940 F.3d 467
9th Cir.2019Background
- John and Judith Bedrosian reported artificial losses from Stone Canyon Partners on their 1999–2000 individual returns.
- IRS opened a Stone Canyon partnership proceeding (Feb 2005) and issued an FPAA 62 days later, before TEFRA’s 120‑day waiting period expired.
- IRS also issued a deficiency notice to the Bedrosians while the partnership proceeding was pending.
- The Bedrosians did not file a §6223(e) election within 45 days and did not challenge the FPAA in the partnership proceeding.
- Tax Court dismissed the Bedrosians’ partner‑level petition for lack of jurisdiction as to partnership items; the Ninth Circuit affirmed, holding the timeliness challenge is a partnership item (forfeited), conversion requirements were not met, and IRS motives are irrelevant.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether a statute‑of‑limitations/timeliness challenge to an FPAA is a partnership item | FPAA issued after §6501 limitations; partnership proceeding thus time‑barred and a nullity | Timeliness is a partnership item affecting the whole partnership and must be raised at partnership level | Timeliness is a partnership item; failure to raise in partnership proceeding forfeits the challenge |
| Whether the partners’ items converted to non‑partnership items under §6223(e) despite no formal election | Bedrosians’ Tax Court petition substantially complied and should count as an election | No §6223(e) election was timely filed with IRS; petition was not the correct form/place | No substantial compliance; no timely election filed; items remain partnership items bound by the FPAA |
| Whether IRS bad faith in issuing FPAA/deficiency invalidates assessments | IRS intentionally violated TEFRA; FPAA should be invalidated | Court cannot look behind deficiency notices to question Commissioner’s motives; §6231(g)(2) narrow exception not invoked | Motive is irrelevant here; Tax Court correctly refused to invalidate assessments on that basis |
| Whether Tax Court had jurisdiction over partner‑level challenge to partnership adjustments | Bedrosians sought Tax Court review via deficiency proceeding | TEFRA/26 U.S.C. §7422(h) deprive Tax Court of jurisdiction for partnership items unless raised at partnership level | Tax Court lacked jurisdiction to adjudicate partnership‑item challenges in the deficiency proceeding |
Key Cases Cited
- Woods v. United States, 571 U.S. 31 (2013) (describes partnership passthrough and TEFRA framework)
- Kaplan v. United States, 133 F.3d 469 (7th Cir. 1998) (statute‑of‑limitations challenge to FPAA is a partnership item)
- Keener v. United States, 551 F.3d 1358 (Fed. Cir. 2009) (FPAA timeliness must be litigated at partnership level)
- Weiner v. United States, 389 F.3d 152 (5th Cir. 2004) (same)
- Davenport Recycling Assocs. v. Comm'r, 220 F.3d 1255 (11th Cir. 2000) (same)
- Chimblo v. Comm'r, 177 F.3d 119 (2d Cir. 1999) (same)
- Scar v. Comm'r, 814 F.2d 1363 (9th Cir. 1987) (courts generally may not probe IRS motives behind deficiency notices)
- Fischer Indus., Inc. v. Comm’r, 87 T.C. 116 (1986) (requires clear expression of intent to elect for §6223(e) conversion)
- Meruelo v. Comm'r, 691 F.3d 1108 (9th Cir. 2012) (TEFRA bars simultaneous partnership and partner deficiency proceedings)