Internal Revenue Manual - 4.31.5 NonTEFRA Examinations

Part 4. Examining Process
Chapter 31. Pass-Through Entity Handbook
Section 5. NonTEFRA Examinations - Field Office Procedures

4.31.5.1 (05-31-2004)
Introduction

The purpose of this chapter is to define nonTEFRA pass-through entities and to outline and explain how to use the Service's available resources to process these types of cases. Technical issues will not be found in this part of the IRM. Audit techniques for partnerships, both TEFRA and nonTEFRA, and S corporations are found in IRM 4.35.

4.31.5.2 (02-22-2008)
NonTEFRA Flow-Through Entity Defined

A NonTEFRA flow-through entity is any flow-through that does not fall under the provisions for TEFRA partnerships. (LLCs that file as partnerships, or should file as partnerships, may be subject to TEFRA procedures as well.) They are usually the types of entities described in (a) and (b) below. The Form 13813, Partnership Procedures Cheek Sheet, must be completed to ensure a proper determination is made. The completion of the Partnership Procedures Check Sheet is mandatory for every partnership examined. The completed check sheet will be included in the audit file to document that the partnership is or is not subject to the TEFRA procedures. SB/SE examiners will file this check sheet and other TEFRA work papers under a separate line item in Section 600 on the Form 4318. Industry Case examiners will file the TEFRA check sheets and work papers under SAIN number 703 on Form 4764. The examiner’s manager is to review the Partnership Procedures Check Sheet and work papers to ensure that TEFRA procedures were properly considered. The manager’s signature on the Partnership Procedures Check Sheet indicates that the TEFRA procedures were reviewed and correctly considered.
1. A partnership or an LLC (limited liability company) *, which meets the small partnership exception to TEFRA partnership rules and has not elected to be included under TEFRA rules as provided in IRC 6231(a)(1)(B);
  *An LLC, which has more than one member and has not elected to be classified as a corporation under Treas. Reg. section 301.7701-3 (effective January 1, 1997) will have filed Form 1065.
  
  Note:
  
  An LLC that has only one member and has not elected to be classified as a corporation will be treated as a disregarded entity for income tax purposes.
2. An S corporation whose tax period begins after December 31, 1996 (the Small Business Job Protection Act of 1996 made S corporations and their shareholders subject to nonTEFRA procedures. It should also be noted that S corporations cannot make an election to be subject to TEFRA after this date.);
3. It can also be a fiduciary or trust; a business entity which is not a trust or corporation that may be treated as a partnership or corporation (if as a corporation, an S corporation election may be made); a joint venture; or similar type entity such as a Real Estate Mortgage Investment Conduit (REMICS).
A nonTEFRA flow-through entity:
1. In general, has no tax liability for itself, but passes the tax consequences to its partners, shareholders, beneficiaries, or investors. S corporations occasionally pay tax at the entity level.
2. Might not file a tax return and may not even be required to file a return (i.e., a Schedule C or F syndication or promotion reported directly on each investor's Form 1040 Form ).
3. There is no unified proceeding as in TEFRA. There is also no NBAP, Summary Report or FPAA. However, there are similar letters that are used to keep taxpayers informed and similar procedures for linking cases on PCS.

4.31.5.3 (05-31-2005)
Terminology

The following is a list of key terms and a brief explanation of each:
1. CC - Command Code
2. CCP - Centralized Case Processing. This function, located at a campus, processes assessments and abatements and closes or transfers cases to files.
3. CTF - The Campus TEFRA Function (CTF; formerly ESU) is the suspense, technical and report writing units for investor returns located in the Brookhaven and Ogden campuses. The two CTF's will be maintained to obtain and control, through the AIMS and the Partnership Control System (PCS), any partner or shareholder returns related to key cases within their jurisdiction. For details see IRM 4.31.6 NonTEFRA Examinations-CTF (formerly ESU) Procedures.
4. CWSD - Centralized Workload Selection & Delivery (formerly PSP)
5. Investor - The Partner, Member, Shareholder, or Beneficiary return that reflects pass-through items from a flow-through entity.
6. Key Case - A flow-through return, usually a Form 1120S, U. S. Income Tax Return for an S Corporation; a Form 1065, U. S. Return of Partnership Income; or a Form 1041, U. S. Income Tax Return for Estates and Trusts. It may also be a promotion or tax avoidance scheme (an agency or promoter examination) that results in pass-through items to partners, shareholders, or investors (individual returns or another flow-through entity).
7. PCS or Partnership Control System - The PCS is a database program designed to control and monitor flow-through entities and linked investor returns. It is described in more detail later in this chapter. The PCS will also be used to identify and establish linkages on tier entities. AIMS ( IRM 4.4) and PCS ( IRM 4.29) are also used to identify and control indirect investors and/or flow-through entities.
8. Tier - For nonTEFRA purposes, a tier will be a trust, an S Corporation, or a partnership. If the key case is linked on PCS, the tier appears on the PCS database as a key case record (PS) and an investor record (PN).
9. TS - Technical Support (formerly TSS). The TEFRA coordinator in TS acts as a liaison between the field and the CTF's for both TEFRA and nonTEFRA cases for SB/SE agents in their Area and for LMSB agents in their geographical area.

4.31.5.4 (02-22-2008)
Identification of NonTEFRA Key Case Returns

Identification of returns as TEFRA vs. nonTEFRA is necessary in order to have a valid assessment of tax because the TEFRA partnership rules and the deficiency procedures that nonTEFRA entities fall under are mutually exclusive. If the Service applies the wrong procedures, e.g., erroneously proceeds as TEFRA at the partnership level rather than deficiency procedures at the investor or partner level, or vice versa, barred deficiencies and/or refunds can result.
For Form 1120S, See IRM 4.31.5.2..
For Form 1065, the examiner must determine, for each taxable year, whether TEFRA or nonTEFRA procedures apply. Comments on Form 4318, Examination Workpapers, are required from the examiner as to whether the flow-through return is TEFRA or nonTEFRA, and the reasons supporting this conclusion. The Form 13813, Partnership Procedures Check Sheet, which is required to be completed will assist the examiner in making the determination.
IRC 6231(a)(1) provides that TEFRA rules apply to all partnerships required to file tax returns under IRC 6031(a) whose tax years begin after 9-3-82, except for small partnerships and partnerships electing out of partnership status pursuant to IRC 761(a). (See IRM 4.35 for IRC 761(a) details as they are not included in this chapter)
The small partnership exception applies to partnerships or LLC's treated as a partnership, consisting of 10 or fewer partners or members, each of whom is an individual (other than a nonresident alien), a C corporation, or an estate of a deceased partner.

Note:

A partner that is a trust (including grantor trusts) or a single member LLC that it is treated as a disregarded entity, does not meet the definition "each of whom is an individual (other than a nonresident alien), a C corporation, or an estate of a deceased partner" . Thus, a Form 1065 with a trust or a single member LLC as a partner/member can not be nonTEFRA.
For purposes of the small partnership exception:
1. A husband and wife (and their estates) will be treated as one partner.
2. For partnership tax years ending before August 6, 1997 the word "natural person" is used instead of "individual" , the phrase "a C corporation" , is not included after individual, and the phrase "of a deceased partner is not added after" estate.
3. The "same share" requirement that provided that each partner's share of any partnership item is the same as his or her distributive share of every other partnership item (with the exception of guaranteed payment distributions) was eliminated for partnership tax years ending after August 5, 1997.
4. A small partnership could not include a partnership with a C corporation partner for years ending before August 6, 1997.

4.31.5.4.1 (05-31-2004)
Special Considerations for Limited Liability Companies (LLC's)

If the type of entity on the investor's Schedule K-1 is "Limited Liability Company" , the agent should always check for MFT 02 on a BMFOL or check on INOLET to see if the type of return required is Form 1120, as it would be if the LLC partner has elected to be treated as a C corporation. If it has elected to be treated as a C corporation, it will be treated as a C corporation for TEFRA partnership rules including the small partnership exception.

4.31.5.5 (02-22-2008)
Election by a Small Partnership to be Included Under the TEFRA Provisions

A partnership eligible to be excluded under the rules outlined above may elect to be included under the TEFRA provisions ( IRC 6231(a)(1)(B)(ii).) The election is binding for the year for which it is made and all subsequent years unless revoked with IRS consent. Since the small partnership election is binding for the year for which it is made, as well as all subsequent years, examiners should inquire about prior year elections. The Form 8893 or an equivalent statement should be attached to the partnership return in the year the election is made.
Per the regulations, a partnership shall make the election by attaching a statement to the partnership return for the first taxable year that the election is to be effective. The statement shall be identified as an election under IRC 6231(a)(1)(B)(ii) , shall be signed by all persons who were partners of that partnership at any time during the taxable year to which the return relates, and shall be filed at the time (determined with regard to any extension of time for filing) and place prescribed for filing the partnership return. The partnership may make this election on Form 8893. (Under certain circumstances they may file retroactively. Contact the local TEFRA coordinator if the issue is raised.) Treas. Reg. section 301.6231(a)(1)-1(b)(2).
The CC MFTRA, CC ACTRA, and CFOL CC BMFOL 'E' indicate whether the partnership return may be a TEFRA return. However, the facts and circumstances, as to whether or not the partnership elected to be covered by the TEFRA procedures, are controlling.
If the examiner determines that a valid election has been filed, the procedures for TEFRA will be followed.

