Burks v. U.S.

• Decision Date: 09 February 2011
• Docket Number: Nos. 09–11061,09–60827.,s. 09–11061
• Citation: 633 F.3d 347
• Parties: Daniel S. BURKS, Tax Matters Partner of Key Harbor Investment Partners, Plaintiff–Appellant,v.UNITED STATES of America, Defendant–Appellee.Daniel S. Burks, Tax Matters Partner of DJB Investment Partners, Plaintiff–Appellant,v.United States of America, Defendant–Appellee.Commissioner of Internal Revenue, Petitioner,v.MITA, Partner; John F. Lynch, A Partner Other Than the Tax Matters Partner, Respondents.
• Court: U.S. Court of Appeals — Fourth Circuit

633 F.3d 347

107 A.F.T.R.2d 2011-824

2011-1 USTC P 50,219

Daniel S. BURKS, Tax Matters Partner of Key Harbor Investment Partners, Plaintiff–Appellant,

v.UNITED STATES of America, Defendant–Appellee.Daniel S. Burks, Tax Matters Partner of DJB Investment Partners, Plaintiff–Appellant,

v.United States of America, Defendant–Appellee.Commissioner of Internal Revenue, Petitioner,

v.MITA, Partner; John F. Lynch, A Partner Other Than the Tax Matters Partner, Respondents.

Nos. 09–11061

09–60827.

United States Court of Appeals, Fifth Circuit.

Feb. 9, 2011.

OPINION TEXT STARTS HEREWest CodenotesValidity Called into Doubt26 C.F.R. § 301.6229(c)(2)–1(a)(iii)26 C.F.R. § 301.6501(e)–1(a)(iii) Joel N. Crouch (argued), David E. Colmenero, Meadows, Collier, Reed, Cousins, Crouch & Ungerman, L.L.P., Dallas, TX, for Burks.Joel I. Oppenheimer (argued), Michael J. Haungs, Dept. of Justice, Tax Div., Appellate Section, Washington, DC, for U.S.Michael Todd Welty, Laura L. Gavioli, SNR Denton US, L.L.P., Dallas, TX, Thomas A. Cullinan, Sutherland Asbill & Brennan, L.L.P., Atlanta, GA, Kent Jones (argued), Sutherland Asbill & Brennan, L.L.P., Washington, DC, for MITA, John Lynch.Joan I. Oppenheimer, John DiCicco, Michael J. Haungs, Dept. of Justice, Tax Div., Appellate Section, Washington, DC, Clarissa C. Potter, Washington, DC, Gilbert Steven Rothenberg, Deputy Asst. Atty. Gen., Dept. of Justice, Washington, DC, for C.I.R.Eddy Manuel Quijano, Arroyo Grande, CA, Jeffrey W. Koonce, Cherish D. van Mullem, Phelps Dunbar, L.L.P., Baton Rouge, LA, for Equipment Holding Co., L.L.C., Adams.Roger J. Jones, Andrew R. Roberson, Latham & Watkins, L.L.P., Chicago, IL, Kim Marie Kozaczek Boylan, Latham & Watkins, L.L.P., Washington, DC, for Bausch and Lomb, Inc.Appeal from the United States District Court for the Northern District of Texas.Appeal from the United States Tax Court.Before DeMOSS, BENAVIDES and ELROD, Circuit Judges.DeMOSS, Circuit Judge:

This consolidated appeal requires us to determine whether an overstatement of basis constitutes an omission from gross income for purposes of the Tax Code, 26 U.S.C. § 6501(e)(1)(A), which extends the tax assessment period from three to six years. Because we conclude that an overstatement of basis is not an omission from gross income for purpose of the relevant statute, the Commissioner was limited to three years to pursue unpaid tax claims against the taxpayers. We further find that the recently promulgated Treasury Regulations do not apply to the taxpayers. We thus affirm the tax court's judgment in favor of the taxpayer, and reverse the district court's judgment in favor of the government.

I.

Appellee United States of America and Petitioner Commissioner of the Internal Revenue Service (IRS) (collectively “the government”) assert that Appellants Daniel Burks, M.I.T.A., and John E. Lynch (collectively “taxpayers” or “the taxpayers”) utilized the “Son of BOSS”¹ tax shelter to create artificial tax losses in order to offset capital gains. In a Son of BOSS scheme, partners engage in various long and short sale transactions and transfer the resulting obligations to the partnership thereby improperly inflating the basis in the partnership assets. See e.g., Coltec Indus., Inc. v. United States, 454 F.3d 1340, 1343 (Fed.Cir.2006) (outlining steps of transactions used to inflate basis in assets). The partners do not reduce the basis by the liabilities assumed by the partnership. See id; I.R.S. Notice 2000–44, 2000–2 C.B. 255 (describing prohibited transactions used to create an artificial basis). When basis is overstated, “gross income is affected to the same degree as when a gross-receipt item of the same amount is completely omitted from a tax return.” Colony, Inc. v. Comm'r, 357 U.S. 28, 32, 78 S.Ct. 1033, 2 L.Ed.2d 1119 (1958).

