FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
BAKERSFIELD ENERGY PARTNERS,
LP, ROBERT SHORE, STEVEN FISHER,
GREGORY MILES, SCOTT MCMILLAN,
PARTNERS OTHER THAN THE TAX No. 07-74275
MATTERS PARTNERS,
Petitioners-Appellees, Tax Ct. No. 4204-
06
v. OPINION
COMMISSIONER OF INTERNAL
REVENUE,
Respondent-Appellant.
Appeal from a Decision of the
United States Tax Court
Argued and Submitted
February 9, 2009—Pasadena, California
Filed June 17, 2009
Before: Andrew J. Kleinfeld, Carlos T. Bea, and
Sandra S. Ikuta, Circuit Judges.
Opinion by Judge Ikuta
7197
7200 BAKERSFIELD ENERGY PARTNERS v. CIR
COUNSEL
Steven R. Mather, Beverly Hills, California, for the
petitioners-appellees.
Joan I. Oppenheimer, Washington, D.C., for the respondent-
appellant.
OPINION
IKUTA, Circuit Judge:
The IRS generally has three years after a return is filed to
assess a tax deficiency, but it has six years to do so when the
return “omits from gross income an amount properly includ-
ible therein which is in excess of 25 percent of the amount of
gross income stated in the return.” 26 U.S.C. § 6501(a),
(e)(1)(A). This case requires us to decide whether the IRS can
use this extended six-year limitations period to assess a defi-
ciency where a taxpayer has overstated its basis in an asset
and thereby lowered the amount of gross income reported in
its return. In other words, does a taxpayer “omit[ ] from gross
income an amount properly includible therein” for purposes
of § 6501(e)(1)(A) by overstating its basis? We conclude, like
the Tax Court below, that we are bound by Colony, Inc. v.
Comm’r, 357 U.S. 28, 33 (1958), which held that a taxpayer’s
overstatement of basis does not “omit[ ] from gross income an
amount properly includible therein” for purposes of
§ 6501(e)(1)(A). Accordingly, the IRS had only three years to
assess the tax deficiency at issue in this case, and it failed to
BAKERSFIELD ENERGY PARTNERS v. CIR 7201
do so. We therefore affirm the Tax Court’s judgment in favor
of the taxpayer.
I
Bakersfield Energy Partners, LP (Bakersfield), the taxpayer
in this case, is a limited partnership that owned an interest in
oil and gas property.1 A third party, Seneca, offered to pur-
chase the property for $23,898,611.
According to the IRS, before the sale was consummated,
four of the seven partners in Bakersfield took a series of steps
that led Bakersfield to increase its basis in its oil and gas
property and thereby decrease its gross (and potentially tax-
able) income from the sale.2 Before taking these steps,
Bakersfield’s basis in the oil and gas property was zero.
The steps were as follows: First, the four partners formed
a new partnership, Bakersfield Resources, LLC (Resources).
Second, the four partners sold their partnership interests in
Bakersfield to Resources for $19,924,870. The four partners
collectively owned 76.3% of Bakersfield; by selling more
than half of the total partnership interests in Bakersfield, they
caused a technical termination of the Bakersfield partnership
and the formation of a new Bakersfield partnership in which
Resources held a 76.3% interest. See 26 U.S.C.
1
Bakersfield’s notice partners are also parties to this appeal. A “notice
partner” is a partner whose name appears on the partnership’s return and
who has the right to petition the Tax Court for readjustment. See 26 U.S.C.
§§ 6223(a), 6226(b)(1). Because Bakersfield’s notice partners have the
same interests and arguments as Bakersfield, we refer to them collectively
as “Bakersfield” throughout this opinion.
2
“Basis” is the cost of acquiring an asset, as adjusted by various other
factors, such as depreciation over time. See 26 U.S.C. § 1012. In general,
a taxpayer’s gross income includes gains from sales of property, where
“gain” is defined as the sales price minus the taxpayer’s basis in the prop-
erty. See 26 U.S.C. § 61(a)(3); 26 C.F.R. § 1.61-6(a). Increasing the basis
therefore reduces the amount of gross (and potentially taxable) income.
7202 BAKERSFIELD ENERGY PARTNERS v. CIR
§ 708(b)(1)(B). Third, the new Bakersfield partnership made
use of certain tax provisions that allow a partnership to elect
to increase its basis in partnership assets following a transfer
of a partnership interest. See 26 U.S.C. §§ 754, 743. In this
case, Bakersfield made an election under § 754 to adjust its
basis in all of its assets by the $19,924,870 sales price of the
partnership interests sold to Resources. Bakersfield allocated
$16,515,194 of its new $19,924,870 basis to the oil and gas
property and the remainder to its other assets. Fourth, after
completing these steps to adjust its basis in its oil and gas
property, Bakersfield consummated the sale of its oil and gas
property to Seneca for $23,898,611 in May 1998.
