[Federal Register Volume 66, Number 193 (Thursday, October 4, 2001)]
[Rules and Regulations]
[Pages 50541-50564]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-24517]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 301 and 602

[TD 8965]
RIN 1545-AW86


Unified Partnership Audit Procedures

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations and removal of temporary regulations.

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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

[[Page 50542]]

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 Secs. 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: Secs. 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 Secs. 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 Sec. 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 
Sec. 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 Sec. 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 Sec. 301.6223(e)-2T

    As stated above, section 6223 requires the IRS to provide partners 
with an NBAP and an FPAA. If the IRS fails to provide a partner with 
timely notice, the partner may, under Sec. 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

[[Page 50543]]

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 Sec. 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 Sec. 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 return with 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 Sec. 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 nonpartnership 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, 
Secs. 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 Secs. 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 
thereunder.
    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 Sec. 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 Sec. 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 Sec. 301.6229(f)-1T to clarify that the 
rules applicable to partial settlements of partnership items also

[[Page 50544]]

apply to partnership-level determinations of penalties.
    The final regulations also amend Sec. 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 Sec. 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 Sec. 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 April 2, 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 Sec. 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 Sec. 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:


Sec. 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

[[Page 50545]]

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 Secs. 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 Sec. 301.6221-1T contained in 
26 CFR part 1, revised April 1, 2001.


Sec. 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:


Sec. 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 
Sec. 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, Sec. 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 Sec. 301.6222(a)-
1T contained in 26 CFR part 1, revised April 1, 2001.


Sec. 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:


Sec. 301.6222(a)-2  Application of consistent reporting and 
notification rules to indirect partners.

    (a) In general. The consistent reporting requirement of 
Sec. 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 Sec. 301.6222(c)-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 (b)(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 Sec. 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

[[Page 50546]]

    (ii) Files a statement identifying the inconsistency with the 
source partnership in accordance with Sec. 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 Sec. 301.6222(a)-2T contained 
in 26 CFR part 1, revised April 1, 2001.


Sec. 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:


Sec. 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 Sec. 301.6222(b)-1T contained 
in 26 CFR part 1, revised April 1, 2001.


Sec. 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:


Sec. 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 
Sec. 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, Secs. 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 Sec. 301.6222(b)-2T contained 
in 26 CFR part 1, revised April 1, 2001.


Sec. 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:


Sec. 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 Sec. 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

[[Page 50547]]

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 Sec. 301.6222(b)-3T contained 
in 26 CFR part 1, revised April 1, 2001.


Sec. 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:


Sec. 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 Sec. 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 Sec. 301.6223(c)-1) or the 
partnership. See Sec. 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 Sec. 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 Sec. 301.6223(a)-1T contained 
in 26 CFR part 1, revised April 1, 2001.


Sec. 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:


Sec. 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 Sec. 301.6223(a)-2T contained 
in 26 CFR part 1, revised April 1, 2001.


Sec. 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:


Sec. 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

[[Page 50548]]

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 
Sec. 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 Sec. 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 Sec. 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 Sec. 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 Sec. 301.6223(b)-1T contained 
in 26 CFR part 1, revised April 1, 2001.


Sec. 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:


Sec. 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

[[Page 50549]]

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 Sec. 301.6223(c)-1T contained in 26 CFR part 1, 
revised April 1, 2001.


Sec. 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:


Sec. 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 
Sec. 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 
Sec. 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 Sec. 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 Sec. 301.6223(e)-1T contained 
in 26 CFR part 1, revised April 1, 2001.

[[Page 50550]]

Sec. 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:


Sec. 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 Sec. 301.6223(e)-2T contained 
in 26 CFR part 1, revised April 1, 2001.


Sec. 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:


Sec. 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 Sec. 301.6223(f)-1T contained 
in 26 CFR part 1, revised April 1, 2001.


Sec. 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:


Sec. 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 Sec. 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 Sec. 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 
Sec. 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 
Sec. 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 
Sec. 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;

[[Page 50551]]

    (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 Sec. 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 
Sec. 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 Sec. 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 Sec. 301.6223(g)-1T contained 
in 26 CFR part 1, revised April 1, 2001.


Sec. 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:


Sec. 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 Sec. 301.6223(h)-1T contained 
in 26 CFR part 1, revised April 1, 2001.


Sec. 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:


Sec. 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 Sec. 301.6224(a)-1T contained 
in 26 CFR part 1, revised April 1, 2001.


Sec. 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:


Sec. 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 Sec. 301.6224(b)-1T contained 
in 26 CFR part 1, revised April 1, 2001.


Sec. 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:


Sec. 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--

[[Page 50552]]

    (1) Are, as of the day on which the agreement is entered into, 
either notice partners or members of a notice group (see 
Sec. 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 Sec. 301.6224(c)-1T contained 
in 26 CFR part 1, revised April 1, 2001.


Sec. 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:


Sec. 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 
Sec. 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 Sec. 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 Sec. 301.6224(c)-2T contained 
in 26 CFR part 1, revised April 1, 2001.


Sec. 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:


Sec. 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,

[[Page 50553]]

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 Sec. 301.6224(c)-3T contained 
in 26 CFR part 1, revised April 1, 2001.


Sec. 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:


Sec. 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 Sec. 301.6226(a)-1T contained 
in 26 CFR part 1, revised April 1, 2001.


Sec. 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:

[[Page 50554]]

Sec. 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 Sec. 301.6226(b)-1T contained 
in 26 CFR part 1, revised April 1, 2001.


