T.C. Memo. 2009-253
UNITED STATES TAX COURT
UTAM, LTD., DDM MANAGEMENT, INC., TAX MATTERS PARTNER,
Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 24762-06. Filed November 9, 2009.
James F. Martens, Michael B. Seay, and Kelli H. Todd, for
petitioner.
Edsel Ford Holman, Jr., for respondent.
MEMORANDUM OPINION
KROUPA, Judge: This partnership-level matter is before the
Court on petitioner’s motion for summary judgment as supplemented
and respondent’s cross-motion for partial summary judgment,
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respectively filed under Rule 121.1 Respondent issued UTAM, Ltd.
(partnership) a notice of final partnership administrative
adjustment (FPAA) for 1999 on October 13, 2006, which is beyond
the general 3-year periods for assessment under sections 6229(a)
and 6501(a). We must decide whether a basis overstatement
constitutes a substantial omission from gross income that can
trigger an extended 6-year assessment period under section
6229(c)(2) or section 6501(e)(1)(A). We hold that the extended
assessment period does not apply to an overstatement of basis in
this case and follow Bakersfield Energy Partners, LP v.
Commissioner, 128 T.C. 207 (2007), affd. 568 F.3d 767 (9th Cir.
2009).2 Accordingly, we shall grant petitioner’s motion for
summary judgment and deny respondent’s cross-motion for partial
summary judgment.
Background
The following facts have been assumed solely for purposes of
resolving the pending motions. David Morgan created several
entities for both tax and non-tax related purposes. Mr. Morgan’s
first business enterprise was Success Life, a life insurance
agency based in Austin, Texas. As Success Life expanded into
real estate and other ventures, Mr. Morgan merged Success Life
1
All section references are to the Internal Revenue Code
(Code) in effect for the year at issue, and all Rule references
are to the Tax Court Rules of Practice and Procedure, unless
otherwise indicated.
2
Respondent does not argue that the regulations under sec.
301.6501(e)-1T, Temp. Proced. & Admin. Regs., 74 Fed. Reg. 49321
(Sept. 28, 2009), apply.
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into UTA Management, Inc. (UTA Management), an S corporation he
solely owned. Mr. Morgan decided, because of the Texas franchise
tax on S corporations, to transfer the business of UTA Management
to a limited partnership. Mr. Morgan created UTAM, Ltd., a
limited partnership consisting of two partners, UTA Management
and DDM Management, Inc. (DDMM), an S corporation owned by Mr.
Morgan and his family. Shortly after the partnership’s
formation, an unrelated insurance company offered to purchase all
outstanding partnership interests.
Before the sale occurred, UTA Management artificially
inflated its basis in the partnership from $2,764,685 to
$41,105,132 through a series of transactions constituting what is
now known as a “Son of BOSS” tax shelter. These transactions
reduce or eliminate capital gains by creating artificial losses
through the transfer of assets laden with significant liabilities
to a partnership. Here, UTA Management increased its basis by
contributing $38,158,500 in cash along with short sale positions
of $38 million in U.S. Treasury Notes to the partnership. UTA
Management included the cash contributions in computing its new
partnership basis but excluded the short sale position because
the liability could not be determined at the time of transfer.
UTA Management and DDMM sold their partnership interests for
$27,848,493 and $350,000 respectively. DDMM reported a $318,187
gain from the sale on its Federal tax return for 1999. UTA
Management elected to treat the sale of its partnership interest
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as a deemed sale of partnership assets under section 338(h)(10)
and reported a $13,256,639 loss.3
As previously stated, respondent issued the FPAA beyond the
general 3-year assessment periods. Respondent determined that
UTAM “was a sham” and found UTA Management’s basis overstatement
presented issues that must be addressed at the partnership level.
Respondent therefore reversed all of UTAM’s income items, expense
items, and capital transactions and adjusted UTA Management’s
outside partnership basis to zero.
Petitioner challenges the timeliness of the FPAA arguing
that the general 3-year assessment periods had already expired
when respondent issued the FPAA. Petitioner argues that a basis
overstatement cannot trigger an extended 6-year period of
assessment under either section 6229(c)(2) or section
6501(e)(1)(A) citing Bakersfield Energy Partners, LP v.
Commissioner, supra. Respondent asserts that we decided
Bakersfield incorrectly and urges us to overrule it. We decline
to do so.
Appeal of this case lies with the Court of Appeals for the
D.C. Circuit, and no case in the D.C. Circuit contradicts our
prior holdings on the contested issue.
3
This is calculated by subtracting UTA Management’s claimed
basis ($41,105,132) from the amount it received for its interest
in the partnership ($27,848,493).
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Discussion
This is yet one more Son of BOSS case before the Court on
the parties’ cross-motions for full or partial summary judgment
on the issue whether the FPAA was timely if issued after the
general 3-year periods expired. Both parties agree that the
facts are not in dispute. We must apply the law to the facts.
We begin with the general rules for the limitations period.
The Code does not provide a limitations period within which
the Commissioner must issue an FPAA. See Curr-Spec Partners, LP
v. Commissioner, 579 F.3d 391 (5th Cir. 2009), affg. T.C. Memo.
2007-289; Rhone-Poulenc Surfactants & Specialties, LP v.
