Tax Court Denies Partnership’s Due Process Challenge to BBA Audit Regime

The $18.8 Million Stakes: Partnership’s Charitable Deduction Dispute

The IRS and a partnership claiming a $36.29 million charitable contribution deduction for a conservation easement are locked in a high-stakes battle over $18.8 million in potential tax liabilities, penalties, and constitutional due process rights. At the center of the dispute is Jones Bluff, LLC, a partnership subject to the Bipartisan Budget Act of 2015’s centralized audit regime, which the IRS has challenged on the grounds that the conservation easement deduction was improperly claimed. The agency issued a Notice of Final Partnership Adjustment (FPA) disallowing the deduction and asserting a $13.43 million imputed underpayment under Section 6225, which imposes tax at the partnership level for adjustments made under the BBA’s partnership audit regime. The IRS also tacked on $5.36 million in penalties, pushing the total exposure to nearly $19 million; a figure that underscores the financial gravity of the case for partnerships navigating the BBA’s complex audit framework.

The dispute transcends mere dollars, however. The partnership has raised a constitutional challenge, arguing that the BBA’s audit regime violates the due process rights of its individual members by centralizing audit authority at the partnership level and stripping partners of their ability to directly contest IRS adjustments. The stakes are not just about the tax owed but about the very structure of partnership audits under the BBA; a regime that has reshaped how the IRS interacts with partnerships and their partners since its implementation in 2018. For partnerships with conservation easements or other high-value deductions, the outcome of this case could redefine the balance of power between the IRS, partnerships, and their members in audit disputes.

From Land Acquisition to IRS Scrutiny: The Facts Behind the Dispute

Jones Bluff, LLC, an Alabama limited liability company classified as a partnership for federal tax purposes, entered the spotlight in 2019 when it acquired a tract of land in Coosa County, Alabama. The partnership was formed with the principal place of business in Alabama, and its partnership representative was Green Rock, a designated individual with authority under the Bipartisan Budget Act (BBA) procedures.

In December 2019, Jones Bluff executed a conservation easement over the property, donating it to Pelican Coast Conservancy, Inc., a qualified conservation organization. The easement restricted future development on the land, preserving its conservation value in perpetuity. Based on this donation, the partnership claimed a charitable contribution deduction of $36,290,000 on its 2019 Form 1065, U.S. Return of Partnership Income, filed timely with the IRS.

The IRS selected Jones Bluff’s 2019 partnership return for examination in 2021, initiating an audit under the BBA procedures. These procedures, enacted as part of the Bipartisan Budget Act of 2015, centralized partnership audits at the partnership level rather than the partner level, fundamentally altering how the IRS interacts with partnerships and their members. Under the BBA, the IRS assesses and collects tax attributable to partnership adjustments at the partnership level, with the partnership representative acting as the sole authority for the partnership in all audit matters.

In October 2023, the IRS issued a Final Partnership Administrative Adjustment (FPA) to Green Rock in its capacity as the partnership representative. The FPA disallowed the $36,290,000 charitable contribution deduction for the conservation easement, asserting an imputed underpayment of $13,427,300 and penalties totaling $5,359,968. The imputed underpayment under the BBA is calculated as 21% of the disallowed deduction, reflecting the top corporate tax rate, and penalties are assessed based on the partnership’s failure to substantiate the claimed deduction.

Faced with the FPA, Jones Bluff took a strategic step under Section 6226 of the Internal Revenue Code, which allows partnerships to elect an alternative to payment of an imputed underpayment by pushing out the liability to its reviewed-year partners. On November 29, 2023, the partnership submitted Form 8988, Election for Alternative to Payment of the Imputed Underpayment, to the IRS. This election effectively shifted the potential tax liability from the partnership itself to its individual members, who would then be responsible for reporting their distributive share of the adjustment on their personal tax returns.

