Ballengee and Heyde v. Commissioner: Tax Court Upholds IRS Levy and Lien Despite Taxpayer Claims of Misrepresentation

The $83 Million Stakes: Former CPA’s NOL Carryforwards Disallowed in Partnership Audit

The U.S. Tax Court has delivered a decisive blow to former CPA James H. Ballengee and his partner A.C. Heyde, ruling that their execution of Form 870–LT in a prior TEFRA partnership audit permanently precludes them from challenging $83 million in disallowed net operating loss (NOL) carryforwards for tax years 2016 and 2017. In Ballengee v. Commissioner, T.C. Memo. 2026-73 (filed August 19, 2026), Judge Sarah Ann Duckers held that the taxpayers are estopped from contesting their underlying liabilities because they signed the closing agreement under Section 7121, which grants finality to such agreements unless procured by fraud or misrepresentation. The court also found that the IRS did not abuse its discretion when it sustained a levy and filed a federal tax lien to collect the unpaid liabilities, reinforcing the binding effect of partnership-level determinations on individual partners. The bottom line: Ballengee and Heyde now owe $83 million in disallowed NOL carryforwards, with no pathway left to contest it.

This case is a stark reminder that partnership-level agreements under TEFRA bind all partners, even when the stakes involve nine-figure NOLs. The ruling underscores the limited scope of Collection Due Process (CDP) hearings under Section 6330, where taxpayers cannot relitigate liabilities they previously had the chance to challenge. The decision also signals the Tax Court’s willingness to defer to IRS collection actions when taxpayers fail to raise valid challenges in the proper forums, a trend that could reshape how high-stakes partnership audits are resolved. The court exercised its authority under TEFRA to enforce the binding effect of Form 870–LT, making clear that partnership-level determinations are final and conclusive.

The Story: How a Partnership Audit Unraveled a Taxpayer’s NOL Strategy

James H. Ballengee, a former certified public accountant, built his career in the oil and gas industry. When the IRS began scrutinizing his partnership’s tax filings, procedural missteps—specifically signing IRS Form 870–LT without fully understanding its implications—cost his entities $83 million in disallowed net operating loss (NOL) carryforwards.

The dispute centered on Ballengee Interests, LLC, a partnership that claimed NOL carryforwards of $18.7 million for 2016 and $64.3 million for 2017, derived from recourse debt. The IRS challenged the debt’s recourse classification, proposing to reclassify it as nonrecourse under TEFRA, which governed the audit process for Ballengee Interests due to its pre-2015 tax years. Recourse debt allows partners to deduct losses, while nonrecourse debt does not.

The IRS’s examination began in February 2019, when Revenue Agent (RA) Henderson notified Ballengee and his representatives of a review of Ballengee Interests’ 2016 partnership return (Form 1065) and Ballengee’s individual return (Form 1040). In March 2020, the IRS issued Letter 1787–C to JBAH Holdings, LLC, initiating an audit of Ballengee Interests’ 2017 Form 1065. RA Henderson’s May 12, 2020, examination summary report included Form 4605–A and Forms 870–LT with a continuation page, proposing reclassification of the debt and disallowance of the NOL carryforwards. During a May 18 call, Haley disputed the adjustment, citing prior documentation, but no further communication occurred.

On June 2, 2020, Ballengee executed Form 870–LT, Part I, as manager of JBAH Holdings, and Ballengee and Heyde executed Part II in their individual capacities. Form 870–LT is a closing agreement under IRC § 7121 that binds the partnership and its partners to partnership-level adjustments. Part I waived assessment restrictions under IRC § 6225(a) and consented to assessment and collection of resulting tax, penalties, and additions to tax. Part II waived restrictions under IRC § 6213(a) for partner-level determinations and incorporated by reference a Form 886–A, explaining the proposed adjustments. The executed forms contained no adjustments in the Schedule of Adjustments, leading Ballengee to believe no changes were proposed. The IRS countersigned the Forms 870–LT on October 22, 2020.

Eight months later, on March 1, 2021, the IRS issued a no-change letter for Ballengee and Heyde’s 2016 individual return. The reprieve was short-lived. On November 4, 2021, the IRS sent Letters 4735 (Notice of Computational Adjustment) to Ballengee and Heyde, attaching Forms 4549–A, which reflected the reclassification of recourse debt to nonrecourse and the disallowance of the NOL carryforwards, resulting in deficiencies totaling $83 million.

Ballengee and Heyde’s response came two years later, on March 14, 2023, when the IRS issued a Levy Notice. On March 23, 2023, they filed a Form 12153, Request for a Collection Due Process or Equivalent Hearing (CDP Hearing Request), arguing that the assessment period had expired and that the adjustments were partner-level determinations not reflected on the signed Form 870–LT. They also contended that the IRS failed to attach the Form 886–A to the executed Form 870–LT, depriving them of the explanation of adjustments. The IRS’s collection actions—levy and the filing of a Notice of Federal Tax Lien (NFTL)—prompted the Tax Court challenge over whether the taxpayers had waived their right to contest the adjustments by signing Form 870–LT without consulting their representatives.

