Home Concrete & Supply, LLC v. U.S.

• Decision Date: 21 November 2008
• Docket Number: No. 7:06-CV-181-FL.,7:06-CV-181-FL.
• Citation: 599 F.Supp.2d 678
• Court: U.S. District Court — Eastern District of North Carolina
• Parties: HOME CONCRETE & SUPPLY, LLC, a Delaware Limited Liability Company; Robert L. Pierce, as Tax Matters Partner; Susanne D. Pierce; Stephen R. Chandler; Rebecca R. Chandler; and Home Oil and Coal Company, Inc., a North Carolina Corporation, Plaintiffs/Petitioners, v. UNITED STATES of America, Defendant/Respondent.

599 F.Supp.2d 678

HOME CONCRETE & SUPPLY, LLC, a Delaware Limited Liability Company; Robert L. Pierce, as Tax Matters Partner; Susanne D. Pierce; Stephen R. Chandler; Rebecca R. Chandler; and Home Oil and Coal Company, Inc., a North Carolina Corporation, Plaintiffs/Petitioners, v. UNITED STATES of America, Defendant/Respondent.

No. 7:06-CV-181-FL.

United States District Court, E.D. North Carolina, Southern Division.

November 21, 2008.

Richard Temple Rice, Robert T. Numbers, II, Womble Carlyle Sandridge & Rice, PLLC, Winston-Salem, NC, for Plaintiffs/Petitioners.

Grover Hartt, III, Senior Litigation Counsel, Christopher R. Egan, Trial Attorney, U.S. Dept. of Justice, Dallas, TX, for Defendant/Respondent.

ORDER

LOUISE W. FLANAGAN, Chief Judge.

Plaintiffs/petitioners ("plaintiffs") initiated this action by filing "Complaint and Petition for Readjustment of Partnerships Items Under 26 U.S.C. § 6226," wherein they seek a determination that any tax assessment for the 1999 tax year is time barred and that no adjustment of their taxes is warranted for the 1999 tax year. Plaintiffs include Home Concrete & Supply, LLC, ("Home Concrete"), a Delaware limited liability company which is deemed a partnership, and its owners who are deemed partners, for federal income tax purposes.¹ Plaintiffs also include Robert L. Pierce ("Pierce"), the tax matters partner for Home Concrete, who seeks reimbursement of the sum of $1,392,118.00² he deposited with the IRS, together with his wife, plaintiff Susanne D. Pierce, with whom he filed jointly for the 1999 tax year. Pierce owned Home Oil & Coal Company, Inc. ("Home Oil") at the time of its 1999 sale together with plaintiff Stephen R. Chandler ("Chandler"), who proceeds here also with his wife, Rebecca R. Chandler, with whom he filed jointly for that tax year. Home Oil also is a plaintiff in this action.

The case comes now before the court on plaintiffs' motion for summary judgment and defendant's motion for partial summary judgment, presenting for decision the question of whether a three year or a six year limitations period applies for any IRS assessments relating to the transactions at issue.

STATEMENT OF THE CASE

Plaintiffs filed the instant action pursuant to 26 U.S.C. § 6226(e)(1), seeking refund of deposit made for the 1999 tax year in response to the 2006 FPAA. Plaintiffs allege that the 2006 FPAA was time barred by the three year statute of limitations in §§ 6229³ and 6501. Plaintiffs allege further that the IRS assessments are erroneous and disclaim any liability. Defendant asserts in response that the six year limitations period prescribed in § 6501(e)(1)(A) applies and plaintiffs are not entitled to refund of the deposit. It is the government's position that the assessments are proper.

On February 23, 2007, plaintiffs moved for judgment on the pleadings, asserting, as they do now, that defendant's assessment of taxes for the 1999 tax year was time barred because the three year limitations period set forth in § 6501(a) applies to any action to recover taxes related to their 1999 tax returns. The six year statute of limitations provided by § 6501(e)(1)(A) in this case applies, the government argued then and argues now, because plaintiffs omitted a substantial amount of gross income from their returns. As set forth in prior order, after protracted briefing, the court denied, without prejudice, plaintiffs' motion for judgment on the pleadings and defendant's motion for partial summary judgment. An agreed to case schedule was implemented, including limited discovery, and on this basis the parties' cross-motions come now before the court.

In their motion for summary judgment, plaintiffs argue that the FPAA is time barred by 26 U.S.C. § 6501(a), which sets out a general three year statute of limitations for actions to assess taxes on partnerships and individuals. Defendant moves for partial summary judgment, on grounds that the six year statute of limitations provided by § 6501(e)(1)(A) applies to tax assessments based on the plaintiffs' 1999 tax returns under the circumstances presented, and the assessment therefore was timely.

