Partners' Attempt to Intervene in TEFRA Proceeding Nixed by Tax Court

(Parker Tax Publishing October 2025)

The Tax Court held that, after the tax matters partner of a partnership subject to the TEFRA audit and litigation procedures filed a petition in the Tax Court challenging the IRS's Notice of Final Partnership Administrative Adjustment, and subsequently entered into a settlement agreement with the IRS, the nonparticipating partners who were unsatisfied with the terms of the settlement agreement were not permitted to participate in the case. Blomquist Holdings, LLC v. Comm'r, 165 T.C. No. 6 (2025).

Background

Blomquist Holdings, LLC (Blomquist) is a partnership subject to the audit and litigation procedures of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA). For the 2017 tax year, Blomquist donated a conservation easement and claimed a $53,862,117 charitable contribution deduction under Code Sec. 170. In a Notice of Final Partnership Administrative Adjustment (FPAA), the IRS disallowed the deduction and determined a 40 percent gross valuation misstatement penalty and a 20 percent accuracy-related penalty for an underpayment due to negligence or a substantial understatement of income tax.

In 2021, Blomquist's tax matters partner, Crestlawn Investors, LLC (Crestlawn) filed a petition in the Tax Court challenging the FPAA. None of Blomquist's partners filed a notice of election to participate in the case under Code Sec. 6226(c) or Rule 245(b) of the Tax Court Rules of Practice and Procedure. Nor did any of them request leave to file a notice of election to participate out of time under Code Sec. 6226(c) and Tax Court Rule 245(c). Crestlawn and the IRS subsequently entered into a settlement agreement under Tax Court Rule 248(b). Under the agreement, Blomquist's conservation easement deduction was disallowed, an "other deduction" of $11,657,800 was allowed, and a 10 percent accuracy-related penalty was imposed. The IRS, consistent with Rule 248(b), filed a Motion for Entry of Decision along with a Proposed Decision.

Thirty-nine nonparticipating partners of Blomquist (partners) each filed and subsequently amended a Motion for Leave to File Notice of Election to Participate pursuant to Tax Court Rule 248(b)(4), seeking to avoid the settlement and proceed with the Tax Court case. The partners contended that they had an absolute right to participate in this case under Code Sec. 6226(c)(2) and, even if not, they made the requisite substantial showing as to why the Tax Court should permit their participation at this late stage of the litigation. The IRS responded that the partners should not be permitted to participate because they failed to make a substantial showing of their preparedness to litigate the case on the merits or that the proposed decision was unreasonable or otherwise faulty.

Analysis

The Tax Court held that the partners were required to make a substantial showing as to why they should be permitted to participate in this case under Tax Court Rule 248(b)(4) and that they failed to make such a showing. The court therefore denied the partners' Motions for Leave to File Notice of Election to Participate.

The court found that Code Sec. 6226(c) provides a statutory to objecting nonparticipating partners in a TEFRA proceeding to participate in a case. In addition, Tax Court Rule 245(b) afforded. the partners the right to participate without "qualifications, special showings, or demonstrations of necessity." However, the court found that the partners did not avail themselves of that right, nor did they attempt to participate out of time under Tax Court Rule 245(c), although they had three years to do so. Instead, the partners waited "until the last minute" before a decision was entered before attempting to participate.

The court found that Code Sec. 6226(c) did not give the partners the absolute right to participate at this stage of the litigation. Rather, under Tax Court Rule 248(b)(4), when nonparticipating partners request leave to file an election to participate they must make a substantial showing as to why they should be permitted to participate. In the court's view, the partners failed to make such a showing because they did not allege that the terms of the settlement were unreasonable or otherwise make any argument regarding the substantive facts of the case. They merely stated that they desired to continue the case apart from Blomquist because the Motion for Entry of Decision did not adequately represent their position and they did not want to accept the settlement.

The court concluded that, while the partners asserted that they stood ready and financially able to litigate this case on the merits, they provided no reason for failing to participate under Rule 245(b) or requesting leave to participate out of time under Rule 245(c). Instead, they were content to let Crestlawn negotiate a solution to the case, and only when they were unhappy with that resolution did they attempt to come forward. They provided no reason, in the court's view, to believe that Crestlawn was neglecting their interests or was otherwise in breach of its fiduciary duty to the partnership. The court observed that Crestlawn reached an agreement with the IRS to settle the case, with both parties making concessions. The settlement did not result in a better or worse position for one or more partners as compared to one or more other partners; all the partners will bear the result of the settlement in proportion to their ownership interests.

For a discussion of the TEFRA audit procedures, see Parker Tax ¶28,505.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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