Challenging the Validity of a Push-Out Election Under BBA: Passthrough Partners, Part 3
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 whether partners can challenge an election made by the partnership.
Up until this point my last two posts have only discussed determining whether the push-out election made by the audited partnership or the partnership that filed the administrative adjustment request (AAR partnership) is invalid. However, there is another group worth mentioning here. For both an AAR push-out election and an exam push-out election,1 if a statement is furnished to a passthrough partner,2 that passthrough partner has it owns obligations
and consequences under the Bipartisan Budget Act.3 If a passthrough partner receives a push-out statement, it is required to furnish statements of its own to its reviewed year partners by the extended due date of the audited or AAR partnership’s adjustment year return, including extensions (the six-month extension is applied regardless of whether the audited or AAR partnership requests an extension or is required to file an adjustment year return).4 If the passthrough partner fails to timely furnish proper statements, it must pay an imputed underpayment (IU) calculated on the adjustments contained in the push-out statement furnished to it.5 So how does the IRS determine that a passthrough partner did not timely or correctly furnish push-out statements such that it is now liable for an IU? The answer is — it’s not clear (you were going to guess “it depends,” weren’t you?).
The Internal Revenue Code refers to the IU that a passthrough partner may be required to pay as the result of a push-out election as a “specified similar amount.”6 The most important thing to note about a specified similar amount is that the restrictions on assessing an IU (for example,
1 For purposes of this post, an AAR push-out election is an election made under section 6227(b)(2) and an exam push-out election is an election made under section 6226(a).
2 As defined in reg. section 301.6241-1(a)(5).
3 A passthrough partner is a passthrough entity that holds an interest in a partnership. A passthrough entity is a partnership, S corporation, trust, or an estate. An entity that is a wholly owned entity disregarded as separate from its own for federal income tax purposes is not a passthrough entity. Reg. section 301.6241-1(a)(5).
4 Reg. section 301.6226-3(e)(3)(ii). Reg. section 301.6227-3(c) adopts the rules for passthrough partners in exam push-out elections for AAR pushout elections with differences not relevant here (for example, content of the statements, interest rate).
5 Reg. section 301.6226-3(e)(4). There is also a difference in how adjustments that do not result in an IU are treated for passthrough partners in an AAR push-out versus an exam push-out but those differences do not matter for purposes of the discussions in this post.
6 Section 6232(f)(2).
issuing a notice of final partnership adjustment (FPA)), don’t apply.7 And, as an IU, deficiency procedures also do not apply.8 Thus, it would appear that the IRS could determine a passthrough partner did not properly furnish statements and assess the IU with no additional fanfare. This would be similar to an IU in an exam push-out. Therefore, as I discussed in my most recent post it stands to reason that the same remedies that are available to a partnership if the IRS determines than an exam push-out election is invalid would also be available to a passthrough partner with respect to a specified similar amount (pay and file suit in district court or the Court of Federal Claims or utilize a collection due process proceeding).
However, there is a key difference between an IU from an exam and a specified similar amount. As previously mentioned in my most recent post, in an exam push-out election, the IU has already been determined as the result of a final court decision or defaulted FPA. But a specified similar amount has not been determined. While the adjustments that result in a specified similar amount may be finally determined (adjustments following an FPA or court decision would be finally determined), the calculation of a specified similar amount (and any allocation of those adjustments past the direct partners in an audited or AAR partnership) has not been finally determined. Therefore, the restriction under section 6330(c)(4) would not seem to apply to a specified similar amount such that a passthrough partner may be able to challenge the calculation of the specified similar amount in CDP or in a refund forum.
Can a Partner Challenge Whether a Push-Out Election Is Valid?
If the partnership makes a valid push-out election, the liability for any tax on the adjustments to partnership-related items (PRIs) shifts from the partnership to its partners.9 Unlike under Tax Equity and Fiscal Responsibility Act, in
an exam, partners in a BBA partnership do not have any right to notice from the IRS of the proceeding, a right to participate in the proceeding, and section 6223 binds partners to any actions taken by the partnership or the partnership representative (which would include making a push-out election) and any final decision in a BBA proceeding.10 Therefore, a partner (direct or indirect) may receive a push-out statement (either as the result of an exam pushout election or an AAR push-out election) out of the blue without any prior notice. A push-out election is an action taken by the partnership through its representative under section 6226 or section 6227 (that is under BBA). Accordingly, section 6223 would seem to bind the partners to that election (which includes furnishing push-out statements). Can the partner challenge whether the partnership made a valid push-out election and shift the liability back to the partnership? It seems unlikely. There is no provision under BBA for a partner to challenge actions taken by the partnership and several provisions seem to prevent it.
