Mind the Clock: Bayou Serpent Prevails Over IRS on Late Notice

The U.S. Tax Court issued a significant decision in favor of Bayou Serpent Property, LLC (“Bayou Serpent”), holding that the Internal Revenue Service’s (“IRS”) Final Partnership Adjustment (“FPA”) was invalid because it was not issued within the strict statutory timeframe mandated by the Bipartisan Budget Act (“BBA”) audit regime.  Specifically, the court found that the FPA, which sought to disallow a $76.5 million charitable donation deduction for a conservation easement, was issued more than 270 days after Bayou Serpent submitted its modification request, and crucially, after no further information was either provided by the partnership or requested by the IRS. As a result, the adjustments in the FPA are unenforceable, and the IRS is barred from collecting the related imputed underpayment or penalties from the partnership or its partners.

This case centers on Bayou Serpent’s 2019 donation of a conservation easement over 202.2 acres in Louisiana for which it claimed a charitable donation deduction.  After an IRS audit and the issuance of a Notice of Proposed Partnership Adjustment (“NOPPA”) disallowing the deduction, Bayou Serpent timely filed Form 8980 to request modification of the imputed underpayment on February 8, 2024.  The IRS denied the modification request on September 23, 2024, and did not request any further information from the partnership thereafter.  The IRS ultimately issued its FPA on January 13, 2025, more than 270 days after the modification request had been filed.

Bayou Serpent filed an unopposed Motion for Summary Judgment on September 17, 2025 (“Motion”).  The court granted Bayou Serpent’s Motion, finding that the statutory language of Section 6235(a)(2) controlled the timeliness of the FPA as the 270-day clock commenced when the partnership made a timely modification request.  As such, the FPA was issued after the statutory deadline of 270 days and its adjustments to the partnership were invalid and unenforceable.   

Importantly, Bayou Serpent’s Motion for Summary Judgement was filed on the heels of a taxpayer win in the JM Assets v. Commissioner opinion, 165 T.C. No. 1 (2025), in which the Tax Court held that Treasury Regulation Section 301.6235-1(b)(2)(A), which interpreted Section 6235(a)(2) was invalid because it attempted to change an unambiguous provision in the statute. The court, agreeing with its opinion in JM Assets, and strictly applying the deadline set forth in the statute, entered an Order and Decision on November 5, 2025 dismissing the Bayou Serpent case.

In summary, the Tax Court’s Order and Decision in Bayou Serpent confirms that procedural deadlines in the BBA audit regime are strictly enforced.  Tax defense counsel must closely monitor procedural deadlines as any FPA issued past the deadline will be invalid, thereby precluding the assessment of any asserted adjustments.