munro decision will be followed depends on whether or not the partner return is oversheltered. An oversheltered return for the purposes of IRC 6234 is a return that shows no taxable income and shows a net loss from partnership items. See IRM 8.19.6.9.3.2.

3. Tax computation specialists should seek assistance from the AO if help is needed in determining whether the return is oversheltered or not.

4. See Exhibit 8.19.6-9 for a flowchart that may be used in determining whether to issue a statutory notice using a Munro computation or to issue a Notice of Adjustment.

(2) A statutory notice of deficiency may be issued for affected items (including penalties for partnership tax years ending before August 6, 1997) that are considered by Appeals after the TEFRA proceedings are completed.

(3) With the exception of Munro computations, the statutory notice of deficiency for non-TEFRA issues will be prepared following the guidelines shown in IRM 8.17.4, Notices of Deficiency.

(4) If the partner case is unagreed for both the TEFRA and non-TEFRA issues, both a statutory notice of deficiency and an FPAA will be issued.

(5) If the taxpayer is a partner in several TEFRA partnerships, a separate FPAA will generally be issued for each partnership.

(1) If the TEFRA and non-TEFRA adjustments are computed at the same time, there are usually two settlement computations in the file, one for the non-TEFRA adjustments and the other for the TEFRA adjustments. However, a combined settlement computation can also be prepared. If there is a combined settlement computation, generally the deficiency attributable to the TEFRA issues for each tax year and for each TEFRA partnership should be separately identified.

(2) If the TEFRA and non-TEFRA adjustments are combined on the same settlement computation, the TCS should generally include a statement in the remarks section of the settlement computation that identifies the deficiency attributable to the TEFRA issues for each tax year and for each TEFRA partnership, similar to the following example:

(3) If TEFRA adjustments had been previously assessed by Compliance, the TCS should work from the TEFRA adjustments report when preparing the non-TEFRA report.

(4) In the rare instance where the TEFRA partner case requires a report to the Joint Committee on Taxation and the partner is an individual, interest suspension on the TEFRA adjustments may apply. The TCS will determine if the partner case is subject to interest suspension under IRC 6404(g). The TCS will include a statement on the Form 3610, Form 5278, or Form 4549/4549-A when IRC 6404(g) applies. See IRM 8.17.6.9.7 for procedures. See IRM 8.19.6.11.

(5) The TCS may be asked to assist in the preparation of theIRC 6601(c) comment the AO is required to make on the Form 5402 by notating the information on the first page of the settlement computation for each TEFRA linkage to be assessed, the amount of the deficiency for each TEFRA linkage, the name of the TEFRA key case, and the date that the settlement agreement (if applicable) was signed on behalf of the IRS. See IRM 8.19.6.11.

(1) Partner cases which are tried for non-TEFRA issues will be processed as Rule 155 cases, as explained in IRM 8.17.2. The Rule 155 procedures in IRM 8.17.2 are generally followed for computations prepared for the non-TEFRA issues.

(2) If the TEFRA case has been resolved by agreement or default, the TCS will take the TEFRA adjustments into account when preparing the Rule 155 computation.

(3) If the TEFRA issues are unresolved, the deficiency will be computed taking into account the TEFRA amounts as reported on the return.

(4) A stipulated decision document must include language that any change to the deficiency liability caused by resolution of the TEFRA proceeding can be assessed at the conclusion of the TEFRA proceeding as a computational adjustment. See Exhibit 8.19.6-8 for the approved language.

(1) When the non-TEFRA examination of a TEFRA partner is complete, the case cannot close if there is an open TEFRA linkage. In some cases, primarily CIC cases, the partner may request that their case be closed early before the TEFRA key case examination or appeal is complete. This is known as an accelerated closure.

(2) To resolve the partner’s share of the TEFRA examination or appeal before the TEFRA key case partnership proceeding is complete, the AO must coordinate with the key case agent or AO. Failing to consult with the key case agent or AO could jeopardize the examination or appeal.

(3) The key case agent or AO will provide the terms for settlement. To avoid the risk of consistent settlement problems, it is recommended that the partner wanting an accelerated settlement understand they must concede 100% of all potential adjustments.

