Unified Partnership Audit Procedures

DEPARTMENT OF THE TREASURY
Internal Revenue Service 26 CFR Parts 301 and 602 [TD 8965] RIN
1545-AW86

TITLE: Unified Partnership Audit Procedures

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations and removal of temporary regulations.

SUMMARY: This document contains final regulations relating to the
unified partnership audit procedures added to the Internal Revenue
Code by the Tax Equity and Fiscal Responsibility Act of 1982
(TEFRA), and amended by the Taxpayer Relief Act of 1997 (1997 Act)
and the Internal Revenue Service Restructuring and Reform Act of
1998 (1998 Act). The unified partnership audit procedures provide
administrative rules for the auditing of a partnership and its
partners. EFFECTIVE DATES: These regulations are effective October
4, 2001.

FOR FURTHER INFORMATION CONTACT: William Heard at (202) 622-7950
(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collections of information contained in these final regulations
have been reviewed and, pending receipt and evaluation of public
comments, approved by the Office of Management and Budget (OMB)
under 44 U.S.C. 3507 and assigned control number 1545-0790.
Responses to these collections of information are both mandatory and
voluntary and are required to receive a benefit.

An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless the collection of
information displays a valid control number assigned by the Office
of Management and Budget The collections of information required by
§§301.6222(b)-1, 301.6227(c)-1, and 301.6227(d)-1 are
reflected on Form 8082 "Notice of Inconsistent Treatment or
Administrative Adjustment Request (AAR)." The burden associated with
them is reflected on that form.

The remaining collections of information: §§301.6222(a)-2,
301.6222(b)-2, 301.6222(b)-3( a)(2), 301.6223(b)-1(b),
301.6223(c)-1(a), 301.6223(e)-2(a), 301.6223(g)-1, 301.6223(h)-1,
301.6224(b)-1(b), 301.6224(c)-1(c), 301.6224(c)-3(c),
301.6229(b)-2(b), 301.6230(b)-1, 301.6230(e)-1, 301.6231(a)(1)-1(b),
301.6231(a)(7)-1, 301.6231(c)-1(d), 301.6231(c)-2(d), are not
reflected on the Form 8082. The estimated annual burden per
respondent varies from .25 hours to .75 hours, depending on
individual circumstances, with an estimated average of .5 hours.
Books or records relating to this collection of information must be
retained as long as their contents may become material in the
administration of any internal revenue law. Generally, tax returns
and tax return information are confidential, as required by 26
U.S.C. 6103.

Background

These regulations finalize the regulations proposed December 13,
1984 (49 FR 48573), April 18, 1986 (51 FR 13231), and January 26,
1999 (64 FR 3886) and issued as temporary regulations on December
13, 1984 (49 FR 48536), March 5, 1987 (52 FR 6779) and January 26,
1999 (64 FR 3837). On January 26, 1999, proposed regulations
(REG-106564-98) were published in the Federal Register (64 FR 3886).
These regulations implemented the amendments to the unified
partnership audit rules made by the 1997 and 1998 Acts. In addition,
the preamble to those proposed regulations stated that the IRS
planned on finalizing all of the unified partnership audit procedure
regulations as part of this project (i.e., those regulations
proposed on December 13, 1984, and April 18, 1986). No written
comments were received in response to the January 26, 1999, notice
of proposed rulemaking. Contemporaneous with the issuance of
proposed regulations, Treasury and the IRS issued temporary
regulations containing substantially similar rules. Taxpayers and
the IRS have been operating under these rules since they were
promulgated as temporary regulations..The proposed regulations under
§§301.6221 thru 301.6233 are adopted, as revised by this
Treasury decision.

Explanation of Provisions

These final regulations contain regulations substantially similar to
the previously proposed and currently effective temporary
regulations under sections 6221 through 6231, inclusive. The
substantive changes from the provisions in the proposed and
temporary regulations are as follows: 1. Clarification of
§301.6223(a)-2T Section 6223 requires the IRS to provide
partners with notice of partnership proceedings. Under section 6223,
the IRS must notify each partner of the beginning of an
administrative proceeding by sending out a notice of the beginning
of an administrative proceeding (NBAP).

Under §301.6223(a)-2T, if the IRS has issued an NBAP but
decides not to propose any adjustments to the partnership return as
filed, the IRS has 45 days to withdraw the NBAP. If the IRS does not
withdraw the NBAP, however, it is not required to issue a notice of
final partnership administrative adjustment (FPAA). This has led to
some confusion among partnerships who postpone raising adjustments
that may result in refunds or offsets while they await the outcome
of the partnership-level audit. The issue of whether the IRS is
required to issue an FPAA after issuance of an NBAP was litigated in
Atlantic Richfield Co. v. Dept. of Treasury, 1996 U.S. Dist. LEXIS
19891, (D.D.C. Dec. 31, 1996). In that case, the court held that the
IRS is not required to issue an FPAA even if it does not withdraw
the NBAP. If the IRS does not issue an FPAA the partners will be
unable to request favorable adjustments unless they have filed a
timely administrative adjustment request (AAR) seeking a change in
the treatment of partnership items. Accordingly, a sentence has been
added to §301.6223(a)-2 to explicitly inform taxpayers that the
IRS does not have to issue an FPAA notwithstanding the issuance of
(and failure to withdraw) an NBAP.

2. Elections Made Under §301.6223(e)-2T

As stated above, section 6223 requires the IRS to provide partners
with an NBAP and anFPAA. If the IRS fails to provide a partner with
timely notice, the partner may, under §301.6223(e)-2T(c)(2),
elect to have either the FPAA, a court decision, a consistent
settlement agreement, or conversion to nonpartnership items apply to
that partner's partnership items. That election must be mailed
within 45 days after "that notice was mailed." Section
301.6223(e)-2T( c)(2). To remove any ambiguity regarding which
notice triggers the right to make an election under section 6223(e),
the final regulations amend the temporary regulations to make it
clear that the 45-day period for making the election under section
6223(e) relates to the mailing of the FPAA, not the NBAP. The final
regulations also clarify that, in accordance with Wind Energy
Technology Associates III v. Commissioner, 94 T.C. 787 (1990), the
issuance of an NBAP fewer than 120 days before the issuance of the
FPAA does not invalidate the FPAA. Instead, a taxpayer will have 45
days from the mailing of the FPAA to make the elections provided in
section 6223(e).

3. Effect of a Nonresident Alien Partner on the Small Partnership
Exception of Section 6231(a)(1)(B)(i)

For purposes of the unified partnership audit rules, section 6231(a)
(1)(B)(i) contains an exception from the definition of a partnership
for certain small partnerships. Under this rule, a partnership does
not include any partnership having 10 or fewer partners, each of
whom is an individual (other than a nonresident alien), a C
corporation, or an estate of a deceased partner. The proposed
regulations stated that "the 10 or fewer limitation . . . is applied
to the number of natural persons (other than nonresident aliens) . .
." Some practitioners have read this provision to mean that a
nonresident alien can be a partner in a small partnership that is
not subject to the unified partnership audit rules, but that such
partners are not counted toward the 10 partner limitation. To
clarify that a partnership that has a nonresident alien partner
cannot qualify for the small partnership exception of section
6231(a)(1)(B)(i), this parenthetical has been removed in
§301.6231(a)(1)-1(a)(1) of the final regulations.

4. Definition of Affected Item

Under the unified partnership audit rules, special procedures apply
with respect to affected.items, that is, items that are affected by
partnership items. Section 301.6231(a)(5)-1T defines the term
affected item as including, among other things, a partner's basis in
the partner's partnership interest, the application of the section
465 at-risk rules to a partner, and any addition to tax or
additional amount to the extent that they are not partnership items.
Generally, affected items are directly assessed following
partnership proceedings. If the item requires partner-level
determinations, however, the IRS must assert changes to affected
items in a partner-level deficiency proceeding following the
completion of the partnership-level proceeding. The IRS promulgated
§301.6231(a)(5)-1T before the enactment of section 469, the
passive loss rules. Because the application of the passive loss
rules to a partner is similar to the existing list of affected
items, the final regulations provide that the application of the
passive loss rules under section 469 to a partner with respect to a
loss flowing from a partnership is an affected item to the extent it
is not a partnership item.

5. Husbands and Wives Owning Partnership Interests Separately or
Jointly

The temporary regulations under section 6231 describe the treatment
of spouses under the unified partnership audit rules where: (1) a
married couple owns an interest in a partnership as joint property;
and (2) a married individual owns an interest in a partnership as
separate property. Section 301.6231(a)(12)-1T applies when a married
couple owns a partnership interest as joint property. It provides
that, with limited exceptions, spouses holding a joint interest in a
partnership are both treated as partners for purposes of subchapter
C of chapter 63 of the Internal Revenue Code. This regulation
interprets section 6231(a)(12), which provides that a husband and
wife who have a joint interest in a partnership shall be treated as
one person, except as otherwise provided in regulations.

Section 301.6231(a)(2)-1T applies when one spouse owns a partnership
interest as separate property. It provides that, with limited
exceptions, a spouse who files a joint ret urn wit h an individual
holding a separate interest in a partnership is treated as a partner
for purposes of subchapter C of chapter 63. This regulation
interprets section 6231(a)(2), which provides that the term partner.
Includes any person whose income tax liability is determined in
whole or in part by taking into account directly or indirectly
partnership items.

In Callaway v. Commissioner, 231 F.3d 106 (2d Cir. 2000), the U.S.
Court of Appeals for the Second Circuit considered §301.6231(a)
(2)-1T in holding that a wife was not bound by the outcome of a
unified partnership proceeding where her husband's partnership items
converted to nonpartnership items during the proceeding. The
partnership interest at issue in Callaway was the husband's separate
property. The court reasoned that the wife was treated as a partner
under the regulation only because she filed a joint return with a
person who owned a partnership interest; therefore, her tax
liability was determined in part by taking into account partnership
items. Once the husband's partnership items converted to non
partnership items, the wife's tax liability was no longer affected
by any partnership items and there was no longer any reason for her
to participate in or be bound by the partnership proceedings.

In so holding, the Callaway court distinguished Dubin v.
Commissioner, 99 T.C. 325 (1992). In Dubin, the Tax Court held that
a wife was bound by the outcome of a unified partnership audit
proceeding even though her husband's partnership items converted to
nonpartnership items prior to the conclusion of the proceeding. In
Dubin, unlike Callaway, the husband and wife owned the interest as
joint property. Therefore, each was treated as having a share of
partnership items that could be affected by the partnership
proceeding independently of the other's share.

To resolve questions concerning the treatment of partnership items
when a conversion event occurs with respect to a spouse,
§§301.6231(a)(2)-1T and 301.6231(a)(12)-1T have been
amended to be consistent with the Callaway opinion.

6. Partnership-Level Determinations of Penalties

Before the 1997 Act, the IRS could impose penalties on a partner
only through the application of the deficiency procedures after the
completion of a partnership-level proceeding. Forcing the IRS to
open deficiency proceedings against the individual partners was
inconsistent. with the efficiency goal of the partnership audit
rules. The 1997 Act cured this problem by providing that, for
partnership taxable years ending after August 5, 1997, partnership-
level proceedings include the determination of applicable penalties
at the partnership level. Partners may now raise any partner-level
defenses to the imposition of penalties only in a subsequent refund
action.

The temporary regulations issued on January 26, 1999 (the 1999
Regulations) revised §§301.6221-1T, 301.6224(c)-3T(b)(1),
and 301.6231(a)(6)-1T to conform those regulations to the statutory
change. The revised regulations mandate that the partnership's
penalty defenses are to be resolved during the partnership
proceeding; individual defenses can only be brought by the partner
in a subsequent refund action. In addition, the 1999 Regulations
modify the computational adjustment rules to allow the IRS to assess
penalties under those procedures.

Finally, the 1999 Regulations specify that partnership-level
determinations of a penalty may be the subject of a settlement
agreement between the IRS and a partner in a partnership. If they
are, then the IRS must offer consistent settlement terms with
respect to those partnership-level determinations of the penalty
(and other settled partnership items) to other partners in the
partnership, subject to the limitations of section 6224(c)(2) and
the regulations there under. The final regulations make additional
changes to the regulations under subchapter C of chapter 63 to
conform those regulations to the new statutory treatment of
penalties. Specifically, the final regulations amend
§301.6224(c)-1T to clarify that a settlement agreement between
the tax matters partner and the IRS with respect to penalties, like
a settlement agreement with respect to partnership items, binds
partners other than notice partners and members of a notice group.
Similarly, the final regulations amend §301.6224(c)-2T to
clarify that a settlement agreement between a pass-thru partner and
the IRS with respect to penalties binds indirect partners, as would
a settlement agreement with respect to partnership items. In
addition, the final regulations amend §301.6229(f)-1T to
clarify that the rules applicable to partial settlements of
partnership items also apply to partnership-level determinations of
penalties.

The final regulations also amend §301.6226(f)-1T to reflect the
1997 Act changes to section 6226(f). The 1997 Act grants courts
jurisdiction to determine penalties, additions to tax, or additional
amounts relating to an adjustment to partnership items. The final
regulations do not, however, amend §301.6226(e)-1T to require
that a partnership contesting an FPAA, in a United States district
court or the United States Court of Federal Claims, deposit tax
attributable to partnership-level determinations of penalties as a
condition of bringing the proceeding. Because the 1997 Act amends
section 6226(f), but not section 6226(e), it appears that Congress
did not intend to require a deposit of penalties attributable to
partnership-level determinations as a condition of bringing such an
action. This rule is applicable to civil actions beginning on or
after October 4, 2001.

Treasury and the IRS also amended §301.6226(e)-1T to clarify
that, in the case of a petition filed by a 5-percent group or pass-
thru partner, the members of the group or the indirect partners
holding an interest in the partnership through the pass-thru partner
must deposit the aggregate amount by which their tax liabilities
would be increased if the treatment of partnership items on the
partners' returns were made consistent with the treatment of
partnership items on the partnership return. This clarification is
applicable to civil actions beginning on or after March 30, 2002.

7. Applicability Dates

This document contains final regulations relating to the unified
partnership audit procedures added to the Internal Revenue Code by
TEFRA, and amended by the 1997 Act and the 1998 Act. Proposed
regulations were published on December 13, 1984, April 18, 1986, and
January 26, 1999. Temporary regulations were published on December
13, 1984 (effective December 10, 1984), March 5, 1987 (effective
September 3, 1982), and January 26, 1999 (effective January 26,
1999). The final regulations published in this document apply to
unified partnership proceedings with respect to partnership taxable
years beginning on or after October 4, 2001. For unified partnership
proceedings with respect to partnership taxable years beginning.
before October 4, 2001, taxpayers and practitioners are directed to
the temporary regulations that were in effect for the period in
question.

Effective Date These regulations are effective as of October 4,
2001.

Special Analyses

It has been determined that this Treasury decision is not a
significant regulatory action as defined in Executive Order 12866.
Therefore, a regulatory assessment is not required. It is hereby
certified that the collection of information in
§301.6229(b)-2(b) does not have a significant impact on a
substantial number of small entities. This certification is based on
the fact that the notification is only required for the few
partnerships whose Tax Matters Partners are debtors in a bankruptcy
proceeding under Title 11 of the United States Code. Moreover, the
time required to prepare and file the notification is minimal and
will not have a significant impact on those few small entities that
file the notification. Therefore, a Regulatory Flexibility Analysis
under the Regulatory Flexibility Act (5 U.S.C. chapter 6) is not
required for §301.6229(b)-2(b).

The other information collections imposed by this Treasury decision
are not subject to the Regulatory Flexibility Act because the notice
of proposed rulemaking with respect to these requirements was
published prior to March 29, 1996. Nevertheless, we believe that
these information collections will not have a significant impact on
a substantial number of small entities. This is based on the fact
that most of the information collections only apply to entities
under audit, and the remaining information collections apply only to
a small number of small businesses, namely small partnerships who
elect to have the provisions of subchapter C of chapter 63 apply,
and small business partners that report partnership items
inconsistently with the reporting of that item on the partnership
return. Moreover, the time required to prepare and file the required
statements is minimal on those few small entities that file the
statements.

It also has been determined that section 553(b) of the
Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to
these regulations. Pursuant to section 7805(f) of the Internal.
Revenue Code, the notice of proposed rulemaking was submitted to the
Chief Counsel for Advocacy of the Small Business Administration for
comment on its impact on small business.

Drafting Information

The principal author of these regulations is Horace Howells, Office
of Associate Chief Counsel (Passthroughs and Special Industries),
IRS. However, other personnel from the IRS and Treasury Department
participated in their development. List of Subjects

26 CFR Part 301

Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income
taxes, Penalties, Reporting and recordkeeping requirements.

