The Tax Times: Tax Court Confirms: Partnership Penalties Can Survive Even If the Underlying Tax Is Abated

Thursday, July 10, 2025

Tax Court Confirms: Partnership Penalties Can Survive Even If the Underlying Tax Is Abated

The recent Tax Court decision in Moxon Corporation v. Commissioner delivers a significant message for anyone involved with partnership tax matters: partnership-level penalties can be assessed and collected even if the underlying tax deficiency is wiped out due to a procedural error.

Background: What Happened?

Moxon Corporation was a partner in a fund that generated substantial losses from complex foreign currency transactions. The IRS challenged these losses and, after years of litigation, issued notices of deficiency (SNODs) to Moxon for both back taxes and hefty penalties. However, the IRS mailed these notices to the wrong address—a critical procedural misstep. As a result, the underlying tax deficiencies were abated; in other words, Moxon didn’t owe the tax because the IRS didn’t follow the proper process.

The Big Question: What About the Penalties?

Moxon argued that if the tax was abated, the penalties should be too. They pointed to the fact that the IRS initially included penalties in the same deficiency notices and argued that a penalty can’t stand if there’s no collectible tax.

The Court’s Take: Penalties Stand Alone

The Tax Court disagreed. Here’s why:

· Penalties from Partnership Proceedings Are Different: Under the Tax Equity and Fiscal Responsibility Act (TEFRA), partnership-level penalties aren’t subject to the same “deficiency procedures” as regular tax assessments. The law specifically says these penalties can be assessed directly, even if the IRS messes up the mailing of a deficiency notice.

· “Tax Imposed” Still Means Something: The Court said that even if the IRS can’t collect the tax because of a procedural error, the tax was still “imposed” for purposes of calculating penalties. The penalty is based on what the correct tax would have been, not what the IRS can actually collect.

· Procedural Errors Don’t Save You from Penalties: Mailing the notice to the wrong address meant the tax couldn’t be collected, but it didn’t erase the penalty liability that was determined at the partnership level.

What This Means for Taxpayers

This decision is a wake-up call for anyone involved in partnerships facing IRS scrutiny.

Even If You Escape The Underlying Tax Because of a Technicality, Partnership-Level Penalties Can Still Stick.

Your main recourse to challenge these penalties is either through a refund suit or by raising specific defenses during a Collection Due Process (CDP) hearing.

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