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Partnership Did Not Have To Substantiate Assets In Order to Make Valid BBA Election

(Parker Tax Publishing June 2024)

The Tax Court held that a partnership made a valid election to apply the audit rules under the Bipartisan Budget Act of 2015 (BBA) (Pub. L. 114-74) (BBA election) for its 2016 tax year and therefore, a notice of final partnership administrative adjustment issued by the IRS under the repealed rules under the Tax Equity and Fiscal Responsibility Act (TEFRA) (Pub. L. 97-248) was invalid. The court rejected the IRS's argument that under Reg. Sec. 301.9100-22(b)(2), the partnership was required to provide proof that it had sufficient assets to pay an imputed tax liability and that its failure to do so invalidated its BBA election. SN Worthington Holdings LLC v. Comm'r, 162 T.C. No. 10 (2024).


In 1982, Congress enacted the Tax Equity and Fiscal Responsibility Act (TEFRA) (Pub. L. 97-248) to provide procedures by which the IRS determined deficiencies relating to certain partnerships. Under TEFRA, adjustments were determined at the partnership level, but the assessment and collection of tax attributable to partnership items occurred at the partner level. In 2015, the TEFRA procedures were replaced with new, streamlined procedures under the Bipartisan Budget Act of 2015 (BBA) (Pub. L. 114-74). The BBA procedures allow audits, adjustments, and payments to all occur at the partnership level. The BBA partnership audit procedures included a delayed effective date, generally applying to partnership returns for tax years beginning after December 31, 2017. Thus, under the default rules, any return with a tax year beginning before January 1, 2018, remains subject to TEFRA.

Although enacted with a delayed effective date, the BBA specifically authorized partnerships to elect, in the form and manner prescribed by the Treasury Secretary, into the BBA procedures for partnership tax years beginning after November 2, 2015, and before January 1, 2018. The regulations in Reg. Sec. 301.9100-22 set forth the form and manner for making such an election. To make an election into the BBA procedures, Reg. Sec. 301.9100-22(b)(2) requires that a partnership provide a written statement in which the partnership makes a series of representations. One of those representations, set forth in Reg. Sec. 301.9100-22(b)(2)(ii)(E)(4), is that "the partnership has sufficient assets, and reasonably anticipates having sufficient assets, to pay a potential imputed underpayment" that may be determined by the IRS.

SN Worthington Holdings LLC (SN Worthington) is an Ohio limited liability company that is classified as a partnership for federal income tax purposes. SN Worthington filed a partnership return for 2016. The IRS notified SN Worthington that its 2016 return was selected for examination. In response, SN Worthington submitted to the IRS an election to be subject to the BBA audit procedures. In doing so, SN Worthington represented that it had sufficient assets to pay an imputed underpayment.

The IRS determined that SN Worthington's BBA election was invalid because it appeared that SN Worthington did not have sufficient assets. It sent SN Worthington a letter stating that it determined that SN Worthington would not be able to pay an imputed underpayment and that that if the partnership disagreed, it could submit supporting documents to the IRS within 30 days. SN Worthington did not respond. The IRS sent a second letter again stating that SN Worthington's BBA election was invalid because "proof of sufficient available assets to pay a potential imputed tax liability was never provided." SN Worthington did not respond to the second letter.

In June of 2020, SN Worthington raised with the IRS its view that its examination was being conducted under the wrong procedures. The partnership's position was that the examination of its 2016 return should not have been occurring under TEFRA procedures because it had elected into the BBA procedures. SN Worthington told the IRS that there was no requirement that it provide proof of sufficient assets to pay an imputed tax liability. The IRS did not address SN Worthington's argument. In August of 2020, the IRS issued a notice of final partnership administrative adjustment (FPAA). In response, SN Worthington filed a petition with the Tax Court, challenging the IRS's determination. SN Worthington filed a motion to dismiss and asked the Tax Court to declare the FPAA invalid.

The IRS argued that allowing an election into the BBA procedures when a partnership fails to establish that it had, and would continue to have, sufficient assets to pay a potential imputed underpayment would frustrate the purpose of the BBA procedures. Alternatively, the IRS argued that SN Worthington should be equitably estopped from arguing that it made a valid election into the BBA procedures "based on its misleading silence and later statements regarding the applicability of TEFRA, to which [the IRS] relied upon to [its] detriment."


The Tax Court held that SN Worthington made a valid BBA election because it satisfied the requirement to make a representation that it had, and anticipated continuing to have, enough assets to pay a potential imputed underpayment.

The court held that taxpayers make valid elections when they comply with the text of the election requirements. According to the court, the manner of making an election can be set forth in various ways, but once it is established, the IRS may not add ad hoc additional requirements. When determining whether an election is valid, the IRS may not require the taxpayer to satisfy more stringent requirements than the provision authorizing the election.

The court rejected the IRS's contention that it would frustrate the purpose of the BBA for a partnership to elect early into the BBA when it does not have sufficient assets to pay an imputed underpayment that may become due. The court found that the BBA procedures themselves refuted that argument. Under Code Sec. 6232(f)(1)(B), if a partnership does not promptly pay an imputed underpayment, the IRS can assess and collect from the partners of the partnership their proportionate shares of the imputed underpayment. Thus, the court found that the BBA procedures contemplate the situation in which a partnership has insufficient assets to satisfy an imputed underpayment.

The court also rejected the IRS's argument that SN Worthington should be equitably estopped from arguing that the BBA procedures applied. In order for the doctrine of equitable estoppel to apply, the IRS had to show: (1) a false representation or misleading silence on the part of SN Worthington: (2) an error originating in a statement of material fact, not in opinion or a statement of law; (3) that the IRS did not know the facts; (4) that the IRS actually and reasonably relied on the acts or statement of SN Worthington; and (5) that the IRS was adversely affected as a consequence of its reliance. The court noted that SN Worthington did not inform the IRS that it had made an incorrect determination regarding the BBA election until 2020, after the period of limitations to make adjustments for the 2016 tax year had expired. However, the court further found that the misleading silence went to a question of law, not a statement of fact. The court also found that, regardless of when SN Worthington informed it that it disagreed with the IRS's application of the law, the IRS possessed all of the information necessary to apply its own regulations.

For a discussion of the election to apply the BBA audit procedure rules, see Parker Tax ¶28,799.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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