T.C. Memo. 2019-150
UNITED STATES TAX COURT
BEVERLY CLARK COLLECTION, LLC,
NELSON CLARK, TAX MATTERS PARTNER, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 27538-08. Filed November 14, 2019.
Steven Ray Mather, for petitioner.
John W. Stevens, for respondent.
MEMORANDUM OPINION
PUGH, Judge: This case is before the Court on petitioner’s Motion for
Summary Judgment. In a notice of final partnership administrative adjustment
(FPAA) dated August 25, 2008, respondent determined that certain transactions in
1999 and 2000 were shams and should not be respected. The specific issue for
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[*2] decision is whether the period for assessment for 2000 was extended to six
years under sections 6501(e)(1)(A) and 6229(c)(2).1
Background
The following facts are from the parties’ pleadings and other materials in
the record.
From 1987 to 2000 Nelson and Beverly Clark owned a wedding accessories
business, the Beverly Clark Collection, which they operated as a sole
proprietorship. On March 12, 1999, the Clarks transferred all of the assets and
liabilities of the business to a newly created California limited liability company,
Beverly Clark Collection, LLC (BCC). In exchange they received 100% of BCC’s
equity, with the Clarks each receiving 50% interests.
BCC’s 1999 Form 1065, U.S. Return of Partnership Income, and the Clarks’
1999 Form 1040, U.S. Individual Income Tax Return, reported what they claimed
to be a sale on December 31, 1999, of an 80.01% interest in BCC to Fausset Trust
in exchange for a $10,401,300 Treasury note. Before that sale the Clarks had
contributed Treasury notes and a small amount of cash to BCC. BCC then sold
1
Unless otherwise indicated, all section references are to the Internal
Revenue Code of 1986, as amended and in effect at all relevant times. Rule
references are to the Tax Court Rules of Practice and Procedure. All monetary
amounts are rounded to the nearest dollar.
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[*3] the Treasury notes, recognizing a small loss. Respondent characterized the
Clarks’ acquisition of the notes through a short sale, their contribution to BCC,
and BCC’s disposition for a small loss as a “Son-of-BOSS” transaction that
artificially inflated the Clarks’ outside basis in BCC.2
On their 1999 Form 1040 the Clarks reported a short-term capital loss of
$26,813 and a long-term capital loss of $3,703 on the sale of the BCC interest to
Fausset Trust. BCC’s 1999 Form 1065 reported capital contributions of
$13,257,425 for the year. The 1999 Schedules K-1, Partner’s Share of Income,
Credits, Deductions, etc., for Mr. Clark, Mrs. Clark, and Fausset Trust showed
end-of-year ownership interests of 9.99%, 10%, and 80.01%, respectively.
BCC’s Form 1065 and the Clarks’ Form 1040 for 2000 reported what they
claimed to be the tax consequences to BCC and its partners, the Clarks and
Fausset Trust, of the March 2000 liquidation of BCC and sale of its assets to
Maplewood LF Investors, LLC. The Clarks’ 2000 Form 1040 reported $2,083,976
of gross proceeds and $1,406,395 of gain from the postliquidation sale of BCC’s
assets and goodwill. The Clarks also reported gross income of $811,512 for 2000.
BCC’s 2000 Form 1065 reported a $10,527,061 distribution of property and the
2
We first described these types of transactions in Kligfeld Holdings v.
Commissioner, 128 T.C. 192 (2007).
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[*4] Clarks’ 2000 Schedules K-1 reported flowthrough losses of $7,284,835 and
$7,284,837, respectively. The Schedules K-1 also reported guaranteed payments
from BCC to the Clarks totaling $150,000; the Clarks did not report this amount
on their 2000 Form 1040, however.
Respondent issued an FPAA to petitioner on August 25, 2008, challenging
the reported tax consequences described above. The parties agree that the FPAA
was issued more than three but less than six years after the close of the relevant tax
years (plus extensions of time for assessment).3
Petitioner filed a Motion for Summary Judgment that the applicable
limitations period was three years, not six, and therefore the assessment of any tax
stemming from the adjustments set forth in the FPAA is time barred. Respondent
objected that the applicable period is six years because there was substantial
omitted income within the meaning of section 6501(e)(1)(A). He offered two
theories in support of this argument. First, he argued that substantial omitted
income arose from the Clarks’ overstated bases in their interests in BCC. Second,
he argued that the Clarks’ 1999 sale of 80.01% of their interest in BCC to Fausset
3
The parties agree that respondent received from the Clarks a Form 872-I,
Consent to Extend the Time to Assess Tax as Well as Tax Attributable to Items of
a Partnership, as to the 2000 tax year before the expiration of the six-year period
and that the FPAA was issued within that extended period. For simplicity we will
disregard the extension and refer to the six-year period.