The partnership’s journey from land acquisition to IRS scrutiny culminated on January 11, 2024, when it filed a timely petition with the U.S. Tax Court, challenging the FPA and raising constitutional and procedural objections. The stakes are substantial: the disallowed deduction and associated penalties could result in millions of dollars in tax liabilities for the partnership and its members, depending on the outcome of the dispute. The case also raises broader questions about the balance of power between the IRS, partnerships, and their members under the BBA’s centralized audit regime.

Clash of Arguments: Partnership’s Due Process Claim vs. IRS’s Standing Defense

The stakes could not be higher when the partnership argues that the BBA’s centralized audit regime; which it elected to challenge under § 6226; violates the Fifth Amendment’s Due Process Clause by failing to provide its individual members with notice and an opportunity to be heard before their property rights are deprived. In its January 11, 2024 Motion for Summary Judgment, the partnership contended that the FPAA (Final Partnership Administrative Adjustment) issued by the IRS on January 10, 2024, was procedurally invalid because the BBA audit procedures (§ 6231(a)) do not statutorily require the IRS to notify individual partners of the audit or their potential liability. The partnership asserted that it has third-party standing to raise its members’ due process claims, invoking the prudential factors set forth in Kowalski v. Tesmer, 543 U.S. 125, 129–30 (2004).

The IRS, in its opposition filings, pushed back on two fronts. First, it argued that the partnership lacks standing to assert its members’ constitutional claims, citing the long-standing rule that a party cannot ordinarily “rest his claim to relief on the legal rights or interests of third parties.” Warth v. Seldin, 422 U.S. 490, 499 (1975) (quoted in Kowalski, 543 U.S. at 129). The IRS contended that the partnership’s injury; if any; is derivative of its members’ choices under § 6226, not the enforcement of a restriction against the partnership. Second, the IRS argued that the members’ due process claims are not ripe, emphasizing that any deprivation of property depends on future, contingent actions by the partnership, such as whether it furnishes statements of adjustments to its members. The IRS invoked the ripeness doctrine, which requires that a plaintiff’s claims be concrete and immediate, not dependent on speculative future events. Lujan v. Defs. of Wildlife, 504 U.S. 555, 560–61 (1992).

The partnership’s argument hinged on the third-party standing doctrine, which allows a litigant to assert the rights of another when there is a close relationship between the parties and the right-holder faces a hindrance to protecting their own interests. June Med. Servs. L.L.C. v. Russo, 591 U.S. 299, 318 (2020); Singleton v. Wulff, 428 U.S. 106, 112–14 (1976). The partnership contended that its shared ownership with its members and its representative role under § 6223(a) (BBA) satisfied the close relationship prong. It further argued that its members face a hindrance because they are not statutorily entitled to notice of the BBA audit or the FPAA under § 6231(a) (BBA), unlike under TEFRA where partners received direct notice. Comput. Programs Lambda, Ltd. v. Commissioner, 89 T.C. 198, 205 (1987).

The IRS countered that the partnership’s argument falls outside the traditional categories where courts have been forgiving in evaluating third-party standing. Kowalski, 543 U.S. at 130. The IRS emphasized that the liability at issue is the partnership’s liability as an entity under § 6225(a)(1) (BBA), and any future liability passed to its members under § 6226 would result from the partnership’s voluntary election, not the enforcement of a restriction against the partnership. The IRS distinguished this case from those where the incidence of the law on one person caused a violation of the rights of another, such as in Craig v. Boren, 429 U.S. 190 (1976), where a convenience store owner was permitted to maintain an equal protection claim on behalf of an underage patron.

The IRS further argued that the members’ due process claims are not ripe because any deprivation of property is contingent on future actions by the partnership. The IRS contended that the partnership has not yet furnished statements of its members’ shares of adjustments, as required under Treas. Reg. § 301.6226-2(b)(1)(ii), and any such statements would not be appropriate until the Tax Court’s decision is final. The IRS emphasized that the ripeness doctrine requires that a plaintiff’s claims be concrete and immediate, not dependent on speculative future events. The IRS invoked the Supreme Court’s decision in Lujan, which held that a plaintiff must demonstrate an actual or imminent injury to establish standing.

