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Part 8. Appeals

Chapter 19. Appeals Pass-Through Entity Handbook

Section 7. Administrative Adjustment Request

8.19.7  Administrative Adjustment Request

8.19.7.1  (03-07-2008)
Overview

  1. IRC 6227 allows any partner to change the reporting of partnership items by filing an Administrative Adjustment Request (AAR). An Administrative Adjustment Request (AAR) is an amended return with Form 8082 (Notice of Inconsistent Treatment or Administrative Adjustment Request (AAR)) as a cover sheet. See Exhibit 8.19.7-1.

  2. The Form 8082 is a dual purpose form. Partners also use the form to notify the Service when they have taken a position on their return that is inconsistent with the reporting on the partnership tax return. IRM 8.19.1.6.2, Consistent Reporting on Investor Return, describes the consistent reporting requirements.

  3. An AAR filed by the Tax Matters Partner (TMP) on behalf of the partnership may allow the Service to make a direct change to the tax liability of the partners without securing an amended return or a waiver from each partner. An AAR filed on behalf of a partner affects only the partner filing the AAR, unless the IRS begins a partnership proceeding. See IRCs 6227(c) and (d) and Treasury Reg. sections 301.6227(b)-1 and 301.6227(c)-1. Judicial review of AARs is governed by IRC 6228.

  4. This represents a substantial improvement over the procedures for non-TEFRA partnerships. If a non-TEFRA partnership wants to change the reporting of a partnership item, each partner must file an amended return. For a comparison of claim and AAR procedures, see Figure 7-1.

    Figure 8.19.7-1

    Comparison of Claim and AAR Procedures

    Filing Amended Returns: Claim (Non-TEFRA) AAR (TEFRA)
    Partnership level None TMP files amended Form 1065 with Form 8082
    Partner level Partner files amended income tax return (such as Forms 1040X or 1120X) Partner files amended income tax return with Form 8082
    Period for filing claim/AAR Later of:
    3 years from later of filing date or due date of investor return plus extensions, if any
    Or
    2 years from date of payment     		Three years from filing date of Form 1065 or last date for filing the return, whichever is later - if the partnership statute has been extended under IRC 6229(b), 6 months after the extension expires
    Petitioning Courts: Claim (Non-TEFRA) AAR (TEFRA)
    Partnership level None File in Tax Court, District Court, or United States Court of Federal Claims - see IRC 6228(a)
    Partner level File in District Court or United States Court of Federal Claims - see IRC 7422 – or raised in existing deficiency procedures pursuant to section 6512(b)(3) File in District Court or United States Court of Federal Claims - see IRC 7422 as modified by IRC 6228(b) (or raised in an existing deficiency procedures pursuant to IRC 6512(b)).
    Period for partnership petition None Eighteen month period beginning 6 months after AAR filed and ending before the date which is 2 years after AAR filed.
    Period for partner petition Six months after claim filed and prior to 2 years after statutory notice of claim disallowance Period stated above for partnership, or, if IRC 6231(b)(1)(A) notice is issued, 2 years after issuance of notice of non-partnership treatment
    Effect of initiation of examination None Issuance of NBAP prevents petition unless Service fails to send FPAA

  5. All guidance in this section concerning the Campus TEFRA Functions (CTFs) is for cases controlled on the Partnership Controlled System (PCS). The CTFs only work with key cases and investors controlled on the PCS.

8.19.7.1.1  (01-01-2007)
Filing Limits

  1. Generally, an AAR must be filed within 3 years after the later of the date that the partnership return was filed or the last day for filing the return. The filing period is extended from 3 years to 7 years for claims relating to bad debts or worthless securities. If the partnership statute has been extended under IRC 6229(b), the period for filing an AAR is extended until 6 months after the extension expires. See IRCs 6227(a), (b), and (e).

  2. An AAR cannot be filed after an FPAA has been mailed to the TMP for the same taxable year because any issue that could be raised in an AAR may be raised in a petition of the FPAA. Once an FPAA is issued, all adjustments will be fixed and determined by the FPAA (if no petition is filed) or a court decision.

  3. Although an AAR may be filed after an NBAP is issued, it cannot be petitioned unless the Service fails to send an FPAA.

8.19.7.1.2  (01-01-2007)
No Action by Service

  1. A major difference between Claim and AAR procedures is found in the time the taxpayer is given to file a petition for refund. Under IRC 6532(a) the time to file suit for refund on non-TEFRA cases ends two years from the date the Service mails a certified notice of claim disallowance. If the Service takes no action on the claim, the taxpayer has an unlimited time in which to file suit. In both instances, however, a suit cannot be filed before six months have passed since the taxpayer filed a claim for refund or an AAR.

