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TAX CONTROVERSY CORNER

federal district court, or the Court of Federal Claims. The allowed partner-level defenses to penalties to be raised
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partnership thus has the option of challenging the assess- under the modification procedures, but this method of
ment of penalties as part of the review of the partnership raising penalty defenses has been removed. 16
tax adjustments. It is unclear how partner penalty issues will be handled
through a closing agreement since we have not yet had
Partner-Level Defenses experience with how audits will be conducted under the
There may be partner-level defenses to penalties, such as new centralized audit regime. Nonetheless, this potential
that the partner had reasonable cause for taking the posi- avenue for penalty relief is something that practitioners
tion on the return and acted in good faith. Under the handling these audits should keep in mind.
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BBA, a partner can raise these penalty defenses, but not With regard to partner-level penalties, the BBA is not
during the partnership proceedings. Instead, the Proposed so different from TEFRA. Under TEFRA, individual
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Regulations state, in part: partners could not raise partner-level penalty defenses in
a pre-assessment partnership deficiency proceeding, as it
A relevant partner may raise a partner-level defense was outside of the Tax Court’s jurisdiction. Rather, simi-
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(as described in §301.622-3(d)(3)) by first paying the lar to the BBA, the partner had to pay and file a refund
penalty, in addition to tax, or additional amount with claim to assert partner-level defenses, including defenses
the amended return filed under this paragraph (d)(2) to penalties. As succinctly explained by the Tax Court:
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and then filing a claim for refund in accordance with
forms, instructions, and other guidance. 13 The partnership itself may have a defense to a penalty
that would shield all its partners; one partner may
Similarly, the Proposed Regulations state that a partner have a defense to the penalty that’s all his own. Our
claiming a partner-level defense for the imposition of a Court has jurisdiction to rule on any partnership-level
penalty that relates to an adjustment reported on a Code defense, but partners have to take their partner-level
Sec. 6226 “push out” statement must first pay the penalty defenses to a refund forum. 20
and file a claim for refund. 14
In this regard, the BBA has a similar structure, and unless
the partners are able to resolve their penalty issues with
As explained above, however, the the IRS in a closing agreement, the partners will have to

Proposed Regulations clearly state pay first in order to receive consideration of their penalty
defenses.
that partner-level penalty defenses However, in addition to the ability to challenge penal-
will not be considered in the ties through refund jurisdiction, in certain circumstances,
partnership adjustment proceedings, individual partners also may be able to use the Collection
Due Process (“CDP”) procedures of Code Sec. 6330.
and thus the IRS should not be able Under TEFRA, individual partners who did not have

to argue that partners had a prior an opportunity to raise partner-level defenses to penal-
ties before assessment could submit a request for a CDP
opportunity to raise those defenses hearing under Code Sec. 6330. Because the partner did
or that they were determined not receive a statutory notice of deficiency or did not

during the partnership-level otherwise have a prior opportunity to raise the partner-
level defenses, IRS Appeals could consider the merits of
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proceedings, leaving CDP as an the defense, and if the issue was not resolved with Appeals,
option for partners. the partner could challenge the denial of CDP relief by
filing a petition with the Tax Court. 22
The Proposed Regulations do not reference the CDP
procedures, and no court has decided the issue yet, since
The Proposed Regulations contain only one exception: the BBA only recently took effect. However, it appears
an individual partner’s penalty issues can be resolved with that the CDP procedures may remain available for
the IRS in the closing agreement containing the adjust- taxpayers to challenge partner-level penalties. The IRS
ments to a partnership-related item under Code Sec. may argue that the partner is precluded from challeng-
7121. The prior version of the Proposed Regulations ing partner-level penalties through CDP based on Code
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52 JOURNAL OF PASSTHROUGH ENTITIES JANUARY–FEBRUARY 2019