Estate of Simon involved an affected item notice of deficiency issued to an indirect partner after the notice of final partnership administrative adjustment (“FPAA”) issued to the partnership was not timely challenged. (Mary McNulty discussed the complex procedural rules for partnership audits and tax litigation in this recent presentation.) Mr. Simon was an indirect partner in Charlevoix, a TEFRA partnership that participated in a Son-of-Boss transaction in 2000. Charlevoix’s 2000 partnership return listed Charlevoix’s address as Mr. Simon’s residential address in Petoskey, Michigan (the Petoskey address). In January 2001, Mr. Simon moved but did not provide the required notice of the new address for Charlevoix to the IRS. The FPAA was mailed to the Petoskey address but was returned by the Post Office. None of the partners knew of, or challenged, the FPAA.
The Estate filed a petition in Tax Court challenging the affected item notice of deficiency. The Estate argued that, because Mr. Simon did not receive notice of the FPAA as required, his partnership items had been converted into nonpartnership items. Therefore, the FPAA and the affected item notice of deficiency were not valid with respect to Mr. Simon. However, the Tax Court rejected this argument. Mr. Simon had not given the required notice of a changed address and therefore mailing the FPAA to the old address did not invalidate the FPAA or the affected item notice of deficiency. (This issue was discussed in more detail in our recent blog post on the Taurus case, which involved the same issue in a partnership-level proceeding.)
Although the Tax Court held that the notice of deficiency was valid, the IRS moved to dismiss the portion of the case concerning the accuracy-related penalties. The Tax Court generally does not have jurisdiction over penalties in a partner-level proceeding because the penalties are a partnership item that must be challenged in a partnership-level proceeding. (The Supreme Court is currently considering this issue in the Woods case and heard arguments on October 9th. See this blog post for more detail.) The Estate argued that the penalties were no longer partnership items because the IRS failed to give proper notice by mailing the FPAA to the old address. But the court had concluded that mailing the FPAA to the old address did not invalidate the FPAA. Therefore, the penalties were still partnership items and could not be contested in the deficiency proceeding. The Estate could contest the penalties only by paying the amount assessed and filing a refund suit.
If you have any questions about these issues, please contact one of the undersigned or any of the other Tax lawyers at Thompson & Knight.