  2. There is no requirement that the Service send a notice of denial of all or a portion of the adjustments reported on the AAR. The time to file suit for an AAR is based on the date the AAR was filed, not the date of a claim disallowance letter. Inaction by the Service effectively disallows the AAR and requires legal action by the partner or TMP to secure the requested changes.

8.19.7.2  (01-01-2007)
AAR Filed by TMP on Behalf of the Partnership

  1. An AAR filed by the TMP is made by filing a completed Form 8082 and attaching an amended Form 1065. The instructions for Form 8082 include the requirements for the amended Form 1065. All TMP filed AARs must include revised schedules showing the effect of the request on the distributive shares of the partners. If the information is not attached to the AAR, the Service will assume the AAR applies to the TMP only in the individual capacity of a partner.

  2. When the AAR is filed, the TMP must decide whether the partnership wants the Service to assess the tax liability of the partners. If so, the TMP must request that the treatment shown on the AAR be substituted for the treatment of partnership items on the original partnership return.

    1. To request substituted return treatment, the TMP must check the box on line 2 of the Form 8082 and should write "See attached Form 8082 for AAR per IRC 6227(c)(1)" on the top margin of the amended Form 1065. Line 2 of the Form 8082 is labeled "For TMPs filing on behalf of the pass-thru entity—check box if this is a substituted return. "

    2. If the request for substituted return treatment is not made on the AAR, the AAR will be treated as if it were not a substituted return.

    3. Figure 7-2 compares AARs that are substituted returns with AARs that are not substituted returns.

    Figure 8.19.7-2

    AAR Filed by the Tax Matters Partner on Behalf of the Partnership Comparison of Substituted Return and Not Substituted Return

      Substituted Return Not a Substituted Return
    Form to file Form 8082 and amended Form 1065 (See Form 8082 instructions for information to include on amended Form 1065) Form 8082 and amended Form 1065 (See Form 8082 instructions for information to include on amended Form 1065)
    Designation on Form 8082 Check the box on line 2, "For TMPs filing on behalf of the pass-thru entity—check box if this is a substituted return" Do NOT check the box on line 2
    Options available to the Service 1. Open a partnership proceeding
    2. Take no action
    3. Make refunds to all partners
    4. Assess additional tax as a mathematical or clerical error—all partners (partner may object to assessment)     		1. Open a partnership proceeding
    2. Take no action
    3. Make refunds to all partners
    4. Cannot assess additional tax for any partners

8.19.7.2.1  (01-01-2007)
Substituted Return

  1. The distinguishing characteristic of a substituted return is that it allows the Service to consider the changes shown on the AAR as mathematical or clerical errors. Deficiency procedures are not required for assessments of mathematical or clerical errors. The Service will determine the tax effect on each partner and make the assessment. This option is particularly important when the AAR shows an increase to partnership income. Even if the partnership reports an increase in a partnership item, the effect on the partner may be a no-change, a deficiency, or a refund, depending on the share of partnership income that was reported on the partner’s return. The Service can make the necessary adjustments to partner returns in all 3 circumstances.

    Note:

    No deficiency may be assessed if both the IRC 6229(a) and 6501 statutes have expired for a partner.

  2. The disadvantage of this type of assessment is that the partner can request abatement. Within 60 days after the date that the notice of correction of error is mailed, the partner can request that the correction not be made. The Service must abate the assessment, and any reassessment must be preceded by the issuance of an FPAA.

  3. If the Service does not consider the changes shown on the AAR as mathematical or clerical errors, or the partners request abatement of assessments made as mathematical or clerical errors, the Service may begin a partnership proceeding or take no action.

8.19.7.2.2  (01-01-2007)
Not a Substituted Return

  1. If the AAR filed by the TMP is not designated as a substituted return, it generally serves as a claim for refund or credit. The Service is permitted to take no action on the AAR, begin a partnership proceeding, or make the refunds that result from the issues identified in the AAR.

    Note:

    If the adjustments shown on an AAR which is not a substituted return would create a tax deficiency for a partner, the Service cannot assess the deficiency without a partnership proceeding.

  2. The option of making refunds to all partners does not apply to a partner whose partnership items were converted to nonpartnership items by reason of 1 or more events described in IRC 6231(b). See IRC 6227(c)(2)(B).