On October 15, 1999, Bakersfield filed a partnership return
for the tax year ending December 1998. The return reported
that Bakersfield’s gain from the sale of the oil and gas prop-
erty was $7,383,417: the sales price of the oil and gas prop-
erty ($23,898,611) minus its new adjusted basis
($16,515,194). Bakersfield’s return also stated that its gain
was reduced by mining exploration costs of $1,993,034.
Accordingly, Bakersfield’s return recognized a net taxable
gain of $5,390,383 from the sale of the oil and gas property
(the $7,383,417 gain minus the $1,993,034 in mining and
exploration costs).
Bakersfield’s partnership return included a short statement
explaining its claimed basis:
Pursuant to IRC Sec. 708(b)(1)(B) and the regula-
tions thereunder, Bakersfield Energy Partners, LP
terminated on April 1, 1998. On that date, certain
partners sold over a 50% ownership interest in the
partnership’s capital and profits to Bakersfield
Resources, LLC (TEIN XX-XXXXXXX). On April 7,
1998, Bakersfield Resources, LLC acquired addi-
tional partnership interests through purchases. These
transactions resulted in a new partnership for federal
BAKERSFIELD ENERGY PARTNERS v. CIR 7203
income tax purposes (the “new” partnership retains
the same federal employer identification number).
As reflected within the capital accounts, the partner-
ship books were restated to reflect the value of the
assets as required in the regulations under IRC 704.
As reflected within this return, in the event of a sale
of these assets proper adjustments have been made
to reflect the tax basis and the proper taxable gain.
Bakersfield also attached a statement indicating its election
under 26 U.S.C. § 754 to adjust the basis in its assets in accor-
dance with § 743(b)(1).
On October 4, 2005, almost six years after the return was
filed on October 15, 1999, the IRS mailed Bakersfield a
notice of final partnership administrative adjustment (FPAA).
An FPAA tolls the limitations period in which the IRS can
assess a tax deficiency. See 26 U.S.C. §§ 6503(a)(1), 6229(d).
The IRS conceded before the Tax Court that, if the FPAA was
untimely, there was no other basis for tolling the limitations
period for any assessment and that summary judgment should
therefore be entered in favor of Bakersfield. See Bakersfield
Energy Partners v. Comm’r, 128 T.C. 207, 212 (2007).
The FPAA claimed that Bakersfield’s adjustment of its
basis in the oil and gas property from zero to $16,515,194 was
invalid because it “was the result of a sham transaction, a
transaction lacking economic substance that had no business
purpose and no economic effect and/or was availed for tax
avoidance purpose and should not be respected for tax pur-
poses.” Because the IRS determined that Bakersfield’s basis
in the oil and gas property was zero, not $16,515,194, the IRS
calculated that Bakersfield’s gain from the sale of the oil and
gas property to Seneca was $21,905,577, not $5,390,383.
Based on this calculation, the IRS determined that Bakersfield
had underpaid its taxes and was also liable for a 40% penalty
on the underpayment.
7204 BAKERSFIELD ENERGY PARTNERS v. CIR
Bakersfield petitioned the Tax Court for readjustment.
Before the Tax Court, the parties filed cross-motions for sum-
mary judgment. Bakersfield claimed, among other things, that
the FPAA was untimely under the three-year limitations
period in 26 U.S.C. § 6501(a).3 The IRS argued that the
FPAA was timely under the six-year limitations period in 26
U.S.C. §§ 6501(e)(1)(A)4 and 6229(c)(2).5 These provisions
3
Section 6501(a) provides, in pertinent part:
Except as otherwise provided in this section, the amount of any
tax imposed by this title shall be assessed within 3 years after the
return was filed (whether or not such return was filed on or after
the date prescribed) . . . and no proceeding in court without
assessment for the collection of such tax shall be begun after the
expiration of such period.
4
26 U.S.C. § 6501(e) states:
Substantial omission of items. Except as otherwise provided in
subsection (c)—
(1) Income taxes. In the case of any tax imposed by subtitle
A—
(A) General rule. If the taxpayer omits from gross
income an amount properly includible therein which is
in excess of 25 percent of the amount of gross income
stated in the return, the tax may be assessed, or a pro-
ceeding in court for the collection of such tax may be
begun without assessment, at any time within 6 years
after the return was filed. For purposes of this
subparagraph—
(i) In the case of a trade or business, the term
“gross income” means the total of the amounts
received or accrued from the sale of goods or ser-
vices (if such amounts are required to be shown on
the return) prior to diminution by the cost of such
sales or services; and
(ii) In determining the amount omitted from gross
income, there shall not be taken into account any
BAKERSFIELD ENERGY PARTNERS v. CIR 7205
give the IRS six years in which to assess a tax when “the tax-
payer omits from gross income an amount properly includible
therein which is in excess of 25 percent of the amount of
gross income stated in the return.” 26 U.S.C. § 6501(e)(1)(A).