Sec. 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:


Sec. 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 April 2, 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 Sec. 301.6226(e)-1T contained in 26 CFR 
part 1, revised April 1, 2001.


Sec. 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:


Sec. 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 Sec. 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 Sec. 301.6226(f)-1T contained 
in 26 CFR part 1, revised April 1, 2001.


Sec. 301.6226(f)-1T  [Removed]

    Par. 25a. Section 301.6226(f)-1T is removed.


Sec. 301.6227(b)-1T  [Removed]

    Par. 26. Section 301.6227(b)-1T is removed.

    Par. 26a. Section 301.6227(c)-1 is added to read as follows:


Sec. 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 Sec. 301.6227(b)-1T contained 
in 26 CFR part 1, revised April 1, 2001.


Sec. 301.6227(c)-1T  [Removed]

    Par. 27. Section 301.6227(c)-1T is removed.

[[Page 50555]]


    Par. 27a. Section 301.6227(d)-1 is added to read as follows:


Sec. 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 Sec. 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:


Sec. 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 
Sec. 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 Sec. 301.6229(b)-1T contained 
in 26 CFR part 1, revised April 1, 2001.


Sec. 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:


Sec. 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 Sec. 301.6223(c)-1.
    (2) In addition to the information specified in Sec. 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 Sec. 301.6229(b)-2T contained 
in 26 CFR part 1, revised April 1, 2001.


Sec. 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:


Sec. 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 Sec. 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 Sec. 301.6229(e)-1T contained 
in 26 CFR part 1, revised April 1, 2001.


Sec. 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:


Sec. 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

[[Page 50556]]

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 Sec. 301.6229(f)-1T contained 
in 26 CFR part 1, revised April 1, 2001.


Sec. 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:


Sec. 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 Sec. 301.6230(b)-1T contained 
in 26 CFR part 1, revised April 1, 2001.


Sec. 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:


Sec. 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 Sec. 301.6230(c)-1T contained 
in 26 CFR part 1, revised April 1, 2001.


Sec. 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:


Sec. 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 Sec. 301.6230(e)-1T contained 
in 26 CFR part 1, revised April 1, 2001.


Sec. 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:


Sec. 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)).

[[Page 50557]]

    (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 Sec. 301.6231(a)(1)-1T 
contained in 26 CFR part 1, revised April 1, 2001.


Sec. 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:


Sec. 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 
Sec. 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 Sec. 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 Sec. 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 Sec. 301.6231(a)(2)-1T 
contained in 26 CFR part 1, revised April 1, 2001.


Sec. 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:


Sec. 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

[[Page 50558]]

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 Sec. 301.6231(a)(5)-1T 
contained in 26 CFR part 1, revised April 1, 2001.


Sec. 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:


Sec. 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 Sec. 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 Sec. 301.6231(a)(6)-1T 
contained in 26 CFR part 1, revised April 1, 2001.


Sec. 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:


Sec. 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

[[Page 50559]]

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.


Sec. 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:


Sec. 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 
Sec. 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 
Sec. 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 Sec. 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 Sec. 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 Sec. 301.6231(a)(12)-1T 
contained in 26 CFR part 1, revised April 1, 2001.


Sec. 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:


Sec. 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,

[[Page 50560]]

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 Sec. 301.6231(c)-1T contained 
in 26 CFR part 1, revised April 1, 2001.


Sec. 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:


Sec. 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 
Sec. 301.6231(c)-2T contained in 26 CFR part 1, revised April 1, 2001.


Sec. 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:

[[Page 50561]]

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

    (a) In general. A provision of Secs. 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 Sec. 301.6231(c)-3T contained 
in 26 CFR part 1, revised April 1, 2001.


Sec. 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:


Sec. 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 Sec. 301.6231(c)-4T contained 
in 26 CFR part 1, revised April 1, 2001.


Sec. 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:


Sec. 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 Sec. 301.6231(c)-5T contained 
in 26 CFR part 1, revised April 1, 2001.


Sec. 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:


Sec. 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 Sec. 301.6231(c)-6T contained 
in 26 CFR part 1, revised April 1, 2001.


Sec. 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:


Sec. 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 Sec. 301.6231(c)-7T contained 
in 26 CFR part 1, revised April 1, 2001.


Sec. 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:


Sec. 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

[[Page 50562]]

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 Sec. 301.6231(c)-8T contained 
in 26 CFR part 1, revised April 1, 2001.


Sec. 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:


Sec. 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 Sec. 301.6231(d)-1T contained 
in 26 CFR part 1, revised April 1, 2001.


Sec. 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:


Sec. 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 Sec. 301.6231(e)-1T contained 
in 26 CFR part 1, revised April 1, 2001.


Sec. 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:


Sec. 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 Sec. 301.6231(e)-2T contained 
in 26 CFR part 1, revised April 1, 2001.

[[Page 50563]]

Sec. 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:


Sec. 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 Sec. 301.6231(f)-1T contained 
in 26 CFR part 1, revised April 1, 2001.


Sec. 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:


Sec. 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 Sec. 301.6233-1T contained in 
26 CFR part 1, revised April 1, 2001.


Sec. 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:


Sec. 602.101  OMB Control numbers.

* * * * *
    (b) * * *

------------------------------------------------------------------------
                                                             Current OMB
     CFR part or section where identified and described      control No.
------------------------------------------------------------------------
 
                  *        *        *        *        *
301.6222(a)-2..............................................    1545-0790
301.6222(b)-1..............................................    1545-0790

[[Page 50564]]

 
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.
[FR Doc. 01-24517 Filed 10-3-01; 8:45 am]
BILLING CODE 4830-01-P