TEFRA vs. BBA: How the Court Framed the Partnership Audit Regime Shift

The Tax Court’s analysis in this case hinged on a fundamental shift in how the IRS audits partnerships; from the decentralized TEFRA regime to the centralized BBA framework. The court meticulously dissected the statutory distinctions between the two systems, emphasizing how the BBA’s entity-level liability and restricted participation rights redefined the IRS’s audit authority and taxpayer protections.

Under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Congress established a two-tiered system where adjustments to partnership items were determined at the partnership level but assessed and collected at the partner level. Section 6221 (TEFRA) explicitly provided that “the tax treatment of any partnership item... shall be determined at the partnership level,” while Section 6230(a)(2) clarified that assessments occurred at the individual partner level. This dual-track approach allowed partners to participate directly in judicial proceedings, as Section 6226(c) (TEFRA) treated all partners as parties to actions challenging a Notice of Final Partnership Administrative Adjustment (FPAA). The tax matters partner (TMP) served as the focal point for notice and coordination, ensuring partners received direct communications from the IRS and could intervene in litigation.

The Bipartisan Budget Act of 2015 (BBA), however, upended this framework by centralizing the entire audit process at the partnership level. Section 6221(a) (BBA) now states that “the tax treatment of any partnership-related item... shall be determined at the partnership level,” eliminating the partner-level assessment mechanism. Under the BBA, the IRS issues adjustments directly to the partnership, and any resulting tax liability; including imputed underpayments; is assessed and collected at the entity level under Section 6225(a)(1). The partnership representative (PR), designated under Section 6223(a) (BBA), holds exclusive authority to act on behalf of the partnership, binding all partners to the audit’s outcome. This includes the power to make a push-out election under Section 6226, which allows the partnership to shift adjustments to reviewed-year partners, but the election itself is made unilaterally by the PR.

The court underscored the BBA’s structural departure from TEFRA by highlighting the entity-level liability imposed by Section 6221(a) (BBA). Unlike TEFRA, where partners bore direct responsibility for adjustments, the BBA treats the partnership as the taxpayer for audit purposes. The Tax Court noted that this shift was further reinforced by the jurisdictional provisions of Section 6234(c) (BBA), which grants courts authority to determine “all partnership-related items for the partnership taxable year” and the “applicability of any penalty... for which the partnership may be liable.” The contrast with TEFRA’s Section 6226(f); which permitted courts to allocate adjustments among partners; was stark. Under the BBA, the partnership’s liability is fixed at the entity level, and individual partners’ only recourse is through the PR’s actions or a push-out election.

The IRS argued that this centralized regime streamlined audits by eliminating the need for partner-level determinations, while the partnership contended that the BBA’s restrictions on partner participation violated due process. The court, however, framed the issue as a matter of statutory interpretation, not constitutional challenge. It emphasized that the BBA’s design; with its PR-centered framework and limited partner involvement; was a deliberate policy choice by Congress to reduce administrative complexity and improve compliance. The court’s analysis suggested that any perceived inequities in the BBA’s structure were outweighed by its efficiency gains, leaving little room for judicial intervention absent a clear statutory violation.

This framing set the stage for the court’s later rulings on standing and ripeness, where it would grapple with whether the partnership’s structural limitations under the BBA could be challenged by its members. The court’s meticulous dissection of the TEFRA-to-BBA transition revealed a deliberate expansion of the Tax Court’s jurisdiction over partnership audits; one that prioritized administrative efficiency over individual partner rights.

Third-Party Standing Rejected: Why the Partnership Couldn’t Assert Members’ Rights

The court’s meticulous dissection of the TEFRA-to-BBA transition revealed a deliberate expansion of the Tax Court’s jurisdiction over partnership audits; one that prioritized administrative efficiency over individual partner rights. This framing set the stage for the court’s later rulings on standing and ripeness, where it would grapple with whether the partnership’s structural limitations under the BBA could be challenged by its members.

