Katanga Properties, LLC v. Commissioner of Internal Revenue

The $1M+ Charitable Deduction Dispute: Court Upholds IRS Timing in BBA Audit

The stakes could not have been higher for Katanga Properties, LLC. The IRS had just disallowed a $1.2 million charitable contribution deduction claimed on the partnership’s 2020 tax return—a deduction that, if sustained, would have slashed the partnership’s tax liability by over $400,000 in federal taxes alone. But the dispute was never about the deduction’s validity. It was about who controls the clock in the IRS’s new centralized partnership audit regime under the Bipartisan Budget Act of 2015 (BBA). On September 9, 2026, the U.S. Tax Court delivered a decisive blow to Katanga Properties, siding with the IRS in a ruling that cements the agency’s authority to issue a Final Partnership Adjustment (FPA) within the statutory framework of Section 6235—even when the partnership argues the IRS moved too quickly.

The court’s decision in Katanga Properties, LLC v. Commissioner (Docket No. 9439-25, T.C. 167 No. 10) was a clear assertion of judicial power over the IRS’s audit procedures, rejecting the partnership’s attempt to invalidate the FPA on timing grounds. The opinion, authored by Judge Samuel H. Grier, underscores a critical reality for partnerships navigating the BBA regime: the IRS’s compliance with statutory deadlines is not a matter of discretion but of statutory mandate, and courts will enforce those deadlines rigorously. The ruling arrives at a pivotal moment, as the IRS ramps up enforcement under the BBA, and partnerships scramble to understand the limits of their defenses against untimely adjustments. For Katanga Properties, the court’s holding means the partnership’s $1.2 million deduction is gone—and the IRS’s authority to police partnership audits under the BBA has been strengthened.

The Timeline: How Katanga Properties' Audit Unfolded

The saga began with Katanga Properties’ 2020 tax filing—a return that would later become the epicenter of a high-stakes dispute over a $1.2 million charitable deduction. On June 10, 2021, the Louisiana-based limited liability company filed its Form 1065, U.S. Return of Partnership Income, with the IRS. Alongside the return, Katanga Properties designated R. Brent Evans as its Partnership Representative (PR) via Form 8979, a critical role under the Bipartisan Budget Act of 2015 (BBA) that would soon take center stage in the audit drama.

The IRS’s examination machinery lurched into motion nearly a year later. On May 27, 2022, the agency issued a Notice of Selection for Examination to Katanga Properties, signaling the start of a formal audit into the partnership’s 2020 tax year. The BBA’s centralized audit regime—designed to streamline partnership-level enforcement—meant this was no ordinary IRS inquiry. The stakes were immediate: under § 6235(a)(1), the IRS had just three years from the later of the return’s filing date or its original due date to finalize any adjustments. For Katanga, that clock started ticking on June 10, 2021.

The partnership and the IRS, however, agreed to hit the pause button. On January 27, 2023, Katanga Properties signed Form 872-M, a consent to extend the limitations period for partnership adjustments under § 6235(b). The IRS countersigned the form on February 21, 2023, pushing the deadline for the IRS to issue a Final Partnership Adjustment (FPA) from the original May 30, 2024, to May 30, 2025. The extension—common in complex audits—gave both sides breathing room, but it also underscored the IRS’s growing assertiveness in policing partnership-level tax liabilities under the BBA.

The audit’s next phase arrived on April 16, 2024, when the IRS issued a Notice of Proposed Partnership Adjustment (NOPPA) to Katanga Properties and its PR. The NOPPA outlined proposed changes to the partnership’s 2020 return, including the disallowance of the $1.2 million charitable deduction—a deduction that had already drawn the IRS’s scrutiny. Under the BBA’s framework, the NOPPA triggered a 270-day window for the partnership to contest the adjustments or risk the IRS finalizing them via an FPA. Katanga Properties, however, took no action during this period, leaving the IRS with a clear path to close the case.

On March 25, 2025, the IRS made its move. The agency mailed the Final Partnership Adjustment (FPA) to Katanga Properties, addressed to the PR, R. Brent Evans. The FPA formalized the proposed adjustments, including the denial of the charitable deduction and the resulting tax deficiency. For the partnership, the timing of the FPA was everything. Katanga Properties alleged in its subsequent Tax Court petition that the FPA was untimely—a claim that would force the court to grapple with the precise boundaries of the BBA’s audit deadlines and the IRS’s enforcement authority.

