TEFRA partnership procedures for pre-2018 years

Which regime applies to a pre-2018 year

The BBA repealed TEFRA for partnership years beginning on or after January 1, 2018, but IRM 4.31.2.1.1 is clear that “This IRM is still in effect for all TEFRA partnerships and remains in effect for partnership years beginning before January 1, 2018.” The IRM also warns that its code references “are reflective of the TEFRA law, and not the BBA law passed in 2015 that used the same code sections (6221 through 6248).” A citation to IRC 6226 means something different for a 2016 year than for a 2019 year.

For years beginning before 2018 there are three possibilities:

The small partnership exception is narrow: “The small partnership exception applies to partnerships consisting of 10 or fewer partners, each of whom is an individual (other than a nonresident alien), a C corporation, or an estate of a deceased partner.” A husband and wife count as one partner. Any partnership, LLC filing as a partnership or disregarded, trust (including a grantor trust), nominee, nonresident alien or S corporation partner at any time in the year makes the partnership TEFRA (IRM 4.31.2.2.2 and 4.31.2.2.6). The count is at any point in time, so turnover can produce more than 10 Schedules K-1 without losing the exception.

A small partnership could elect TEFRA, for years beginning on or after January 1, 2004 using Form 8893, and the election binds later years unless revoked with consent on Form 8894 (IRM 4.31.2.2.3). Checking the TEFRA question on Schedule B or naming a TMP is not an election: “Checking a box is not sufficient for the return to be treated as TEFRA.” Examiners document the determination on Form 15260 because, as the IRM puts it, “If the IRS applies the wrong procedures, e.g., erroneously proceeds at the partnership level rather than at the partner level, or vice versa, barred deficiencies and/or refunds can result.” When status is unclear, the IRS protects both the TEFRA and non-TEFRA statutes (IRM 4.31.2.2.8).

The tax matters partner and notice partners

The TMP is the partner designated to represent the partnership in TEFRA proceedings before the IRS and the courts. Examiners complete Form 13828 to confirm the TMP qualifies before securing consents or powers of attorney, and Form 13827 to designate a new TMP if needed (IRM 4.31.2.3.6). Unlike a BBA partnership representative, the TMP must be a partner, and the other partners keep rights of their own.

Every direct partner is a notice partner unless the partnership has more than 100 partners. Then only partners with 1 percent or more, and groups of smaller partners that together hold 5 percent, are notice partners; the rest are non-notice partners (IRM 4.31.2.1.6). Notice partners receive the NBAP and FPAA and can settle, participate and petition on their own.

Starting the exam: the NBAP and the 45-day rule

The IRS will not start a TEFRA key case exam unless at least one year remains on the IRC 6229(a) statute (IRM 4.31.2.3.1). The exam begins with the notice of the beginning of an administrative proceeding (NBAP), Letter 1787-F, mailed by certified mail to “The Tax Matters Partner” in care of the partnership at the Form 1065 address and the current address if different; the TMP is not named, which protects the IRS if the designated TMP later proves unqualified (IRM 4.31.2.3.7). A separate NBAP goes out for each year, and the 120-day statutory notice period begins with the NBAP to the last identified notice partner.

The IRS can withdraw the TMP's NBAP within 45 days, in which case neither the IRS nor the TMP must notify the other partners. The examiner holds the linkage package until the 45 days pass, because once partners are notified the NBAP cannot be withdrawn (IRM 4.31.2.3.7.4). The IRS links partner returns on the Pass-Through Control System so the campus can control partner statutes and generate notices.

Partnership items and affected items

TEFRA determines partnership items in the partnership proceeding. Affected items are items that require adjustment because of a partnership item adjustment, either computational (assessed directly) or factual (requiring a partner-level determination such as basis, at-risk or passive activity status, IRM 4.31.2.3.15). For years ending after August 5, 1997, penalties are determined at the partnership level, and the IRM notes: “Penalties determined at the partnership level must be directly assessed and are not subject to deficiency procedures, even when the underlying deficiency upon which they are based is subject to deficiency procedures.”