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[*5] Trust was a sham and should be disregarded, and, therefore, the Clarks were
required to report the entire $12,990,000 in sale proceeds that respondent
determined arose from the 2000 postliquidation sale of BCC’s assets. Respondent
contends that the omission of 80.01% of the sale proceeds resulted in a substantial
omission of income and triggered the six-year limitations period under section
6501(e) as to the Clarks’ return and, therefore, as to BCC’s return under section
6229(c)(2), making the FPAA timely. See Rhone-Poulenc Surfactants &
Specialties, L.P. v. Commissioner, 114 T.C. 533, 542 (2000).
We entered an order and decision in this case granting summary judgment to
petitioner, ruling that the period of limitations for assessment was three years and
therefore had expired. We based our decision on the effect of our Opinion in
Bakersfield Energy Partners, LP v. Commissioner, 128 T.C. 207 (2007), aff’d, 568
F.3d 767 (9th Cir. 2009), and did not address respondent’s sham transaction
argument. We specifically noted that Bakersfield “held that an overstatement of
basis is not an omission of gross income triggering application of the 6-year period
of limitations” at issue there. Beverly Clark Collection, LLC v. Commissioner,
T.C. Dkt. No. 27538-08 (Nov. 10, 2010).
Respondent appealed our decision to the U.S. Court of Appeals for the
Ninth Circuit. He abandoned his overstatement of basis argument after the U.S.
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[*6] Supreme Court decided United States v. Home Concrete & Supply, LLC, 566
U.S. 478 (2012). In an unpublished opinion the Court of Appeals vacated our
order and decision so that we could consider respondent’s remaining argument
that the limitations period remains open because the 1999 sale was a sham.
Beverly Clark Collection, LLC. v. Commissioner, 571 F. App’x 601 (9th Cir.
2014).
Discussion
Rule 121(b) provides in part that after a motion for summary judgment and
opposing response are filed “[a] decision shall thereafter be rendered if the
pleadings * * * and any other acceptable materials, together with the affidavits or
declarations, if any, show that there is no genuine dispute as to any material fact
and that a decision may be rendered as a matter of law.” The moving party bears
the burden of showing that there is no genuine issue of fact, and factual inferences
will be drawn in the light most favorable to the nonmoving party. Dahlstrom v
Commissioner, 85 T.C. 812, 821 (1985).
Ordinarily, the limitations period on assessment of tax is three years after
the return was filed. Sec. 6501(a). The period is extended to six years “[i]f 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”. Id.
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[*7] subsec. (e)(1)(A). In determining the amount omitted from gross income, any
amounts “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”
are not taken into account. Id. cl. (ii).4
With respect to a partnership subject to the Tax Equity and Fiscal
Responsibility Act of 1982 (TEFRA),5 Pub. L. No. 97-248, sec. 402(a), 96 Stat.
at 648, section 6229 provides that “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” (1) the date on which the partnership return for that taxable
year was filed or (2) the last day for filing the return for that year, whichever was
later. Sec. 6229(a) (repealed 2018). The period can be extended further by
agreement “before the expiration of such period.” Id. subsec. (b)(1); see also
sec. 6501(c)(4)(A).
4
In the 2010 amendment to sec. 6501 enacted by the Hiring Incentives to
Restore Employment Act, Pub. L. No. 111-147, sec. 513(a)(1), 124 Stat. at 111
(2010), this provision was moved to sec. 6501(e)(1)(B)(ii).
5
Before its repeal, see Bipartisan Budget Act of 2015, Pub. L. No. 114-74,
sec. 1101(a), 129 Stat. at 625, TEFRA governed the tax treatment and audit
procedures for certain partnerships, see Tax Equity and Fiscal Responsibility Act
of 1982, Pub. L. No. 97-248, secs. 401-407, 96 Stat. at 648-671.
