Tax Court nixes BBA audit rule for exceeding authority

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On July 2, the U.S. Tax Court issued a notable decision in JM Assets LP v. Commissioner, holding that a Treasury regulation governing audits of so-called BBA partnerships — those subject to the centralized partnership audit regime created by the Bipartisan Budget Act of 2015 — unlawfully contradicted the clear statutory deadline for issuing a final partnership adjustment (FPA). The court held that when a regulation attempts to alter the plain language of an unambiguous statute, it exceeds the rulemaking authority Congress delegated. Specifically, it determined that Reg. Section 301.6235-1(b)(2)(A) conflicts with Section 6235(a)(2) by extending the adjustment period beyond what the statute allows. As a result of the decision, the commissioner must issue an FPA within 270 days after the partnership representative has submitted all necessary materials for the modification request. 

Background

In 2018, JM Assets LP, a BBA partnership whose primary business is real estate management, disposed of real properties and reported the transactions as installment sales on its Form 1065. As part of its 2018 filing, JM Assets included Form 4797 (Sales of Business Property), along with multiple Forms 6252 (Installment Sale Income). On Form 4797, it reported $403,672 of Section 1231 gain from installment sales and $732,566 of Section 1231 gain from like-kind exchanges.

The IRS initiated an examination of JM Assets’ 2018 Form 1065 and on June 9, 2022, issued a Notice of Proposed Partnership Adjustment (NOPPA) stating that there was an imputed underpayment of $2.03 million, based on the position that JM Assets should have recognized the full gain from all five real estate properties sold through installments in the year of the sale. This adjustment resulted in a $5.5 million increase to the partnership’s Section 1231 gain.

JM Assets submitted Form 8980 (Partnership Request for Modification of Imputed Underpayments Under IRC Section 6225(c)) on Feb. 14, 2023, to request a tax rate adjustment for two partners but did not file Form 8981 (Waiver of the Period Under IRC Section 6231(b)(2)(A) and Expiration of the Period for Modification Submissions Under IRC Section 6225(c)(7)). The commissioner neither requested further information nor received any supplements and on June 5, 2023, approved the modification in full. Subsequently, on Dec. 1, 2023, the commissioner issued an FPA reflecting an imputed underpayment of $2,034,792 related to adjustments to the partnership’s Section 1231 gain.

After receiving the FPA, JM Assets filed a petition challenging the FPA as untimely. JM Assets argued that, under Section 6225(c), the commissioner had only 270 days from the date the partnership submitted all necessary information for its modification request to issue the FPA. According to JM Assets, that 270-day period expired before the FPA was issued. In response, the commissioner relied on Reg. Section 301.6235-1(b)(2), which defines the date on which “everything necessary” is considered submitted as the date the modification period itself ends, not when the partnership’s submission is complete.

Tax Court analysis 

The central issue before the Tax Court was whether the statutory period under Section 6235(a) for adjusting partnership-related items had expired before the commissioner issued the FPA.

In evaluating the validity of the regulation, the court emphasized that “[s]tatutes, no matter how impenetrable, do — in fact, must — have a single, best meaning. This is the whole point of having written statutes; ‘every statute’s meaning is fixed at the time of enactment.’” The court further clarified that “even where Congress expressly delegates broad rulemaking authority, that authority does not extend to contradicting statutory text.”

Here, the Tax Court found a direct conflict between the statute and regulation. Section 6235(a)(2) provides that the commissioner has 270 days to issue an FPA after a taxpayer submits information required for a modification request. However, Section 6235-1(b)(2) redefines that starting point, tying the 270-day period to the end of the overall modification period rather than the date the partnership’s submission is complete. The court found that this regulatory interpretation improperly extended the statutory deadline. As Judge Ronald Buch explained, “The regulations must give way to the statute.” The court also reiterated that the commissioner, even when exercising delegated authority, may not enact rules that conflict with clear statutory mandates.

Applying that principle, the court determined that JM Assets submitted all necessary information under Section 6225(c) on Feb. 14, 2023, when it filed Form 8980. The partnership did not supplement the submission, nor did the commissioner request any additional materials. Notably, the commissioner approved the modification in full on June 5, 2023. Based on these facts, the Court concluded that the 270-day clock began on Feb. 14 and that the FPA issued on Dec. 1, 2023, was untimely.

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