In Blomquist Holdings, LLC, Crestlawn Investors, LLC, Tax Matters Partner v. Commissioner, 165 T.C. No. 6, filed September 17, 2025, the U.S. Tax Court addressed a critical procedural issue under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA). The Court held that a nonparticipating partner’s statutory right to participate in a partnership-level proceeding under I.R.C. § 6226(c)(2) is not absolute and is subject to the Tax Court Rules of Practice and Procedure. Specifically, when nonparticipating partners seek to object to a settlement at the eleventh hour, they must make a "substantial showing" under Tax Court Rule 248(b)(4) to be granted leave to participate. The Court’s denial of the partners’ motion in this case provides a valuable lesson on the importance of timely action for partners wishing to protect their rights in TEFRA proceedings.

Factual Background

The case originated with a significant charitable contribution deduction claimed by Blomquist Holdings, LLC (Blomquist), a TEFRA partnership, on its 2017 Form 1065. Blomquist donated a conservation easement and claimed a deduction of $53,862,117, asserting the property’s highest and best use was as a cemetery. The IRS subsequently issued a Notice of Final Partnership Administrative Adjustment (FPAA), disallowing the bulk of the conservation easement deduction ($53,830,000) and other deductions ($1,405,000). The FPAA also asserted a 40% gross valuation misstatement penalty under I.R.C. § 6662(h), along with various 20% accuracy-related penalties as alternatives.

Crestlawn Investors, LLC (Crestlawn), the Tax Matters Partner (TMP) for Blomquist, timely filed a Petition for Readjustment in the Tax Court on May 20, 2021. None of the 39 partners who would later object to the settlement (the Objecting Nonparticipating Partners) filed a notice of election to participate within the time prescribed by Tax Court Rule 245(b).

In early 2024, the IRS offered Crestlawn a settlement proposal. The terms included:

Disallowance of the $53,830,000 conservation easement deduction.
An allowance of an "other deduction" of $11,657,800.
A reduction of the I.R.C. § 6662(h) penalty from 40% to 10%.
A concession that the I.R.C. § 67 2% floor on miscellaneous itemized deductions would not apply to the allowed deduction.

Crestlawn, as TMP, accepted this settlement on behalf of Blomquist in April 2024.

The Partners’ Request to Participate and Overturn the Settlement

Following the settlement agreement, the IRS filed a Motion for Entry of Decision on June 20, 2024, pursuant to Tax Court Rule 248(b). This rule applies when the TMP agrees to a settlement but cannot certify that no other partners object. This filing triggered a 60-day window under Rule 248(b)(4) for any nonparticipating partner to object by filing a motion for leave to file a notice of election to participate.

On August 19, 2024, 39 nonparticipating partners (collectively owning approximately 21.4% of Blomquist) timely filed motions seeking to participate and reject the settlement. They argued they had an absolute statutory right to participate under I.R.C. § 6226(c). They also asserted they had made the "substantial showing" required by the Court’s rules by demonstrating their readiness to litigate, claiming the TMP lacked authority to bind them, alleging a conflict of interest on the part of the TMP, and citing communications from a petitioner affiliate in another case.

The Court’s Legal Analysis

The Court began by outlining the TEFRA framework, which was enacted to provide uniform administrative and judicial resolution of partnership items at the partnership level. I.R.C. § 6226(c) states that each partner is a party to a partnership-level action and the court "shall allow each such person to participate". However, I.R.C. § 6230(l) explicitly provides that such actions shall be conducted in accordance with the rules of practice and procedure of the court in which the action is brought.

Statutory Right vs. Procedural Rules

The Objecting Nonparticipating Partners claimed their right to participate was absolute and not constrained by procedural rules. The Court flatly rejected this argument, holding that the right to participate under I.R.C. § 6226(c)(2) is not absolute but is subject to the Tax Court’s procedural rules. The Court drew an analogy to Fed. R. Civ. P. 24, which governs intervention in federal courts and requires a "timely motion" even when a statute grants an unconditional right to intervene. The Supreme Court, in NAACP v. New York, 413 U.S. 345 (1973), established that an untimely application for intervention must be denied. The Eleventh Circuit, to which this case is appealable, has adopted similar precedent.

