Tax Court Strikes IRS Timeline for Partnership Adjustments – Houston Tax Attorneys

The partnership audit regime rules are not all that new at this point. But what makes them new is that the IRS hasn’t fully implemented them, is often not following the new rules, and the disputes involving this have just started to trickle up to the courts.

Practitioners are also at fault here. Many have not taken the time to review or understand these new rules. This is actually understandable, as there have been so many changes in the past several years. The incoming and outgoing administrations with their own tax agendas, followed by the IRS upheaval, has pushed this new set of rules to the side. But for those of us who work on IRS audits, appeals, and litigation, these rules are essential.

Partnership audits under the BBA follow a specific timeline that can determine whether the IRS has the authority to make adjustments to partnership tax returns. When partnerships submit modification requests to reduce their imputed underpayments, the question becomes: when does the clock start ticking on the IRS’s deadline to issue a final partnership adjustment? The Tax Court’s ruling in JM Assets LP v. Commissioner, 2025 WL 123456 (T.C. 2025), demonstrates what happens when the IRS fails to follow these timing requirements and shows how courts will invalidate Treasury regulations that contradict clear statutory language.

Facts & Procedural History

This case involved a limited partnership headquartered in Texas. The partnership managed real property investments.

In 2018, the partnership disposed of several properties. The selling prices ranged from $88,000 to over $7 million. The partnership reported these transactions as installment sales on its Form 1065 partnership return. The partnership properly disclosed these transactions using Forms 4797 and 6252 by providing detailed information about the five properties.

On June 9, 2022, the IRS issued a Notice of Proposed Partnership Adjustment (“NOPPA”) to the partnership to increase the partnership’s section 1231 gain by $5,499,437 and to calculate an imputed underpayment of $2,034,792. The IRS took the position that the partnership should have recognized the full gain on these property sales in 2018 rather than treating them as installment sales.

Following the established procedures for BBA partnership audits, the partnership submitted a Form 8980 modification request on February 14, 2023, seeking to modify the tax rates for two of its partners. The IRS approved the modification request in full on June 5, 2023. However, on December 1, 2023, the IRS issued a Notice of Final Partnership Adjustment (“FPA”) containing the same adjustments and imputed underpayment amounts as the original NOPPA.

The partnership challenged the FPA by filing a petition in U.S. Tax Court, arguing that the adjustment was untimely under section 6235(a)(2) of the tax code. The case involved cross-motions for summary judgment, with each party arguing different interpretations of when the limitation period began to run.

Understanding BBA Partnership Audit Procedures

The Bipartisan Budget Act of 2015 changed the rules of the game for how the IRS partnership audits are conducted. Under these procedures, for taxpayers who do not elect to opt out of the new rules, the IRS examines partnership returns and makes adjustments at the partnership level rather than examining individual partners. This centralized approach is intended to streamline the audit process, which it does in some respects. It also creates specific timing requirements that both the IRS and partnerships must follow, which makes it more difficult for the IRS and taxpayers.

When the IRS identifies adjustments to a partnership return, it calculates an “imputed underpayment” by applying the highest marginal tax rate to the net partnership adjustments. The partnership then has the opportunity to request modifications to this imputed underpayment, such as demonstrating that certain partners are tax-exempt or subject to lower tax rates. Taxpayers are often subject to lower tax rates.

About the Partnership Modification Process

The modification process under Section 6225(c) allows partnerships to request adjustments to their imputed underpayments after receiving a NOPPA. This process recognizes that the IRS’s initial calculation using the highest marginal tax rate may not accurately reflect the actual tax liability of the partnership’s specific partners.

Partnerships can request modifications for several reasons. They may demonstrate that certain partners are tax-exempt organizations that would not owe tax on their distributive shares. They may show that individual partners are subject to lower tax rates than the highest marginal rate used in the imputed underpayment calculation. They may also request modifications based on amended returns filed by partners or alternative procedures that would reduce the overall tax liability.

The modification request must be submitted on Form 8980, along with supporting documentation to substantiate the requested changes. The IRS has established specific procedures for these requests, including required forms and documentation that must be attached to make the request complete. The partnership has 270 days from the date the IRS mails the NOPPA to submit its modification request.

How Do Modification Requests Affect the Limitation Period?

The I.R.C. § 6235(a) limitation period determines when the IRS must complete its partnership audit and issue a final partnership adjustment.

This section provides several different time limits, and the IRS must finish its audit within the latest of these periods. The provision creates different deadlines depending on whether the partnership requests modification of its imputed underpayment.

Under I.R.C. § 6235(a)(3), if a partnership does not request modification, the IRS has 330 days after mailing the NOPPA to issue its final partnership adjustment. This provides a straightforward timeline that begins when the IRS sends the proposed adjustment notice.

However, I.R.C. § 6235(a)(2) creates a different timeline when a partnership submits a modification request. In this situation, the IRS has 270 days “after the date on which everything required to be submitted to the Secretary pursuant to such section is so submitted” to issue its final partnership adjustment. This language appears to start the clock when the partnership completes its modification submission.

When Is Everything Required Actually Submitted?