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[*8] Section 6229 thus provides an alternative minimum period of limitations to
the one set out in section 6501 and gives the Commissioner a minimum of three
years to challenge items on a TEFRA partnership return. Rhone-Poulenc
Surfactants & Specialties, L.P. v. Commissioner, 114 T.C. at 542. Section
6229(c)(2) provides that the limitations period is extended to six years “[i]f any
partnership omits from gross income an amount properly includible therein”, and
that amount is described in section 6501(e)(1)(A) as “in excess of 25 percent of
the amount of gross income stated in the return”.
Partnership-level adjustments may result in a substantial omission at the
partner level for purposes of section 6501(e). Rhone-Poulenc Surfactants &
Specialties, L.P. v. Commissioner, 114 T.C. at 551; see also CNT Inv’rs, LLC v.
Commissioner, 144 T.C. 161, 189-191 (2015). And as we explained in Rhone-
Poulenc Surfactants & Specialties, partnerships are not taxable entities; any
income tax attributable to partnership items must be assessed at the partner level.
So if the limitations period was open as to the Clarks when respondent issued the
FPAA, the FPAA was not meaningless, and this case may proceed; if it was
closed, the FPAA is untimely and we must enter decision for petitioner. See CNT
Inv’rs, LLC v. Commissioner, 144 T.C. at 213; see also Rhone-Poulenc
Surfactants & Specialties, L.P. v. Commissioner, 114 T.C. at 534-535.
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[*9] Respondent’s argument is that the so-called omission on the 2000 returns
arose not just from overstated basis generated by the “Son-of-BOSS” transaction
but also because the 1999 sale by the Clarks of 80.01% of BCC to Fausset Trust
was a sham.6 If so, then the Clarks omitted 80.01% of gain on the postliquidation
2000 sale from their 2000 Form 1040 because they received greater gross proceeds
than were reported as allocable to them on BCC’s 2000 Form 1065 or their 2000
Form 1040.
Because the question of whether the 1999 sale was a sham is a genuine
factual dispute material to respondent’s argument against summary judgment, we
will assume that it was so for purposes of deciding petitioner’s motion. We agree
that, assuming the 1999 sale was a sham, the Clarks should have reported gain on
the full amount of the proceeds of the postliquidation asset sale--$12,990,000.
Respondent contends that this was an omission in excess of 25% of the gross
income the Clarks reported on their 2000 Form 1040 and BCC reported as
attributable to the Clarks on its 2000 Form 1065. Therefore, argues respondent,
the six-year period of limitations applies, and the FPAA issued to petitioner is
6
Respondent does not argue that there was an omission of gross income on
the 1999 returns. And as the only adjustment to BCC’s 1999 Form 1065 in the
FPAA was a reduction in the amount of capital contributed to BCC by the Clarks,
we likewise conclude that there was no omission.
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[*10] timely. So the first question we must answer is whether the Clarks’ failure
to report the other 80.01% of the gain is an omission for purposes of the six-year
limitations period.
In considering the application of a prior version of section 6501(e)(1)(A),
the U.S. Supreme Court explained that “the Commissioner is at a special
disadvantage” where a taxpayer fails to report an item of tax and “the return on its
face provides no clue to the existence of the omitted item.” Colony, Inc. v.
Commissioner, 357 U.S. 28, 36 (1958). The Court went on to explain: “On the
other hand, when * * * 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. 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.
We recently addressed this question in another “Son-of-BOSS” case, CNT
Inv’rs, LLC. There, the taxpayer argued that under United States v. Home
Concrete & Supply, LLC, 566 U.S. 478 (2012), “the allegedly omitted item--gain
recognized on * * * [a partnership’s] distribution of appreciated property to its
shareholders--d[id] not constitute an omission within the meaning of section
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[*11] 6501(e)(1)(A) because it derive[d] entirely from an overstatement of outside
basis.” CNT Inv’rs, LLC v. Commissioner, 144 T.C. at 208.