The Tax Equity and Fiscal Responsibility Act of 1982 “established ‘a single unified procedure for determining the tax treatment of all partnership items at the partnership level, rather than separately at the partner level.’ ” Kornman & Assocs., Inc. v. United States, 527 F.3d 443, 446 n. 1 (5th Cir.2008) (quoting Callaway v. Comm'r, 231 F.3d 106, 108 (2d Cir.2000)). Generally, taxes must be assessed and collected within three years of the filing of the tax return. See 26 U.S.C. §§ 6501(a), 6229(a). The limitations period is extended to six years when the taxpayer “omits from gross income an amount properly includible therein ... in excess of 25 percent of the amount of gross income stated in the return.” 26 U.S.C. § 6501(e)(1)(A) .

In the present cases, the IRS issued Final Partnership Administrative Adjustments (FPPAs) adjusting the partnership tax returns filed by the taxpayers on the grounds that the challenged transactions lacked economic substance.² See Klamath Strategic Inv. Fund ex rel. St. Croix Ventures v. United States, 568 F.3d 537, 543 (5th Cir.2009) (“The economic substance doctrine allows courts to enforce the legislative purpose of the [Tax] Code by preventing taxpayers from reaping tax benefits from transactions lacking in economic reality.”). The FPPAs were filed more than three years but less than six years after the taxpayers' individual tax returns were filed with the IRS. The taxpayers moved for summary judgment before the district court and tax court on the grounds that the government had issued the FPAAs after the expiration of the general three year limitations period for assessing tax against the various partners. In both matters, the government conceded that the three year limitations period had expired but asserted that an extended six year limitations period applied because the partners had omitted gross income in excess of 25% from their tax returns in violation of § 6501(e)(1)(A) when they overstated their basis.

In United States v. Burks (09–11061), the district court held that this court's decision in Phinney v. Chambers, 392 F.2d 680 (5th Cir.1968), established that an overstatement of basis was an omission from gross income for purposes of § 6501(e)(1)(A). The district court thus denied Burks's motion for summary judgment. This court granted Burks permission to file an interlocutory appeal.

In Commissioner v. M.I.T.A. (09–60827), the tax court relied on the Supreme Court's decision in Colony, Inc. v. Commissioner, 357 U.S. 28, 32, 78 S.Ct. 1033, 2 L.Ed.2d 1119 (1958), and cases construing that decision to support its finding that an overstatement of basis did not constitute an omission from gross income for purposes of § 6501(e)(1)(A). The tax court further found that Phinney did not directly address the issue facing the court. Because the tax court held that the three year limitations period applied, it granted the taxpayers' motion for summary judgment. The government timely appealed.

II.

On appeal, the taxpayers argue that an overstatement of basis does not constitute an omission from gross income as established by the Supreme Court in Colony v. Commissioner and thus the three year limitations period applies. The government argues that this court's decision in Phinney v. Chambers established that the six year limitations period applies to an overstatement of basis for purposes of § 6501(e)(1)(A). The government contends that Colony applies only in the context of a trade or business engaged in the sale of goods or services. The government also argues that application of Colony to the revised statute renders § 6501(e)(1)(A) subsections (i) and (ii) superfluous.³ Finally, the government asserts that recently enacted Treasury Regulations purporting to define “omission from gross income” as encompassing an overstatement of basis are determinative and apply retroactively to the present matters. We consider each in turn.

A.

This court reviews de novo a court's determination on a motion for summary judgment. See Staff IT, Inc. v. United States, 482 F.3d 792, 797 (5th Cir.2007); Ford Motor Co. v. Tex. Dep't of Transp., 264 F.3d 493, 498 (5th Cir.2001). Summary judgment is proper when “the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a).

B.

The taxpayers argue that the Supreme Court's decision in Colony v. Commissioner, holding that an overstatement of basis was not an omission from gross income such that the extended limitations period applied, is controlling in the present matters.

In Colony, the Court held that an overstatement of basis did not constitute an omission from gross income for purposes of § 275(c) of the 1939 Tax Code, the predecessor to § 6501(e)(A)(1). 357 U.S. at 36, 78 S.Ct. 1033. Section 275(c) stated that a five year (now six year) statute of limitations applied when a taxpayer “omits from gross income an amount properly includible therein which is in excess of 25 per centum of the amount of gross income stated in the return.” Id. at 29, 78 S.Ct. 1033.⁴ The taxpayer in Colony had understated gross income by overstating the basis in land the taxpayer had sold. Id. at 30, 78 S.Ct. 1033. The Court began its analysis by focusing on the plain language of the statute. “In determining the correct interpretation of § 275(c) we start with the critical statutory language, ‘omits from gross income an amount properly includible therein.’ ” Id. at 32, 78 S.Ct. 1033.

The taxpayers argued that the term “omits” was commonly defined as “to leave out or unmentioned; not to insert, include, or name” and thus by the plain language of the statute only the complete omission of an item of income triggered application of the extended limitations period. Id. at 32–33, 78 S.Ct. 1033. The Court stated it was “inclined” to agree with the taxpayers' argument, however it held that “it cannot be said that [§ 275(c)] is unambiguous” and turned to the legislative history of the statute. Id. at 33, 78 S.Ct. 1033.

The court found “in that history persuasive evidence that Congress was addressing itself to the specific situation where a taxpayer actually omitted some...