The central legal issue in this case involved interpreting the phrase “everything required to be submitted to the Secretary pursuant to such section is so submitted” in I.R.C. § 6235(a)(2). The IRS had interpreted this phrase through Treasury Regulation § 301.6235-1(b)(2), which defined the submission date as “the date the period for requesting modification ends.”

Under the IRS’s interpretation, even if a partnership submitted a complete modification request early in the 270-day period, the limitation period would not begin until the modification window closed. This interpretation was based on the theory that partnerships could theoretically submit additional information during the modification period, so the submission could not be considered complete until the period ended.

The IRS also pointed to Form 8981, which partnerships can use to waive the modification period, as evidence that the modification window remains open until formally closed. According to the IRS, the failure to submit Form 8981 meant that the partnership could make additional submissions during the entire 270-day period.

The partnership took the position that the statutory language was clear and unambiguous. The limitation period begins when the partnership actually submits everything required for its modification request. Since the partnership submitted its complete Form 8980 on February 14, 2023, and never submitted additional information, the 270-day period should have begun on that date.

The Court’s Analysis of the Modification Timeline

The U.S. Tax Court applied the Supreme Court’s decision in Loper Bright Enterprises v. Raimondo, which emphasized that courts must exercise independent judgment when reviewing agency interpretations of statutes. The court noted that statutes must have a single, best meaning that is fixed at the time of enactment.

The court found a direct conflict between the plain language of I.R.C. § 6235(a)(2) and the IRS’s regulation. The statute clearly states that the limitation period runs from “the date on which everything required to be submitted… is so submitted,” while the regulation interprets this to mean the date the modification period ends. The court observed that these are different dates, and the regulation must give way to the statute.

The IRS attempted to defend its regulation by pointing to I.R.C. § 6225(c)(1), which grants the IRS broad authority to establish procedures for modification requests. However, the court rejected this argument, explaining that even broad rulemaking authority does not extend to contradicting statutory text. The court cited Varian Medical Systems, Inc. & Subsidiaries v. Commissioner for the principle that regulations cannot change unambiguous statutory provisions.

The court examined the facts for the partnership’s modification request to determine when everything required was actually submitted. The partnership submitted its Form 8980 on February 14, 2023, requesting modification of the tax rates for two partners. The IRS never requested additional information during the modification period. The partnership never submitted supplemental materials after its initial request.

The IRS approved the modification request in full on June 5

The IRS approved the modification request in full on June 5, 2023, confirming that the initial submission contained everything necessary for the requested modification. These facts established that the partnership submitted “everything required to be submitted” on February 14, 2023.

Under the correct interpretation of I

Under the correct interpretation of I.R.C. § 6235(a)(2), the IRS had 270 days from February 14, 2023, to issue its final partnership adjustment. The 270-day period expired on November 11, 2023, which fell on a Saturday, so the deadline extended to Monday, November 13, 2023, under I.R.C. § 7503. The IRS issued its FPA on December 1, 2023, which was 18 days after the limitation period expired.

The Takeaway

This decision establishes that partnerships can rely on the plain language of section 6235(a)(2) when calculating limitation periods for BBA partnership adjustments. When a partnership submits a complete modification request, the IRS’s 270-day deadline begins immediately, not at the end of the modification period as the Treasury Regulation suggested. This ruling provides partnerships with greater certainty about limitation periods and demonstrates that courts will not defer to agency interpretations that contradict clear statutory language.

For partnerships that have received final partnership adjustments, this case serves as a reminder to carefully review the timing of modification requests and FPA issuances. The IRS’s failure to follow proper procedures can result in adjustments being thrown out entirely, even when the underlying tax positions may be questionable.

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Stephan Dorsey

Stephan is the sports journalist for the Maple Grove Report.

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Probate Estate Can Serve as a Condit for Retirement Assets – Houston Tax Attorneys

When estate planning involves retirement accounts, most advisors recommend naming beneficiaries directly to avoid probate delays and preserve tax advantages. Surviving spouses typically receive the most favorable treatment under the tax code, with the ability to roll over inherited retirement assets into their own accounts and defer distributions based on their own life expectancy. However, some individuals deliberately choose to name their estate as the beneficiary of retirement accounts to maintain control over distribution terms and coordinate with overall estate planning objectives.

This creates a potential problem: does routing retirement assets through an estate destroy the surviving spouse’s valuable rollover rights or trigger an income tax debt for the estate? The answer has significant implications for tax planning and estate administration.

The IRS addressed this exact question in Private Letter Ruling 202525008, where a surviving spouse sought confirmation that she could roll over her deceased husband’s retirement plan assets even though they were designated to pass through his estate. This ruling provides an opportunity to examine how spousal rollover rights interact with estate administration and what structures can preserve these valuable tax benefits.

Facts & Procedural History

The taxpayer in this ruling was the surviving spouse. The decedent was a participant in retirement assets held in multiple employer-sponsored plans. Specifically, the decedent maintained accounts in two section 401(a) qualified retirement plans and one section 403(b) plan. The plans were all administered by the same custodian.