For exam push-out elections there are several other provisions that factor into whether the partners can dispute the fact the partner received a push-out statement and the adjustments contained therein. Reg. section 301.6226-1(e) provides that an exam push-out election and the furnishing of the push-out statements are binding on the partners, unless the IRS determines otherwise (which also means the partner cannot file inconsistently from a push-out statement issued as the result of an exam push-out election). As previously stated, under reg. section 301.62261(c)(1), an exam push-out election is valid unless and until the IRS determines that it invalid. This suggests that only the IRS (and not the partners or the partnership) can challenge whether the exam push-out election purportedly made by the partnership is valid.11
Under section 6221(a), adjustments to PRIs can only be determined at the partnership level under BBA, unless an exception applies (for
7 Section 6232(b) (flush language).
8 Sections 6226(b)(4)(ii) (referring to the amount as an IU), 6232(a)(1) (providing that subchapter B of chapter 63 does not apply to IUs).
9 Section 6226(a) (flush language).
10 Section 6223(b); reg. section 301.6223-2(d)(1).
11 Even without this provision, the government could argue the partnership is estopped from arguing the election it made is invalid, especially once the time to assess the IU has expired.
example the special enforcement provisions under section 6241(11) and reg. section 301.62417).12 As previously discussed in part one of this three-part series, an AAR push-out election is a PRI, which means it can only be adjusted at the partnership level and not in a partner-level proceeding. In addition, as discussed, in order to determine that an AAR push-out election is invalid, the IRS must open an exam and issue an FPA. This would result in a final determination in a BBA proceeding to which a partner is bound under section 6223.
Similar to the Schedule K-1, “Partner’s Share of Income, Deductions, Credits, etc.,” furnished to the partner with the filing of the partnership return (and unlike with an exam push-out election), a partner may file inconsistently with the adjustments contained in a push-out statement furnished to the partner as the result of an AAR push-out election (provided there is no post-AAR partnership-level proceeding to which the partner is bound).13 If a partner files a notice of inconsistent treatment with respect to a BBA partnership, the IRS may adjust any inconsistently-reported PRI in a partner-level proceeding (the IRS can also conduct a partnership-level proceeding).14
This raises an interesting question — can a partner file a notice of inconsistent treatment with the inconsistent treatment being whether the partnership made a valid AAR push-out election? It is a PRI after all and the partner can file inconsistently with PRIs on the partnership return (recall that only the AAR push-out election is on the partnership return) so long as the partner files a notice of inconsistent treatment, right? As discussed in my previous post (Tax Notes Federal, Jan. 13, 2025, p. 331), filing a notice of inconsistent
12 There was a very similar provision in TEFRA under section 6221 (prior to repeal by the BBA) that provided that the tax treatment of partnership items could only be determined at the partnership level. Case law under TEFRA made it clear that partnership items could not be determined at the partner level.
13 See reg. section 301.6222-1 (providing that a partner may not file inconsistently from a push-out statement issued as the result of an exam push-out election but not prohibiting a partner being inconsistent from a push-out statement issued as the result of an AAR push-out election). In addition, the instructions to Form 8082, “Notice of Inconsistent Treatment or Administrative Adjustment Request (AAR),” provides instructions for how a partner may file inconsistently from an AAR filed by a BBA partnership.
14 Reg. section 301.6222-1(c)(4)(ii).
treatment does not allow partners to take actions they cannot normally take. A push-out election (exam or AAR) is an election only the partnership (through the representative) can make. Likewise, the decision not to make a push-out election is one only the partnership can make. As the partner has no ability to make (or not make) a push-out election, it’s very unlikely the partner could file inconsistently from the partnership and take an action (not making a push-out election) it could not normally take.
In sum, neither the statute nor regulations under BBA provide a clear way for the partnership to challenge an IRS determination that its push-out election is invalid, especially in the context of an exam push-out election. As previously noted, to avoid potentially foreclosing their ability to challenge any determination that the exam push-out election was not made within 45 days of the issuance of the FPA, partnerships should still furnish push-out statements to their partners in order to complete the process. There is also nothing that provides partners the ability to challenge whether the partnership made a valid push-out election. Although this post provides some insights as to possible outcomes based on the statutes and regulations, it is ultimately the courts that will decide whether they have jurisdiction over a partnership’s push-out election which would then dictate whether, and how, it may be challenged.