Carpenter Family Invs., LLC v. Comm'r of Internal Revenue

• Decision Date: 25 April 2011
• Docket Number: No. 30833–08.,30833–08.
• Citation: 136 T.C. 373,136 T.C. No. 17
• Parties: CARPENTER FAMILY INVESTMENTS, LLC, Carpenter Capital Management, LLC, Tax Matters Partner, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Tax Court

136 T.C. 373

136 T.C. No. 17

CARPENTER FAMILY INVESTMENTS, LLC, Carpenter Capital Management, LLC, Tax Matters Partner, Petitioner

v.COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 30833–08.

United States Tax Court.

April 25, 2011.

P moved for summary judgment on the ground that R's partnership item adjustments were made after the general 3–year period of limitations for assessing tax had expired. R argues that an extended 6–year period of limitations applies.

Held: The 3–year period of limitations is applicable. Thus P's motion for summary judgment will be granted.

Kevin T. Pearson and Eric J. Kodesch, for petitioner.

Gary J. Merken, for respondent.

OPINION

WHERRY, Judge:

This case is before the Court on petitioner's motion for summary judgment filed September 28, 2009. Respondent filed an objection to petitioner's motion on November 20, 2009. Petitioner filed a memorandum in support of its motion on July 27, 2010. The issue is whether the notice of final partnership administrative adjustment (FPAA) challenged in the petition was issued before the applicable period of limitations for assessing tax had expired. Our decision turns on whether the general 3–year period of limitations under section 6501(a) or the extended 6–year period of limitations under section 6229(c)(2) or section 6501(e)(1)(A) applies.¹ This is an issue of law and may be disposed of by summary judgment pursuant to Rule 121, Tax Court Rules of Practice and Procedure. See also Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520, 1992 WL 88529 (1992) (“Summary judgment is appropriate if the pleadings and other materials show that there is no genuine issue as to any material fact and a decision may be rendered as a matter of law.”), affd. 17 F.3d 965 (7th Cir.1994); Fla. Peach Corp. v. Commissioner, 90 T.C. 678, 681, 1988 WL 31439 (1988) (“Summary judgment is intended to expedite litigation and avoid unnecessary and expensive trials.”).

Background

I. Undisputed Facts

The following facts are not in dispute. Petitioner, Carpenter Capital Management, LLC, is a Nevada limited liability company classified as a partnership for Federal income tax purposes. Petitioner is the tax matters partner of Carpenter Family Investments, LLC, an Oregon limited liability company classified as a partnership for Federal income tax purposes with its principal place of business in Salem, Oregon (the partnership).

At the end of its 2000 taxable year the partnership was owned as follows: Tommie Carpenter, 0.5 percent; Virginia Carpenter, 0.5 percent; petitioner, 99 percent. During the taxable year ending December 31, 2000, petitioner was owned as follows: Tommie Carpenter, 75.25 percent and Virginia Carpenter, 24.75 percent. Accordingly, Tommie and Virginia Carpenter (the partners) ultimately were allocated all items of income, gain, loss, deduction, and credit of the partnership.

During its 2000 taxable year the partnership sold shares of stock of American Tower Corp. (ATC), a publicly traded corporation listed on the New York Stock Exchange, for total proceeds of $29,608,861 (the stock sale). On or before October 15, 2001, the partnership timely filed Form 1065, U.S. Return of Partnership Income, for its taxable year ending December 31, 2000. On this information return the partnership reported gross proceeds of $29,608,861, an adjusted tax basis of $23,285,745, and gain of $6,323,116 from the stock sale. On or before October 15, 2001, the partners timely filed a joint income tax return on Form 1040, U.S. Individual Income Tax Return, for calendar year 2000. On this tax return the partners reported all of the $6,323,116 gain from the stock sale.

On April 10, 2007, petitioner sent to respondent a Form 872–P, Consent to Extend the Time to Assess Tax Attributable to Partnership Items, executed on behalf of the partnership. Also on April 10, 2007, the partners sent to respondent an executed Form 872–I, Consent to Extend the Time to Assess Tax As Well As Tax Attributable to Items of a Partnership. On October 2, 2008, respondent issued an FPAA to petitioner, as tax matters partner of the partnership, for the partnership's taxable year ending December 31, 2000.

