Under TEFRA, FPAA Timeliness Must Be Challenged at the Partnership Level or Is Waived

1. Introduction

The Tenth Circuit held that taxpayers cannot use an individual, partner-level deficiency proceeding to challenge the timeliness of a final partnership administrative adjustment (“FPAA”) when they failed to raise that challenge in the earlier partnership-level proceeding. This rule includes challenges to the validity of agreements signed by a tax matters partner extending the applicable limitations period.

Scott and Audrey Blum sought to avoid approximately $15.9 million in disputed tax deficiencies arising from an artificial $78.5 million loss generated through the Bond Linked Issue Premium Structure (“BLIPS”) tax shelter. Their central argument was procedural: an allegedly defective extension agreement made the partnership adjustment untimely and, consequently, invalidated the later notices of deficiency issued to them individually.

The court did not decide whether the disputed extension agreement was defective. Instead, it held that the Blums had raised the issue in the wrong proceeding. Under the Tax Equity and Fiscal Responsibility Act of 1982 (“TEFRA”), that defense belonged in the partnership litigation, in which they were parties and could have participated.

The decision establishes the Tenth Circuit’s alignment with an existing, uniform appellate approach. Its significance lies both in enforcing TEFRA’s division between partnership and partner proceedings and in reaching that result through independent statutory and regulatory interpretation, without administrative deference.

2. Background: The Tax Shelter and TEFRA’s Two-Level System

The BLIPS transactions

Mr. Blum participated in BLIPS through Bogan Ventures, LLC, a single-member entity disregarded for federal tax purposes. Bogan held approximately 90 percent of Democrat Strategic Investment Fund, LLC (“DSIF”), a partnership whose tax matters partner was Presidio Growth, LLC.

The transactions artificially inflated Bogan’s basis in its partnership interest. When DSIF liquidated and distributed assets to Bogan, the inflated basis carried into the distributed assets. Their subsequent sale at fair market value produced a reported loss of $78.5 million, although the transactions had not generated a corresponding economic loss.

The Blums used that loss to offset approximately $74.8 million in unrelated capital gains on their 1999 return. They also claimed unused portions of the loss as capital-loss carryforwards in 2007 and 2010.

Why two proceedings were required

Partnerships generally do not pay federal income tax themselves. Their income, gains, losses, and deductions pass through to their partners. TEFRA established a coordinated procedure for resolving disputes about those items:

• Partnership level: Common questions concerning partnership items are determined once for the partnership.
• Partner level: The resulting consequences for individual partners are implemented, including any necessary determinations concerning affected items.

Under I.R.C. § 6221, the tax treatment of partnership items must be determined at the partnership level. Section 6231(a)(3) defines partnership items by reference to matters required to be taken into account under subtitle A of the Code and appropriately determined collectively under Treasury regulations.

Treasury Regulation § 301.6231(a)(3)-1(a) identifies such items as partnership income, gains, losses, deductions, and credits. Subsection (b) extends the definition to the accounting practices and legal or factual determinations underlying their amount, timing, and characterization.

An affected item, by contrast, is an individual tax item affected by a partnership item. Here, the Blums’ basis in assets received through the liquidating distribution required partner-level treatment, but the partnership determinations underlying the resulting adjustments had already been resolved collectively.

Material procedural events

The Blums knew about the partnership litigation and were treated as parties under TEFRA. They could have participated on Bogan’s behalf but did not. Their unsuccessful efforts to negotiate a settlement did not preserve an unasserted limitations defense.

3. Summary of the Opinion

The Tenth Circuit affirmed on the following grounds:

1. FPAA timeliness is a partnership item. It is a legal determination underlying the amount of a partnership loss under the governing regulation.
2. Section 6221 independently supports partnership-level determination. The court reasoned that FPAA timeliness at least relates to an adjustment to a partnership item.
3. TEFRA’s structure and purpose confirm the required forum. A common limitations issue should be resolved once, not repeatedly in potentially inconsistent individual proceedings.
4. The Blums waived their challenge. They could not attack the tax matters partner’s extension agreement for the first time in their partner-level case.
5. The individual extension agreements were immaterial. The partnership-based limitations provisions supported the notices without requiring a decision on the separate individual agreements.

The original notices involved approximately $22.2 million in taxes and penalties. That was not the amount substantively before the appellate court. The Tax Court had dismissed the misstatement penalties for lack of jurisdiction, and the Blums did not appeal the late-filing penalty. Approximately $15.9 million in tax deficiencies remained disputed.