The IRS claimed that, because this provision applied to
Bakersfield’s 1998 return, the FPAA was timely.
Applying the Supreme Court’s decision in Colony to
§ 6501(e)(1)(A), the Tax Court determined that the three-year
limitations period applied. See Bakersfield, 128 T.C. at 215-
16. Accordingly, the Tax Court held that the IRS’s FPAA was
untimely and granted Bakersfield’s motion for summary judg-
ment. The IRS timely appeals. We have jurisdiction under 26
U.S.C. § 7482.
amount which is omitted from gross income stated
in the return if such amount is disclosed in the
return, or in a statement attached to the return, in
a manner adequate to apprise the Secretary of the
nature and amount of such item.
5
26 U.S.C. § 6229 applies to partnerships subject to the Tax Equity and
Fiscal Responsibility Act of 1982 (TEFRA), Pub L. No. 97-248, 96 Stat.
324. Subsection (a) provides a minimum time period in which the IRS can
assess a tax deficiency. Section 6229(a) states, in pertinent part:
Except as otherwise provided in this section, the period for
assessing any tax imposed by subtitle A with respect to any per-
son which is attributable to any partnership item (or affected
item) for a partnership taxable year shall not expire before the
date which is 3 years after the later of—
(1) the date on which the partnership return for such taxable
year was filed, or
(2) the last day for filing such return for such year (deter-
mined without regard to extensions).
Subsection (c)(2) extends this three-year minimum to six years in cases
where a “partnership omits from gross income an amount properly includ-
ible therein which is in excess of 25 percent of the amount of gross income
stated in its return.” This language is identical to that contained in 26
U.S.C. § 6501(e)(1)(A), and the IRS concedes that the two provisions
have the same meaning. We therefore limit our discussion to § 6501.
7206 BAKERSFIELD ENERGY PARTNERS v. CIR
This case turns on whether the general three-year limita-
tions period in § 6501(a), or the extended six-year limitations
period in § 6501(e)(1)(A), applies to Bakersfield’s 1998 part-
nership return, which was filed almost six years before the
IRS mailed its FPAA to Bakersfield. The Supreme Court
addressed this precise question over sixty years ago in Col-
ony, when it interpreted the same language in an earlier ver-
sion of the tax code. Thus the primary legal dispute in this
case is whether Colony is controlling or whether it is distinguish-
able.6
II
Understanding the parties’ arguments requires an overview
of the extended limitations period in § 6501(e)(1)(A) and its
precursor, § 275(c), which was the provision construed by the
Supreme Court in Colony.
Section 275(c) of the 1939 tax code provided:
If the taxpayer omits from gross income an amount
properly includible therein which is in excess of 25
per centum of the amount of gross income stated in
the return, the tax may be assessed, or a proceeding
in court for the collection of such tax may be begun
without assessment, at any time within 5 years after
the return was filed.
26 U.S.C. § 275(c) (1934 & Supp. V), 53 Stat. 86-87 (empha-
sis added). Other than replacing the five-year period with a
six-year period, and “per centum” with “percent,” this lan-
guage in the 1939 Code is identical to the language in the
body of the current provision, 26 U.S.C. § 6501(e)(1)(A).7
6
Alternatively, Bakersfield argues that its tax return adequately dis-
closed the amount of gross income in dispute under 26 U.S.C.
§ 6501(e)(1)(A)(ii). We do not reach this issue.
7
As discussed below, although Congress copied the majority of the lan-
guage from § 275(c) into the body of § 6501(e)(1)(A), Congress also
added two subparagraphs to § 6501(e)(1)(A), see § 6501(e)(1)(A)(i) and
(ii), which did not appear in § 275(c).
BAKERSFIELD ENERGY PARTNERS v. CIR 7207
The 1939 Internal Revenue Code, like the current code,
generally defined “gross income” as including gains from
“dealings in property” and provided that “gain from the sale
or other disposition of property shall be the excess of the
amount realized therefrom over the adjusted basis.” 26 U.S.C.
§ 22(a) (1934 & Supp. V), 53 Stat. 9; 26 U.S.C. § 22(f) (1934
& Supp. V), 53 Stat. 12; 26 U.S.C. § 111(a) (1934 & Supp.
V), 53 Stat. 37. In other words, “gross income” under the
1939 Code had the same general meaning that it does under
the current code: the total amount of money received (i.e.,
“gross receipts”) minus basis. See 26 U.S.C. § 61(a); 26
C.F.R. § 1.61-1(a).
