Litigating BBA Modi cation Denials: Open
Questions, Potential Chaos
POSTED ON NOV. 15, 2024
Jenni Black is a managing director in Citrin Cooperman’s National Tax O ce 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 explores unanswered questions facing partnerships that want to litigate the IRS’s denial of their requests to modify the calculation of imputed underpayments under the Bipartisan Budget Act’s partnership audit rules.
Those familiar with the centralized partnership audit rules enacted by the Bipartisan Budget Act (no, it’s not called CPAR it’s always been BBA and we’re not changing it now), know the calculation of the imputed underpayment (IU) (the partnership-level liability computed on adjustments to partnership-related items (PRIs) the partnership must pay unless it elects to push out the adjustments) will generally be much higher than the tax that would have been owed by the partners if the items were reported correctly. Because of this, Congress built into the BBA options for the partnership to either pay a lower IU (modi cation) or pay no IU by pushing out the adjustments to the partners for them to pay tax on (push out). This article will focus solely on modi cation.
By way of quick overview, modi cation (as it is colloquially referred to) is a process by which the partnership can bring in partner-level tax attributes or have partners take into account their share of the adjustments (and pay any applicable tax) to lower the amount of the IU the
partnership may be required to pay. Requests to modify the IU are submitted to the IRS through an electronic portal and must be submitted within 270 days of when the IRS mails the Notice of Proposed Partnership Adjustment (NOPPA) (this time can be extended). The modi cation request is on Form 8980, “Partnership Request for Modi cation of Imputed Underpayments Under IRC Section 6225(c), ” along with any supporting forms and documentation. Modi cation requests are reviewed by a speci c unit at the Ogden, Utah, IRS service center There are two types of modi cations: base modi cations and rate modi cations.
Base modi cations change the amount of the adjustments used in the calculation of the IU. The applicable base modi cations are:
1 amended return modi cation;
2. amounts allocable to tax-exempt partners;
3. disregarding decreases to speci ed passive activity losses of publicly traded partnerships;
4. closing agreements;
5. de ciency dividend procedures for regulated investment companies and real estate investment trusts;
6. tax treaties; and
7. the opaque “other” modi cation, which basically means, “make something up that sounds legit and the IRS will think about it.”
The second category is rate modi cation, which allows the partnership to request to modify the rate used in calculating the IU for adjustments allocable to C corporation partners or, for adjustments to capital gains or quali ed dividends, the amounts allocable to partners that are individuals or S corporations.
In addition to rate and base modi cations, the partnership can also request to move the adjustments around to allow negative adjustments that would not normally net with positive adjustments in the calculation of the IU to do just that, net, or to ask for adjustments to be split into more than one IU if the partnership wants to “pay” for some adjustments while pushing out the rest.
Partnerships can also apply modi cations to any IU calculated as part of the ling of an administrative adjustment request (AAR) (how a partnership subject to the BBA can adjust items on its previously led return). In the case of AARs, the partnership applies the modi cations to the IU in the AAR and attaches the Form 8980 and any supporting forms and documentation to the AAR. However, not all modi cations are available for AARs. The only ones available are amounts allocable to tax-exempt partners, rate modi cation, speci ed passive activity losses, de ciency dividends, treaties, and allowing adjustments to net that would not otherwise net. In other words, amended return modi cation, closing agreements, and “other” modi cations are not available for AARs
Administrative Review of Modi cation Requests
After processing the partnership’s modi cation request as part of an exam, the IRS will issue Form 15027, “Partnership Summary of Approved Modi cations and the Imputed Underpayments,” which will include the IRS’s decision on the requested modi cations as well as a computation of the IU with any approved modi cations taken into account If the IRS denies some or all of the requested modi cations requested in an exam, the partnership is given the opportunity to challenge the denial in the IRS Independent O ce of Appeals. If the case remains unagreed, the IRS will issue a notice of nal partnership adjustment (FPA), which includes Form 15027 re ecting any approved and unapproved modi cations.
In the context of an AAR, if the IRS disagrees with the modi cations the partnership applied to the IU, the IRS must open an exam of the partnership 1 The IU is a PRI Under section 6221(a), any adjustments to PRIs must be determined at the partnership level (unless an exception applies, none of which are applicable here). On the AAR led by the partnership, the partnership calculated an IU, which was net of any modi cations the partnership determined should apply. As the IU is a PRI, if the IRS wants to adjust the IU reported by the partnership on its AAR, it must follow the normal BBA procedures, which will ultimately allow the partnership to challenge the adjustments (that is, the denied modi cations) in Appeals or in court, just like any other partnership adjustment.
Accordingly, regardless of whether the modi cations were requested in an exam or applied in an AAR, any modi cations denied by the IRS will end up in an FPA, which is the partnership’s “ticket” to court.
Under section 6234(c), if the partnership petitions a court in response to an FPA, the court has jurisdiction over all PRIs for the taxable year (“all” means “all” and not just the items adjusted in the FPA), the proper allocation of those PRIs amongst the partners, and the applicability of any penalty for which the partnership may be liable under the BBA. As previously mentioned, the IU is included within the de nition of a PRI. This means the court, in a BBA proceeding, has jurisdiction to determine the amount of the IU. The IU includes any applicable modi cations.