Note:

Simply checking a box on the Form 1065 and/or completing the line for the tax matters partner on the return is not a proper election. The agent must determine if the partnership has actually filed the proper election.

4.31.5.6 (05-31-2005)
Determining and Identifying the Number of Partners or Members

Except for a transfer of interest by a partner, if at any time during the taxable year the number of partners exceeds the small partnership exception of ten partners, the return will fall under the TEFRA provisions. A partnership may have more than 10 partners during the year, but still fall within the small partnership exception, because it never had more than 10 partners at any point in time (as when sales of partnership interests cause more than 10 Schedules K-1 to be filed).
The small partnership exception does not apply to a partnership for the taxable year if any partner in the partnership during the taxable year is a pass-through partner. (Treas. Reg. section 301.6231(a)(1)-1(a)(2).) For example, a partnership consisting of three partners; two individuals plus a partnership, an S corporation or trust will not meet the small partnership exception.
IRC 6231(a)(1)(B)(i) provides that for the purposes of the small partnership exception "a husband and wife (and their estates) will be treated as one partner." This provision is unqualified and thus should apply to a husband and wife regardless of the manner in which they hold their interests or file their returns.
A partner must have a proprietary interest in profits or capital. Therefore, if a Schedule K-1 indicates no ownership interest, no distribution of any partnership items, and no capital account balance, the person in question may not be a partner for the taxable year involved. Consult Area Counsel, Federal law controls.

4.31.5.7 (05-31-2004)
S Corporations

The Small Business Job Protection Act of 1996 removed S corporations from the special audit provisions of TEFRA for tax years beginning after December 31, 1996. All S corporation examinations with tax years beginning after that date must follow nonTEFRA procedures. For S corporations, TEFRA rules only apply to taxable years beginning after 12-31-82, and before 1-1-97. (If assigned a delinquent return that may fall under the TEFRA procedures, please contact the local TEFRA coordinator.)

4.31.5.8 (05-31-2004)
Partnership Control System (PCS)

The PCS is a database designed to control and monitor flow-through entities and linked investor returns. It does not replace AIMS inventory control, but it provides the additional information needed to control investor and flow-through returns. It Interfaces with AIMS to establish returns, access information, and provide mass updates to AIMS.
PCS allows an unlimited number of investors to be linked to each key case or tier and allows an investor to be linked to an unlimited number of flow-through entities. The linkage charges the returns to the appropriate area office or CTF. In addition, it places the flow-through entity PICF Code 2 on the key case on AIMS and ERCS databases. It also places an investor PICF Code of 6 on AIMS and ERCS databases so that any other part of the service can see that an entity related to the investor return is under examination. This prevents premature closure of an investor return until all key case issues are resolved. It should also prevent improperly restricted statute extensions.
The campus will input an H freeze on the partnership as part of the linkage process. The H freeze will appear on the key case AIMS transcript when PCS is established for TEFRA or nonTEFRA cases.
The PCS is described in the text of IRM 4.29, the Partnership Control System (PCS) Handbook.

Note:

Refer to IRM 4.29 for in-depth information on special features, the various user reports, letters, input documents, and indicators.

4.31.5.8.1 (05-31-2004)
Rules and Guidelines for Linking NonTEFRA Entities on PCS

The decision to use or not to use PCS must be made as early in the examination as possible. In some cases the use of PCS is highly recommended, while in others it is optional. The number of investors and/or their geographic location will be the factors to consider for required linkage. For entities with less than 5 investors, efficient use of the Service's resources is the important factor. In either case, the examiner should understand that using PCS will not prevent them from following package audit requirements nor interfere with the examination of any related investor.

4.31.5.8.2 (05-31-2004)
Advantages of using PCS

When the key case is linked on PCS ( Form 8341), it establishes the investor returns on AIMS and generates Form 5546, Examination Return Charge-Out documents for their tax returns. If an investor return is not already in an audit status, the investor returns are sent directly to the CTF. The CTF becomes responsible for protecting the statute on the investor cases, except for cases charged out to Compliance. For cases already charged out to Compliance, the examiner with control of the investor case has the statute responsibility. The CTF will also secure agreements, assess tax and send notices of deficiency when necessary.

Note:

All investors that the field wants to examine must be on AIMS prior to linkage. All investors not already on AIMS will automatically update, and be sent, to the appropriate campus.
If the Tax Identifying Number of the investor is incorrectly reported on the Schedule K-1, the CTF unit will identify the problem and take appropriate action. This will include determination of the correct information so that the proper tax return can be secured or notifying the examining agent that additional information is needed. The CTF will contact the examining agent for assistance when they are unable to determine the correct investor.
The CTF is responsible for inspecting the investor returns to determine if the taxpayer reported all flow-through items. If there are differences, the CTF determines the reason. After the determination is made, the CTF will contact the key case examiner, who will decide the action that should be taken. Unlike TEFRA cases, the investor return cannot be conformed to the key case return using a computational adjustment. Deficiency procedures must be used.
When the investor returns are received in the CTF, cases with potential non-flow-through audit issues are identified and sent to the investor's area/territory.
The PCS system places a Partnership Investor Control File (PICF) Code of "6" on the AIMS record for the investor. The code alerts personnel to the existence of an ongoing examination of the key case return and prevents its premature closure. For example, an examiner in Peoria may be auditing Investor A's individual income tax return when an examiner in Boston begins the examination of a nonTEFRA S Corporation in which Investor A is a shareholder. If Investor A asks for a restricted consent, the Peoria examiner can check the PICF Code and determine whether the restricted consent should include any flow-through entities. Investor A's examination cannot be closed without addressing the PCS linkage.
The CTF will retain a copy of the RAR for the flow-through entity in its Centralized RAR file. IRS personnel with questions about the adjustments may contact the key case CTF for a copy. Submission of the RAR for the Centralized RAR file is mandatory when the case is linked. If the return is not linked, submission of the RAR to the CTF is optional, but recommended.

4.31.5.8.3 (05-31-2004)
Agent Responsibilities if PCS is Not Utilized, or PCS is Used But Cases Are Controlled Locally

If the return is not linked, the key case examiner assumes total responsibility for statute control for all of the investor returns. The CTF has no responsibility for any statute protection for any investor unless that investor is in the CTF because of another TEFRA or nonTEFRA linkage. Once the other linkage is resolved, the CTF will no longer have responsibility for the statute.
If a decision is made not to link the return, the key case examiner is responsible for securing the necessary information from the investor's area/territory regarding any other key cases or tier entities in which the out-of-area/territory investor may have an interest. If a flow-through entity has any out-of-area/territory investors, it is strongly recommended that the case be linked.
The key case examiner must reconcile the items reported on the investor Schedule K-1 to the amounts reported on the investor return, and the reason for any differences must be determined. The key case examiner must inspect the investor returns to determine whether non-flow-through issues should be examined.
If the key case is not linked on PCS, there is no Form 5546, Examination Return Charge-Out document to be associated with the investor case, and there is no PICF code on AIMS. A person, other than the key case examiner, holding the investor return may be unaware of the need to include the nonTEFRA flow-through in any proposed adjustments, statute extensions, or statutory notices of deficiency. If the key case is not linked, the person holding the investor return (CTF, examiner, appeals officer, etc) is not responsible for statute control on unlinked issues for which there is no notification. For example, if the investor requests a restricted consent, the person holding the investor return will not know to include the non-linked entity in the consent.

4.31.5.8.4 (08-01-2006)
When to Link the Key Case on PCS

The decision to use the PCS should be considered and made as early in the examination as possible. If the examiner waits until there is less than one year on investor statutes, they may not be able to use PCS. The examiner should make the decision within 60 days of the initial interview.
It is strongly recommended that the area/territory link all nonTEFRA key cases that meet the following criteria:
1. The entity has more than five investors, or
2. There is at least one out-of-area/territory investor, or
3. There is an investor that is a tier.
If the key case is not linked on PCS, Appeals will only accept protesting investors cases if both of the following are met:
1. The entity has five or fewer investors, and
2. None of the investors is a flow-through entity.
Note:

As a general rule, the key case and one protesting investor will be sent to Appeals. However, Appeals will accept protesting investors with different representatives, protesting investors without representation and protesting investors with unagreed non-flow-through issues. The key case examiner must either link the key case on PCS or hold the investor returns until the key case entity issues are resolved in Appeals.

4.31.5.9 (05-31-2004)
Linking the Key Case and Investors on PCS

The following subsections cover the nonTEFRA linkage procedures.