Given this definition of “gross income,” disputes arose over
whether the extended limitations period of § 275(c) applied if
a taxpayer overstated its basis. A taxpayer that overstated its
basis would report an erroneously low amount of gross
income, since gross income was defined as the difference
between gross receipts and basis. This court, as well as the
majority of other courts addressing the issue, determined that
an overstatement of basis was not an omission of an amount
from gross income under § 275(c). In Slaff v. Comm’r, we
sided with the majority of the circuits to address the question
and held that the general three-year limitations period was
applicable where a taxpayer reported the income he had
received overseas on his tax forms but erroneously claimed it
was excluded from gross income. 220 F.2d 65, 68 (9th Cir.
1955) (“From the day these returns were filed it was plainly
revealed that this taxpayer had earned $3300 and said amount
was claimed to be exempt . . . . How such a plain statement
can be construed as an omission is difficult for us to under-
stand under the circumstances.”); see also Uptegrove Lumber
Co. v. Comm’r, 204 F.2d 570, 573 (3d Cir. 1953) (holding
that a manufacturing corporation’s tax return did not make an
omission from gross income when it erroneously inflated its
cost of goods sold). But see Reis v. Comm’r, 142 F.2d 900,
903 (6th Cir. 1944) (holding that the five-year limitations
period applied where the “petitioner adopted an incorrect
7208 BAKERSFIELD ENERGY PARTNERS v. CIR
basis” because it resulted in an understatement of more than
25% of the gross income properly stated in the return).
In 1954, Congress enacted a new tax code. The 1954 Code,
still in effect as amended,8 reenacted § 275(c) as
§ 6501(e)(1)(A). See Benson v. Comm’r, 560 F.3d 1133, 1135
-36 (9th Cir. 2009) (referring to § 275(c) as “the predecessor
statute to § 6501(e)(1)(A)”). As noted above, § 6501(e)(1)(A)
of the 1954 Code, using the same language as § 275(c), pro-
vides for an extended six-year limitations period when a “tax-
payer omits from gross income an amount properly includible
therein which is in excess of 25 percent of the amount of
gross income stated in the return.” Congress also added two
subparagraphs to § 6501(e)(1)(A) not present in § 275(c). The
first, and the one of import here, is subparagraph (i), which
defines “gross income” in the case of a “trade or business” as
gross receipts, i.e., the total amount of money received from
a transaction, without any subtraction of cost or basis. See 26
U.S.C. § 6501(e)(1)(A)(i) (“In the case of a trade or business,
the term ‘gross income’ means the total of the amounts
received or accrued from the sale of goods or services (if such
amounts are required to be shown on the return) prior to dimi-
nution by the cost of such sales or services.”). Accordingly,
in the case of a trade or business, an overstatement of basis
cannot constitute an omission from gross income under the
1954 Code, because subparagraph (i) of § 6501(e)(1)(A)
removes basis as a component of the definition of “gross
income.”9
8
Although the 1954 Code was renamed the “Internal Revenue Code of
1986” by the Tax Reform Act of 1986, Pub. L. 99-514, § 2, 100 Stat.
2085, 2095, we follow the parties’ lead and refer simply to the “1954
Code.”
9
The second addition to § 6501(e)(1)(A), subparagraph (ii), provides:
In determining the amount omitted from gross income, there shall
not be taken into account any amount which is omitted from
gross income stated in the return if such amount is disclosed in
the return, or in a statement attached to the return, in a manner
adequate to apprise the Secretary of the nature and amount of
such item.
BAKERSFIELD ENERGY PARTNERS v. CIR 7209
Shortly after the enactment of the 1954 Code, the Supreme
Court issued its decision in Colony. Because Colony involved
a tax return relating to tax years prior to 1954, see 357 U.S.
at 29, the Court applied the 1939 Code, even though the Court
was aware of and referred to the additional subparagraphs in
the 1954 code, see id. at 32, 34.
Colony involved “a corporation dealing in real estate” that
filed a tax return containing “understatements of gross income
of more than twenty-five per cent resulting from an erroneous
overstatement of the basis of land sold, rather than from any
omission of gross receipts.” 244 F.2d 75, 75 (6th Cir. 1957)
(per curiam), rev’d, 357 U.S. 28 (1958). The IRS did not
argue that the corporation’s return had “inaccurately reported
its gross receipts.” 357 U.S. at 30. “Instead, the deficiencies
were based upon the Commissioner’s determination that the
taxpayer had understated the gross profits on the sales of cer-
tain lots of land for residential purposes as a result of having
overstated the ‘basis’ of such lots by erroneously including in
their cost certain unallowable items of development expense.”
Id. The Sixth Circuit had held that § 275(c)’s extended limita-
tions period did apply. Id. at 31.