Reg. section 301.6241-1(a)(3). As such, when determining the amount of the IU, the court can determine whether any modi cations should apply to the IU. Sounds simple, right? Of course it’s not.
One thing not spelled out in the Internal Revenue Code is what the standard and scope is of the court’s review of any denied modi cations. Does the court have full de novo review of any modi cations? Or is the court’s review limited to whether the IRS abused its discretion in denying a requested modi cation? If the latter, does the partnership get to produce additional information to support its requested modi cation, or is it limited to the administrative record the information it provided to the IRS and on which the IRS based its decision? Su ce it to say, partnerships would probably prefer de novo review. But be careful of what you wish for, because you might just get it.
As an initial matter, there is a curious provision in the BBA that may apply here. Section 6225(c)(8) provides that “any modi cation of the [IU] . . . shall be made only upon approval of such modi cation by the Secretary” (emphasis added). Neither the Joint Committee on Taxation’s blue book nor the regulations implementing the BBA elaborate on what this means. If a modi cation can only be made if the IRS approves the modi cation, does this mean the court’s review of any denied modi cations is limited to abuse of discretion (one could also make the argument that this means there is no review of the IRS’s decision on modi cation, but some level of review is likely intended as the court has jurisdiction over the IU)? Contrast this with section 6234(c), which gives the court jurisdiction over all PRIs for the taxable year (which would include the IU). Section 6225(c)(8) must mean something, right? And “only” does mean “only,” after all. If Congress took the time to include this provision it surely meant for it to do something. If section 6225(c)(8) was not intended to apply to the review of any modi cations in a judicial proceeding, it is unclear what exactly it wouldapply to.
If the court’s review of any denied modi cations is limited to determining whether the IRS abused its discretion in denying the modi cation, the court must then determine whether the partnership may submit additional evidence to support its requested modi cations. Section 6225(c)(7) states that “anything required to be led or submitted under [modi cation] shall be submitted to the Secretary not later than the close of the 270-day period beginning on the date on which the [NOPPA]” is mailed by the IRS (unless extended). If everything required for the modi cation request must be submitted within 270 days of when the NOPPA is mailed, does this preclude the partnership from bringing in additional information once that time has expired? Personally, I’ve never understood how someone could abuse their discretion by not considering information they were never given, but it’s clear that the Tax Court has allowed the introduction of new evidence in cases in which the court was determining whether the IRS abused its discretion (for example, collection due process). If additional evidence can be submitted, it starts to look more like a de novo review.
Remember when I said be careful what you wish for because you just might get it? Yeah, I was referring to de novo review. As we know, when the court reviews something de novo, it reviews all the evidence and makes an independent decision regarding what the outcome should be. In the context of denials of requested modi cations, it’s unclear how the court will do this without it becoming an absolute circus. As previously mentioned, almost all modi cations are based on partner-level characteristics and actions. For example, the partner les an amended return, the partner says it is tax-exempt and would not be subject to tax on the adjustments, or the partner distributes a de ciency dividend. Unlike under TEFRA, partners are not parties to BBA proceedings So, if the IRS denies the modi cation based on a partner-level reason how would this work? Would the partnership have to litigate how the adjustments should have been reported by the partner on the amended return and what the tax e ect should be?
Modi cations are requested (or applied, in the case of an AAR) by the partnership through the Form 8980. In preparing the modi cation request, the partnership will request modi cation based on partner actions and characteristics it likely is not privy to. For example, if a partner les an amended return as part of modi cation or the partner is tax-exempt, the partners provide the partnership with an a davit (for example, Form 8983, “Certi cate of Partner TaxExempt Status for Modi cation Under IRC Section 6225(c)(3), ” and Form 8982, “A davit for Partner Modi cation Amended Return Under IRC Section 6225(c)(2)(A) or Partner Alternative
Procedure Under IRC Section 6225(c)(2)(B)”) and are not required to provide the partnership with any proof or evidence that the partner’s statements on those forms are correct. See reg. section 301.6225-2(d)(2)(iii). Accordingly, what happens if the IRS denies the requested modi cation based on a partner ling an amended return because the partner has not properly taken into account the adjustments (for example, basis, at-risk, or passive limitations) or because the adjustments would be unrelated business taxable income to the tax-exempt partner? If the court is reviewing the denied modi cations de novo, does this mean the court will have to determine, in the BBA proceeding, whether the partner’s amended return was correct or whether the adjustments are UBTI? Recall that partners are not parties to BBA proceedings. Therefore, assuming all relevant records could be obtained from the third-party partner, the parties would be litigating the tax e ects to a third party using the third party’s information when the third party may not even be aware of the litigation. The partnership would have to dig into the partner’s return to determine how it thinks the partner should have led, which may also require reviewing several years of returns. It’s not clear whether the partner could intervene. While how the partner took into account the adjustments would be at issue, the court does not have jurisdiction to determine the partner’s tax, just the IU, so the partner doesn’t have a lot of skin in the game (for tax purposes) as any determination about the partner’s tax situation would be limited to its impact on the IU calculation. It’s like talking about someone behind their back on steroids.