The Court explained that its own rules provide a clear, tiered structure for participation:

Rule 245(b): A partner has 90 days from the date the petition is served on the Commissioner to participate as of right, without needing to show cause.
Rule 245(c): After 90 days, a partner may seek leave to participate out of time upon a showing of "sufficient cause".
Rule 248(b)(4): A partner seeking to participate at the final stage to object to a settlement must make a "substantial showing". The Court emphasized that this is an intentionally higher bar than "sufficient cause," designed to prevent partners from waiting on the sidelines and disrupting settlements at the last minute.

Application of the "Substantial Showing" Standard

Having established the governing legal standard, the Court analyzed whether the Objecting Nonparticipating Partners had met the high bar of a "substantial showing." It concluded they had not.

Readiness to Litigate Is Insufficient

The partners argued they were prepared for trial, having hired counsel, secured funding, and engaged experts. The Court found this insufficient. Merely demonstrating a willingness and ability to litigate does not explain the unreasonable delay or substantively challenge the settlement’s terms. The partners failed to present any evidence or argument that the settlement was unreasonable, particularly given the significant penalty reduction and allowance of a multi-million dollar deduction.

TMP Authority and Conflict of Interest Arguments Fail

The partners’ claims regarding the TMP’s authority and conflicts of interest were dismissed as speculative and unsupported.

Lack of Authority: The partners speculated that the TMP improperly counted non-responsive votes to achieve majority consent for the settlement. The Court noted they provided no evidence for this claim and that Rule 248(b) does not even require majority partner consent—only the TMP’s agreement.
Conflict of Interest: The partners asserted the TMP was compromised due to a Senate Finance Committee investigation and a separate tax case involving a civil fraud penalty. The Court found no evidence that the TMP had become a government witness or received any personal benefit in exchange for agreeing to the settlement, distinguishing the case from Transpac Drilling Venture 1982-12 v. Commissioner, 147 F.3d 221 (2d Cir. 1998). Furthermore, the Court pointed out that the investigation report and the other court case were public knowledge long before the partners sought to participate, yet they never moved to remove the TMP under Rule 250(b) or to participate earlier under Rule 245(c). Their failure to act when the alleged conflict became known undermined the urgency and credibility of their claim.

The partners’ final argument, concerning a letter in another case, was also unpersuasive. The letter merely informed partners of their right to file a motion for leave to participate, which is precisely what the Tax Court Rules require and does not grant an automatic right to do so.

Conclusion and Takeaways for Practitioners

The Tax Court denied the partners’ motions, holding they had failed to make the requisite substantial showing for their delay and objections. They waited until the TMP had negotiated a resolution and only attempted to enter the case when they were dissatisfied with the outcome. The settlement negotiated by the TMP treated all partners proportionally and avoided the risks and costs of further litigation.

For tax professionals representing partners in TEFRA partnerships, Blomquist Holdings serves as a critical reminder:

Timeliness is Paramount: The right to participate in a TEFRA proceeding is not perpetual. Partners must elect to participate within the 90-day window provided by Rule 245(b) to ensure their voice is heard without procedural hurdles.
The "Substantial Showing" Standard is a High Bar: Waiting until a settlement is reached to object is a high-risk strategy. A court will require concrete evidence of TMP misconduct or a fundamentally unreasonable settlement—not just a desire for a different outcome—to permit late entry.
Monitor TMP Actions: If partners have concerns about a TMP’s potential conflicts of interest or fiduciary conduct, they must act promptly. The Tax Court provides mechanisms like a motion to remove the TMP under Rule 250(b), but these tools are ineffective if not used in a timely manner.

Ultimately, the Court’s decision reinforces the structure and purpose of the TEFRA rules: to promote judicial efficiency and provide finality, while protecting diligent partners who actively engage in the process.

Prepared with assistance from NotebookLM.