(4) The key case agent or AO must provide the AO working the partner case with the key case adjustments used in the settlement agreement. IRC 6224(c)(2) requires that all partners may request the same settlement; therefore, a settlement to one partner may result in a settlement of all partners. Avoiding the risk of consistent settlement problems is why it is critical that the key case agent or AO be involved with any settlement issued to a partner before completion of the key case examination.

(5) A settlement agreement Form 870–PT(AD), Form 870–LT(AD), or Form 906 must be secured from the partner. The agreement is a final determination on the tax effect of the partnership and affected items. The partner may not later file an Administrative Adjustment Request (AAR) nor may they request to go to court on the settled issues.

(6) A copy of the executed settlement agreement must be sent to the appropriate Campus TEFRA Function (CTF) controlling the key case linkage. Refer to Exhibit 8.19.11-8 for a sample Form 3210 that lists the documents needed in the closing package transmitting the agreement form.

(7) For partner cases which are CIC corporation, Joint Committee, or other corporate specialty cases, Appeals prepares computations and makes assessments if the partner is in Appeals jurisdiction. If the case is in Compliance jurisdiction, the Compliance function makes the computations and assessments on the partner cases to reflect TEFRA key case adjustments.

(1) Final determinations of tax liability pursuant to IRC 7121 are ordinarily reflected on Form 866, Agreement As To Final Determination of Tax Liability.

(2) If the taxpayer is a partner in a TEFRA pass-thru entity, the Form 866 should include the following statement in the Determination section:

"This agreement does not cover a deficiency or overassessment resulting from adjustments made under Subchapters C and D of Chapter 63 in Subtitle F of the Internal Revenue Code concerning the tax treatment of partnership items determined at the partnership level."

(1) Final determinations of specific matters pursuant to IRC 7121 are ordinarily reflected onForm 906, Closing Agreement on Final Determination Covering Specific Matters.

(2) If the taxpayer is a partner in a TEFRA pass-thru entity, Form 906 should include the following statement in the Determination section:

"This agreement does not cover adjustments made under Subchapters C and D of Chapter 63 in Subtitle F of the Internal Revenue Code concerning the tax treatment of partnership Items at the partnership level."

(1) The Restructuring and Reform Act of 1998 (RRA 98) gave taxpayers the right to a due process hearing with Appeals when they receive a Notice of Federal Tax Lien Filing or a Notice of Intent to Levy. A taxpayer may raise any relevant issue related to the unpaid tax or proposed levy including spousal defenses, such as relief under IRC 6015.

(2) Upon receipt of the computational adjustments, a spouse or former spouse of a partner in a TEFRA partnership may request innocent spouse relief by filing Form 8857, Request for Innocent Spouse Relief. If the claim is denied it will be forwarded to an AO for consideration of the innocent spouse issue.

(3) The AO may find that the unpaid liabilities relate to adjustments of TEFRA partnership items, including penalties, additions to tax, and affected items.

(4) If the taxpayer entered into a specific matters closing agreement, innocent spouse relief is available unless the closing agreement addressed the innocent spouse issue. If the taxpayer entered into an agreement for final determination of tax liability, innocent spouse relief may or may not be available depending on whether the agreement was signed pursuant to IRC 6224(c). See Treas. Reg. 1.6015-1(c)(2).

(1) Innocent spouse relief cannot be granted prior to the assessment of the tax relating to TEFRA partnership adjustments.

(2) Taxpayers requesting innocent spouse relief prior to the assessment of the deficiency should be directed to contact the IRS employee with jurisdiction of the pass-thru entity return to resolve the issues raised in the TEFRA examination. Form 8857, Request for Innocent Spouse Relief, should be filed after the assessment is made.

(3) The existence of an open TEFRA linkage should not prevent resolution of the innocent spouse relief issue regarding non-TEFRA issues and TEFRA issues that have been assessed. If a taxpayer wants to obtain innocent spouse relief from potential liability due to the open TEFRA linkage, the taxpayer may file another Form 8857 to request innocent spouse relief from the TEFRA liability after the assessment for the open TEFRA linkage is made.

