10-4183-ag
Wilmington Partners v. Commissioner
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
SUMMARY ORDER
RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT. CITATION TO A
SUMMARY ORDER FILED ON OR AFTER JANUARY 1, 2007 IS PERMITTED AND IS GOVERNED
BY FEDERAL RULE OF APPELLATE PROCEDURE 32.1 AND THIS COURT'S LOCAL RULE
32.1.1. WHEN CITING A SUMMARY ORDER IN A DOCUMENT FILED WITH THIS COURT, A
PARTY MUST CITE EITHER THE FEDERAL APPENDIX OR AN ELECTRONIC DATABASE (WITH
THE NOTATION "SUMMARY ORDER"). A PARTY CITING A SUMMARY ORDER MUST SERVE A
COPY OF IT ON ANY PARTY NOT REPRESENTED BY COUNSEL.
At a stated term of the United States Court of Appeals
for the Second Circuit, held at the Daniel Patrick Moynihan
United States Courthouse, 500 Pearl Street, in the City of New
York, on the 10th day of September, two thousand twelve.
PRESENT:
DENNY CHIN,
RAYMOND J. LOHIER, JR.,
Circuit Judges,
EDWARD R. KORMAN,
District Judge.*
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WILMINGTON PARTNERS L.P., WILMINGTON
MANAGEMENT CORP., Tax Matters Partner,
Petitioners-Appellees,
-v.- 10-4183-ag
COMMISSIONER OF INTERNAL REVENUE,
Respondent-Appellant.
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FOR PETITIONERS-APPELLEES: GREGORY G. GARRE (Kim Marie
Boylan, on the brief), Latham
& Watkins, L.L.P., Washington,
D.C.; Roger J. Jones and
Andrew R. Roberson, McDermott
Will & Emery, Chicago,
Illinois, on the brief.
*
The Honorable Edward R. Korman, United States District
Judge for the Eastern District of New York, sitting by
designation.
FOR RESPONDENT-APPELLANT: JOAN I. OPPENHEIMER (Damon
Taaffe, Michael J. Haungs, on
the brief), for Gilbert S.
Rothenberg, Acting Deputy
Assistant Attorney General,
Tax Division, Department of
Justice, Washington, D.C.
Appeal from orders of the United States Tax Court
(Kroupa, J.) entered on May 28, 2010 and July 19, 2010.
UPON DUE CONSIDERATION, IT IS HEREBY ORDERED, ADJUDGED,
AND DECREED that the orders of the tax court are AFFIRMED in part
and the case is REMANDED for further proceedings.
Respondent-appellant Commissioner of Internal Revenue
appeals from the tax court's order and decision entered May 28,
2010, and its order entered July 19, 2010, in favor of
petitioners Wilmington Partners, L.P., and its tax matters
partner, Wilmington Management Corp. (together, "Wilmington").
Decisions of the tax court are reviewed de novo, and
its findings of fact are reviewed for clear error. Robinson
Knife Mfg. Co. v. Comm’r, 600 F.3d 121, 124 (2d Cir. 2010).
Mixed questions of law and fact are also reviewed for clear
error. Wright v. Comm’r, 571 F.3d 215, 219 (2d Cir. 2009). The
tax court's interpretation of federal statutes is reviewed de
novo. Id.
We assume the parties' familiarity with the underlying
facts, the procedural history of the case, and the issues on
appeal.
In 1993, to restructure short-term debt, Bausch & Lomb
Incorporated ("B&L") and several other entities formed
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Wilmington. One partner, B&L International Holdings Corp.
("BLIHC"), contributed a reset note with a face value of $550
million (the "Note").2 BLIHC had previously received the Note
from a subsidiary, and it treated the Note as having a basis of
$550 million. Wilmington treated the Note as having a fair
market value and basis of $550 million.
In 1996, the Commissioner commenced an audit of
Wilmington's partnership return for its 1993 tax year. On March
23, 2000, the Commissioner issued a "No Adjustments Letter,"
proposing to make no adjustments to Wilmington's 1993 partnership
return, and thereby closing the audit.
In June 1999, B&L restructured Wilmington, terminating
the partnership for tax purposes. As a consequence, Wilmington
filed two partnership returns for "short" years: the first for
the 1999-1 tax year, ending June 4, 1999, and the second for the
1999-2 tax year, ending December 25, 1999.
The restructuring involved several transactions. In
one of those transactions, BLIHC sold its interest in Wilmington
and reported a long-term capital loss of $347,910,187, based at
least in part on a claimed basis for the Note of $550 million.
