The Fifth Circuit Court of Appeals has affirmed a Tax Court decision that a second-tier partner couldn’t challenge, in a Collection Due Process (CDP) hearing, computational adjustments resulting from the audit of a first-tier partnership return. The second-tier partner had an opportunity to challenge the adjustments when the IRS issued the final partnership administrative adjustments (FPAAs) to the second-tier partnership.
Code Sec. 6330(a)(1) requires the IRS to give a taxpayer written notice when the IRS intends to levy upon the taxpayer’s property. The notice must inform the taxpayer of the right to request an administrative CDP hearing with the Appeals Office. If such a hearing is timely requested, it is held before an impartial Appeals officer and the taxpayer may raise any relevant issue. (Code Sec. 6330(a)(3)(B)) However, a taxpayer is precluded from contesting the existence or amount of the underlying tax liability at such a hearing unless the taxpayer didn’t receive a deficiency notice or otherwise have an opportunity to dispute the liability. (Code Sec. 6330(c)(2)(B))
Background—FPAAs under TEFRA audit proceedings.
Under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) unified partnership audit procedures, which generally apply to partnership tax years that begin before Jan. 1, 2018, the IRS issues an FPAA notifying the partners of any adjustments to the partnership items, and the partners may seek judicial review of the FPAA. (Former Section 6223(a)(2), Former Section 6226(a), Former Section 6226(b))
A partnership item is “any item required to be taken into account for the partnership’s tax year under any provision of subtitle A to the extent [the] regs…provide that, for purposes of this subtitle, such item is more appropriately determined at the partnership level than at the partner level.” (Former Section 6231(a)(3))
An FPAA adjustment may be challenged via a partnership-level petition. (Former Section 6226(a), Former Section 6226(b), Former 6226(c))
Upon completion of any partnership-level proceeding (a proceeding begun by a partnership filing a petition challenging an FPAA) or if no petition is filed, the FPAA becomes final and conclusive. (Genesis Oil and Gas, Ltd., (1989) 93 TC 562) Even so, in the case of a computational adjustment, a partner may file a claim for refund and challenge the adjustment. (Former Section 6230(c)(1))
Former Section 6231(a)(6) defines the term “computational adjustment” as “the change in the tax liability of a partner which properly reflects the treatment of a partnership item.”
The taxpayer, Allen Davison III (Davison), was a partner (second-tier partner) in Six-D Partnership (Six-D), which was a partner in two other partnerships (first-tier partnerships): Cedar Valley Bird Co., LLP (Cedar Valley) and TARD Properties, LLC (TARD). The IRS audited Cedar Valley and TARD, both of which were subject to TEFRA as was Six-D (second-tier partnership). After the audits, the IRS issued two FPAAs to Six-D reflecting computational adjustments for Cedar Valley and TARD. No petitions were filed to challenge either FPAA.
At some point during the audit, Six-D allegedly transferred its interest in TARD to T.A.R.D Business Trust (Trust), but the IRS determined the transfer was a sham transaction. Fearing a possible “whipsaw” in which both Six-D and Trust claim the other is liable for the taxes, the IRS sent FPAAs related to TARD to both Six-D and Trust. As a result of the computational adjustments sent to Six-D, an additional income-tax liability flowed through to Davison.
After Davison failed to pay the additional income-tax liability, the IRS issued to him a Notice of Intent to Levy and Right to a Hearing. Davison timely requested a Collection Due Process (CDP) hearing.
In his CDP hearing, Davison attempted to contest the tax liability that resulted from the TARD FPAA on the theory that Six-D transferred its interest in TARD to Trust, which was responsible for the additional taxes. The hearing officer rejected that argument and found that Davison could not challenge the tax liability related to the TARD FPAA in his CDP hearing because he could have challenged the liability at the partnership level. The hearing officer then sustained the IRS’s levy.
Tax Court’s decision.
The Tax Court agreed with the hearing officer, holding that Davison was precluded from challenging the tax liability related to the TARD FPAA in his CDP hearing because he could have disputed the liability by challenging the FPAA when it was issued. See FPAA effectively provided second tier partner with opportunity to dispute liability (04/12/2019).
Appeals Court affirmed.
The Fifth Circuit Court of Appeals agreed with the Tax Court that Davison could not challenge the tax liability related to the TARD FPAA in his CDP hearing because he had a prior opportunity to dispute that liability when the FPAAs were issued and failed to do so. The Appeals Court also rejected Davison’s argument that the IRS did not give Six-D proper notice because the FPAA was sent to the wrong address so Davison did not really have a prior opportunity to challenge the tax liability related to the TARD FPAA. Davison raised this argument for the first time on appeal so the Appeals Court considered it waived.
To continue your research on collection due process hearings with regard to levies, see FTC 2d/FIN ¶ V-5255; United States Tax Reporter ¶ 63,304.
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