(1) Prepare a report to the Joint Committee when any one of the following sources result in a refund to a taxpayer in excess of $2,000,000:

1. Audit of a TEFRA partnership return in which the taxpayer is an partner.

2. Audit of the partner's return.

3. AAR filed by a TMP on behalf of a partnership in which the taxpayer is a partner.

4. AAR filed by any partner.

5. Refund claim based on non-TEFRA items.

(1) The Appeals or Compliance employee with jurisdiction of the partner case is responsible for ensuring that a report is made to the Joint Committee on Taxation when the TEFRA adjustments result in a refund in excess of $2,000,000 to the taxpayer. See Exhibit 8.19.6-3 and see Exhibit 8.19.6-4 for sample Joint Committee on Taxation letters when the refund results from TEFRA partnership adjustments.

(2) The AO who considered the appeal of the partnership, if applicable, should cooperate as much as possible with the employee preparing the Joint Committee on Taxation report for the partner, if so requested.

(3) When the partner case is in Appeals jurisdiction, the AO should determine the need for a Joint Committee referral on TEFRA issues when the tax computations are made at the partner level. The AO will not suspend a report to the Joint Committee for a refund from TEFRA issues waiting on the outcome of the non-TEFRA issues.

(4) Do not add the refund from TEFRA adjustments to the refund from non-TEFRA adjustments to determine if a Joint Committee referral is needed. These are separate refunds and, if a referral to the Joint Committee is necessary, report the TEFRA refund to the Joint Committee separately from the report of the non-TEFRA refund.

(1) On all potential Joint Committee cases the AO should secure an AMDISA and TSUMY to determine whether the taxpayer is a party to a TEFRA proceeding before making a report to the Joint Committee on Taxation on the non-TEFRA issues. If the taxpayer is a party to a TEFRA proceeding, the Joint Committee on Taxation report must be modified as discussed in IRM 8.19.6.14.3.1. See Exhibit 8.19.6-1 and Exhibit 8.19.6-2.

(2) Appeals Officers will not suspend Joint Committee referrals on partner cases under Appeals jurisdiction for non-TEFRA issues to wait for the results of a TEFRA proceeding.

(1) After tax from the adjustment of TEFRA partnership items is assessed, Appeals may receive the partner case for consideration from any of the following sources:

1. Protest of 30-day letter adjusting affected items or penalties.

2. Counsel referral of a Tax Court petition of a statutory notice of deficiency for affected items or penalties.

3. Protest of the denial of an offer in compromise based on doubt as to liability.

4. Protest of the denial of a claim for refund.

(1) The partner file generally includes these items:

1. Partner’s return

2. Schedule K-1

3. Form 886-Z for the partner from the key case

4. Partner campus workpapers and Form 4318

5. Penalty information

(2) The file should also include documents that authorize the assessment of tax based on the adjustment of partnership items:

1. Decision document

2. Settlement agreement

3. FPAA

(3) The file should also include TEFRA letters sent to the partner such as the following:

1. Cover letter for computational adjustment

2. Partner’s tax computation for the TEFRA items adjusted (RAR)

3. Statutory notice of deficiency for affected items or penalties, if applicable

4. Correspondence to or from the partner after the computational report

(1) Examine the partner case file carefully for documents. The partner case file may contain all the documents to complete Appeals consideration.

(2) Request the key case administrative file if needed. Do not assume it was destroyed or misplaced just because you did not receive it.

(3) Contact the key case CTF for the certified mailing records for its key cases. See IRM 4.29.5.2.2 for NBAPs and IRM 4.29.5.2.4 for FPAAs.

(4) The key case CTF maintains certain records for its key cases for a period after the final closing. Contact the key case CTF for records located in the CTF. Local procedures may vary.

(5) Additional actions to consider are these:

1. Secure a transcript for statute information.

2. Secure a TSINQI for the partner.

3. Contact the key case AO, key case attorney or key case revenue agent.

4. Contact the TMP and/or the partnership’s representative.

5. Research the tax services for previous litigation by other partners in this key case.

6. Use the internet to find TMP’s and/or partnership’s representatives.

7. Use the IRS global email address book to find IRS employees associated with the key case.

(6) Contact an Appeals TEFRA resource person for additional guidance. The contacts are found on the Appeals TEFRA website.

