The Tax Court has only recently started grappling with cases implicating the partnership audit rules enacted by the Bipartisan Budget Act of 2015 (the BBA Rules). One of these cases recently resulted in a unanimous reviewed opinion holding that a Department of the Treasury regulation addressing the statute of limitations under the BBA rules is "invalid as applied" to the taxpayer at issue. JM Assets, LP v. Commissioner, 165 T.C. No. 1 (2025). This meant the Notice of Final Partnership Adjustment (FPA) — equivalent to a statutory notice of deficiency — was untimely. The opinion is a significant win for the partnership at issue but is especially noteworthy given the ramifications for a potentially broad swath of other partnerships.

The Internal Revenue Service (IRS) audited the partnership under the BBA Rules and issued a Notice of Proposed Partnership Adjustment (NOPPA) on June 9, 2022. This started a 270-day period — which ended on March 6, 2023 — for the partnership to submit a request to the IRS to modify the imputed underpayment identified in the NOPPA. The partnership submitted this request to the IRS on February 14, 2023, several weeks before the deadline. The IRS subsequently approved the modification request without asking for any additional information and issued an FPA on December 1, 2023. The partnership asserted the FPA was untimely.

When a partnership requests to modify an imputed underpayment, the IRS has 270 days from the date on which "everything required to be submitted" regarding the modification request "is so submitted" to issue an FPA. See section 6235(a)(2). The partnership asserted this date was February 14, 2023, the date the partnership submitted a complete modification request. But Treasury regulations define this date as the earlier of the date the 270-day period for the partnership to submit a modification request ends (March 6, 2023, in this case) or the date on which the taxpayer waives the modification period (not applicable here). See Treas. Reg. § 301.6235-1(b)(2)(i). Thus, the issue was whether the IRS's 270-day period to issue an FPA ran from February 14, 2023, in which case the FPA was untimely, or March 6, 2023, in which case the FPA was timely.

The Tax Court stated that, "[a]s applied in this case, there is a direct conflict between the statute and the regulation." According to the court, the statute's plain text provides that the relevant deadline for issuing an FPA is 270 days after the date on which everything required for a complete modification request is submitted. The regulation interprets this date to be 270 days after the date the period for requesting modification ends. "As is made evident in this case, those are different dates, and the regulation must give way to the statute."

The court's holding that the regulation is "invalid as applied" appears to suggest that the court might find the regulation valid in other circumstances. At a minimum, other partnerships with the same circumstances should expect the same result in the Tax Court. In our experience, more often than not, partnerships elect to push out an imputed underpayment under section 6226 rather than request to modify the imputed underpayment under section 6225. However, we have no doubt the IRS has approved many modification requests to date. We have also experienced a pattern of the IRS issuing an FPA with mere days left on what the IRS believes to be the applicable limitations period. This makes us believe there is likely a meaningful universe of other unresolved FPAs that are untimely based on JM Assets.

That said, we expect other partnerships will have to wait before obtaining relief. As an initial matter, we expect the IRS will appeal the case. We expect the Tax Court would respond by staying other cases presenting the same issue and appealable to the same U.S. Circuit Court of Appeals (which is not immediately apparent from the Tax Court's opinion). Cases presenting the same issue and appealable to other circuits could face the same fate. For partnerships with cases pending at the IRS Independent Office of Appeals, an IRS appeal would delay the date of an "unreviewable decision," which is now a prerequisite before Appeals will concede hazards of litigation based on a judicial opinion invalidating a regulation. See Treas. Reg. § 301.7803-2(c)(19). Regardless of their current procedural posture, partnerships with the same circumstances as those in JM Assets should closely follow the IRS's next steps.

For more information, please contact:

James R. Gadwood, jgadwood@milchev.com, 202-626-1574

Katherine Lewis, klewis@milchev.com, 202-626-5894

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