Blak Invs. v. Comm'r of Internal Revenue
| Decision Date | 23 December 2009 |
| Docket Number | No. 1283–07.,1283–07. |
| Citation | 133 T.C. No. 19,133 T.C. 431 |
| Parties | BLAK INVESTMENTS, Kyle W. Manroe Trust, Robert and Lori Manroe, Trustees, Tax Matters Partner, Petitioner v. COMMISSIONER of INTERNAL REVENUE, Respondent. |
| Court | U.S. Tax Court |
In 2001 two partners of partnership P borrowed Treasury securities and sold them in the open market; i.e., a short sale. They contributed the short sale proceeds and the obligation to cover the short sale to P in exchange for interests in P. The two partners claimed their bases in P were increased by the short sale proceeds but not reduced by the obligation to cover the short sale. P then redeemed the two partners' interests in P. On their Federal income tax returns the two partners claimed significant losses with respect to the redemption and subsequent sale of assets received in the redemption. Neither the partnership nor the two partners disclosed their participation in the transaction on tax returns for 2001 and 2002.
Sec. 6501(c)(10), I.R.C., provides that if a taxpayer fails to disclose on a return or statement for any taxable year any information required under sec. 6011, I.R.C., with respect defined in sec. 6707A(c)(2) limitations for assessment respect to the transaction after the Internal Revenue to a listed transaction as, I .R.C., the period of of any tax imposed with does not expire until 1 year Service is furnished the information so required. R argues that P and its partners were required to disclose their participation in the transaction at issue under sec. 6501(c)(10), I.R.C.
Petitioner argues that:
(1) Because sec. 6707A, I.R.C., is incorporated into sec. 6501(c)(10), I.R.C., the effective date of sec. 6707A, I.R.C., controls and sec. 6501(c)(10), I.R.C., cannot apply to any transaction for which a return or statement was due on or before Oct. 22, 2004;
(2) sec. 1.6011–4T, Temporary Income Tax Regs. (the temporary regulation), 67 Fed.Reg. 41327 (June 18, 2002), which requires disclosure of participation in listed transactions, is invalid because it violates:
(a) Executive Order 12866, 3 C.F.R. 638 (1994) (Executive Order 12866);
(b) the Regulatory Flexibility Act (RFA), 5 U.S.C. secs. 601–612 (1994);
(c) the Administrative Procedure Act, 5 U.S.C. sec. 553(b) and (c) (1994).
Held: Sec. 6501(c)(10), I.R.C., is effective for tax years with respect to which the period for assessing a deficiency did not expire before Oct. 22, 2004. The effective date of sec. 6707A, I.R .C., defining “listed transaction” and incorporated into sec. 6501(c)(10), I.R.C., has no bearing on the application of sec. 6501(c)(10), I.R.C., in this case.
Held, further: the temporary regulation does not violate Executive Order 12866 or the RFA.
Held, further: the temporary regulation was replaced by sec. 1.6011–4, Income Tax Regs. (the final regulation), T.D. 9046, 2003–1 C.B. 614, effective Feb. 28, 2003, and the rules of the temporary regulation were incorporated into the final regulation.
Held, further: the final regulation is valid and requires disclosure of the 2001 transaction on the partnership's and the partners' 2002 returns.
Held, further: The period of limitations for assessment of tax resulting from the adjustment of partnership items with respect to the transaction at issue is open for the year 2001 under sec. 6501(c)(10), I.R.C.
Ernest S. Ryder, Richard V. Vermazen, and Lauren A. Rinsky, for petitioner.
Donna F. Herbert and Jonathan H. Sloat, for respondent.
This case is before the Court on respondent's motion and petitioner's cross-motion for partial summary judgment filed pursuant to Rule 121.1 The issues are: (1) Whether the effective date of section 6707A precludes application of section 6501(c)(10) to the transaction at issue; whether the transaction at issue is a listed transaction; and whether the period of limitations for assessment of tax resulting from the adjustment of partnership items with respect to the transaction at issue is open for 2001 under section 6501(c)(10).
BLAK Investments (the partnership) is a California general partnership created by Robert and Lori Manroe (the Manroes). The Manroes are partners of the partnership as are two trusts created by the Manroes for the benefit of their children. The petition has been brought by Robert and Lori Manroe, as trustees of the Kyle W. Manroe Trust, tax matters partner of the partnership.