(1) The filing of a petition in bankruptcy is one of the special enforcement areas that convert the partner’s partnership items to nonpartnership items (Treas. Reg. 301.6231(c)-7(a)).

(2) Treas. Reg. 301.6231(c)-7(a) can be reduced to a simple three-part test. The items convert if:

1. the partnership taxable year has ended;

2. the partner's taxable year in which the partnership items are reported has ended; and

3. the bankruptcy proceeding is still open at the time the partner's year ends so that a claim (secured, administrative, priority, or general unsecured) could be filed against the partner.

(3) It may be difficult to determine whether a claim could be filed against the partner in a bankruptcy case where the debtor is an individual.

1. In Katz v. Commissioner, 335 F.3d 1121 (10th Cir. 2003), a case involving an individual Chapter 7 debtor, the Court held that the debtors partnership items arising in 1990, the year that the bankruptcy petition was filed, did not convert on the petition date because the debtor did not elect to split the 1990 tax year into two short taxable years pursuant toIRC 1398(d)(2). Thus, the debtor's 1990 taxes were treated as post-petition debt of the debtor that could not be claimed in the bankruptcy case. It followed that the latest taxable year of the debtor-partner with respect to which the United States could file a claim for income tax due in the bankruptcy proceeding was 1989, not 1990. The debtor's bankruptcy failed to convert the 1990 partnership items even though the partnership items may effect the bankruptcy estate's liability by virtue of the debtor's partnership interest having passed to the estate.

2. If you have a Chapter 7 or Chapter 11 bankruptcy case and a tax year that ends after the bankruptcy petition date, please consult Area Counsel to determine whether a claim could be filed against the partner.

(4) The filing of a petition in bankruptcy also starts the minimum one-year assessment period under IRC 6229(f). Within one year of the filing of the bankruptcy petition, the tax must be assessed after the partner signs a waiver of assessment (Form 870 or Form 870-AD) under the deficiency procedures or the IRS must issue a statutory notice of deficiency within the partner's IRC 6501 period if longer. The one-year assessment date may be extended with Form 872-F, Form 872, or Form 872-A.

(5) If a joint return is filed, and one spouse owns a separate interest in the partnership, and that spouse files for bankruptcy, the partnership items convert to nonpartnership items for that spouse. The spouse who was a partner only by virtue of filing a joint return is no longer considered a partner in the partnership. See Treas. Reg. 301.6231(a)(2)-1.

(6) If a joint return is filed, and one spouse owns a separate interest in the partnership, and the other spouse files for bankruptcy, the partnership items for the spouse who owns the interest do not convert to nonpartnership items. However, the spouse that does not have an interest is no longer treated as a partner. See Treas. Reg. 301.6231(a)(2)-1.

(7) If a husband and wife own a joint interest in a partnership, each spouse is treated as a separate partner. Therefore, if one spouse files for bankruptcy, only the partnership items of the spouse filing for bankruptcy convert to nonpartnership items. The spouse who did not file for bankruptcy continues as a partner in the partnership proceeding. Deficiency procedures would apply to the spouse filing for bankruptcy. See Treas. Reg. 301.6231(a)(2)-1.

(8) The bankruptcy of a consolidated group member converts that member's separately held partnership items to nonpartnership items for all group members. The other members of the consolidated group will no longer be considered partners under IRC 6231(a)(2)(B) with respect to the bankrupt corporation's separately held items.

(9) IRC 6229(h) provides for a suspension of the running of the period of limitations with respect to the bankrupt partner while the bankruptcy proceeding prohibits assessment plus 60 more days. There is no longer a prohibition against assessment, making this provision inapplicable. It is strongly recommended that a statutory notice of deficiency be issued. (See 11 U.S.C. 362(b)(9).)