26 CFR Part 602

Reporting and recordkeeping requirements. Adoption of Amendments to
the Regulations Accordingly, 26 CFR parts 301 and 602 are amended as
follows:

PART 301 - - PROCEDURE AND ADMINISTRATION

Paragraph 1. The authority citation for part 1 is amended by adding
entries in numerical order to read as follows:

Authority: 26 U.S.C. 7805 * * *

Section 301.6231(c)-1 also issued under 26 U.S.C. 6231(c)(1) and
(3).

Section 301.6231(c)-2 also issued under 26 U.S.C. 6231(c)(1) and
(3). * * *

Par. 2. Section 301.6221-1 is added to read as follows:
§301.6221-1 Tax treatment determined at partnership level.

(a) In general. A partner's treatment of partnership items on the
partner's return may not be changed except as provided in sections
6222 through 6231 and the regulations thereunder. Thus, for example,
if a partner treats an item on the partner's return consistently
with the treatment of the item on the partnership return, the IRS
generally cannot adjust the treatment of that item on the partner's
return except through a partnership-level proceeding. Similarly,
the. taxpayer may not put partnership items in issue in a proceeding
relating to nonpartnership items. For example, the taxpayer may not
offset a potential increase in taxable income based on changes to
nonpartnership items by a potential decrease based on partnership
items.

(b) Restrictions inapplicable after items become nonpartnership
items. Section 6221 and paragraph (a) of this section cease to apply
to items arising from a partnership with respect to a partner when
those items cease to be partnership items with respect to that
partner under section 6231(b).

(c) Penalties determined at partnership level. Any penalty, addition
to tax, or additional amount that relates to an adjustment to a
partnership item shall be determined at the partnership level.
Partner-level defenses to such items can only be asserted through
refund actions following assessment and payment. Assessment of any
penalty, addition to tax, or additional amount that relates to an
adjustment to a partnership item shall be made based on partnership-
level determinations. Partnership-level determinations include all
the legal and factual determinations that underlie the determination
of any penalty, addition to tax, or additional amount, other than
partner-level defenses specified in paragraph (d) of this section.

(d) Partner-level defenses. Partner-level defenses to any penalty,
addition to tax, or additional amount that relates to an adjustment
to a partnership item may not be asserted in the partnership-level
proceeding, but may be asserted through separate refund actions
following assessment and payment. See section 6230(c)(4). Partner-
level defenses are limited to those that are personal to the partner
or are dependent upon the partner's separate return and cannot be
determined at the partnership level. Examples of these
determinations are whether any applicable threshold underpayment of
tax has been met with respect to the partner or whether the partner
has met the criteria of section 6664(b) (penalties applicable only
where return is filed), or section 6664(c)(1) (reasonable cause
exception) subject to partnership-level determinations as to the
applicability of section 6664(c)(2).

(e) Cross-references. See §§301.6231(c)-1 and
301.6231(c)-2 for special rules relating to. certain applications
and claims for refund based on losses, deductions, or credits from
abusive tax shelter partnerships.

(f) Effective date. This section is applicable to partnership
taxable years beginning on or after October 4, 2001. For years
beginning prior to October 4, 2001, see §301.6221-1T contained
in 26 CFR part 1, revised April 1, 2001. §301.6221-1T [Removed]
Par. 2a. Section 301.6221-1T is removed. Par. 3. Section
301.6222(a)-1 is added to read as follows: §301.6222(a)-1
Consistent treatment of partnership items.

(a) In general. The treatment of a partnership item on the partner's
return must be consistent with the treatment of that item by the
partnership on the partnership return in all respects including the
amount, timing, and characterization of the item.

(b) Treatment must be consistent with partnership return. The
treatment of a partnership item on the partner's return must be
consistent with the treatment of that item on the partnership
return. Thus, a partner who treats an item consistently with a
schedule or other information furnished to the partner by the
partnership has not satisfied the requirement of paragraph (a) of
this section if the treatment of that item is inconsistent with the
treatment of the item on the partnership return actually filed. For
rules relating to the election to be treated as having reported the
inconsistency where the partner treats an item consistently with an
incorrect schedule, see §301.6222(b)-3.

(c) Examples. The following examples illustrate the principles of
this section: Example 1. B is a partner of Partnership P. Both B and
P use the calendar year as the taxable year. In December 2001, P
receives an advance payment for services to be performed in 2002 and
reports this amount as income for calendar year 2001. However, B
reports B's distributive share of this amount on B's income tax
return for 2002 and not on B's return for 2001. B's treatment of
this partnership item is inconsistent with the treatment of the item
by P.

Example 2. Partnership P incurred certain start-up costs before P
was actively engaged in its business. P capitalized these costs. C,
a partner in P, deducted C's proportionate share of these start-up
costs. C's treatment of the partnership expenditure is inconsistent
with the treatment of that item by P. Example 3. D is a partner in
partnership P. P reports a loss of $100,000 on its return, $5,000 of
which it reports on the Schedule K-1 attached to its return as D's
distributive share. However, P reports $15,000 as D's distributive
share of P's loss on the Schedule K-1 furnished to D. D reports the
$15,000 loss on D's income tax return. D has not satisfied the
consistent reporting requirement. See, however, §301.6222(b)-3
for an election to be treated as having reported the inconsistency.

(d) Effective date. This section is applicable to partnership
taxable years beginning on or after October 4, 2001. For years
beginning prior to October 4, 2001, see §301.6222(a)-1T
contained in 26 CFR part 1, revised April 1, 2001.
§301.6222(a)-1T [Removed] Par. 3a. Section 301.6222(a)-1T is
removed. Par. 4. Section 301.6222(a)-2 is added to read as follows:
§301.6222(a)-2 Application of consistent reporting and
notification rules to indirect partners.

(a) In general. The consistent reporting requirement of
§301.6222(a)-1 is generally applied with respect to the source
partnership. For purposes of this section, the term source
partnership means the partnership (within the meaning of section
6231(a)(1)) from which the partnership item originates.

(b) Indirect partner files consistently with source partnership. An
indirect partner who treats an item from a source partnership in a
manner consistent with the treatment of that item on the source
partnership's return satisfies the consistency requirement of
section 6222(a) regardless of whether the indirect partner treats
that item in a manner consistent with the treatment of that item by
the pass-thru partner through which the indirect partner holds the
interest in the source partnership. Under these circumstances,
therefore, the Internal Revenue Service shall not send to the
indirect partner the notice described in section 6231(b)(1)(A).

(c) Indirect partner files inconsistently with source
partnership--(1) Indirect partner notifies the Internal Revenue
Service of inconsistency. An indirect partner who--( i) Treats an
item from a source partnership in a manner inconsistent with the
treatment of that item on the source partnership's return; and (ii)
Files a statement identifying the inconsistency with the source
partnership in accordance with §301.6222(b)-1, shall not be
subject to a computational adjustment to conform the treatment of
that item to the treatment of that item on the return of the source
partnership.

(2) Indirect partner does not notify the Internal Revenue Service of
inconsistency. Except as provided in paragraph (c)(3) of this
section, an indirect partner who--( i) Treats an item from a source
partnership in a manner inconsistent with the treatment of that item
on the source partnership's return; and (ii) Fails to file a
statement identifying the inconsistency with the source partnership
in accordance with §301.6222(b)-1, is subject to a
computational adjustment to conform the treatment of that item to
the treatment of that item on the return of the source partnership.

(3) Indirect partner files consistently with a pass-thru partner
that notifies the Internal Revenue Service of the inconsistency. If
an indirect partner treats an item from a source partnership in a
manner consistent with the treatment of that item by a pass-thru
partner through which the indirect partner holds the interest in the
source partnership and that pass-thru partner--

(i) Treats that item in a manner inconsistent with the treatment of
that item on the source partnership's return; and

(ii) Files a statement identifying the inconsistency with the source
partnership in accordance with §301.6222(b)-1, the indirect
partner is not subject to a computational adjustment to conform to
the treatment of that item on the return of the source partnership.

(d) Examples. The following examples illustrate the principles of
this section: Example 1. One of the partners in Partnership A is
Partnership B, which has four equal partners C, D, E, and F. Both A
and B are partnerships within the meaning of section 6231(a)(1). On
its return, A reports $100,000 as B's distributive share of A's
ordinary income. B, however, reports only $80,000 as its
distributive share of the income and does not notify the Internal
Revenue Service of this inconsistent treatment with respect to A. C
reports $20,000 as its distributive share of the item. Although C
reports the item consistently with B, C is subject to a
computational adjustment to conform the treatment of that item on
C's return to the treatment of that item on A's return.

Example 2. Assume the same facts as in Example 1, except that B
notified the Internal Revenue Service of its inconsistent treatment
with respect to source partnership A. C is not subject to a
computational adjustment. Example 3. Assume the same facts as in
Example 1. D reports only $15,000 as D's distributive share of the
income and does not report the inconsistency. F reports only $9,000
as its distributive share of the item but reports this inconsistency
with respect to source partnership A. D is subject to a
computational adjustment to conform the treatment of that item on
D's return to the treatment of that item on A's return. F is not
subject to a computational adjustment.

Example 4. Assume the same facts as in Example 3, except that F
reported the inconsistency with respect to B and did not report the
inconsistency with respect to source partnership A. F is subject to
a computational adjustment to conform the treatment of that item on
F's return to the treatment of that item on A's return.

Example 5. Assume the same facts as in Example 1. E reports $25,000
as its distributive share of the item. Regardless of whether E
reports the inconsistency between its treatment of the item and that
by B, E is neither subject to a computational adjustment to conform
E's treatment of that item to that of B nor subject to the notice
described in section 6231(b)(1)(A) with respect to any such
notification of inconsistent treatment.

(e) Effective date. This section is applicable to partnership
taxable years beginning on or after October 4, 2001. For years
beginning prior to October 4, 2001, see §301.6222(a)-2T
contained in 26 CFR part 1, revised April 1, 2001.
§301.6222(a)-2T [Removed] Par. 4a. Section 301.6222(a)-2T is
removed. Par. 5. Section 301.6222(b)-1 is added to read as follows:
§301.6222(b)-1 Notification to the Internal Revenue Service
when partnership items are treated inconsistently.

(a) In general. The statement identifying an inconsistency described
in section 6222(b)(1)(B) shall be filed by filing the form
prescribed for that purpose in accordance with the instructions
accompanying that form.

(b) Effective date. This section is applicable to partnership
taxable years beginning on or after October 4, 2001. For years
beginning prior to October 4, 2001, see §301.6222(b)-1T
contained in 26 CFR part 1, revised April 1, 2001.
§301.6222(b)-1T [Removed] Par. 5a. Section 301.6222(b)-1T is
removed. Par. 6. Section 301.6222(b)-2 is added to read as follows:
§301.6222(b)-2 Effect of notification of inconsistent
treatment.

(a) In general. Generally, if a partner treats a partnership item on
the partner's return in a manner inconsistent with the treatment of
that item on the partnership return, the Internal Revenue Service
may make a computational adjustment to conform the treatment of the
item by the partner with the treatment of that item on the
partnership return. Any additional tax resulting from that
computational adjustment may be assessed without either the
commencement of a partnership proceeding or notification to the
partner that all partnership items arising from that partnership
will be treated as nonpartnership items. However, if a partner
notifies the Internal Revenue Service of the inconsistent treatment
of a partnership item in the manner prescribed in
§301.6222(b)-1, the Internal Revenue Service generally may not
make an adjustment with respect to that partnership item unless the
Internal Revenue Service--

(1) Conducts a partnership-level proceeding; or

(2) Notifies the partner under section 6231(b)(1)(A) that all
partnership items arising from that partnership will be treated as
nonpartnership items. See, however, §§301.6231(c)-1 and
301.6231(c)-2 for special rules relating to certain applications and
claims for refund based on losses, deductions, or credits from
abusive tax shelter partnerships.

(b) Partner protected only to extent of notification. (1) A partner
who reports the inconsistent treatment of partnership items on the
partner's return is protected from computational adjustments under
section 6222(c) only with respect to those partnership items the
inconsistent treatment of which is reported. Thus, if a partner
notifying the Internal Revenue Service with respect to one item
fails to report the inconsistent treatment of another item, the
partner is subject to a computational adjustment with respect to
that other item.

(2) The following example illustrates the principles of this
paragraph (b): Example. Partner A of Partnership P treats a
deduction and a capital gain arising from P on A's return in a
manner that is inconsistent with the treatment of those items by P.
A reports the inconsistent treatment of the deduction but not of the
gain. A is subject to a computational adjustment under section
6222(c) with respect to the gain.

(c) Adjustments in a separate proceeding not limited to conforming
adjustments. (1) If the Internal Revenue Service conducts a separate
proceeding with a partner whose partnership items are treated as
nonpartnership items under section 6231(b), the Internal Revenue
Service is not limited to making adjustments that merely conform the
partner's return to the partnership return.

(2) Example. The following example illustrates the principles of
this paragraph (c): Example. Partnership P allocates to E, one of
its partners, a loss of $8,000. E, however, claims a loss of $9,000
and reports the inconsistent treatment. The Internal Revenue Service
notifies E that it will treat all of E's partnership items arising
from P as nonpartnership items. As a result of a separate proceeding
with E, the Internal Revenue Service may issue a deficiency notice
which could include reducing the loss to $3,000.

(d) Effective date. This section is applicable to partnership
taxable years beginning on or after October 4, 2001. For years
beginning prior to October 4, 2001, see §301.6222(b)-2T
contained in 26 CFR part 1, revised April 1, 2001.
§301.6222(b)-2T [Removed] Par. 6a. Section 301.6222(b)-2T is
removed. Par. 7. Section 301.6222(b)-3 is added to read as follows:
§301.6222(b)-3 Partner receiving incorrect schedule.

(a) In general. A partner shall be treated as having complied with
section 6222(b)(1)(B) and §301.6222(b)-1 with respect to a
partnership item if the partner--

(1) Demonstrates that the treatment of the partnership item on the
partner's return is consistent with the treatment of that item on
the schedule prescribed by the Internal Revenue Service and
furnished to the partner by the partnership showing the partner's
share of income, credits, deductions, etc.; and

(2) Elects in accordance with the rules prescribed in paragraph (b)
of this section to have this section apply with respect to that
item.

(b) Election provisions--(1) Time and manner of making election. The
election described in paragraph (a) of this section shall be made by
filing a statement with the Internal Revenue Service office issuing
the notice of computational adjustment within 30 days after the
notice is mailed to the partner.

(2) Contents of statement. The statement described in paragraph (b)
(1) of this section shall be--

(i) Clearly identified as an election under section 6222(b)(2);

(ii) Signed by the partner making the election; and

(iii) Accompanied by copies of the schedule furnished to the partner
by the partnership and of the notice of computational adjustment.
The partner need not enclose a copy of the notice of computational
adjustment, however, if the partner clearly identifies the notice of
computational adjustment. Generally, the requirement described in
paragraph (a)(1) of this section will be satisfied by attaching to
the statement a copy of the schedule furnished to the partner by the
partnership. However, if it is not clear from the information
contained on the schedule that the treatment of the partnership item
on the schedule is consistent with the partner's treatment of such
item on the partner's return the statement shall also include an
explanation of how the treatment of such item on the schedule is
consistent with the treatment on the partner's return with respect
to the characterization, timing, and amount of such item.

(c) Effective date. This section is applicable to partnership
taxable years beginning on or after October 4, 2001. For years
beginning prior to October 4, 2001, see §301.6222(b)-3T
contained in 26 CFR part 1, revised April 1, 2001.
§301.6222(b)-3T [Removed] Par. 7a. Section 301.6222(b)-3T is
removed. Par. 8. Section 301.6223(a)-1 is added to read as follows:
§301.6223(a)-1 Notice sent to tax matters partner.

(a) In general. For purposes of subchapter C of chapter 63 of the
Internal Revenue Code, a notice is treated as mailed to the tax
matters partner on the earlier of--

(1) The date on which the notice is mailed to "THE TAX MATTERS
PARTNER" at the address of the partnership (as provided on the
partnership return, except as updated under §301.6223(c)-1); or

(2) The date on which the notice is mailed to the person who is the
tax matters partner at the address of that person (as provided on
the partner's return, except as updated under §301.6223(c)-1)
or the partnership. See §301.6223(c)-1 for rules relating to
the information used by the Internal Revenue Service in providing
notices, etc.

(b) Example. The provisions of this section may be illustrated by
the following example: Example. Partnership P designates B as its
tax matters partner in accordance with §301.6231(a)(7)-1(b). On
December 1 a notice of the beginning of an administrative proceeding
is mailed to "THE TAX MATTERS PARTNER" at the address of P. On
January 10, a copy of the notice is mailed to B at B's address.
December 1 is treated as the date that the notice was mailed to the
tax matters partner.