Commissioner, 114 T.C. 533, 534-535 (2000). Partnership item
adjustments will be time barred at the partner level, however, if
the Commissioner does not issue the FPAA within an applicable
period for assessing tax attributable to partnership items.
Curr-Spec Partners, LP v. Commissioner, supra at 398; Rhone-
Poulnec Surfactants & Specialities, LP v. Commissioner, supra at
535. The Commissioner must generally assess a tax or issue a
notice of deficiency within a 3-year period after a taxpayer
files his or her return. Secs. 6501(a), 6503(a). The Code
provides a specific rule governing the adjustment of partnership
items.4 Sec. 6229(a), (d). The general 3-year assessment
4
Partnership items include any item of income, gain, loss,
deduction, or credit that subtit. A requires the partnership to
take into account for the taxable year, to the extent that
(continued...)
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periods extend to six years if the taxpayer (or partnership)
omits an amount properly includable in gross income that exceeds
25 percent of the amount of gross income stated in the return.
Secs. 6501(e)(1)(A), 6229(c)(2). The additional three years is
necessary because the Commissioner is at a special disadvantage
to discover an omission of items from a return as opposed to
including items that reduce taxable income. See Colony, Inc. v.
Commissioner, 357 U.S. 28, 36 (1958); Taylor v. United States,
417 F.2d 991, 993 (5th Cir. 1969).
Respondent concedes that he issued the FPAA after the
general 3-year assessment periods expired. Respondent argues
this Court maintains jurisdiction because a basis overstatement
by the partnership extends the period for assessing tax under
either section 6229(c)(2) or section 6501(e)(1)(A). Respondent
admits there was no such omission in the partnership’s tax return
for 1999 but claims that UTA Management omitted an item from
gross income by overstating the basis of its investment in the
partnership by $37,857,494. He therefore argues the FPAA was
timely because the alleged overstated basis on UTA Management’s
return extended the limitations period for assessing an income
tax deficiency against Mr. Morgan, the sole shareholder of UTA
(...continued)
regulations provide that the item is more appropriately
determined at the partnership level than at the partner level.
See sec. 6231(a)(3); see also sec. 301.6231(a)(3)-1(a), Proced. &
Admin. Regs.
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Management, to six years. Petitioner counters that Bakersfield
Energy Partners, LP v. Commissioner, 128 T.C. 207 (2007) controls
this case, and asserts that even if UTA Management’s basis was
overstated, that alone is not an omission from gross income.
We have held that a basis overstatement is not an omission
from gross income. See id. at 213-215. In Bakersfield we
applied the Supreme Court’s holding in Colony, Inc. v.
Commissioner, supra, and stated that the extended limitations
period applies where “specific income receipts have been ‘left
out’ in the computation of gross income and not when an
understatement of gross income resulted from an overstatement of
basis.” Bakersfield Energy Partners, LP v. Commissioner, supra
at 213 (paraphrasing Colony, Inc. v. Commissioner, supra).
The Court of Appeals for the Ninth Circuit affirmed our
Opinion in Bakersfield, 568 F.3d at 778. The Court of Appeals
for the Federal Circuit also recently held that Colony controlled
the disposition of a section 6501(e)(1)(A) case involving a basis
overstatement. Salman Ranch Ltd. v. United States, 573 F.3d
1362, 1377 (Fed. Cir. 2009); see also Intermountain Ins. Serv. of
Vail, LLC v. Commissioner, T.C. Memo. 2009-195; Beard v.
Commissioner, T.C. Memo. 2009-184. These cases have all
concluded that mere overstatement of basis does not trigger the
extended period of limitations.
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Respondent relies on Phinney v. Chambers, 392 F.2d 680 (5th
Cir. 1968). The Fifth Circuit Court of Appeals in Phinney found
that the 6-year period of limitations applied to a fiduciary
income tax return on which the nature of an item of income was
misstated. The Commissioner was at a disadvantage identifying
the error in the reporting of the transaction in issue in Phinney
because the fiduciary tax return listed the item of income
without disclosing its receipt in an installment sale. Phinney
is not directly on point and does not persuade this Court to
overrule Bakersfield.
Respondent further argues that the Supreme Court holding in
Colony is limited to the context of trade or business income from
the sale of goods or services. Respondent asserts that Colony
should not apply because petitioner was not in the trade or
business of selling partnership interests. This Court rejected
the same argument in Bakersfield. Neither the language nor the
rationale of Colony can be limited to the sale of goods or
services by a trade or business. Bakersfield Energy Partners, LP
v. Commissioner, 128 T.C. at 215.
Finally, respondent argues that the Court should focus on
the definition of the phrase “gross income,” not on the
definition of the word “omits” when interpreting the phrase
“omits from gross income.” The Supreme Court, however, attached
importance to the word “omits” in determining whether the
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limitations period should be extended. See Colony, Inc. v.
Commissioner, supra at 32. This Court finds no “omission” from
gross income such as would trigger an extended period for
assessment.
We have considered all arguments made in reaching our
decision, and, to the extent not mentioned, we conclude that they
are moot, irrelevant, or without merit. We conclude that neither
the partnership nor any of its partners omitted gross income from
a return so as to make applicable the extended assessment period
of section 6229(c)(2) or section 6501(e)(1)(A). We therefore
find that the limitations period for assessing tax against
petitioner has expired.
An appropriate order and
decision will be entered for
petitioner.