The Supreme Court reversed the Sixth Circuit’s decision,
holding that the extended limitations period was applicable
only in “the specific situation where a taxpayer actually omit-
ted some income receipt or accrual in his computation of
gross income, and not more generally to errors in that compu-
tation arising from other causes.” Id. at 33.
In reaching this conclusion, the Court first examined the
statutory text of § 275(c) and held that, although “the statute
on its face lends itself more plausibly to the taxpayer’s inter-
pretation, it cannot be said that the language is unambiguous.”
See id. On one hand, the Court noted, “the draftsman’s use of
the word ‘amount’ (instead of, for example, ‘item’) suggests
a concentration on the quantitative aspect of the error—that is,
whether or not gross income was understated by as much as
7210 BAKERSFIELD ENERGY PARTNERS v. CIR
25%.” Id. at 32. On the other hand, the Court noted that “the
Commissioner’s reading fails to take full account of the word
‘omits,’ which Congress selected when it could have chosen
another verb such as ‘reduces’ or ‘understates,’ either of
which would have pointed significantly in the Commission-
er’s direction.” Id.
Because § 275(c) was ambiguous, the Court then examined
the provision’s legislative history and found “persuasive evi-
dence that Congress was addressing itself to the specific situa-
tion where a taxpayer actually omitted some income receipt
or accrual in his computation of gross income, and not more
generally to errors in that computation arising from other
causes.” Id. at 33. Concluding that Congress “did not intend
the five-year limitation to apply whenever gross income was
understated,” id. at 35, the Court explained:
Congress manifested no broader purpose than to give
the Commissioner an additional two years to investi-
gate tax returns in cases where, because of a taxpay-
er’s omission to report some taxable item, the
Commissioner is at a special disadvantage in detect-
ing errors. In such instances the return on its face
provides no clue to the existence of the omitted item.
On the other hand, when, as here, the understatement
of a tax arises from an error in reporting an item dis-
closed on the face of the return the Commissioner is
at no such disadvantage. And this would seem to be
so whether the error be one affecting “gross income”
or one, such as overstated deductions, affecting other
parts of the return.
Id. at 36.
Finally, the Court offered the following dictum, upon
which the IRS in this case places considerable weight:
“[W]ithout doing more than noting the speculative debate
between the parties as to whether Congress manifested an
BAKERSFIELD ENERGY PARTNERS v. CIR 7211
intention to clarify or to change the 1939 Code, we observe
that the conclusion we reach is in harmony with the unambig-
uous language of § 6501(e)(1)(A) of the Internal Revenue
Code of 1954.” Id. at 37. The Court did not specify which part
of § 6501(e)(1)(A) was unambiguously “in harmony with” its
conclusion.
III
[1] As explained above, Colony held that a taxpayer “omits
from gross income an amount properly includible therein” for
purposes of the extended limitations period in § 275(c) when
the taxpayer “actually omitted some income receipt or accrual
in his computation of gross income, and not more generally
to errors in that computation arising from other causes.” Col-
ony, 357 U.S. at 33. Here, Bakersfield did not omit any
income receipt or accrual in its computation of gross income;
it reported the full amount of its receipts from Seneca for the
oil and gas properties. Cf. Benson, 560 F.3d at 1135-36 (dis-
tinguishing Colony and holding that the taxpayers omitted an
amount from gross income by failing to report constructive
dividends paid by their closely held corporations). The IRS
contends only that Bakersfield overstated its basis in the prop-
erty it sold. Applying Colony’s interpretation of § 275(c) to
the substantially identical language in § 6501(e)(1)(A),
Bakersfield’s error does not trigger the extended limitations
period.
Notwithstanding this straightforward application of Colony,
the IRS contends that the plain language of § 6501(e)(1)(A)
compels the conclusion that the taxpayer “omits from gross
income an amount properly includible therein” for purposes
of § 6501(e)(1)(A) when the taxpayer overstates its basis. The
IRS notes that “gross income” is defined as “all income from
whatever source derived,” including “gains derived from deal-
ings in property.” 26 U.S.C. §§ 61(a), 61(a)(3). The “gain”
from property is defined as “the excess of the amount realized
therefrom over the adjusted basis.” 26 U.S.C. § 1001(a).