(c) Effective date. This section is applicable to partnership
taxable years beginning on or after October 4, 2001. For years
beginning prior to October 4, 2001, see §301.6223(a)-1T
contained in 26 CFR part 1, revised April 1, 2001.
§301.6223(a)-1T [Removed] Par. 8a. Section 301.6223(a)-1T is
removed. Par. 9. Section 301.6223(a)-2 is added to read as follows:
§301.6223(a)-2 Withdrawal of notice of the beginning of an
administrative proceeding.

(a) In general. If the Internal Revenue Service, within 45 days
after the day on which the notice specified in section 6223(a)(1) is
mailed to the tax matters partner, decides not to propose any
adjustments to the partnership return as filed, the Internal Revenue
Service may withdraw the notice specified in section 6223(a)(1) by
mailing a letter to that effect to the tax matters partner within
that 45-day period. Even if the Internal Revenue Service does not
withdraw the notice specified in section 6223(a)(1), the Internal
Revenue Service is not required to issue a notice of final
partnership administrative adjustment. If the Internal Revenue
Service withdraws the notice specified in section 6223(a)(1),
neither the Internal Revenue Service nor the tax matters partner is
required to furnish any notice with respect to that proceeding to
any other partner. Except as provided in paragraph (b) of this
section, a notice specified in section 6223(a)(1) which has been
withdrawn shall be treated for purposes of subchapter C of chapter
63 of the Internal Revenue Code as if that notice had never been
mailed to the tax matters partner.

(b) Internal Revenue Service may not reissue notice except under
certain circumstances. If the notice specified in section 6223(a)(1)
was mailed to the tax matters partner with respect to a partnership
taxable year and that notice was later withdrawn as provided in
paragraph (a) of this section, the Internal Revenue Service shall
not mail a second notice specified in section 6223(a)(1) with
respect to that taxable year unless--

(1) There is evidence of fraud, malfeasance, collusion, concealment,
or misrepresentation of a material fact;

(2) The prior proceeding involved the misapplication or erroneous
interpretation of an established Internal Revenue Service position
existing at the time of the previous examination, or the failure to
make an adjustment based on such a position; or

(3) Other circumstances exist which indicate that failure to reissue
the notice would be a serious administrative omission.

(c) Effective date. This section is applicable to partnership
taxable years beginning on or after October 4, 2001. For years
beginning prior to October 4, 2001, see §301.6223(a)-2T
contained in 26 CFR part 1, revised April 1, 2001.
§301.6223(a)-2T [Removed] Par. 9a. Section 301.6223(a)-2T is
removed. Par. 10. Section 301.6223(b)-1 is added to read as follows:
§301.6223(b)-1 Notice group.

(a) In general. If a group of partners having in the aggregate a 5
percent or more interest in the profits of a partnership requests
and designates one of their members to receive the notices described
in section 6223(a)(1) and (2), the member so designated shall be
treated as a partner to whom section 6223(a) applies. Thus, the
designated representative is entitled to receive any notice
described in section 6223(a) that is mailed to the tax matters
partner 30 days or more after the day on which the Internal Revenue
Service receives the request from the group. (b) Request for
notice--

(1) In general. The Internal Revenue Service shall mail to the
member of the notice group designated to receive such notice any
notice described in section 6223(a) that is mailed to the tax
matters partner 30 days or more after the day on which the Internal
Revenue Service receives the request for notice from the group if
such request for notice is made in accordance with the rules
prescribed in this paragraph (b).

(2) Content of request. The request for notice from a notice group
shall--

(i) Identify the partnership by name, address, and taxpayer
identification number;

(ii) Specify the taxable year or years for which the notice group is
formed;

(iii) Designate the member of the group to receive the notices;

(iv) Set out the name, address, taxpayer identification number, and
profits interest of each member of the group; and

(v) Be signed by all partners comprising the notice group.

(3) Place for filing. The request for notice from a notice group
generally must be filed with the service center where the
partnership return is filed. However, if the notice group
representative knows that the notice described in section 6223(a)(1)
(beginning of an administrative proceeding) has already been mailed
to the tax matters partner, the statement should be filed with the
Internal Revenue Service office that mailed that notice.

(4) Copy to be sent to the tax matters partner. A copy of the
request for notice from a notice group shall be provided to the tax
matters partner by the notice group representative within 30 days
after the request is filed with the Internal Revenue Service.

(5) Years covered by request. A request for notice by a notice group
may relate only to partnership taxable years that have ended before
the request is filed. A request, however, may relate to more than
one partnership taxable year if the 5 percent or more profits
interest requirement of section 6223(b)(2) is satisfied for each
year to which the request relates.

(c) Composition of notice group--

(1) In general. A notice group shall be comprised only of persons
who were partners at some time during the partnership taxable year
for which the group is formed. If a notice group is formed for more
than one taxable year, each member of the group must have been a
partner at some time during at least one of the taxable years for
which the group is formed. A notice group may include a partner
entitled to separate notice. See section 6231(d) and
§301.6231(d)-1 for rules relating to determining the interest
of a partner in the profits of a partnership for a partnership
taxable year for purposes of section 6223(b). See paragraph (c)(6)
of this section for rules relating to indirect and pass-thru
partners.

(2) Partner may be a member of only one group. A partner cannot be a
member of more than one notice group with respect to the same
partnership for the same partnership taxable year. See paragraph (c)
(6) of this section for rules relating to indirect and pass-thru
partners.

(3) Partner may join group after formation. A partner may join a
notice group at any time after the formation of that group by filing
with the Internal Revenue Service office where the notice group
filed its request a statement that it is joining the notice group.
The statement shall identify the partner joining the notice group,
the partnership, and the members of the notice group by name,
address, and taxpayer identification number and shall be signed by
the joining partner. A copy of the statement shall be provided by
the joining partner to both the tax matters partner and the notice
group representative within 30 days after the request is filed with
the Internal Revenue Service. The partner shall become a member of
the notice group for each partnership taxable year for which the
group was formed and for which the partner was a partner at any time
during such partnership taxable year.

(4) Date on which a partner becomes a member of notice group. A
partner shall become a member of a notice group on the 30th day
after the day on which the Internal Revenue Service receives--

(i) A request for notice from a notice group that identifies that
partner as a member of that notice group; or

(ii) A statement filed in accordance with paragraph (c)(3) of this
section that states that the partner is joining the notice group.

(5) No withdrawal from notice group. A partner who has signed a
notice group request filed with the Internal Revenue Service remains
a member of that notice group until the group terminates. A partner
cannot withdraw from the notice group.

(6) Indirect and pass-thru partners--

(i) Pass-thru partners and unidentified indirect partners. A pass-
thru partner may become a member of a notice group as provided in
this section. For purposes of applying the aggregate interest
requirement specified in paragraph (a) of this section to a pass-
thru partner, the partnership interest held by the pass-thru partner
shall not include any interest held through the pass-thru partner by
an indirect partner that has been identified as provided in section
6223(c)(3) and §301.6223(c)-1 before the date on which the
pass-thru partner becomes a member of the notice group.

(ii) Indirect partners identified before the pass-thru partner joins
a notice group. An indirect partner may become a member of a notice
group with respect to a partnership taxable year only if--

(A) The indirect partner held an interest in the partnership (either
directly or through one or more pass-thru partners) at some time
during that taxable year; and

(B) The indirect partner was identified as provided in section
6223(c)(3) and §301.6223(c)-1 on or before the date on which
the pass-thru partner became a member of a notice group.

(d) Termination of notice group. Unless the original request for
notice from the notice group or a subsequent statement filed by the
representative (in accordance with paragraphs (b)(3) and (4) of this
section) designates a successor to the designated group
representative, the group terminates if the representative dies (or,
in the case of an entity, if the entity is dissolved), resigns, or
is adjudicated incompetent.

(e) Notice group is not a 5-percent group. The forming of a notice
group under this section does not constitute the forming of a 5-
percent group for purposes of litigation. A notice group is formed
solely for the purpose of receiving notices. A 5-percent group is
formed solely for the purpose of filing a petition for judicial
review or appealing a judicial determination. See
§301.6226(b)-1. Thus, a member of a notice group may choose not
to join a 5-percent group formed by other members of the notice
group.

(f) Effective date. This section is applicable to partnership
taxable years beginning on or after October 4, 2001. For years
beginning prior to October 4, 2001, see §301.6223(b)-1T
contained in 26 CFR part 1, revised April 1, 2001.
§301.6223(b)-1T [Removed] Par. 10a. Section 301.6223(b)-1T is
removed. Par. 11. Section 301.6223(c)-1 is added to read as follows:
§301.6223(c)-1 Additional information regarding partners
furnished to the Internal Revenue Service .

(a) In general. In addition to the names, addresses, and profits
interests as shown on the partnership return, the Internal Revenue
Service will use additional information as provided in this section
for purposes of administering subchapter C of chapter 63 of the
Internal Revenue Code.

(b) Procedure for furnishing additional information--

(1) In general. Any person may furnish additional information at any
time by filing a written statement with the Internal Revenue
Service. However, the information contained in the statement will be
considered for purposes of determining whether a partner is entitled
to a notice described in section 6223(a) only if the Internal
Revenue Service receives the statement at least 30 days before the
date on which the Internal Revenue Service mails the notice to the
tax matters partner. Similarly, information contained in the
statement generally will not be taken into account for other
purposes by the Internal Revenue Service until 30 days after the
statement is received.

(2) Where statement must be filed. A statement furnished under this
section generally must be filed with the service center where the
partnership return is filed. However, if the person filing the
statement knows that the notice described in section 6223(a)(1)
(beginning of an administrative proceeding) has already been mailed
to the tax matters partner, the statement should be filed with the
Internal Revenue Service office that mailed such notice.

(3) Contents of statement. The statement shall--

(i) Identify the partnership, each partner for whom information is
supplied, and the person supplying the information by name, address,
and taxpayer identification number;

(ii) Explain that the statement is furnished to correct or
supplement earlier information with respect to the partners in the
partnership;

(iii) Specify the taxable year to which the information relates;

(iv) Set out the corrected or additional information; and

(v) Be signed by the person supplying the information.

(c) No incorporation by reference to previously furnished documents.
Incorporation by reference of information contained in another
document previously furnished to the Internal Revenue Service will
not be given effect for purposes of section 6223(c) or 6229(e). For
example, reference to a return filed by a pass-thru partner which
contains identifying information with respect to the indirect
partners of that pass-thru partner is not sufficient to identify the
indirect partners unless a copy of the document referred to is
attached to the statement. Furthermore, reference to a prior general
notification to the Internal Revenue Service that a partner who
would otherwise be the tax matters partner is a debtor in a
bankruptcy proceeding or has had a receiver appointed for the
partner in a receivership proceeding is not sufficient unless a copy
of the notification document referred to is attached to the
statement.

(d) Information supplied by a person other than the tax matters
partner. The Internal Revenue Service may require appropriate
verification in the case of information furnished by a person other
than the tax matters partner. The 30-day period referred to in
paragraph (b)(1) of this section shall not begin until that
verification is supplied.

(e) Power of attorney--

(1) In general. This paragraph (e) applies to powers of attorney
with respect to proceedings under subchapter C of chapter 63 of the
Internal Revenue Code (chapter 63C) that begin on or after January
2, 2002.

(2) Specifically for purposes of subchapter C of chapter 63 of the
Internal Revenue Code. A power of attorney specifically for purposes
of subchapter C of chapter 63 of the Internal Revenue Code shall be
furnished in accordance with paragraph (b)(2) of this section.

(3) Existing power of attorney. A power of attorney granted to
another person by a partner for other tax purposes shall not be
given effect for purposes of subchapter C of chapter 63 unless the
partner specifically requests that the power be given such effect in
a statement furnished to the Internal Revenue Service in accordance
with paragraph (b) of this section.

(f) Internal Revenue Service may use other information. In addition
to the information on the partnership return and that supplied on
statements filed under this section, the Internal Revenue Service
may use other information in its possession (for example, a change
in address reflected on a partner's return) in administering
subchapter C of chapter 63 of the Internal Revenue Code. However,
the Internal Revenue Service is not obligated to search its records
for information not expressly furnished under this section.

(g) Effective date. Except as provided in paragraph (e)(1) of this
section, this section is applicable to partnership taxable years
beginning on or after October 4, 2001. For years beginning prior to
October 4, 2001, see §301.6223(c)-1T contained in 26 CFR part
1, revised April 1, 2001.

§301.6223(c)-1T [Removed] Par. 11a. Section 301.6223(c)-1T is
removed. Par. 12. Section 301.6223(e)-1 is added to read as follows:
§301.6223(e)-1 Effect of Internal Revenue Service's failure to
provide notice.

(a) Notice group. Section 6223(e)(1)(B)(ii) applies with respect to
a notice group only if the request for notice described in
§301.6223(b)-1 is received by the Internal Revenue Service at
least 30 days before the notice is mailed to the tax matters
partner.

(b) Indirect partners--

(1) In general. For purposes of section 6223(e), the Internal
Revenue Service's failure to provide notice to a pass-thru partner
entitled to notice under section 6223(b) is deemed a failure to
provide notice to indirect partners holding an interest in the
partnership through the pass-thru partner. However, this rule does
not apply if the indirect partner--

(i) Receives notice from the Internal Revenue Service;

(ii) Is identified as provided in section 6223(c)(3) and
§301.6223(c)-1 at least 30 days before the notice is mailed to
the tax matters partner; or

(iii) Is a member of a notice group entitled to notice under
paragraph (a) of this section.

(2) Examples. The provisions of paragraph (b)(1) of this section may
be illustrated by the following examples: Example 1. Partnership ABC
has as one of its partners, A, a partnership with three partners, X,
Y, and Z. ABC does not have more than 100 partners, and partnership
A is entitled to notice under section 6223(a). In addition, Z was
identified as provided in section 6223(c)(3) and §301.6223(c)-1
on May 1, 2002. The Internal Revenue Service mailed a notice to the
tax matters partner of ABC on July 1, 2002, but failed to provide
notice to partnership A. Notwithstanding the Internal Revenue
Service's notice to the tax matters partner, the Internal Revenue
Service is deemed to have failed to provide notice to X and Y. The
Internal Revenue Service's failure to provide notice to A, however,
has no effect on Z; whether notice was provided to Z is determined
independently.

Example 2. Assume the same facts as in Example 1, except that the
Internal Revenue Service provided notice to partnership A but did
not provide separate notice to Z. Notwithstanding the Internal
Revenue Service's notice to partnership A, the Internal Revenue
Service is deemed to have failed to provide notice to Z.

Example 3. Assume the same facts as in Example 1, except that
partnership ABC has more than 100 partners and partnership A is
entitled to notice under section 6223(b) because it had at least a 1
percent profits interest in partnership ABC. In addition, X became a
member of a notice group on June 1, 2002, and the Internal Revenue
Service mailed a notice to the designated member of that notice
group. The Internal Revenue Service also mailed a separate notice to
Z. The Internal Revenue Service's failure to provide notice to
partnership A only affects Y, who is deemed not to have been
provided notice by the Internal Revenue Service.

(c) Effective date. This section is applicable to partnership
taxable years beginning on or after October 4, 2001. For years
beginning prior to October 4, 2001, see §301.6223(e)-1T
contained in 26 CFR part 1, revised April 1, 2001.
§301.6223(e)-1T [Removed] Par. 12a. Section 301.6223(e)-1T is
removed. Par. 13. Section 301.6223(e)-2 is added to read as follows:
§301.6223(e)-2 Elections if Internal Revenue Service fails to
provide timely notice.

(a) In general. This section applies in any case in which the
Internal Revenue Service fails to timely mail any notice described
in section 6223(a) of the Internal Revenue Code to a partner
entitled to such notice within the period specified in section
6223(d). The failure to issue any notice within the period specified
in section 6223(d) does not invalidate the notice of the beginning
of an administrative proceeding or final partnership administrative
adjustment (FPAA). An untimely FPAA enables the recipient of the
untimely notice to make the elections described in paragraphs (b),
(c), and (d) of this section. The period within which to make the
elections described in paragraphs (b), (c), and (d) of this section
commences with the mailing of an FPAA to the partner. In the absence
of an election, paragraphs (b) and (c) of this section provide for
the treatment of a partner's partnership items.

(b) Proceeding finished. If at the time the Internal Revenue Service
mails the partner an FPAA--

(1) The period within which a petition for review of the FPAA under
section 6226 may be filed has expired and no petition has been
filed; or

(2) The decision of a court in an action begun by such a petition
has become final, the partner may elect in accordance with paragraph
(d) of this section to have that adjustment, that decision, or a
settlement agreement described in section 6224(c)(2) with respect to
the partnership taxable year to which the adjustment relates apply
to that partner. If the partner does not make an election in
accordance with paragraph (d) of this section, the partnership items
of the partner for the partnership taxable year to which the
proceeding relates shall be treated as having become nonpartnership
items as of the day on which the Internal Revenue Service mails the
partner the FPAA.

