Key takeaways

• Because the 270-day period of limitation related to a modification of an imputed underpayment starts when all required information is submitted (as outlined in Form 8980), partnerships should consider making a complete and well-documented submission that allows the IRS to evaluate the request without seeking additional information.
• The IRS’s attempt to invoke the six-year substantial omission of income rule when its primary argument failed illustrates how exam teams may pivot to alternative theories to attempt to keep a period of limitations open. Partnerships should prepare for potential alternative positions.
• This case illustrates that taxpayers should consider challenging other BBA regulations that conflict with or go beyond the statute’s plain language.

In depth

The JM Assets, LP v. Commissioner decision underscores a growing pattern of IRS aggressiveness with BBA partnerships, often through regulations that stretch, or even conflict with, the statute itself. This case reflects the IRS’s willingness to rely on its regulations to justify extending the statutory deadline or otherwise reframe definitions, even where the statutory text says otherwise. It also foreshadows further challenges to other problematic BBA regulations, including those governing the calculation of the imputed underpayment.

The BBA replaced the prior partnership audit provisions of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub. L. No. 97-248, with a centralized audit regime, effective for tax years beginning after January 1, 2018. Although the BBA regime was promoted as a tool to “streamline enforcement,” in practice, it shifts tax administration to taxpayers, limits partner participation, and imposes rigid procedural constraints that can disadvantage partnerships.

One of the few procedural safeguards in this otherwise aggressive regime is the modification process for reducing what is likely to be a significantly overinflated imputed underpayment amount. After a Notice of Proposed Partnership Adjustment (NOPPA) is issued, the partnership has 270 days from the date the notice is mailed to request a modification of the imputed underpayment, which is the partnership’s net positive adjustments multiplied by the highest applicable federal income tax rate. Because exam teams interpret the imputed underpayment framework to permit adjustments to non-income items, the modification process provides a critical opportunity for taxpayers to correct IRS overstatements or miscalculations and reduce the often overstated imputed partnership level “tax” liability.

Once the partnership submits all required information for a modification, the IRS has at least 270 days to review the submission and issue a notice of final partnership adjustments (FPA). This period may be longer if an extension is granted under section 6225(c)(7)) or the statue of limitation has not otherwise run under the other rules in section 6235(a).

Facts in JM Assets v. Commissioner

On June 9, 2022, the IRS notified JM Assets, LP (JM Assets) of an imputed underpayment. JM Assets submitted all required materials for a modification request 250 days later, on February 14, 2023. The IRS issued an FPA 290 days after that submission, on December 1, 2023. JM Assets argued that the adjustment period expired 270 days after it submitted its modification request, resulting in a deadline of November 11, 2023 (which, falling on a Saturday, extended to Monday, November 13). Accordingly, JM Assets contended that the IRS’s December 1, 2023 FPA was untimely. The IRS countered that the 270 days did not begin to run until after March 6, 2023 (the end of the period within which to seek modification), making the December 1 issuance timely. The IRS relied on Treas. Reg. § 301.6235-1(b)(2)(ii)(A), which defined the “date on which everything required to be submitted” to be the date the period for requesting the modification ends.

Courts reasoning and impact

The central issue in JM Assets was whether the period of limitations for adjusting partnership items under section 6235(a)(2) expired before the IRS mailed the FPA. The Tax Court concluded it had. To resolve this issue, the court had to decide when the 270-day period of limitations under section 6235(a)(2) began to run. The other limitations periods under section 6235(a) were not at issue.

The statute provides that the 270-day period begins to run after “the date on which everything required to be submitted” for an imputed underpayment modification is so submitted. The regulations attempted to extend this timeframe by defining “the date on which everything required to be submitted” as the “date the period for requesting modification ends” or expires. The court rejected the IRS’s attempt to extend the period through regulatory interpretation, finding the regulation, as applied in that case, conflicted with the statute’s plain language. Citing Loper Bright Enters. v. Raimondo, 144 S. Ct. 2244, 2266 (2024), the court reiterated that “statutes, no matter how impenetrable, do—in fact, must—have a single, best meaning. That is the whole point of having written statutes; ‘every statute’s meaning is fixed at the time of enactment.’”

While the IRS argued it had “broad authority” to establish procedures with respect to modification under section 6225(c), the court rejected the notion that such authority would permit the agency to adopt regulations contradicting the plain language of the statute.

Because JM Assets submitted the information required for its request for modification on February 14, 2023, the statutory deadline for issuing an FPA expired before the IRS issued the FPA on December 1, 2023, making the FPA untimely.

To try to extend the general statute of limitations from three to six years under section 6235(c), the IRS sought to amend its answer to advance an alternative theory, arguing that the partnership fell under the extended six-year statute of limitations due to a substantial omission of income. The Tax Court rejected the IRS’s request to amend, finding the IRS would be unlikely to succeed on its new argument as the income was disclosed on the return.

This pivot highlights the IRS’s broader posture under the BBA: even when the statute imposes clear limits, the IRS is willing to assert expansive theories in its attempt to collect additional partnership-level tax.