Judgment summary
Petitioner is Jones Bluff, LLC, an Alabama limited liability company treated as a partnership for federal tax purposes, with Green Rock Management, LLC as its partnership representative. Respondent issued a Notice of Final Partnership Adjustment (FPA) for the 2019 tax year disallowing a charitable contribution deduction under section 170 and asserting penalties.
Petitioner filed a Motion for Summary Judgment contending that the FPA was invalid because the audit regime enacted by the Bipartisan Budget Act of 2015 (BBA) deprived its individual members of due process under the Fifth Amendment.
The Court held that petitioner cannot raise a due process claim under the Fifth Amendment on behalf of its individual members, and held further that the FPA is valid. The Court denied the Motion.
Background
Petitioner is an Alabama limited liability company treated as a partnership for federal tax purposes. For the 2019 tax year, petitioner is subject to the centralized partnership audit regime enacted as part of the BBA. Its partnership representative is Green Rock.
Petitioner purportedly acquired a tract of land in Coosa County, Alabama, upon its formation. In December 2019 petitioner purportedly granted a conservation easement over the property to Pelican Coast Conservancy, Inc. Petitioner then timely filed Form 1065, U.S. Return of Partnership Income, for its 2019 tax year, claiming a charitable contribution deduction of $36,290,000 for its donation of the easement. Petitioner listed Green Rock as its partnership representative.
In 2021 respondent selected petitioner's Form 1065 for examination under the BBA procedures. In October 2023 respondent sent the FPA to Green Rock in its capacity as petitioner's partnership representative. In the FPA respondent disallowed the $36,290,000 cashless charitable contribution deduction and asserted an imputed underpayment of $13,427,300 and penalties of $5,359,968.
On November 29, 2023, petitioner submitted to respondent Form 8988, Election for Alternative to Payment of the Imputed Underpayment - IRC Section 6226. On January 11, 2024, petitioner timely filed a Petition. Petitioner was not eligible to elect out of the BBA audit procedures for the 2019 tax year because one of its members was a limited liability company.
Core dispute
The issue for consideration is whether petitioner has standing to raise the individual due process rights of its members to invalidate the FPA.
Petitioner contended that the FPA is invalid because the partnership audit rules of the BBA violate the Due Process Clause of the Fifth Amendment by not providing individual partners with notice and opportunity to be heard before being deprived of property. Petitioner contended it had standing to raise a due process claim on behalf of its members based on the third-party standing doctrine.
Respondent countered that petitioner does not have standing to assert the rights of its individual members as third parties to the lawsuit and that the claims of the members are not ripe.
Court findings
The Court set out the summary judgment standard, noting it may grant summary judgment only if there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.
The Court found that respondent did not contend that petitioner lacked standing to challenge the FPA, and that petitioner had Article III standing to challenge the FPA because it had been injured by the assertion of the imputed underpayment, the injury was caused by respondent, and the Court had the power to redress the grievance.
On third-party standing, the Court noted that a party cannot ordinarily rest its claim to relief on the legal rights or interests of third parties, though this rule is not absolute. The inquiry weighs two factors: whether the party has a close relationship with the right-holder, and whether there is a hindrance to the right-holder's ability to protect their own interests.
The Court found that the liability at issue is a liability of the partnership, and that any liability passed to members under a section 6226 election would result from the partnership's choice, not from enforcement of a restriction against the partnership. The Court held this case does not belong to the class of cases where courts have been forgiving in granting third-party standing.
Even assuming the close relationship prong was satisfied, the Court held the second prong weighed strongly against petitioner. Although individual members other than the partnership representative are not granted a statutory right to participate directly in this proceeding, they remain free to raise their constitutional claims in future litigation. Because the statute does not hinder the members from presenting their due process claims, petitioner did not have third-party standing.
On ripeness, the Court agreed with respondent that the liability at issue is that of the partnership and not of the individual members. The passing on of that liability to members would occur, if at all, as a result of petitioner's actions and not respondent's actions. Those actions are contingent future events that render the claims made on behalf of the members not ripe.
Outcome
The Court held that petitioner cannot raise a due process claim under the Fifth Amendment on behalf of its individual members, and held further that the FPA is valid. The Court denied the Motion. An appropriate order was to be issued.
Major issues / areas of contention
- Whether the partnership had standing to raise the individual due process rights of its members to invalidate the Notice of Final Partnership Adjustment.
- Whether the third-party standing doctrine permitted the partnership to assert its members' Fifth Amendment due process claims.
- Whether the members' due process claims were ripe for adjudication.
- Whether the Notice of Final Partnership Adjustment issued under the BBA audit regime was valid.