The court reviewed legal conclusions de novo and factual findings for clear error. Its decisive ruling concerned the legal allocation of issues between TEFRA’s two procedural stages.

4. Analysis of the Court’s Legal Reasoning

A. Why a limitations defense qualifies as a partnership item

The central interpretive question was whether a procedural limitations issue can fall within a definition tied to substantive income-tax provisions.

The Blums emphasized that the limitations provisions appear in subtitle F, governing procedure and administration, whereas § 6231(a)(3) refers to matters taken into account under subtitle A, governing income taxes. On their reading, the statutory location of the limitations provisions excluded FPAA timeliness from partnership-item treatment.

The court rejected that categorical distinction. It read the statute together with the regulation’s inclusion of legal and factual determinations that “underlie” the amount, timing, or characterization of partnership items. The claimed partnership loss was indisputably a subtitle A item. Whether the IRS could timely disallow that loss determined whether the reported $78.5 million loss would survive the adjustment process.

Thus, a rule located in subtitle F could supply an underlying determination affecting a subtitle A item. The statutory connection depended on the determination’s function, not simply its location in the Code.

This reasoning is consequential because it treats some procedural predicates as part of the collective determination of partnership tax treatment. It does not mean that an expired limitations period makes an artificial loss economically genuine. Rather, timeliness determines whether the IRS may effectively impose the adjustment rejecting that loss.

B. The alternative reliance on § 6221

The court also relied on § 6221, which requires partnership-level determination of partnership-item tax treatment and includes a parenthetical addressing penalties, additions to tax, or additional amounts relating to adjustments to partnership items.

Because the timeliness issue controlled whether the loss would be disallowed, the court concluded that it “relates to an adjustment to a partnership item” and therefore belongs at the partnership level.

This alternative rationale warrants careful treatment. The quoted “relates to” language appears within a parenthetical expressly addressing penalties and related amounts. The court’s application therefore reaches beyond the most straightforward reading of that parenthetical as a penalty-allocation provision. The opinion’s separate holding under § 6231(a)(3) and the regulation provides a direct foundation for the result, without requiring readers to treat every issue related to a partnership adjustment as automatically subject to partnership-level adjudication.

The parties had not developed this particular construction in their briefs. After oral argument and supplemental letters, the court invoked its authority to identify and apply the governing law when the statutory-construction issue itself is properly before it.

C. TEFRA supplies both a collective forum and participation rights

The court’s contextual analysis linked the substantive allocation of issues to TEFRA’s procedural safeguards:

• The tax matters partner may execute a limitations extension applicable to all partners.
• The tax matters partner may petition for review of an FPAA.
• If the tax matters partner does not act, qualifying partners may initiate review.
• Rules governing competing petitions channel the dispute into one proceeding.
• Partners are treated as parties and must be permitted to participate.
• Section 6226(d)(1) expressly accommodates participation to assert that the limitations period for assessing partnership-attributable tax has expired as to a partner.

These provisions answer an important fairness concern: requiring a defense to be raised collectively is more defensible when affected partners have a statutory opportunity to present it. Here, the Blums had both knowledge of the litigation and an opportunity to participate.

The disputed tax matters partner consent also presented a common issue. Its validity would affect the partnership collectively, rather than depend on an individualized fact peculiar to one taxpayer. Allowing successive partner-level challenges would risk inconsistent treatment of the same agreement.

D. Waiver, not a merits determination about the disputed signature

The Blums asserted that the IRS had not signed the first tax matters partner consent before the original limitations period expired. If that agreement failed, they argued, the later agreements could not revive the expired period.

The appellate court observed that supplemental record materials appeared to show an IRS signature dated April 2, 2003, before the original period expired. It expressly declined to resolve the appeal on that ground.

Accordingly, the decision should not be described as a substantive ruling validating the first consent. Its holding is procedural: the Blums could no longer litigate that alleged defect in the partner-level proceeding.

The opinion uses “waiver” to describe this failure to present the defense in the required forum. Its analysis should not be expanded into a holding that all limitations questions are jurisdictional, or that every limitations defense concerning an individual partner is unavailable at the partner level.

E. Why the individual consents did not matter

The Blums separately argued that their individual extension agreements lacked the express coverage of partnership-attributable tax required by § 6229(b)(3).