That split still drives results: partner-level factual affected items need a notice of deficiency to each partner, while computational adjustments and partnership-level penalties are assessed directly within the one-year period after the partnership proceeding ends.

Settlements and consistent settlement

At or after the closing conference, each notice partner can settle by signing Form 870-PT (partnership items and partnership-level penalties) or Form 870-LT (adding a Part II for affected items and assessment without deficiency procedures). Each notice partner signs individually. A TMP binds non-notice partners only if specific language is added to its Form 870-PT, and cannot bind them on affected items. A pass-through partner's settlement binds its indirect partners except those identified to the IRS at least 30 days before the agreement (IRM 4.31.2.3.11).

Partners have a statutory right to consistent settlement under IRC 6224(c)(2) (TEFRA). The request must be made in writing by the later of 150 days after the FPAA is mailed to the TMP, 60 days after the settlement is accepted by the Commissioner, or 45 days after an untimely FPAA is mailed to the partner (IRM 4.31.2.3.11.1). All TEFRA agreements are countersigned by a Technical Services pass-through coordinator or other authorized employee.

The FPAA and judicial review

The notice of final partnership administrative adjustment (FPAA) is TEFRA's statutory notice, issued by the Technical Services pass-through coordinator or campus, not field agents. FPAAs to notice partners must be mailed within 60 days after the FPAA to the TMP. The petition rules differ from BBA:

• “The TMP has the exclusive right to file a petition with the Tax Court, the U. S. District Court for the district where the partnership's principal place of business is located, or the U.S. Court of Federal Claims within 90 days from the date the IRS mailed the FPAA to the TMP.”
• “If the TMP does not file a petition, any notice partner or 5-percent group may file a petition with any of the courts within 60 days after the expiration of the 90 day period.”
• If several partners file in the 60-day period, the first Tax Court petition controls and the others are dismissed; if none is in Tax Court, the first in another court goes forward (IRM 8.19.12.11.1).

General petition practice is on Tax Court petitions.

In docketed TEFRA cases the TMP can elect to intervene in a petition filed by another partner, and Appeals generally does not accept settlement agreements within 75 days of a calendared trial date, so that consistent settlement requests do not arise after trial begins (IRM 8.19.13).

The IRC 6229 statute

IRC 6229(a) (TEFRA) sets a minimum period for assessing tax attributable to partnership and affected items for all partners: three years after the later of the date the partnership return was filed or its original due date. IRC 6501 does not shorten it but can extend the time for an individual partner. The TMP or an authorized person can extend it for all partners on Form 872-P or Form 872-O, and a partner can extend it for itself (IRM 4.31.2.5.1 and 4.31.2.5.2). See Form 872 statute extensions.

An FPAA suspends the period for 150 days (the 90-day TMP period plus the 60-day partner period), plus one year; if a petition is filed, the suspension runs until the decision is final, and the IRS then has one year to assess (IRM 4.31.2.5.6). The IRM's one-year date rule: “Adjustments to the partner returns must be made within one year of a final partnership determination that finalizes the key case adjustments.” For settlements, the one-year period under IRC 6229(f) runs from the IRS's execution of the agreement (IRM 8.19.13). Statute basics are on the assessment statute of limitations.

Electing into BBA for 2016 and 2017

A partnership with a year beginning after November 2, 2015 and before January 1, 2018 could elect into BBA within 30 days of the IRS's first written notice of selection, on Form 7036 or an equivalent statement signed by the TMP or a person authorized to sign the return, with representations about solvency and ability to pay. No extension of that 30-day period is allowed. After January 1, 2018, the election can also be made by filing a BBA AAR for an eligible year, unless a TEFRA AAR or non-TEFRA amended return was already filed (IRM 4.31.9.13 and 4.31.9.13.3). Once made, the election can be revoked only with IRS consent. See the BBA regime overview.

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