In a significant decision for tax professionals navigating Bipartisan Budget Act (BBA) partnership audit procedures, the United States Tax Court in JM Assets, LP v. Commissioner, 165 T.C. No. 1 (2025), delivered a ruling that clarifies the statute of limitations for final partnership adjustments, particularly when a partnership requests modification of an imputed underpayment. This opinion, penned by Judge Buch, underscores the judiciary’s role in ensuring administrative regulations adhere strictly to statutory text, drawing on recent Supreme Court precedent.

Factual Background of the Dispute

JM Assets, LP, a limited partnership with its principal place of business in Texas, is subject to the audit and litigation procedures established by the Bipartisan Budget Act of 2015. In 2018, JM Assets engaged in several real property dispositions, reporting them as installment sales on its Form 1065, U.S. Return of Partnership Income, timely filed on September 13, 2019. The return included a Form 4797, Sales of Business Property, and several Forms 6252, Installment Sale Income, which detailed the sale of five properties, listing their selling prices, basis, expenses, gross profit, and installment sale income. A-A-A Storage, LLC, was identified as the partnership representative.

The Commissioner of Internal Revenue (Commissioner) examined JM Assets’ 2018 return and, on June 9, 2022, issued a Notice of Proposed Partnership Adjustment (NOPPA). The NOPPA proposed an adjustment to increase the partnership’s overall section 1231 gain related to these installment sales, referencing the properties and sale prices from JM Assets’ Forms 6252. This resulted in a proposed adjustment of $5,499,437 to net section 1231 gain and an imputed underpayment of $2,034,792.

On February 14, 2023, 250 days after the NOPPA, JM Assets submitted Form 8980, Partnership Request for Modification of Imputed Underpayments Under Section 6225(c), seeking modification of tax rates for two partners. JM Assets did not submit any additional information, nor did the Commissioner request any. The Commissioner subsequently approved the modifications in full via a letter dated June 5, 2023. Importantly, JM Assets did not file Form 8981, which is a waiver of the period for modification submissions.

However, on December 1, 2023, the Commissioner issued a Notice of Final Partnership Adjustment (FPA). Despite the earlier approval of modification, the FPA contained the same section 1231 gain adjustment and imputed underpayment amounts as the NOPPA. It also determined accuracy-related penalties.

Taxpayer’s Assertion of Untimeliness

JM Assets, through its Partnership Representative, filed a timely Petition challenging the FPA. The core of JM Assets’ argument was that the FPA was untimely pursuant to Internal Revenue Code (I.R.C.) section 6235(a)(2). JM Assets contended that the period for adjustment expired 270 days after it submitted its modification request on February 14, 2023. This calculation would place the expiration date on November 13, 2023 (accounting for a weekend).

Crucially, JM Assets argued that Treasury Regulation § 301.6235-1(b)(2) — upon which the Commissioner relied to assert timeliness — exceeded the authority granted by Congress because it effectively extended the statutory adjustment period.

The Commissioner, conversely, argued that the 270-day period for issuing an FPA began not when the modification request was submitted, but 270 days after the close of the period during which JM Assets could request modification, as defined by the regulation. This interpretation would render the December 1, 2023 FPA timely.

Separately, the Commissioner sought to amend his pleadings to introduce an alternative argument: that the FPA was timely under I.R.C. section 6235(c)(2) due to a substantial omission of income by JM Assets. The Commissioner alleged JM Assets omitted $5,499,437, which he claimed was 34% of its reported gross income. JM Assets objected, asserting that section 6235(c)(2) did not apply because it had adequately disclosed the transactions on its Forms 6252.

Court’s Analysis of the Law

The Court’s analysis focused on two primary issues: the validity of the Treasury Regulation governing the statute of limitations and the applicability of the substantial omission of income rule.

BBA Partnership Audit Procedures and Limitations

The BBA, enacted in 2015, established a new framework for partnership adjustments for tax years beginning after December 31, 2017. Under these procedures, the partnership acts as the sole party before the Commissioner, represented by a partnership representative, and any adjustments and tax liability are assessed at the partnership level. The process involves the Commissioner issuing a NOPPA, which includes proposed adjustments and an imputed underpayment. Following a NOPPA, a partnership may submit a request to modify the imputed underpayment within 270 days. Ultimately, the Commissioner issues an FPA, which can be challenged in court.

Regarding the statute of limitations, I.R.C. section 6235(a) dictates that no adjustment may be made after the latest of several dates. As relevant to this case, these include:

Three years after the partnership return was filed, the return due date, or the date of an administrative adjustment request.
In the case of a NOPPA, 330 days after the date of such notice.
In the case of a modification of imputed underpayment under section 6225(c), 270 days “after the date on which everything required to be submitted to the Secretary pursuant to such section is so submitted”.

