1. Tax Court
a. As with a non-TEFRA notice of deficiency, the TMP can file a petition in Tax Court within 90 days after the FPAA is mailed. I.R.C. § 6226(a)(1).
b. If the TMP does not file a petition within 90 days, any notice partner or notice group can file a petition within 60 days after the TMP’s 90-day period ends. I.R.C. § 6226(b)(1).
i. Since the TMP is also a notice partner, the TMP can file a petition for readjustment, in its capacity as a partner other than the TMP, within 150 day after the FPAA is mailed. Barbados #6, Ltd. v. Comm’r, 85 T.C. 900 (1985). ii. If a notice partner prematurely files a petition for
readjustment during the 90-day period and if no petition for readjustment is filed by the TMP or by any notice partner during the 60-day period, the premature petition will be deemed filed at the end of the 60-day period. I.R.C. § 6226(b)(5).
iii. The 150-day filing period is jurisdictional and is not subject to equitable tolling. A.I.M. Controls, L.L.C. Comm’r, 109 A.F.T.R.2d ¶2012-1110 (5th Cir. 2012) (affirming the Tax Court’s finding that the partner’s petition was time-barred because the 150-day period was not tolled during the time a district court suit had been pending).
c. For the Tax Court to have jurisdiction over the petition, the FPAA must be valid.
i. The Tax Court will not have jurisdiction over a FPAA issued to an indirect partner when the source partnership proceedings have not concluded. Rawls Trading LP et al. v. Comm’r, 138 T.C. 12 (2012).
ii. The Tax Court lacks jurisdiction over an erroneously issued FPAA. Thompson v. Comm’r, 137 T.C. 17 (2011) (finding the court lacked jurisdiction over an erroneously issued statutory notice of deficiency when it was only required to make a computational adjustment).
d. If multiple petitions are filed within the 90-150 day period, the first action brought in Tax Court shall go forward. If multiple petitions are filed, but none in Tax Court, the first action brought shall go forward. The other actions are dismissed. I.R.C. § 6226(b)(2), (3), (4).
2. District Court or U.S. Court of Federal Claims
a. Either the TMP or a notice partner can also file suit in U.S. District Court or the U.S. Court of Federal Claims. I.R.C. § 6226(a)(2), (3). Suit in district court must be brought in the district court for the district in which the partnership’s principal place of business is located. I.R.C. § 6226(a). If the partnership has dissolved,
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practitioners recommend that suit be filed in the Court of Federal Claims and not in a district court, unless the government has waived venue objections. See Transcapital Leasing Associates v. United States, 398 F.3d 1317 (Fed. Cir. 2005).
b. There is a further jurisdictional requirement for such suits. A readjustment petition can be filed only if the partner filing the petition deposits with the IRS the amount by which the partner’s tax liability would increase if the partner’s return were made consistent with the partnership return as adjusted by the FPAA. I.R.C. § 6226(e). The deposit is based on only the potential increased tax liability and not interest and penalties. Thus, if the TMP files the petition in district court or the Court of Federal Claims, the TMP must deposit the amount by which its tax liability would increase if the FPAA were applied. A deposit requirement does not apply to suits filed in Tax Court.
c. This requirement is similar to the “full payment” rule of Flora v. United States, 362 U.S. 145 (1960), for non-TEFRA refund suits, with two notable differences.
i. The petition for readjustment must still be filed within 90 days after the FPAA is mailed to the TMP. The deposit is not considered a payment that then allows the taxpayer to wait up to two years to file a refund claim.
ii. The deposit generally only covers the potential increased tax liability for that partner rather than all partners. Treas. Reg. § 301.6226(e)-1(a)(1). However, the Service’s position, adopted by two decisions of the Court of Federal Claims, is that the deposit must cover tax increases for all affected years, not only the tax year that is the subject of the suit. Kislev Partners, L.P. v. United States, 84 Fed. Cl. 385 (2008); Russian Recovery Fund, Ltd. v. United States, 90 Fed. Cl. 698 (2008). A later decision of the Court of Federal Claims reached a contrary result. Prestop Holdings, LLC v. United States, 96 Fed. Cl. 244 (2010). iii. A pass-thru partner is required to deposit an amount based
on the potential tax liability of all indirect partners who own interests through the pass-thru partner. Treas. Reg. § 301.6226(e)-1(a)(1). The IRS has interpreted Treas. Reg. § 301.6226(e)-1(a)(1) as requiring the deposit amount to include the total impact on the tax liability of indirect partners, even if some of the changes to the indirect
partner’s tax liability stem from an interest in a separate pass-thru intermediary and not the pass-thru partner filing the petition. The Court of Federal Claims agreed with this interpretation. Russian Recovery Fund v. U.S., 90 Fed. Cl. 698 (2009).
iv. Incorrectly calculated deposits will not deprive a court of jurisdiction, so long as the TMP made a good faith attempt to satisfy the deposit requirement and any shortfall in the amount required to be deposited is timely corrected. I.R.C. § 6226(e)(1). Courts liberally interpret the good faith requirement. See Gail Vento LLC v. United States, 108 AFTR 2d 2011-7113 (D.V.I. Nov. 8, 2011), for a survey of relevant cases.
d. A deposit is not a payment of tax. Therefore, the IRS still may assess and collect deficiencies based on non-partnership items, even if the deposit exceeds those deficiencies. Treas. Reg. § 301.6226(e)-1(c). More significantly, the IRS may assess and collect deficiencies based on partnership items while the case is pending in the Court of Federal Claims or the district court. The prohibition against assessment and collection of tax based upon adjustments to partnership items expires 150 days after the mailing of the FPAA, unless a proceeding is begun in Tax Court. I.R.C. § 6225(a).
e. Jury trials are not available for TEFRA suits because jurisdiction is based on 28 U.S.C. § 1508 and 28 U.S.C. § 1346(e).
3. An indirect partner may not have the right to file a petition on its own behalf because, as discussed above, an indirect partner may not constitute a “notice partner.” Therefore, an indirect partner’s right to file a petition will depend on its ability to convince the pass-thru partner to file a petition for readjustment.
Practice Tip: As noted above, the TMP can file a petition even after the 90- day deadline is missed, by filing a petition in its capacity as a notice partner. This allows more time to prepare, although there is a risk that another notice partner will file first and take priority.
4. Under non-TEFRA procedures, a taxpayer can choose to not respond to a notice of deficiency, allow the IRS to assess additional tax liability, pay the assessed amount, and then file a refund claim and litigate in District Court or the Court of Federal Claims. That same opportunity is not available under TEFRA procedures and thus presents a trap for the
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unwary. If the partners do not contest the FPAA, any determinations as to partnership items are final.