The recent Tax Court decision in Moxon Corporation v. Commissioner, 165 T.C. No. 2 (Filed July 2, 2025), provides critical insights for tax professionals concerning the assessment and collectibility of partnership-level penalties, particularly when underlying tax deficiencies are abated due to procedural errors. This case clarifies the distinct treatment of partnership-level penalties under deficiency procedures and the calculation of "underpayment" for penalty purposes, even in the absence of a collectible tax liability.

Factual Background

Moxon Corporation (Petitioner) was a partner in AD Global FX Fund, LLC (AD Global) during 1999. AD Global engaged in transactions involving paired foreign currency options, which generated purported losses amounting to tens of millions of dollars for its partners. The Commissioner of Internal Revenue (Respondent) subsequently issued a Notice of Final Partnership Administrative Adjustment (FPAA) to AD Global’s tax matters partner on October 15, 2004, disallowing these purported losses and asserting various alternative penalties, including a 40% gross valuation misstatement penalty under I.R.C. § 6662(h). Following litigation, the Commissioner’s determinations in the partnership-level proceeding were largely sustained.

Based on the outcome of the partnership-level proceeding, the Commissioner mailed affected items Notices of Deficiency (SNODs) to Petitioner in March and April 2015. These SNODs determined a $12,615,331 deficiency and a $5,046,132 I.R.C. § 6662(h) penalty for the 1999 tax year, and a smaller deficiency and penalty for the 2000 tax year. Critically, the Commissioner mailed these SNODs to an incorrect address. As a result, Petitioner did not file a Tax Court petition, and the Commissioner proceeded to assess the deficiencies and penalties on August 17, 2015.

When Petitioner did not pay, the Commissioner initiated collection actions in 2017, issuing a Notice of Federal Tax Lien Filing and Your Right to a Hearing and a Final Notice–Notice of Intent to Levy. Petitioner timely requested a Collection Due Process (CDP) hearing. During a supplemental CDP hearing, requested by the Commissioner after discovering the mailing error, the Appeals officer determined that the original deficiencies for 1999 and 2000 were subject to deficiency procedures and, due to the unverified mailing to the last known address, were invalid and would be abated. However, the Appeals officer concluded that the penalties were not subject to deficiency procedures under I.R.C. § 6230(a)(2)(A)(i) and therefore would not be abated. This led to cross-motions for partial summary judgment before the Tax Court.

Taxpayer’s Request for Relief

Petitioner sought abatement of the penalties, asserting two primary arguments against the Appeals officer’s determination:

First, Petitioner contended that the penalties are subject to deficiency procedures. Consequently, if the SNODs were improperly mailed (as confirmed by the abatement of the underlying tax deficiencies), then the penalties should also be abated. Petitioner attempted to draw an inverse inference from I.R.C. § 6230(a)(2)(A)(i) and distinguish between "deficiency proceedings" and "deficiency procedures" based on Code section headings to argue that procedures might still apply. Petitioner also noted that the Commissioner’s actions (including penalties in SNODs and assessing them after 90 days) suggested the Commissioner initially believed deficiency procedures applied to them. Furthermore, Petitioner cited language from Thompson v. Commissioner, 137 T.C. 220, 239 n.24 (2011), rev’d and remanded on other grounds, 729 F.3d 869 (8th Cir. 2013), regarding "ambiguity" in I.R.C. § 6230(a)(2)(A)(i). Petitioner also argued that reliance on regulations to clarify statutory ambiguity, as done in Thompson, was no longer valid following Loper Bright Enterprises v. Raimondo, 144 S. Ct. 2244, 2266 (2024), which overruled Chevron U.S.A. Inc. v. Natural Res. Def. Council, 467 U.S. 837 (1984).
Second, Petitioner argued that no penalties could apply because the underlying tax was zero. Petitioner asserted that a tax cannot be considered "imposed" if the taxing authority has decreed it need not be paid, meaning it must be required to be paid to be "imposed". Petitioner pointed out that Treasury Regulation § 1.6664-2(b) does not specifically exclude amounts that cannot be assessed for procedural reasons from the "amount of income tax imposed". Petitioner cited Baur v. Commissioner, 2 T.C. 1016, 1018 (1943), aff’d, 145 F.2d 338 (3d Cir. 1944), contending that if the Commissioner cannot assess or collect the tax, there is no "tax imposed". Petitioner also referenced Adams v. Commissioner, 72 T.C. 81 (1979), supplementing 70 T.C. 373 (1978), aff’d, 688 F.2d 815 (1982) (unpublished table decision), and Occidental Petroleum Corp. v. United States, 231 Ct. Cl. 334, 335 n.2 (1982), to support its interpretation of "imposed" and the requirement of collectibility.