7212 BAKERSFIELD ENERGY PARTNERS v. CIR
Because gain is determined by subtracting basis from the
amount realized, the IRS argues that, under a natural reading
of § 6501(e)(1)(A), a taxpayer can “omit[ ] from gross income
an amount properly includible therein” by overstating its
basis. Other courts have agreed with this interpretation of
§ 6501(e)(1)(A). See Salman Ranch Ltd. v. United States, 79
Fed. Cl. 189, 200 (2007); Brandon Ridge Partners v. United
States, 100 A.F.T.R. 2d 2000-5347, 2007 WL 2209129, at *7
(M.D. Fla. July 30, 2007). The IRS further supports its argu-
ment by pointing to the addition of § 6501(e)(1)(A)(i) in the
1954 Code. As noted above, subparagraph (i) removes basis
as a component of the definition of “gross income” in the case
of a trade or business, and therefore taxpayers in a trade or
business can never be subject to the six-year limitations
period merely because they overstated their basis. The IRS
contends that the existence of a special rule for these taxpay-
ers makes clear that the general rule, as set forth in the main
section of § 6501(e)(1)(A), is that an overstatement of basis
constitutes an omission from gross income.
The IRS’s interpretation of § 6501(e)(1)(A) is reasonable.
Unfortunately for the IRS, however, it is also directly contrary
to Colony’s construction of the same language in the pre-
decessor statute, § 275(c). Nevertheless, the IRS contends that
we are not bound by Colony’s interpretation of § 275(c) for
two reasons. First, the IRS argues that Colony’s interpretation
of § 275(c) is not binding because § 6501(e)(1)(A), as reen-
acted with the addition of subparagraph (i), is materially dif-
ferent from § 275(c). Second, the IRS argues that Colony,
read correctly, interpreted § 275(c) as having the same mean-
ing as § 6501(e)(1)(A)(i) and applying only to taxpayers in a
trade or business. We consider each argument in turn.
A
The IRS first argues that we are not bound by Colony in
interpreting § 6501(e)(1)(A) because the provision was mate-
rially altered by the addition of subparagraph (i). If we read
BAKERSFIELD ENERGY PARTNERS v. CIR 7213
§ 6501(e)(1)(A) in light of subparagraph (i), the IRS argues,
Colony’s interpretation of § 275(c) is simply inapplicable, and
we must give § 6501(e)(1)(A) its plain meaning (as explained
by the IRS above). The IRS also contends that it would be
unreasonable to apply the Supreme Court’s interpretation of
§ 275(c) to § 6501(e)(1)(A), because the Supreme Court’s
interpretation of § 275(c) would make § 6501(e)(1)(A)(i)
superfluous.
The IRS points out that if we apply Colony to the main sec-
tion of § 6501(e)(1)(A) and hold that an overstatement of
basis cannot constitute an omission from gross income, then
no taxpayer that overstates its basis will be subject to the six-
year limitations period. Because the special definition of
“gross income” as gross receipts in § 6501(e)(1)(A)(i) also
means that an overstatement of basis cannot constitute an
omission from “gross income” in the specific case of a trade
or business, the IRS argues that applying Colony to
§ 6501(e)(1)(A) generally would render subparagraph (i)
superfluous. And because “[i]t is a cardinal principle of statu-
tory construction that a court must give effect, if possible, to
every clause and word of a statute,” In re Bonner Mall P’ship,
2 F.3d 899, 908 (9th Cir. 1993), the IRS argues that we cannot
read Colony’s interpretation of § 275(c) as applying to
§ 6501(e)(1)(A).
[2] We disagree. Congress did not change the language in
the body of § 6501(e)(1)(A), which is identical to the lan-
guage in § 275(c) that the Supreme Court construed in Col-
ony. As a general rule, we construe words in a new statute that
are identical to words in a prior statute as having the same
meaning. See 1A Norman J. Singer, Sutherland’s Statutes and
Statutory Construction, § 22.33 (6th ed. 2002) (explaining
that a successor provision using equivalent language consti-
tutes “a continuation of the original law”); see also United
States v. O’Brien, 542 F.3d 921, 926 (1st Cir. 2008); Strange
v. Comm’r, 114 T.C. 206, 210 n.4 (2000); Lilly v. Comm’r, 45
T.C. 168, 175 (1965). We therefore interpret § 6501(e)(1)(A)
7214 BAKERSFIELD ENERGY PARTNERS v. CIR
in light of Colony. See Benson, 560 F.3d at 1135-36 (applying
Colony to § 6501(e)(1)(A)).
[3] Although the IRS would have us infer that Congress’s
addition of subparagraph (i) casts the language in the body of
§ 6501(e)(1)(A) in a different light, we can equally infer that
Congress in 1954 intended to clarify, rather than rewrite, the
existing law. See Castaneda v. United States, 546 F.3d 682,
696 (9th Cir. 2008) (noting that “redundancies across statutes
are not unusual events in drafting” and that the presumption
against surplusage “applies more weakly in situations . . . in
which the provision is potentially rendered superfluous by
language contained in a separate, later statute” (internal for-
matting omitted)). In enacting the 1954 Code, Congress was
presumably aware of the dispute over the interpretation of
§ 275(c), and it could have expressly added a definition of
“omits” if it wanted to overrule the cases that concluded, as
the Supreme Court later did in Colony, that “omits” did not
include an overstatement of basis. Instead, Congress allowed
the preexisting general definition of “omits” to carry forward
into the successor provision, and additionally provided for a
special definition of “gross income” in the case of a “trade or
business.” Clarifying that an overstatement of basis is not an
omission from gross income in the case of a trade or business
does not establish that Congress also intended to alter the gen-
eral judicial construction of “omits” in all other contexts. Nor
has the IRS pointed to any legislative history evincing an
intent to alter the law outside the context of a trade or busi-
ness.