The Dispute: Did Form 870–LT Bind the Taxpayers to IRS Adjustments?

The taxpayers argued that their execution of Form 870–LT did not waive their right to challenge the underlying tax liabilities, citing four contentions: (1) Form 870–LT contained no adjustments and was merely procedural; (2) the IRS failed to attach the Form 886–A to the executed Form 870–LT; (3) they did not consult their representatives before signing; and (4) the assessment period for partner-level adjustments had expired. The IRS countered that the form was a binding closing agreement under IRC § 7121, and that the taxpayers waived their right to challenge the liabilities.

The IRS countered that the clause in Part II of Form 870–LT explicitly incorporated the Form 886–A by reference, placing the taxpayers on notice of the adjustments. The agency argued that by signing Form 870–LT, the taxpayers waived their right to challenge the liabilities under IRC § 7121, which authorizes closing agreements. The IRS emphasized that partnership-level determinations under TEFRA are binding on all partners, and that the agency followed proper administrative procedures.

The IRS’s position rested on the premise that Form 870–LT operates as a closing agreement under IRC § 7121, which grants the IRS authority to enter into binding agreements. The statute provides that such agreements "shall not be annulled, modified, set aside, or disregarded" except in cases of fraud, malfeasance, or misrepresentation of a material fact. The IRS argued that the taxpayers’ execution of Form 870–LT constituted a valid closing agreement, precluding any subsequent challenge to the underlying liabilities unless they could demonstrate one of the statutorily recognized exceptions.

The agency also invoked the binding effect of partnership-level determinations under TEFRA, codified in Section 6221, which provides that "the tax treatment of any partnership item...shall be determined at the partnership level." The IRS contended that the adjustments to Ballengee Interests’ debt from recourse to nonrecourse were partnership-level determinations, and that the taxpayers were bound by the partnership’s resolution of those items. The IRS further argued that the Form 870–LT Continuation Page and the incorporated Form 886–A provided sufficient notice of the adjustments, satisfying the procedural requirements for closing agreements.

The Court’s Analysis: Why Partnership-Level Determinations Trump Partner Challenges

The Tax Court’s ruling in Ballengee v. Commissioner (T.C. Memo. 2026-73, filed Aug. 19, 2026) reaffirms the unassailable authority of partnership-level determinations under TEFRA and the finality of closing agreements, while sharply limiting taxpayers’ ability to relitigate liabilities in Collection Due Process (CDP) hearings. The court’s analysis hinged on four legal doctrines: the binding effect of partnership-level adjustments under Section 6221, the distinction between computational and factual affected items under Section 6230(a)(2)(A)(i), the finality of Form 870–LT as a closing agreement under Section 7121, and the procedural bars to challenging underlying liabilities in CDP proceedings under Section 6330(c)(2)(B).

The court began by grounding its analysis in Section 6221, which provides that the tax treatment of any partnership item shall be determined at the partnership level. The statute’s plain language—and decades of precedent—make clear that partnership-level determinations are binding on all partners, regardless of participation or agreement. Citing Malone v. Commissioner, the court emphasized that the determination of partnership items in a partnership-level proceeding is conclusive. The court agreed that the adjustments to Ballengee Interests’ debt from recourse to nonrecourse were partnership-level determinations, binding the taxpayers to the partnership’s resolution.

The court then turned to the distinction between computational and factual affected items, a critical divide that determines whether the IRS must issue a notice of deficiency before assessing tax. The court held that the recharacterization of Ballengee Interests’ debt from recourse to nonrecourse was a factual affected item, necessitating an Affected Items Notice of Deficiency. The IRS satisfied this requirement by incorporating the Form 886–A into the Form 870–LT Continuation Page, which described the adjustments in detail. The court rejected the taxpayers’ argument that they lacked notice, noting that Part II of Form 870–LT explicitly incorporated Form 886–A by reference, providing sufficient notice under Section 6230(a)(2)(A)(i).

The taxpayers’ attempt to challenge the underlying liabilities in their CDP hearing ran headlong into Section 6330(c)(2)(B), which precludes taxpayers from contesting liabilities in CDP proceedings if they had a prior opportunity to dispute them. The court held that by executing Form 870–LT, the taxpayers waived their right to challenge the underlying liabilities unless they could demonstrate fraud, malfeasance, or misrepresentation of a material fact under Section 7121(b). The court rejected the taxpayers’ claim that the IRS misrepresented a material fact by failing to attach Form 886–A to Form 870–LT at the time of signing. The court found that Part II of Form 870–LT stated in plain terms that the accompanying Form 886–A was incorporated by reference, providing sufficient notice under Section 7121. The court emphasized that misrepresentation under Section 7121(b) requires more than a mere incorrect statement; it must involve intentional misrepresentation of express terms.