8.19.7.2.3  (01-01-2007)
Processing of AARs

  1. Campus TEFRA Function (CTF) and Compliance procedures for processing AARs filed by the TMP are outlined in IRM 4.31.4. The Campus screens the AAR for timeliness, completeness, purpose, and, in some cases, materiality. AARs requiring further examination action are routed to the Centralized Workload Selection and Delivery (CWSD) formerly Planning and Special Programs function (PSP) along with the original entity return. CWSD determines whether the AAR should be sent for examination, allowed in whole or in part, or returned to the CTF with no action taken.

  2. If the AAR is allowed in whole or in part, individual partner schedules of adjustment (Forms 886-S or 886-Z(c)) will be completed and forwarded to the key case CTF for processing. If no action is to be taken, the reason for the inaction should be explained on Form 4318.

  3. When the AAR is received in the Campus TEFRA Function (CTF), Code 971 should be posted to the key case Master File record. If the return is sent to the CWSD, the transcript should show a 420 posting when it is sent and a 421 posting when the case is returned to files.

8.19.7.2.4  (01-01-2007)
Judicial Review of AARs Made on Behalf of the Partnership

  1. If any part of an AAR filed by the TMP is not allowed, the TMP may file a Petition for Adjustment with respect to partnership items to either the Tax Court, the United States Court of Federal Claims, or the appropriate U. S. District Court. This differs from the petition of an FPAA, which is called a Petition for Readjustment.

  2. The petition must be filed in the 18 month period beginning 6 months after the date the AAR is filed and ending before the date which is 2 years after the AAR is filed. See IRC 6228(a)(2).

    Example:

    Fred Larkspur, TMP of Rose Partnership files an AAR on October 1, 1998. The TMP is able to file a petition between April 1, 1999 and September 30, 2000.

  3. The period for filing suit for adjustment differs substantially from the period for filing suit for refund attributable to nonpartnership items, which begins six months after the claim is filed and ends two years from the date the IRS mails a certified notice of claim disallowance (or within two years from the date the taxpayer files a signed waiver that waives the requirement that the IRS mails the notice to the taxpayer). See IRC 6532(a). There is no certified notice of AAR disallowance.

  4. This period for filing a petition for adjustment after an AAR can be extended using Form 9248, Agreement to Extend the Time to File a Petition for Adjustment by the Tax Matters Partner (Person) with Respect to Partnership or Subchapter S Items. See Exhibit 8.19.7-2.

  5. The Service may issue an investor a refund only as long as the TMP is able to file suit and within two years of the date a court decision on the AAR becomes final. If no suit is filed, and the refund is not made before the time to file suit has expired, the Service has no authority to make the refund.

    Example:

    The AAR filed by the TMP of Rose Partnership in the example in (2) above is determined to be correct, and the Service intends to allow the investor refunds. If the TMP does not file suit, the Service has no authority to make the refunds after September 30, 2000.

  6. If an NBAP is issued to the partnership for the same year as the AAR, the TMP cannot file a petition until the Service issues an FPAA. However, if the IRC 6229(a) statute expires before the Service issues an FPAA, the TMP may file a Petition for Adjustment. The two year period in which to file the petition shall not expire before 6 months after the IRC 6229(a) statute expires.

  7. Tax Court Rules for Petitions for Adjustment are the same as the rules for Petitions for Readjustment. Cases will be closed by Decision Document following Tax Court Rules 248(a) or 248(b). However, the IRC 6229(a) statute is NOT suspended during the time that the Tax Court has jurisdiction.

  8. AARs petitioned in U. S. District Court or the United States Court of Federal Claims are under the jurisdiction of the Department of Justice. Appeals will not have jurisdiction in such cases.

8.19.7.2.5  (01-01-2007)
Allocation Issues

  1. An AAR may change the allocation of income, loss, or credit among the investors. The reallocation will likely result in a refund for at least one investor and a deficiency for another.

  2. If the AAR is a substituted return, the Service must first determine whether there is sufficient time on the IRC 6229(a) statute to assess investors. If an AAR is filed one day before the time period for filing the AAR expires, it is considered timely filed. However, no tax could be assessed because the IRC 6229(a) statute would expire before the Campus could locate the investor returns, compute the tax liability, and make the assessment.

    Note:

    Arguably, under IRC 6501(c)(7) the statute for assessing tax does not expire before 60 days after the day the Service receives the document. Similarly, an assessment may be made if a partner's unextended section 6501 period is open or the statute has been extended for partnership items. Contact the area counsel if reliance on either of these provisions is contemplated.

