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Use Form 2198, Determination of Liability for Personal Holding Company Tax, as an informal agreement for liability of personal holding company tax under IRC 547(c)(3). For authority to enter into such agreements, see Delegation Order No. 8 (Rev. 11) in IRM 1.2.43.10.

Do not accept Form 2198 unless sufficient time remains to make an assessment, taking into consideration the taxpayer is allowed 120 days.

Do not accept this agreement form on behalf of the IRS unless the taxpayer executes an appropriate agreement form, such as Form 870 or Form 870-AD, covering the proposed adjustments to both income tax and personal holding company tax for the years involved. Form 870 must contain conditional paragraphs as shown in IRM Part 4. Ordinarily it is not necessary to insert conditional paragraphs on Form 870-AD since the acceptance of Form 870-AD and Form 2198 are concurrent. See also Rev. Proc. 63-1, 1963-1 C.B. 471.

When using closing agreements as determinations under IRC 547(c)(2), see IRM 8.13.1, Closing Agreement Manual, and Rev. Proc. 68-16, 1968-1 C.B. 770.

If Form 2198 is accepted, solicit taxpayer's claim ( Form 976) and secure necessary substantiating evidence.

Specific rules for establishing the date of the determination are set forth in the Regulations. There are two deadlines that apply. The taxpayer has 90 days after the date of the determination (generally, the date the signed Form 2198 is mailed to the taxpayer by registered or certified mail) to distribute the deficiency dividend. The taxpayer has 120 days after the date of the determination to file a claim on Form 976, Claim for Deficiency Dividends Deduction by a Personal Holding Company, Regulated Investment Company, or Real Estate Investment Trust.

If no unusual circumstances are involved and verification of payment of dividends can easily be made, verify the claim. Prepare Form 3189, Deficiency Dividend Deduction Case Transmittal, and Form 5402, Appeals Transmittal and Case Memorandum, and close the case.

If unable to verify the claim, send the substantiating evidence and administrative file to Compliance to verify the claim and prepare the report. Clearly state on the transmittal that the entire case file must be returned to Appeals, including the Revenue Agent Report (RAR) reflecting the recommendation to allow or disallow the claim.

When preparing settlement computations, the AO is responsible for providing the information contained in (3) below.

Depending on local procedures, either APS or the AO controls the 120 days. APS must notify the AO of the date Form 2198 is mailed.

Because the amount of personal holding company tax is embedded in the body of the settlement computation and hard to see, the employee preparing the settlement computations (AO or TCS) must provide the amount in Reference Number 321 field of the Form 5403 Worksheet. This requirement is valid for MFT 02 returns.

The AO or TCS, whomever prepares the settlement computations, is responsible for preparing supporting schedules to explain the settlement pertaining to personal holding tax.

Interest is restricted for personal holding company tax underpayments under IRC 547(f)(2) and on overpayments under IRC 547(b)(2). This information is annotated on Form 3610 when applicable.

APS prepares Form 5403, Appeals Closing Record, in accordance with Examination function's claim verification and closes the case to the Campus.

APS mails Form 2198, Form 976 and the cover, letter prepared by the AO, to the taxpayers using certified mail. The AO prepares the cover letter to explain that the taxpayer has 90 days from the date of determination to distribute the deficiency dividend and 120 days from the date of the determination to file a claim on Form 976, Claim for Deficiency Dividends Deduction by a Personal Holding Company or Real Estate Investment Trust.

Depending on local procedures, either APS or the AO controls the 120 days. APS must notify the AO of the date Form 2198 is mailed.