4.31.5.9.1 (05-31-2005)
Initiating Timely PCS Controls on NonTEFRA Flow-Through Entities

If the examiner has not determined that the examination will result in a No-Change within 60 days of the initial interview he/she should prepare the package described above and submit it to his/her manager. The group manager will review the package for timeliness and accuracy. The group manager will indicate approval by signing the Form 8341.
The examiner should make every effort to have the linkage package in the hands of the PCS Coordinator before the last 12 months of the shortest investor statute is to expire.
The written approval of the Area Director (SB/SE) or Director of Field Operations (LMSB) is required to start an examination of a nonTEFRA key case entity with less than 12 months remaining on the statutory period of limitations for assessment of the tax for any investor.
1. The approval of the Area Director (SB/SE) or Director of Field Operations (LMSB) should be granted only when extenuating circumstances require the commencement of an examination with less than 12 months remaining on the statutory period of limitations of any investor.
2. A copy of this approval must be transmitted with Form 8341 to the PCS Coordinator for input.
3. A copy of the approval will be transmitted with the Form 5546, Examination Charge-Out, or Form 6658, Notice of Special Investor Action, as applicable.
4. The circumstances surrounding the late start of the examination will be set forth in the memorandum of approval.
5. The memorandum of approval must identify the key case entity and contain the original signature (a facsimile stamp is not acceptable) of the Area Director (SB/SE) or Director of Field Operations (LMSB).
6. A copy of this approval will be sent to the key case CTF with the linkage package.
7. Additional approval is not required to start the examination of a second-tier entity where the examination is limited to making adjustments stemming from the examination of the first-tier entity. However, approval is required for the second-tier entity where another issue (an issue generated from its own return) is examined.
In those instances where there are less than 7 months/210 days remaining on the statutory period of limitations for assessment of the tax for any investor, the key case area is responsible for securing extensions of the statutory period of limitations on all related investor returns, including tier returns and their related investors. When extensions cannot be secured, the agent is also responsible for all 30-day letters or notices of deficiency. The CTF will not accept these packages for linkage on the PCS.

Caution:

In situations where the 7 month time limitation may lapse during mailing of the package, the CTF should be notified of the package prior to mailing. If the CTF is not notified, and the there are less than 210 days remaining on the statute, then the CTF may reject the package.
The key case examiner is responsible for securing the necessary information from any investor areas regarding any other key cases or tier entities in which the investor may have an interest so as to not exclude them from any restricted consents.

4.31.5.9.2 (02-22-2008)
The NonTEFRA Linkage Package

When the decision to link the nonTEFRA entity has been made, the key case examiner will submit the following package through their group manager to the Area/Territory PCS Coordinator. It should be transmitted with Form 3210. A copy of both the linkage package and the Form 3210 will be retained in the key case file as a record and to aid with follow-up if necessary. The linkage package will include:
1. Form 13824, NonTEFRA Linkage Package Check Sheet.
2. A Form 8341, PCS Establish or Add, completed through box 28. Form 8341 is used to link nonTEFRA investors to the PCS. See IRM Exhibit 4.29.2-3 for instructions for completing the form. The Form 8341 must be signed by the group manager.
  
  Note:
  
  When a promoter of a Schedule C or F type promotion is identified and being worked, obtain a dummy taxpayer identification number (TIN) for the specific shelter from the AIMS coordinator. See IRM 4.31.5.9.2.1. for information on dummy TIN's.
3. A copy of the flow-through entity return, including all Schedules K-1 with any attachments.
4. One additional copy of all Schedules K-1 with all attachments and the MFT of the investor properly annotated on each Schedule K-1 either in the top margin or the investor name and address area.
5. A current AMDISA printout showing that the key case is established on AIMS. (PCS cannot be used when the key case has no AIMS database.)
6. An adding machine tape or spread sheet showing the reconciliation of the income or loss on the Schedules K-1 to the total income or loss of the key case return.
7. A copy of the appointment letter initiating the examination. (The exam must be initiated with more than 12 months on the shortest investor statute.)
8. If more than two years has passed since the key case was due to be filed (without consideration of extensions), an IMFOLT or BMFOLT for each investor must be included to verify investor statutes.
9. If the agent is aware of any Schedule K-1 identification errors (i.e. erroneous TIN's), names etc.) or has secured missing information, that should be explained in a brief memo.
Transmit the complete linkage package to the area PCS Coordinator in the CWSD function using Form 3210 so there is a record of the date mailed and received by the coordinator for the file.
The package should then be mailed to the Campus by first placing the linkage package inside an "Open By Addressee Only" envelope. This will help ensure the package gets to the proper unit intact.

4.31.5.9.2.1 (05-31-2004)
Requesting "Dummy" Taxpayer Identification Numbers

A dummy TIN is required to link any key case that did not file, or is not required to file, a tax return.
The field office is responsible for acquiring a dummy TIN when:
1. It is needed for a key case. Identification of a Schedule C or F type promotion is one example of an occasion where a dummy TIN is needed.
2. the field chooses to work investors that did not file, or were not required to file, a return.
The campus is responsible for acquiring a dummy TIN when the campus will control the linked investor(s).
A dummy TIN is created by using two command codes. First, AMTIN7 is used to generate a dummy number. CC AMNON is then used to establish the dummy number on AIMS.

Note:

Field personnel should work with the AIMS Coordinator in acquiring a dummy TIN.
Once the entity is established, the agent can submit the Form 8341 to control all investor returns that are identified. Before the Form 8341 is input, the key case examiner must insure that the NMF TIN, MFT code, tax period and employee group code shown on AIMS are consistent with the input information on the Form 8341.
The NMF AIMS for any investor should be established before the key case is linked. That will eliminate any rejects that would occur when linking the NMF investor.
As additional investors are identified, use Form 8341 to add controls for the additional investors. All existing instructions for PCS are then applicable including case closing instructions.

4.31.5.9.2.2 (05-31-2004)
Entities Acting as Agents for Investors

Examiners may encounter situations where an entity such as a corporation is acting as an agent for investors. The agent-investor arrangement may be identified as a result of the examination of the agent-promoter or the examination of the investor. In either instance, the examiner will determine whether it should be controlled using the PCS or manual procedures.
If the agent-investor arrangement is identified as a result of the examination of the agent-promoter and there is an adjustment affecting the investors, or a determination is made to control the arrangement, the PCS procedures should be used to control the investor returns. A copy of the substitute Schedule K-1 or other similar document provided by the agent to the investors showing distributive shares of income, loss, etc. will be used in lieu of Schedule K-1.
If the agent-investor arrangement is identified as a result of the examination of an investor, nominee, etc. and it is determined that controlling the arrangement would be beneficial, the examiner of the investor's return will prepare and submit a collateral examination request to the agent's area. The procedures discussed in (2) above for controlling the investor's returns will be followed.
If it is determined, as a result of the examination by the agent, that a partnership return should have been filed, the return will be secured from a responsible party. The procedures in this Handbook, including the use of the PCS, will then be followed.
When a promoter of a Schedule C or F type promotion is identified, obtain a dummy taxpayer identification number (TIN) for the specific shelter by using the procedures outlined in IRM 4.4, AIMS/Processing Handbook. Create the dummy entity on AIMS as a non-Master File entity. Input Form 8341 to control all investor returns that are identified. As additional investors are identified, use Form 8341 to control the additional investors. All existing instructions for PCS are then applicable including case closing instructions. Before the Form 8341 is input, the key district examiner must insure that the NMF TIN, MFT Code, tax period, and PBC code shown on AIMS are consistent with the input information on the Form 8341.

4.31.5.9.3 (05-31-2004)
Forwarding Linkage Package to the CTF

The Area/Territory PCS Coordinator ensures that:
1. All required information is included in the package;
2. The Form 8341 package meets the various statute of limitations provisions (12 months for earliest investor statute) or the contains the required opening memo; and
3. The Schedules K-1 include the investor's name, address, TIN, MFT and tax period.
The Area/Territory PCS Coordinator forwards the Form 8341 package via a Form 3210. The CTF will acknowledge the Form 3210 within three days of receipt to the PCS Coordinator in the CTF that services the division of the examiner. Currently SB/SE is serviced by the Brookhaven campus and the Ogden Campus services LMSB. The CTF will input the Form 8341 data and freeze codes as appropriate.

Note:

If the field is working all of the investors along with the key case, then there is no reason to get the campus involved. Linkage is not recommended, however, the investors can be linked by the PCS Coordinator in the field. If the investors are going to be linked, it is recommended that the campuses work the majority of the investors. Having linked investors in the field can cause confusion as PCS reports will generate to the campuses when there is no corresponding administrative file.

4.31.5.9.4 (05-31-2004)
Verification of Linkage

The examiner should verify linkages using a TSUMYP print. No Form 886-Z(c) is generated for nonTEFRA investors. If the examiner notices any discrepancies between the TSUMYI print and the return, the local TEFRA coordinator should be contacted. The local TEFRA coordinator will rectify any linkage problems with the appropriate campus.

4.31.5.10 (05-31-2004)
Examination Process

The following subsections cover the examination process.

4.31.5.10.1 (05-31-2005)
Starting the Examination

The examiner will issue a regular appointment letter confirming the initiation of an examination with an accompanying Information Document Request (IDR). If, within 60 days, the examiner and his/her manager have determined that PCS linkage will not be used, the investor returns not already controlled by the examiner will be requested. Any returns already open outside the group will be notified that an entity, in which their taxpayer is an investor, is under examination. Use the Form 6658 to notify other offices of the exam and send with a Form 3210. Make sure an acknowledgment copy is received to ensure the examining agent is aware of the key case examination. A copy of each investor Schedule K-1 and a TSINQ print should be included with the notification for the investor's file.

4.31.5.10.2 (05-31-2004)
Notice to Investors of Examination of Key Case Entity

When the examiner has secured the investor returns but is not examining issues other than the flow-through, the examiner should use one of the following letters to inform the investors of the examination. This assures that the taxpayers first contact is not a request for a statute extension, a 30-day letter or a notice of deficiency.
1. Letter 3457(DO), Notification of Beginning of Partnership Audit
2. Letter 3458(DO), Notification of Beginning of S Corporation Audit
3. Letter 3459(DO), Notification of Beginning of Trust Audit
Note:

The CTF uses a (SC) version of the letters to send to the investors for cases linked on PCS.
Do not contact the taxpayer if there is "Z" Freeze or a TC 914 on the taxpayer account. If there is a "Z" Freeze or a TC 914 on the taxpayer account, give the investor information to the TEFRA Coordinator for immediate, appropriate action.