  3. If the IRC 6229(a) statute is open the Service will either allow the AAR as filed, take no action, or open a partnership proceeding. If the Service is unable to assess the deficiency, it will take no action.

  4. If the AAR is not a substituted return and the IRC 6229(a) statute is open, the Service will either take no action or open a partnership proceeding. If the IRC 6229(a) statute has expired, the Service will take no action.

8.19.7.2.6  (01-01-2007)
AAR Received in Appeals

  1. CASES on ACDS is the system for identifying investor cases in Appeals.

  2. When the AAR filed by the TMP on behalf of the partnership is received in Appeals, it will be carded in as a TEFRA key case.

  3. If there has been no examination activity, the file may only contain the AAR and either a petition or a protest. If the original return is not included with the AAR, it should be requested from the Campus. The original return is preferable to a copy because any comments made by the Compliance CWSD function would be attached to the original return.

8.19.7.2.6.1  (01-01-2007)
Partnership Proceeding Begun

  1. If, in response to an AAR, the Service begins a partnership proceeding, the issues raised in the AAR will be considered along with any other issues raised in the examination. The case will be processed in the same manner as any examined TEFRA key case. It will not be treated as an AAR. The key case may be non-docketed or docketed. Keep the IRC 6229(a) statute open. Any court action will result from the issuance of an FPAA.

8.19.7.2.6.2  (01-01-2007)
No Partnership Proceeding

  1. AARs may be received in Appeals in both docketed and non-docketed status.

  2. In some cases, the only information sent to Appeals may be a petition to the Tax Court and a copy of the AAR.

  3. When an AAR is received in Appeals, the appeals officer should first determine the correct TMP. The selection of the TMP is made annually. See Treasury Reg. sections 301.6231(a)(7)-1 and 301.6231(a)(7)-2. If an ineligible partner is selected as TMP, the AAR will be considered to be filed on behalf of the partner who filed the AAR, not the partnership.

  4. Cases that have not been reviewed by an examiner should be sent to the Compliance function for further development or comment. Appeals will retain jurisdiction of docketed AARs.

  5. Even if there has been no audit, the Compliance CWSD function may have inspected the AAR and made comments in accordance with IRM 4.31.2.3.1. IRM 8.19.7.2.3 describes the transcript postings that will assist in the determination of actions taken by the Compliance function.

  6. Even though no partnership proceeding is commenced, the Service may examine the partnership. This technique will be especially useful when the IRC 6229(a) statute expired before a partnership proceeding could be started. (Generally the Service cannot send an FPAA unless the IRC 6229(a) statute is open.)

    1. If the IRC 6229(a) statute is open, a partnership proceeding may be commenced.

    2. If the section 6229(a) statute has expired, the Service can determine the merits of the issues raised in the AAR and determine whether there are any offsetting adjustments.

8.19.7.2.7  (03-07-2008)
Statutes – Period of Limitations - AAR

  1. Two separate statutes affect AARs:

    1. IRC 6229(a) – statute of limitations for TEFRA partnership returns

    2. IRC 6228 - the period for filing suit under IRCs 6228(a)(2) and 6228(b)(2)(B)

8.19.7.2.7.1  (01-01-2007)
IRC 6229(a) Statute

  1. The IRC 6229(a) statute is not suspended when an AAR is petitioned to the Tax Court. IRC 6229(d) suspends the section 6229(a) statute only after an FPAA is issued. Keeping the IRC 6229(a) statute open has important benefits.

    1. When the investor-level computations are made, an investor may have a deficiency instead of a refund, even if there is a reduction of partnership income. The investor may not have properly reported the distributive share of income, expense or credit, or the adjustments may increase the alternative minimum tax. If the IRC 6229(a) statute has expired, the deficiency cannot be assessed.

    2. The AAR may raise an allocation issue that will decrease the income of one partner and increase the income of a different partner. The Service cannot make a deficiency assessment if the IRC 6229(a) statute has expired.

    3. A partnership proceeding may be commenced if the IRC 6229(a) statute is open.

  2. See IRM 8.19.1.6.6.8, Statute Extensions-Partnerships/S Corporations, for the forms and procedures used to extend the statute at the partnership level.

  3. The entry in the statute field on CASES depends on whether the IRC 6229(a) statute is open at the time the case is received.

    1. If the IRC 6229(a) statute is open when the case is received, do NOT use the terms "CLAIM" or "DOCKT" in the statute section. The IRC 6229(a) statute should be shown in the statute field, even on docketed cases.