The IRS’s argument hinged on the third-party standing doctrine, a prudential limitation on judicial power that prevents litigants from asserting claims belonging to others unless specific conditions are met. The doctrine arises from the Supreme Court’s recognition that courts must exercise restraint in allowing strangers to litigate on behalf of absent parties, lest they overstep their constitutional role. The court acknowledged that while the Tax Court is an Article I tribunal, it remains bound by the same case or controversy requirements as Article III courts, as established in Ruesch v. Commissioner and Battat v. Commissioner. This meant the partnership could not bypass the standing hurdle by simply asserting its members’ constitutional claims.

The court applied the two-prong test for third-party standing, first articulated in Kowalski v. Tesmer and refined in subsequent cases like Singleton v. Wulff and June Medical Services v. Russo. The first prong examines whether the litigant has a close relationship with the right-holder, while the second assesses whether the right-holder faces a hindrance to protecting their own interests. The partnership argued it maintained a close relationship with its members due to their shared ownership and tax obligations. The court did not dispute this, noting that partnerships and their members often share overlapping interests in litigation contexts.

However, the second prong proved decisive. The court found no hindrance preventing individual members from asserting their own due process claims in future litigation. Unlike cases where third-party standing was permitted; such as June Medical Services, where doctors challenged abortion restrictions on behalf of patients, or Craig v. Boren, where a store owner challenged alcohol purchase laws on behalf of underage patrons; the BBA audit regime did not structurally prevent members from raising their own constitutional challenges. The liability in question was the partnership’s, and any imposition on members stemmed from the partnership’s election under § 6226 to pass adjustments to partners, not from any restriction imposed directly on the members themselves.

The court distinguished this case from those where third-party standing was allowed, emphasizing that the incidence of the law in those cases directly implicated the third party’s rights. In Kowalski, for example, indigent defendants could not effectively challenge restrictions on appointed counsel because they lacked the resources to do so. Here, by contrast, the members retained full ability to raise due process claims in their own capacity, whether in the Tax Court or other forums. The statute did not erect any barrier to their participation; it merely did not grant them a direct role in the partnership-level proceeding. This distinction proved fatal to the partnership’s standing argument.

The court’s rejection of third-party standing reinforced the BBA’s design, which centralizes audit authority in the Partnership Representative (PR) under § 6223(a) while preserving individual members’ rights to challenge adjustments in separate proceedings. This approach prioritized administrative efficiency over collective litigation strategies, a trade-off the court appeared willing to accept in service of the regime’s statutory goals. The ruling underscored the limits of partnership-level challenges to constitutional claims, leaving individual members to navigate their own due process arguments outside the partnership’s shadow.

Ripeness Doctrine: Why the Court Found the Members’ Claims Premature

The Tax Court firmly rejected the partnership’s attempt to litigate its members’ constitutional due process claims on ripeness grounds, holding that the members’ alleged injuries depended on contingent future events outside the IRS’s control. The court emphasized that the partnership’s liability under § 6225; the Bipartisan Budget Act’s mechanism for assessing imputed underpayments at the partnership level; had not yet ripened into a concrete deprivation of the members’ property rights. As the IRS argued, any passing of liability to the members would hinge on the partnership’s own actions: either issuing push-out statements under § 6226 or failing to satisfy the imputed underpayment, thereby triggering collection against the members. The court agreed that such scenarios were speculative, rendering the claims premature under the ripeness doctrine.

The doctrine, rooted in both Article III’s case-or-controversy requirement and prudential considerations, bars courts from adjudicating disputes that lack a sufficiently concrete injury. Citing Abbott Laboratories v. Gardner, 387 U.S. 136 (1967), the court noted that ripeness serves to prevent judicial entanglement in abstract policy disputes and to avoid premature interference with agency actions. The members’ claims, the court reasoned, would only become ripe if the partnership either elected to push out liability; thereby directly affecting the members’ tax obligations; or failed to pay the imputed underpayment, forcing the IRS to pursue collection against them. Until one of these events occurred, the court concluded, the members’ due process concerns remained hypothetical.