STATEMENT OF UNDISPUTED FACTS

On the record presented, the specific date of filing of the partners' individual returns, which the parties agree, for purposes of beginning the §§ 6501(a) and (e) limitations periods, are the relevant ones, see Bufferd v. C.I.R., 506 U.S. 523, 526, 113 S.Ct. 927, 122 L.Ed.2d 306 (1993), is unclear. However, for purposes of calculating the § 6501 limitations periods, the actual date of filing of a return does not matter, as long as the return is filed before the deadline. See 26 U.S.C. § 6501(b)(1). The date used as the date of "filing" for returns filed before the deadline is the deadline date. There is no dispute that the returns at issue were filed before the April 17, 2000, deadline.

On the record before the court, there also is no issue that June 19, 2003, the IRS served summons pursuant to court order on Jenkens & Gilchrist, P.C. ("Jenkens"), plaintiffs' attorneys, well within the six year statute of limitations asserted by the government.⁴ Though the record is unclear as to the precise date that Jenkens responded to the summons related to Home Concrete, the parties agree that the earliest possible date of compliance was May 17, 2004. It is undisputed that the IRS issued the FPAA assessing the contested taxes on September 7, 2006, more than six years after the April 17, 2000 filing date.⁵

The FPAA assessing the taxes contested by plaintiffs was issued in response to a series of transactions undertaken by plaintiffs Pierce and Chandler in anticipation of the sale of the business, Home Oil. Following the advice of their accountants, Arthur Andersen LLP, and Jenkens, plaintiffs embarked on a series of transactions including short sales⁶ designed to increase basis in certain assets, thus decreasing income tax liability from the sale of the business.⁷ Plaintiffs contend an increased basis for Pierce and Chandler in Home Concrete resulted equal to the amount of the proceeds from the short sales with no offset for the obligations to close the short sales. The IRS contends that the proper treatment of the capital contributions at issue would include the obligations to close the short sales as a liability offsetting the contributions and, therefore, the contributions produced no increase in basis.

According to plaintiffs' calculation, because of the basis claimed by the plaintiffs from the short sales, Home Oil's basis in its partnership interest in Home Concrete exceeded the amount of its share of Home Concrete's basis in its assets by the amount of basis claimed from those transactions. Plaintiffs elected to take advantage of 26 U.S.C. § 754, which allows partnerships to increase the partnership's basis in its assets to equal the partners' basis in the partnership. The parties agree that, using this election, Home Oil claimed an increased basis in Home Concrete of $5,984,526.17. This apparently produced a total basis in Home Concrete's assets of approximately $10,527,350.00, though, again, the record does not appear particularly precise on this point.

On August 31, 1999, Home Concrete sold substantially all of its assets to a third party for $10,623,348.00. Plaintiffs claim this resulted in only a modest gain for Home Concrete. Defendant claims that, because the stepped up basis claimed by plaintiffs was impermissible, Home Concrete realized a substantially greater amount of taxable gain. Ultimately, defendant issued the September 7, 2006, FPAA assessing taxes on the amount plaintiffs allegedly omitted from gross income, and thereafter the instant dispute was presented to the court.

DISCUSSION

Summary judgment is appropriate, under Rule 56(c), "if the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled to a judgment as a matter of law." FED.R.CIV.P. 56(c). A fact is material if it might affect the outcome of the case. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). In deciding a motion for summary judgment, the court construes evidence in the light most favorable to the nonmoving party and draws all reasonable inferences in the nonmovant's favor. Anderson, 477 U.S. at 255, 106 S.Ct. 2505.

A party seeking summary judgment "bears the initial responsibility of informing the district court of the basis for its motion, and identifying those portions of the [record] which it believes demonstrate the absence of a genuine issue of material fact." Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). Once the moving party has met its burden, the non-moving party must then "set forth specific facts showing that there is a genuine issue for trial." Matsushita Elec. Indus. Co. Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586-87, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986) (quoting FED. R.CIV.P. 56(e)).

While both sides frame the question presented as whether the three year statute of limitations in § 6501(a) or the six year statute of limitations in § 6501(e)(1)(A) applies to plaintiffs' situation, because plaintiffs contend that none of the assessments on their face are proper, consideration now of whether § 6501(e)(1)(A) applies is more complicated. Section 6501(e)(1)(A) provides that if a 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 extended statute of limitations for assessments of tax by the IRS is triggered. 26 U.S.C. § 6501(e)(1)(A). So determining whether an item has been omitted in this case, where the alleged omission is an overstatement of basis, requires this court first to decide whether such an overstatement can constitute an omission under § 6501(e)(1)(A). Assuming that it does, the court then must determine...