    2. If the IRC 6229(a) statute has expired when the case is received in Appeals, the statute field should be shown as "CLAIM" if it is a non-docketed case and "DOCKT" if it is a docketed case.

    3. If the appeals officer decides not to extend the IRC 6229(a) statute, refer to IRM 8.21.3.1.3.3, No Consent Required. If no partnership proceeding will begin, and the decision is made not to extend the IRC 6229(a) statute, instruct the CTF to conform all investor returns to the Schedules K-1 on the original return before the IRC 6229(a) statute expires. Change the statute date to "CLAIM" on non-docketed cases and " DOCKT" for docketed cases.

8.19.7.2.7.2  (01-01-2007)
IRC 6228(a) Statute

  1. IRC 6228(a)(2) provides that the TMP may file suit with regard to the AAR during the eighteen month period which begins 6 months after the AAR is filed and ends 2 years after the AAR is filed.

  2. Be aware of the IRC 6228(a)(2) statute on non-docketed cases because the Service cannot make any refunds once the period for filing suit has passed unless a timely suit is filed.

  3. The decision to extend the period to file suit will be made on a case by case basis. For example, if there is a reasonable expectation that the issues raised in the AAR will be resolved, the statute may be extended. If a resolution of the issues is unlikely, the Service should not offer an extension. The TMP is responsible for timely filing suit.

  4. If the decision to allow the AAR in whole or in part is made when there is less than one year left on the time to file suit, extend the statute for filing suit on Form 9248 (Agreement to Extend the Time to File a Petition For Adjustment by the Tax Matters Partner (Person) With Respect to Partnership or Subchapter S Items) to allow sufficient time for the investor returns to be processed. See Exhibit 8.19.7-2.

8.19.7.2.8  (01-01-2007)
Partnership Control System (PCS)

  1. When a case is received in Appeals, determine whether the key case is linked on PCS. If there has been no examination action prior to the receipt in Appeals, it will probably not be linked.

  2. Always link docketed AARs on PCS. To link the return, send Form 8341 (PCS TEFRA Establish or Add) and the information described in IRM 4.31.4.6.1.2.1 to the PCS Coordinator at the CTF after the case is established on AIMS. The transmittal should clearly inform the CTF that the linkage is being requested because of the AAR. NBAPs should not be sent to the investors. See a sample Form 3210 (Document Transmittal) transmitting the appropriate documents to the CTF in Exhibit 8.19.7-3. The Compliance function may agree to perform the linking procedure for Appeals.

  3. If the case is non-docketed, it should be linked if there is any potential to affect the investor return.

8.19.7.2.9  (01-01-2007)
Case Conclusion and Dispositions

  1. The appeals officer considers the issues and discusses the facts, law, and arguments of the case with the Tax Matters Partner (TMP). The TMP is required to tell the partners that the AAR was filed and must inform them of subsequent actions taken with regard to the AAR. See Treasury Reg. section 301.6223(g)-1.

  2. The Service can recommend acceptance, partial acceptance, offset with other issues, or rejection.

    1. The Service may adjust partnership items of the same or a different character as the adjustments in the AAR. For example, if the AAR shows additional business expenses of $250,000, the Service may offset this adjustment with adjustments to income, deductions, capital gain, credits, or any other partnership items taken into account in the determination of the taxable income of the partner.

    2. In some cases, the Service may readily determine the effect on a partner return. For example, if the $250,000 additional business expenses are allowed, but gross receipts are increased by at least $250,000, it is clear that there will be no refund to the partners.

    Note:

    The effect of offsetting adjustments may not be determinable at the partnership level. For example, the $250,000 additional business expenses may be allowed but the energy tax credit may be reduced. The CTF should determine the partner’s corrected taxable income based on all of the partnership adjustments. If the effect at the partner level is an overassessment, the refund should be paid. If the result is a deficiency, it should not be assessed.

  3. If no part of the AAR is allowed, notify the CTF if the case is linked on PCS. If there are no adjustments to investor returns, the CTF must unlink the investors. The investor returns are surveyed.

    Note:

    If the AAR is non-docketed, but it is likely that the AAR will be petitioned, the CTF will want to keep the investors linked until the time to file suit has passed. If the investor returns were unlinked, the investor returns would be sent back to the files. When the TMP filed a petition, the CTF would have to re-link the cases and retrieve the investor returns. See sample Forms 3210 transmitting the appropriate documents to the CTF in Exhibits 8.19.7-4 and 8.19.7-5.