4.31.5.10.3 (05-31-2004)
Control of Investor Returns Related to Key Case Entities

The examiner of the unlinked entity is responsible for controlling statutes and applying examination results to investors open in his/her group. The examiner must also keep any other investor groups updated on the progress of the entity's examination and provide them with an interim report when statute considerations require the issuance of a notice of deficiency. This interim report should be prepared and mailed out when any investor has less than 210 days remaining on the statute.
A record of the status of each investor's case as it relates to the key case entity may be maintained on Form 5752 (Flow-through Entity Distribution Schedule).
If Form 5752 is used, it should be maintained in the key case file by the examiner.
When the key case is closed from Examination, the Form 5752 becomes part of the key case administrative file.

4.31.5.10.4 (05-31-2004)
Control of Cases Established on PCS

After December 31, 1996, the AIMS databases and the tax returns for the investors of a key case will establish in the key case PBC, Employee Group Code 5400 and be delivered to the key case CTF, unless the investors are already established on AIMS.
When tier investor returns are received in the key case CTF, the tax returns of the tier investors will also be requisitioned. This procedure will be followed through the significant layers of the tiering arrangement.
If a TC 420 already exists on the module when a TC424 request posts, the function with the return will be notified as explained below.

4.31.5.10.5 (05-31-2004)
Notification of Examination of the Key Case Entity

Internally, notice of a key case examination is provided by Form 5546, Examination Return Charge-Out, which is produced by AIMS.
The Form 5546, Examination Return Charge-Out, delivers the investor return to the key case CTF or delivers an acknowledgment to the location of the return if it was previously charged-out to another campus function or area. The Form 5546, Examination Return Charge-Out, shows the identifying information of the entity under examination.

4.31.5.10.6 (05-31-2004)
NonTEFRA Key Case Statute Control

In general, no statute control is necessary for nonTEFRA key case entities as they are considered information returns. The AIM's/ERCS databases should be updated to the GG alpha statute (i.e. 04-GG-2003) changing only the day. The statute of limitations of each investor return controls the flow-through entity issues on the investor's return. This general rule also applies to S corporation tax years beginning after December 31, 1996. An S corporation can need the IRC 6501 statute protected when corporate level tax issues under IRC 1374, IRC 1375, or IRC 55 are to be raised. The agent would solicit a regular Form 872.

4.31.5.10.7 (05-31-2005)
Extension of Investor Statute for NonTEFRA Items

The examiner charged with the investor return is responsible for the IRC 6501 statute for all nonTEFRA issues on the investor return. All regular statute extension request procedures must be followed when soliciting Form 872, Consent to Extend the Time to Assess Tax, including requests for restricted consents. If the examiner receives a return letter with a signed consent that places conditions on the extension, the examiner should include these terms in a revised Form 872, if they are acceptable to the Service, and re-mail to the taxpayer for signature.
The case file must be documented that managerial approval has been obtained to solicit a consent to extend the statute of limitations from the taxpayer 180 days prior to the statute expiration date.
The Restructuring and Reform Act of 1998 (RRA '98), section 3461(b), imposed provisions that must be followed in soliciting a consent to extend the statute of limitations. The provision requires the IRS to provide the taxpayer(s) or their authorized representative(s) with an explanation of their rights to decline to extend the assessment statute of limitations, or to request that any extension be limited to a specific period of time or to specific examination issues.
In order to meet the provisions of RRA '98, the IRS has established the following procedures whenever an extension to the statute of limitations is solicited:
1. Letter 907(DO), and Publication 1035 (Extending the Tax Assessment Period), must be provided to both the taxpayer and any authorized representative. In the case of a joint return, both spouses must be separately notified. A copy of Letter 907(DO) must be attached to the Form 872 in the file, and its mailing documented in the case activity record.
  
  Note:
  
  The extension forms have been revised to include the RRA '98 language. However, the Letter 907(DO) and Publication 1035 should still be provided to the taxpayer.
2. Examiners should ensure that the proper extension form is transmitted to the taxpayer and representative.
3. Upon receipt of the executed copy from the taxpayer or authorized representative, the consent should be date stamped received and processed to the manager for execution. All requests for restricted consents must be considered. If the examiner receives a return letter with a signed consent that places conditions on the extension, the examiner should include these terms in a revised Form 872, if they are acceptable to the Service, and re-mail to the taxpayer for signature. A copy of the executed consent must be returned to the taxpayer and/or authorized representative(s) with the original attached to the tax return. The team should ensure that both the AIMS and ERCS databases are properly updated to reflect the new statute of limitations date.
If the taxpayer or authorized representative does not wish to execute a consent, they should be notified that the case will be evaluated to determine whether a Statutory Notice of Deficiency should be issued.
Further guidance on the control of statutes can be found at IRM 25.6, Statute of Limitations Handbook.
If any investor statute of limitations expires, the responsible agent will follow the statute expiration procedures as outlined in IRM 25.6.14, Statute of Limitations, Barred Assessments.

4.31.5.10.7.1 (05-31-2005)
Restricted Consents

Restricted consents are quite common with TEFRA investor cases. Care must be taken to ensure all restricted issues are covered.
Research the investor for other linkages. If other linkages exist, contact the examining agent to see if other restrictions exist.
There is a restricted consent indicator on AIMS that signifies if a restricted consent is secured. An "R" will follow the Statute Date if a restricted consent was secured. If an extension was secured with no restriction, an "X" will follow the Statute Date.
More than one restricted consent can be secured for a taxable year.
Once the original IRC 6501 statute is gone, each existing restricted consent must be extended timely to keep the statute open.
No other restricted issues may be added after the original IRC 6501 statute has passed.

Note:

The original statute may be, for example, the six-year period for a return with a substantial omission under IRC 6501(e).

4.31.5.11 (05-31-2004)
Post Exam Process

The following subsections cover the post exam process.

4.31.5.11.1 (05-31-2005)
NonTEFRA Examination Results

NonTEFRA reports are similar to those for TEFRA partnerships. The agent prepares a Form 4605-A, a Form 886-A, Explanation of Items, and a Form 886-S, Form 886-X, Form 886-W or Form 886-Z to show the corrected flow-through amounts for each investor. A Form 875 is used to secure agreement from the entity. All are available on RGS.
There is no summary report letter. Instead, for cases with adjustments, Letter 921(DO) (Report Transmittal for a Partnership, Fiduciary or S-corporation) is used for the entity and Letter 950(DO) (30-Day Letter) for each of the investors. When investors do not file a protest to the 30-day letter or when the statute does not allow time for the 30-day letter, a notice of deficiency is issued.
A Letter 992(DO) (No-change Letter) is used for the entity when it is no-changed. The examiner will also prepare Form 6657, Related Returns Examination Report, as a cover for the reports for investors not under their control.
These forms and letters are used for both PCS linked and unlinked cases. Letter 992 and Form 6657, whether or not case is PCS linked, will be issued by the agent.
The unified proceeding with NBAP's, a Summary Report and FPAA's used under TEFRA are not available for these entities. The subsections below discuss the procedures for processing the results of the key case examination.

4.31.5.11.2 (05-31-2005)
Key Cases With No Adjustments and Investors Not Linked on PCS

The examiner will immediately issue a Form 4605 or Form 4605-A indicating no adjustments and mailed to the entity along with Letter 992(DO). A copy will be issued to the POA as required. There is no requirement for the flow-through entity to sign the forms. IRM 4.10.8 describes the report writing requirements if no changes are proposed for the flow-through entity.
The examiner will prepare a Form 6657 indicating a no-change. The Form 6657 and a copy of the report must be associated with any investor files that are open. The Form 6657 must be sent with the report for all investors not under the control of the examining entity agent. Any investors that have been contacted will need to be notified of the no-change. Letter 3401(DO), preliminary No-Change Report Transmittal Letter will be used to notify the investors when all issues are no-changed. Letter 590(DO), No Change Letter, is checked off on Form 3198, and is issued when the case is officially closed.
If all examined years result in a no-change, a no-change stamped impression is placed on the Procedural Reminders side of Form 4318 (Examination Workpapers) or on the top of the Large Case workpapers, if Form 4605 is not used.
An examination is not considered a no-change with adjustments case merely because there is no tax at the entity level.
It may be important to notify the taxpayer of, or secure agreement to, audit adjustments to basis, passive/non-passive activity or recourse/non-recourse type items so that the items will be properly reflected in subsequent returns of the taxpayer. If so, a report on Form 4605 (with explanatory pages) should be prepared and given to the flow-through entity at the conclusion of the examination.
If the taxpayer raises affirmative issues, they should be considered by the agent as part of the examination. If adjustments are made in the taxpayer's favor, the adjustments should be made by the examiner on the key case and the investor returns. It would no longer be considered a no-change. The agent will issue Letter 950(DO) (30-Day Letter) to each of the investors.
If the examiner determines that the affirmative issues are not allowable, a no-change report will be issued. The fact that the issues were considered but not allowed will be noted in the remarks section of the Form 4605 and explained on Form 886-A. This report should be associated with the investor files for future reference. There is no procedure similar to the AAR procedure under TEFRA for nonTEFRA entities. Investors will have to file claims for any further consideration.
Unless there are other issues to be determined for the investor returns, the key case and investor returns case will be closed to CCP. There is no special handling needed in TS.