In Home Concrete & Supply, LLC, 566 U.S. at 483, the Supreme Court
concluded that its interpretation in Colony, Inc., applied with equal force to the
current version. In both cases the Supreme Court considered and rejected
respondent’s argument here that the phrase “omits * * * an amount” in section
6501(e)(1)(A) should be read to include an understatement of an amount,
concluding that such a reading would give too much weight to “amount” and too
little to “omits”. Home Concrete & Supply, LLC, 566 U.S. at 485-486; Colony,
Inc. v. Commissioner, 357 U.S. at 32-33. In Colony, Inc., the Court rejected the
Commissioner’s argument that the phrase “omits from gross income an amount
properly includible therein” should be read to include an understatement of
income arising from an overstatement of costs. And in Home Concrete & Supply,
LLC, 566 U.S. at 490, the Court expressly rejected the Commissioner’s argument
that “omits” could be construed to include an understatement of income arising
from an overstatement of basis.
Thus, as we explained in CNT Inv’rs, LLC v. Commissioner, 144 T.C. at
208, under both Colony, Inc. and Home Concrete & Supply “[t]o ‘omit’ an amount
properly includible in gross income is to leave something out entirely.” And we
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[*12] then analyzed whether the taxpayers omitted any item of income entirely,
accepting for purposes of our analysis their basis overstatements as accurate. Id.
at 209-210.
The question before us is a little different, as respondent’s theory here is
that a sham sale, not an overstatement of basis, gave rise to the omission. So we
must decide whether that distinction makes any difference. We conclude that it
does not; we are bound to the Supreme Court’s analysis. That is, even if we
assume that the basis was not wrong but the sale of BCC to Fausset Trust was a
sham, the Clarks did not omit an item of gain entirely; they just reported an
incorrect amount of gain. See id. at 208 (concluding that when a taxpayer
overstates basis and thereby understates gain, “the taxpayer has reported, not
omitted, the item of gain, albeit in an incorrect amount”). We therefore reject
respondent’s assertion that the test in section 6501(e)(1)(A) is computational. And
we find no support for respondent’s claim that Colony, Inc. should not apply here
because that case involved gross proceeds of a business unlike here. See
Carpenter Family Invs., LLC v. Commissioner, 136 T.C. 373, 386 (2011).
The parties agree that the Clarks reported gain attributable to the total
19.99% interest in BCC that they claimed to retain after the sham transaction. One
could argue that the Clarks omitted the entire amount of gain allocated to Fausset
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[*13] Trust, but the result of respondent’s sham-sale theory is that the Clarks
should have reported 100% of the gain on the postsale liquidation rather than
19.99%. And because they reported 19.99% of the gain rather than 100%, they
did not “omit” an item of gain entirely but rather reported an incorrect amount, so
the six-year period of limitations does not apply.7 While the clues on the returns
filed here seem “sufficient to intrigue [only] a Sherlock Holmes”,8 they must
suffice under the statutory framework for the reasons explained by the Supreme
Court.9
7
The Clarks’ failure to report any of the guaranteed payments reported on
the 2000 Schedules K-1 does not constitute an omission for purposes of sec.
6501(e)(1)(A) for two reasons. First, it does not amount to 25% of the gross
income the Clarks reported on their 2000 Form 1040. Second, it was reported on
the Schedules K-1 that the Clarks received, and we have held that information
disclosed on partnership returns may constitute adequate disclosure when the
taxpayer’s return makes reference to them, as was done here. See, e.g., Davenport
v. Commissioner, 48 T.C. 921 (1967); Walker v. Commissioner, 46 T.C. 630
(1966); Roschuni v. Commissioner, 44 T.C. 80 (1965), supplementing T.C. Memo.
1964-321.
8
In Quick Tr. v. Commissioner, 54 T.C. 1336, 1347 (1970), aff’d per
curiam, 444 F.2d 90 (8th Cir. 1971), we stated: “The touchstone in cases of this
type is whether respondent has been furnished with a ‘clue’ to the existence of the
error. * * * Concededly, this does not mean simply a ‘clue’ which would be
sufficient to intrigue a Sherlock Holmes. But neither does it mean a detailed
revelation of each and every underlying fact.”
9
We therefore do not reach the question whether, in determining whether
disclosure was adequate on a return for one tax year, we consider what was
(continued...)
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[*14] We therefore will grant petitioner’s Motion for Summary Judgment that the
FPAA was untimely.10
To reflect the foregoing,
An appropriate order and decision
will be entered.
9
(...continued)
reported on returns for a different tax year.
10
As respondent received the Form 872-I from petitioner after the three-
year limitation period expired, the form was ineffective and the limitations period
was not extended. See secs. 6229(b)(1), 6501(c)(4)(A).