(c) Proceeding still going on. If at the time the Internal Revenue
Service mails the partner an FPAA, paragraphs (b)(1) and (2) of this
section do not apply, the partner shall be a party to the proceeding
unless the partner elects, in accordance with paragraph (d) of this
section, to have--

(1) A settlement agreement described in section 6224(c)(2) with
respect to the partnership taxable year to which the proceeding
relates apply to the partner; or

(2) The partnership items of the partner for the partnership taxable
year to which the proceeding relates treated as having become
nonpartnership items as of the day on which the Internal Revenue
Service mails the partner the FPAA.

(d) Election--

(1) In general. The election described in paragraph (b) or (c) of
this section shall be made in the manner prescribed in this
paragraph (d). The election shall apply to all partnership items for
the partnership taxable year to which the election relates.

(2) Time and manner of making election. The election shall be made
by filing a statement with the Internal Revenue Service office
mailing the FPAA within 45 days after the date on which the FPAA was
mailed to the partner making the election.

(3) Contents of statement. The statement shall--

(i) Be clearly identified as an election under section 6223(e)(2) or
(3);

(ii) Specify the election being made (that is, application of final
partnership administrative adjustment, court decision, consistent
settlement agreement, or nonpartnership item treatment);

(iii) Identify the partner making the election and the partnership
by name, address, and taxpayer identification number;

(iv) Specify the partnership taxable year to which the election
relates; and

(v) Be signed by the partner making the election.

(e) Effective date. This section is applicable to partnership
taxable years beginning on or after October 4, 2001. For years
beginning prior to October 4, 2001, see §301.6223(e)-2T
contained in 26 CFR part 1, revised April 1, 2001.
§301.6223(e)-2T [Removed] Par. 13a. Section 301.6223(e)-2T is
removed. Par. 14. Section 301.6223(f)-1 is added to read as follows:
§301.6223(f)-1 Duplicate copy of final partnership
administrative adjustment.

(a) In general. Section 6223(f) does not prohibit the Internal
Revenue Service from issuing a duplicate copy of the notice of final
partnership administrative adjustment (for example, in the event the
original notice is lost).

(b) Effective date. This section is applicable to partnership
taxable years beginning on or after October 4, 2001. For years
beginning prior to October 4, 2001, see §301.6223(f)-1T
contained in 26 CFR part 1, revised April 1, 2001.
§301.6223(f)-1T [Removed] Par. 14a. Section 301.6223(f)-1T is
removed. Par. 15. Section 301.6223(g)-1 is added to read as follows:
§301.6223(g)-1 Responsibilities of the tax matters partner.

(a) Notices described in section 6223(a)--(1) Notice of beginning of
proceeding. Except as otherwise provided in §301.6223(a)-2, the
tax matters partner shall, within 75 days after the Internal Revenue
Service mails the notice specified in section 6223(a)(1), forward a
copy of that notice to each partner not entitled to notice from the
Internal Revenue Service under section 6223. See §301.6230(e)-1
for information to be furnished to the Internal Revenue Service.

(2) Notice of final partnership administrative adjustment. The tax
matters partner shall, within 60 days after the Internal Revenue
Service mails the notice specified in section 6223(a)(2), forward a
copy of that notice to each partner not entitled to notice from the
Internal Revenue Service under section 6223.

(3) Requirement inapplicable in certain cases. The tax matters
partner is not required to send notice to a partner if--

(i) Before the expiration of the applicable 75-day or 60-day period
the partnership items of that partner have become nonpartnership
items (for example, by settlement);

(ii) That partner is an indirect partner and has not been identified
to the tax matters partner at least 30 days before the tax matters
partner is required to send such notice;

(iii) That partner is treated as a partner solely by virtue of
§301.6231(a)(2)-1;

(iv) That partner was a member of a notice group as of the date on
which the notice was mailed to the tax matters partner (see
§301.6223(b)-1(c)(4) for the date on which a partner becomes a
member of a notice group);

(v) The notice has already been provided to that partner by another
person; or

(vi) The notice is withdrawn by the Internal Revenue Service under
§301.6223(a)-2.

(b) Other notices or information--

(1) In general. The tax matters partner shall furnish to the
partners specified in paragraph (b)(2) of this section information
with respect to the following--

(i) Closing conference with the examining agent;

(ii) Proposed adjustments, rights of appeal, and requirements for
filing of a protest;

(iii) Time and place of any Appeals conference;

(iv) Acceptance by the Internal Revenue Service of any settlement
offer;

(v) Consent to the extension of the period of limitations with
respect to all partners;

(vi) Filing of a request for administrative adjustment (including a
request for substituted return treatment under §301.6227(c)-1)
on behalf of the partnership;

(vii) Filing by the tax matters partner or any other partner of any
petition for judicial review under sections 6226 or 6228(a);

(viii) Filing of any appeal with respect to any judicial
determination provided for in sections 6226 or 6228(a); and

(ix) Final judicial redetermination.

(2) Partners to be notified. The tax matters partner shall provide
information with respect to any action or other matter specified in
paragraph (b)(1) of this section to all notice group representatives
and all other partners except partners--

(i) Whose partnership items become nonpartnership items before the
expiration of the period specified in paragraph (b)(3) of this
section for furnishing that information;

(ii) Who are indirect partners and who are not identified to the tax
matters partner at least 30 days before the tax matters partner is
required to provide the information;

(iii) Who are treated as partners solely by virtue of
§301.6231(a)(2)-1;

(iv) Who are members of a notice group as of the date on which the
tax matters partner takes that action or receives information with
respect to that matter (see §301.6223(b)-1(c)(4) for the date
on which a partner becomes a member of a notice group); or

(v) Who have already received information with respect to the action
or matter from any other person.

(3) Time for furnishing information. The tax matters partner shall
furnish information with respect to an action or other matter
described in paragraph (b)(1) of this section within 30 days of
taking the action or receiving information with respect to that
matter.

(c) Effective date. This section is applicable to partnership
taxable years beginning on or after October 4, 2001. For years
beginning prior to October 4, 2001, see §301.6223(g)-1T
contained in 26 CFR part 1, revised April 1, 2001.

§301.6223(g)-1T [Removed]

Par. 15a. Section 301.6223(g)-1T is removed.

Par. 16. Section 301.6223(h)-1 is added to read as follows:

§301.6223(h)-1 Responsibilities of pass-thru partner.

(a) In general. The pass-thru partner shall, within 30 days of
receiving notice or any other information regarding a partnership
proceeding from the Internal Revenue Service, the tax matters
partner, or another pass-thru partner, forward a copy of that notice
or information to the person or persons holding an interest through
the pass-thru partner in the profits or losses of the partnership
for the partnership taxable year to which the notice or information
relates. In the case of a pass-thru partner that is a partnership
within the meaning of section 6231(a)(1), the tax matters partner of
such partnership shall forward copies of the notice or information
to the partners of such partnership.

(b) Effective date. This section is applicable to partnership
taxable years beginning on or after October 4, 2001. For years
beginning prior to October 4, 2001, see §301.6223(h)-1T
contained in 26 CFR part 1, revised April 1, 2001.
§301.6223(h)-1T [Removed] Par. 16a. Section 301.6223(h)-1T is
removed. Par. 17. Section 301.6224(a)-1 is added to read as follows:
§301.6224(a)-1 Participation in administrative proceedings.

(a) In general. Every partner in the partnership, including an
indirect partner, has the right to participate in any phase of
administrative proceedings. However, except as provided in section
6223 and the regulations thereunder, neither the Internal Revenue
Service nor the tax matters partner is required to provide notice of
any proceeding to the partners. Consequently, a partner who wishes,
for example, to be present during a preliminary discussion between
an examining agent and the tax matters partner should make special
arrangements with the tax matters partner to obtain information as
to the time and place of the discussion. The Internal Revenue
Service and the tax matters partner will determine the time and
place for all administrative proceedings. Arrangements will
generally not be changed merely for the convenience of another
partner.

(b) Effective date. This section is applicable to partnership
taxable years beginning on or after October 4, 2001. For years
beginning prior to October 4, 2001, see §301.6224(a)-1T
contained in 26 CFR part 1, revised April 1, 2001.
§301.6224(a)-1T [Removed] Par. 17a. Section 301.6224(a)-1T is
removed. Par. 18. Section 301.6224(b)-1 is added to read as follows:
§301.6224(b)-1 Partner may waive rights.

(a) In general. A partner may at any time waive any right that the
partner has or any restriction on action by the Internal Revenue
Service under subchapter C of chapter 63 of the Internal Revenue
Code.

(b) Form and manner of making waiver. The waiver described in
paragraph (a) of this section shall be made by a written statement.
If the Internal Revenue Service furnishes a form to be used for this
purpose, the partner may make the waiver by completing the form in
accordance with the form's instructions. If such a form is not
furnished, the statement shall--

(1) Be clearly identified as a waiver under section 6224(b);

(2) Identify the partner and the partnership by name, address, and
taxpayer identification number;

(3) Specify the right or restriction being waived and the taxable
year(s) to which the waiver applies;

(4) Be signed by the partner making the waiver; and

(5) Be filed with the service center where the partnership return is
filed. However, if the person filing the statement knows that the
notice described in section 6223(a)(1) (beginning of an
administrative proceeding) has already been mailed to the tax
matters partner, the statement shall be filed with the Internal
Revenue Service office that mailed such notice.

(c) Effective date. This section is applicable to partnership
taxable years beginning on or after October 4, 2001. For years
beginning prior to October 4, 2001, see §301.6224(b)-1T
contained in 26 CFR part 1, revised April 1, 2001.
§301.6224(b)-1T [Removed]

Par. 18a. Section 301.6224(b)-1T is removed.

Par. 19. Section 301.6224(c)-1 is added to read as follows:

§301.6224(c)-1 Tax matters partner may bind nonnotice partners.

(a) In general. In the absence of a showing of fraud, malfeasance,
or misrepresentation of fact, if the tax matters partner enters into
a settlement agreement with the Internal Revenue Service with
respect to partnership items, including partnership-level
determinations relating to any penalty, addition to tax, or
additional amounts that relate to adjustments to partnership items,
and expressly states that the agreement shall be binding on the
other partners, then that agreement shall be binding on all partners
except those who--

(1) Are, as of the day on which the agreement is entered into,
either notice partners or members of a notice group (see
§301.6223(b)-1(c)(4) for the date on which a partner becomes a
member of a notice group); or

(2) Have, at least 30 days before the day on which the agreement is
entered into, filed with the Internal Revenue Service the statement
described in paragraph (c) of this section.

(b) Indirect partners--

(1) In general. If, under paragraph (a) of this section, a pass-thru
partner is not bound by an agreement entered into by the tax matters
partner, all indirect partners holding an interest in the
partnership through that pass-thru partner shall not be bound by
that agreement. If, however, the pass-thru partner is bound by an
agreement entered into by the tax matters partner, paragraph (a) of
this section shall be applied separately to each indirect partner
holding an interest in the partnership through the pass-thru partner
to determine whether the indirect partner is also bound by the
agreement.

(2) Example. The following example illustrates the principles of
this section: Example. Partnership P has over 100 partners.
Partnership J is a partner in partnership P with a profits interest
of less than 1 percent. Partnership J has three partners, A, B, and
C. A is a member of a notice group with respect to partnership P,
but B and C are not. On July 1, 2002, B filed the statement
described in paragraph (c) of this section not to be bound by any
settlement agreement entered into by the tax matters partner of
partnership P. On August 1, 2002, the tax matters partner of
partnership P enters into a settlement agreement with the Internal
Revenue Service and states that the agreement is binding on other
partners as provided in section 6224(c)(3). Because partnership J is
bound by the settlement agreement, paragraph (a) of this section is
applied separately to each of the indirect partners to determine
whether they are bound. A is not bound by the agreement because A
was a member of a notice group on the day the agreement was entered
into and B is not bound because B filed the statement not to be
bound at least 30 days before the agreement was entered into. C is
bound by the settlement agreement.

(c) Statement not to be bound--(1) Contents of statement. The
statement referred to in paragraph (a)(2) of this section shall--

(i) Be clearly identified as a statement to deny settlement
authority to the tax matters partner under section 6224(c)(3)(B);

(ii) Identify the partner and partnership by name, address, and
taxpayer identification number;

(iii) Specify the taxable year or years to which the statement
applies; and

(iv) Be signed by the partner filing the statement.

(2) Place where statement is to be filed. The statement described in
paragraph (c)(1) of this section generally shall be filed with the
Internal Revenue Service service center where the partnership return
is filed. However, if the partner knows that the notice described in
section 6223(a)(1) (beginning of an administrative proceeding) has
already been mailed to the tax matters partner, the statement shall
be filed with the Internal Revenue Service office that mailed that
notice.

(3) Consolidated statements. The statement described in paragraph
(c)(1) of this section may be filed with respect to more than one
partner if the requirements of that paragraph (c)(1) (including
signatures) are satisfied with respect to each partner.

(d) Effective date. This section is applicable to partnership
taxable years beginning on or after October 4, 2001. For years
beginning prior to October 4, 2001, see §301.6224(c)-1T
contained in 26 CFR part 1, revised April 1, 2001.
§301.6224(c)-1T [Removed] Par. 19a. Section 301.6224(c)-1T is
removed. Par. 20. Section 301.6224(c)-2 is added to read as follows:
§301.6224(c)-2 Pass-thru partner binds indirect partners.

(a) Pass-thru partner binds unidentified indirect partners--

(1) In general. If a pass-thru partner enters into a settlement
agreement with the Internal Revenue Service with respect to
partnership items, that agreement binds all indirect partners
holding an interest in that partnership through the pass-thru
partner except those indirect partners who have been identified as
provided in section 6223(c)(3) and §301.6223(c)-1 at least 30
days before the date on which the agreement is entered into. A
settlement with respect to partnership items includes partnership-
level determinations relating to any penalty, addition to tax, and
additional amounts that relate to adjustments to partnership items.
However, if, in addition to the interest in the partnership held
through the pass-thru partner entering into a settlement agreement,
an indirect partner holds a separate interest in that partnership,
either directly or indirectly through a different pass-thru partner,
then the indirect partner shall not be bound by that settlement
agreement with respect to the interests held directly or indirectly
through a pass-thru partner other than the pass-thru partner
entering into the settlement agreement.

(2) Example. The provisions of paragraph (a)(1) of this section may
be illustrated by the following example: Example. Partnership J is a
partner in partnership P. C is a partner in J but has not been
identified as provided in section 6223(c)(3) and
§301.6223(c)-1. The only interest that C holds in P is through
J. The tax matters partner of J enters into a settlement agreement
with the Internal Revenue Service with respect to partnership items
arising from P. C is bound by the settlement agreement entered into
by the tax matters partner of J.

(b) Person in pass-thru partner authorized to enter into settlement
agreement that binds indirect partners. In the case of a pass-thru
partner that is--

(1) A partnership within the meaning of section 6231(a)(1), the tax
matters partner of that partnership;

(2) A partnership other than a partnership described in paragraph
(b)(1) of this section, any general partner of that partnership;

(3) An S corporation, any officer of that S corporation; or

(4) A trust, estate, or nominee, any person authorized in writing to
act on behalf of that trust, estate, or nominee, may enter into a
settlement agreement with the Internal Revenue Service on behalf of
its respective entity that would bind the unidentified indirect
partners that hold a partnership interest through the pass-thru
partner.

(c) Effective date. This section is applicable to partnership
taxable years beginning on or after October 4, 2001. For years
beginning prior to October 4, 2001, see §301.6224(c)-2T
contained in 26 CFR part 1, revised April 1, 2001.
§301.6224(c)-2T [Removed] Par. 20a. Section 301.6224(c)-2T is
removed. Par. 21. Section 301.6224(c)-3 is added to read as follows:
§301.6224(c)-3 Consistent settlements.

(a) In general. If the Internal Revenue Service enters into a
settlement agreement with any partner with respect to partnership
items, whether comprehensive or partial, the Internal Revenue
Service shall offer to any other partner who so requests in
accordance with paragraph (c) of this section, settlement terms
consistent with those contained in the settlement agreement entered
into.