4.31.5.11.3 (08-01-2006)
Key Cases With Adjustments and Investors Not Linked on PCS

The examiner will furnish a copy of the examination report to the responsible individual for the entity. A copy of the examination report should be transmitted to the flow-through entity by Letter 921(DO). A copy will be provided to the POA as required. This letter informs the responsible person in the entity that the investors will receive a 30-day letter reflecting their share of the adjustments made at the entity level. Only the investors will be able to request a hearing with Appeals because there is no "deficiency" at the entity level.
The examiner will discuss any proposed adjustment(s) with a responsible individual for the entity at the conclusion of the examination. This provides an opportunity to secure from the responsible person at the entity level an agreement with respect to the treatment of any key case adjustments. The examination report will contain a complete explanation of adjustments including any penalty items.
The responsible individual should sign in the space provided on Form 4605 (Examination Changes-Partnerships, Fiduciaries, S Corporations, and Interest Charge Domestic International Sales Corporations). The examiner should also request a signature on Form 875, Acceptance of Examiner's Findings By a Partnership, Fiduciary, S Corporation or Interest Charge Domestic International Sales Corporation. While these signed documents are not binding, the fact that a responsible person at the entity level has agreed to the adjustments may help secure agreements from investors.
The examiner will prepare a Form 6657 indicating agreed or unagreed (at entity level). The Form 6657 and a copy of the entity report must be associated with any investor files that are not under their control.
Whether a responsible person at the entity level agrees or does not agree, the examiner must still solicit agreements from investors under their control. A Letter 950(DO) (30-Day Letter) will be used to propose adjustments to each of the investors.
If an investor does not agree to the proposed key case adjustments and files a protest, both the key case and the investor return will be sent to the Appeals Office for the area/territory that examined the key case return. Appeals requires at least 180 days remaining on the statutes of the investor returns. The examiner should allow at least an additional 30 days of processing time for the returns to reach Appeals. See Appeals IRM 8.19.3.4(1).

Note:

If a nonTEFRA key case is unagreed, not linked, and has more than five investors, Appeals will not accept all the investors returns. Appeals will accept protesting investors with different representatives, protesting investors without representation and protesting investors with unagreed non-flow-through issues. The key case examiner must either link the key case on PCS or hold the investor returns until the key case entity issues are resolved in Appeals.
When no investors file a protest to the 30-day letter or when the statute does not allow time for the 30-day letter, a notice of deficiency is issued.
When all investor cases are agreed, the key case and investor returns will be closed to CCP. There is no special handling needed in TS.

4.31.5.11.4 (08-01-2006)
Key Cases With Investors Linked on PCS

Except for the closure of the key case, key cases with PCS linkages are worked in the same manner as those without linkages. There is no difference in the reports or cover letters issued to the entity. The reports issued to any investors under the examiners control are also the same. The main difference is that the key case must be closed through CSP to TS for special handling. This is true even when an in-area investor has requested an Appeals hearing. The examiner will notate on the Form 3198, Special Handling Notice, "PCS linked nonTEFRA Key Case, forward to area examination TS" . In the TS the case will be assigned to the TEFRA coordinator for a procedural review before closing the case to the CTF responsible for servicing the examiner's operating division.
Adjustments to the flow-through items from the key case entity should be proposed in the examinations of the income tax returns of all investors open in the area. A copy of the key case RAR must be included in the investor files. If any of the investors do not agree, the procedures in IRM 4.10.8 should be followed.
For all closures the key case examiner should prepare a single Form 6657, and place a copy in the key case file.
There are additional actions that must be taken if the key case examiner has control of any of the investors and the key case is linked.
1. The examiner will close the investor returns following normal procedures but because of the PCS linkage on the investor, (PICF 6), they must initiate a change to the PCS to allow the investor to close. Unagreed investors will not require this action.
2. The examiner will prepare a Form 8339, PCS Change, for each investor for which it has jurisdiction. The Form 8339 will be included in the investor case file on top of the Form 5344. More than one Form 8339 may need to be prepared if the assessment is the result of adjustment of more than one key case. The Form(s) 8339 will be input before attempting to close the case at the terminal. Box 11, Change(s), will be completed with item number 05, investor one-year assessment statute date field. The entry will be, for a no-change, 22222222$NCT (time in tenths of an hour). For a change/ no-change, it will be 22222222$CNCT). For a deficiency, it will be 22222222$ (enter whole dollars) T. For an overassessment, it will be 22222222$ (enter whole dollars)-T. As an example, a deficiency in the amount of $3,400.00 with 4 hours of time on the flow-through portion of the case would require an entry of 22222222$3400T4.0. AIMS will not allow the investor case to close until the preceding is entered.
  
  Note:
  
  The PCS will not allow anything other than 22222222 to be entered in the one year date field. An attempt to enter a real date will result in an error message.
3. The examiner must also answer yes to the question "TSCLS ?" when completing the Form 5344 on RGS. If completed manually, check the TSCLS box in the upper left-hand corner.
When they have received the closed key case from the area TS, the CTF will send the appropriate letters to linked investors in their jurisdiction and will prepare any additional Form 6657 that may be needed to make other offices aware of the flow-through entity results.

Note:

The package should be placed in an "Open by Addressee Only" envelope before mailing. This will help ensure that the package gets to the proper unit intact.

4.31.5.11.5 (05-31-2004)
CTF Actions After Receipt of Form 6657

The key case CTF will receive the examiner's key case administrative file and one Form 6657 properly completed along with a complete copy of the entire examination report when the examination of the key case is completed. In lieu of listing all investors on the Form 6657, a TSUMYP print of the key case may be attached to the form and included with the copy of the report.
1. The Form 6657 will reflect the closing status (agreed, no-change, unagreed) of the flow-through entity.
2. The examination report and the Form 6657 should be reproduced and a copy associated with each investor case file.
3. A complete legible copy of the examination report, suitable for photocopying, should be reproduced and filed in the Centralized RAR files.
For agreed or no-change key case examinations, the results (if any) will be included in the investor examination report. No feedback to the key case area is required. If any of the investors do not agree, the procedures in IRM 4.10.8, Examination of Returns, Report Writing will be followed.
For unagreed key case examinations, the Form 6657 will provide guidance for issuing the appropriate letter. The investor area or the investor CTF should take the action indicated as soon as the status of the investor case permits. Adjustments will be proposed to each investor. If any of the investors do not agree, the procedures in IRM 4.10.8 Examination of Returns, Report Writing will be followed.

4.31.5.12 (05-31-2004)
Centralized RAR Files

The following Centralized RAR procedures apply to all nonTEFRA key case entities that are linked to investor returns on the PCS. Key case RAR's are sent to the Centralized RAR File by the CTF as part of the RAR distribution process.
After the key case examination is completed at the Area/Territory level and the case is routed to the CTF for association with the CTF's key case administrative file, the CTF must send a copy of the key case RAR to the Centralized RAR File. The RAR must be legible and suitable for photocopying.
If the key case examination results in an unagreed report and is later resolved in Appeals or the courts, Appeals should send a copy of their Appeals Case Memorandum (ACM), the Counsel settlement memorandum, or the Tax Court opinion to the CTF who will forward it to the Centralized RAR Files for association with the existing key case RAR.

4.31.5.13 (05-31-2004)
Field NonTEFRA Investor Procedures

Field examiners (Revenue Agents and Tax Compliance Officers) other than the key case examiner will in some cases be responsible for applying the results of the key case examination. He/she may have been assigned the case before the nonTEFRA entity examination was initiated or received it because it was classified and sent to the field by the CTF after linkage.
If linked on PCS, a Form 5546, (Examination Return Charge-Out) should be received labeled "Flow Through Notification" . If classified by the CTF the Form 5546 will be in the file when assigned.
When not linked, a Form 6658 (Notice of Special Investor Action) should be received from the key case examiner. The investor examiner should find an attached Schedule K-1 and TSINQ print for the investor.
If the investor examiner has completed the non-flow-through issues and has not received the results of the entity examination, he/she may request the results by following the procedures explained in IRM 4.31.6.1.16, Requesting Flow-through RAR From Centralized RAR File.

