Tax Court Upholds Penalties Against Partnership, Despite IRS Mailing Error

(Parker Tax Publishing August 2025)

The Tax Court held that, with respect to penalties assessed against a partner of a partnership under Code Sec. 6662(h) after a partnership-level proceeding, (1) the deficiency procedures do not apply and (2) the fact that the relevant deficiencies were improperly assessed did not affect the IRS's assessments and ability to collect the penalties. The court found that the deficiencies at issued were imposed pursuant to Code Sec. 6664(a) and that although the IRS improperly assessed them and could not collect the associated underpayments, the relevant statutory scheme clearly allows for Code Sec. 6662 penalties based on those underpayments to be assessed and collected. Moxon Corp. v. Comm'r, 165 T.C. No. 2 (2025).

Background

Moxon Corporation (Moxon) was a partner in AD Global FX Fund, LLC (AD Global). In 1999, AD Global used paired foreign currency options to generate tens of millions of dollars in purported losses for AD Global's partners, including Moxon. In 2004, the IRS issued a notice of final partnership administrative adjustment regarding AD Global, setting forth the IRS's disallowance of purported losses and assertion of a Code Sec. 6662(h) gross valuation misstatement penalty. The IRS's determinations were largely sustained in a TEFRA partnership-level proceeding. The IRS then issued Moxon affected items notices of deficiency determining deficiencies and Code Sec. 6662(h) penalties based on the result of the partnership-level proceeding. However, the IRS mailed the affected items notices of deficiency to an incorrect address. Moxon did not file a Tax Court petition in response to those notices, and the IRS assessed the deficiencies and penalties.

The IRS later issued collection notices to Moxon, and Moxon requested a collection due process (CDP) hearing. The IRS determined that the collection actions should be sustained and issued Moxon a notice of determination stating the same. Moxon filed a petition with the Tax Court in response.

The IRS eventually realized that it had mailed the affected items notices of deficiency to an incorrect address. The IRS requested that this case be remanded for a supplemental CDP hearing, after which the IRS issued Moxon a supplemental notice of determination reflecting the Appeals officer's determination that the deficiencies were subject to deficiency procedures and would be abated. However, the Appeals officer determined that the penalties were not subject to deficiency procedures and would not be abated.

The IRS and Moxon filed cross-motions for partial summary judgment regarding certain of the Appeals officer's determinations with respect to the penalties. Moxon alleged that the Appeals officer erred as a matter of law in determining that the penalties should not be abated. Moxon made two primary arguments in support of its position. First, Moxon argued that deficiency procedures apply to the penalties and the penalties should therefore be abated because the notices of deficiency were not sent to Moxon's last known address. Second, Moxon argued that the penalties should be abated because "the penalties are a function of the tax, which is zero." The IRS alleged that the Appeals officer correctly determined that the penalties should not be abated. The IRS argued that the "penalties were determined to be applicable at the partnership-level, and deficiency procedures do not apply to such penalties." Disputing Moxon's second argument, the IRS argued that Moxon's tax liabilities could be determined even when assessment of the tax liabilities was prohibited, and that penalties based on such tax liabilities were properly assessed and may be collected.

Analysis

The Tax Court agreed with the IRS and held that the Code Sec. 6662(h) penalties at issue were not subject to deficiency procedures because under Code Sec. 6230(a)(2)(A)(i), penalties determined to apply in a partnership-level proceeding are exempt from deficiency proceedings. In Thompson v. Comm'r, 137 T.C. 220 (2011), the Tax Court held that under Code Sec. 6230(a), a Code Sec. 6662(h) penalty determined to apply in a partnership-level proceeding "may be directly assessed as a computational adjustment, notwithstanding the need for partner-level determinations." In the court's view, Moxon's arguments were based on strained readings of the relevant statutes. The court found that Moxon failed to address the fact that the IRS also included penalties in the affected items notices of deficiency at issue in Thompson and other similar cases. According to the court, the penalties at issue were properly dismissed from those cases; the fact that they were included in affected items notices of deficiency was of no consequence.

Further, the court found that the fact that the relevant deficiencies were improperly assessed did not affect the IRS's assessments regarding, and ability to collect, the Code Sec. 6662(h) penalties. The court noted that this was an issue of first impression before the Tax Court. Under Code Sec. 6664(a), the penalty applies to the portion of an underpayment of tax required to be shown on a return. The statute generally defines an "underpayment" for this purpose as the amount by which any "tax imposed" exceeds the amount shown as the tax by the taxpayer on his return. Moxon argued that there could be no "tax imposed" when no tax was required to be paid. But the court disagreed, finding that the term "tax imposed" in Code Sec. 6664(a) means the amount that is required to be shown on a taxpayer's return, not an amount based on the IRS's ability to assess and collect. The court pointed out that in U.S. v. Galletti, 541 U.S. 114 (2004), the Supreme Court interpreted the term "assessment" as referring only to the calculation or recording of a tax liability. Further, the Tax Court observed that taxes are "imposed" by Congress, not the IRS. A taxpayer's liability for a tax imposed by Congress, the court reasoned, is distinct from whether the IRS has, or may, assess and collect that liability.

For a discussion of the determination of penalties in a partnership-level proceeding, see Parker Tax ¶28,775.

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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