Isn’t It Ironic?: A Court’s Ability to Make Adjustments Under BBA
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 is also a contributing author for Procedurally Taxing.
In this post, Black examines whether, in a case challenging a notice of final partnership adjustment under the Bipartisan Budget Act of 2015, the court loses its ability to make an adjustment if the section 6235 limitations period expires while the court case is ongoing.
This post reflects the author’s personal views and not necessarily those of Citrin Cooperman.
The centralized partnership audit regime enacted by the Bipartisan Budget Act of 2015 is unique in a lot of ways. One unique1 feature of BBA is that it has a period of limitations on making
adjustments, not a period of limitations on assessments.2 Under section 6235, “no adjustment under [BBA] for any partnership taxable year may be made” after the period in section 6235 expires. The section 6235 period of limitations on making adjustments expires the later of (1) three years from when the partnership return (or administrative adjustment request (AAR)) is filed; (2) if modification is requested, the date which is 270 days after the date everything required to be submitted for modification is submitted; or (3) the date which is 330 days after the date of the notice of proposed partnership adjustment. All of these dates can be extended and there are special rules that extend the period of limitations for situations like fraud, nonfilers, substantial omissions, etc., just like under section 6501.
Under section 6234, if the IRS makes adjustments in a notice of final partnership adjustment (FPA), the partnership may file a petition in the Tax Court, district court, or Court of Federal Claims to challenge those adjustments. However, unlike the period of limitations on making assessments,3 the period of limitations on making adjustments under section 6235 is not suspended during the period in which the case is pending in court. So what happens if the section 6235 period expires while the court case is ongoing? Does the court lose its ability to make adjustments?
1 I call it unique but technically the electing large partnership (ELP) regime under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) also had a period of limitations on making adjustments. See section 6248 (prior to repeal by the BBA). However, as the ELP regime was never really used, BBA is really the first time a period of limitations on making adjustments is operative.
2 That’s not to say that the period of limitations on assessing tax under section 6501 doesn’t apply to BBA; it absolutely does. The imputed underpayment and any partner tax (for example, as a result of push out) must be assessed within the applicable period of limitations on making assessments. But, if adjustments are made under BBA, any tax impact of those adjustments occurs in a “current” year which has a brand new period of limitations on making assessments. As such, the ability to make adjustments will always be shorter than the period of limitations to assess any tax attributable to those adjustments.
3 Section 6503.
The irony of this is that there used to be a provision that suspended the period of limitations on making adjustments while the case was pending in court. When the BBA was enacted in 2015, it had section 6235(d), which provided:
(d) Suspension when Secretary mails notice of adjustment. If notice of a final partnership adjustment with respect to any taxable year is mailed under section 6231, the running of the period specified in subsection (a) (as modified by the other provisions of this section) shall be suspended —
(1) for the period during which an action may be brought under section 6234 (and, if a petition is filed under such section with respect to such notice, until the decision of the court becomes final), and
(2) for 1 year thereafter.
This section was repealed by Congress in the Tax Technical Corrections Act of 2018. Did Congress inadvertently limit the ability of the courts to make adjustments in BBA proceedings?4 Wouldn’t that be ironic? Like rain on your wedding day.
The first question is: Does the court make adjustments? The IRS clearly makes adjustments in the FPA (after all, it’s a notice of final partnership adjustment), so the period of limitations on making adjustments must be open at the time the FPA is issued in order for the IRS to be able to make the adjustments contained in the FPA. But if a petition is filed in response to the FPA, does the court also make adjustments such that it also needs the period of limitations on making adjustments to be open? It sure looks that way. Under section 6234, the partnership may file a petition for “readjustment” and, if a petition is filed, the court has jurisdiction to determine all
partnership-related items (PRIs) for the taxable year, regardless of whether they are in the FPA. Therefore, the court can not only “readjust” the adjustments made by the IRS, it can make new adjustments to items not adjusted by the IRS in the FPA. So it certainly seems like the court makes adjustments.
If no adjustments can be made for the tax year once the period of limitations on making adjustments has expired, what happens if the period of limitations expires while the case is pending in court? There isn’t anything that exempts the courts from the period of limitations. After all, the other regimes in the Internal Revenue Code for making adjustments to tax returns and assessing any tax attributable to those adjustments have suspensions of the applicable period of limitations while the case is pending in court. Deficiency procedures have section 6503, TEFRA had section 6229(d), and the ELP regime had section 6248. If a suspension was needed in all of those regimes, why wouldn’t one be needed for BBA? After all, there was one originally; Congress just repealed it. Well isn’t this nice.
