Challenging the Validity of a Push-Out Election Under BBA: Forums for Review, Part 2
by Jenni Black
Jenni Black is a managing director in Citrin Cooperman’s National Tax Office and the practice leader of the Tax Procedure and Controversy practice. She has over two decades of combined legal and accounting experience and has extensive experience dealing with complex tax issues, including partnership audit procedures under the Tax Equity and Fiscal Responsibility Act of 1982 and the Bipartisan Budget Act of 2015.
In this post, Black discusses the possible forums for judicial review if the IRS determines a push-out election is invalid.
As discussed in my previous post, the AAR push-out election1 is a partnership-related item (PRI) and PRIs can only be adjusted at the partnership level under the Bipartisan Budget Act, absent an exception, none of which apply here. Therefore, if the IRS determines the AAR pushout election is invalid, the IRS must open an exam of the partnership and issue a notice of final partnership adjustment (FPA). When the partnership receives an FPA, it may challenge the adjustments contained in the FPA (for example, the determination that the AAR push-out election is invalid) in the U.S. Tax Court, or in the U.S.
district courts or Court of Federal Claims (so long as the jurisdictional deposit is made).2 However, if the administrative adjustment request (AAR) contains adjustments that do not result in an imputed underpayment (ATDNR), there is no AAR push-out election with respect to those adjustments.3 Unlike in an exam, ATDNR in an AAR must be pushed out to the reviewed year partners.4 Period. There is no other option. Regardless of how badly the partnership messes up the push-out, the ATDNR are still pushed out. The ATDNR do not pass Go and do not collect $200.
For exam push-out elections,5 determining how the partnership can challenge an IRS determination that its push-out election is invalid is more complicated. As previously mentioned, the restrictions on assessing an imputed underpayment (IU) resulting from the exam were lifted when the IRS issued the FPA, or when the court’s opinion became final. Deficiency procedures do not apply to IUs6 and there is nothing else in the Internal Revenue Code that would require the IRS to take further steps to assess an IU that has already been determined. Thus, if the IRS determines the exam push-out election is invalid, there seems to be nothing stopping the IRS from assessing the IU determined in the FPA or court, as applicable. So what forums are available to the partnership to
1 For purposes of this post, an “AAR push-out election” is an election made under section 6227(b)(2).
2 Section 6234. In an FPA determining the AAR push-out election is invalid, the IRS could also adjust any other PRIs for the partnership’s tax year, including the amount of the IU included on the AAR.
3 Section 6227(b) (flush language); reg. section 301.6227-2(d).
4 Section 6227(b) (flush language).
5 For purposes of this post, an “exam push-out election” is an election made under section 6226(a).
6 Section 6232(a)(1).
challenge a determination that the exam push-out election is invalid?
There is no clear forum in the code for challenging the IRS’s determination that an exam push-out election is invalid, although there are two likely options. One likely forum is the U.S. district courts or the Court of Federal Claims as part of a refund action if the partnership pays the IU and then seeks a refund, alleging that it was not liable for the IU as it made a valid exam pushout election. When Congress enacted the BBA, it repealed section 7422(h). Section 7422(h) (prior to repeal), prohibited someone from bringing an action for a refund of any tax attributable to partnership items unless the person used one of the two methods available under Tax Equity and Fiscal Responsibility Act (the predecessor to BBA). Without a new section 7422(h), that restriction no longer exists. However, it is not clear how the partnership would make the required administrative claim for refund.
Under section 7422(a), no suit for refund can be brought until a claim for refund is filed with the IRS. Under BBA, there is nothing that clearly provides a means for a partnership to request a refund of an IU, and the IRS has not provided any guidance on how to do so. An IU is a PRI.7 Normally, to change a PRI, a partnership files an AAR. But in the case of an exam push-out election, an AAR can no longer be filed for the reviewed year8 and the partnership is bound to the amount of the IU.9 So it would seem an AAR is out. Moreover, it is not clear that requesting a refund of the IU (based on the partnership not being liable for the IU) is an adjustment to a PRI and AARs are only for making adjustments to PRIs. The amount of the IU is not at issue (that
7 Section 6241(2)(B)(i); reg. section 301.6241-1(a)(6)(ii)(C).
8 In the case of an exam push-out election, a notice of administrative proceeding would have been issued for the reviewed year, which would cut off the ability of the partnership to file an AAR. Section 6227(c). There is also a high probability that, at the time the partnership would be seeking a refund, more than three years would have passed from the date the reviewed year return was filed. Id.