[4] Moreover, we are not convinced that applying Colony
to the 1954 Code would render § 6501(e)(1)(A)(i) superflu-
ous. The main body of § 6501(e)(1)(A) provides:
If the taxpayer omits from gross income an amount
properly includible therein which is in excess of 25
percent of the amount of gross income stated in the
return, the tax may be assessed, or a proceeding in
BAKERSFIELD ENERGY PARTNERS v. CIR 7215
court for the collection of such tax may be begun
without assessment, at any time within 6 years after
the return was filed.
Subparagraph (i) provides that:
In the case of a trade or business, the term “gross
income” means the total of the amounts received or
accrued from the sale of goods or services (if such
amounts are required to be shown on the return)
prior to diminution by the cost of such sales or ser-
vices.
Section 6501(e)(1)(A) requires a comparison of two numbers:
(1) the “gross income” omitted with (2) the “gross income”
stated in the return. If the first number divided by the second
number is greater than 25%, then the six-year limitations
period applies. Because § 6501(e)(1)(A)(i) changes the defini-
tion of “gross income” for taxpayers in a trade or business, it
potentially affects both the numerator (the omission from
gross income) and the denominator (the total gross income
stated in the return). Colony’s holding, however, affects only
the numerator, by defining what constitutes an omission from
gross income.
[5] When there is no dispute about the amount of gross
income omitted, the denominator, the total amount of gross
income stated in the return, determines whether the omission
meets the 25% threshold that triggers the six-year limitations
period. For taxpayers not in a trade or business, the denomina-
tor is the amount of gross income (gross receipts minus basis);
for taxpayers in a trade or business, the denominator is the
total amount of money received without any reduction for
basis (gross receipts). Thus, in a case where there is no dis-
pute regarding the amount of gross income omitted, whether
a taxpayer’s omissions constitute more than 25% of the gross
income stated in the return may depend on whether subpara-
graph (i)’s definition of “gross income” applies. In such cases,
7216 BAKERSFIELD ENERGY PARTNERS v. CIR
subparagraph (i) may be dispositive, whether or not we accept
the IRS’s interpretation of Colony.
[6] Indeed, in numerous Tax Court cases where the amount
omitted (the numerator) was not in dispute, the applicability
of the six-year limitations period under § 6501(e)(1)(A)
turned on whether the court was obliged to use subparagraph
(i)’s special definition of “gross income” for trades and busi-
nesses when determining the amount of gross income stated
in the return (the denominator). In one case, for example, the
Tax Court determined that, because the special definition of
“gross income” in § 6501(e)(1)(A)(i) applied, the IRS had to
provide evidence of the taxpayers’ share of gross receipts
(rather than gains) from various partnerships they owned in
order to prove that the taxpayers’ omission met the 25%
threshold. See Hoffman v. Comm’r, 119 T.C. 140, 148 (2002)
(“The amount petitioners omitted, the numerator in the calcu-
lation, is not in dispute in this case. The amount omitted is
$779,114. The parties disagree, however, as to the amount of
gross income stated in their return.”). Because the IRS could
not meet its burden of proof of showing the taxpayers’ gross
receipts, the six-year limitation period did not apply. See id.
at 150. Whether § 6501(e)(1)(A)(i) applied was the disposi-
tive issue because it determined whether the omitted amount
of gross income constituted more than 25% of the gross
income stated in the return, wholly aside from Colony’s hold-
ing regarding what constitutes an omission from gross
income. See also Eagan v. United States, 80 F.3d 13, 18 (1st
Cir. 1996); Insulglass Corp. v. Comm’r, 84 T.C. 203, 209-10
(1985);10 Connelly v. Comm’r, 45 T.C.M. (CCH) 49 (1982);
10
Insulglass provides a numerical example: In Insulglass, the sole issue
was “whether petitioners omitted from gross income an amount in excess
of 25 percent of the amount of gross income” stated in their return for pur-
poses of invoking the six-year limitations period for assessing a deficiency
under § 6501(e)(1)(A).
