Tax Court Finds Partnership Elected Out of TEFRA, FPAA Invalid

Tax Court Finds Partnership Elected Out of TEFRA, FPAA Invalid

U.S. Tax Court

The Tax Court dismissed for lack of jurisdiction a partnership’s challenge to a notice of final partnership administrative adjustment, finding that the partnership made a valid election to have the Bipartisan Budget Act of 2015 procedures apply to its examination, so the FPAA issued under the 1982 Tax Equity and Fiscal Responsibility Act is invalid. The IRS notified SN Worthington Holdings, a limited liability company classified as a partnership, that its 2016 return had been selected for examination, and the company elected to have the BBA procedures apply. However, the IRS informed SN Worthington that the partnership did not provide proof of sufficient available assets to pay the potential imputed tax liability, so the election was invalid. The IRS proceeded under TEFRA, and during the examination, SN Worthington raised the issue that it was being conducted under the wrong procedures, but the IRS did not respond and eventually issued an FPAA. The partnership challenged the FPAA in the Tax Court but later sought dismissal for lack of jurisdiction, asserting that the FPAA was invalid because it elected into the BBA procedures. The IRS claimed the election was invalid or, alternatively, that the partnership should be estopped from arguing the election was valid. Judge Ronald L. Buch, in determining the validity of the FPAA, considered whether there was a valid BBA election. Buch explained that TEFRA was replaced by the BBA procedures, which provided a streamlined audit process for partnerships, and partnerships were allowed to elect into the procedures before their effective date. Reg. <a href="/research/federal/cfr26/301.9100-22" resolve="/lr/resolve//28b3r">section 301.9100-22</a> provided the form and manner for making the election. Under the applicable regulation, a partnership must make a representation that “the partnership has sufficient assets, and reasonably anticipates having sufficient assets, to pay a potential imputed underpayment with respect to the partnership taxable year.” The Tax Court found that SN Worthington complied with the plain text of reg. <a href="/research/federal/cfr26/301.9100-22#28b3r-0000004" resolve="/lr/resolve//28b3r#28b3r-0000004">section 301.9100-22(b)(2)</a> when it represented that it had sufficient assets to satisfy an imputed underpayment. According to the court, the IRS could not impose additional requirements that SN Worthington establish that it had sufficient assets to satisfy an imputed underpayment. Therefore, the court held that the BBA election was valid, making the TEFRA procedures inapplicable and the FPAA issued under TEFRA invalid. Buch also found that equitable estoppel didn't apply to preclude the partnership from arguing that the BBA procedures applied. The court held that the IRS did not establish that all the requirements for equitable estoppel were met, finding that the error did not originate in a mistake of material fact and that the IRS had knowledge of the material facts needed to make the correct determination. After determining that the FPAA was invalid, the Tax Court concluded that it lacked jurisdiction and dismissed the case.

The Tax Court dismissed for lack of jurisdiction a partnership’s challenge to a notice of final partnership administrative adjustment, finding that the partnership made a valid election to have the Bipartisan Budget Act of 2015 procedures apply to its examination, so the FPAA issued under the 1982 Tax Equity and Fiscal Responsibility Act is invalid.

The Tax Court dismissed for lack of jurisdiction a partnership’s challenge to a notice of final partnership administrative adjustment, finding that the partnership made a valid election to have the Bipartisan Budget Act of 2015 procedures apply to its examination, so the FPAA issued under the 1982 Tax Equity and Fiscal Responsibility Act is invalid. The IRS notified SN Worthington Holdings, a limited liability company classified as a partnership, that its 2016 return had been selected for examination, and the company elected to have the BBA procedures apply. However, the IRS informed SN Worthington that the partnership did not provide proof of sufficient available assets to pay the potential imputed tax liability, so the election was invalid. The IRS proceeded under TEFRA, and during the examination, SN Worthington raised the issue that it was being conducted under the wrong procedures, but the IRS did not respond and eventually issued an FPAA. The partnership challenged the FPAA in the Tax Court but later sought dismissal for lack of jurisdiction, asserting that the FPAA was invalid because it elected into the BBA procedures. The IRS claimed the election was invalid or, alternatively, that the partnership should be estopped from arguing the election was valid. Judge Ronald L. Buch, in determining the validity of the FPAA, considered whether there was a valid BBA election. Buch explained that TEFRA was replaced by the BBA procedures, which provided a streamlined audit process for partnerships, and partnerships were allowed to elect into the procedures before their effective date. Reg. section 301.9100-22 provided the form and manner for making the election. Under the applicable regulation, a partnership must make a representation that “the partnership has sufficient assets, and reasonably anticipates having sufficient assets, to pay a potential imputed underpayment with respect to the partnership taxable year.” The Tax Court found that SN Worthington complied with the plain text of reg. section 301.9100-22(b)(2) when it represented that it had sufficient assets to satisfy an imputed underpayment. According to the court, the IRS could not impose additional requirements that SN Worthington establish that it had sufficient assets to satisfy an imputed underpayment. Therefore, the court held that the BBA election was valid, making the TEFRA procedures inapplicable and the FPAA issued under TEFRA invalid. Buch also found that equitable estoppel didn't apply to preclude the partnership from arguing that the BBA procedures applied. The court held that the IRS did not establish that all the requirements for equitable estoppel were met, finding that the error did not originate in a mistake of material fact and that the IRS had knowledge of the material facts needed to make the correct determination. After determining that the FPAA was invalid, the Tax Court concluded that it lacked jurisdiction and dismissed the case.

Sec. 6226 Alternative to payment of imputed underpayment by partnership

Sec. 6221 Determination at partnership level.

Search Connectors

Retrieving Documents With a Tax Analysts’ Citation:

Field Restricted Searching:

Tax Court Finds Partnership Elected Out of TEFRA, FPAA Invalid