Page 86 - TaxAdviser_Jan_Apr23_Neat

Even with the adoption of the BBA audit rules,
cases are still being litigated involving TEFRA issues.

In Gluck, the taxpayers sold a Since the taxpayers had not alleged any Excelsior Aggregates LLC for a con-
condominium and then attempted inconsistencies with the partnership servation easement. The IRS issued
to complete a like-kind exchange tax return, the IRS followed the infor- the LLC an FPAA disallowing its
within the meaning of Sec. 1031 by mation provided on the Form 1065, deduction and determined penalties
purchasing a partnership interest in an U.S. Return of Partnership Income. under Secs. 6662A and 6662. The
apartment building.9 Under Sec. 1031, The Tax Court rejected the tax- Tax Court addressed whether the IRS
taxpayers can defer the tax on the gain payers’ filing on the grounds that it complied with Sec. 6751(b)(1) with re-
from a sale of real property held for lacked jurisdiction to hear the peti- spect to these penalties. Sec. 6751(b)(1)
productive use in a trade or business or tion because the adjustment the IRS requires that the initial determination
for investment if they exchange it for made on their tax return was treated of a penalty assessment be personally
property of a like kind within a certain as a computational adjustment of an approved in writing by the immedi-
period. However, a partnership interest affected partnership item, which re- ate supervisor of the person making
is not considered of like kind to real quired no further determinations at the the determination.
property and thus does not qualify partner level and thus was outside the The IRS contended that the initial
for Sec. 1031 exchange treatment. Tax Court’s jurisdiction. The taxpayers determination of the penalties in ques-
In this case, the taxpayers filed their appealed to the Second Circuit, which tion was communicated in the FPAA.
tax return and claimed like-kind upheld the Tax Court’s decision.10 Had Because supervisory approval for the
exchange treatment for their interest the taxpayers properly filed the Form penalties was secured before that date,
in the property purchased to replace 8082, the Tax Court could have heard the IRS argued, the approval was
their condominium. the case. timely. The taxpayer contended that
The IRS audited the taxpayers’ In Warner Enterprises, Inc.,11 the supervisory approval was not timely
return and found that they had pur- IRS had determined accuracy-related because the initial determination of
chased an interest in a partnership penalties in an earlier TEFRA the penalties occurred earlier, when the
that owned the property, not a direct partnership-level proceeding. One of IRS mentioned the possibility of pen-
interest in the property itself. Thus, the the partners objected to the penalties, alties during a phone conference with
IRS determined, the transaction did contending that the IRS had not com- the LLC’s representative. As part of
not qualify as a like-kind exchange, and plied with the requirement under Sec. the phone conference, the IRS faxed an
the gain on the sale was taxable. The 6751(b) to obtain supervisory approval agenda laying out a tentative position
IRS based this determination on the of the penalty. The partner argued that on each topic for discussion, includ-
tax return that was filed for a partner- partners were entitled to raise Sec. ing penalties.
ship that represented that it owned the 6751(b) as a defense at either the part- The court ruled that the approval
property and included the taxpayers as nership level or partner level. The Tax for the penalties was timely. The court
a partner. The taxpayers received notice Court disagreed, noting that allowing specifically noted that the IRS sub-
of the partnership tax return having partners to object to the penalty at mitted a supplemental civil penalty
been filed and did not file Form 8082, either the partnership or partner level approval form in which the revenue
Notice of Inconsistent Treatment or Ad- would ignore TEFRA’s framework agent recommended the assertion of
ministrative Adjustment Request (AAR), requiring partnership items affecting penalties and that the agent’s supervi-
which would have notified the IRS all partners equally to be determined at sor signed the form before the FPAA
they were taking a position on their tax the partnership level. was issued.
return that was inconsistent with items The court found that the earlier
on the partnership tax return or that Penalty issues phone conference was not an initial
they wanted to challenge the partner- Another case12 involved a charitable determination of penalties because
ship’s characterization of those items. contribution deduction claimed by the agenda did not inform the
9. Gluck, T.C. Memo. 2020-66. 11. Warner Enterprises, Inc., T.C. Memo. 2022-85.
10. Gluck, No. 21-867 (2d Cir. 3/17/22). 12. Excelsior Aggregates, LLC, T.C. Memo. 2021-125.

www.thetaxadviser.com February 2023 31