Tax Court Sides with Partnership; IRS Cannot Extend Period for Imposing Penalties

(Parker Tax Publishing July 2025)

The Tax Court sided with a partnership and held that (1) the statute of limitations for adjusting items on the partnership's tax return expired before the IRS mailed the partnership a notice of final partnership adjustment; and (2) to the extent Reg. Sec. 301.6235-1(b)(2)(A) holds the period for making a partnership adjustment open longer than Code Sec. 6235(a)(2) specifies, it is contrary to the statute. The court also concluded that because the partnership adequately disclosed the nature and amount of certain income items that the IRS asserted it had omitted on its return, Code Sec. 6235(c)(2) did not apply to extend the statute of limitations. JM Assets, LP, A-A-A Storage, LLC v. Comm'r, 165 T.C. No. 1 (2025).

Background

JM Assets, LP (JM Assets), is a partnership subject to the audit and litigation procedures of Code Sec. 6221 et seq. as established by the Bipartisan Budget Act of 2015 (Pub. L. 114-74). Under those procedures, at the conclusion of a partnership audit, the IRS calculates any imputed underpayment. Within 270 days of being notified of a proposed imputed underpayment, a partnership may submit a request for modification of that amount. In the case of any modification, Code Sec. 6235(a) provides that the period within which the IRS may make a final partnership adjustment remains open for at least 270 days "after the date on which everything required to be submitted . . . is so submitted." Reg. Sec. 301.6235-1(b)(2)(A) defines "the date on which everything required to be submitted . . . is so submitted" as the date the period during which a partnership may request modification ends.

In 2018, JM Assets engaged in several transactions to dispose of real property it owned, and it reported those transactions as installment sales on its 2018 Form 1065, U.S. Return of Partnership Income. On that return, JM Assets identified A-A-A Storage, LLC (AAA Storage), as the partnership representative with respect to its 2018 Form 1065. On June 9, 2022, the IRS issued a notice of proposed partnership adjustment (NOPPA) to JM Assets and AAA Storage. The NOPPA increased the partnership's overall Code Sec. 1231 gain relating to the installment sales of five separate properties on the partnership's 2018 return. According to the IRS, JM Assets omitted approximately $5.5 million of gross income, an amount that exceeded 25 percent of JM Assets' reported gross income. The NOPPA thus proposed an adjustment of $5.5 million to JM Assets' net Code Sec. 1231 gain.

On February 14, 2023, JM Assets submitted Form 8980, Partnership Request for Modification of Imputed Underpayments under Section 6225(c), and requested a modification of the tax rates for two of its partners. On June 5, 2023, the IRS approved the modifications in full.

On December 1, 2023, the IRS issued a notice of final partnership adjustment (FPA), in which it determined an imputed underpayment of $2,035,000 relating to adjustments to JM Assets' Code Sec. 1231 gain. Notwithstanding the June 5, 2023, letter approving the requested modification in full, the FPA contained the same Code Sec. 1231 gain adjustment and imputed underpayment amounts as detailed in the NOPPA.

JM Assets argued that the FPA was untimely pursuant to Code Sec. 6235(a)(2) which provides that the period within which the IRS may issue an FPA expires 270 days "after the date on which everything required to be submitted to the Secretary . . . is so submitted." While the IRS admitted an error as to the amounts shown in the FPA, it disputed that the FPA was untimely.

Shortly thereafter, the IRS filed a motion for partial summary judgment arguing that the FPA was issued within the statute of limitations described Code Sec. 6235(a)(2). The IRS said that when it issues an NOPPA setting forth an imputed underpayment, a taxpayer has 270 days within which to seek modification of the amount of the imputed underpayment. In turn, under Code Sec. 6235(a)(2), the period within which the IRS may issue an FPA expires 270 days "after the date on which everything required to be submitted to the Secretary . . . is so submitted." The IRS argued that, when a taxpayer seeks modification of the imputed underpayment, the period within which to issue an FPA under Code Sec. 6235(a)(2) begins running at the conclusion of the period within which a modification may be sought under Code Sec. 6225(c)(7). For this proposition, the IRS relied on Reg. Sec. 301.6235-1(b)(2), which defines the "date on which everything required to be submitted" as the date the period for the requesting the modification ends. Thus, the IRS's position was that the 270-day modification window remained open because the partnership failed to submit Form 8981, Waiver of the Period Under IRC Section 6231(b)(2)(A) and Expiration of the Period for Modification Submissions Under IRC Section 6225(c)(7). The failure to submit Form 8981, the IRS argued, meant that the partnership could make additional submissions during the 270-day period under Code Sec. 6225(c)(7).

The IRS also filed two other motions in which it argued the FPA was timely under Code Sec. 6235(c)(2), which extends the statute of limitations for a partnership adjustment from three to six years if there is a substantial omission of income as described in Code Sec. 6501(e)(1)(A), which the IRS argued there was in this case. By reporting its sales of property as installment sales, the IRS claimed that JM Assets omitted approximately $5.5 million of gross income, an amount in excess of 25 percent of JM Assets' reported gross income, and that constituted a substantial omission.

JM Assets filed a motion to dismiss arguing the FPA was untimely. Relying on the same facts and Code provisions as the IRS, JM Assets argued that the period within which the IRS could issue an FPA expired 270 days after JM Assets submitted its modification request to the IRS. JM Assets also argued that Code Sec. 6235(c)(2) did not apply to extend the statute because it had adequately disclosed the transactions giving rise to what the IRS argued was omitted income.

Analysis

The Tax Court agreed with JM Assets and held that the FPA was untimely. Citing its decision in Varian Medical Systems, Inc. & Subs. v. Comm'r, 163 T.C. 76 (2024), the court stated that when a regulation attempts to change an unambiguous provision of a statute, the regulation falls outside the boundaries of any rulemaking authority that Congress may have delegated. The court thus rejected the IRS's reliance on Reg. Sec. 301.6235-1(b)(2)(A) for the proposition that the FPA did not expire until 270 days after the close of the period during which JM Assets could request modification. To the extent Reg. Sec. 301.6235-1(b)(2)(A) holds the period of a final partnership adjustment open longer than Code Sec. 6235(a)(2), the court found the regulation to be contrary to the statute.

With respect to the IRS's attempt to extend the statute of limitations to six years, the court concluded that JM Assets adequately disclosed the nature and amount of the income the IRS asserted it had omitted on its return and thus Code Sec. 6235(c)(2) did not apply to extend the statute of limitations.

For a discussion of the statute of limitations for adjusting an item on a partnership return, see Parker Tax ¶28,785.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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