SERVICE ANNOUNCES PROCEDURES FOR SELECTING TAX MATTERS PARTNER.

Rev. Proc. 88-16

SECTION 1. PURPOSE

This revenue procedure describes circumstances under which the Internal Revenue Service will select a tax matters partner (TMP) for a partnership pursuant to section 6231(a)(7) of the Internal Revenue Code. It also describes criteria the Service will consider in selecting the TMP.

SEC. 2. BACKGROUND

01 Title IV of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), 1982-2 C.B. 462, 585, changed the examination and administrative procedures for partnership items, which are defined in section 301.6231(a)(3)-1 of the Regulations on Procedure and Administration. The rules are applicable to partnership taxable years beginning after September 3, 1982, and are also applicable to any partnership taxable year beginning on or before, and ending after, September 3, 1982, if the partnership, each partner, and each indirect partner requests such application and the Secretary consents.

02 Prior to TEFRA, tax adjustments were made at the partner level. Under provisions added by TEFRA, the tax treatment of partnership items is generally determined at the partnership level through a unified administrative and judicial proceeding, even though the tax liability that results from such a determination is imposed on each partner individually.

03 Generally, under the unified proceedings, the TMP is the general partner designated by the partnership to represent the partnership before the Service in all tax matters for a specific taxable year. See section 301.6231(a)(7)-1T of the Temporary Regulations on Procedure and Administration for the rules concerning the designation of the TMP. In addition to facilitating administrative proceedings, the TMP has the authority to extend the statutory period for assessment of tax based upon partnership items for all partners, and to choose the forum for judicial review of adjustments to partnership items. The TMP also has the authority to enter into a binding settlement agreement for certain partners who, under section 6223 of the Code, are not entitled to notice of administrative proceedings (nonnotice partners). See section 6224(c)(3).

04 Section 6231(a)(7)(A) of the Code provides that the TMP of any partnership is the general partner designated by the partnership as the TMP in the manner provided in regulations. Section 6231(a)(7)(B) provides that if there is no general partner who has been so designated, the TMP is the general partner having the largest profits interest in the partnership at the close of the taxable year involved (or, if there is more than one such partner, the one whose name appears first in an alphabetical listing). Section 6231(a)(7) provides further that if there is no general partner designated as the TMP and the Secretary determines that it is impracticable to apply the largest profits interest rule, the partner selected by the Secretary shall be the TMP. The Service will consider it impracticable to apply the largest profits interest rule under the circumstances described in section 3.03 of this revenue procedure.

05 Under section 301.6231(a)(7)-1T(b)(1) of the temporary regulations, the partnership may designate a person as the TMP for a taxable year only if that person was a general partner in the partnership at some time during the taxable year for which the designation is made, or is a general partner in the partnership as of the time the partnership makes the designation. However, (1) if the partnership fails to designate a TMP, or if a prior designation has been terminated under section 301.6231(a)(7)-1T(1) and the partnership has not made a subsequent designation, and (2) if the Service determines that it is impracticable to apply the largest profits interest rule, the Service may select as the TMP for the taxable year any person who was a partner, including a person who was a limited partner, at some time during the taxable year.

SEC. 3. APPLICATION

DETERMINATION OF LARGEST PROFITS INTEREST

01 For purposes of applying the largest profits interest rule of section 6231(a)(7)(B) of the Code and section 301.6231(a)(7)-1T(m)(2) of the temporary regulations, the Service will determine the general partner with the largest profits interest based on the year-end profits interests reported on the Schedules K-1 filed with the partnership income tax return for the taxable year for which the selection is being made. See section 6223(c)(1).

02 Under section 301.6231(a)(7)-1T(m)(3) of the temporary regulations each general partner whose selection as TMP would be immediately terminated because of the occurrence of one or more of the events described in section 301.6231(a)(7)-1T(1)(1) through (4) is treated as having a zero profits interest for that taxable year for purposes of applying the largest profits interest rule. Those events are as follows:

(1) The death of the designated TMP;

(2) An adjudication by a court of competent jurisdiction that the individual designated as the TMP is no longer capable of managing the individual's person or estate;

(3) The liquidation or dissolution of the TMP, if the TMP is an entity; and

(4) The treatment of partnership items of the TMP as nonpartnership items under section 6231(c) of the Code (relating to special enforcement areas). This includes being under investigation by the Criminal Investigation Division and being so notified, being assessed income tax under section 6851 (relating to termination assessments) or section 6861 (relating to jeopardy assessment); or being named a debtor in a bankruptcy proceeding.

