Basr P'ship v. United States

• Decision Date: 30 September 2013
• Docket Number: No. 10-244,10-244
• Parties: BASR PARTNERSHIP, by and through, WILLIAM F. PETTINATI, SR., Tax Matters Partner, Plaintiff, v. THE UNITED STATES, Defendant.
• Court: U.S. Claims Court

BASR PARTNERSHIP, by and through, WILLIAM F. PETTINATI, SR.,Tax Matters Partner, Plaintiff, v. THE UNITED STATES, Defendant.

No. 10-244

United States Court of Federal Claims

Filed: September 30, 2013

Jurisdiction, 28 U.S.C. § 1508 (re: 28

U.S.C. § 6226 petition);

Summary Judgment, RCFC 56(c);

Tax Equity and Fiscal Responsibility Act of

1982, Pub. L. No. 97-248, 96 Stat. 324

(1982) (codified as amended in scattered

sections of 26 U.S.C.);

26 U.S.C. § 743 (adjustment to basis of

partnership property);

26 U.S.C. § 754 (election to adjust partnership

basis);

26 U.S.C. § 6223(a)(2) (notice to partners of

administrative adjustment);

26 U.S.C. § 6225(a)(1) (re: partnership item

assessment period);

26 U.S.C. § 6226(a) (time period to readjust

partnership items);

26 U.S.C. § 6229(c)(1) (time period for

administrative adjustment of a final

partnership item);

26 U.S.C. § 6501(c)(1) (exceptions to time

period for false or fraudulent returns, with

the intent to evade tax).

Thomas A. Cullinan, Sutherland Asbill & Brennan LLP, Atlanta, Georgia, Counsel for Plaintiff.

Jacob E. Christensen, United States Department of Justice, Tax Division, Court of Federal Claims Section, Washington, D.C., Counsel for the Government.

MEMORANDUM OPINION AND FINAL ORDER

BRADEN, Judge.

This case concerns a petition filed in the United States Court of Federal Claims, pursuant to 28 U.S.C. § 1508, for a readjustment and refund of federal taxes paid, plus interest. The pending motion for summary judgment requests that the court determine that the refund, plus interest, is due, because a January 20, 2010 Internal Revenue Service ("IRS") Notice of Final Partnership Administrative Adjustment ("FPAA") was timebarred by 26 U.S.C. § 6229(c)(1). Inthe alternative, the pending motion argues that the FPAA is timebarred, because none of the taxpayers had the requisite intent to trigger the extended statute of limitations period in 26 U.S.C. § 6501(c)(1).

I. RELEVANT FACTUAL BACKGROUND.¹

In 1999, Erwin Mayer, a partner in the law firm of Jenkens & Gilchrist, advised William F. Pettinati, Sr. and Mr. Pettinati's accountant, John C. Malone, about the tax consequences of the sale of Page Printing Co. ("Page"). Page was a business owned by 1) Mr. Pettinati, 2) his wife and 3) gift trusts for the benefit of their sons, William F. Pettinati, Jr. and Andrew Pettinati ("the Gift Trusts"). Gov't Ex. 5; Pl. PFOF ¶ 14; Gov't Resp. App. C at 46 (9/26/12 William F. Pettinati, Sr. Dep.).

The tax plan designed by Mr. Malone included the following steps:

1. A Family General Partnership will be created.

2. A short sale of Treasury securities is conducted by each family member.

3. [The] stock of [Page] and the short sale will be contributed by the four family stockholders into the family partnership.

4. An S-corporation[²] will be created.

5. The partnership interests will be contributed to the S-corporation.

6. Such contribution triggers the IRC §754 basis step-up for the Page stock.

7. The short sale is closed out, creating a minor gain or loss.

8. The Page stock may then be sold to your printing business buyer by the family partnership.

Gov't Ex. 5 at G12.

On May 24, 1999, the BASR Partnership ("BASR") was formed as a general partnership under the laws of Texas.³ Pl. PFOF ¶ 1. The partners in BASR were:

Bingle Investments LLC, a Delaware limited liability company, the sole member of which was William F. Pettinati, Sr., who also was designated BASR's Tax Matters Partner, as defined in I.R.C. § 6231(a)(7);

Falba Investments LLC, a Delaware limited liability company, the sole member of which was Virginia Pettinati, William F. Pettinati, Sr.'s wife;

Winding Oak Investments LLC, a Delaware limited liability company, the sole member of which was Pettinati 1998 Gift Trust fbo/William F. Pettinati, Jr.; and

Watermill Investments LLC, a Delaware limited liability company, the sole member of which was Pettinati 1998 Gift Trust fbo/Andrew Pettinati.

Pl. PFOF ¶¶ 2, 4.

On June 10, 1999, each of BASR's partners contributed cash and short positions in United States Treasury Notes to BASR. Pl. PFOF ¶ 13. "BASR's partners took the position that the contribution of the short positions in U.S. Treasury Notes increased the partners' outside bases⁴ in BASR by approximately $6,638,100." Pl. PFOF ¶ 13. On June 12, 1999, each of theaforementioned partners contributed ninety-nine percent of their respective interests in BASR, as a capital contribution to Cypress Investments Inc., a Delaware corporation, resulting in the termination of the May 24, 1999 BASR and the creation of a new BASR.⁵ Pl. PFOF ¶¶ 3, 4. On the same date, Mr. Pettinati, Sr., his wife, and the Gift Trusts contributed their Page Printing Company stock ("Page stock") to the new BASR.⁶ Pl. PFOF ¶ 12. On or around August 17, 1999, BASR sold its Page stock to Nationwide Graphics, Inc. ("Nationwide") for $4,828,771 and received a promissory note from Nationwide, then valued at $2,069,474. Pl. PFOF ¶ 12.