B&L could not use all of the capital losses in 1999, so it
carried the loss back to 1998 and forward to 2001, 2002, 2003,
and 2004.
2
A reset note is a note with an interest rate that
"resets" periodically. See In re Ames Dep't Stores, Inc. Note
Litig., 991 F.2d 968, 969-70 n.1 (2d Cir. 1993).
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Wilmington filed its 1999-1 return on April 6, 2000.
It filed its 1999-2 return on June 6, 2000, reporting a capital
loss of $643,790, based on a value for the Note of $550 million.
The Commissioner examined Wilmington's returns for the
two 1999 short taxable years. On May 12, 2006, the Commissioner
issued a Notice of Final Partnership Administrative Adjustment
("FPAA") to Wilmington for the two years, reducing the basis of
the Note from $550 million to zero. The Commissioner took the
position that Wilmington had overstated its basis in the Note; he
consequently increased Wilmington's long-term capital gain for
1999-2 by $189,882,108.
Wilmington commenced this action below alleging, inter
alia, that the adjustments for 1999-2 -- made substantially more
than three years but less than six years after Wilmington filed
its return -- were time-barred by the statute of limitations for
tax assessments. See I.R.C. § 6501(a). In response, the
Commissioner argued that the adjustments were not time-barred
because the extended six-year statute of limitations for
omissions of gross income applied. See id. §§ 6229(c)(2) and
6501(e)(1)(A).
The tax court ruled in favor of Wilmington. It held
that the extended six-year statute of limitations did not apply
because even if Wilmington had overstated the basis of the Note,
an overstatement of basis did not constitute an omission of gross
income for statute of limitations purposes. It held that the
Commissioner was barred from assessing taxes based on
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Wilmington's 1999 returns because the three-year statute of
limitations had expired. It also ruled that the Commissioner
"may not assess any tax related to the 1999-2 adjustments." As
to tax year 1999-1, the tax court noted that the Commissioner had
"made no relevant legal arguments in his memorandum to support
his response on why we are authorized to make an assessment for
that year."
Two principal issues are raised on appeal: (1) whether
the extended six-year statute of limitations applies because, as
the Commissioner contends, an overstatement of basis constitutes
an omission of gross income; and (2) whether assessments may be
made with respect to tax years 2001-2004 based on adjustments to
Wilmington's 1999-2 partnership items.
The first issue has now been decided by the Supreme
Court. In United States v. Home Concrete & Supply, LLC, 132 S.
Ct. 1836 (2012), the Court held that an overstatement of basis
does not constitute an omission from gross income. Id. at 1844
("[O]verstatements of basis, and the resulting understatement of
gross income, do not trigger the extended limitations period
. . . ."). The Commissioner acknowledges the Supreme Court's
ruling, and, by letter dated May 23, 2012, seeks to withdraw his
appeal as to the first issue. In light of the Supreme Court's
decision, we affirm the tax court in this respect; the extended
six-year statute of limitations is inapplicable, and the FPAA was
untimely.
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As for the second issue, the Commissioner contends that
it is still before us. The parties dispute the precise nature of
the issue on appeal. On the one hand, the Commissioner maintains
that the question is whether, even assuming the three-year
statute of limitations barred the Commissioner from assessing
taxes with respect to partnership items for 1999-2, the
Commissioner could nonetheless adjust partnership items for 1999-
2 to assess taxes on partners for 2001 through 2004, the years to
which the 1999 losses were allegedly carried forward to offset
gains. On the other hand, Wilmington asserts that the issue
relates to whether Wilmington's basis in a "reset note" in fact
leads to any additional tax liability in 2001 through 2004 -- a
merits issue that, Wilmington argues, the tax court decided and
the Commissioner failed to appeal.
It is not apparent to us that the tax court decided
either of these issues. We believe the wiser course is to remand
the case for the tax court to further consider the question and
to clarify its ruling.
First, we acknowledge the tax court broadly stated that
the Commissioner "may not assess any tax related to the 1999-2
adjustments" and that "[n]o provision in Subchapter K or TEFRA
[the Tax Equity and Fiscal Responsibility Act of 1982] provides
that a partner's basis in its partnership interest is to be
adjusted based on changes in a partnership's basis in contributed
property." These observations, however, were made largely in the
context of the tax court's rejecting the Commissioner's argument
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that Bakersfield Energy Partners, L.P. v. Comm’r, 128 T.C. 207
(2007), aff'd, 568 F.3d 767 (9th Cir. 2009), should be overruled.