WHEN DEEMED IMPRACTICABLE

03 The Service will consider it impracticable to apply the largest profits interest rule of section 301.6231(a)(7)-1T(m) of the temporary regulations if on the date that the rule is applied, --

(1) The general partner with the largest profits interest is not apparent from the Schedules K-1 and is not otherwise readily determinable;

(2) Each general partner is deemed to have a zero profits interest under section 301.6231(a)(7)-1T(m)(3) of the temporary regulations because of the occurrence of one or more of the events described in section 301.6231(a)(7)-1T(1)(1) through (4); or

(3) The general partner with the largest profits interest determined under section 301.6231(a)(7)-1T(m) of the temporary regulations --

(a) Has been notified of suspension from practice before the Service;

(b) Is incarcerated;

(c) Is residing outside the United States, its possessions or territories; or

(d) Cannot be located or cannot perform the functions of a TMP for any reason. Lack of cooperation with the Service by a general partner with the largest profits interest is not a basis for finding that the partner cannot perform the functions of a TMP.

SELECTION OF TMP WHEN IMPRACTICABLE TO APPLY LARGEST PROFITS INTEREST RULE

04 If it is impracticable under section 30.03(1) of this revenue procedure to apply the largest profits interest rule of section 301.6231(a)(7)-1T(m)(2) of the temporary regulations, the Service will select as the TMP any person who was a general partner at any time during the taxable year under examination, in accordance with the notification procedures set forth in sections 3.09 through 3.11.

05 If it is impracticable under section 3.03(2) of this revenue procedure to apply the largest profits interest rule, the Service will select a limited partner as the TMP in accordance with the criteria set forth in section 3.07. The Service will notify both the partner selected and the partnership of its selection, effective as of the date specified in the notice.

06 If it is impracticable under section 3.03(3) of this revenue procedure to apply the largest profits interest rule, the Service will treat each general partner who fits the criteria contained in section 3.03(3) as having a zero profits interest for the taxable year, and will select a TMP from the remaining persons who were general partners anytime during the taxable year in accordance with the notification procedures set forth in section 3.09 through 3.11. However, if all such general partners during the taxable year either (1) are treated as having zero profits interest for the taxable year under section 301.6231(a)(7)-1T(m)(3) of the temporary regulations, or (2) are described in section 3.03(3), the Service will select a limited partner as the TMP in accordance with the criteria set forth in section 3.07 of this revenue procedure. The Service will notify both the partner selected and the partnership of its selection, effective as of the date specified in the notice.

CRITERIA FOR SELECTION OF A LIMITED PARTNER AS TMP

07 The Service will select a limited partner as the TMP only if the limited partner was a partner in the partnership at the close of the taxable year under examination.

The Service may also consider the following criteria in selecting a limited partner as the TMP:

(1) The general knowledge of the limited partner in tax matters and the administrative operation of the partnership;

(2) The limited partner's access to the books and records of the partnership;

(3) The profits interest held by the limited partner;

(4) The views of the partners having a majority interest in the partnership regarding the selection;

(5) Whether the limited partner is a member of the partnership at the time the TMP selection is made; and

(6) Whether the limited partner is a United States person.

08 The partnership cannot designate a limited partner to serve as TMP in lieu of a limited partner selected by the Service.

NOTIFICATION OF PARTNERSHIP

09 The group manager of the agent examining the partnership will select the new TMP with the approval of the District Director (or the District Director's delegate).

10 Before selecting a general partner as TMP under sections 3.04 or 3.06 of this revenue procedure, the Service will notify the partnership by mail that after 30 days from the date of such notice the Service will make a determination that it is impracticable to apply the largest profits interest rule, and will select the TMP unless a prior designation is made by the partnership. This delay in making the determination will permit the partnership to designate a TMP under the regulations, thereby avoiding a selection made by the Service.

11 If the Service selects a TMP, the Service will notify both the partner selected and the partnership of its selection, effective as of the date specified in the notice.

12 During the 30-day period and prior to a TMP designation by the partnership, the Service will communicate with the partnership by sending all correspondence or notices to "The Tax Matters Partner" in care of the partnership, at the partnership's address.

13 Any subsequent designation of a TMP by the partnership after the 30-day period will become effective as provided under section 301.6231(a)(7)-1T(k)(2) of the temporary regulations.

SEC. 4. EFFECTIVE DATE

This revenue procedure is effective for selections made 30 days after February 29, 1988, the date of publication for all partnership taxable years that begin after September 3, 1982. It is also applicable to partnership taxable years that begin on or before and end after September 3, 1982, if the partnership, each partner, and each indirect partner requests application of Title IV of TEFRA and the Secretary consents.

DRAFTING INFORMATION

The principal author of this revenue procedure is Mary Jane Kossar of the Individual Tax Division. For further information regarding this revenue procedure contact Ms. Kossar on (202) 566-4751 (not a toll-free call).