(b) Requirements for consistent settlement terms--

(1) In general. Consistent settlement terms are those based on the
same determinations with respect to partnership items. However,
consistent settlement terms also may include partnership-level
determinations of any penalty, addition to tax, or additional amount
that relates to partnership items. Settlements with respect to
partnership items shall be self-contained; thus, a concession by one
party with respect to a partnership item may not be based upon a
concession by another party with respect to any item that is not a
partnership item other than a partnership-level determination of any
penalty, addition to tax, or additional amount that relates to an
adjustment to a partnership item. Consistent agreements must be
identical to the original settlement (that is, the settlement upon
which the offered settlement terms are based). A consistent
agreement must mirror the original settlement and may not be limited
to selected items from the original settlement. Once a partner has
settled a partnership item, or a partnership-level determination of
any penalty, addition to tax, or additional amount that relates to
an adjustment to a partnership item, that partner may not
subsequently request settlement terms consistent with a settlement
that contains the previously settled item. The requirement for
consistent settlement terms applies only if--

(i) The items were partnership items (or a partnership-level
determination of any related penalty, addition to tax, or additional
amount) for the partner entering into the original settlement
immediately before the original settlement; and

(ii) The items are partnership items (or a partnership-level
determination of any related penalty, addition to tax, or additional
amount) for the partner requesting the consistent settlement at the
time the partner files the request.

(2) Effect of consistent agreement. Consistent settlement terms are
reflected in a consistent agreement. A consistent agreement is not a
settlement agreement that gives rise to further consistent
settlement rights because it is required to be given without
volitional agreement of the Secretary. Therefore, a consistent
agreement required to be offered to a requesting taxpayer is not a
settlement agreement under section 6224(c)(2) or paragraph (c)(3) of
this section which starts a new period for requesting consistent
settlement terms. For all other purposes of the Internal Revenue
Code, however, (e.g., binding effect under section 6224(c)(1) and
conversion to nonpartnership items under section 6231(b)(1)(C)), a
consistent agreement is treated as a settlement agreement.

(c) Time and manner of requesting consistent settlements--

(1) In general. A partner desiring settlement terms consistent with
the terms of any settlement agreement entered into between any other
partner and the Internal Revenue Service shall submit a written
statement to the Internal Revenue Service office that entered into
the settlement.

(2) Contents of statement. Except as otherwise provided in
instructions to the taxpayer from the Internal Revenue Service, the
written statement described in paragraph (c)(1) of this section
shall--( i) Identify the statement as a request for consistent
settlement terms under section 6224(c)(2);

(ii) Contain the name, address, and taxpayer identification number
of the partnership and of the partner requesting the settlement
offer (and, in the case of an indirect partner, of the pass-thru
partner through which the indirect partner holds an interest);

(iii) Identify the earlier agreement to which the request refers;
and

(iv) Be signed by the partner making the request.

(3) Time for filing request. The statement shall be filed not later
than the later of--

(i) The 150th day after the day on which the notice of final
partnership administrative adjustment is mailed to the tax matters
partner; or

(ii) The 60th day after the day on which the settlement agreement
was entered into.

(d) Examples. The following examples illustrate the principles of
this section: Example 1. The Internal Revenue Service seeks to
disallow a $100,000 loss reported by Partnership P $20,000 of which
was allocated to partner X, and $10,000 of which was allocated to
partner Y. The Internal Revenue Service agrees to a settlement with
X in which the Internal Revenue Service allows $12,000 of the loss,
accepts the treatment of all other partnership items on the
partnership return, and imposes a penalty for negligence related to
the $8,000 loss disallowance. Partner Y requests settlement terms
consistent with the settlement made between X and the Internal
Revenue Service. The items are partnership items (or a related
penalty) for X immediately before X enters into the settlement
agreement and are partnership items (or a related penalty) for Y at
the time of the request. The Internal Revenue Service must offer Y
settlement terms allowing a $6,000 loss, a negligence penalty on the
$4,000 disallowance, and otherwise reflecting the treatment of
partnership items on the partnership return.

Example 2. F files inconsistently with Partnership P and reports the
inconsistency. The Internal Revenue Service notifies F that it will
treat all partnership items arising from P as nonpartnership items
with respect to F. Later, the Internal Revenue Service enters into a
settlement with F on these items. The Internal Revenue Service is
not required to offer the other partners of P settlement terms
consistent with the settlement reached between F and the Internal
Revenue Service because the items arising from P are not partnership
items with respect to F.

Example 3. G, a partner in Partnership P, filed suit under section
6228(b) after the Internal Revenue Service failed to allow an
administrative adjustment request with respect to a partnership item
arising from P for a taxable year. Under section 6231(b)(1)(B), the
partnership items of G for the partnership taxable year became
nonpartnership items as of the date G filed suit. After G filed
suit, another partner and the Internal Revenue Service entered into
a settlement agreement with respect to items arising from P in that
year. G is not entitled to consistent settlement terms because, at
the time of the settlement, the items arising from P are no longer
partnership items with respect to G.

(e) Effective date. This section is applicable to partnership
taxable years beginning on or after October 4, 2001. For years
beginning prior to October 4, 2001, see §301.6224(c)-3T
contained in 26 CFR part 1, revised April 1, 2001.
§301.6224(c)-3T [Removed] Par. 21a. Section 301.6224(c)-3T is
removed. Par. 22. Section 301.6226(a)-1 is added to read as follows:
§301.6226(a)-1 Principal place of business of partnership.

(a) In general. The principal place of a partnership's business for
purposes of determining the appropriate district court in which a
petition for a readjustment of partnership items may be filed is its
principal place of business as of the date the petition is filed.
(b) Example. The provisions of paragraph (a) of this section may be
illustrated by the following example: Example. The principal place
of Partnership A's business on the day that the notice of the final
partnership administrative adjustment was mailed to A's tax matters
partner was Cincinnati, Ohio. However, by the day on which a
petition seeking judicial review of that adjustment was filed, A had
moved its principal place of business to Louisville, Kentucky. For
purposes of section 6226(a)(2), A's principal place of business is
Louisville.

(c) Effective date. This section is applicable to partnership
taxable years beginning on or after October 4, 2001. For years
beginning prior to October 4, 2001, see §301.6226(a)-1T
contained in 26 CFR part 1, revised April 1, 2001.
§301.6226(a)-1T [Removed] Par. 22a. Section 301.6226(a)-1T is
removed. Par. 23. Section 301.6226(b)-1 is added to read as follows:
§301.6226(b)-1 5-percent group.

(a) In general. All members of a 5-percent group shall join in
filing any petition for judicial review. The designation of a
partner as a representative of a notice group does not authorize
that partner to file a petition for a readjustment of partnership
items on behalf of the notice group.

(b) Effective date. This section is applicable to partnership
taxable years beginning on or after October 4, 2001. For years
beginning prior to October 4, 2001, see §301.6226(b)-1T
contained in 26 CFR part 1, revised April 1, 2001.
§301.6226(b)-1T [Removed] Par. 23a. Section 301.6226(b)-1T is
removed. Par. 24. Section 301.6226(e)-1 is added to read as follows:
§301.6226(e)-1 Jurisdictional requirement for bringing an
action in District Court or United States Court of Federal Claims.

(a) Amount to be deposited--

(1) In general. The jurisdictional amount that the filing partner
(or, in the case of a petition filed by a 5-percent group, each
member of the group, or, for civil actions beginning on or after
March 30, 2002, in the case of a petition filed by a pass-thru
partner, each indirect partner holding an interest through the pass-
thru partner) shall deposit is the amount by which the tax liability
of the partner would be increased if the treatment of the
partnership items on the partner's return were made consistent with
the treatment of partnership items on the partnership return, as
adjusted by the notice of final partnership administrative
adjustment. The partner is not required to pay other outstanding
liabilities in order to deposit a jurisdictional amount.

(2) Example. The provisions of paragraph (a)(1) of this section may
be illustrated by the following example: Example. A files a petition
for readjustment of partnership items in the United States Court of
Federal Claims. A's tax liability would be increased by $4,000 if
partnership items on A's return were conformed to the partnership
return, as adjusted by the notice of final partnership
administrative adjustment. A has an unpaid liability of $10,000
attributable to nonpartnership items. A is required to deposit
$4,000 in order to satisfy the jurisdictional requirement.

(b) Deposit taken into account in computing interest. The amount
deposited is treated as a payment of tax for purposes of chapter 67
of the Internal Revenue Code (relating to interest).

(c) Deposit generally not treated as payment of tax. Except as
provided in paragraph (b) of this section, an amount deposited under
section 6226(e) shall not be treated as a payment of tax. Thus, the
Internal Revenue Service may proceed against the depositor for a
deficiency based on nonpartnership items without regard to this
deposit.

(d) Amount deposited may be applied against assessment. If the
restriction on assessment provided under section 6225(a) lapses with
respect to a deficiency attributable to partnership items for a
partnership taxable year while an amount is on deposit under section
6226(e) in connection with a petition relating to those items, the
Internal Revenue Service may apply the amount deposited against any
such deficiency that is assessed.

(e) Effective date. Except as otherwise provided in paragraph (a)(1)
of this section, this section is applicable to civil actions
beginning on or after October 4, 2001. For civil actions beginning
prior to October 4, 2001, see §301.6226(e)-1T contained in 26
CFR part 1, revised April 1, 2001. §301.6226(e)-1T [Removed]
Par. 24a. Section 301.6226(e)-1T is removed. Par. 25. Section
301.6226(f)-1 is added to read as follows: §301.6226(f)-1 Scope
of judicial review.

(a) In general. A court reviewing a notice of final partnership
administrative adjustment has jurisdiction to determine all
partnership items for the taxable year to which the notice relates
and the proper allocation of such items among the partners. Thus,
the review is not limited to the items adjusted in the notice. In
addition, the court has jurisdiction in the partnership-level
proceeding to determine any penalty, addition to tax, or additional
amount that relates to an adjustment to a partnership item. However,
the court does not have jurisdiction in the partnership-level
proceeding to consider any partner-level defenses to any penalty,
addition to tax, or additional amount that relates to an adjustment
to a partnership item. See section 6230(c)(4) and
§301.6221-1(c) and (d).

(b) Example. The provisions of paragraph (a) of this section may be
illustrated by the following example: Example. The Internal Revenue
Service issues a notice of final partnership administrative
adjustment with respect to Partnership ABC in which the only item
adjusted is depreciation. A petition for judicial review of that
notice is filed. During the judicial proceeding, a partner of ABC,
in accordance with the applicable court rules, raises an issue
relating to the treatment of intangible drilling costs. The court
reviewing the notice has jurisdiction to determine the intangible
drilling cost issue in addition to the depreciation issue.

(c) Effective date. This section is applicable to partnership
taxable years beginning on or after October 4, 2001. For years
beginning prior to October 4, 2001, see §301.6226(f)-1T
contained in 26 CFR part 1, revised April 1, 2001.
§301.6226(f)-1T [Removed] Par. 25a. Section 301.6226(f)-1T is
removed. §301.6227(b)-1T [Removed] Par. 26. Section
301.6227(b)-1T is removed..-44- Par. 26a. Section 301.6227(c)-1 is
added to read as follows: §301.6227(c)-1 Administrative
adjustment request by the tax matters partner on behalf of the
partnership.

(a) In general. A request for an administrative adjustment filed by
the tax matters partner on behalf of the partnership shall be filed
on the form prescribed by the Internal Revenue Service for that
purpose in accordance with that form's instructions. Except as
otherwise provided in that form's instructions, the request shall
be--

(1) Filed with the service center where the original partnership
return was filed (but, if the notice described in section 6223(a)(1)
(beginning of an administrative proceeding) has already been mailed
to the tax matters partner, the statement should be filed with the
Internal Revenue Service office that mailed such notice);

(2) Signed by the tax matters partner; and

(3) Accompanied by revised schedules showing the effects of the
proposed changes on each partner and an explanation of the changes.

(b) Denied request for treatment as a substituted return remains
administrative adjustment request. An administrative adjustment
request filed by the tax matters partner on behalf of the
partnership for which substituted return treatment is requested but
not granted remains an administrative adjustment request. Thus, for
example, the tax matters partner may file suit under section 6228(a)
if the Internal Revenue Service fails to take timely action on the
request.

(c) Effective date. This section is applicable to partnership
taxable years beginning on or after October 4, 2001. For years
beginning prior to October 4, 2001, see §301.6227(b)-1T
contained in 26 CFR part 1, revised April 1, 2001.
§301.6227(c)-1T [Removed] Par. 27. Section 301.6227(c)-1T is
removed. Par. 27a. Section 301.6227(d)-1 is added to read as
follows: §301.6227(d)-1 Administrative adjustment request filed
on behalf of a partner.

(a) In general. A request for an administrative adjustment on behalf
of a partner shall be filed on the form prescribed by the Internal
Revenue Service for that purpose in accordance with that form's
instructions. Except as otherwise provided in that form's
instructions, the request shall--

(1) Be filed in duplicate, the original copy filed with the
partner's amended income tax return (on which the partner computes
the amount by which the partner's tax liability should be adjusted
if the request is granted) and the other copy filed with the service
center where the partnership return is filed (but, if the notice
described in section 6223(a)(1) (beginning of an administrative
proceeding) has already been mailed to the tax matters partner, the
statement should be filed with the Internal Revenue Service office
that mailed such notice);

(2) Identify the partner and the partnership by name, address, and
taxpayer identification number;

(3) Specify the partnership taxable year to which the administrative
adjustment request applies;

(4) Relate only to partnership items; and

(5) Relate only to one partnership and one partnership taxable year.

(b) Effective date. This section is applicable to partnership
taxable years beginning on or after October 4, 2001. For years
beginning prior to October 4, 2001, see §301.6227(c)-1T
contained in 26 CFR part 1, revised April 1, 2001. Par. 28. Section
301.6229(b)-1 is added to read as follows: §301.6229(b)-1
Extension by agreement.

(a) In general. Any partnership may authorize any person to extend
the period described in section 6229(a) with respect to all partners
by filing a statement to that effect with the service center where
the partnership return is filed (but, if the notice described in
section 6223(a)(1) (beginning of an administrative proceeding) has
already been mailed to the tax matters partner, the statement should
be filed with the Internal Revenue Service office that mailed such
notice). The statement shall--

(1) Provide that it is an authorization for a person other than the
tax matters partner to extend the assessment period with respect to
all partners;

(2) Identify the partnership and the person being authorized by
name, address, and taxpayer identification number;

(3) Specify the partnership taxable year or years for which the
authorization is effective; and

(4) Be signed by all persons who were general partners (or, in the
case of an LLC, member-managers, as those terms are defined in
§301.6231(a)(7)-2(b)) at any time during the year or years for
which the authorization is effective.

(b) Effective date. This section is applicable to partnership
taxable years beginning on or after October 4, 2001. For years
beginning prior to October 4, 2001, see §301.6229(b)-1T
contained in 26 CFR part 1, revised April 1, 2001.

§301.6229(b)-1T [Removed]

Par. 28a. Section 301.6229(b)-1T is removed.

Par. 29. Section 301.6229(b)-2 is added to read as follows:

§301.6229(b)-2 Special rule with respect to debtors in Title 11
cases.

(a) In general. Notwithstanding any other law or rule of law, if an
agreement is entered into under section 6229(b)(1)(B), and the
agreement is signed by a person who would be the tax matters partner
but for the fact that, at the time that the agreement is executed,
the person is a debtor in a bankruptcy proceeding under Title 11 of
the United States Code, such agreement shall be binding on all
partners in the partnership unless the Internal Revenue Service has
been notified of the bankruptcy proceeding in accordance with
paragraph (b) of this section.

(b) Procedures for notifying the Internal Revenue Service of a
partner's bankruptcy proceeding. (1) The Internal Revenue Service
shall be notified of the bankruptcy proceeding of the tax matters
partner in accordance with the procedures set forth in
§301.6223(c)-1.

(2) In addition to the information specified in §301.6223(c)-1,
notification that a person is (or was) a debtor in a bankruptcy
proceeding shall include the date the bankruptcy proceeding was
filed, the name and address of the court in which the bankruptcy
proceeding exists (or took place), the caption of the bankruptcy
proceeding (including the docket number or other identification
number used by the court), and the status of the proceeding as of
the date of notification.

(c) Effective date. This section is applicable to partnership
taxable years beginning on or after October 4, 2001. For years
beginning prior to October 4, 2001, see §301.6229(b)-2T
contained in 26 CFR part 1, revised April 1, 2001.
§301.6229(b)-2T [Removed] Par. 29a. Section 301.6229(b)-2T is
removed. Par. 30. Section 301.6229(e)-1 is added to read as follows:
§301.6229(e)-1 Information with respect to unidentified
partner.

(a) In general. A partner who is not properly identified on the
partnership return (including an indirect partner) remains an
unidentified partner for purposes of section 6229(e) until
identifying information is furnished as provided in
§301.6223(c)-1.

(b) Effective date. This section is applicable to partnership
taxable years beginning on or after October 4, 2001. For years
beginning prior to October 4, 2001, see §301.6229(e)-1T
contained in 26 CFR part 1, revised April 1, 2001.

§301.6229(e)-1T [Removed]

Par. 30a. Section 301.6229(e)-1T is removed.

Par. 31. Section 301.6229(f)-1 is added to read as follows:

§301.6229(f)-1 Special rule for partial settlement agreements.

