May 27, 2020
By: A. Lavar Taylor
Some of us practitioners are old enough to have endured the transition to the TEFRA Partnership audit provisions from the unwieldy pre-TEFRA rules that required the IRS to audit the tax returns of all partners in a tax partnership in order to assess deficiencies resulting from adjustments to Forms 1065 filed by those partnerships. That transition required a considerable learning curve. Even 30+ years after the enactment of the TEFRA Partnership audit provisions, we have still been “learning through litigation” about the proper interpretation of some of the more poorly drafted TEFRA Partnership audit provisions. See, e.g., Petaluma FX Partners, LLC v. Comm’r, 792 F.3d 72 (D. C. Cir. 2015).
The intersection between the TEFRA Partnership audit provisions and the bankruptcy/insolvency world has also proven to be quite interesting, as illustrated by the Ninth Circuit’s opinion in Cent. Valley Ag Enters. v. United States, 531 F.3d 750 (9th Cir. 2008). In that case, the taxpayer/debtor was allowed to challenge a claim filed by the IRS based on a TEFRA Partnership audit even though the IRS had issued an FPAA and the deadline for filing a Tax Court petition with respect to the FPAA had expired without any petition having been filed. Outside of bankruptcy, no judicial challenges to the audit assessment made against that partner as the result of the TEFRA Partnership audit would have been permissible as of the date on which the Chapter 11 bankruptcy case was filed. But once inside Chapter 11, per the Ninth Circuit, the taxpayer/debtor/partner was entitled to challenge the merits of the audit assessment under section 505(a)(2) of the Bankruptcy Code. The filing of the Chapter 11 by the partner allowed the debtor/taxpayer/partner to escape the otherwise preclusive effect of the failure of any party in interest to file a Tax Court petition in response to the FPAA.
Now, thanks to Congress, we are faced with learning an entirely new set of partnership audit provisions: the BBA Partnership audit provisions. Learning how these new provisions will operate in the real world is likely to be no less painful than it was to learn how the TEFRA Partnership audit provisions operate in the real world.
This learning process will be even more painful where a bankruptcy is involved. How much more painful? That remains to be seen, but masochists and sadists will likely rejoice.
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