Subsequently, Mr. Pettinati, in his capacity as the Tax Matters Partner, filed the BASR partnership return for the year ended June 12, 1999, and the IRS stamped the return as received on October 12, 2000. Pl. PFOF ¶ 19(a). He also filed the BASR partnership return for the year ended December 12, 1999, and the IRS stamped the return as received on October 12, 2000. Pl. PFOF ¶ 19(b). In addition, Mr. and Mrs. Pettinati filed a joint individual income tax return for 1999, which was stamped as received on October 12, 2000. Pl. PFOF ¶ 19(c). William F. Pettinati, Jr., as trustee of the Pettinati 1998 Gift Trust F/B/O William F. Pettinati, Jr., also filed the trust's income tax return for 1999, which was stamped as received on October 18, 2000. Pl. PFOF ¶ 19(d). And Andrew Pettinati, as trustee of the Pettinati 1998 Gift Trust F/B/O Andrew Pettinati, filed the trust's income tax return for 1999, which was stamped as received on October 12, 2000. Pl. PFOF ¶ 19(e). Likewise, William F. Pettinati, Sr. filed Cypress Investments, Inc.'s income tax return for 1999, which was stamped as received on October 12, 2000. Pl. PFOF ¶ 19(f). All of the aforementioned federal tax returns were prepared by Mr. Malone, a certified public accountant and partner in the firm Malone & Bailey PLLC. Pl. PFOF ¶ 15. In addition, Mr. Malone signed the tax returns of BASR and its partners; not Jenkens & Gilchrist. Pl. PFOF ¶ 18.⁷

On August 8, 2006, the IRS initiated an audit of BASR's returns for the tax years ended June 12, 1999 and December 22, 1999. Pl. PFOF ¶ 20.

On January 20, 2010, the IRS issued a Final Partnership Administrative Adjustment ("FPAA") for the tax years ended June 12, 1999 and December 22, 1999. Pl. PFOF ¶ 22.

II. PROCEDURAL HISTORY.

On April 16, 2010, BASR, by and through its Tax Matters Partner, filed a Complaint in the United States Court of Federal Claims seeking a refund of $735,533 on federal taxes paid, plus interest. Compl. ¶ 7(a). The Complaint alleges that the January 20, 2010 FPAA was untimely, pursuant to I.R.C. §§ 6229, 6501, and that no penalties may be assessed, pursuant to I.R.C. § 6662, because the IRS's disallowance of tax benefits was not attributable to a valuation misstatement. Compl. ¶¶ 7(c), (d). In addition, the Complaint alleges that the IRS erred in determining that:

(i) neither BASR nor its partners established the existence of BASR as a partnership as a matter of fact;

(ii) BASR is disregarded because it had no business purpose other than tax avoidance, lacked economic substance, and constitutes an economic sham for federal income tax purposes;

(iii) the transactions giving rise to the basis in the stock of [Page] claimed on the federal income tax returns of the partners of BASR are disregarded because they had no business purpose other than tax avoidance, lacked economic substance, and constituted an economic sham for federal income tax purposes;

(iv) BASR violated the intent of Subchapter K of the Code and, consequently, pursuant to Treas. Reg. Sec. 1.701-2, all transactions engaged in by BASR are treated as engaged in directly by its partners, the U.S. Treasury Note positions contributed to or assumed by BASR are treated as never having been contributed to or assumed by BASR, and any gains or losses realized by BASR on such positions are treated as having been realized by the partners;

(v) BASR violated the intent of Subchapter K of the Code and pursuant to Treas. Reg. Sec. 1.701-2, BASR should be disregarded and all transactions engaged in by BASR should instead be treated as engaged in directly by its partners;

(vi) neither BASR nor its partners entered into the U.S. Treasury Note positions or purchased the U.S. Treasury Notes with a profit motive for purposes of Code Section 165(c)(2);

(vii) the U.S. Treasury Note positions constitute an arrangement under Code Section 465(b)(4) to limit the exposure to risk of loss, and neither BASR nor its partners established any other amounts considered to be at risk that would allow the partners to deduct losses arising from or in connection with BASR;

(viii) even if the proceeds of the U.S. Treasury Note positions are treated as contributed to BASR by its partners, the amount treated as contributed should be reduced by the amounts paid by the partners for the purchase of other U.S.Treasury Note positions, and the partners' bases in BASR should be reduced accordingly;

(ix) the adjusted bases of the assets contributed to BASR are not established under Code Section 723, and the partners' adjusted bases in their respective partnership interests are not established in an amount greater than zero;

(x) for purposes of determining gain or loss from the sale, exchange, or liquidation of BASR interests, the partners' bases are not established in an amount greater than zero;

(xi) the obligation to close short sales of U.S. Treasury Notes transferred to BASR constituted liabilities for purposes of Code Section 752;

(xii) the assumption of obligations to close short sales of U.S. Treasury Notes by BASR constituted a

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