The court did not decide that question. Once the attack on the first tax matters partner consent was unavailable, the partnership extension framework remained operative for purposes of this litigation. The IRS mailed the FPAA on December 17, 2004, within the extension period recognized by the court.

Under § 6229(d), mailing the FPAA suspended the relevant limitations period through the partnership litigation and for one year afterward. Because the partnership judgment became final on January 20, 2015, the December 8, 2015 notices fell within the resulting period ending January 20, 2016.

The deficiencies for 2007 and 2010 derived from carryforwards of the same disallowed 1999 loss. The partnership-based limitations treatment therefore also supported the adjustments to those later years.

The opinion contains differing descriptions of whether the final consent extended the period to December 31, 2004 or December 31, 2005. That discrepancy does not affect the stated result: the December 17, 2004 FPAA preceded either date.

F. Independent interpretation rather than administrative deference

The Blums invoked the Supreme Court’s restrictions on administrative deference. The Tenth Circuit answered that it had independently interpreted both the statute and the regulation, without deferring to the Treasury Department’s interpretation.

The court also distinguished judicial interpretation from Congress’s express delegation of authority. Section 6231(a)(3) authorizes Treasury to identify appropriate partnership items within statutory limits. Independently enforcing those limits does not require disregarding regulations validly issued under that delegation.

This aspect of the opinion preserves the result reached by earlier appellate decisions while supplying a nondeferential rationale for it.

5. Precedents Cited and Their Influence

A. The Supreme Court and TEFRA’s basic architecture

United States v. Woods, 571 U.S. 31 (2013), supplied the controlling description of TEFRA’s two stages. Partnership adjustments are determined first; resulting computational adjustments and necessary affected-item proceedings follow. This sequencing explains why an individual deficiency case is not a second opportunity to challenge matters allocated to the partnership case.

Omega Forex Grp., LC ex rel. Flath v. United States, 906 F.3d 1196 (10th Cir. 2018), supplied binding circuit background on TEFRA’s objectives, notice procedures, and the tax matters partner’s role. Its statement that TEFRA promotes consistent treatment and avoids duplicative litigation became a recurring justification for the result.

Prati v. United States, 603 F.3d 1301 (Fed. Cir. 2010), was the source of that statement of legislative purpose, quoted through Omega Forex Grp., LC ex rel. Flath v. United States. Its influence was structural rather than a separate analysis of the disputed signature.

Callaway v. Comm'r, 231 F.3d 106 (2d Cir. 2000), reinforced the treatment of partnership litigation as a coordinated proceeding designed to avoid repeated adjudication of common issues.

B. The unanimous appellate treatment of FPAA limitations challenges

The court identified five other circuits that had required these challenges to be raised at the partnership level. It treated their agreement as persuasive, while independently examining the governing text.

Exby-Stolley v. Bd. of Cnty. Comm'rs, 979 F.3d 784 (10th Cir. 2020) (en banc), and United States v. Thomas, 939 F.3d 1121 (10th Cir. 2019), supplied the circuit’s stated reluctance to create an unnecessary conflict with numerous other circuits. That consideration corroborated, rather than replaced, the statutory analysis. The opinion also cited Exby-Stolley v. Bd. of Cnty. Comm'rs when introducing its explanation of the statutory framework.

C. Administrative-law precedents

Kisor v. Wilkie, 588 U.S. 558 (2019), influenced the method of regulatory interpretation. The court used traditional interpretive tools to determine the regulation’s meaning rather than accepting an agency construction through deference.

Loper Bright Enterprises v. Raimondo, 603 U.S. 369 (2024), framed the Blums’ objection to reliance on older agency-deference reasoning. The court’s response was that its own reading of the statute and regulation established the result. It also found no demonstrated basis for concluding that the regulation exceeded Treasury’s expressly delegated authority.

D. Statutory-construction precedents

The court also invoked the presumption against ineffectiveness described in Scalia and Garner’s Reading Law: The Interpretation of Legal Texts. That canon favored a textually permissible interpretation advancing TEFRA’s coordinated adjudication system rather than frustrating it.

E. The shelter litigation and related background cases

Estate of Keeter v. Comm'r, 75 F.4th 1268 (11th Cir. 2023), supplied the explanation of BLIPS: liabilities and partnership distributions are used to inflate basis and generate artificial losses. It explained the transactions, not the preservation rule.