(a) In general. If a partner enters into a settlement agreement with
the Internal Revenue Service with respect to the treatment of some
of the partnership items or partnership-level determinations of any
penalty, addition to tax, or additional amount in dispute for a
partnership taxable year, but one or more other partnership items or
determinations remain in dispute, the period of limitations for
assessing any tax attributable to the settled items shall be
determined as if such agreement had not been entered into.

(b) Other items remaining in dispute. Pursuant to section 6226(c), a
partner is a party to a partnership-level judicial proceeding with
respect to partnership items and partnership-level determinations of
penalties, additions to tax or additional amounts. When a partner
settles partnership items, the settled partnership items convert to
nonpartnership items under section 6231(b)(1)(C) and will not be
subject to any future or pending partnership-level proceeding
pursuant to section 6226(d)(1). The remaining unsettled partnership
items, as well as any unsettled penalty, addition to tax, or
additional amount that relates to an adjustment to a partnership
item (regardless of whether the partnership item to which it relates
has been settled), however, will remain subject to determination
under partnership-level administrative and judicial procedures.
Consequently, any remaining unsettled items, including any unsettled
penalty, addition to tax, or additional amount that relates to an
adjustment to a partnership item, will be deemed to remain in
dispute. Thus, the period for assessing any tax attributable to the
settled items will be governed by the period for assessing any tax
attributable to the remaining unsettled items.

(c) Effective date. This section is applicable to partnership
taxable years beginning on or after October 4, 2001. For years
beginning prior to October 4, 2001, see §301.6229(f)-1T
contained in 26 CFR part 1, revised April 1, 2001.
§301.6229(f)-1T [Removed] Par. 31a. Section 301.6229(f)-1T is
removed. Par. 32. Section 301.6230(b)-1 is added to read as follows:
§301.6230(b)-1 Request that correction not be made.

(a) In general. The request that a correction not be made under
section 6230(b)(2) shall be in writing and shall--

(1) State that it is a request that a correction not be made under
section 6230(b);

(2) Identify the partnership and the partner filing the request by
name, address, and taxpayer identification number;

(3) Be signed by the partner filing the request; and

(4) Be filed with the Internal Revenue Service office that provided
the notice of the correction of the error.

(b) Effective date. This section is applicable to partnership
taxable years beginning on or after October 4, 2001. For years
beginning prior to October 4, 2001, see §301.6230(b)-1T
contained in 26 CFR part 1, revised April 1, 2001.
§301.6230(b)-1T [Removed] Par. 32a. Section 301.6230(b)-1T is
removed. Par. 33. Section 301.6230(c)-1 is added to read as follows:
§301.6230(c)-1 Claim arising out of erroneous computation, etc.

(a) In general. A claim for refund under section 6230(c) shall state
the grounds for the claim and shall be filed with the service center
where the partner's return is filed.

(b) Effective date. This section is applicable to partnership
taxable years beginning on or after October 4, 2001. For years
beginning prior to October 4, 2001, see §301.6230(c)-1T
contained in 26 CFR part 1, revised April 1, 2001.
§301.6230(c)-1T [Removed] Par. 33a. Section 301.6230(c)-1T is
removed. Par. 34. Section 301.6230(e)-1 is added to read as follows:
§301.6230(e)-1 Tax matters partner required to furnish names.

(a) In general. If a notice of the beginning of an administrative
proceeding is mailed to the tax matters partner with respect to any
partnership taxable year, the tax matters partner shall furnish to
the Internal Revenue Service office that issued the notice the name,
address, profits interest, and taxpayer identification number of
each person who was a partner in the partnership at any time during
that taxable year if that information was not provided on the
partnership return filed for that year.

(b) Revised or additional information. If the tax matters partner
discovers that any information furnished to the Internal Revenue
Service on the partnership return or under paragraph (a) of this
section was incorrect or incomplete, the tax matters partner shall
furnish revised or additional information to the Internal Revenue
Service within 15 days of discovering that the information furnished
to the Internal Revenue Service was incorrect or incomplete.

(c) Information required with respect to indirect partners. The
requirements of this section for identifying information apply with
respect to indirect partners to the extent that the tax matters
partner has such information.

(d) Effective date. This section is applicable to partnership
taxable years beginning on or after October 4, 2001. For years
beginning prior to October 4, 2001, see §301.6230(e)-1T
contained in 26 CFR part 1, revised April 1, 2001.
§301.6230(e)-1T [Removed] Par. 34a. Section 301.6230(e)-1T is
removed. Par. 35. Section 301.6231(a)(1)-1 is added to read as
follows: §301.6231(a)(1)-1 Exception for small partnerships.

(a) In general. For purposes of the exception for small partnerships
under section 6231(a)(1)(B), the rules contained in this section
shall apply.

(1) 10 or fewer. The 10 or fewer limitation described in section
6231(a)(1)(B)(i) is applied to the number of natural persons, C
corporations, and estates of deceased partners that were partners at
any one time during the partnership taxable year. Thus, for example,
a partnership that at no time during the taxable year had more than
10 partners may be treated as a small partnership even if, because
of transfers of interests in the partnership, 11 or more natural
persons, C corporations, or estates of deceased partners owned
interests in the partnership for some portion of the taxable year.
See section 1361(a)(2) for the definition of a C corporation. For
purposes of section 6231(a)(1)(B) and this section, a husband and
wife (and their estates) are treated as one person.

(2) Pass-thru partner. The exception provided in section 6231(a)(1)
(B) does not apply to a partnership for a taxable year if any
partner in the partnership during that taxable year is a pass-thru
partner as defined in section 6231(a)(9). For purposes of this
paragraph (a)(2), an estate shall not be treated as a pass-thru
partner.

(3) Determination made annually. The determination of whether a
partnership meets the requirements for the exception for small
partnerships under section 6231(a)(1)(B) and this paragraph (a)
shall be made with respect to each partnership taxable year. Thus, a
partnership that does not qualify as a small partnership in one
taxable year may qualify as a small partnership in another taxable
year if the requirements for the exception under section 6231(a)(1)
(B) and this paragraph (a) are met with respect to that other
taxable year.

(b) Election to have subchapter C of chapter 63 apply--

(1) In general. Any partnership that meets the requirements set
forth in section 6231(a)(1)(B) and paragraph (a) of this section
(relating to the exception for small partnerships) may elect under
paragraph (b)(2) of this section to have the provisions of
subchapter C of chapter 63 of the Internal Revenue Code apply with
respect to that partnership.

(2) Method of election. A partnership shall make the election
described in paragraph (b)(1) of this section by attaching a
statement to the partnership return for the first taxable year for
which the election is to be effective. The statement shall be
identified as an election under section 6231(a)(1)(B)(ii), shall be
signed by all persons who were partners of that partnership at any
time during the partnership 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. However, for any partnership taxable year
for which the due date of the return (determined without regard to
extensions) is before January 2, 2002, the partnership may file the
statement described in the preceding sentence on or before the date
which is one year before the date specified in section 6229(a) for
the expiration of the period of limitations with respect to that
partnership (determined with regard to extensions of that period
under section 6229(b)).

(3) Years covered by election. The election shall be effective for
the partnership taxable year to which the return relates and all
subsequent partnership taxable years unless revoked with the consent
of the Commissioner.

(c) Effective date. This section is applicable to partnership
taxable years beginning on or after October 4, 2001. For years
beginning prior to October 4, 2001, see §301.6231(a)(1)-1T
contained in 26 CFR part 1, revised April 1, 2001. §301.6231(a)
(1)-1T [Removed] Par. 35a. Section 301.6231(a)(1)-1T is removed.
Par. 36. Section 301.6231(a)(2)-1 is added to read as follows:
§301.6231(a)(2)-1 Persons whose tax liability is determined
indirectly by partnership items.

(a) Spouse filing joint return with individual holding a separate
interest--

(1) In general. Except as otherwise provided in this paragraph (a),
a spouse who files a joint return with an individual holding a
separate interest in the partnership shall be treated as a partner
for purposes of subchapter C of chapter 63 of the Internal Revenue
Code. Thus, the spouse who files a joint return with a partner will
be permitted to participate in administrative and judicial
proceedings.

(2) Counting rules. A spouse who files a joint return with an
individual holding a separate interest in the partnership shall not
be counted as a partner for purposes of applying section 6223(b)
(relating to special rules for partnerships with more than 100
partners) and section 6231(a)(1)(B) (relating to the exception for
small partnerships).

(3) Notice rules--

(i) In general. Except as provided in paragraph (a)(3)(ii) of this
section, for purposes of subchapter C of chapter 63 of the Internal
Revenue Code, a spouse who files a joint return with an individual
holding a separate interest in the partnership shall be treated as
receiving any notice received by the individual holding the separate
interest.

(ii) Spouse identified on partnership return or by statement.
Paragraph (a)(3)(i) of this section shall not apply to a spouse who
files a joint return with an individual holding a separate interest
in the partnership if that spouse-- (A) Is identified on the
partnership return; or (B) Is identified as a partner entitled to
notice as provided in §301.6223(c)-1(b).

(4) Conversion of partnership items--

(i) Individual holding a separate interest. A spouse who files a
joint return with an individual holding a separate interest in the
partnership shall cease to be treated as a partner in the
partnership under paragraph (a)(1) of this section upon the
conversion of the partnership items of the individual holding the
separate interest in the partnership to nonpartnership items
pursuant to section 6231(b). If each spouse holds a separate
interest in the partnership, the previous sentence shall be applied
separately with respect to each partnership interest.

(ii) Spouse who files a joint return with an individual holding a
separate interest in the partnership. A spouse who files a joint
return with an individual holding a separate interest in the
partnership shall cease to be treated as a partner in the
partnership under paragraph (a)(1) of this section upon the
occurrence of an event that would convert the partnership items of
the spouse to nonpartnership items if the spouse were the owner of a
separate interest.

(iii) Examples. The following examples illustrate the application of
paragraph (a)(4) of this section: Example 1. Husband owns a separate
interest in ABC partnership and files a joint return with Wife.
Husband files for bankruptcy. Pursuant to §301.6231(c)-7, upon
filing for bankruptcy, the partnership items of the debtor convert
to nonpartnership items. Thus, Husband's partnership items converted
to nonpartnership items upon the filing of Husband's bankruptcy
petition. Pursuant to paragraph (a)(4)(i) of this section, Wife is
no longer treated as a partner of ABC partnership as of the date the
partnership items of Husband converted to nonpartnership items.

Example 2. Wife owns a separate interest in XYZ partnership and
files a joint return with Husband. Husband files for bankruptcy.
Because the filing of the bankruptcy petition by Husband is an event
that would convert Husband's partnership items to nonpartnership
items if Husband were the owner of a separate interest, Husband
shall no longer be treated as a partner as of the filing of the
bankruptcy petition. Pursuant to paragraph (a)(4)(ii) of this
section, the partnership items of Wife are not affected by Husband's
bankruptcy.

(5) Cross-reference. See §301.6231(a)(12)-1 for special rules
relating to spouses holding a joint interest in a partnership.

(b) Shareholder of C corporation. A shareholder of a C corporation
(as defined in section 1361(a)(2)) is not a partner in a partnership
merely because the C corporation is a partner in that partnership.

(c) Effective date. This section is applicable to partnership
taxable years beginning on or after October 4, 2001. For years
beginning prior to October 4, 2001, see §301.6231(a)(2)-1T
contained in 26 CFR part 1, revised April 1, 2001. §301.6231(a)
(2)-1T [Removed] Par. 36a. Section 301.6231(a)(2)-1T is removed.
Par. 37. Section 301.6231(a)(5)-1 is added to read as follows:
§301.6231(a)(5)-1 Definition of affected item.

(a) In general. The term affected item means any item to the extent
such item is affected by a partnership item. It includes items
unrelated to the items reflected on the partnership return (for
example, an item, such as the threshold for the medical expense
deduction under section 213, that varies if there is a change in an
individual partner's adjusted gross income).

(b) Basis in a partner's partnership interest. The basis of a
partner's partnership interest is an affected item to the extent it
is not a partnership item.

(c) At-risk limitation. The application of the at-risk limitation
under section 465 to a partner with respect to a loss incurred by a
partnership is an affected item to the extent it is not a
partnership item.

(d) Passive losses. The application of the passive loss rules under
section 469 to a partner with respect to a loss incurred by a
partnership is an affected item to the extent it is not a
partnership item.

(e) Penalty, addition to tax, or additional amount--

(1) In general. The term affected item includes any penalty,
addition to tax, or additional amount provided by subchapter A of
chapter 68 of the Internal Revenue Code of 1986 to the extent
provided in this paragraph (e).

(2) Penalty, addition to tax, or additional amount without floor. If
a penalty, addition to tax, or additional amount that does not
contain a floor (that is, a threshold amount of underpayment or
understatement necessary before the imposition of the penalty,
addition to tax, or additional amount) is imposed on a partner as
the result of an adjustment to a partnership item, the term affected
item shall include the penalty, addition to tax, or additional
amount computed with reference to the portion of the underpayment
that is attributable to the partnership item adjustment(s) to which
the penalty, addition to tax, or additional amount applies.

(3) Penalty, addition to tax, or additional amount containing
floor--

(i) Floor exceeded prior to adjustment. If a partner would have been
subject to a penalty, addition to tax, or additional amount that
contains a floor in the absence of an adjustment to a partnership
item (that is, the partner's understatement or underpayment exceeded
the floor even without an adjustment to a partnership item) the term
affected item shall include only the portion of the penalty,
addition to tax, or additional amount computed with reference to the
partnership item (or affected item) adjustments.

(ii) Floor not exceeded prior to adjustment. In the case of a
penalty, addition to tax, or additional amount that contains a
floor, if the taxpayer's understatement or underpayment does not
exceed the floor prior to an adjustment to a partnership item but
does so after such adjustment, the term affected item shall include
the penalty, addition to tax, or additional amount computed with
reference to the entire underpayment or understatement to which the
penalty, addition to tax, or additional amount applies.

(4) Examples. The provisions of this paragraph (e) may be
illustrated by the following examples: Example 1. A, a partner of P,
had an aggregate underpayment of $1,000 of which $100 is
attributable to an adjustment to partnership items. A is negligent
in reporting the partnership items. The accuracy-related penalty
under section 6662 for negligence computed with reference to the
$100 underpayment attributable to the partnership item adjustments
is an affected item.

Example 2. B, a partner of P, understated B's income tax liability
attributable to nonpartnership items by $6,000. An adjustment to a
partnership item resulting from a partnership proceeding increased
B's income tax by an additional $2,000. Prior to the adjustment, B
would have been subject to the accuracy-related penalty under
section 6662 for a substantial understatement of income tax with
respect to the $6,000 understatement attributable to nonpartnership
items. The portion of the accuracy-related penalty under section
6662 computed with reference to the $2,000 understatement
attributable to partnership items to which the accuracy-related
penalty applies is an affected item. The portion of the accuracy-
related penalty under section 6662 computed with reference to the
$6,000 pre-existing understatement is not an affected item.

Example 3. C, a partner in partnership P, understated C's income tax
liability attributable to nonpartnership items by $4,000. As a
result of an adjustment to partnership items, that understatement is
increased to $10,000. Prior to the adjustment, C would not have been
subject to the accuracy-related penalty under section 6662 for a
substantial understatement of income tax. The accuracy-related
penalty under section 6662 computed with reference to the entire
$10,000 understatement to which the accuracy-related penalty applies
is an affected item.

(f) Effective date. This section is applicable to partnership
taxable years beginning on or after October 4, 2001. For years
beginning prior to October 4, 2001, see §301.6231(a)(5)-1T
contained in 26 CFR part 1, revised April 1, 2001. §301.6231(a)
(5)-1T [Removed] Par. 37a. Section 301.6231(a)(5)-1T is removed.
Par. 38. Section 301.6231(a)(6)-1 is added to read as follows:
§301.6231(a)(6)-1 Computational adjustments.

(a) Changes in a partner's tax liability--

(1) In general. A change in the tax liability of a partner to
properly reflect the treatment of a partnership item under
subchapter C of chapter 63 of the Internal Revenue Code is made
through a computational adjustment. A computational adjustment
includes a change in tax liability that reflects a change in an
affected item where that change is necessary to properly reflect the
treatment of a partnership item, or any penalty, addition to tax, or
additional amount that relates to an adjustment to a partnership
item. However, if a change in a partner's tax liability cannot be
made without making one or more partner-level determinations, that
portion of the change in tax liability attributable to the partner-
level determinations shall be made under the deficiency procedures
(as described in subchapter B of chapter 63 of the Internal Revenue
Code), except for any penalty, addition to tax, or additional amount
that relates to an adjustment to a partnership item.