(10) Treasury Reg. 301.6229(b)-2 provides that a statute extension signed by a bankrupt partner who would be the TMP except for the bankruptcy is binding on all partners in the partnership unless the IRS was notified of the bankruptcy proceeding in accordance with Treas. Reg. 301.6223(c)-1. (For partnership taxable years beginning prior to October 4, 2001, see Temporary Treas. Reg. 301.6229(b)-2T.)

(11) Any agreement to extend the statute of limitations signed by a tax matters partner before the date of his personal bankruptcy remains valid.

(12) The TMP’s bankruptcy will not toll the statute of limitations. See Tempest Associates v. Commissioner, 94 T. C. 794 (1990).

(1) When a partner files for bankruptcy, the bankrupt partner’s partnership items are converted to nonpartnership items if the partnership items were not previously converted. The conversion to nonpartnership items is permanent. There is no reinstatement even if the bankruptcy is dismissed or discharged.

(2) The one-year assessment date per IRC 6229(f) begins on the day the petition naming the partner in a bankruptcy proceeding is filed. See Treas. Reg. 301.6231(c)-7(a). The one-year assessment date may be extended with Form 872-F, Form 872 or Form 872-A.

(3) If a partner’s one-year assessment date started before the bankruptcy petition, the one-year assessment date continues the same as if the bankruptcy petition had not been filed. The one-year assessment date could start before the bankruptcy petition due to the conversion of partnership items to nonpartnership items, by settlement or other conversion events. Issuing a statutory notice of deficiency on partnership items made final by a defaulted FPAA or a final court decision will not suspend the period of limitations.

(4) Under IRC 6871(b) the period for assessment under IRC 6229(f) is not suspended by IRC 6503(a)(1) if a statutory notice is issued for tax which may be assessed immediately. The deficiency from the previously converted or finalized partnership items can now be assessed immediately under IRC 6871(b) and 11 U.S.C. 362(b)(9)(D)without having to ask the bankruptcy court to lift the stay of 11 U.S.C. 362(a)(6) of the Bankruptcy Code. The deficiency must be assessed within one year of the settlement or the finalizing of the partnership items by default of the FPAA or entry of the final court decision, whichever is appropriate.

(1) If a partner files for bankruptcy, the CTF will send a notice to the key case Appeals Office alerting them of that occurrence. The Appeals Office with the key case is not responsible for the partner case.

(2) If Appeals becomes aware of a partner bankruptcy for which no notice was received from the CTF, Appeals will notify the CTF of the occurrence.

(3) The AO assigned the key case must determine if the bankrupt partner is the TMP. If the bankrupt partner is the TMP and the partnership does not select a new TMP, Appeals may have to seek the designation of a new TMP. If the case is docketed, consult with associate area counsel about asking the court to appoint a new TMP. Note on the Form 886-Z that the partner was removed from the partnership proceeding by the bankruptcy.

(4) The CTF will notify Compliance that the partner filed for bankruptcy and will forward the partner case to the appropriate Compliance office to work the converted bankrupt partner case. Appeals should provide the key case adjustment information to the Compliance employee charged with the partner case.

(1) A partner may file for bankruptcy while the CTF has the TEFRA issues on the partner case and Appeals has the non-TEFRA issues on the partner case.

(2) Cooperate with the employee who has the TEFRA issues on the partner case to provide information for the adjustment to the partner case.

(3) The Compliance function may issue a statutory notice of deficiency on the partner including the pass-thru entity adjustments.

(4) Additional statutory notices of deficiency may be issued even though the partner in Appeals jurisdiction already has been issued a statutory notice. See IRC 6230(a)(2). Under IRC 6230(a)(2)(A) and (B) Compliance may issue a statutory notice of deficiency combining partnership items in multiple partnerships in one notice of deficiency (IRC 6230(a)(2)(A)(ii) and IRC 6231(e)(1)(B)).

(5) If a statutory notice of deficiency is issued, this will terminate a Form 872-A. If you become aware that a partner in your inventory, whose statute is extended with a Form 872-A, filed for bankruptcy, and the compliance function will issue a statutory notice of deficiency, secure an extension of the statute with a Form 872 to protect the statute in your jurisdiction.

(6) See IRM 8.7.6 for additional requirements for a bankruptcy case.

