Bang – A Warning to Tax Matters Partners (and their advisors)

In Uncategorized on 01/05/2011 at 11:10

Usually I don’t comment on 7463s, the small claims, no appeal cases. Most of them are time-wasting, no-documentation reiterations of the same theme. But Beverly Bernice Bang,  T.C. Sum. Op. 2011-1 (1/4/11) carries an important message for parties other than the petitioner/taxpayer (Bang).

Bang was an investor in a jojoba “research” deal in 1983. She clearly wasn’t a sophisticated investor, nor was her investment very large. At the end of the day, her actual tax liability when IRS blew up the deal was under $2700. Of course, her accountant never bothered to file a timely petition after she got the 90-day letter, 22 years after she took the deduction that led to the underpayment, but we’ll pass that.

The case comes up on a 6330 levy review. Of course, having had an opportunity to contest the liability and not having timely filed, Bang had no chance to contest the underlying liability which, with interest from 1984 to 2006, plus tax-motivated transaction interest, plus failure-to-pay penalty, amount to more than $32,000. IRS also assessed a $13.18 failure-to-pay-tax penalty.

After granting summary judgment to IRS, the Court reserved judgment on the $13.18 penalty. I cannot imagine there will be a trial on that issue.

The point of this story for professionals is how the interest accrued. IRS issued a Notice of Final Partnership Administrative Adjustment in 1989, six years after the tax year in question. The partnership promptly petitioned Tax Court for review.

However, the tax matters partner, who had authority under the partnership agreement to bind all the partners, large and small, stipulated in 1994 to be bound by the results in a similar Tax Court case  (the similar case) involving an unrelated taxpayer. That case was decided in 1998, and the unrelated taxpayer lost.

For some reason, an Order and Decision in Bang’s partnership’s case, confirming the result of the similar case, was not made or entered until 2005, 22 years after the fact, with interest running all the while at the enhanced tax-motivated transaction rate.

Bang’s deficiency notice was issued in 2006. The Bang Court refused to abate the interest under 6404, because litigation delay was not a ground for abatement.

What was communicated between the tax matters partner and the other partners is not part of the decision. If the other partners had known that interest was running on any underpayment at an enhanced rate, one wonders if they would have stood by for 22 years, while a $2700 liability became a $32,000 liability. One also wonders what the statute of limitations might be to bar a partner from bringing suit against the tax matters partner for breach of fiduciary duty in not warning the partners of the potential interest consequences, and for negligence in waiting seven years to move the partnership’s Tax Court case forward to keep interest from accruing.

Tax matters partners are partners first, and tax matterers second. And given the current bifurcation between partnership-level adjustments and the impact on individual partners, from the latter of whom the effects of these partnership-level adjustments might be hidden for decades, tax matter partners should be aware that although hidden, the impact may be substantial upon those partners—and possibly on the tax matters partners’ wallets.


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