650 F.3d 691 (D.C. Cir. 2011), 10-1204, Intermountain Ins. Service of Vail v. C.I.R.
|Citation:||650 F.3d 691|
|Opinion Judge:||TATEL, Circuit Judge:|
|Party Name:||INTERMOUNTAIN INSURANCE SERVICE OF VAIL, Limited Liability Company and Thomas A. Davies, Tax Matters Partner, Appellees v. COMMISSIONER OF INTERNAL REVENUE SERVICE, Appellant.|
|Attorney:||Gilbert S. Rothenberg, Acting Deputy Assistant Attorney General, U.S. Department of Justice, argued the cause for appellant. With him on the briefs were Michael J. Haungs and Joan I. Oppenheimer, Attorneys. Brian F. Huebsch argued the cause for appellees. With him on the brief was Steven R. Ander...|
|Judge Panel:||Before: SENTELLE, Chief Judge, TATEL, Circuit Judge, and RANDOLPH, Senior Circuit Judge.|
|Case Date:||June 21, 2011|
|Court:||United States Courts of Appeals, Court of Appeals for the District of Columbia Circuit|
Argued April 5, 2011.
[Copyrighted Material Omitted]
Appeal from the United States Tax Court.
The Commissioner of Internal Revenue and Intermountain Insurance Service of Vail disagree about Intermountain's 1999 gross income to the tune of approximately $2 million, a disagreement arising from Intermountain's sale of assets and centering primarily on the Commissioner's conclusion that Intermountain inflated its basis in those assets. But deciding whether Intermountain inflated its basis must wait for another day because we must first answer an antecedent question: did the Commissioner wait too long to adjust Intermountain's gross income? Although the Commissioner usually must make such an adjustment within three years, sections 6501(e)(1)(A) and 6229(c)(2) of the Internal Revenue Code give the Commissioner up to six years if the taxpayer (or partnership) " 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." (emphasis added). Because in this case the Commissioner waited nearly six years after Intermountain filed its 1999 tax return, the adjustment was timely only if a basis overstatement can result in an " omission from gross income" for purposes of these two provisions. Id. Believing it does not, the Tax Court granted summary judgment to Intermountain. For the reasons set forth in this opinion, we reverse.
The key tax concept at issue in this case is " basis." Basis refers to a taxpayer's capital stake in an item of property— generally the amount the taxpayer paid to obtain it, as adjusted by various other factors. 26 U.S.C. § 1012. When a taxpayer sells property, he realizes gain from that sale, and that gain contributes to gross income. Id. § 61(a)(3). But the taxpayer's gain from the property sale is not the sale price (or in technical terms, the " amount realized" ) but rather the sale price minus basis. Id. § 1001. Given the role basis plays in calculating gross income, a higher basis translates into a lower gross income. In the real world, of course, people generally prefer a higher gross income. But when dealing with the tax collector, lower gross income means a smaller tax bill. Taxpayers, therefore, prefer a higher basis.
The question this case presents is whether a taxpayer who overstates basis in sold property and therefore understates gross income triggers the extended statute of limitations periods. (For the sake of brevity, we will sometimes refer to the issue as whether a basis overstatement constitutes an omission from gross income under the relevant provisions.) This issue " arises in the context of the now infamous Son of BOSS tax shelter," which shields income from taxation by artificially inflating basis. Appellant's Br. 4 (internal quotation marks and citations omitted). As amicus Bausch & Lomb accurately observes,
however, our resolution of this case will " apply equally to all taxpayers ... without regard to the nature of the underlying transaction." Amicus's Br. 7; see also Wilmington Partners v. Comm'r, No. 10-4183 (2d Cir. filed Oct. 13, 2010). Conscious of that, and because we agree with the Tax Court that " [t]he details of the transactions are largely irrelevant to the issues we face today," we shall refer to those details only to the extent necessary to explain our disposition of this case. Intermountain Ins. Serv. of Vail, L.L.C. v. Comm'r, 134 T.C. 211, 212 (2010) (" Intermountain II " ).
