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Tax Controversy Corner

MEGAN L. BRACKNEY is a
Partner at Kostelanetz & Fink,
Challenging Penalties Under the BBA
LLP in New York, New York.

By Megan L. Brackney*

he Bipartisan Budget Act of 2015 (the “BBA”) made substantial changes
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to the audit procedures for passthrough entities. This column discusses
T how partnerships and individual partners will be able to challenge penalties
under the BBA procedures. The BBA repealed the prior rules for partnership audits
and replaced them with a centralized regime that, in general, assesses and collects
tax at the partnership level in the year that the adjustment is made. The BBA
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contains exceptions to the new rules, such as options to modify the adjustments
through filing amended returns, or for partnerships to “push out” adjustments to
the partners who were partners during the tax year that is audited. 3
The BBA and recently issued Proposed Regulations contain provisions on how
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penalties will be assessed. This column discusses how partnerships and partners
can each raise their defenses to penalties under the new provisions.
First, an example may be helpful to illustrate the difference between a partner-
ship and partner-level defense. If a partnership engaged in a tax shelter, but the
partnership’s managing partner obtained independent opinions that the transac-
tion was permissible, the partnership itself may have a reasonable cause defense
to penalties based on reliance on the advice of a tax professional. If, however,
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the partnership’s reliance was not reasonable because the advisor also was a pro-
moter of the transaction, the partnership will be liable for the penalties, but an
individual partner may still have his or her own defense if he or she obtained a
separate opinion from an independent and competent advisor. 6

Partnership-Level Defenses
Under the BBA rules, the applicability of any penalty or other addition to tax is
determined at the partnership level. The Proposed Regulations make clear that
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penalties will be determined at the partnership level, both under the general rules
of the BBA, as well as under the procedures for modification of adjustments and
push-outs under Code Secs. 6225 and 6226. Likewise, for defenses to penalties,
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such as the reasonable cause and good faith exceptions, “the partnership is treated
as the taxpayer.” This means that “the facts and circumstances taken into account
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to determine whether the partnership has established reasonable cause and good
faith are the facts and circumstances applicable to the partnership.” 10
The judicial review provisions of the BBA provide that within 90 days after the
IRS mails a notice of a final partnership adjustment under Code Sec. 6231(a)(3)
with respect to any partnership taxable year, a partnership may file a petition for
a readjustment of any partnership adjustment with the Tax Court, an appropriate

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