4.31.5.13.1 (05-31-2005)
Processing NonTEFRA Flow-Through Adjustments

The procedures below can be completed with or without the resolution or completion of any TEFRA issues.
All issues, other than key case issues, should be completed for the investor's return. If the proposed adjustments from the key case examiner are received while the investor's return is still under examination, the adjustments will be incorporated into the report.
Upon receipt of the proposed adjustments from the key case examiner, the CTF will forward the proposed adjustments to the CWSD to forward to the examination group to prepare an examination report if the investor's case is in the field.
If the examination of all other issues is completed prior to the completion of the key case examination, a partial agreement should be obtained for the resolved items using forms prescribed by IRM 4.10.8 Examination of Returns, Report Writing.
- For revenue agents, a statement is inserted in the "Other Information" section of the Form 4549 (Income Tax Examination Changes) stating that the items contained in the Form 4549 do not include adjustments attributed to the examination of the related key case and that the related adjustments, if any, will be proposed upon completion of the key case examination.
- For Tax Compliance Officers/Tax Auditors, a similar statement will be on the Form 886-A (Explanation of Items) or the Form 3547 (Explanation of Adjustments) and attached to the Form 1902-B, Report of Individual Income Tax Examination Changes.
Note:

For all such cases, Form 3198 (Special Handling Notice) is attached to the front of the case file. The "Partial Agreement" block and "Other" block will be checked. After " Other" the following statement will be made: "Suspense Case with Unresolved Flow-through Entity Issue - forward to CTF (or return to group ) after assessment." ( See IRM 4.31.5.13.1. below.) After the assessment is made, the case(s) will be suspensed until the completion of the related key case examination. These cases will be updated to suspense status code 33 if they are in the CTF. If they are in the Compliance Technical Services Unit, the case(s) will be updated to status code 21. If they are in the examination group, the case(s) will be updated to status 13.
Investor returns that are joint committee, CIC corporations, or other corporate specialty cases ( Form 1120 with letters after the 1120 other than A, S, or X) are suspensed in the field by the examination group charged with the return. The investor return will be suspensed in the examination group that has control of that return for that year after the group has had all other nonTEFRA adjustments processed. If the return was never examined (i.e. surveyed), prior to being linked to a nonTEFRA key case, the return will be suspensed with the examination group that would have examined the return had it been examined. The return will not be suspensed in the CWSD function and under no circumstances will the return be suspensed in the CTF.
For unagreed cases, reports are prepared as prescribed by IRM 4.10.8, Examination of Returns. Form 3198 will be attached to the front of the case file. The "Other" block will be checked and the following statement made: "Unagreed Suspense Case with Unresolved Flow-through Entity Issue - forward to CTF (or the examination group)." ( See IRM 4.31.5.13.1. above.) Normally, no Appeals action will be taken on any items until the resolution of the flow-through entity items.
For no-change cases, Form 3198 is attached to the front of the case file. The " Other" block is checked and the following statement made: " Suspense Case with Unresolved Flow-through Entity Issue - Forward to CTF (or the examination group)." ( See IRM 4.31.5.13.1. above.)
After the examination of other issues is completed and assessment of the agreed portion, if any, is made, the return is placed in suspense by the CTF pending receipt of the proposed adjustments from the key case examiner.
Statute control for nonTEFRA issues is the primary responsibility of the area that has control of the investor return. If less than 210 days are left on the statute the examiner should solicit an appropriate extension before closing to the CTF. If the examiner is unable to secure an extension, they should ask their local field TEFRA Coordinator how to proceed.
Any return that the area does not choose to examine should be stamped "Surveyed" and closed through CCP to the CTF. The agent will need to attach Form 3198 to the front of the case file. The "Other" block is checked and the following statement made: "Surveyed Suspense Case with unresolved Flow-through Entity Issue - Forward to CTF" . The CCP will update AIMS to Status Code 33, Employee Group Code 5417, and send the return to the CTF via Form 3210. The CTF will acknowledge the Form 3210 within three days of receipt.

Note:

If the surveyed return meets the criteria in See IRM 4.31.5.13.1., the return will not be forwarded to the CTF but will remain in the examination group instead.

4.31.5.13.1.1 (02-22-2008)
Special Computations for Oversheltered Returns (IRC Section 6234)

Special computations exist for oversheltered returns related to a partnership return with a taxable year after ending August 5, 1997.
An oversheltered return is an income tax return which will have no tax due after applying the proposed adjustments.
A notice of adjustment, Letter 4151, may be sent to the taxpayer if:
1. the taxpayer files an oversheltered return,
2. adjustments are proposed (for other than partnership items) for the taxable year, and
3. the adjustments being proposed to not create a deficiency, but would create a deficiency if there were no net partnership losses.
A notice of adjustment must be sent to the taxpayer via certified or registered mail.
The law allows the taxpayer to petition the Tax Court even though no deficiency exists.
If the taxpayer does not petition the Court, or the court upholds the adjustments, the adjustments will be taken into account in determining the amount of any computational adjustment in connection with a subsequent partnership proceeding.

4.31.5.13.1.2 (02-22-2008)
Special Computation for Non-Oversheltered Returns (Munro Decision)

Non-oversheltered returns (and oversheltered returns related to partnership returns with tax years ending before August 6, 1997) are returns that will have a taxable amount owing after the proposed adjustments (for other than partnership items).
For non-oversheltered returns, Munro computations will continue to be used.
1. When adjusting a taxpayers return for nonTEFRA flow-through issues and the Form 4549 results in a reduced deficiency because of large TEFRA partnership losses, the report writer will prepare a report without consideration of any TEFRA partnership income or losses.
2. Prepare a report starting with the original return, or as amended, and remove all TEFRA issues from open TEFRA proceedings. Label this report as: "Information Only – Do Not Process" . Using this report as the starting point, prepare a report making the nonTEFRA flow-through adjustment.
When there is an open TEFRA proceeding, the following paragraph should be used on the statutory notice of deficiency:

In computing the deficiency attributable to the adjustments in this notice, which adjustments are neither partnership items nor affected items, as defined by IRC 6231, all TEFRA partnership items subject to an open TEFRA proceeding, whether income, loss, deduction or credits have been ignored exclusively for the purpose of computing the deficiency which is attributable to the adjustments set forth herein. All TEFRA partnership items subject to an open TEFRA proceeding have been ignored in this notice of deficiency for computational purposes only and this notice is not a substitute for any Notices of Final Partnership Administrative Adjustment (FPAA) which may be issued in regard to the TEFRA partnerships. This computation is being made pursuant to the Tax Court decision in Munro v. Commissioner, 92 T.C. 71 (1989).

The following sample paragraph should be included in the explanation of items:

The following TEFRA partnerships are subject to partnership level proceedings pursuant to the partnership audit and litigation procedures of IRC section 6221 through 6234 with respect to the taxable year(s) and accordingly, all partnership items, whether income, loss, deductions or credits, have been disregarded for purposes of computing a deficiency attributable to the adjustments in this notice:

	ABC Partnership	$(30,000.00)
	XYZ Partnership	(7,000.00)
	HIJ Partnership	(27,700.00)
	Total	$(64,7000.00)

A Munro computation may result in an inflated deficiency due to a change in tax bracket until treatment of the TEFRA items is finally determined.

4.31.5.14 (05-31-2004)
Requesting Investor Returns From the CTF

When an examiner determines that a linked (PICF code 6) investor's return is needed to complete an examination due to basis, passive activity, at-risk or other investor level issue, he/she may request it from the campus CTF.
Both of the CTF's will establish a liaison to respond to area requests for tax returns. The name, address, and telephone number of the identified liaison will be distributed to all area offices. The examiner should contact the local TEFRA Coordinator for this information.
The CTF will send the entire investor file to the requestor via a Form 3210. The requestor will acknowledge the Form 3210 within three days of receipt. If the individual who would normally acknowledge the Form 3210 is unavailable, the manager will ensure the Form 3210 will be acknowledged by another employee (or himself/herself) within that three day period. The CTF will ensure that the AIMS data base has been updated to reflect the requesting area's status, PBC, SBC and EGC, and the correct statute date.

4.31.5.15 (05-31-2004)
Miscellaneous

This section covers other areas that may be a concern during an examination.

4.31.5.15.1 (05-31-2005)
Items Requiring Key Case and Investor Level Determinations

The key case examiner may need to examine both the entity and investors for some issues such as passive loss, at-risk, and basis issues. Determinations at the key case level and the investor level are required to develop the issue factually. Unlike TEFRA, adjustments are made as part of the same report to the investor.
Partnership level components for basis:
1. Amount of the initial capital contribution to the partnership.
2. Amount of each distribution from the partnership.
3. Amount of all subsequent capital contributions to the partnership.
4. Amount of partner's share of taxable income, non-taxable income, losses and deductions.
A partner level component for basis is: "Did the partner buy his interest from another partner without the partnership making a IRC 754 election?" In this situation the partnership does not have to know the purchase price, and it does not have to take the purchase price into account for its taxable year.
An at-risk issue requires certain determinations at the key case level. In situations where loans or notes appear on the books of an entity, it must be determined in the entity level examination whether the loans or notes are recourse or nonrecourse to the entity. In determining at-risk, several items must be addressed, including where:
1. The loans or notes appear to be recourse, but the partnership is protected from loss.
2. The loans or notes are nonrecourse in substance.
3. The loans or notes are nonrecourse.
4. The investors cannot use their proportionate share in determining their at-risk amount for deducting losses.
Note:

Not all nonrecourse notes or loans follow the general rule that the investors can use their proportionate share in determining their at-risk amount for deducting losses.
Partnership level components for at-risk are:
1. Was a particular loan or note recourse or nonrecourse?
2. What was the amount of the loan or note?
3. Whether a partner is a limited or a general partner.
4. Whether the lender has an interest other than as a creditor.
Partner level components for at-risk are:
1. Are there third party side agreements (stop-loss or assumption agreements)?
2. Did the partner contribute money borrowed from another partner to the partnership?
3. Did a partner bear the ultimate economic risk of loss with respect to a particular partnership liability?
Note:

In these situations the partnership does not have to know, nor does it have to take into account for its taxable year, any of these components.
A passive activity loss issue requires certain determinations at the entity and investor level as to type(s) of activity.
Partnership level components for passive loss are:
1. Whether the partnership is engaged in a rental activity.
2. Whether the partnership is engaged in a trade or business for purposes of IRC section 162.
3. Whether a partner is a limited or a general partner.
4. Whether income is portfolio income.
A partner level determination for passive activity loss is: "Did the partner materially participate in the business? " In this situation the partnership may know if the partner materially participates.