(2) Affected items that do not require partner-level determinations.
Changes in a partner's tax liability with respect to affected items
that do not require partner-level determinations (such as the
threshold amount of medical deductions under section 213 that
changes as the result of determinations made at the partnership
level) are computational adjustments that are directly assessed.
When making computational adjustments, the Internal Revenue Service
may assume that amounts the partner reported on the partner's
individual return include all amounts reported to the partner by the
partnership (on the Schedule K-1s attached to the partnership's
original return), absent contrary notice to the Internal Revenue
Service (for example, a "Notice of Inconsistent Treatment" pursuant
to §301.6222(a)-2(c)). Such an assumption by the Internal
Revenue Service does not constitute a partner-level determination.
Moreover, substituting redetermined partnership items for the
partner's previously reported partnership items (including
partnership items included in carryover amounts) does not constitute
a partner-level determination where the Internal Revenue Service
otherwise accepts, for the sole purpose of determining the
computational adjustment, all nonpartnership items (including, for
example, nonpartnership item components of carryover amounts) as
reported.

(3) Affected items that require partner-level determinations.
Changes in a partner's tax liability with respect to affected items
that require partner-level determinations (such as a partner's at-
risk amount to the extent it depends upon the source from which the
partner obtained the funds that the partner contributed to the
partnership) are computational adjustments that are subject to the
deficiency procedures. Notwithstanding the preceding sentence, any
penalty, addition to tax, or additional amount that relates to an
adjustment to a partnership item is not subject to the deficiency
procedures, but rather may be directly assessed as part of the
computational adjustment that is made following the partnership
proceeding, based on determinations in that proceeding, regardless
of whether any partner-level determinations may be required.

(b) Interest. A computational adjustment includes any interest due
with respect to any underpayment or overpayment of tax attributable
to adjustments to reflect properly the treatment of partnership
items. (c) Effective date. This section is applicable to partnership
taxable years beginning on or after October 4, 2001. For years
beginning prior to October 4, 2001, see §301.6231(a)(6)-1T
contained in 26 CFR part 1, revised April 1, 2001. §301.6231(a)
(6)-1T [Removed] Par. 38a. Section 301.6231(a)(6)-1T is removed.
Par. 39. Section 301.6231(a)(7)-1 is amended by revising paragraphs
(p)(2), (r)(1), and (s) to read as follows: §301.6231(a)(7)-1
Designation or selection of tax matters partner.

* * * * *

(p) * * *

(2) When each general partner is deemed to have no profits interest
in the partnership. If it is impracticable under paragraph (o)(2) of
this section to apply the largest-profits-interest rule of paragraph
(m)(2) of this section, the Commissioner will select a partner
(including a general or limited partner) as the tax matters partner
in accordance with the criteria set forth in paragraph (q) of this
section. The Commissioner will notify, within 30 days of the
selection, the partner selected, the partnership, and all partners
required to receive notice under section 6223(a) of the selection of
the tax matters partner, effective as of the date specified in the
notice.

* * * * *

(r) * * * (1) In general. If the Commissioner selects a tax matters
partner under the provisions of paragraph (p)(1) or (p)(3)(i) of
this section, the Commissioner will notify, within 30 days of the
selection, the partner selected, the partnership, and all partners
required to receive notice under section 6223(a) of the selection of
the tax matters partner, effective as of the date specified in the
notice.

* * * * *

(s) Effective date. This section applies to all designations,
selections, and terminations of a tax matters partner occurring on
or after December 23, 1996, except for paragraphs (p)(2) and (r)(1),
that are applicable on or after October 4, 2001. §301.6231(a)
(7)-1T [Removed] Par. 39a. Section 301.6231(a)(7)-1T is removed.
Par. 40. Section 301.6231(a)(12)-1 is added to read as follows:
§301.6231(a)(12)-1 Special rules relating to spouses.

(a) Spouses holding a joint interest--

(1) In general. Except as otherwise provided in this section,
spouses holding a joint interest in a partnership shall be treated
as separate partners for purposes of subchapter C of chapter 63 of
the Internal Revenue Code. Thus, both spouses may participate in
administrative and judicial proceedings. The term joint interest
includes tenancies in common, joint tenancies, tenancies by the
entirety, and community property.

(2) Identification of joint interest. For purposes of this section,
an interest shall be treated as a joint interest in a partnership
only if both spouses are identified on the partnership return or are
identified as partners entitled to notice as provided in
§301.6223(c)-1(b).

(3) Failure to identify both spouses as partners. If both spouses
are not identified as set forth in paragraph (a)(2) of this section,
then the partnership interest shall be treated as separately owned
by the identified spouse.

(4) Example. The following example illustrates the application of
paragraph (a)(3) of this section: Example. Wife owns an interest in
ABC Partnership and is identified on the Schedule K-1 of the
partnership return. Wife and Husband live in a community property
state. The partnership return of ABC partnership does not identify
Husband, and Husband is not identified as a partner entitled to
notice as provided in §301.6223(c)-1(b). Pursuant to paragraph
(a)(3) of this section, the partnership interest of Wife shall be
treated as separately owned by Wife.

(b) Notice and counting rules--

(1) In general. Except as provided in paragraph (b)(2) of this
section, for purposes of applying section 6223 (relating to notice
to partners of proceedings) and section 6231(a)(1)(B) (relating to
the exception for small partnerships), spouses holding a joint
interest in a partnership shall be treated as one partner. Except as
provided in paragraph (b)(2) of this section, the Internal Revenue
Service or the tax matters partner may send any required notice to
either spouse.

(2) Identified spouse entitled to notice. For purposes of applying
section 6223 (relating to notice to partners of proceeding) for a
partnership taxable year, an individual who holds a joint interest
in a partnership with a spouse who is entitled to notice under
section 6223 shall be entitled to receive separate notice under
section 6223 if such individual--( i) Is identified as a partner on
the partnership return for that taxable year; or (ii) Is identified
as a partner entitled to notice as provided in
§301.6223(c)-1(b).

(c) Conversion of partnership items--

(1) In general. If spouses holding a joint interest in a partnership
are treated as separate partners under this section, then section
6231(b) (relating to the conversion of partnership items) shall be
applied separately to each spouse.

(2) Example. The following example illustrates the application of
paragraph (c) of this section:

Example. Husband and Wife own a joint interest in XYZ Partnership.
The partnership return identifies both spouses on the Schedule K-1.
Under this section, each spouse is treated as a separate partner. If
Wife enters into a settlement agreement, Wife's partnership items
convert to nonpartnership items pursuant to section 6231(b)(1)(C).
Accordingly, Wife no longer has the right to participate in the
partnership proceeding subsequent to entering into the settlement
agreement. Pursuant to paragraph (c) of this section, however, the
partnership items of Husband are not affected by the conversion of
the partnership items of Wife, and Husband continues to have the
right to participate in the partnership proceeding. This result is
the same regardless of whether the partnership items are reported on
a joint return or on separate returns.

(d) Cross-reference. See §301.6231(a)(2)-1(a) for special rules
relating to spouses who file joint returns with individuals holding
a separate interest in a partnership.

(e) Effective date. This section is applicable to partnership
taxable years beginning on or after October 4, 2001. For years
beginning prior to October 4, 2001, see §301.6231(a)(12)-1T
contained in 26 CFR part 1, revised April 1, 2001. §301.6231(a)
(12)-1T [Removed] Par. 40a. Section 301.6231(a)(12)-1T is removed.
Par. 41. Section 301.6231(c)-1 is added to read as follows:
§301.6231(c)-1 Special rules for certain applications for
tentative carryback and refund adjustments based on partnership
losses, deductions, or credits.

(a) Application subject to this section. This section applies in the
case of an application under section 6411 (relating to tentative
carryback and refund adjustments) based on losses, deductions, or
credits of a partnership if the Commissioner, or the Commissioner's
delegate, determines, after review of the available relevant
information, that it is highly likely that a person described in
section 6700(a)(1) made, with respect to the partnership.

(1) A gross valuation overstatement; or

(2) A false or fraudulent statement with respect to the tax benefits
to be secured by reason of holding an interest in the partnership
that would be subject to a penalty under section 6700 (relating to
penalty for promoting abusive tax shelters, etc.). This section
applies only with respect to an application based upon the original
reporting on the partner's income tax return of partnership losses,
deductions, or credits. Thus, this section does not apply to a
request for administrative adjustment under section 6227 through
which a partner seeks to change the partner's reporting of
partnership items on the partner's income tax return (or on an
earlier request for administrative adjustment).

(b) Determination of special enforcement area. In the case of an
application under section 6411 described in paragraph (a) of this
section, precluding an assessment under section 6225 that would be
permitted under section 6213(b)(3) (relating to assessments arising
out of tentative carryback or refund adjustments) with respect to
any amount applied, credited, or refunded as a result of the
application may encourage the proliferation of abusive tax shelter
partnerships and make the eventual collection of taxes due more
difficult. Consequently, the Secretary hereby determines that such
applications present special enforcement considerations within the
meaning of section 6231(c)(1)(E).

(c) Assessment permitted under section 6213(b)(3). Notwithstanding
section 6225 (relating to restrictions on assessment with respect to
partnership items), an assessment that would be permitted under
section 6213(b)(3) with respect to any amount applied, credited, or
refunded as a result of an application described in paragraph (a) of
this section may be made before there is a final partnership-level
determination with respect to the losses, deductions, or credits on
which the application is based. As provided in section 6213(b)(1),
the Internal Revenue Service shall mail notice of any such
assessment to the partner filing the application. The notice shall
also inform the partner of the partner's limited right to elect to
treat items as nonpartnership items as provided in paragraph (d) of
this section.

(d) Limited right to elect to treat items as nonpartnership items--

(1) In general. A partner to whom the Internal Revenue Service mails
a notice of suspension of action on a refund claim under paragraph
(c) of this section may elect in accordance with this paragraph (d)
to have all partnership items for the partnership taxable year in
which the losses, deductions, or credits at issue arose treated as
nonpartnership items.

(2) Time and place of making election. The election shall be made by
filing a statement with the Internal Revenue Service office that
mailed the notice of suspension. The statement may be filed at any
time--

(i) After the date which is one year after the date on which the
partnership return was filed for the partnership taxable year in
which the items at issue arose; and

(ii) Before the date on which the Internal Revenue Service mails to
the tax matters partner the notice of final partnership
administrative adjustment for the partnership taxable year in which
the items at issue arose. For purposes of this paragraph (d)(2), a
partnership return filed before the last day prescribed by law for
its filing (determined without regard to extensions) shall be
treated as filed on the last day.

(3) Contents of the statement. The statement shall--

(i) Be clearly identified as an election to have partnership items
treated as nonpartnership items because of notification of an
assessment under section 6213(b)(3);

(ii) Identify the partnership by name, address, and taxpayer
identification number;

(iii) Identify the partner making the election by name, address, and
taxpayer identification number;

(iv) Specify the partnership taxable year to which the election
applies; and

(v) Be signed by the partner making the election.

(e) Effective date. This section is applicable to partnership
taxable years beginning on or after October 4, 2001. For years
beginning prior to October 4, 2001, see §301.6231(c)-1T
contained in 26 CFR part 1, revised April 1, 2001.
§301.6231(c)-1T [Removed] Par. 41a. Section 301.6231(c)-1T is
removed. Par. 42. Section 301.6231(c)-2 is added to read as follows:
§301.6231(c)-2 Special rules for certain refund claims based on
losses, deductions, or credits from abusive tax shelter
partnerships.

(a) Claims subject to this section. This section applies in the case
of a claim for credit or refund based on losses, deductions or
credits of a partnership if the Commissioner, or the Commissioner's
delegate, determines, after review of available relevant
information, that it is highly likely that a person described in
section 6700(a)(1) made, with respect to the partnership--( 1) A
gross valuation overstatement; or (2) A false or fraudulent
statement with respect to the tax benefits to be secured by reason
of holding an interest in the partnership that would be subject to a
penalty under section 6700 (relating to penalty for promoting
abusive tax shelters, etc.). This section applies only with respect
to a claim that is based upon the partner's original reporting on
the partner's income tax return of partnership losses, deductions,
or credits. Thus, this section does not apply to a request for
administrative adjustment under section 6227 through which a partner
seeks to change the partner's reporting of partnership items on the
partner's income tax return (or on an earlier request for
administrative adjustment). For purposes of this section, any income
tax return requesting a credit or refund shall be treated as a claim
for a credit or refund.

(b) Determination of special enforcement area. Granting a claim for
credit or refund described in paragraph (a) of this section may
encourage the proliferation of abusive tax shelter partnerships and
make the eventual collection of taxes more difficult. Consequently,
the Secretary hereby determines that such claims present special
enforcement considerations within the meaning of section 6231(c)(1)
(E).

(c) Action on refund claims suspended. In the case of a claim
described in paragraph (a) of this section, the Internal Revenue
Service may mail to the partner filing the claim a notice stating
that no action will be taken on the partner's claim until the
completion of the partnership-level proceedings. The notice shall
also inform the partner of the partner's limited right to elect to
treat items as nonpartnership items as provided in paragraph (d) of
this section.

(d) Limited right to elect to treat items as nonpartnership items--

(1) In general. A partner to whom the Internal Revenue Service mails
a notice of suspension under paragraph (c) of this section may elect
in accordance with this paragraph (d) to have all partnership items
for the partnership taxable year in which the losses, deductions, or
credits at issue arose treated as nonpartnership items.

(2) Time and place of making election. The election shall be made by
filing a statement with the Internal Revenue Service office that
mailed the notice of suspension. The statement may be filed at any
time--

(i) After the date which is one year after the date on which the
partnership return was filed for the partnership taxable year in
which the items at issue arose; and

(ii) Before the date on which the Internal Revenue Service mails to
the tax matters partner the notice of final partnership
administrative adjustment for the partnership taxable year in which
the items at issue arose. For purposes of this paragraph (d)(2), a
partnership return filed before the last day prescribed by law for
its filing (determined without regard to extensions) shall be
treated as filed on the last day.

(3) Contents of the statement. The statement shall--

(i) Be clearly identified as an election to have partnership items
treated as nonpartnership items because of notification of
suspension of action on a refund claim;

(ii) Identify the partnership by name, address, and taxpayer
identification number;

(iii) Identify the partner making the election by name, address, and
taxpayer identification number;

(iv) Specify the partnership taxable year to which the election
applies; and

(v) Be signed by the partner making the election.

(e) Effective date. This section applies with respect to any claim
described in paragraph

(a) of this section that is filed on or after October 4, 2001. For
claims filed prior to October 4, 2001, see §301.6231(c)-2T
contained in 26 CFR part 1, revised April 1, 2001.
§301.6231(c)-2T [Removed]

Par. 42a. Section 301.6231(c)-2T is removed.

Par. 43. Section 301.6231(c)-3 is added to read as follows:

§301.6231(c)-3 Limitation on applicability of
§§301.6231(c)-4 through 301.6231(c)-8.

(a) In general. A provision of §§301.6231(c)-4 through
301.6231(c)-8 shall not apply with respect to partnership items
arising in a partnership taxable year if, as of the date on which
those items would otherwise begin to be treated as nonpartnership
items under that provision--

(1) A notice of final partnership administrative adjustment with
respect to those items has been mailed to the tax matters partner;
and

(2) Either--

(i) The period during which an action with respect to that final
partnership administrative adjustment may be brought under section
6226 has expired and no such action has been brought; or

(ii) The decision of the court in an action brought under section
6226 with respect to that final partnership administrative
adjustment has become final.

(b) Effective date. This section is applicable to partnership
taxable years beginning on or after October 4, 2001. For years
beginning prior to October 4, 2001, see §301.6231(c)-3T
contained in 26 CFR part 1, revised April 1, 2001.

§301.6231(c)-3T [Removed]

Par. 43a. Section 301.6231(c)-3T is removed.

Par. 44. Section 301.6231(c)-4 is added to read as follows:

§301.6231(c)-4 Termination and jeopardy assessment.

(a) In general. The treatment of items as partnership items with
respect to a partner against whom an assessment of income tax under
section 6851 (termination assessment) or section 6861 (jeopardy
assessment) is made will interfere with the effective and efficient
enforcement of the internal revenue laws. Accordingly, partnership
items of such a partner arising in any partnership taxable year
ending with or within the partner's taxable year for which an
assessment of income tax under section 6851 or 6861 is made shall be
treated as nonpartnership items as of the moment before such
assessment is made.

(b) Effective date. This section is applicable to partnership
taxable years beginning on or after October 4, 2001. For years
beginning prior to October 4, 2001, see §301.6231(c)-4T
contained in 26 CFR part 1, revised April 1, 2001.
§301.6231(c)-4T [Removed]

Par. 44a. Section 301.6231(c)-4T is removed.

Par. 45. Section 301.6231(c)-5 is added to read as follows:

§301.6231(c)-5 Criminal investigations.