On December 4, 2001, the Manroes as trustees of the Manroe Family Trust opened an account with A.G. Edwards & Sons, Inc. On December 10, 2001, the Manroes deposited $825,000 into the Manroe Family Trust account. On December 12, 2001, the Manroes, through the Manroe Family Trust Account, borrowed Treasury notes maturing on November 15, 2006, with a maturity value of $6,815,000. The Treasury notes were then sold on the open market for $5,481,713; i.e ., the Treasury notes were sold short.2 Of the proceeds, $2,491,233 was allocated to Mr. Manroe and $2,990,480 was allocated to Ms. Manroe.
On December 12, 2001, the Manroes contributed the short sale proceeds, the $825,000 previously deposited into the Manroe Family Trust account, and the obligation to cover the short sale to the partnership in exchange for a combined 95.2964–percent partnership interest. The two trusts for the children each contributed $20,000 in exchange for respective 2.3518–percent partnership interests.
Mr. Manroe reported a $2,866,688 capital contribution to the partnership, of which $2,491,233 was proceeds from the short sale. Ms. Manroe reported a $3,440,025 capital contribution to the partnership, of which $2,990,480 was proceeds from the short sale. Neither of their contributions was reduced by the partnership's obligation to cover the short sale.
On December 28, 2001, the partnership redeemed Mr. Manroe's partnership interest for $380,988.3 Of that amount, Mr. Manroe received $330,988 and 82,645 Swiss francs having a fair market value of $50,000. On December 28, 2001, the partnership redeemed Ms. Manroe's partnership interest for $457,185. That amount did not include any foreign currency.
On December 31, 2001, Mr. Manroe converted his 82,645 Swiss francs into U.S. dollars in the amount of $45,931.
On January 11, 2002, the partnership covered the short sale by purchasing treasury notes with a face value of $6,815,000 maturing on November 16, 2006, for $5,600,567.
The Manroes claim that upon making their initial contributions to the partnership their total basis in their partnership interests was $6,306,713, equal to the total short sale proceeds of $5,481,713 and the $825,000 cash. See sec. 722. The Manroes took the position that the obligation to cover the short sale was not a liability for purposes of section 752(b).
Mr. Manroe claims that when the partnership redeemed his partnership interest, he recognized no gain or loss because the money distributed did not exceed his basis in the partnership. See sec. 731(a). He claims that his basis in the Swiss francs became $2,585,700; i.e., his total basis in the partnership interest less the cash distributed. See sec. 732(b). Mr. Manroe further claims that when he converted his Swiss francs into U.S. dollars he recognized an ordinary loss of $2,539,769. The purported loss was claimed on Schedule E, Supplemental Income and Loss, of the Manroes' joint 2001 Form 1040, U.S. Individual Income Tax Return. The loss was reported as being from “Culebra Trading Partners, Ltd.”, although it was attributable to the transaction described above.
Ms. Manroe claims that when the partnership redeemed her partnership interest, she recognized a short-term capital loss of $2,982,840, equal to her basis less the amount of money received. See secs. 731(a)(2), 741. The short-term capital loss was claimed on Schedule D, Capital Gains and Losses, of the Manroes' 2001 Form 1040. The claimed loss offset $1,474,391 of short-term capital gains for 2001. The Manroes claimed a $458,190 carryover loss on their 2002 return. 4
Neither the partnership nor the Manroes attached a disclosure statement to its or their 2001 return. They did not file a copy of a disclosure statement with respondent's Office of Tax Shelter Analysis. No material adviser provided respondent with information regarding the partnership's or the Manroes' participation in the transaction. See sec. 6112.
On October 13, 2006, respondent issued the partnership a notice of final partnership administrative adjustment (FPAA). Respondent determined that the partnership was a sham, was formed and availed of solely for the purpose of overstating the bases of partnership interests, and lacked economic substance. Respondent contends that the consequence of these determinations, if they are sustained, would be the disallowance of the losses the Manroes claimed on their 2001 and 2002 joint returns and imposition of accuracy-related penalties determined at the partnership level upon the partners. See sec. 6221.
The tax matters partner timely petitioned the Court for review of the FPAA, asserting among other things that the statute of limitations bars the determination of a liability with respect to partnership items or affected items for 2001. Respondent, in his answer, asserted that section 6501(c)(10) applies to the transaction because it constituted a listed transaction requiring disclosure. Petitioner denied the applicability of section 6501(c)(10) in its reply. On November 30, 2007, the Court filed respondent's motion for partial summary judgment on the statute of limitations issue. On March 10, 2008, the Court filed petitioner's cross-motion for partial summary judgment on the same issue. A hearing on the motions was held in San Diego, California.
Under the general rule set forth in section 6501(a), the Internal Revenue Service (IRS)...
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