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For decades, tax audit procedures for partnerships had been governed by a framework established in the Tax Equity and Fiscal Responsibility Act of 1982. This partnership audit regime was commonly referred to as the TEFRA partnership procedures, or simply TEFRA. In 2015, in response to widespread criticism over the complexities of TEFRA, Congress replaced TEFRA with a new audit regime under the Bipartisan Budget Act of 2015, now the BBA partnership procedures.
The BBA partnership procedures have been phasing in, with the first wave of partnership audits applying the BBA still underway and legacy audits under TEFRA still in process. As BBA partnership audits begin to scale, the IRS is issuing batches of guidance to attempt to answer many of the questions raised by the new BBA partnership audit procedures. The most recent batch of regulations was published in the Federal Register on December 9, 2022.
An item addressed in the December 9 final regulations is the applicable statute of limitations on assessment. The questions is whether the IRS may make an assessment if the partnership statute has expired but the partner-level statute of limitation remains open, or vice-versa. The purpose of the centralized partnership audit regime is to have adjustments to partnership-related items occur at the partnership level, not in a partner examination. Arguably, any departure from that directive should be narrow and only exist where there is clear justification for the departure. Treasury received comments on its proposed regulations that the statute of limitations on assessing partnership-related items should be governed exclusively by the 3-year statute set forth in the centralized partnership audit regime, Section 6235.
The IRS, however, went in a different direction. In the final regulations, the IRS leverages the discretion Congress allowed under Section 6241 with respect to special enforcement matters. According to the final regulations, Section 6241 supports that the IRS may assess partnership-related items directly against partners, outside of the BBA partnership procedures, and at any time within the partner’s statute of limitations. The IRS’ position in effect is that it may assess taxes under the longer of the partnership or partner-level statute of limitations.
For those who wrestled for decades with TEFRA, and the interplay between TEFRA’s Section 6229 statute of limitations and the Section 6501 statute of limitations, this BBA statute of limitations issue is, in the words of the great baseballer Yogi Berra, “déjà vu all over again.” The Tax Court first addressed the issue in 2000, in Rhone-Poulenc Surfactants & Specialties, L.P. v. Commissioner. It took about another decade for the tax community to gain resolution on the issue. Against this well-known backdrop, Congress could have specified that the Section 6501 statute is unaffected by the BBA statute of limitations, but it didn’t.
At the end of the day, there still remain many unanswered questions in the BBA partnership procedures, and we should expect a combination of additional guidance from the IRS and litigation to define many of the procedure’s parameters. Some of these parameters the new regulations attempted to provide guidance on, such as calculating the imputed underpayment and determining eligibility to elect out of the BBA regime. There remain gaps on these topics, however, and a wider range of unanswered questions still beg for guidance. These questions will continue to surface as partners and their advisors confront the legislative changes to the Administrative Adjustment Request process, the new concept of push-out elections which may occur in a variety of contexts that Congress may not have considered, and potential unintended pitfalls such as the stranded overpayment problem.
Note: Yogi Berra’s peak salary was $61,000 in 1961, which is roughly $520,000 today adjusted for inflation. This is about $200,000 shy of the current league minimum, and a rounding error in Aaron Judge’s $360,000,000 contract. Yogi was an 18-time All-Star, 10-time World Series Champion as a player (3 more as a manager), and 5-time AL MVP. We’ll see how Aaron Judge’s career compares.