Bakersfield addressed the first issue -- whether the six-year
statute of limitations applies when an understatement of income
results from an overstatement of basis. It is not clear,
furthermore, to what extent these were observations about the
merits.
Second, in the two orders that are the subject of this
appeal -- the orders entered May 28, 2010, and July 19, 2010 --
the tax court did not discuss the differences between assessing
taxes and adjusting the tax treatment of partnership items and
the applicability of the statute of limitations thereto. See,
e.g., Addington v. Comm’r, 205 F.3d 54, 61 (2d Cir. 2000) (noting
distinction between assessments and adjustments and holding that
"[s]ection 6229 limits the time for making assessments against
individual partners . . . [but] the provision sets forth no
limitations whatsoever on the time in which adjustments can be
made"); G-5 Inv. P'ship v. Comm’r, 128 T.C. 186, 189-90 (2007)
("In deficiency proceedings, section 6501 does not preclude an
examination into events occurring in prior years which are closed
to assessment for the purpose of correctly determining income tax
liability for years which are still open."); see also Curr-Spec
Partners, L.P. v. Comm’r, 579 F.3d 391, 399 (5th Cir. 2009)
(holding that Commissioner may issue FPAA at any time and that he
"is free to assess partnership-item tax on any taxpayer who, on
his individual tax return, has taken advantage of the now-
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challenged partnership items within the preceding three years").
In the two orders in question, the tax court did not cite or
discuss these cases -- which appear to support the conclusion
that the Commissioner may make adjustments on partnership items
for 1999-2 that could affect partners' open years. Nor have the
parties done so on appeal.3
Third, in an earlier ruling, the tax court seemed to
hold that the Commissioner could make assessments for later, open
years based on adjustments to partnership items for an earlier,
closed year. In its memorandum opinion filed August 26, 2009,
denying Wilmington's motion to dismiss, the tax court wrote: "We
read nothing in TEFRA that prohibits us from considering in a
nondocketed (or closed) year (here 1993) to make proper
adjustments for a docketed year (here 1999-1 or 1999-2)." In its
August 26, 2009, decision, the tax court noted that the Court of
Federal Claims had held that "the law was well settled that
courts in a nonpartnership proceeding may adjust items (including
basis) in a nondocketed (or closed) year to assess tax in a
3
The statute of limitations for making assessments
against partners is governed by § 6229(a), which provides that
the limitations period "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 is filed, or (2) the
last day for filing such return for such year." See Addington,
205 F.3d at 60. The issuance of an FPAA suspends the running of
the applicable period under §§ 6229 and 6501 until the FPAA
adjustments are finalized, after which the Commissioner has one
year in which to assess partners based on the adjusted
partnership items. Id.; G-5 Inv. P'ship, 128 T.C. at 190.
Hence, any tax years that were still open when the FPAA was filed
in 2006 will remain open until one year after the conclusion of
the partnership proceedings.
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docketed year," and, citing G-5 Investments Partnership, held
that this settled law "applied just as strongly in a TEFRA
proceeding." See 128 T.C. at 189-90. This reasoning, of course,
would appear to be at odds with the notion that the partnership
items for 1999 could not be adjusted to assess taxes for partners
for 2001-2004 -- to the extent those years are open -- just
because Wilmington's 1999 tax year was closed.
Fourth, in its order dated August 8, 2008, as confirmed
in its order dated October 21, 2009, the tax court ruled that the
Commissioner "may not assess any tax for 1998, 1999, or 2000
relating to the adjustments in the FPAA made for 1999-2, because
the applicable period of limitations had expired." These orders
-- which provided the context for the May 28, 2010, and July 19,
2010, orders that are the subject of this appeal -- did not
address taxes for the years 2001-2004.
For all these reasons, it is simply not clear whether
the tax court ruled on the issue in question. Moreover, the
parties and the tax court focused almost entirely on the first
issue -- the applicability of the extended six-year statute of
limitations. Indeed, much of the briefing on appeal focuses not
on the merits of the second issue but on whether the parties made
certain concessions below or waived certain arguments.
In light of all the circumstances, we conclude that the
better course is to remand the case to the tax court so that it
may further consider the question and clarify its ruling. The
tax court may decide to do so by reference to the merits or by
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reference to the statute of limitations, and in its discretion it
may, of course, seek further briefing from the parties.
Accordingly, the judgment of the tax court is hereby
AFFIRMED in part and the case is REMANDED for further
proceedings.
FOR THE COURT:
CATHERINE O'HAGAN WOLFE, CLERK
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