Shasta Strategic Inv. Fund, LLC v. United States (Shasta SIF), No. C-04-04264-RS, 2014 WL 3852416 (N.D. Cal. July 31, 2014), was the actual partnership-level adjudication underlying this appeal. It sustained the relevant adjustments because the BLIPS transactions lacked economic substance. Its importance was procedural as well as substantive: it was the proceeding in which the Blums should have raised their limitations defense, and its finality established the date used in calculating the subsequent assessment period.

Blum v. Commissioner, 737 F.3d 1303 (10th Cir. 2013), concerned the Blums’ separate OPIS shelter. The court used it for background and to distinguish that earlier controversy from the BLIPS issues now before it.

Blum v. Commissioner, T.C.M. (RIA) 2025-018 (2025), also cited in the opinion as Blum v. Comm'r, was the Tax Court decision under review. It supplied the factual findings and held that the limitations challenge had been waived. The appellate court adopted that dispositive conclusion without deciding every alternative ground discussed below.

F. Review standards and applicable statutory versions

Olsen v. Comm'r, 52 F.4th 889 (10th Cir. 2022), and Petersen v. Comm'r, 924 F.3d 1111 (10th Cir. 2019), supplied the distinction between de novo review of legal conclusions and clear-error review of factual findings.

Christiansen v. Comm'r, 843 F.2d 418 (10th Cir. 1988), supported using the statutory and regulatory provisions effective for the taxable years involved. This mattered because TEFRA had been amended repeatedly and later repealed.

6. Impact and Limits of the Decision

Preservation must occur in the correct proceeding

The immediate practical lesson is that partners must investigate limitations issues while partnership litigation remains open. They should not assume that a challenge to a common extension agreement can be saved for their own deficiency proceedings.

Participation rights carry practical responsibilities. Even a partner who does not actively litigate may be bound by the collective process. Settlement discussions alone do not substitute for presenting a defense in court.

Greater consistency and finality

The decision prevents partners from successively attacking the same tax matters partner agreement after the partnership case has concluded. It protects consistent treatment and limits attempts to reopen common questions indirectly through affected-item disputes.

A post-deference foundation for existing doctrine

The opinion demonstrates that a conclusion previously supported partly by agency-deference reasoning may remain valid after independent judicial examination. Expressly delegated regulatory authority and ordinary textual interpretation remain important even when deference is unavailable.

Important boundaries

• Legacy regime: TEFRA was repealed effective January 1, 2018. The holding directly concerns disputes still governed by that framework, not automatically the replacement partnership-audit regime.
• No ruling on the disputed consents’ merits: The court did not decide whether the first partnership consent or the individual consents were substantively valid.
• No blanket exclusion of individual defenses: The case concerns an attempt to revive an antecedent partnership-level challenge. It does not hold that independently arising partner-level limitations questions can never be heard.
• No new economic-substance test: The shelter’s substantive invalidity had already been established in the partnership case.
• No merits vindication of dismissed penalties: Dismissal for lack of jurisdiction is not a substantive determination that the penalties were unwarranted.

7. Complex Concepts Simplified

FPAA

The IRS’s formal notice stating its final proposed changes to a partnership’s reported tax items.

Tax matters partner

The partner designated under TEFRA to perform specified representative functions, including certain litigation, notice, and extension-agreement responsibilities.

Partnership item

A tax matter appropriately decided collectively for the partnership, including qualifying legal and factual determinations underlying its reported items.

Affected item

An individual partner’s tax item whose treatment depends on a partnership determination.

Outside and inside basis

Outside basis concerns a partner’s investment in the partnership interest; inside basis concerns the partnership’s tax basis in its assets.

Limitations extension and suspension

An extension agreement lengthens the relevant period. A statutory suspension stops its running for the specified time, here including partnership litigation and the prescribed period afterward.

Waiver in this opinion

Losing the ability to assert the particular defense later because it was not presented in the proceeding designated to resolve it.

De novo review

The appellate court decides the legal question independently rather than deferring to the Tax Court’s legal conclusion.

8. Conclusion

Blum v. CIR makes the procedural lesson clear: a challenge to FPAA timeliness—including an alleged defect in a tax matters partner’s extension agreement—must be presented in the TEFRA partnership proceeding. It cannot be reserved for later individual deficiency litigation.

By affirming on waiver grounds, the Tenth Circuit preserved the partnership judgment’s finality, joined the existing appellate consensus, and supplied an independent textual and structural justification for that result. The Blums’ separate individual extension agreements therefore did not affect their liability for the approximately $15.9 million disputed on appeal.