There was no dispute that the taxpayers had omitted $380,030.05 from
their gross income. The IRS argued that the total amount of gross income
BAKERSFIELD ENERGY PARTNERS v. CIR 7217
Philipp Bros. Chems., Inc. v. Comm’r, 52 T.C. 240, 254-55
(1969). We therefore do not render subparagraph (i) superflu-
ous by applying Colony’s holding to the same statutory lan-
guage in the 1954 Code.
B
The IRS next argues that, if Colony’s holding does apply
to the substantially identical language in § 6501(e)(1)(A),
then Colony’s interpretation of § 275(c) applies only in the
case of a trade or business. As the IRS notes, Colony held that
the language of § 275(c) was ambiguous. The Court also
stated that its conclusion was “in harmony with the unambigu-
ous language of § 6501(e)(1)(A) of the Internal Revenue
Code of 1954.” 357 U.S. at 37 (emphasis added). The IRS
reasons that, if the main section of § 275(c) is ambiguous,
then the main section of § 6501(e)(1)(A) must also be ambig-
uous. Accordingly, the argument goes, the “unambiguous lan-
guage of § 6501(e)(1)(A)” must be subparagraph (i). Thus,
the IRS asserts, Colony was interpreting § 275(c) in a manner
consistent with subparagraph (i) of § 6501(e)(1)(A), so that it
stated in the taxpayers’ return was $628,295.92, which included
$202,202.69 of capital gains from selling commodities. Under this analy-
sis, the amount omitted from gross income ($380,030.05) would have
been in excess of 25% of the amount of gross income stated in the return
($628,295.92) and the six-year limitations period would apply.
The taxpayers argued that the IRS erred in calculating the “total amount
of gross income” as including only $202,202.69 of gains from selling
commodities. The taxpayers argued they were engaged in the trade or
business of selling commodities, and so their “gross income” under
§ 6501(e)(1)(A)(i) comprised their gross proceeds from the commodities
sales ($5,150,585.21), not just their gains from such sales. Under this anal-
ysis, the amount omitted from gross income ($380,030.05) would not have
been in excess of 25% of the amount of gross income stated in their return
($5,150,585.21), and so the six-year limitations period would not apply.
The Tax Court ultimately rejected the taxpayers’ argument and held that
the six-year limitations period applied, apparently on the ground that the
taxpayers were not involved in a trade or business.
7218 BAKERSFIELD ENERGY PARTNERS v. CIR
would be applicable only to a taxpayer engaged in a trade or
business.
[7] We reject this argument because it overreads Colony’s
brief references to § 6501(e)(1)(A). The Court expressly
avoided construing the 1954 Code, see Colony, 357 U.S. at
37, and did not even hint that its interpretation of § 275(c)
was limited to cases in which the taxpayer was engaged in a
“trade or business.” There is no ground for suggesting that the
Court intended the same language in § 275(c) to apply differ-
ently to taxpayers in a trade or business than to other taxpay-
ers. The only mention of the phrase “trade or business” in
Colony is in a quotation from § 6501(e)(1)(A)(i). See 357
U.S. at 37 n.3. Under a fair reading of Colony, the Court pro-
vides a general construction of § 275(c) that is not limited to
any particular type of taxpayer.
IV
[8] Interpreting § 275(c) of the 1939 Internal Revenue
Code, the Supreme Court held in Colony that a taxpayer does
not “omit[ ] from gross income an amount properly includible
therein” by overstating its basis. See 357 U.S. at 32. This
holding controls our interpretation of the same language in
§ 275(c)’s successor provision, § 6501(e)(1)(A) of the 1954
Code. However sensible the IRS’s argument may be that a
taxpayer can “omit . . . an amount” of gain by overstating its
basis, this argument is foreclosed by Colony. The Court
acknowledged that the statutory language was ambiguous,
357 U.S. at 33, but nonetheless rejected the same interpreta-
tion the IRS is proposing in this case. The IRS may have the
authority to promulgate a reasonable reinterpretation of an
ambiguous provision of the tax code, even if its interpretation
runs contrary to the Supreme Court’s “opinion as to the best
reading” of the provision. Nat’l Cable & Telecomms. Ass’n v.
Brand X Internet Servs., 545 U.S. 967, 982-83 (2005); accord
Swallows Holding, Ltd. v. Comm’r, 515 F.3d 162, 170 (3d
Cir. 2008). We do not.
BAKERSFIELD ENERGY PARTNERS v. CIR 7219
[9] Because we affirm the Tax Court on the ground that an
overstatement of basis cannot constitute an omission from
gross income, we need not reach Bakersfield’s alternative
argument that it adequately disclosed its overstated basis on
its return. Under Colony, Bakersfield’s allegedly overstated
basis is not an omission from gross income under
§ 6501(e)(1)(A) or § 6229(c)(2). We therefore agree with the
Tax Court’s conclusion that the FPAA was untimely, and we
AFFIRM the judgment of the Tax Court.