Under section 6225(c)(6), the IRS may create, through regulations, modi cations in addition to the ones provided for in the statute. One of the additional modi cations created by the IRS is “other” modi cations under reg section 301 6225-2(d)(10) (that is, make up something that sounds legit and the IRS will think about it). Under reg. section 301.6225-2(d)(10), a partnership may request a modi cation not otherwise listed in the statute or regulations and the IRS will determine whether the requested modi cation is “accurate and appropriate.” If the partnership requests an “other” modi cation and the IRS denies the request, it is even less clear how the court would review this denial. Section 6225(c)(6) allows the IRS to create additional modi cations, but nothing allows a court to create additional modi cations. Therefore, how can the court determine whether the modi cation that the partnership made up is a pre-existing modi cation? There is no clear line between what falls into “other” modi cations and what is creating a whole new modi cation. Admittedly, this would be much more clear-cut if it was just a matter of whether the IRS abused its discretion in denying the requested modi cation.
If the merits of the partner’s actions and characteristics must be litigated in the BBA proceeding or if the court has to determine whether a requested “other” modi cation is a real thing, this could detract from determining whether the partnership adjustments are correct. Personally, I think review based on abuse of discretion and the administrative record more closely aligns with the code (including section 6225(c)(7) and (8)) and the practicalities of trying to litigate partner-level issues in a partnership-level proceeding, especially where partners may be several tiers removed from the partnership under audit or the partnership that led the AAR. As I said: Be careful what you wish for.
New Modi cations?
If you haven’t had your ll of BBA fun by this point, let’s add another issue regarding modi cation: Can the partnership request a modi cation of the IU for the rst time in court? This goes back to a couple key issues discussed previously whether the partnership can submit new information in court (administrative record) and whether IRS approval is required before a modi cation can be allowed (abuse of discretion) If either situation is true not being able to submit more information or IRS approval required the partnership would be unable to submit new modi cations for the rst time in court as they would be unable to introduce the information to support the request and there would be no IRS approval.
However, even if the court reviews modi cation denials de novo, it does not necessarily mean the partnership can raise new modi cations for the rst time in court. The code contemplates that modi cation will occur after the NOPPA has been issued and before the FPA has been issued (that is, that modi cation is an administrative, not judicial, process). See section 6225(c)(7). But section 6234(c) gives courts jurisdiction over all PRIs for the taxable year, which would include the IU. Needless to say, there is tension between these provisions (ability to provide additional information and required IRS approval versus judicial review of the IU).
One could argue that section 6225(c)(7) and (8) control in the case of modi cation, as those provisions are speci c to modi cation, whereas section 6234 is a more general provision. But that same argument is inherent in the issue of what the standard and scope of review are for denials of requested modi cations Therefore, it may be that the standard and scope of review for denied modi cations go hand-in-hand with whether a partnership can request new modi cations in court. Arguably, Congress didn’t intend partnerships to be able to request
new modi cations while in court because, if it did, it would have included something to that e ect, even if it was just a mention instead of dead silence. Instead, the rules Congress enacted are worded in terms of modi cation happening during exam. Silence can be interpreted in more than one way by not mentioning a speci c situation, perhaps Congress didn’t intend for it to apply in that situation, or conversely, by not expressly excluding a speci c situation Congress did not intend to exclude it. A third possibility is that Congress didn’t consider the issue at all when the provisions were drafted (in this case it would seem more like silence would mean that Congress did not intend the provision to apply as it wasn’t expressly mentioned) I’m sure that, just like me, you can’t wait to see how this all plays out
FOOTNOTES
1 Unlike under BBA’s predecessors (the procedures under the Tax Equity and Fiscal Responsibility Act of 1982 and the defunct electing large partnership (ELP) regime), there is no requirement that the IRS approve the AAR before adjustments take e ect. Related to that, unlike TEFRA/ELP, there is no ability for the partnership to challenge the denial of an AAR, and the ling of an AAR triggers certain obligations and consequences (such as the requirement to furnish push-out statements and pay any IU). Taken together, it is clear that BBA AARs are “self-executing” (similar to an amended return that is not a claim for refund) such that the IRS must conduct an audit to adjust the AAR.
END FOOTNOTES
DOCUMENT ATTRIBUTES
JURISDICTIONS
SUBJECT AREAS/TAX TOPICS
MAGAZINE CITATION
UNITED STATES
AUDIT PRACTICES AND METHODS LITIGATION AND APPEALS
PARTNERSHIPS PRACTICE AND PROCEDURE
TAX NOTES FEDERAL, NOV. 18, 2024, P. 1449
185 TAX NOTES FEDERAL 1449 (NOV 18, 2024)
AUTHORS JENNI BLACK
TAX ANALYSTS DOCUMENT NUMBER
DOC 2024-32636
EXPLORE SUBSCRIPTIONS