Rather than naming his wife directly as beneficiary, the decedent had designated his estate as the sole beneficiary of all three retirement accounts. The decedent’s will provided that his surviving spouse served as both the sole personal representative of the estate and she was the sole beneficiary of all estate assets. This dual role meant that while the retirement funds would initially be distributed to the estate, the surviving spouse would control the estate’s receipt of these assets and would ultimately receive them as the estate’s only beneficiary.

The surviving spouse planned to direct the retirement plan assets from the decedent’s accounts to the estate in her capacity as personal representative. She would then receive those same assets as the estate’s sole beneficiary and intended to roll them over into IRAs maintained in her own name within 60 days of the estate’s receipt of the distributions.

The taxpayer requested private letter ruling from the IRS to confirm the tax consequences for re-directing the retirement funds to herself.

Spousal Rollover Rights Under Section 402(c)

Section 402(c) of the tax code provides the framework for tax-free rollovers from qualified retirement plans. It allows recipients to transfer eligible rollover distributions to other qualified retirement plans or individual retirement accounts without recognizing immediate taxable income. This preserves the tax-deferred character of retirement savings.

Section 402(c)(9) provides special treatment for surviving spouses that goes beyond what other beneficiaries receive. This provision says that when a distribution attributable to an employee is paid to the spouse after the employee’s death, the rollover rules apply “in the same manner as if the spouse were the employee.”

This treatment allows surviving spouses to roll inherited retirement assets into their own IRAs or other qualified plans, rather than being limited to inherited account treatment. The surviving spouse who chooses rollover treatment for the inherited assets treats the retirement funds as the spouse’s own retirement funds for all tax purposes. Even the required minimum distributions are based on the surviving spouse’s age rather than the deceased participant’s age. The surviving spouse can even name new beneficiaries who will receive their own stretch treatment upon the spouse’s eventual death.

This flexibility makes spousal rollover rights extremely valuable for retirement and estate planning purposes.

What Constitutes Distribution to a Spouse?

The language in section 402(c)(9) requires that distributions be “paid to the spouse of the employee after the employee’s death.” This requirement is more complex when retirement assets don’t flow directly to the surviving spouse but instead pass through intermediate entities like estates or trusts.

The IRS and courts have generally applied a substance-over-form in these situations.n This considers who ultimately receives the economic benefit of the retirement assets rather than focusing solely on the mechanical steps of the distribution process. The question is whether the spouse is the true recipient of the funds even though they pass through other entities as part of the transfer mechanism.

This flexible interpretation serves important practical purposes in estate administration. Many estate plans involve structures that create indirect paths for asset transfers, such as revocable trusts or estate administration arrangements that might technically receive distributions before transferring them to intended beneficiaries. Requiring direct distribution to qualify for spousal treatment would eliminate rollover opportunities in many common planning scenarios.

Can Estates Serve as Conduits for Rollover Treatment?

Estate administration creates unique challenges for retirement asset distributions because estates are separate legal entities that can receive distributions independently of their beneficiaries. Assets that pass through an estate and then to the beneficiaries through the estate administration process are not all that different than a conduit trust situation.

With that said, estates generally cannot roll over retirement assets because they are not individuals eligible to maintain IRAs or participate in qualified plans. This means that if the estate is truly the distributee, rollover treatment would not be available. This potentially forces immediate income recognition for tax purposes.

However, when an estate serves merely as a conduit for distributions to eligible recipients, the IRS has shown willingness to look through the estate to the ultimate beneficiaries for rollover purposes.

The IRS Analysis: Substance Over Form

This brings us to the IRS ruling in this case. The ruling emphasized that the surviving spouse occupied a unique dual role as both the sole personal representative of the estate and the sole beneficiary of all estate assets. As personal representative, she would have complete authority to direct the estate’s receipt and handling of the retirement assets. As sole beneficiary, she would ultimately receive all economic benefits from those assets.

Under these circumstances, the IRS concluded that the estate would serve merely as a conduit for the distribution process. The surviving spouse’s control over both the receipt of assets by the estate and their ultimate distribution to herself meant that she should be treated as the true distributee for purposes of the rollover rules.

The IRS specifically ruled that the taxpayer would be treated as the payee or distributee of the retirement plan assets despite their initial payment to the estate. This determination allowed the normal spousal rollover provisions to apply, treating the spouse as if she were the original employee for rollover purposes.

This ruling shows that spousal rollover rights can be preserved even when the decedent’s estate is named as the plan beneficiary. To qualify, the surviving spouse has to maintain complete control over both the estate administration process and the ultimate distribution of assets. Different circumstances, such as multiple beneficiaries or co-personal representatives, might not qualify for the same favorable treatment and could require separate tax advice and could present opportunities to settle the probate estate on a tax efficient manner.

The Takeaway

This ruling clarifies that surviving spouses can preserve their valuable rollover rights even when retirement assets flow through estate administration. They have to maintain complete control over the process as both personal representative and sole beneficiary to get this tax treatment. While direct beneficiary designations remain simpler and more certain, this ruling provides important reassurance for estate plans that deliberately route retirement assets through estate administration for control and coordination purposes.