The critical point of contention was the interpretation of "the date on which everything required to be submitted...is so submitted" for purposes of section 6235(a)(2). Treasury Regulation § 301.6235-1(b)(2) defines this date as the earlier of:

The date the period for requesting modification ends (i.e., the expiration of the 270-day window from the NOPPA).
The date the period for requesting modification expires due to a waiver of the prohibition on mailing an FPA.

Regulation Validity and Loper Bright

The Court asserted that a regulation’s validity hinges on its reasonableness and consistency with the law. Citing the recent Supreme Court decision in Loper Bright Enterprises v. Raimondo, 144 S. Ct. 2244, 2273 (2024), the Tax Court emphasized that lower courts must "exercise their independent judgment in deciding whether [the] agency has acted within its statutory authority." The Court highlighted Loper Bright’s premise that "statutes, no matter how impenetrable, do—in fact, must—have a single, best meaning. That is the whole point of having written statutes; ‘every statute’s meaning is fixed at the time of enactment.’".

Applying this standard, the Court found a direct conflict between the plain text of I.R.C. section 6235(a)(2) and Treasury Regulation § 301.6235-1(b)(2)(i)(A). The statute explicitly states the 270-day period runs from the date everything is "so submitted," whereas the regulation interprets this as 270 days after the period for requesting modification ends. The Court determined these are distinctly different dates.

The Commissioner’s argument that section 6225(c)(1) provides "broad authority to establish procedures" for modification and justifies the regulation was rejected. The Court reiterated that even broad rulemaking authority "does not extend to contradicting statutory text," citing its own precedent in Varian Med. Sys., Inc. & Subs. v. Commissioner, 163 T.C. 76, 107 (2024).

The Commissioner also suggested that without a Form 8981 waiver, a submission isn’t truly "complete" until the 270-day modification window expires. The Court dismissed this, stating that nothing in the statute or regulations requires a waiver for a submission to be considered complete. The Commissioner’s own regulations deem a waiver as a "submission," but this does not imply that without a waiver, a submission cannot be complete earlier.

Substantial Omission of Income Analysis

The Commissioner’s alternative argument hinged on I.R.C. section 6235(c)(2), which extends the general three-year period of limitations to six years in cases of a substantial omission of income as defined by section 6501(e)(1)(A). A "substantial" omission occurs if it is "in excess of 25 percent of the amount of gross income stated in the return".

The Court applied the "clue test" from Colony, Inc. v. Commissioner, 357 U.S. 28, 36 (1958), which was later extended to section 6501(e)(1)(A) in United States v. Home Concrete & Supply, LLC, 566 U.S. 478, 490 (2012). Under this test, an omission occurs when the return fails to provide a "clue" as to the existence of the omitted item, placing the Commissioner at a disadvantage. However, if an amount is "disclosed in the return, or in a statement attached to the return in a manner adequate to apprise the Secretary of the nature and amount of such item," it is not considered omitted income.

Application of Law to the Facts and Conclusions

Timeliness of the FPA: The Court found no genuine dispute that JM Assets submitted everything required to be submitted for its modification request on February 14, 2023, with Form 8980. JM Assets submitted no further information, and the Commissioner requested none. Applying the plain text of I.R.C. section 6235(a)(2), the Commissioner had 270 days from February 14, 2023, to issue an FPA. This period expired on November 11, 2023, which, due to it being a Saturday, extended the deadline to Monday, November 13, 2023, under I.R.C. section 7503. Since the Commissioner mailed the FPA on December 1, 2023, after this deadline, the Court concluded that the FPA was untimely. As applied to these facts, Treasury Regulation § 301.6235-1 was deemed contrary to the Code.

Substantial Omission of Income: The Court agreed with JM Assets that the income the Commissioner alleged was "omitted" was, in fact, adequately disclosed. JM Assets’ Forms 6252, included with its 2018 return, provided detailed information on the five property sales, including selling prices and how installment sale income was calculated. The NOPPA itself referenced these forms and selling prices. The alleged "omission" stemmed from an increase in section 1231 gain, not from a failure to report an accurate sale price. Applying the Colony "clue test," the Court concluded that understating gross income by misstating cost or basis is not an "omission" for purposes of extending the limitations period under section 6501(e)(1)(A) if adequate disclosure provides a "clue" to the Commissioner. Therefore, JM Assets did not omit 25% of its income under section 6501(e)(1)(A). Given this conclusion, the Court found that the Commissioner’s alternative argument regarding a substantial omission was "supported neither by the facts nor the law" and that granting his motions to amend pleadings would be "futile".

Overall Ruling: Based on these findings, the Tax Court denied the Commissioner’s Motion for Partial Summary Judgment and granted JM Assets’ recharacterized Motion for Summary Judgment. Furthermore, the Court denied the Commissioner’s Motions for Leave to add the substantial omission argument. This ruling underscores the importance of strict adherence to statutory language in tax administration and the limits of regulatory authority.

Prepared with assistance from NotebookLM.