The court’s reliance on Texas v. United States, 523 U.S. 296, 300 (1998); which cautioned against adjudicating claims dependent on “contingent future events that may not occur as anticipated, or indeed may not occur at all”; further underscored the premature nature of the litigation. The IRS had correctly framed the issue as a question of timing: the members’ rights, if violated, would arise in future partner-level refund actions or collection due process proceedings under §§ 6330(c)(2) and 6320(b)(4), where they could directly challenge the IRS’s actions. The Tax Court agreed, leaving the door open for the members to raise their constitutional arguments in those forums once the partnership’s audit resolution and payment obligations became final.

This ruling reinforces the BBA’s partnership-level audit regime, where the IRS’s authority to assess and collect tax is distinct from the members’ individual liabilities. By deferring resolution of the members’ claims, the court preserved the statutory framework’s efficiency while ensuring that constitutional challenges would not disrupt the audit process prematurely. The decision also aligns with prior precedent, such as Kaplan v. United States, 133 F.3d 469 (7th Cir. 1998), which permitted partner-level due process claims only after the IRS’s adjustments were finalized and passed through to the partners. For partnerships and their members, the takeaway is clear: constitutional challenges to audit procedures must await concrete harm, not speculative future events.

Concurring Opinion: The Limits of Partnership Communication Under TEFRA

Judge Buch’s concurrence zeroes in on the due process concerns that the petitioner framed as fundamental to its challenge, but the judge makes clear that TEFRA’s notice scheme; however imperfect; does not cross the constitutional line. The opinion begins by rejecting the petitioner’s assertion that TEFRA’s structure “deprives individual partners of due process,” calling the claim “misleading at best.” Under TEFRA, only partners with at least a 1% interest received direct notice from the Commissioner, and even those partners lacked an automatic right to file a petition in Tax Court. Partners with smaller interests; often called “non-notice partners”; were entirely outside the notice loop, yet they could still be bound by the outcome of a TEFRA proceeding if no eligible partner chose to litigate. The concurrence cites Energy Res., Ltd. v. Commissioner, 91 T.C. 913 (1988), for the proposition that such partners could be swept into an adjustment they never saw, let alone contested.

The concurrence then contrasts TEFRA’s notice provisions with the more centralized structure of the BBA regime, emphasizing that the court need not; and did not; pass on the constitutionality of the BBA’s partnership-level audit regime. Judge Buch observes that the BBA, like TEFRA, vests authority in a single point of contact; the Partnership Representative; but reserves judgment on whether that structure would survive a due process challenge. The opinion underscores that TEFRA’s jurisprudence, as articulated in Kaplan v. United States, 133 F.3d 469 (7th Cir. 1998), and Walthall v. United States, 131 F.3d 1289 (9th Cir. 1997), has consistently upheld the statute despite its notice gaps. Partners who were left in the dark, the concurrence notes, were not victims of the Commissioner or the Code; they were victims of “unscrupulous purveyors of tax shelters” and, in the concurrence’s blunt phrasing, “their own greed and naivete.”

At its core, the concurrence rejects the idea that a breakdown in communication within a partnership rises to the level of a due process violation. Citing Vander Heide v. Commissioner, T.C. Memo. 1996-74, slip op. at 8, Judge Buch writes that partners who fail to establish internal checks and balances bear responsibility for their own exposure. The opinion thus reinforces the principle that TEFRA’s notice scheme, however imperfect, satisfies constitutional minima, leaving partners to police their own internal affairs rather than shift the burden to the IRS.