The dispute reached the U.S. Tax Court on June 23, 2025, when Katanga Properties filed a petition challenging the FPA’s validity. The case landed in the hands of the Tax Court at a pivotal moment, as partnerships across the country scrambled to understand the limits of their defenses against untimely adjustments under the BBA. The court’s eventual ruling would not only determine the fate of Katanga Properties’ $1.2 million deduction but also clarify whether the IRS’s timing in issuing the FPA had crossed a legal line—or if the agency’s authority under the BBA’s centralized audit regime would prevail.

The Legal Showdown: Katanga Properties vs. IRS on FPA Timing

The stakes could not have been higher for Katanga Properties LLC, which faced a potential $1.2 million tax deficiency over a disputed $1M+ charitable deduction. The case hinged on a single, technical question: When does the IRS’s clock run out to issue a Final Partnership Adjustment (FPA) under the Bipartisan Budget Act (BBA) audit regime? The answer would determine whether the IRS had acted within its statutory authority—or overstepped it.

The IRS argued that its FPA was issued on May 30, 2025, well within the extended deadline permitted by Section 6235(a). The petitioner, Katanga Properties, countered that the IRS had missed the mark by March 12, 2025, the deadline set by Section 6235(a)(3). The dispute turned on the interpretation of Section 6235(a), which establishes the statute of limitations for partnership adjustments under the BBA, and the effect of a Form 872-M extension agreement signed by the parties.

At the heart of the disagreement was whether the extension agreement, which pushed the deadline for issuing a Notice of Proposed Partnership Adjustment (NOPPA) under Section 6235(a)(1) to May 30, 2025, also extended the deadline for issuing the FPA. Katanga Properties contended that the FPA deadline was governed solely by Section 6235(a)(3), which requires the IRS to issue the FPA within 330 days of the NOPPA issuance date. The IRS, however, argued that Section 6235(a) sets a "later of" standard, allowing the agency to rely on the extended deadline under Section 6235(a)(1)—even if it exceeded the Section 6235(a)(3) deadline.

The IRS’s position rested on the plain text of Section 6235(a), which states that "no adjustment under this subchapter for any partnership taxable year may be made after the later of" the deadlines in paragraphs (1), (2), or (3). The agency argued that the use of "or" between the subparagraphs indicated they should be read disjunctively, meaning the IRS could issue the FPA at any time before the latest of the three deadlines. This interpretation would allow the IRS to leverage the extended deadline under Section 6235(a)(1)—even if it rendered the Section 6235(a)(3) deadline irrelevant.

Katanga Properties, however, rejected this reading. The petitioner argued that Section 6235(a)(1) and Section 6235(a)(3) served distinct purposes and that the extension agreement, which explicitly governed only the NOPPA deadline under Section 6235(a)(1), did not extend the FPA deadline under Section 6235(a)(3). In other words, the petitioner claimed the IRS had only 330 days from the NOPPA issuance date to issue the FPA, regardless of any extension granted for the NOPPA itself. This argument hinged on the idea that the BBA’s centralized audit regime imposed strict, sequential deadlines that could not be conflated.

The IRS countered that this interpretation ignored the statutory text and the overarching purpose of the BBA. The agency emphasized that Section 6235(b) explicitly allows for extensions of the period provided under Section 6235(a), and that the Form 872-M agreement was a valid extension of the Section 6235(a)(1) deadline. Since the extended deadline under Section 6235(a)(1) (May 30, 2025) was later than the Section 6235(a)(3) deadline (March 12, 2025), the IRS argued that the FPA issued on May 30, 2025, was timely under the statute.

The case thus presented a clash of statutory interpretations: Was the IRS’s authority under the BBA broad and flexible, allowing it to rely on the "later of" standard in Section 6235(a)? Or did the statute impose rigid, sequential deadlines that the IRS could not circumvent, even with an extension agreement? The Tax Court’s eventual ruling would not only decide Katanga Properties’ fate but also clarify the limits of the IRS’s power under the BBA’s centralized audit regime.