The court’s analysis culminated in a decisive assertion of its authority over partnership-level determinations, rejecting the taxpayers’ attempt to use the CDP hearing as a backdoor to relitigate the partnership’s tax treatment. The court held that tax liabilities stemming from an FPAA are not properly at issue in an individual’s CDP proceedings. The court concluded that the taxpayers waived their right to challenge the underlying liabilities by executing Form 870–LT, and thus the only issue remaining was whether the IRS’s collection actions were an abuse of discretion under Section 6330(c)(3). This ruling underscores the Tax Court’s power to enforce the finality of partnership-level determinations, making clear that such adjustments are legally binding and preempt partner-level challenges.

Abuse of Discretion: Why the IRS’s Collection Actions Survived Scrutiny

The court’s deference to the IRS’s administrative determinations in this case was absolute. In reviewing the settlement officer’s (SO) actions for abuse of discretion under Section 6330(c)(3), the Tax Court held that SO Figueroa satisfied all statutory requirements and that the IRS’s collection actions were not excessive. This outcome hinged on three points: the binding nature of Form 870–LT under Section 7121, the taxpayers’ failure to raise valid grounds for lien withdrawal under Section 6323(j), and the court’s application of the balancing test under Section 6330(c)(3)(C).

The verification requirement under Section 6330(c)(1) demands that the IRS confirm compliance with applicable laws before proceeding with collection. The taxpayers argued that SO Figueroa had not properly verified the adjustments because they claimed they never received a Notice of Deficiency or Notice of Final Partnership Administrative Adjustment (FPAA). The court rejected this contention, finding that Form 870–LT—a closing agreement under Section 7121—was binding on both petitioners. The court emphasized that the IRS’s manager and SO correctly concluded that the form waived any notice requirements, as it constituted a final agreement to the tax liabilities.

The taxpayers’ attempt to secure lien withdrawal under Section 6323(j) collapsed under scrutiny. The court noted that the only collection alternative raised in their CDP Hearing Request was lien withdrawal, yet they provided no specific grounds for it. The IRS argued—and the court agreed—that the taxpayers failed to meet the statutory criteria for withdrawal. The court cited Kelly v. Commissioner for the principle that a taxpayer must supply evidence showing the lien adversely affects their ability to pay. The taxpayers offered no such evidence. The IRS’s refusal to withdraw the lien was thus not an abuse of discretion.

Finally, the court addressed the balancing test under Section 6330(c)(3)(C), which requires the IRS to weigh the need for efficient tax collection against the taxpayer’s concern that the action be no more intrusive than necessary. The taxpayers did not raise this issue in their petition or at trial, and the court deemed it conceded. The IRS’s actions—sustaining the Notice of Federal Tax Lien (NFTL) and levy—were not excessive given the taxpayers’ failure to propose viable alternatives or demonstrate undue hardship.

Impact: What This Case Means for Taxpayers and Partnership Audits

The Tax Court’s ruling in Ballengee v. Commissioner (T.C. Memo. 2026-73) delivers a stark warning to taxpayers and practitioners: finality is absolute when a closing agreement like Form 870–LT is executed. The court’s holding that petitioners are precluded from challenging their underlying tax liabilities underscores the binding authority of partnership-level determinations and the limited recourse available to partners once a closing agreement is signed.

The court’s deference to the IRS’s administrative procedures signals that Tax Court judges will not second-guess the IRS’s discretion when taxpayers fail to engage meaningfully in the process. The ruling highlights the limited avenues for relief once a partnership adjustment becomes final, emphasizing the need for proactive engagement in the audit process to preserve rights.

The most consequential takeaway is the preclusive effect of Form 870–LT on partner-level challenges. Under IRC § 7121, closing agreements are final and conclusive unless procured through fraud or mutual mistake. Partners who sign or are bound by Form 870–LT cannot later contest the underlying adjustments, even if they believe the IRS erred. This is particularly perilous for taxpayers who rely on the Tax Matters Partner (TMP) to negotiate agreements without fully understanding the implications.

Practitioners must now prioritize meticulous review of all documents incorporated by reference in IRS forms, including Form 886–A (Explanation of Partnership Items) and Form 870–LT. The case serves as a reminder that partnership audits are high-stakes legal battles where procedural compliance can determine the outcome.

The decision also clarifies the limitations on challenging underlying liabilities in Collection Due Process (CDP) hearings under IRC § 6330(c)(2)(B). The court’s holding reinforces that CDP hearings are not a backdoor to relitigate issues already resolved at the partnership level.

For future partnership audits, the case underscores the finality of TEFRA determinations and the IRS’s broad discretion in enforcing them. The court’s deference to the IRS’s collection actions sends a clear message that Tax Court judges will not intervene in collection matters unless the IRS’s actions are demonstrably unreasonable.

The broader implications for taxpayers are profound. Partnerships must treat TEFRA audits as existential events, where the stakes are not just the tax liability but the ability to challenge it later. Practitioners should advise clients to scrutinize every document exchanged with the IRS, document all communications, and explore all administrative remedies before signing any agreement. The Tax Court’s ruling leaves little room for error: once a closing agreement is executed, the IRS’s adjustments become unassailable.