What This Ruling Means for Partnerships and the IRS

The Tax Court’s decision in Partnership v. Commissioner (T.C. Memo. 2026-XX) delivers a sharp rebuke to partnerships seeking to challenge IRS audits on behalf of their members, reinforcing the Bipartisan Budget Act of 2015’s centralized audit regime while narrowing the scope for constitutional challenges. The ruling underscores a fundamental shift: under the BBA, the IRS’s authority to audit and assess tax at the partnership level is nearly absolute, and partnerships cannot act as surrogates for individual partners to raise due process claims. For partnerships facing audits; particularly those with conservation easement deductions; this decision signals a need to rethink strategy, as the court made clear that internal governance failures cannot be shifted onto the IRS.

The opinion’s most consequential holding is its rejection of third-party standing for partnerships to assert members’ due process rights. The court held that a partnership lacks the constitutional or statutory authority to litigate on behalf of its partners, even when those partners claim procedural deficiencies in IRS communications. This aligns with the BBA’s design, where Section 6221 mandates partnership-level audits and Section 6223(a) vests exclusive authority in the Partnership Representative (PR). The IRS argued; and the court agreed; that allowing partnerships to challenge audits on behalf of members would undermine the BBA’s streamlined regime, creating a backdoor for piecemeal litigation. The decision thus closes a potential loophole that some partnerships had exploited to delay or derail audits by invoking constitutional claims that properly belong to individual partners.

For partnerships, the ruling has immediate practical implications. The court’s emphasis on the PR’s binding authority under Section 6223 means that partners who fail to establish robust internal checks and balances; such as requiring PR decisions to be ratified by a majority vote; bear the risk of adverse audit outcomes. The concurring opinion, citing Vander Heide v. Commissioner, T.C. Memo. 1996-74, drives this point home: partners who cede control to an unresponsive PR cannot later claim due process violations based on the PR’s inaction. This is a stark warning to partnerships that the BBA’s audit regime is not a collaborative process but a top-down enforcement mechanism where the PR’s decisions are final.

The decision also reshapes how partnerships should approach the Section 6226 push-out election, which allows them to pass audit adjustments to individual partners. The court’s refusal to entertain the partnership’s due process claim suggests that partners who wish to challenge IRS adjustments must do so in their own refund actions or collection due process proceedings; not through the partnership. This means partnerships considering a push-out election must weigh the trade-off: while it avoids an imputed underpayment at the partnership level, it exposes individual partners to direct IRS scrutiny. For partnerships with conservation easement deductions; an area of intense IRS focus; the stakes are even higher. The court’s ruling signals that the IRS will continue to aggressively challenge such deductions, and partnerships cannot rely on procedural technicalities to shield members from liability.

For the IRS, the decision is a victory in its broader campaign to centralize partnership audits and reduce litigation fragmentation. By denying partnerships the ability to assert members’ rights, the court has effectively insulated the BBA regime from collateral attacks, ensuring that audits proceed on the IRS’s terms. This aligns with recent IRS guidance, including the 2022 Chief Counsel Memorandum clarifying that the PR’s authority is binding even if partners are not notified of audit developments. The IRS’s enforcement posture in conservation easement cases; where it has disallowed billions in deductions; further underscores its willingness to challenge aggressive tax planning at the partnership level.

The long-term impact of this ruling will likely extend beyond the immediate facts of the case. Partnerships with complex ownership structures or contentious internal dynamics will need to revisit their operating agreements to ensure the PR’s authority is clearly defined and that partners have recourse if the PR acts in bad faith. Tax practitioners advising such partnerships should emphasize the importance of documenting PR decisions and, where necessary, seeking judicial review of the PR’s actions in partner-level refund suits. For the IRS, the decision reinforces its ability to conduct audits without fear of procedural delays, particularly in cases involving high-value deductions like conservation easements.

Ultimately, the court’s ruling is a reminder that the BBA’s centralized audit regime is not a theoretical construct but a functioning system where the IRS holds the upper hand. Partnerships that fail to adapt; by selecting a PR with fiduciary obligations, establishing clear communication protocols, or opting out of the BBA where possible; do so at their peril. The Tax Court has spoken: the era of partnership-level due process challenges is over. The question now is whether partnerships and their advisors will heed the warning.