Court’s Legal Analysis

The Tax Court first addressed the appropriate standard of review in this CDP case. While the Commissioner briefly argued that Petitioner was precluded from challenging underlying penalty liabilities, the Court agreed with Petitioner that it was not challenging the underlying penalty liabilities but rather the Appeals officer’s legal determination that the penalties should not be abated as a matter of law. The Court clarified that it reviews the Appeals officer’s verification under I.R.C. § 6330(c)(1) to determine if all applicable laws and administrative procedures have been met, irrespective of whether the taxpayer specifically raised the issue during the CDP hearing, provided it was raised timely before the Court. Thus, the Court reviewed whether the Appeals officer’s determination was based on a correct interpretation of applicable law.

Whether Deficiency Procedures Apply to Penalties

The Court reaffirmed that under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), adjustments to partnership items and the applicability of penalties related to those adjustments are determined in a partnership-level proceeding, not at the partner level. While "affected items" that require partner-level determinations are generally subject to deficiency procedures, I.R.C. § 6230(a)(2)(A)(i) explicitly exempts "penalties, additions to tax, and additional amounts that relate to adjustments to partnership items" from deficiency proceedings.

The Court cited long-standing precedent supporting this position:

Such penalties "may be directly assessed as a computational adjustment, notwithstanding the need for partner-level determinations." Thompson v. Commissioner, 137 T.C. 220, 239 (2011), rev’d and remanded on other grounds, 729 F.3d 869 (8th Cir. 2013).
"The issuance of [a purported notice of deficiency that includes such a penalty] cannot trigger deficiency procedures where none applies." Thompson, 137 T.C. at 239.
"The deficiency procedures [do not] apply to the assessment of any partnership-item penalty determined at the partnership level, regardless of whether further partner-level determinations are required." Domulewicz v. Commissioner, 129 T.C. 11, 23 (2007), aff’d in relevant part, remanded in part sub nom. Desmet v. Commissioner, 581 F.3d 297 (6th Cir. 2009).
The Tax Court lacks jurisdiction in a pre-payment forum to consider penalties determined at the partnership level, meaning it has "no authority to enjoin . . . collection or assessment" of such penalties. Gunther v. Commissioner, T.C. Memo. 2019-6, at *14–15 (aff’d, 789 F. App’x 836 (11th Cir. 2020)).

Other appellate courts have also affirmed this interpretation:

The Commissioner can "assess the 40-percent penalty directly." United States v. Woods, 571 U.S. 31, 42 n.2 (2013).
I.R.C. § 6230(a)(1) and (a)(2)(A)(i) "clearly exclude[s] the [I.R.C. § 6662(h)] penalty at issue from Tax Court deficiency jurisdiction." Highpoint Tower Tech. Inc. v. Commissioner, 931 F.3d 1050, 1060 (11th Cir. 2019).
"Penalties determined in a partnership proceeding, even if they require a partner-level substantive determination, are excepted from the affected-item notice of deficiency requirement." Chai v. Commissioner, 851 F.3d 190, 197 n.5 (2d Cir. 2017).
"It was proper for the IRS to directly assess [the taxpayer’s] share of the penalties as a computational adjustment without following deficiency procedures, regardless of whether partner-level determinations were required to do so." Gosnell v. United States, 525 F. App’x 598, 600 (9th Cir. 2013).

The Court dismissed Petitioner’s attempts to create ambiguity through "inverse inference" or reliance on Code section headings, noting that statutory headings do not have the force of law and cannot obscure the plain language of the statute. Rowen v. Commissioner, 156 T.C. 101, 112 n.9 (2021). The Court also clarified that the Commissioner’s act of including penalties in SNODs or assessing them at the same time as taxes is irrelevant to whether deficiency procedures apply; they simply do not.

Regarding Petitioner’s argument concerning Loper Bright’s impact on Chevron deference, the Court stated that even under the Loper Bright standard, it would rule for the Commissioner. While Thompson noted some "ambiguity" in I.R.C. § 6230(a)(2)(A)(i), the statute clearly favors the Commissioner’s position overall, as established in prior rulings such as Domulewicz, 129 T.C. at 22, and Hamel v. Commissioner, T.C. Memo. 2025-19, at *9–10. Furthermore, the Supreme Court in Loper Bright cautioned that overruling Chevron does not call into question prior cases that relied on the Chevron framework, and their holdings are still subject to statutory stare decisis. Loper Bright, 144 S. Ct. at 2273. Thus, the holding that penalties determined in a partnership-level proceeding are not subject to deficiency procedures remains valid and assessable by the Commissioner. Taxpayers’ recourse to challenge such penalties is typically through a refund action or a CDP case to raise partner-level defenses. I.R.C. § 6230(c)(1)(C), (4); McNeill v. Commissioner, 148 T.C. 481, 489 (2017).