(1) There is no one sure method to determine if a partner is named in a bankruptcy petition. Sometimes the taxpayer, representative or TMP may make remarks that raise questions about a partner filing for bankruptcy.

(2) IRM 8.7.6, Appeals Bankruptcy Cases, contains detailed information about bankruptcy cases. Some specific sections that may be helpful in identifying and verifying bankruptcy cases are:

1. IRM 8.7.6.2.1 - Verification of Bankruptcy Filing

2. IRM 8.7.6.5.1 - Notification Procedures

3. IRM 8.7.6.9.1 - Identifying Bankruptcy Cases.

(1) The AO will verify the TYPE TEFRAP for TEFRA penalty only cases and for affected item only cases.

1. The partner case may be either docketed or non-docketed.

2. Since the partner will have resolved the partnership issues, the statute for a non-docketed partner case is the one-year statute date or as extended. Form 872-F, Form 872, or Form 872-A can be used to extend the one-year statute date depending on the type of event that started the one-year statute date.

3. The statute for a docketed case is the same as any other deficiency determined under IRC 6503, IRC 7481, and IRC 7483. The issuance of an affected item notice of deficiency during the one year period will suspend the period for assessment under IRC 6503 in the same manner as a normal notice of deficiency.

(2) For partnership tax years ending after August 5, 1997, penalties are assessed when the tax from the partnership items is assessed. Any partner who objects to the penalty must pay the tax and file a claim for refund. The partner cases will be claims cases.

(1) Sometimes an affected item case reaches Appeals in non-docketed status. The statute for the non-docketed affected item case is one year from the date one of the following events occurred:

1. The partnership items were converted to nonpartnership items for that partner.

2. The FPAA defaulted.

3. The decision of the court became final.

(2) The one-year statute date by which the period of limitations is suspended by a defaulted FPAA or a final court decision can be extended. See IRC 6229(d). A Form 872 or a Form 872-A can be used in this instance to extend the IRC 6229(a) statute.

(3) A one-year statute date created by a conversion of partnership items to nonpartnership items as described in IRC 6229(f) can be extended. Use Form 872-F, Form 872 or Form 872-A.

(1) A partnership proceeding is not necessarily required prior to an affected item proceeding. See Roberts v. Commissioner, 94 T. C. 853 (1990).

(2) In such an affected item proceeding, no partnership level item may be challenged. Only affected items and issues that require partner level determinations may be considered.

(3) If there is no prior partnership proceeding, the statute of limitations for an affected item proceeding is determined underIRC 6229(a) or IRC 6501. The issuance of an affected item notice of deficiency suspends these periods underIRC 6503.

(1) In an affected item case after a partnership proceeding, neither the taxpayer nor the government may challenge a partnership level item. Only issues that require partner level determinations may be challenged.

(2) Consider the partnership level evaluation along with evidence and facts provided by the individual to arrive at a settlement position on the individual partner's case. If the partner does not present additional evidence and facts, follow the partnership level evaluation.

(3) If the partner's case is docketed, the decision documents should specify that the penalties or affected items are attributable to a specific TEFRA partnership. See IRM 35.8.6.1.5.

(4) Appeals may not settle partnership items as part of an affected item proceeding. Doing so may reopen partnership items for all other partners under the consistent agreement rule of IRC 6224(c)(2).

(1) A docketed affected item case may result in an overpayment. A statement of account is generally needed.

(2) For partnership tax years ending after August 5, 1997, IRC 6230(c)(1)(C) and IRC 6230(d) provide for the refund of penalties, additions to tax or additional amounts that related to an adjustment to a partnership item. Refunds for affected items requiring deficiency procedures are provided under IRC 6512(b). IRC 6230(c)(1) and IRC 6230(d) provide for refunds of affected items which do not require deficiency procedures (computational affected items).

(3) For pass-thru entity tax years ending before August 6, 1997, IRC 6512(b) provides for refund of penalties and affected items that require deficiency procedures. Alternatively, the partner may allow the notice of deficiency to default, pay the tax and sue for refund in a district court or the U.S. Court of Federal Claims.