Tax Court in Brief | Pettennude v. Commissioner | A Warning to All Tax Matters Partners Under TEFRA

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Tax Litigation:  The Week of July 18th, 2022, through July 22nd, 2022

Pettennude v. Comm’r, T.C. Memo. 2022-79 | July 18, 2022 | Buch, J. | Dkt. No. 636-21L


Short Summary: Trevor Pettennude (“Petitioner”), an entrepreneur, invested in Ecotec Coal, LLC (“Ecotec”). In 2006, Ecotec, which had over 100 partners, claimed certain credits, pursuant to I.R.C. § 45, carried most of the credits forward to later tax years, and solicited capital contributions in exchange for coal credits. The IRS examined Ecotec’s partnership returns for tax years 2008 through 2011. Following TEFRA procedures, the IRS issued Ecotec’s tax matters partner (“TMP”) notices of Final Partnership Administrative Adjustment (“FPAAs”) for 2008 through 2011, disallowing the claimed coal credits. The IRS did not send copies of the FPAAs to Petitioner. Ecotec filed Tax Court petitions for the tax years at issue, and in 2017, the Tax Court entered stipulated decisions wherein the parties agreed that Ecotec was not entitled to the coal credits in tax years 2008 through 2011. Accordingly, the IRS adjusted Petitioner’s individual income tax returns for tax years 2009 through 2011, resulting in additional taxes of $812,885 and $27,289 for tax years 2009 and 2011, respectively.

The IRS subsequently issued to Petitioner a Notice of Intent to Levy related to tax years 2009 and 2011. Petitioner timely requested a CDP hearing, challenging the underlying tax liabilities but not proposing any collection alternatives. Petitioner’s attorney participated in the CDP hearing with the assigned IRS settlement officer. Petitioner never provided the documents required to consider collection alternatives, and the settlement officer determined the collection action was appropriate. Petitioner timely filed a petition with the Tax Court, challenging only the underlying liabilities. The IRS subsequently filed a motion for summary judgment.

Key Issues:

  • (1) Whether Petitioner may challenge his underlying tax liabilities, and if so, whether he is liable for additional tax as a partner of Ecotec; and
  • (2) Whether the IRS abused its discretion in sustaining the collection action.

Primary Holdings:

  • (1) Petitioner was not entitled to challenge his underlying tax liabilities because he had a prior opportunity to challenge the liabilities; and
  • (2) The IRS did not abuse its discretion in sustaining the collection action because Petitioner never sought or suggested any collection alternatives.

Key Points of Law:

  • A taxpayer may challenge the existence or amount of her underlying tax liability in a CDP case only if he did not receive any statutory notice of deficiency for such tax liability or did not otherwise have an opportunity to dispute it. See R.C. § 6330(c)(2)(B).
  • Generally, the issuance of an FPAA at the conclusion of a TEFRA examination provides an opportunity for a partner to challenge the IRS’s determinations. See Davison v. Comm’r, T.C. Memo. 2019-26, at *12-13, aff’d, 805 F. App’x 259 (5th Cir. 2020).
  • The IRS must issue various notices regarding partnership proceedings, including FPAAs, to a partnership’s TMP; however, a partner who has a less than one-percent interest in a partnership’s profits are generally not entitled to receive notice directly from the IRS. See R.C. §§ 6223(a), (b)(1); 6231(a)(7).
  • The TEFRA provisions denying direct notice to non-notice partners do not violate due process because the TMP, who receives notice and has the right to petition the Tax Court to reconsider the FPAA, acts as the agent for the other partners. See Blonien v. Comm’r, 118 T.C. 541, 553 (2002), supplemented by C. Memo. 2003-308.
  • The TMP’s failure to notify a partner of partnership proceedings or send a partner copies of an FPAA does not affect the applicability of adjustments to such a partner. See R.C. § 6230(f); Kimball v. Comm’r, T.C. Memo. 2008-78, 95 T.C.M. (CCH) 1306, 1308.
  • In determining whether the settlement officer abused his/her discretion, the Tax Court considers whether he/she: (1) verified that the requirements of any applicable law or administrative procedure have been met; (2) considered any relevant issues petitioners raised; and (3) determined whether “any proposed collection action balances the need for the efficient collection of taxes with the legitimate concern of [petitioner] that any collection action be no more intrusive than necessary.” See R.C. §§ 6330(c).
  • It is not an abuse of discretion for a settlement officer to sustain a levy and not consider any collection alternatives when the taxpayer proposes no collection alternatives. See Cavazos v. Comm’r, T.C. Memo. 2008-257, 96 T.C.M. (CCH) 341, 343-44.

Insight: Pettennude is a sobering reminder for those taxpayers involved in TEFRA partnerships. The partnership’s TMP effectively serves as the agent for the partnership and the other partners with respect to federal tax proceedings. The fact that a TMP does not keep the other partners informed of the federal tax proceedings does not affect the underlying due process considerations to other partners. Moreover, taxpayers should be mindful of what relief they are seeking in CDP hearings or in Tax Court. Generally, taxpayers should propose at least one collection alternative (and provide the supporting documentation) as a backstop to any challenges to the underlying tax liabilities.

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