T.C. Memo. 2000-286
UNITED STATES TAX COURT
CC&F WESTERN OPERATIONS LIMITED PARTNERSHIP, CC&F INVESTORS,
INC., TAX MATTERS PARTNER, Petitioner v. COMMISSIONER OF INTERNAL
REVENUE, Respondent
Docket No. 544-98. Filed September 8, 2000.
William F. Nelson and Peter J. Genz, for petitioner.
Dana E. Hundrieser and Lawrence C. Letkewicz, for
respondent.
MEMORANDUM OPINION
COHEN, Judge: Respondent issued a Notice of Final
Partnership Administrative Adjustment (FPAA) for 1990 for CC&F
Western Operations Limited Partnership (Western). CC&F
Investors, Inc. (petitioner), the designated tax matters partner
for Western, filed a Petition for Readjustment of Partnership
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Items Under Code Section 6226. After concessions, the sole
remaining issue is whether disclosures made in the 1990 Federal
income tax returns of Western and of partnerships in which
Western owned interests were adequate to apprise respondent of
the nature and amount of omitted items and, thereby, to preclude
the application of the 6-year period of limitations under section
6229(c)(2). This issue is before the Court on cross-motions for
summary judgment pursuant to Rule 121. The record shows, and the
parties agree, that there is no genuine issue of material fact.
Unless otherwise indicated, all section references are to the
Internal Revenue Code in effect for the year in issue, and all
Rule references are to the Tax Court Rules of Practice and
Procedure.
Background
Western is a Delaware limited partnership whose principal
place of business was Boston, Massachusetts. Petitioner is a
corporation organized under Delaware law.
Western’s sole activity was selling, to a third-party buyer,
Western’s 84-percent partnership interests in CC&F Bellevue
Office Investment Co. (Bellevue), CC&F Cabot Plaza II Investment
Co. (Cabot Plaza), CC&F Chatsworth Investment Co. (Chatsworth),
CC&F Diamond Bar Investment Co. (Diamond Bar), CC&F Issaquah I
Investment Co. (Issaquah), CC&F Mira Loma Investment Co. (Mira
Loma), and CC&F Topanga Investment Co. (Topanga); Western’s
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99-percent partnership interests in CC&F Vacant Land Associates I
(Vacant Land I), CC&F Vacant Land Associates II (Vacant Land II),
CC&F Vacant Land Associates III (Vacant Land III), CC&F Vacant
Land Associates IV (Vacant Land IV), and CC&F Vacant Land
Associates V (Vacant Land V); and 100 percent of the outstanding
stock of CC&F Stadium Properties, Inc. (Stadium). The sale
occurred in two phases, the first on March 28, 1990, and the
second on April 26, 1990. The agreement with the third-party
purchaser required that the underlying property of each
partnership be free and clear of all debt following the closing.
Thus, a portion of the proceeds paid into escrow was applied to
pay off all debt at the closing of the sale.
On October 15, 1991, petitioner timely filed for Western a
Form 1065, U.S. Partnership Return of Income, for 1990.
Petitioner incorrectly reported a section 1231 loss of $3,196,339
from the sale of the partnership interests. The sale of Stadium
stock was listed separately. The reported loss from the sale of
the partnership interests was based on a reported amount realized
of $27,965,551 and basis of $31,161,890. However, the sale
actually resulted in an aggregate net gain of $9,182,216.
The partnerships that were sold by Western also filed tax
returns for 1990. Except for Bellevue, each partnership that was
conveyed included a statement with its return as follows:
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The above named partnership entity was terminated
under Regulation Section 1.708-1(b)(ii) on [date of
sale] when both the 84% [99% for Vacant Lands I through
V], CC&F Western Operations, L.P. (Federal
Identification Number XX-XXXXXXX), and the 16% [1% for
Vacant Lands I through V] partner sold their entire
interests in the partnership to an unrelated party.
Bellevue did not identify itself as having been sold to an
unrelated third party during 1990. Each partnership that was
conveyed attached, to its Federal income tax return, a Schedule
K-1 for each of its partners. On line B of the 12 Schedules K-1
of Western, the partnerships listed Western’s share of
partnership liabilities in the following amounts:
Bellevue $ 7,657,419
Cabot Plaza 0
Chatsworth 23,552,592
Diamond Bar 8,846,254
Issaquah 4,960,496
Mira Loma 0
Topanga 11,000
Vacant Land I 10,337,621
Vacant Land II 2,935,574
Vacant Land III 298,884
Vacant Land IV 1,866,711
Vacant Land V 9,492,939
Total $69,959,490
Neither the 1990 Federal income tax return of Western nor the
returns of the partnerships that were conveyed disclosed that the
third-party purchaser paid or assumed Western’s liabilities.
