Partnership Subject to Centralized Audit Cannot Raise Due Process Claim on Partners' Behalf

(Parker Tax Publishing April 2026)

The Tax Court held that, in a case involving a partnership subject to the centralized partnership audit regime as established by the Bipartisan Budget Act of 2015 (BBA) (Pub. L. 114-74), where the IRS asserted penalties against the partnership after disallowing its claimed deduction for the donation of a conservation easement, the partnership could raise a claim that the BBA audit regime deprived its individual members of due process. The court found that the partnership did not have third-party standing to assert a claim on its members' behalf and further found that, since the members could raise due process claims individually, the issue was not ripe for adjudication. Jones Bluff, LLC v. Comm'r, 166 T.C. No. 6 (2026).

Background

Jones Bluff, LLC is a limited liability company that is treated as a partnership for tax purposes. For the 2019 tax year, Jones Bluff was subject to the centralized partnership audit regime enacted as part of the Bipartisan Budget Act of 2015 (BBA) (Pub. L. 114-74). Its partnership representative is Green Rock Management, LLC.

Jones Bluff purportedly acquired a tract of land in Coosa County, Alabama, upon its formation. In December 2019 Jones Bluff purportedly granted a conservation easement over the property to Pelican Coast Conservancy, Inc. Jones Bluff 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. Jones Bluff listed Green Rock as its partnership representative on its 2019 Form 1065.

In 2021 the IRS selected Jones Bluff's Form 1065 for examination under the BBA procedures. In October 2023 the IRS sent a notice of final partnership adjustment (FPA) to Green Rock in its capacity as Jones Bluff's partnership representative. In the FPA the IRS disallowed the $36,290,000 cashless charitable contribution deduction and asserted an imputed underpayment of $13,427,300 and penalties of $5,359,968. Jones Bluff filed a petition in the Tax Court.

In a motion for summary judgment, Jones Bluff contended that the FPA was invalid because the partnership audit rules of the BBA violate the Due Process Clause of the Fifth Amendment to the U.S. Constitution by not providing individual partners in partnerships with notice and opportunity to be heard before being deprived of property. The IRS countered that Jones Bluff did not have standing to assert the rights of its individual members as third parties to the lawsuit and that the claims of the members were not ripe. Jones Bluff contended that it did have standing to raise a due process claim on behalf of its members based on the third-party standing doctrine.

Under Kowalski v. Tesmer, 543 U.S. 125 (2004), a party to litigation cannot ordinarily "rest his claim to relief on the legal rights or interests of third parties." However, in June Medical Services L.L.C. v. Russo, 591 U.S. 299 (2020), the Supreme Court stated that the rule against a party's resting its claims on the rights of a third party is not absolute, and there may be circumstances where it is necessary to grant a third party standing to assert the rights of another. The third-party standing inquiry requires weighing two predominant factors: (1) whether the party asserting the right has a close relationship with the person who possesses the right, and (2) whether there is a hindrance to the possessor's ability to protect their own interests. Courts have been forgiving with these criteria in the context of First Amendment cases and in cases when enforcement of the challenged restriction against the litigant would result indirectly in the violation of third parties' rights. Beyond these categories, courts have not looked favorably upon third-party standing. Jones Bluff argued that the BBA audit procedures and the proceeding before the Tax Court operated to deprive its individual members of property without due process, placing it in the class of cases where courts have been forgiving in their evaluation of the third-party standing factors.

Analysis

The Tax Court held that Jones Bluff could not raise a due process claim on behalf of its individual members. The court found that under Code Sec. 6225(a)(1), the liability at issue was a liability of Jones Bluff as an entity. To the extent that Jones Bluff elected to pass its liability on to its members under Code Sec. 6226, the members' liability will have resulted from the partnership's choice, not the enforcement of a restriction against Jones Bluff. In the court's view, this case therefore did not belong to the class of cases where courts have traditionally been forgiving when determining whether to allow for third-party standing.

The court further found that the passing on of Jones Bluff's liability to its individual members would occur (if at all) as a result of Jones Bluff's actions and not the IRS's actions. Jones Bluff's actions therefore were "contingent future events" that rendered the claims it was making on behalf of the individual members not ripe at this time. The court noted that the members of Jones Bluff will be able to raise their constitutional due process claims in the future, once the outcome of this proceeding and Jones Bluff's actions with respect to any required payment are known, which served to confirm that the claims before the court were not now properly raised.

For a discussion of determining audit adjustments at the partnership level under the BBA, see Parker Tax ¶28,705.

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