8.19.7.2.9.1  (01-01-2007)
Docketed AARs

  1. After the TMP petitions an AAR, the Service may begin a partnership proceeding. If an FPAA is mailed before the hearing of the petition for adjustment, the petitioner shall amend the petition for adjustment within 90 days after the date the FPAA is mailed to the TMP. The petition for adjustment will be treated as an action for readjustment of partnership items. See Tax Court Rule 249.

  2. The procedures for closing a docketed AAR are the same as for closing a docketed FPAA. See IRM 8.19.3.14.4.1, IRM 8.19.3.14.5.1 and IRM 8.19.3.14.6.1 for a discussion of appeals officer responsibilities when closing a case using Tax Court Rule 248. See IRM 8.19.5.13.1 and IRM 8.19.5.13.2 for the documentation needed to close the case and notify the CTF of the outcome.

  3. If the Service fails to make the refund that results from a court decision, the partner may file a claim for refund within 2 years of the date that the decision of the court is final. See IRCs 6230(c)(1)(B) and 6230(c)(2)(B).

8.19.7.2.9.2  (01-01-2007)
Non-docketed Cases

  1. If a settlement in a non-docketed case is reached that will disallow any part of the AAR, use Form 870-P(AD) (or Form 870-PT(AD) for partnership tax years ending after August 5, 1997) to ensure that the TMP will not later file suit.

    1. The Partner Name on Page 1 of Form 870-P(AD) (or Form 870-PT(AD)) should show the TMP’s name followed by the Title, "Tax Matters Partner."

    2. The TMP should sign the agreement form as TMP.

    3. The Remarks section of the Schedule of Adjustments should include the following language, "The treatment of partnership items shown above resolves with finality the administrative adjustment request filed by [name of tax matters partner], as tax matters partner, on behalf of [name of partnership], on [date AAR was filed]."

  2. See Exhibit 8.19.7-6 for an example of the agreement form presentation.

  3. An alternative approach to using Form 870-P(AD) (or Form 870-PT(AD), Form 870-L(AD) or Form 870-LT(AD)) is to use a specific matters closing agreement, Form 906, to reflect the partial allowance of the AAR. If this approach is adopted, the AAR should be referenced in the Whereas clauses. Additionally, a provision indicating the TMP’s agreement not to file suit regarding the disallowed portion of the AAR should be included in the body of the closing agreement.

  4. The agreement by the TMP does not preclude individual partners from filing AARs on their own behalf. If the time for filing an AAR has not expired, each partner may file an AAR and later file suit, if the Service does not make the refund. If this is perceived to be a significant problem, the case should be sent to Compliance with the recommendation that a partnership proceeding be conducted.

  5. No agreement form is necessary if the AAR is allowed in full.

  6. If the decision to allow the AAR in whole or in part is made when there is less than one year left to file suit (IRC 6228(a)(2)), extend the statute on Form 9248 (Agreement to Extend the Time to File a Petition for Adjustment by the Tax Matters Partner (Person) with Respect to Partnership or Subchapter S Items) to allow sufficient time for the investor returns to be processed. See Exhibit 8.19.7-2

  7. See a sample Form 3210 transmitting the appropriate documents to the CTF in Exhibit 8.19.7-7.

8.19.7.2.9.3  (01-01-2007)
Petition to District Court or United States Court of Federal Claims

  1. If the AAR is under Appeals jurisdiction at the time a petition is filed with a U. S. District Court or the United States Court of Federal Claims, the Appeals office will transfer the case file to associate area counsel for processing to the Department of Justice. See IRM 8.19.5.17 for these procedures. Notify the CTF that the case is petitioned. If it was not previously linked, notify the CTF to link the partners on PCS. See IRM 8.19.7.2.8(2) for instructions.

  2. When a decision on a case petitioned to a U. S. District Court or the United States Court of Federal Claims is final, the Department of Justice may return the case to Appeals through associate area counsel to complete the processing of the investor returns. Form 4605-A (Examination Changes-Partnerships, Fiduciaries, Small Business Corps. & Domestic Intl. Sales Corp.) and Forms 886-S (Partners’ Share of Income, Deduction and Credits) or 886-Z(c) (Partners' or S Corporation Shareholders' Shares of Income), as appropriate, will be completed and forwarded to the key case CTF. Request that the CTF complete the processing of the partnership items of the investors.