II. The Theory of the FPAA

Respondent alleges that “the partnership exploited a complex series of basis-inflating tax avoidance transactions (a variant of the Son–of–BOSS shelter described in Notice 2000–44) beginning in December 1999.” See Notice 2000–44, 2000–2 C.B. 255, which describes so-called Son–of–BOSS transactions. See also Kligfeld Holdings v. Commissioner, 128 T.C. 192, 194, 2007 WL 1556083 (2007), discussing the prototypical Son–of–BOSS transaction:

Son–of–BOSS is a variation of a slightly older alleged tax shelter known as BOSS, an acronym for “bond and options sales strategy.” There are a number of different types of Son–of–BOSS transactions, but what they all have in common is the transfer of assets encumbered by significant liabilities to a partnership, with the goal of increasing basis in that partnership. The liabilities are usually obligations to buy securities, and typically are not completely fixed at the time of transfer. This may let the partnership treat the liabilities as uncertain, which may let the partnership ignore them in computing basis. If so, the result is that the partners will have a basis in the partnership so great as to provide for large—but not out-of-pocket—losses on their individual tax returns. * * *

Respondent claims a Son–of–BOSS shelter is at work on account of a transfer to the partnership “of short sale proceeds of Treasury Notes and the obligation to close the open short sale position”. Respondent contends that this transfer “artificially stepped-up inside basis”. According to respondent: “As a result of the artificial step-up in basis in the American Tower Corporation stock, the partnership's total net long-term gains derived from dealings in property on its 2000 return was [significantly] understated”.

III. Motion for Summary Judgment

Petitioner moved for summary judgment, arguing that the FPAA was not timely because it was issued after “The period of limitations imposed by I.R.C. § 6501 on assessment and collection of tax * * * [of] three years from the date the return to which the tax relates was filed.” Both the partnership's information tax return and the partners' joint income tax return were filed on or before October 15, 2001. The 3–year limitations period, if applicable, would have expired on or before October 15, 2004. Petitioner contends that “Because the FPAA was issued after October 15, 2004, respondent is precluded from assessing any tax attributable to items reported on the Partnership Tax Return.”

Petitioner further argues that the untimeliness of the FPAA invalidates petitioner's and the partners' consents to extend the limitations period. “Neither of the Forms 872 signed by petitioner or the Partners was executed before the expiration of the three-year period of limitations imposed by I.R.C. § 6501(a) or 6229(a).” As a result, according to petitioner, these consents cannot be used “to reopen the three-year period of limitations on assessment and collection of tax.” See sec. 6501(c)(4) (“Where, before the expiration of the time prescribed in this section for the assessment of any tax imposed by this title, * * * both the Secretary and the taxpayer have consented in writing to its assessment after such time, the tax may be assessed at any time prior to the expiration of the period agreed upon.” (Emphasis supplied.)); see also Romine v. Commissioner, 25 T.C. 859, 871, 1956 WL 779 (1956) (holding that if a taxpayer executes a consent after the expiration of the 3–year limitations period, the Commissioner bears the burden of proving that a longer limitations period applies and that the consent was obtained within such longer period); Seltzer v. Commissioner, 21 T.C. 398, 1953 WL 202 (1953) (same).

IV. Timeliness of the FPAA

Respondent claims that the applicable period of limitations is not 3 years but 6 years, as provided in sections 6229(c)(2) and 6501(e)(1)(A).

On September 24, 2009, the Treasury Department and the Internal Revenue Service issued temporary Treasury regulations under Sections 6229(c)(2) and 6501(e)(1)(A) that clarify that an overstatement of basis relating to the disposition of property, other than the sale of goods or services in a trade or business, constitutes an omission from gross income for purposes of Sections 6229(c)(2) and 6501(e)(1)(A).

Respondent argues that these temporary regulations, sections 301.6229(c)(2)–1T and 301.6501(e)–1T, Temporary Proced. & Admin. Regs., 74 Fed.Reg. 49322–49323 (Sept. 28, 2009), extend the limitations period for the partnership's 2000 taxable year to 6 years because they “apply to taxable years with respect to which the applicable period for assessing tax, as interpreted in the temporary regulations, did not expire before September 24, 2009.”

Because “The FPAA * * * issued within the six-year period of limitations provided in Sections 6229(c)(2) and 6501(e)(1)(A), as further extended by consent,” respondent contends that the FPAA was timely.

Discussion

I. Introduction

We have previously held invalid the temporary regulations respondent cites. See Intermountain Ins. Serv. of Vail, LLC v. Commissioner, 134 T.C. 211, 224, 2010 WL 1838297 (2010).² Since we issued our Opinion in Intermountain, the Commissioner has issued these regulations in final form. See secs. 301.6229(c)(2)–1, 301.6501(e)–1, Proced. & Admin. Regs. Also, the Supreme Court has issued its opinion in Mayo Found. v. United States, 562 U.S. ––––, 131 S.Ct. 704, 178 L.Ed.2d 588 (2011), which clarifies that the Commissioner's regulatory efforts are generally entitled to the same Chevron standard as those of any other agency. See Chevron U.S.A. Inc. v. Natural Res. Def. Council, 467 U.S. 837, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984) (establishing a two-step framework for testing the validity of an agency's interpretation of...