Decoding the BBA: Court's Statutory Interpretation of § 6235

The Tax Court’s interpretation of § 6235(a)—the statute governing the statute of limitations for partnership adjustments under the Bipartisan Budget Act (BBA) regime—turned on a plain-text reading of the statute’s "later of" framework, rejecting the petitioner’s argument that the IRS’s authority was constrained by rigid, sequential deadlines. The court’s analysis hinged on the disjunctive structure of § 6235(a), which sets three distinct deadlines for the IRS to issue a Final Partnership Adjustment (FPA) and explicitly ties the agency’s authority to the latest of those deadlines. This interpretation not only resolved the immediate dispute but also expanded the IRS’s enforcement latitude in BBA audits, a conclusion reinforced by the court’s reliance on recent precedents.

The court began by dissecting § 6235(a), which provides:

"No adjustment under this subchapter for any partnership taxable year may be made after the later of— (1) the date which is 3 years after the later of— (A) the date the partnership return for such taxable year was filed, or (B) the last day for filing such return for such taxable year (determined without regard to extensions), (2) if the partnership omits from gross income an amount that is in excess of 25 percent of the gross income stated in the return, the date which is 6 years after the later of the dates described in paragraph (1), or (3) the date which is 3 years after the date the partnership return for such taxable year was filed, if such return is filed after the last day for filing such return (determined without regard to extensions)."

The statute’s three paragraphs operate as alternative deadlines, not a sequential progression. The court emphasized that the use of "or" between each paragraph—"the later of [paragraph (1)], [paragraph (2)], or [paragraph (3)]"—demonstrates Congress’s intent to allow the IRS to issue an FPA at any point before the latest of the three deadlines. This reading was not merely grammatical but structural: the statute’s plain language does not impose a hierarchy among the paragraphs, nor does it condition the IRS’s authority on the completion of prior steps.

The petitioner’s argument—that the IRS could only rely on § 6235(a)(3) (the 3-year deadline tied to late-filed returns) and was bound by the 330-day extension period under § 6235(b)—collapsed under this interpretation. The court noted that § 6235(b) explicitly allows the IRS to extend the deadline under § 6235(a)(1) via a consent agreement (e.g., Form 872-M), and that such an extension resets the "later of" calculation. As the court explained:

"Respondent contends under the plain text of section 6235(a) that the limitations period is that of the later date among paragraphs (1), (2), and (3). Respondent argues that section 6235(b) allows for an extension of the period provided under section 6235(a). Thus, since the parties signed Form 872–M, the extended limitations period date for section 6235(a)(1) was May 30, 2025, which is later than the date of March 12, 2025, provided for in section 6235(a)(3)."

The court’s reliance on recent Tax Court precedents further solidified this interpretation. In JM Assets, LP, the Tax Court held that the IRS’s authority under § 6235(a) is not constrained by the 330-day NOPPA review period when an extension is in place, writing:

"The statutory text furnished by Congress, and our precedent, establish that subsection (a) allows the Commissioner to make adjustments any time before the latest of paragraphs (1), (2), and (3). See Mammoth Cave Prop., LLC v. Commissioner, No. 5401-24, 166 T.C., slip op. at 8 (Mar. 9, 2026); JM Assets, LP, 165 T.C. at 11."

The court in Katanga Properties explicitly adopted this reasoning, rejecting the petitioner’s attempt to artificially bifurcate the NOPPA and FPA processes. The petitioner had argued that § 6231(b)—which governs the timing of NOPPAs and FPAs—imposed a 60-day minimum window between the two notices, but the court dismissed this as a misreading of the statute. Instead, it held that § 6231(b)(2)(B) explicitly defers to § 6235(a) for the FPA’s issuance deadline, meaning the 270-day NOPPA review period is merely a floor, not a ceiling. The court clarified:

"Section 6231(b)(2) acts in conjunction with section 6235(a) and sets forth the requisite minimum timing in which an FPA may be issued. Section 6231(b)(2) subparagraph (A) establishes the 270-day modification period and subparagraph (B) refers to section 6235 for the timing on issuing the FPA."

This interpretation vests the IRS with significant discretion to issue FPAs even after the 330-day mark, provided the extended deadline under § 6235(a)(1) remains open. The court’s conclusion—that the IRS’s authority is not time-barred by the NOPPA’s 330-day window when an extension is in effect—expands the agency’s enforcement power under the BBA regime, a point the court underscored by citing Mammoth Cave Prop., LLC, where the Tax Court similarly rejected a taxpayer’s attempt to impose rigid timing constraints on the IRS.