8.19.7.2.10  (01-01-2007)
AAR Filed While Key Case Under Appeals Jurisdiction

  1. The TMP may file an AAR while the key case return is in Appeals jurisdiction.

8.19.7.2.10.1  (01-01-2007)
AAR for Same Tax Year

  1. The TMP may file an AAR with the Service after a TEFRA administrative proceeding has begun but not after an FPAA has been issued.

    1. If the case is docketed because of an FPAA, the TMP must raise all issues in the petition or must amend the petition to include the new issues raised in the AAR.

    2. If the case is non-docketed, the issues raised in the AAR should be considered along with any issues raised in the 60-day letter.

  2. The AAR may be given directly to the appeals officer by the TMP or his representative. In the event that the AAR is filed with the Campus, the AAR will be sent to the Appeals office controlling the partnership return for review by the appeals officer. See IRM 4.31.4.9.2(2)(f).

  3. The appeals officer will send the AAR to Compliance for comment. Jurisdiction should remain with Appeals.

  4. The ACM should include a comment on the issues raised in the AAR and the disposition of those issues.

8.19.7.2.10.2  (01-01-2007)
AAR for Subsequent Year – Unrelated to Current Year

  1. If the TMP files an AAR for a year subsequent to the year under Appeals jurisdiction, and the issues of the AAR have no connection to the issues raised in the current year, the AAR should be reviewed for timeliness and completeness. Determine whether the return is under examination.

  2. If it is timely and complete, and the year is not currently under examination, it should be sent under controlled correspondence (Form 3210) to the CTF of the key case Campus. The Form 3210 should include a statement that the AAR is unrelated to the year under Appeals jurisdiction.

  3. If the AAR is not timely or complete, return the AAR to the TMP without further processing.

8.19.7.2.10.3  (01-01-2007)
AAR for Subsequent Year – Related to Current Year

  1. The TMP may file an AAR for a subsequent year which relates to issues under consideration in Appeals. For example, the issue in the current year may be to capitalize certain expenditures. The AAR may request that depreciation be allowed in the subsequent year.

  2. The appeals officer may retain jurisdiction of the AAR. Follow the procedures for non-docketed AARs received in Appeals. See IRM 8.19.7.2.6.2.

    Caution:

    If the adjustments increase partnership income passed through to the partners, the AAR must be a substituted return. The risk that investors may not accept the assessment of a mathematical or clerical error should be considered before accepting the AAR . The IRC 6229(a) statute MUST be extended so that there is time to assess additional tax or open a partnership proceeding if any partner objects to an assessment.

8.19.7.3  (01-01-2007)
AAR Filed on Behalf of a Partner

  1. Any partner may file an AAR that only affects that partner. The service has the following options:

    1. Process the AAR in the same manner as a claim for credit or refund.

    2. Assess any additional tax that would result from the requested adjustment.

    3. Conduct a partnership proceeding.

    4. Mail to the partner a notice that all partnership items of the partner for the year of the request shall be treated as non-partnership items.

  2. See Delegation Order 4-19 for the officials authorized to sign the notice converting partnership items to nonpartnership items. In Appeals, the Director, Technical Services and the Directors, Field Operations have this authority.

  3. Campus and Compliance procedures for processing AARs filed on behalf of the partner are outlined in IRM 4.31.4.9. These procedures are for Campus and Compliance personnel when an AAR is received at the Campus.

  4. For cases received in Appeals, refer to IRM 8.20.5, Processing and Establishing New Receipts, in the Appeals Records and Processing Manual for carding in the case and verifying the documents to be sent with the cases.

8.19.7.3.1  (01-01-2007)
Service Issues Notice to Partner

  1. If the Service has mailed a notice to the partner that the partnership items are treated as non-partnership items, the AAR is treated as a claim for credit or refund of an overpayment attributable to non-partnership items with respect to that year.

  2. The partner may bring an action under IRC 7422 within 2 years of the date the notice is mailed to the partner. A suit for refund is filed in the appropriate district court or the United States Court of Federal Claims. The claim for refund may also be raised in a pending Tax Court deficiency proceeding under IRC 6512(b).

    1. The limitations period for filing suit may not be extended.

    Note:

    IRC 6228(b)(1)(A) may limit refunds to the two-year period.

  3. The notice converting partnership items to nonpartnership items must be included in the case file when received in Appeals.