4.31.5.15.2 (05-31-2005)
Conversion of S Corporation to C Corporation

When a Form 1120S return is filed with an untimely election ( Form 2553, Election by a Small Business Corporation), one in which no proper election was filed or one that becomes invalid due to an improper shareholder, the return is treated as a C corporation.
The findings of the proceeding will determine the amount taxable to the C corporation (if any), and provide the basis for an adjustment to the shareholders.
If the campus receives a Form 1120S for which no Form 2553 is on file, and for which the taxpayer has not responded to queries from the campus, then the unprocessed Form 1120S will be processed as a Form 1120 by attaching a blank Form 1120 to the front of the Form 1120S. A TC 150 with an amount of " 0" is generated.
If the Form 1120S was processed as an S corporation return, but the examiner subsequently determines that it is a C corporation, the examiner will follow the procedures outlined in IRM 4.4, AIMS/Processing Handbook, and IRM 4.10.8, Examination of Returns, Report Writing. There will be two RAR's. One, using Form 4549 will show the taxable income and any tax due to the C corporation. The other will use Form 4605 and Form 886-S to remove items of income and separately stated items from the shareholder's returns.
The filing of either a Form 1120 or Form 1120S (later determined to be invalid) starts the running of the statue of limitations. Remember, Form 1120 (or Form 1120S) is due 21/2 months after the end of the tax year or March 15th for a calendar year return.

4.31.5.15.3 (05-31-2004)
Fast Track Mediation

For SB/SE cases, Fast Track Mediation (FTM) is a service offered by the IRS designed to expedite case resolution. It involves an Appeals Officer who has been trained in mediation techniques acting as a mediator between the Taxpayer and Compliance (Examination/Collection). The purpose is to facilitate communication and to help the parties resolve the issue(s). This service is available for unagreed issues on nonTEFRA key cases and should be considered by the examiner before reports are issued to investors. At the conclusion of an examination/collection determination, if the Taxpayer does not agree to the proposed changes, the examiner will determine whether the case qualifies for FTM using the case criteria set forth in FTM Eligibility. If the case qualifies for FTM, the examiner should offer and explain the benefits of utilizing FTM. If the case does not qualify for FTM, standard procedures for unagreed cases should be followed.

4.31.5.15.4 (05-31-2005)
IRC Section 7602 (c), Third Party Contacts

For nonTEFRA partnerships or S corporations, reasonable advance notice is provided (by issuing any one of Letters 3164 A through 3164 T), as appropriate, to the entity when the examination is being conducted at the entity level. When the examination of the entity is being made as part of the examination of a particular partner/member or shareholder's return, a Letter 3164 should be issued to both the entity and the particular investor. If an entity level examination is being conducted, contacts with the partners/members or shareholders of the entity are not considered IRC 7602(c) contacts. On the other hand, if the examination of the entity is being done as part of the examination of a particular partner or shareholder's return, then contact with any other partner or shareholder (other than the partner or shareholder under exam) should be treated as a third party contact.

Note:

Letter 3164 E(DO), Letter 3164 F(DO), and/or Letter 3164 G(DO)) will most likely be the ones used for investor cases.

4.31.5.15.5 (02-22-2008)
IRC Section 6404(g), Suspension of Interest and Certain Penalties

The notice date for the purposes of IRC 6404(g) is the date adequate notice is mailed or provided to the individual investor. It is not the date a report is given to the entity. All other IRC 6404(g) rules apply.
In the case of an individual who files a return before the due date for the return (including extensions), the Service has a 18-month period beginning on the later of:
1. the date on which the return is filed; or
2. the due date of the return without regard to extensions,
in which to provide notice to the taxpayer specifically stating the taxpayer's liability.
If notice is not provided to the taxpayer before the close of the 18-month period, then any imposition of interest, penalty, additions to tax or additional amounts that are calculated in reference to the 18 month time frame are suspended.
The exceptions to the 18 month notice requirement are:
1. any penalty imposed by IRC 6651;
2. any interest, penalty, addition to tax, or additional amount in a case involving fraud;
3. any interest, penalty, addition to tax, or additional amount with respect to any tax liability shown on the return;
4. any criminal penalty; or
5. any listed transaction or reportable transaction that is not reported.
The term suspension periods means the period:
1. beginning on the day after the close of the 18-month period under (1) above and
2. ending the date which is 21 days after the date on which notice is provided to the taxpayer.

4.31.5.15.6 (02-22-2008)
Preparer Penalties

Under Treas. Reg. section 301.7701-15(b)(3), a preparer of the key case entity return is considered a preparer of the investor's return if the "flow-through" share of income, credits, deductions, etc. from the key case entity reportable on the investor's return constitutes a "substantial" portion of the investor's return.

Note:

For purposes of this section, whether an entry, schedule, or other portion of an investor's return is "substantial" depends on its length, complexity, and the associated tax liability, relative to the return as a whole. A single entry, schedule, or other portion involving amounts of gross income, deduction or basis for computing a credit that is either (i) less than $2,000, or (ii) less than $100,000 and also less than 20% of gross income (or AGI for an individual), shall not, by itself, be " substantial" . If there are several entries, schedules, or other portions, the preceding amounts (and percentage) are applied to the aggregate. See Treas. Reg. section 301.7701-15(b)(2).
In those situations where a preparer penalty under IRC 6694(a) or IRC 6694(b) may be warranted:
1. The key case area will alert the investor area or CTF by placing a comment on line 5 of Form 6657, stating that a penalty is being considered;
2. The investor area or CTF should complete their examination; and
3. Send a memorandum to the key area with a copy of the RAR, and copies of pertinent sections of the investor's income tax return. This allows the key area to decide whether the flow-through items from the key case entity are, in fact, a substantial part of the investor's return, and whether a penalty should be applied.

4.31.5.16 (05-31-2004)
Field TEFRA Coordinator Duties for NonTEFRA Entities

The following subsections cover the duties of the NonTEFRA Coordinator.

4.31.5.16.1 (05-31-2004)
General Responsibilities

The Field TEFRA Coordinator is the main contact for LMSB and SB/SE field agents and managers to explain and clarify the nonTEFRA audit procedures.
The Field TEFRA Coordinator responsibilities include the following:
1. Function as the liaison with the CTF functions for PCS linkage and any related linkage problems if requested by the PCS coordinator;
2. Verifying that the CIC group timely writes the RAR and requests removal of PCS controls and input of the Form 8339 for linked CIC investors;
3. Coordinate with Counsel on key case technical questions involving TEFRA vs. nonTEFRA issues;
4. Give advice on the preparation and signing of statute extensions;
5. Provide on site case visitations/consultations for key cases with procedural problems as necessary;
6. Complete a procedural review of closed nonTEFRA key case entities and related investors;
7. Forward closing nonTEFRA key case packages to the CTF; and
8. Forward PCS reports to examination groups within the area.

4.31.5.16.2 (08-01-2006)
Key Case Closure Procedures

Upon receipt in TS of a nonTEFRA key case closed from a group, the Field TEFRA Coordinator should review the following areas of the case file:
1. Proper determination as nonTEFRA? See IRM 4.31.5.4.
2. If attached, is the Power of Attorney (POA) completed correctly? Two areas of the Form 2848 need to be reviewed.
  For a Form 1065. Item #3 - Type of Tax - Partnership Proceeding , Tax Form Number - 1065 and Consequential Adjustments. Item #9 - The signature block should be signed by a responsible person including their title, such as general partner.
  For a Form 1120S. Item #3 - Type of Tax - Income, Tax Form Number - 1120S and Consequential Adjustments. Item #9 - The signature block should be signed by a responsible person including their title. Any corporate officer that can bind the corporation under State law may sign.
3. Statute Extensions - If statute extensions are part of the package, review any investor consents to determine if they have been prepared and signed correctly. If there are any errors, and the normal statute is still open, a new consent will be secured. If the normal statue is gone, consult with local Counsel on the validity of the consent. An S corporation can need the IRC 6501 statute protected when corporate level tax issues under IRC 1374, IRC 1375, or IRC 55 are to be raised. The agent would solicit a regular Form 872 or Form 872-I.
4. The examiner's RAR will be reviewed for required content and accuracy. The coordinator will ensure that all forms required for a nonTEFRA examination are included. If any required items are missing or incorrect, the package may be returned to the originating office or the reviewer may invite the examining agent to appear at the TS office to complete or correct the case there. Minor errors may be corrected by the coordinator.
5. The Field TEFRA Coordinator will review the PCS linkage using TSUMY to see that it is complete and correct.
6. Form 8339 will be submitted to the PCS coordinator for any agreed or no-changed field controlled investors in the package.
7. The coordinator will close all PCS linked key cases through CCP to the SB/SE or LMSB CTF for completion of the investor returns.
8. When the coordinator has determined that the package is procedurally correct, the administrative file will be closed to the proper CTF. The Form 3198 will be noted to request for SB/SE cases, disposal code 30, and updates to PBC 295 and EGC 5417 (Brookhaven) or for LMSB cases, disposal code 30, and updates to PBC 298 and EGC 5417 (Ogden).

