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PARTNERS & PARTNERSHIPS

amended in its entirety Sec. 6221 et was the person who signed the original
seq. The revised sections instituted new Sen. Wyden’s consent and thus was the relevant fi-
procedures for auditing partnerships, duciary for these purposes. In addition,
affecting issues including determining proposal would other members all also signed extensions
and assessing deficiencies, who pays change the tax individually. The court found that any
the assessed deficiency, and how much claim that the statute-of-limitation ex-
tax must be paid. The BBA procedures treatment for many tensions were otherwise voidable under
publicly traded
replace the unified audit rules as well contract principles of misrepresentation
as the electing large partnership re- partnerships. and undue influence also failed because
gime of TEFRA. In 2018, Congress the members could not show that any of
enacted the Tax Technical Corrections them justifiably relied on the accounting
Act (TTCA),10 which made a number Court decisions firm’s advice, especially when consider-
of technical corrections to the rules Even with the adoption of the BBA ing they were all sophisticated business
under the centralized partnership audit audit rules, cases are still being litigated professionals who had additional advis-
regime. The amendments under the involving TEFRA issues. Most TEFRA ers and ample reason to question the
TTCA are effective as if included in cases revolve around either a statute-of- accounting firm’s advice long before the
Section 1101 of the BBA and, there- limitation issue or whether the income consents to extend the limitation period
fore, are subject to the effective dates in or deduction is a partnership item. This were signed.
Section 1101(g) of the BBA. past year one case dealt with a statute-of- A second case, ES NPA Holding,
limitation issue, and another dealt with LLC,12 examined whether the item in
Statute of limitation the partnership item issue. question was a partnership item. In this
In 2020, the IRS instructed its auditors In BCP Trading & Investments, LLC,11 case the IRS determined that an LLC
on statute-of-limitation issues involv- the IRS issued tax adjustments to an had significant unreported income at-
ing centralized audits of partnerships LLC that the members of the LLC tributable to its receipt of a direct capital
where a transition tax issue under Sec. challenged. The members argued that interest in another LLC in exchange
965 has been identified. Sec. 965 gener- the adjustments were untimely and that for services the first LLC provided. The
ally requires U.S. shareholders to pay a the IRS mistakenly determined that taxpayer argued that the income adjust-
“transition tax” on the untaxed foreign the partnership was a sham. The Tax ment related to a partnership item of the
earnings of certain specified foreign Court originally found the adjustments second LLC, not to the first LLC. Thus,
corporations as if those earnings had timely because the three-year statute of the adjustment was outside the Tax
been repatriated to the United States. limitation for the adjustments was ex- Court’s jurisdiction. The Tax Court did
Sec. 965(k) generally provides that the tended by the partnership and its mem- not accept this argument, stating that
statute of limitation on assessment will bers, and those extensions, contrary to the the adjustment was properly classified
not expire before six years after the re- members’ challenges, were consistent with as a partnership item of the first LLC
turn for that tax year is filed. Taxpayers fiduciary and contract principles. The Tax because the adjustment resulted when
may elect to pay Sec. 965 tax liabilities Court also agreed with the IRS that the the first LLC obtained an interest in the
over an eight-year period. partnership was a sham for tax purposes. second LLC, not from its receipt of a
The IRS made clear that the deferred The LLC members appealed the distributive share of the second LLC’s
taxes are liabilities for the original year Tax Court decision. In the appeal, the income. Accordingly, the taxpayer’s argu-
of inclusion, not the year of payment. members argued that the extensions ment that the adjustment fell outside the
Thus, the six-year statute of limitation of the statute of limitation were void- court’s jurisdiction failed.
will apply to the inclusion year but not able under fiduciary rules because the
to the payment year if the deferral was members relied upon advice from an Economic substance
elected. Under the BBA, any adjustment accounting firm/tax shelter promoter. A basic principle of tax law is that
to a partnership-related item must be The appeals court disagreed and upheld taxpayers are entitled to structure their
determined at the partnership level. Ac- the Tax Court decision, stating that the business transactions in a manner that
cording to the IRS, all Sec. 965 amounts argument was misguided because the tax produces the least amount of tax. How-
are partnership-related items. matters partner, not the accounting firm, ever, business transactions must have

10. Tax Technical Corrections Act, P.L. 115-141. 12. ES NPA Holding, LLC, T.C. Memo. 2021-68.
11. BCP Trading & Investments, LLC, 991 F.3d 1253 (D.C. Cir. 2021).

40 February 2022 The Tax Adviser