8.19.7.3.1.1  (01-01-2007)
Statute for Converted Partners

  1. The Service may wish to examine the issues raised in the AAR. The examination may result in an increase to tax liability. Because the conversion notice is made pursuant to IRC 6231(b)(1), the assessment statute is controlled by IRC 6229(f). The statute is open for one year from the date of the conversion. If the only issues are those raised in the AAR, the statute may be extended using Form 872-F, Form 872-I, or Form 872-IA.

  2. If the IRC 6501 statute is open at the time that the AAR is converted, the Service may examine other non-TEFRA issues. Form 872 is used to extend the IRC 6501 statute. Form 872-I or Form 872-IA should be used to extend both nonpartnership and converted items.

  3. Neither the Form 872-F nor the Form 872 will extend the time for the partner to file suit regarding the AAR.

8.19.7.3.1.2  (03-07-2008)
Conclusion of Case – Pre-90 Day Cases

  1. If the case is agreed, secure an agreement form using the standards for agreements in a pre-90 day non-TEFRA case. Do not secure Form 2297, Waiver of Statutory Notice of Claim Disallowance. Do not send a statutory notice of claim disallowance. The time to file suit regarding the converted AAR differs from the time for filing suit in non-TEFRA cases, which is shown on Form 2297 and the statutory notice of claim disallowance.

  2. The disposition of unagreed cases depends on whether there are adjustments other than the ones raised in the AAR.

    1. If there are no issues other than those raised in the AAR, the case is closed without securing the taxpayer’s agreement on any forms or waivers. Do not send a statutory notice of claim disallowance. No audit statement is needed if the AAR is allowed or denied in full. Prepare an audit statement if there is a partial allowance.

    2. Adjustments to other issues may create a deficiency, even if the issues raised in the AAR are allowed as claimed. The appeals officer should attach a statement with respect to the claim to the statutory notice of deficiency. See IRM 8.17.4.9.8, Unagreed Deficiency Cases Involving Claims.

  3. It is possible for a taxpayer to file suit regarding the AAR after an agreement is made on all of the issues. If, in the judgment of the appeals officer, this is a potential outcome, secure a specific matters closing agreement on Form 906.

    1. The Whereas clause of the closing agreement should clearly state the date of the AAR, the amount claimed, the tax period, the partnership to which the AAR relates, the partnership tax period, and the date the conversion notice was mailed.

    2. The body of the closing agreement should include the disposition of the issues raised in the AAR, the reason for a disallowance, if any, and a statement that the investor agrees not to file suit with regard to the AAR.

8.19.7.3.1.3  (01-01-2007)
Conclusion of Case – Docketed Cases

  1. Cases will only be docketed in Tax Court if issues were raised that created a deficiency. Follow normal Tax Court procedures in completing the case. If there is no deficiency, the taxpayer must petition the appropriate U. S. District Court or the United States Court of Federal Claims. Appeals will not have jurisdiction of those cases.

8.19.7.3.2  (01-01-2007)
Service Does NOT Issue Notice to Partner

  1. The partnership items convert to non-partnership items when the partner begins the civil action for refund. No suit is allowed if an NBAP has been issued.

  2. The petition must be filed in the 18 month period beginning 6 months after the date the AAR is filed and ending before the date which is 2 years after the AAR is filed. See IRC 6228(b)(2)(B). This period may be extended using Form 9247, Agreement to Extend the Time to File a Civil Action for Refund by Notice Partner (Shareholder) With Respect to Partnership or Subchapter S Items. See Exhibit 8.19.7-8.

  3. The decision to extend the period to file suit will be made on a case by case basis. For example, if there is a reasonable expectation that the issues raised in the AAR will be resolved, the statute may be extended. If a resolution of the issues is unlikely, the Service should not offer an extension. The partner is responsible for timely filing suit.

  4. If the decision to allow the AAR in whole or in part is made when there is less than 180 days left on the time to file suit, extend the statute for filing suit on Form 9247 to allow sufficient time for the partner return to be processed.

8.19.7.3.2.1  (01-01-2007)
Conclusion of Case

  1. If a settlement is reached that will disallow any part of the AAR, use Form 870-P(AD) (or Form 870-PT(AD) for partnership tax years ending after August 5, 1997) to ensure that the partner will not later file suit.

    1. The partner name on page 1 of Form 870-P(AD) (or Form 870-PT(AD)) should include the name of the spouse, if a joint return was filed.

    2. The Remarks section of the Schedule of Adjustments should include the following language, "The treatment of partnership items shown above resolves with finality the administrative adjustment request filed by [name of partner] on [date AAR was filed]."

    3. Other partners may be entitled to receive similar treatment if they filed their ow