In 2015 Congress enacted the Bipartisan Budget Act of 2015 (“BBA”) that, among other things, repealed the TEFRA partnership audit provisions and replaced them with BBA partnership audit provisions effective for partnership tax years beginning after December 31, 2017. Both the TEFRA and BBA partnership audit provisions provided for an audit and adjustments at the partnership level. Under the TEFRA provisions any additional tax is assessed against and collected from the individual partners. Under the BBA provisions, however, any “imputed underpayment” is assessed against and collected from the partnership, unless the partnership makes a so-called “push-out election.”
BBA section 1101(g)(4) allowed partnerships to elect into the BBA audit provisions for tax years beginning after November 2, 2015, and before January 1, 2018. To do so, a partnership was required to submit an election that satisfies the requirements of Treas. Reg. sec. 301.9100-22(b)(2). The Tax Court recently addressed the issue of what constitutes a valid election into the BBA audit regime in SN Worthington Holdings, LLC v. Commissioner, 162 T.C. No. 10.
In October 2018, the IRS notified Worthington that its 2016 return had been selected for audit and that it had 30 days within which to elect into the BBA audit procedures. Worthington submitted a completed election form signed under penalties of perjury. One of the representations in the election was that Worthington had sufficient assets to pay and anticipated having sufficient assets to pay the imputed underpayment, as required by Treas. Reg. sec. 301.9100-22(b)(2)(ii)(e)(4). IRS sent Worthington a letter that, based on a review of Worthington’s return it did not have sufficient assets to pay the imputed underpayment and that if it disagreed it should submit documents to the IRS. Worthington did not respond. The IRS subsequently wrote to Worthington that its election was invalid both because it had insufficient assets and that the election was not made by the proper person.[1]
IRS commenced a TEFRA audit of Worthington. In June 2020, Worthington informed the IRS the audit should not be under TEFRA because it had elected into the BBA audit procedures. In August 2020, the IRS issued a TEFRA Final Partnership Administrative Adjustment (FPAA) and Worthington filed a timely petition with the Tax Court. In 2023, Worthington moved to dismiss the case for lack of jurisdiction because the FPAA was invalid. The Court granted the motion.
After reciting the facts, the Court stated that it had jurisdiction over a TEFRA case if (a) there was valid FPAA and (b) a timely petition was filed by the proper person. The IRS argued the election was invalid since the taxpayer was required to provide additional information requested to validate its representations and that allowing an election into the BBA audit procedures when a partnership cannot establish that it has sufficient assets to pay the potential imputed underpayment “would frustrate the purpose of the BBA procedures.” It also argued that based on its failure to respond to the IRS letter and its subsequent actions Worthington should be equitably estopped from arguing that the election was valid.
To decide the motion, the Court had to address two issues: (a) was the FPAA valid and (b) if it was valid, was Worthington equitably estopped from arguing that the FPAA was invalid.
Addressing the first issue, the Court gave a brief overview of TEFRA and BBA audit procedures. Under Treas. Reg. sec. 301.9100-22(a) an election made in accordance with the regulations was valid. The regulations required a written election containing a series of representations, including that the partnership had sufficient assets, and reasonably anticipated having sufficient assets, to pay the imputed underpayment. Since Worthington’s election made this representation, it complied with the regulations.
Discussing valid elections, the Court stated that a taxpayer makes a valid election when it complies “with the plain text of the election requirements.” Once the requirements were met the IRS “may not add ad hoc additional requirements” and “may not require the taxpayer to satisfy more stringent requirements than the provisions authorizing the election.” Since Worthington’s election satisfied the requirement that it had sufficient assets to satisfy an imputed underpayment, the election complied with the regulation.
The Court rejected IRS’s second argument that under Treas. Reg. sec. 301.9100-2(a) an election is invalid if it frustrates the purpose of the BBA and that allowing a partnership to make an election if it did not have sufficient assets to pay the imputed underpayment would frustrate the BBA’s purpose. In addition to pointing to the fact that BBA has procedures where a partnership’s assets were insufficient to promptly pay the imputed underpayment, the Court stated that when there is doubt as to the meaning of a regulation, it is interpreted against the drafter. The IRS could have required partnerships to establish that they had sufficient assets, but it didn’t do so. Since Worthington made a valid election into the BBA audit procedures, the TEFRA procedures were inapplicable and the FPAA issued to Worthington was invalid.
The Court next address whether Worthington was equitably estopped from claiming the FPAA was invalid. To establish equitable estoppel, a party has to show five elements. The first is that there was a false statement or misleading silence by the party claimed to be estopped. Since Worthington never informed the IRS that it made an incorrect determination on the election’s validity for almost two years, there was misleading silence. The second element is that the false representation or misleading silence was about a statement of fact and not an opinion or statement of law. Here, the IRS had all facts needed to determine whether the election was valid. Thus, Worthington’s misleading silence was on a question of law. The third element is that the party claiming estoppel did not know all the facts. Since the IRS had all facts needed to apply the regulation, this element was not established. Thus, the IRS failed to establish two of the five necessary elements for equitable estoppel, and the Court found that equitable estoppel did not apply.
The Court ended by stating that an order of dismissal will be “silenced.”
In making an election, a taxpayer has to make sure that it has complied with all the requirements for the election. These are usually contained in the statute and regulations. If those requirements are met, the Worthington ruling tells us that an IRS challenge to the election cannot be sustained.
[1] The IRS abandoned this claim in Tax Court.
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