9 See sections 6223, 6227(c) (flush language). An IU is assessed and collected as if it a tax imposed in the adjustment year. Section 6232(a). Therefore, an argument could be made that the IU is a PRI for the adjustment year, not the reviewed year. However, it is more likely to be considered a PRI for the reviewed year as it is calculated on the adjustments to the reviewed year and was at issue in a proceeding involving the reviewed year. In addition, section 6232(a) provides that the IU is assessed “as if” it were a tax imposed for the adjustment year and not that it “is” a tax imposed for the adjustment year.
was determined with finality in the court proceeding or defaulted FPA); the only question is whether the partnership is liable for it. As there is no specifically prescribed method for filing a claim for refund for an IU and an AAR cannot be used, the partnership may have to use Form 843, “Claim for Refund and Request for Abatement,” until more specific guidance is provided.
The other potential forum a partnership may use to challenge the IRS’s determination that its exam push-out election is invalid is in a collection due process hearing involving the partnership. In a CDP hearing, the appeals officer must verify that all legal and administrative requirements have been met, which includes whether the assessment was properly made. In addition, a taxpayer may challenge the existence or amount of the underlying liability if the taxpayer did not have a prior opportunity to do so. In the case of an exam push-out election, the partnership had a prior opportunity to contest the amount of the IU but did not have the opportunity to challenge whether the partnership is liable for the IU as the push-out statements are not issued until after the court’s decision becomes final. In addition, as whether there is a valid push-out election impacts whether the IRS may validly assess the IU, it could very plausibly be argued that, as part of verifying the assessment was properly made, Appeals must consider whether the partnership had a valid push-out election, especially if the issue is raised by the partnership.
Section 6330(c)(4) precludes raising, in CDP, any issue for which there has been a final determination under BBA.10 In an exam push-out election, the amount of the IU would be subject to a final determination under BBA as it was included in the FPA and subject to the court’s jurisdiction. However, as previously discussed, if the exam push-out election is not a PRI, the issue of whether the partnership made a valid push-out election would not have been decided by the court
10 The Joint Committee on Taxation’s blue book states that a “final determination” for purposes of section 6330(c)(4) includes a defaulted FPA. JCT, “General Explanation of Tax Legislation Enacted in 2015,” JCS1-16, at 81 (2016).
and the court would have lacked jurisdiction over the election.11 As to whether the partnership is relieved of liability of the IU due to a valid exam push-out election, section 6330(c)(4) arguably does not preclude it being raised in a CDP hearing.
The ability to seek review in a CDP hearing would not be available if the push-out election was a PRI (for example, as in an AAR push-out election). If the push-out election was a PRI, the IRS would have to issue an FPA in order to determine it was invalid. The receipt of the FPA would preclude the partnership from raising the issue both because the partnership would have had a prior opportunity to challenge the determination12 and because it would be subject to a final determination under BBA.
In the exciting conclusion of “Challenging the Validity of a Push-Out Election Under BBA,” I will address an additional complicating factor: What happens if a push-out statement is furnished to a passthrough partner?13 That passthrough partner has it owns obligations and consequences under BBA.
11 Under section 6234, the courts in a BBA proceeding have jurisdiction over PRIs (which includes the IU), the allocation of PRIs amongst the partners, and the applicability of any penalty, addition to tax, or additional amounts on any adjustments to PRIs. At a minimum, the court could not have determined if the partnership made a valid push-out election as the second part of making a valid push-out election (issuing the statements) could not be completed when the case was in the court’s jurisdiction. The only piece of the exam push-out election that would be complete while the case is within the court’s jurisdiction is whether the partnership made the election within 45 days of the mailing of the FPA. But, even with that, if it’s not a PRI, the court lacks jurisdiction over it in a BBA proceeding.
12 See reg. section 301.6330-1(e)(1) (a taxpayer may raise challenges to the existence or amount of the underlying liability if the taxpayer did not receive a statutory notice of deficiency and did not have a previous opportunity to dispute the tax liability).
13 As defined in reg. section 301.6241-1(a)(5).