On October 14, 1997, more than 3 years but less than 6 years
from the date of filing of Western’s return, respondent sent the
FPAA to petitioner, determining that there was unreported gain on
the sale of the partnership interests.
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Discussion
Under the general rule set forth in section 6501, the
Internal Revenue Service is required to assess tax or send a
notice of deficiency within 3 years after a Federal income tax
return is filed. See sec. 6501(a). In the case of a tax imposed
on partnership items, however, section 6229 sets forth special
rules to extend the period of limitations prescribed by section
6501 in situations where the partnership tax return was filed
later than an individual partner’s return. See sec. 6501(o)(2);
Rhone-Poulenc Surfactants & Specialties v. Commissioner, 114 T.C.
533, 540 (2000).
Section 6229 provides in pertinent part:
SEC. 6229(a). General Rule.--Except as otherwise
provided in this section, the period for assessing any
tax imposed by subtitle A with respect to any person
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 (determined without regard to
extensions).
* * * * * * *
(c) Special Rule in Case of Fraud, Etc.--
* * * * * * *
(2) Substantial omission of income.--If any
partnership omits from gross income an amount
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properly includible therein which is in excess of
25 percent of the amount of gross income stated in
its return, subsection (a) shall be applied by
substituting “6 years” for “3 years”.
Section 6229, like other statutes of limitation, receives strict
construction in favor of the Government when taxpayers seek to
have it applied to bar the Government’s rights. See Badaracco v.
Commissioner, 464 U.S. 386, 391 (1984); E.I. Du Pont De Nemours &
Co. v. Davis, 264 U.S. 456, 462 (1924); Rhone-Poulenc Surfactants
& Specialties v. Commissioner, supra at 540.
In drafting section 6229, Congress did not intend to create
a completely separate statute of limitations for assessments
attributable to partnership items. See Rhone-Poulenc Surfactants
& Specialties v. Commissioner, supra at 545. Instead, section
6229 merely supplements section 6501, and, although section 6229
does not repeat all of the terms and provisions already set forth
in section 6501, the adequate disclosure provision of section
6501(e)(1)(A)(ii) is encompassed in section 6229(c)(2).
Consequently, the precedents interpreting section
6501(e)(1)(A)(ii) are equally applicable to section 6229(c)(2).
Section 6501(e)(1)(A)(ii) states:
(ii) 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. [Emphasis added.]
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Petitioner contends that the 1990 Federal income tax return
and the Federal income tax returns of the partnerships that were
conveyed supplied respondent with a clue as to the nature and
amount of gain that was omitted from the Western return, and,
thus, the 6-year period of limitations under section 6229(c)(2)
does not apply. Petitioner concedes that the omitted gain from
the sale of the partnership interests exceeds 25 percent of the
amount of gross income stated in the 1990 Federal income tax
return of Western.
Respondent argues that neither the 1990 return nor the
returns of the partnerships that were conveyed provide adequate
disclosure, and, therefore, the 6-year period of limitations is
applicable. Respondent concedes that the Federal income tax
returns of the partnerships that were conveyed should be
considered along with the 1990 tax return of Western for purposes
of determining whether an adequate disclosure has been made. See
Walker v. Commissioner, 46 T.C. 630, 637-638 (1966).
In Colony, Inc. v. Commissioner, 357 U.S. 28, 37 (1958), the
Supreme Court, although interpreting section 275(c), I.R.C. 1939,
the predecessor of section 6501(e), specifically stated that the
result that it reached is in harmony with the language of section
6501(e)(1)(A):
We think that in enacting section 275(c) Congress
manifested no broader purpose than to give the
Commissioner an additional 2 years [now 3] to
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investigate tax returns in cases where, because of a
taxpayer’s omission to report some taxable item, the
Commissioner is at a special disadvantage in detecting
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
disclosed on the face of the return the Commissioner is
at no such disadvantage. * * * [Id. at 36; emphasis
added.]
This Court has held that, in setting out the “clue”
standard, the Supreme Court did not mean a clue sufficient to
intrigue the likes of Sherlock Holmes, or a clue that involved a
detailed revelation of each and every underlying fact. See Quick
Trust v. Commissioner, 54 T.C. 1336, 1347 (1970), affd. 444 F.2d
90 (8th Cir. 1971). Disclosure of omitted material can be
adequate without disclosing exact dollar amounts. See University
Country Club, Inc. v. Commissioner, 64 T.C. 460, 470 (1975). The
proper application of the rule is whether the need for an
adjustment is “reasonably” apparent from the face of the Federal
income tax return. See id. at 471.