(a) In general. The treatment of items as partnership items with
respect to a partner under criminal investigation for violation of
the internal revenue laws relating to income tax will interfere with
the effective and efficient enforcement of the internal revenue
laws. Accordingly, partnership items of such a partner arising in
any partnership taxable year ending on or before the last day of the
latest taxable year of the partner to which the criminal
investigation relates shall be treated as nonpartnership items as of
the date on which the partner is notified that the partner is the
subject of a criminal investigation and written notification is sent
by the Internal Revenue Service that the partner's partnership items
shall be treated as nonpartnership items. The partnership items of a
partner who is notified that the partner is the subject of a
criminal investigation shall not be treated as nonpartnership items
under this section unless and until such partner is sent written
notification from the Internal Revenue Service of such treatment.

(b) Effective date. This section is applicable to partnership
taxable years beginning on or after October 4, 2001. For years
beginning prior to October 4, 2001, see §301.6231(c)-5T
contained in 26 CFR part 1, revised April 1, 2001.

§301.6231(c)-5T [Removed]

Par. 45a. Section 301.6231(c)-5T is removed.

Par. 46. Section 301.6231(c)-6 is added to read as follows:

§301.6231(c)-6 Indirect method of proof of income.

(a) In general. The treatment of items as partnership items with
respect to a partner whose taxable income is determined by use of an
indirect method of proof of income will interfere with the effective
and efficient enforcement of the internal revenue laws. Accordingly,
partnership items of such a partner arising in any partnership
taxable year ending on or before the last day of the taxable year of
the partner for which a deficiency notice based upon an indirect
method of proof of income is mailed to the partner shall be treated
as nonpartnership items as of the date on which that deficiency
notice is mailed to the partner.

(b) Effective date. This section is applicable to partnership
taxable years beginning on or after October 4, 2001. For years
beginning prior to October 4, 2001, see §301.6231(c)-6T
contained in 26 CFR part 1, revised April 1, 2001.

§301.6231(c)-6T [Removed]

Par. 46a. Section 301.6231(c)-6T is removed.

Par. 47. Section 301.6231(c)-7 is added to read as follows:

§301.6231(c)-7 Bankruptcy and receivership

(a) Bankruptcy. The treatment of items as partnership items with
respect to a partner named as a debtor in a bankruptcy proceeding
will interfere with the effective and efficient enforcement of the
internal revenue laws. Accordingly, partnership items of such a
partner arising in any partnership taxable year ending on or before
the last day of the latest taxable year of the partner with respect
to which the United States could file a claim for income tax due in
the bankruptcy proceeding shall be treated as nonpartnership items
as of the date the petition naming the partner as debtor is filed in
bankruptcy.

(b) Receivership. The treatment of items as partnership items with
respect to a partner for whom a receiver has been appointed in any
receivership proceeding before any court of the United States or of
any State or the District of Columbia will interfere with the
effective and efficient enforcement of the internal revenue laws.
Accordingly, partnership items of such a partner arising in any
partnership taxable year ending on or before the last day of the
latest taxable year of the partner with respect to which the United
States could file a claim for income tax due in the receivership
proceeding shall be treated as nonpartnership items as of the date a
receiver is appointed in any receivership proceeding before any
court of the United States or of any State or the District of
Columbia.

(c) Effective date. This section is applicable to partnership
taxable years beginning on or after October 4, 2001. For years
beginning prior to October 4, 2001, see §301.6231(c)-7T
contained in 26 CFR part 1, revised April 1, 2001.

§301.6231(c)-7T [Removed]

Par. 47a. Section 301.6231(c)-7T is removed.

Par. 48. Section 301.6231(c)-8 is added to read as follows:

§301.6231(c)-8 Prompt assessment.

(a) In general. The treatment of items as partnership items with
respect to a partner on whose behalf a request for a prompt
assessment of tax under section 6501(d) is filed will interfere with
the effective and efficient enforcement of the internal revenue
laws. Accordingly, partnership items of such a partner arising in
any partnership taxable year ending with or within any taxable year
of the partner with respect to which a request for a prompt
assessment of tax is filed shall be treated as nonpartnership items
as of the date that the request is filed.

(b) Effective date. This section is applicable to partnership
taxable years beginning on or after October 4, 2001. For years
beginning prior to October 4, 2001, see §301.6231(c)-8T
contained in 26 CFR part 1, revised April 1, 2001.

§301.6231(c)-8T [Removed]

Par. 48a. Section 301.6231(c)-8T is removed.

Par. 49. Section 301.6231(d)-1 is added to read as follows:

§301.6231(d)-1 Time for determining profits interest of
partners for purposes of sections 6223(b) and 6231(a)(11).

(a) Partner owns interest at close of year. For purposes of section
6223(b) (relating to special rules for partnerships with more than
100 partners) and section 6231(a)(11) (relating to 5- percent
groups), except as otherwise provided in this section, the profits
interest held by a partner, directly or indirectly through one or
more pass-thru partners, in a partnership (the source partnership)
to which subchapter C of chapter 63 of the Internal Revenue Code
applies shall be determined at the close of the source partnership's
taxable year.

(b) Partner does not own interest at close of year. If the entire
direct and indirect interest of a partner in a source partnership is
terminated by virtue of a disposition by such partner of such
interest (or by virtue of the disposition of an interest held by one
or more pass-thru partners through which the partner holds an
interest), then the profits interest of such partner in the source
partnership shall be measured as of the moment before the
disposition causing such termination. The preceding sentence shall
not apply with respect to a termination if subsequent to such
termination and before the close of the source partnership's taxable
year the partner acquires a direct or indirect interest in the
source partnership.

(c) Disposition of last remaining portion of interest is disposition
of entire interest. If a partner (or a pass-thru partner through
which a partner holds an interest) makes several partial
dispositions of an interest in a source partnership during a taxable
year of the source partnership, paragraph (b) of this section will
apply with respect to the disposition which causes a termination of
the partner's entire direct and indirect interest in the source
partnership.

(d) No profits interest in certain cases. If--

(1) The interest of a partner in a partnership is entirely disposed
of before the close of the taxable year of the partnership; and

(2) No items of the partnership for that taxable year are required
to be taken into account by the partner, then that partner has no
profits interest in the partnership for that taxable year.

(e) Examples. The provisions of this section may be illustrated by
the following examples. Assume in all examples that there have been
no reacquisitions prior to the close of the source partnership's
taxable year. The examples are as follows: Example 1. B holds an
interest in partnership P through T, a pass-thru partner. P uses a
fiscal year ending June 30 as P's taxable year; B and T use the
calendar year as the taxable year. As of the close of P's taxable
year ending June 30, 2002, T holds an interest in P and B holds an
interest in P through T. The profits interest held by B in P through
T for that year is determined as of June 30, 2002.

Example 2. Assume the same facts as in Example 1, except that B sold
the entire interest that B held in P through T on November 5, 2001.
The profits interest held by B in P through T for P's taxable year
ending June 30, 2002, is determined as of the moment before the sale
on November 5, 2001.

Example 3. C holds an interest in partnership P through T, a pass-
thru partner. C, P, and T all use the calendar year as the taxable
year. T disposes of T's interest in P on June 5, 2002. The profits
interest held by C in P through T for 2002 is determined as of the
moment before the disposition on June 5, 2002.

Example 4. Assume the same facts as in Example 3, except that C sold
C's entire interest in T (and, therefore, C's entire interest that C
held in P through T) on March 15, 2002. The profits interest held by
C in P through T for 2002 is determined as of the moment before the
sale on March 15, 2002.

Example 5. On January 1, 2002, D held a 2 percent profits interest
in partnership P. Both D and P use the calendar year as the taxable
year. On August 1, 2002, D transfers three-fourths of D's profits
interest in P to E. On September 1, 2002, D sells D's remaining .5
percent profits interest in P to F. For purposes of sections 6223(b)
and 6231(a)(11), D had a .5 percent profits interest in P for 2002.

Example 6. Assume the same facts as in Example 5, except that on
January 1, 2002, D also held a 1 percent profits interest in
partnership P through T, a pass-thru partner which also uses the
calendar year as the taxable year. In addition to the sale to E on
August 1, 2002, D sold a portion of D's interest in T on December 1,
2002, such that after the sale, D held a .2 percent profits interest
in P through T. D made no other transfers of interests in either P
or T. For purposes of sections 6223(b) and 6231(a)(11), D had a .7
percent profits interest in P for 2002.

(f) Effective date. This section is applicable to partnership
taxable years beginning on or after October 4, 2001. For years
beginning prior to October 4, 2001, see §301.6231(d)-1T
contained in 26 CFR part 1, revised April 1, 2001.
§301.6231(d)-1T [Removed]

Par. 49a. Section 301.6231(d)-1T is removed.

Par. 50. Section 301.6231(e)-1 is added to read as follows:

§301.6231(e)-1 Effect of a determination with respect to a
nonpartnership item on the determination of a partnership item.

(a) In general. The determination of an item after it has become a
nonpartnership item with respect to a partner is not controlling in
the determination of that item with respect to other partners. Thus,
for example, the determination by a court in a separate proceeding
relating to a partner that a certain partnership expenditure was
deductible does not bind either the Internal Revenue Service or the
other partners in a later partnership or other proceeding.

(b) Effective date. This section is applicable to partnership
taxable years beginning on or after October 4, 2001. For years
beginning prior to October 4, 2001, see §301.6231(e)-1T
contained in 26 CFR part 1, revised April 1, 2001.
§301.6231(e)-1T [Removed] Par. 50a. Section 301.6231(e)-1T is
removed. Par. 51. Section 301.6231(e)-2 is added to read as follows:
§301.6231(e)-2 Judicial decision not a bar to certain
adjustments.

(a) In general. A court decision with respect to a partner's income
tax liability attributable to nonpartnership items shall not be a
bar to further proceedings with respect to that partner's income tax
liability if that partner's partnership items become nonpartnership
items after the appropriate time to include such nonpartnership
items in the earlier court proceeding has passed. Thus, the Internal
Revenue Service could issue a later deficiency notice for the same
taxable year with respect to that partner or that partner could
bring a refund suit with respect to those items that have become
nonpartnership items.

(b) Effective date. This section is applicable to partnership
taxable years beginning on or after October 4, 2001. For years
beginning prior to October 4, 2001, see §301.6231(e)-2T
contained in 26 CFR part 1, revised April 1, 2001.

§301.6231(e)-2T [Removed]

Par. 51a. Section 301.6231(e)-2T is removed.

Par. 52. Section 301.6231(f)-1 is added to read as follows:

§301.6231(f)-1 Disallowance of losses and credits in certain
cases.

(a) Application of section. This section applies if--

(1) A partnership, whether domestic or foreign, that is required to
file a return under section 6031 for a taxable year fails to file
the return within the time prescribed; and

(2) At any time after the close of that taxable year, either--

(i) The tax matters partner of that partnership resides outside the
United States; or

(ii) The books and records of that partnership are maintained
outside the United States.

(b) Computational adjustment permitted if return is not filed after
mailing of notice. Except as otherwise provided in paragraph (c) of
this section, if--

(1) This section applies with respect to a partnership for a
partnership taxable year;

(2) The Internal Revenue Service mails notice to a partner that the
losses and credits arising from that partnership for that year will
be disallowed to that partner unless the partnership files a return
for that year within 60 days after the date on which the notice is
mailed; and

(3) The partnership fails to file a return for that year within that
60-day period, the Internal Revenue Service may, without conducting
a partnership-level proceeding, mail a notice of computational
adjustment to that partner to reflect the disallowance of any loss
(including a capital loss) or credit arising from that partnership
for that year.

(c) Restriction on notices under paragraph (b) of this section.
Neither the notice referred to in paragraph (b)(2) of this section
nor the notice of computational adjustment referred to in paragraph
(b) of this section may be mailed on a day on which--

(1) The tax matters partner of the partnership resides within the
United States; and

(2) The books and records of the partnership are maintained within
the United States. Thus, if this section applies with respect to a
partnership for a taxable year solely because the tax matters
partner of that partnership resided outside the United States for a
period after the close of that taxable year and the tax matters
partner later takes up residence within the United States, no notice
may be mailed under paragraph (b) of this section while the tax
matters partner resides within the United States.

(d) No disallowance in certain circumstances. If the person to whom
the notice referred to in paragraph (b)(2) of this section is mailed
establishes to the satisfaction of the Internal Revenue Service--

(1) That the losses and credits arising from the partnership for the
year are proper; and

(2) That the partner has made a good faith effort to have the
partnership file the required return; the Internal Revenue Service
may allow the losses and credits in whole or in part.

(e) Effective date. This section is applicable to partnership
taxable years beginning on or after October 4, 2001. For years
beginning prior to October 4, 2001, see §301.6231(f)-1T
contained in 26 CFR part 1, revised April 1, 2001.
§301.6231(f)-1T [Removed]

Par. 52a. Section 301.6231(f)-1T is removed.

Par. 53. Section 301.6233-1 is added to read as follows:

§301.6233-1 Extension to entities filing partnership returns.

(a) Entities filing a partnership return. Except as provided in
paragraph (c)(1) of this section, the provisions of subchapter C of
chapter 63 of the Internal Revenue Code (subchapter C) and the
regulations thereunder shall apply with respect to any taxable year
of an entity for which such entity files a partnership return as
well as to such entity's items for that taxable year and to any
person holding an interest in such entity at any time during that
taxable year. Any final partnership administrative adjustment or
judicial determination resulting from a proceeding under subchapter
C with respect to such taxable year may include a determination that
the entity is not a partnership for such taxable year as well as
determinations with respect to all items of the entity that would be
partnership items, as defined in section 6231(a)(3) and the
regulations thereunder, if such entity had been a partnership in
such taxable year (including, for example, any amounts taxable to an
entity determined to be an association taxable as a corporation).
For example, a final determination under subchapter C that an entity
that filed a partnership return is an association taxable as a
corporation will serve as a basis for a computational adjustment
reflecting the disallowance of any loss or credit claimed by a
purported partner with respect to that entity.

(b) Partnership return filed but no entity found to exist--
Paragraph (a) of this section shall apply where a partnership return
is filed for a taxable year but it is determined that there is no
entity for such taxable year. For purposes of applying paragraph (a)
of this section, the partnership return shall be treated as if it
were filed by an entity. However, any final partnership
administrative adjustment or judicial determination resulting from a
proceeding under subchapter C with respect to such taxable year may
also include a determination that there is no entity for such
taxable year.

(c) Exceptions. Paragraph (a) of this section shall not apply to--

(1) Entities for any taxable year in which such entity would be
excepted from the provisions of subchapter C of the Internal Revenue
Code under section 6231(a)(1)(B) and the regulations thereunder
(relating to the exception for small partnerships) if such entity
were a partnership for such taxable year; and

(2) Entities for any taxable year for which a partnership return was
filed for the sole purpose of making the election described in
section 761(a).

(d) Effective dates. This section is applicable to partnership
taxable years beginning on or after October 4, 2001. For years
beginning prior to October 4, 2001, see §301.6233-1T contained
in 26 CFR part 1, revised April 1, 2001. §301.6233-1T [Removed]

Par. 53a. Section 301.6233-1T is removed.

PART 602 -- OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

Par. 54. The authority for Part 602 continues to read as follows:
Authority: 26 U.S.C.7805.

Par. 55. Section 602.101, paragraph (b) is amended by removing the
entries for "301.6222(a)-2T", "301.6222(b)-1T", "301.6222(b)-2T",
"301.6222(b)-3T", "301.6227(b)-1T", and adding the following entries
to the table in numerical order: §602.101 OMB Control numbers.

* * * * *

(b) * * *
___________________________________________________________________

CFR part or section where Current 
OMB identified and described control No.

* * * * *

301.6222(a)-2.....................................1545-0790
301.6222(b)-1.................................... 1545-0790
301.6222(b)-2.................................... 1545-0790
301.6222(b)-3.....................................1545-0790
301.6223(b)-1.....................................1545-0790
301.6223(c)-1.....................................1545-0790
301.6223(e)-2.....................................1545-0790
301.6223(g)-1.....................................1545-0790
301.6223(h)-1.....................................1545-0790
301.6224(b)-1.....................................1545-0790
301.6224(c)-1.....................................1545-0790
301.6224(c)-3.....................................1545-0790
301.6227(c)-1.................................... 1545-0790
301.6227(d)-1.................................... 1545-0790
301.6229(b)-2.....................................1545-0790
301.6230(b)-1.....................................1545-0790
301.6230(e)-1.....................................1545-0790
301.6231(a)(1)-1..................................1545-0790

* * * * *

301.6231(c)-1.....................................1545-0790
301.6231(c)-2.....................................1545-0790

* * * * *

Robert E. Wenzel
Deputy Commissioner of Internal Revenue Service

Approved: September 20, 2001

Mark Weinberger
Assistant Secretary of the Treasury

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