In order for the FPA to be valid, the period of limitations on making adjustments has to have been open when the IRS issued it. So there is likely some time left on the period of limitations at the time the FPA is issued but how much would vary entirely on the facts and circumstances. As Congress repealed the suspension of the period of limitations while the case was pending in court, the only way to extend the period of limitations further (absent fraud) would be through an extension of the period of limitations entered into by agreement between the IRS and the partnership.5 Can the court force the IRS and the partnership to enter into an agreement to extend the period of limitations so the court can rule? There’s nothing that says it can. Could the court just rule the period of limitations was open? While the court arguably has jurisdiction over the period of limitations (like it does under deficiency procedures and TEFRA), if the facts are that the period of limitations closed, I don’t see how the court can rule it’s open.
4 Regardless of whether Congress unintentionally removed the power of the courts in BBA proceedings, I have no idea why the period of limitations on making adjustments would need to be suspended for one year after the court’s decision on the adjustments becomes final. What adjustments are left to be made after that point? I note that section 6248 (prior to repeal by the BBA) under the ELP regime also had a oneyear suspension of the period of limitations on adjustments after the court decision became final. I also don’t know what the purpose of that was. 5 Section 6235(b).
The second question is: Do the courts need section 6235 in order to make adjustments to
PRIs? Is there something else the courts could use? This is less clear to me. Section 6235 does one thing — it says when adjustments can (and cannot) be made to a BBA partnership for a particular tax year. It’s written in the passive voice. It doesn’t say who can and cannot make adjustments, it just says no adjustment can be made once the period of limitations on making adjustments expires.6 But there’s also section 6234(c). Under section 6234(c) (which deals with the scope of judicial review), if a petition is properly filed with a court the court “shall have jurisdiction to determine all [PRIs] for the taxable year to which the notice of final partnership adjustment relates.” Does this grant of jurisdiction override section 6235? I suspect the courts will say it does because otherwise there’s a bit of a problem. But does it actually?
In non-BBA situations, the grant of jurisdiction and scope of judicial review to the court has no impact on the period of limitations; they are two separate things. For example, section 6214 provides for the scope of the Tax Court’s jurisdiction in deficiency cases, but section 6503 is what suspends the period of limitations on making assessments. And under TEFRA, section 6226(f) provided the scope of judicial review and jurisdiction, but section 6229(d) suspended the period of limitations. Without something explicit in section 6234 or 6235, why would the same wording outside of BBA do something different than in BBA (that is, outside of BBA you have a specific statute that suspends the period of limitations which is different from the statute that provides the scope of judicial review)? There is a difference between BBA and TEFRA or deficiency procedures. Following a TEFRA or deficiency procedure, the IRS has to do something — assess a tax. And the statute is extended for the IRS to take this action. But after a BBA proceeding the
6 As it is written in the passive voice, section 6235 facially applies to partnerships as well. However, the way in which partnerships adjust their PRIs is through the filing of an administrative adjustment request (AAR) which has its own separate period of limitations under section 6227(c). Therefore, it is possible the period of limitations on making adjustments will be open, but the partnership will have no means of making the adjustments. Honestly, this is going to happen any time a partnership files an AAR, as filing an AAR “restarts” the section 6235 period but has no impact on the period of limitations on filing an AAR under section 6227(c). So anytime a partnership files an AAR, the period of limitations on making adjustments will be longer than the time the partnership has to make the adjustments.
IRS doesn’t have to make any more adjustments. It has to assess the imputed underpayment (IU) (if applicable) but section 6501, not section 6235, governs that action. So outside of BBA, the suspension of the period of limitations provides time for the IRS to take an action, not the court (as the court isn’t assessing anyone). But this is a period of limitations on making adjustments and the court does do that. Is this difference between BBA and non-BBA sufficient to read the same words in different statutes differently?7
Technically (and I love technically), section 6235 and section 6234 only conflict once the section 6235 period expires. And section 6234(c) is about what the court can review, not necessarily when it can do so (aside from the requirement that a petition be filed and, for non-Tax Court cases, a jurisdictional deposit made) whereas section 6235 is specific to when adjustments can be made. It certainly would have been nice if Congress had kept section 6235(d) (although, as noted in an earlier footnote, the additional one year is not needed). Who would’ve thought, it figures.
Congress granted the Tax Court, the district courts, and the Court of Federal Claims jurisdiction over petitions filed in response to an FPA issued by the IRS and gave them the power to make adjustments (and readjustments) to PRIs. To me, there is no real question the courts could issue an opinion prior to the expiration of the section 6235 period. However, it is unlikely the section 6235 period will be open for long after the FPA is issued by the IRS as there would have been no real reason to extend the period of limitations for many years past the time the IRS needed to make adjustments (and taxpayers are often reluctant to extend the period of limitations for extended periods of time, but maybe not now!). So, did Congress (inadvertently?) repeal the one thing the courts need to actually exercise this power? Maybe? Congress gave courts ten thousand spoons when all they need is a knife (well, really, they gave them a knife, then took it away). Isn’t it ironic, don’t you think?
7 Section 6226(f) (TEFRA) is worded virtually identically to section 6234(c).