Beverly Clark Collection, LLC v. Comm'r
| Decision Date | 14 November 2019 |
| Docket Number | T.C. Memo. 2019-150,Docket No. 27538-08. |
| Parties | BEVERLY CLARK COLLECTION, LLC, NELSON CLARK, TAX MATTERS PARTNER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
Steven Ray Mather, for petitioner.
John W. Stevens, for respondent.
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 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
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 soldthe 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 theClarks' 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 FaussetTrust 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. 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).
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. 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).
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.
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...
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