Effect of Deficiency Abatements on Penalties

This aspect of the case presented an issue of first impression for the Tax Court. Petitioner argued that if the underlying tax deficiencies were abated, the "tax imposed" for purposes of calculating an underpayment under I.R.C. § 6664(a) became zero, thus eliminating the basis for any penalty under I.R.C. § 6662.

The Court rejected this argument by interpreting "tax imposed" in I.R.C. § 6664(a) as the amount of tax imposed by Congress (through the Code) that is required to be shown on a taxpayer’s return, not an amount based on the Commissioner’s ability to assess and collect. The "basic formula" for underpayment is "(correct tax − reported tax = underpayment)." Feller v. Commissioner, 135 T.C. 497, 510 (2010).

The Court distinguished between a taxpayer’s tax liability and the IRS’s ability to assess and collect that liability:

"Assessment" is "little more than the calculation or recording of a tax liability." United States v. Galletti, 541 U.S. 114, 122 (2004).
"A taxpayer’s ’liability’ for unpaid taxes" is separate from the IRS’s "official ’assessment’ of what the delinquent taxpayer owes." Polselli v. IRS, 143 S. Ct. 1231, 1239 (2023).
Taxes are imposed by Congress, not the IRS. Moore v. United States, 144 S. Ct. 1680, 1693 (2024).

This distinction supports the Commissioner’s position that a tax liability can exist even if the Commissioner is procedurally barred from assessing or collecting it. In Snow v. Commissioner, 141 T.C. 238, 247–48 (2013), the Court held that a Section 6662 penalty is based on an underpayment representing "the true amount the Government was deprived of as a result of [the taxpayer’s] return," focusing on the correct amount of tax that was required to be reported, not collectibility.

The Court further clarified that Treasury Regulation § 1.6664-2(b), which defines "amount of income tax imposed" as tax imposed under subtitle A, does not need to list amounts that cannot be assessed, as such an exhaustive list would be impractical. Petitioner was indeed obligated to report and pay the tax on its returns. The Court reiterated from Wasie v. Commissioner, 86 T.C. 962, 969–70 (1986), that "imposed" means Congress has established the tax’s existence, facilitating its determination and assessment, irrespective of whether it can currently be enforced. Thus, the "correct tax (i.e., the tax imposed) can be used to calculate an underpayment upon which a section 6662 penalty may be based".

The doctrine of setoff also supported the Commissioner’s position, illustrating that a tax liability can still exist and be used to reduce an overpayment claim even if assessment and collection are barred by the statute of limitations. Lewis v. Reynolds, 284 U.S. 281, 283 (1932); Dysart v. United States, 169 Ct. Cl. 276, 282 (1965). This principle applies similarly here: the tax liabilities existed, and the underpayments could be calculated for penalty purposes, even if not directly collectible.

The Court found Petitioner’s citations to Adams v. Commissioner and Occidental Petroleum Corp. v. United States inapposite, as those cases involved unique statutory schemes or hypothetical scenarios distinct from the core issue here.

Application of Law to Facts and Conclusion

Applying these legal principles, the Tax Court found no error in the Appeals officer’s determination. The I.R.C. § 6662(h) penalties in question were determined at the partnership level, and as clearly established by I.R.C. § 6230(a)(2)(A)(i) and extensive precedent, are not subject to deficiency procedures. Therefore, the Commissioner’s error in mailing the SNODs to an incorrect address, which necessitated the abatement of the underlying tax deficiencies, did not invalidate the penalty assessments or the ability to collect them.

Furthermore, the Court concluded that the abated deficiencies still constituted "taxes imposed" for the purpose of calculating an "underpayment" under I.R.C. § 6664(a). The fact that these underlying taxes could no longer be assessed or collected due to the procedural error did not negate their original existence or the accuracy of the "correct tax" figure used in the underpayment calculation. The penalties were properly based on these underpayments and could be assessed and collected.

Ultimately, the Court granted Respondent’s Motion for Partial Summary Judgment and denied Petitioner’s Motion for Partial Summary Judgment.

This decision serves as a crucial reminder for tax professionals that partnership-level penalties operate under distinct assessment rules separate from the underlying tax deficiencies. Procedural defects impacting the collectibility of the tax itself do not automatically extinguish related penalties, which are considered assessable by the Commissioner as computational adjustments. Practitioners must understand these nuances when advising clients involved in partnership audits and subsequent collection actions.

Prepared with assistance from NotebookLM.