LLC cannot raise due process claim for its members

The Tax Court held that an LLC taxed as a partnership did not have standing to bring a due process claim under the U.S. Constitution’s Fifth Amendment on behalf of its individual members.

Background

Jones Bluff is a limited liability company (LLC) treated as a partnership for federal tax purposes that for the 2019 tax year was subject to the centralized partnership audit regime enacted by the Bipartisan Budget Act of 2015 (BBA), P.L. 114–74.

Upon its formation, Jones Bluff purportedly acquired a tract of land in Alabama and in December 2019 purportedly granted a conservation easement over the property to Pelican Coast Conservancy Inc. On its timely filed Form 1065, U.S. Return of Partnership Income, for its 2019 tax year, the LLC claimed a charitable contribution deduction of $36,290,000 for its donation of the easement. Green Rock Management LLC was listed as Jones Bluff’s partnership representative on its 2019 Form 1065.

The IRS examined Jones Bluff’s 2019 partnership return and in October 2023 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 charitable contribution deduction for the easement and asserted an imputed underpayment of $13,427,300 and penalties of $5,359,968. On Nov. 29, 2023, Jones Bluff submitted Form 8988, Election for Alternative to Payment of the Imputed Underpayment — IRC Section 6226, to the IRS. In January 2024, Jones Bluff timely filed a petition in Tax Court challenging the FPA.

Jones Bluff subsequently filed a motion for summary judgment contending that the FPA was invalid because the partnership audit rules of the BBA violated the Due Process Clause of the Fifth Amendment 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 members’ claims were not ripe.

The Tax Court’s decision

The Tax Court held that Jones Bluff could not raise a due process claim under the Fifth Amendment on behalf of its individual members because it did not meet the requirements for third–party standing and the individual member’s claims were not ripe.

Standing: Under Article III of the Constitution, a plaintiff must have standing, i.e., a personal stake in the results of the case. Although the Tax Court is an Article I court (Freytag, 501 U.S. 868 (1991)), standing applies to Tax Court proceedings (Anthony, 66 T.C. 367, 370 (1976)).

The Supreme Court has established requirements for a plaintiff to have standing: (1) an “injury in fact,” meaning an invasion of a legally protected interest that is “concrete and particularized” and actual or imminent, not conjectural or hypothetical; (2) causation, meaning that the injury is “fairly … trace[able]” to the challenged action of the defendant; and (3) redressability, meaning that the injury is “likely” to be “redressed by a favorable decision” of the court (Lujan v. Defenders of Wildlife, 504 U.S. 555, 560—61 (1992)).

The IRS did not contend that Jones Bluff itself lacked standing to challenge the FPA. The Tax Court agreed, finding that Jones Bluff had standing to challenge the FPA because (1) it had been injured by the assertion of the imputed underpayment in the FPA with respect to the partnership’s property (2) by the IRS, and (3) the court had the power to redress Jones Bluff’s grievance with the FPA.

Third–party standing: The IRS did assert, though, that Jones Bluff lacked standing to claim that the BBA partnership audit regime violated its members’ due process rights under the Fifth Amendment, based on the rule that a party cannot ordinarily “rest his claim to relief on the legal rights or interests of third parties” (Kowalski v. Tesmer, 543 U.S. 125, 129 (2004), quoting Warth v. Seldin, 422 U.S. 490, 499 (1975)). The Supreme Court, however, has stated that the rule against a party’s resting its claims to relief 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 (June Medical Services L.L.C. v. Russo, 591 U.S. 299, 318 (2020)).

The third–party–standing inquiry adds a second set of prudential considerations to the Article III requirement of injury in fact (Singleton v. Wulff, 428 U.S. 106, 112 (1976)). This 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. The Tax Court noted that courts have been forgiving with these criteria in the context of First Amendment cases and when enforcement of the challenged restriction against the litigant would result indirectly in the violation of third parties’ rights. However, beyond these types of cases, courts have not looked favorably upon third–party standing.

In Jones Bluff’s case, the liability at issue was a liability of the partnership. The Tax Court found that to the extent that a partnership elects to pass its liability on to its members under Sec. 6226, the members’ liability will have resulted from the partnership’s choice, not the enforcement of a restriction against the partnership. Thus, the Tax Court rejected Jones Bluff’s argument that the BBA audit procedures and the proceeding before the 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. According to the court, unlike in those cases, where the incidence of the law on one person caused a violation of the rights of another, the statute at issue in Jones Bluff’s case addresses only that the partnership may initiate the proceeding.

Applying the two–prong third–party–standing inquiry, the Tax Court found that Jones Bluff in some sense had a close relationship with its individual members because of their shared ownership of the partnership and Green Rock’s representative role for tax purposes, but that a partnership, its representative, and its individual members may not always share a unity of interest in the context of litigation. However, the court found it did not need to determine in Jones Bluff’s case whether a close relationship existed because the second prong of the third–party–standing inquiry was not satisfied.

Regarding the second prong, hindrance to the right holder’s ability to protect their own interests, the Tax Court found that although the individual members of Jones Bluff other than Green Rock, the partnership representative, did not have a statutory right to participate directly in the proceeding, they remained free to raise their constitutional claims in future litigation. Thus, the statute did not hinder the members from presenting their due process claims, and it would not be appropriate to allow Jones Bluff to assert those claims on the members’ behalf. Consequently, the court held that Jones Bluff did not have third–party standing to assert its members’ constitutional due process claims.

Ripeness: A court will not adjudicate a claim that is not “ripe.” A claim is not ripe if it rests upon future events that may not occur or may not occur as anticipated. In the Tax Court’s view, for Jones Bluff’s claims to be ripe, the court would need to decide in favor of the IRS, and Jones Bluff would need to either (1) issue statements to its members to pass through its liability or (2) fail to pay the imputed underpayment and pass through its liability to the members.

The Tax Court found, as had the IRS, that the liability at issue in the proceeding was that of the partnership and not of the individual members. Moreover, the passing on of that liability to the individual members would occur, if at all, only as a result of Jones Bluff’s actions and not the IRS’s actions. The court, therefore, held that Jones Bluff’s actions were “contingent future events” that rendered the claims it was making on behalf of the individual members not ripe at that time.

Reflections

A concurring opinion addressed Jones Bluff’s argument that the BBA violated the Due Process Clause because, unlike the Tax Equity and Fiscal Responsibility Act (TEFRA), P.L. 97–248, the BBA did not provide individual partners subject to a potential adjustment with uniform notice and participation rights. The concurrence called this argument “misleading at best.”

The concurrence explained that, under TEFRA, partners do not have uniform rights. Under TEFRA, not all the partners in a partnership are entitled to notice from the IRS and to participate by filing a petition with respect to a notice of final partnership administrative adjustment. Nonetheless, the TEFRA notice and participation provisions have been held to provide adequate due process, both in cases involving due process challenges by non–notice partners and indirect partners

Like TEFRA, the BBA requires notice to be given to a central figure of the partnership, who acts on behalf of and communicates to the individual partners. As the Tax Court held in Vander Heide, T.C. Memo. 1996–74, a case involving the TEFRA notice provisions, when the communication between the central figure and the other partners breaks down, it is not the fault of the IRS or TEFRA notice provisions. According to the concurrence, “the jurisprudence surrounding the TEFRA notice provisions does not support [Jones Bluff’s] position.”

Jones Bluff, LLC, 166 T.C. No. 6 (2026)

Contributor

James A. Beavers, CPA, CGMA, J.D., LL.M., is The Tax Adviser’s tax technical content manager. For more information about this column, contact thetaxadviser@aicpa.org.