The 1990 Federal income tax return of Western informed
respondent that a sale of partnership interests had occurred and
that petitioner had used an amount realized equal to $27,965,551
in reporting gain. Petitioner claims that statements in the
returns for the partnerships that were conveyed clearly disclose
that Western, at the time of sale, was liable for $69,959,490 of
combined debt. Petitioner argues that, because payment or
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assumption of debt by a purchaser is includable in the amount
realized, respondent should have been on notice that the actual
amount realized might be equal to or greater than the debt of
Western, and, therefore, was understated by at least $41,993,939
in the calculation of the loss on the Federal income tax return.
Petitioner’s argument assumes that it is reasonable to
expect an agent for the Internal Revenue Service to sort through
12 unique and different partnership tax returns to find each
Schedule K-1 issued specifically for Western, and to tally all of
Western’s nonrecourse and other liabilities. Petitioner’s
argument then assumes that an agent should be able to compare the
amount of liabilities to the disclosed amount realized on the
Federal income tax return of Western, and glean from that
comparison that the amount realized is understated by the
difference between the total liabilities listed on the Schedules
K-1 and the amount reported on the return of Western.
Petitioner’s argument surpasses the bounds of reasonableness.
The purpose behind the adequate disclosure doctrine is to allow
the Commissioner an extra 3 years to assess a deficiency in
situations where a taxpayer’s failure to report income puts the
Commissioner at a special disadvantage in detecting errors. See
Colony, Inc. v. Commissioner, supra at 36. The omission in this
case created just that type of disadvantage. Presumably even the
sophisticated preparers of the returns, who were familiar with
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the details of the transactions, did not recognize that
substantial income was omitted.
Colony, Inc. v. Commissioner, supra, upon which petitioner
relies heavily, does not support petitioner’s arguments. Colony
involved the interplay between "gross receipts" and "gross
income”. All of the receipts of a sale of real property had been
disclosed, but cost of goods sold had been overstated. Under
these circumstances, the Supreme Court held that there was not an
omission from gross income within the meaning of the applicable
statute because, in computing the 25-percent threshold, Congress
intended omission of gross income to refer to an understatement
of amount realized rather than net gain. See id. at 1038.
Our holding is consistent with the decision of this Court in
Estate of Knox v. Commissioner, T.C. Memo. 1961-129, revd. on
another issue 323 F.2d 84 (5th Cir. 1963). In Estate of Knox, a
corporation owning real property was liquidated, and the assets
were distributed to the shareholders. Because an election was
not filed within 30 days after the adoption of the plan of
liquidation, the distribution that was received by the
shareholders should have been reported as income on their
individual tax returns. The taxpayer, a 60-percent shareholder,
failed to include the distribution in income. The taxpayer
failed to report that the corporation had been liquidated on her
income tax return but attached a schedule claiming that the
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taxpayer had acquired a 60-percent interest in real property and
was entitled to a depreciation deduction for 60 percent of the
improvements. The Commissioner sent a notice of deficiency after
the expiration of the 3-year period of limitations. The taxpayer
argued that her reporting of depreciation fully apprised the
Commissioner of all of the facts necessary to make a
determination of deficiency. This Court held, however, that such
reporting was not adequate because there was no mention of the
liquidation of the corporation on the tax return. See id.
Our holding is also consistent with the opinion of the Court
of Appeals in Phinney v. Chambers, 392 F.2d 680 (5th Cir. 1968).
In Phinney, a taxpayer incorrectly claimed a stepped-up basis in
her one-half interest in a community-owned installment note
issued in exchange for stock. The full value of the note had
been included in the estate of her deceased husband for estate
tax purposes. When the note was paid in full, the taxpayer
reported, on her individual income tax return, that the amount
collected was a sale of stock with an amount realized equal to
basis. When the Commissioner disallowed the stepped-up basis,
more than 3 years but less than 6 years after the taxpayer filed
her return, the taxpayer argued that she had adequately disclosed
the transaction on her Federal income tax return. The Court of
Appeals held that the taxpayer had not given the Commissioner a
chance to challenge the taxpayer’s contentions, because the
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taxpayer had failed to mention the stepped-up basis anywhere in
the return. See id. at 684.
Like the taxpayers in Estate of Knox and Phinney, petitioner
has failed to provide enough information to allow an examining
agent to reasonably identify the underreporting of gain. In
order to qualify for relief under the adequate disclosure
exception to section 6229(c)(2), the disclosures on the return
have to be more directly related to the omitted income than what
was disclosed by petitioner.
We have considered all remaining arguments made by
petitioner for a result contrary to that expressed herein, and,
to the extent not discussed above, they are irrelevant or without
merit. Respondent’s motion for summary judgment will be granted,
and petitioner’s motion for summary judgment will be denied.
To reflect the foregoing,
An appropriate order and
decision will be entered.