Failure to Comply with Notice Requirement and Engage Partnership in Audit did not Invalidate FPAA

Posted by Mary McNulty and Lee Meyercord          In Green Gas Delaware Statutory Trust, Methane Bio, LLC (available here), the Tax Court found that a final partnership administrative adjustment (FPAA) was valid despite its issuance just 10 days after a notice of beginning administrative proceeding (NBAP) and the partnership’s lack of participation in the partnership audit.BackgroundGreen Gas, a partnership subject to the unified partnership audit and litigation procedures, timely filed an amended return for its 2005 tax year claiming a non-conventional source fuel tax credit for the production of fuel from landfill gas. On 8/10/2009, the IRS issued a NBAP stating that it was opening a partnership-level audit of Green Gas’s 2005 tax year.  On 8/20/2009, just 10 days after the IRS issued the NBAP, the IRS concluded the partnership-level audit by issuing an FPAA to Green Gas. The FPAA disallowed almost all of the non-conventional source fuel tax credits claimed on the amended return on the grounds that the disallowed portion of the credits did not result from sales of qualified fuel to unrelated third parties and Green Gas had failed to substantiate the disallowed credits.  Green Gas’s only communication with the IRS during the partnership audit was its receipt of the NBAP and FPAA. Green Gas timely filed a petition for readjustment of partnership items in Tax Court.Motion to DismissGreen Gas argued that the FPAA was invalid and that the Tax Court therefore lacked jurisdiction because (1) the IRS violated the 120-day timeframe in Section 6223(d) by issuing the FPAA 10 days after the NBAP, and (2) the IRS failed to meet with Green Gas before issuing the FPAA.  In addition, Green Gas argued that the FPAA was not a proper determination of partnership items and was invalid on its face because it erroneously stated that Green Gas failed to substantiate the disallowed credits, when the IRS never gave it the opportunity to do so. FPAA is not invalid because of IRS’s failure to provide timely notice or engage partnership in audit. Section 6223(d)(1) requires that the IRS to mail the NBAP at least 120 days before the FPAA is issued.  However, the regulations provide that the failure to issue the NBAP within the 120 day time-frame does not invalidate the NBAP or the FPAA.  Thus, the Tax Court held that the failure to satisfy the notice requirement in Section 6223(d) did not invalidate the FPAA. In addition, the IRS’s failure to interact with Green Gas during the audit did not invalidate the FPAA.  The Tax Court, citing its decision in Wind Energy Tech. Assoc. III (availablehere), held that Section 6223(e) was the exclusive remedy for a partner’s inability to participate in an administrative proceeding because of noncompliance with the notice requirement in Section 6223.  Section 6223(e) allows a partner to elect out of an ongoing partnership proceeding but does not invalidate the FPAA.  Further, there is no legal requirement that the IRS meet with the partnership before issuing the FPAA. FPAA was a proper determination and not invalid on its face.The Tax Court then addressed Green Gas’s second argument and concluded that the FPAA was a proper determination of partnership items and was not invalid on its face.  Because an FPAA is the partnership equivalent of a notice of deficiency, the FPAA must provide a deficiency amount that is based on information specific to the taxpayer.  The Tax Court found that the IRS appeared to use information specific to the taxpayer because the FPAA disallowed only a portion of the fuel tax credits.  This appearance of using information specific to Green Gas satisfied the minimal requirements for a proper determination. Further, the Tax Court found that the FPAA was not invalid on its face because it stated that Green Gas had failed to substantiate the disallowed credits when Green Gas had not been given the opportunity to do so.  This case was different from those cases in which a notice of deficiency was found to be invalid on its face because the revenue agent requested Green Gas’s original and amended returns prior to issuing the FPAA, the FPAA used the amount of the fuel tax credits and net income from the returns, and the IRS disallowed only a portion of the fuel tax credits, which suggested that the disallowance was not arbitrary. If you have any questions about this case or partnership audits, please contact one of us or any of the other Tax lawyers at Thompson & Knight.