A partner in a partnership that is the subject of a Final Partnership Administrative Adjustment has the right to judicial review in district court or the Court of Federal Claims under Section 6226 of the Internal Revenue Code. The court’s jurisdiction can only be invoked, however, if the partner makes a deposit with the IRS in an amount equal to the increase in tax liability that the partner would have if the court sustains the administrative determination and the partnership items on her return were adjusted in a manner consistent with the Final Partnership Administrative Adjustment. See I.R.C. § 6226(e)(1). The Code also provides that this requirement can be satisfied if the Court rules that “there has been a good faith attempt to satisfy such requirements and any shortfall in the amount required to be deposited is timely corrected.” Id.
In Gail Vento LLC v. United States, 2011 U.S. Dist. LEXIS 130060 (D.V.I. Nov. 8, 2011), the court analyzed this good faith requirement, and concluded that the good faith requirement was to be applied “leniently.” Vento, the tax matters partner, had made a deposit of $100 for each of a series of partnerships. In contrast, the government had initially claimed that the requisite adjustment was $103,000 per partnership, although it later revamped that position, dropping its calculation to $24,000 per partnership. 2011 U.S. Dist. LEXIS 130060 at *6-*7. Vento himself had apparently characterized the deposits as “token.” Nonetheless, the Court held that the deposit had been made in good faith and denied the government’s motion to dismiss.
First, the Court noted that the amount deposited was consistent with at least one set of calculations of the impact of the adjustments that Vento had prepared, which indicated there would be no increase in tax liability and which was the context in which he characterized his deposits as token payments. 2011 U.S. Dist. LEXIS 130060 at *7-*10. Particularly in light of the fact that the government’s own initial calculation was incorrect, the Court concluded that Vento’s calculations were consistent with a good faith effort to meet the deposit requirement. Second, the Court noted that prior district court and Court of Federal Claims cases had held that a large disparity between the amount deposited and correct amount was not an indication of bad faith. 2011 U.S. Dist. LEXIS 130060 at *10. Since Vento had specifically indicated that he was willing to make an additional deposit in the revised amount claimed by the government, the Court denied the government’s motion to dismiss and conditioned the exercise of jurisdiction upon Vento’s making an additional deposit promptly.
The lesson to take from the case is that the good faith requirement is likely to be applied leniently where the partner seeking review can demonstrate a legitimate basis for his calculation of the amount deposited. Assuming that the amount deposited was supported by a reasonable effort to calculate the additional tax liability, the fact that deposit is not correct or that it is substantially less than the government asserts the partner’s liability to be will not result in dismissal. A litigant who wants to rely on this provision should be prepared to show the work by outlining in detail, by affidavit, how the deposit amount was calculated. Obviously, the more thorough the analysis that goes into the deposit amount, the more likely it will be deemed to be in good faith. It would also be wise to avoid using terms such as “token amount” to characterize the deposit.