Part 4. Examining Process

Chapter 31. Pass-Through Entity Handbook

Section 5. NonTEFRA Examinations - Field Office Procedures

4.31.5 NonTEFRA Examinations - Field Office Procedures

4.31.5.1 (05-31-2004)Introduction

4.31.5.2 (02-22-2008)NonTEFRA Flow-Through Entity Defined

Note:

4.31.5.3 (05-31-2005)Terminology

4.31.5.4 (02-22-2008)Identification of NonTEFRA Key Case Returns

Note:

4.31.5.4.1 (05-31-2004)Special Considerations for Limited Liability Companies (LLC's)

4.31.5.5 (02-22-2008)Election by a Small Partnership to be Included Under the TEFRA Provisions

Note:

4.31.5.6 (05-31-2005)Determining and Identifying the Number of Partners or Members

4.31.5.7 (05-31-2004)S Corporations

4.31.5.8 (05-31-2004)Partnership Control System (PCS)

Note:

4.31.5.8.1 (05-31-2004)Rules and Guidelines for Linking NonTEFRA Entities on PCS

4.31.5.8.2 (05-31-2004)Advantages of using PCS

Note:

4.31.5.8.3 (05-31-2004)Agent Responsibilities if PCS is Not Utilized, or PCS is Used But Cases Are Controlled Locally

4.31.5.8.4 (08-01-2006)When to Link the Key Case on PCS

Note:

4.31.5.9 (05-31-2004)Linking the Key Case and Investors on PCS

4.31.5.9.1 (05-31-2005)Initiating Timely PCS Controls on NonTEFRA Flow-Through Entities

Caution:

4.31.5.9.2 (02-22-2008)The NonTEFRA Linkage Package

Note:

4.31.5.9.2.1 (05-31-2004)Requesting "Dummy" Taxpayer Identification Numbers

Note:

4.31.5.9.2.2 (05-31-2004)Entities Acting as Agents for Investors

4.31.5.9.3 (05-31-2004)Forwarding Linkage Package to the CTF

Note:

4.31.5.9.4 (05-31-2004)Verification of Linkage

4.31.5.10 (05-31-2004)Examination Process

4.31.5.10.1 (05-31-2005)Starting the Examination

4.31.5.10.2 (05-31-2004)Notice to Investors of Examination of Key Case Entity

Note:

4.31.5.10.3 (05-31-2004)Control of Investor Returns Related to Key Case Entities

4.31.5.10.4 (05-31-2004)Control of Cases Established on PCS

4.31.5.10.5 (05-31-2004)Notification of Examination of the Key Case Entity

4.31.5.10.6 (05-31-2004)NonTEFRA Key Case Statute Control

4.31.5.10.7 (05-31-2005)Extension of Investor Statute for NonTEFRA Items

Note:

4.31.5.10.7.1 (05-31-2005)Restricted Consents

Note:

4.31.5.11 (05-31-2004)Post Exam Process

4.31.5.11.1 (05-31-2005)NonTEFRA Examination Results

4.31.5.11.2 (05-31-2005)Key Cases With No Adjustments and Investors Not Linked on PCS

4.31.5.11.3 (08-01-2006)Key Cases With Adjustments and Investors Not Linked on PCS

Note:

4.31.5.11.4 (08-01-2006)Key Cases With Investors Linked on PCS

Note:

Note:

4.31.5.11.5 (05-31-2004)CTF Actions After Receipt of Form 6657

4.31.5.12 (05-31-2004)Centralized RAR Files

4.31.5.13 (05-31-2004)Field NonTEFRA Investor Procedures

4.31.5.13.1 (05-31-2005)Processing NonTEFRA Flow-Through Adjustments

Note:

Note:

4.31.5.13.1.1 (02-22-2008)Special Computations for Oversheltered Returns (IRC Section 6234)

4.31.5.13.1.2 (02-22-2008)Special Computation for Non-Oversheltered Returns (Munro Decision)

4.31.5.14 (05-31-2004)Requesting Investor Returns From the CTF

4.31.5.15 (05-31-2004)Miscellaneous

4.31.5.15.1 (05-31-2005)Items Requiring Key Case and Investor Level Determinations

Note:

Note:

4.31.5.15.2 (05-31-2005)Conversion of S Corporation to C Corporation

4.31.5.15.3 (05-31-2004)Fast Track Mediation

4.31.5.15.4 (05-31-2005)IRC Section 7602 (c), Third Party Contacts

Note:

4.31.5.15.5 (02-22-2008)IRC Section 6404(g), Suspension of Interest and Certain Penalties

4.31.5.15.6 (02-22-2008)Preparer Penalties

Note:

4.31.5.16 (05-31-2004)Field TEFRA Coordinator Duties for NonTEFRA Entities

4.31.5.16.1 (05-31-2004)General Responsibilities

4.31.5.16.2 (08-01-2006)Key Case Closure Procedures

4.31.5.1 (05-31-2004)
Introduction

4.31.5.2 (02-22-2008)
NonTEFRA Flow-Through Entity Defined

4.31.5.3 (05-31-2005)
Terminology

4.31.5.4 (02-22-2008)
Identification of NonTEFRA Key Case Returns

4.31.5.4.1 (05-31-2004)
Special Considerations for Limited Liability Companies (LLC's)

4.31.5.5 (02-22-2008)
Election by a Small Partnership to be Included Under the TEFRA Provisions

4.31.5.6 (05-31-2005)
Determining and Identifying the Number of Partners or Members

4.31.5.7 (05-31-2004)
S Corporations

4.31.5.8 (05-31-2004)
Partnership Control System (PCS)

4.31.5.8.1 (05-31-2004)
Rules and Guidelines for Linking NonTEFRA Entities on PCS

4.31.5.8.2 (05-31-2004)
Advantages of using PCS

4.31.5.8.3 (05-31-2004)
Agent Responsibilities if PCS is Not Utilized, or PCS is Used But Cases Are Controlled Locally

4.31.5.8.4 (08-01-2006)
When to Link the Key Case on PCS

4.31.5.9 (05-31-2004)
Linking the Key Case and Investors on PCS

4.31.5.9.1 (05-31-2005)
Initiating Timely PCS Controls on NonTEFRA Flow-Through Entities

4.31.5.9.2 (02-22-2008)
The NonTEFRA Linkage Package

4.31.5.9.2.1 (05-31-2004)
Requesting "Dummy" Taxpayer Identification Numbers

4.31.5.9.2.2 (05-31-2004)
Entities Acting as Agents for Investors

4.31.5.9.3 (05-31-2004)
Forwarding Linkage Package to the CTF

4.31.5.9.4 (05-31-2004)
Verification of Linkage

4.31.5.10 (05-31-2004)
Examination Process

4.31.5.10.1 (05-31-2005)
Starting the Examination

4.31.5.10.2 (05-31-2004)
Notice to Investors of Examination of Key Case Entity

4.31.5.10.3 (05-31-2004)
Control of Investor Returns Related to Key Case Entities

4.31.5.10.4 (05-31-2004)
Control of Cases Established on PCS

4.31.5.10.5 (05-31-2004)
Notification of Examination of the Key Case Entity

4.31.5.10.6 (05-31-2004)
NonTEFRA Key Case Statute Control

4.31.5.10.7 (05-31-2005)
Extension of Investor Statute for NonTEFRA Items

4.31.5.10.7.1 (05-31-2005)
Restricted Consents

4.31.5.11 (05-31-2004)
Post Exam Process

4.31.5.11.1 (05-31-2005)
NonTEFRA Examination Results

4.31.5.11.2 (05-31-2005)
Key Cases With No Adjustments and Investors Not Linked on PCS

4.31.5.11.3 (08-01-2006)
Key Cases With Adjustments and Investors Not Linked on PCS

4.31.5.11.4 (08-01-2006)
Key Cases With Investors Linked on PCS

4.31.5.11.5 (05-31-2004)
CTF Actions After Receipt of Form 6657

4.31.5.12 (05-31-2004)
Centralized RAR Files

4.31.5.13 (05-31-2004)
Field NonTEFRA Investor Procedures

4.31.5.13.1 (05-31-2005)
Processing NonTEFRA Flow-Through Adjustments

4.31.5.13.1.1 (02-22-2008)
Special Computations for Oversheltered Returns (IRC Section 6234)

4.31.5.13.1.2 (02-22-2008)
Special Computation for Non-Oversheltered Returns (Munro Decision)

4.31.5.14 (05-31-2004)
Requesting Investor Returns From the CTF

4.31.5.15 (05-31-2004)
Miscellaneous

4.31.5.15.1 (05-31-2005)
Items Requiring Key Case and Investor Level Determinations

4.31.5.15.2 (05-31-2005)
Conversion of S Corporation to C Corporation

4.31.5.15.3 (05-31-2004)
Fast Track Mediation

4.31.5.15.4 (05-31-2005)
IRC Section 7602 (c), Third Party Contacts

4.31.5.15.5 (02-22-2008)
IRC Section 6404(g), Suspension of Interest and Certain Penalties

4.31.5.15.6 (02-22-2008)
Preparer Penalties

4.31.5.16 (05-31-2004)
Field TEFRA Coordinator Duties for NonTEFRA Entities

4.31.5.16.1 (05-31-2004)
General Responsibilities

4.31.5.16.2 (08-01-2006)
Key Case Closure Procedures