The Commissioner accuses Intermountain Insurance Service of Vail of using a Son of BOSS tax shelter to avoid taxes on approximately $2 million of income. Intermountain realized that income on August 1, 1999 when it sold its assets for $1,918,844. On its 1999 Tax Return, filed on September 15, 2000, Intermountain reported a loss from this sale of $11,420, an amount it calculated by subtracting its purported basis in the sold assets ($2,061,808) from the sale proceeds ($1,918,844) and the recaptured depreciation ($131,544). Believing Intermountain had artificially inflated its basis in those assets, thus converting a substantial gain into a loss, the IRS mailed Intermountain a Final Partnership Administrative Adjustment (abbreviated FPAA and pronounced " F-Paw" in tax-speak) on September 14, 2006, nearly six years after Intermountain had filed its 1999 Tax Return. The FPAA concluded that certain Intermountain transactions " were a sham, lacked economic substance and ... had a principal purpose of ... [reducing] substantially the present value of ... [Intermountain's] partners' aggregate federal tax liability." Id. at 4 (quoting the FPAA) (alterations in the original). As a result, the FPAA adjusted Intermountain's basis to $0.
Intermountain petitioned the Tax Court and moved for summary judgment, arguing that the FPAA was untimely because the IRS mailed it after the expiration of the standard three year statute of limitations provided for in 26 U.S.C. §§ 6501(a) and 6229(a) (2000). Insisting that the FPAA was in fact timely, the Commissioner contended that Intermountain's return triggered the extended six year limitations period, available in the case of any taxpayer, 26 U.S.C. § 6501(e)(1)(A) (2000), or any partnership, 26 U.S.C. § 6229(c)(2) (2000), who " 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." (emphasis added). The alleged omissions to which the Commissioner pointed were almost all overstatements of basis. The key question for the Tax Court, then, was whether such overstatements qualify as omissions from gross income under sections 6501(e)(1)(A) and 6229(c)(2) and thus trigger the six year limitations period. Contending they do not, Intermountain relied on an earlier tax court decision, Bakersfield Energy Partners v. Commissioner, 128 T.C. 207 (2007), aff'd, 568 F.3d 767 (9th Cir.2009), which had applied the Supreme Court's decision in Colony, Inc. v. Commissioner, 357 U.S. 28, 78 S.Ct. 1033, 2 L.Ed.2d 1119 (1958). In Colony, the meaning of which is central to this case, the Supreme Court interpreted " omits from gross income" in section 6501(e)(1)(A)'s predecessor to exclude basis overstatements. Id. The Tax Court agreed with Intermountain that Colony applies to sections 6501(e)(1)(A) and 6229(c)(2) and that basis overstatements are not " omissions from gross income." Intermountain Ins. Serv. of Vail, L.L.C. v. Comm'r, 98 T.C.M. (CCH) 144, 2009 WL 2762360 (2009) (" Intermountain I " ). Accordingly, the court granted Intermountain summary judgment. Id.
Shortly after the Tax Court's grant of summary judgment— and implicitly contradicting that decision— the Internal Revenue Service issued temporary regulations that interpret the phrase " omits from gross income" in sections 6501(e)(1)(A) and 6229(c)(2) to include basis overstatements outside the trade or business context. 26 C.F.R. §§ 301.6501(e)-1T; 301.6229(c)(2)-1T (2010). The Service reasoned that because I.R.C. section 61(a)'s standard definition of " gross income" includes " gains derived from dealings in property," 26 U.S.C. § 61(a)(3), and because such gains are ordinarily calculated by subtracting basis from the amount realized, id. § 1001, " outside the context of a trade or business, any basis overstatement that leads to an understatement of gross income under section 61(a) constitutes an omission from gross income for purposes of sections 6501(e)(1)(A) and 6229(c)(2)." Definition of Omission from Gross Income, T.D. 9466, 74 Fed.Reg. 49,321, 49,321 (Sept. 28, 2009). As for Colony, the Service concluded that it applies only to section 6501(e)(1)(A)'s predecessor, pointing out that Congress had enacted section 6501(e)(1)(A) four years before the Supreme Court decided Colony and had, at that time, added an amendment (limited to the trade or business context) designed to address the very same issue later addressed in Colony . Id . Relying on those temporary regulations, the Commissioner moved the Tax Court for reconsideration and to vacate its grant of summary judgment. Denying that motion, the Tax Court found the temporary regulations inapplicable to Intermountain because the standard three year statute of limitations had expired prior to September 24, 2009, the temporary regulations' applicability date. Intermountain II, 134 T.C. at 218-20. The Tax Court went on to hold that even assuming the regulations applied, because Colony " ‘ unambiguously forecloses the agency's interpretation’ of sections 6229(c)(2) and 6501(e)(1)(A)," that decision " displaces [the Commissioner's] temporary regulations." Id. at 224 (quoting Nat'l Cable & Telecomms. Ass'n v. Brand X Internet Servs., 545 U.S. 967, 983, 125 S.Ct. 2688, 162 L.Ed.2d 820 (2005)). For exactly the...
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