As you know by now, on July 4, 2025, the President signed the lastest tax bill into law. The tax news services to which many of you have subscribed have done a good job of reporting and summarizing the key tax components of the bill. Over the course of the summer, we will continue to analyze the final legislation and provide insights that are relevant to flow-through entities and closely held businesses. We also will have coverage of key provisions at our fall and winter Tax Planning Forum® and Fundamentals of Flow-Through® programs.
Enough about the “One Big Beautiful Bill.” Now we invite you to consider an interesting partnership-level audit case where a partnership was able to send the IRS packing because of the IRS failing to follow the rules of the centralized partnership audit regime enacted by the Bipartisan Budget Act of 2015 (the “BBA”).
Partnerships subject to the BBA must navigate through highly technical rules and regulations when dealing with an IRS exam. The IRS must also navigate through these same technical rules and regulations when administering the exam. An error by the partnership or the IRS could result in unfortunate (or in this case, fortunate) consequences for the partnership and its partners. In this communication we are focusing on the statutory vs regulatory language that the IRS must follow to issue a timely notice of final proposed adjustment (“FPA”).
In last week’s pre-holiday present to the taxpayer, the Tax Court in JM Assets LP v. Commissioner, 165 TC No. 1 (July 2, 2025), held in favor of the taxpayer, identifying a direct conflict between the statute and the regulations regarding the timing in which the IRS must issue an FPA after a limited partnership (”LP”) requests a modification to an imputed underpayment. The IRS mailed a notice of proposed partnership adjustment (“NOPPA”) on June 9, 2022, starting the 270-day period in which the LP could request modification to the imputed underpayment that was proposed in the NOPPA. Even though the LP had until March 6, 2023, to request modification, the LP submitted the modification request early on February 14, 2023. On December 1, 2023, the IRS mailed an FPA to the LP, and the LP asserted in a Tax Court action that the IRS did not issue the FPA timely.
The LP successfully argued that §6235(a)(2) controls and requires the IRS to issue an FPA within 270 days “after the date on which everything is required to be submitted to the Secretary is so submitted” when the partnership is requesting a modification, not Reg. §1.6235-1(b)(2) which requires the IRS to issue the FPA within 270 days from “the date the period for requesting modification ends (including extensions).” (Emphasis added.) The Tax Court held that “the regulation must give way to the statute,” and that the IRS had until November 11, 2023, (270-days from the date the LP submitted everything to IRS when requesting modification) to issue the FPA, not December 1, 2023 (270 days from the last date in which the LP could submit everything to IRS to request modification).
This year’s Tax Planning Forum will have a few interesting exhibits involving the BBA that should pique the interest of our attendees, as well as robust discussion of legislative changes and other developments impacting flow-through entities. Registration is open for both our Forum and Fundamentals programs, and do not miss the Early-Bird discount that ends on July 31st.