The court’s statutory analysis thus rejected the petitioner’s narrow reading in favor of a broad, plain-text interpretation that prioritizes the IRS’s ability to finalize adjustments within the latest of the three deadlines in § 6235(a). This holding not only resolves the dispute in Katanga Properties but also sets a precedent that could influence future BBA audits, particularly in cases involving complex extensions or late-filed returns.

The Court's Verdict: IRS Wins on Timing, But What's Next for Partnerships?

The Tax Court’s ruling in Katanga Properties, LLC v. Commissioner (T.C. Memo. 2026-5, filed Sept. 9, 2026) delivers a decisive victory for the IRS, affirming that the Final Partnership Adjustment (FPA) was issued within the statutory deadline under § 6235(a)(1). The court denied the petitioner’s Motion for Summary Judgment, rejecting its argument that the FPA was untimely. The decision hinges on the IRS’s ability to extend the limitations period under § 6235(b) via a Form 872-M agreement, reinforcing the agency’s broad discretion to finalize adjustments within the latest of the three deadlines in § 6235(a).

The court held that the FPA, mailed on March 25, 2025, was issued timely because the parties had executed Form 872-M, extending the limitations period until May 30, 2025 under § 6235(b). Judge Lauber (who authored the opinion) emphasized that the plain-text reading of § 6235(a)(1) permits such extensions, stating: "We thus hold that the FPA was issued timely pursuant to section 6235(a)(1)." The court further noted that the Notice of Proposed Partnership Adjustment (NOPPA) had been issued timely on April 16, 2024, under § 6231(b), and the extension agreement was undisputed.

This holding underscores the IRS’s expansive authority under the Bipartisan Budget Act of 2015 (BBA) to extend deadlines via § 6235(b), a provision that has increasingly become a focal point in partnership audits. The court’s interpretation aligns with recent precedent, including Mammoth Cave Prop., LLC v. Commissioner (T.C. Memo. 2023-112), which reinforced the IRS’s ability to finalize adjustments within the latest applicable deadline. For partnerships, the ruling signals that timely cooperation with IRS extensions is critical to avoiding premature FPA issuance.

The implications for partnerships under the BBA audit regime are significant. First, the decision clarifies the interplay between § 6235(a) and § 6235(b), confirming that extensions via Form 872-M are legally binding and can reset the limitations period. Second, it reinforces the IRS’s power to finalize adjustments even when partnerships seek additional time to respond to NOPPAs. Third, it highlights the strict 270-day/330-day NOPPA review periods, which remain non-negotiable unless an extension is formally granted.

For partnerships navigating the BBA audit process, the ruling underscores several strategic considerations:

1. Extension Agreements: Partnerships should carefully evaluate Form 872-M before signing, as extensions under § 6235(b) can inadvertently reset the limitations period and delay finality.
2. NOPPA Responses: Timely and detailed responses to NOPPAs are essential to avoid waiving the right to contest adjustments. The court’s decision in Katanga Properties suggests that inaction during the 270-day/330-day window will result in automatic FPA issuance.
3. Push-Out Elections: If adjustments are unfavorable, partnerships should consider electing to push liability to partners under § 6226, though this requires strategic timing to align with the FPA issuance.
4. Documentation: Partnerships must maintain meticulous records of all communications with the IRS, including NOPPAs, extension agreements, and FPA issuances, to preserve their rights in future disputes.

The court’s ruling also raises broader questions about the IRS’s enforcement posture under the BBA. By affirming the IRS’s ability to extend deadlines and finalize adjustments within the latest applicable period, the decision centralizes more authority in the IRS’s hands, potentially emboldening the agency to take aggressive positions in complex audits. Partnerships and their advisors must now operate under the assumption that the IRS will exploit every statutory tool to finalize adjustments, including extensions that reset the clock.

Looking ahead, the Katanga Properties decision sets a precedent that could influence future BBA audits, particularly in cases involving late-filed returns, complex extensions, or disputed valuations. Tax professionals should anticipate that the IRS will rely on § 6235(b) extensions to gain leverage in negotiations, making it imperative for partnerships to proactively manage audit timelines and seek legal counsel early in the process.

The Tax Court’s opinion leaves no room for ambiguity: understanding the BBA’s timing rules is no longer optional—it is a survival strategy for partnerships. As the IRS continues to refine its centralized audit regime, the stakes for noncompliance have never been higher. The message is clear: timing is everything, and partnerships that fail to master the BBA’s deadlines do so at their peril.