Imports v. United States

• Decision Date: 06 June 2011
• Docket Number: No. 2008–5090.,2008–5090.
• Citation: 636 F.3d 1368
• Parties: GRAPEVINE IMPORTS, LTD., a Texas Limited Partnership, T–Tech, Inc., a Texas Corporation, as Tax Matters Partner, Plaintiffs–Appellees,v.UNITED STATES, Defendant–Appellant.
• Court: U.S. Court of Appeals — Federal Circuit

636 F.3d 1368

107 A.F.T.R.2d 2011-1288

2011-1 USTC P 50,264

GRAPEVINE IMPORTS, LTD., a Texas Limited Partnership, T–Tech, Inc., a Texas Corporation, as Tax Matters Partner, Plaintiffs–Appellees,

v.UNITED STATES, Defendant–Appellant.

No. 2008–5090.

United States Court of Appeals, Federal Circuit.

March 11, 2011.Rehearing and Rehearing En Banc Denied June 6, 2011.*

Howard R. Rubin, Katten Muchin Rosenman, of Washington, DC, argued for plaintiffs-appellees. With him on the brief was Robert T. Smith. Of counsel on the brief were M. Todd Welty and Laura L. Gavioli, Sonnenschein, Nath & Rosenthal, of Dallas, Texas; and Kenneth J. Pfaehler, of Washington, DC. Of counsel was William E. Copley, Sonnenschein, Nath & Rosenthal, of Washington, DC.Gilbert S. Rothenberg, Acting Deputy Assistant Attorney General, Appellate Section, Tax Division, United States Department of Justice, of Washington, DC, argued for defendant-appellant. With him on the brief were John A. Dicicco, Acting Assistant Attorney General, and Michael J. Haungs and Joan I. Oppenheimer, Attorneys.Roger J. Jones, Latham & Watkins LLP, of Chicago, Illinois, for amicus curiae Bausch & Lomb Incorporated. With him on the brief were Andrew R. Roberson; and Kim M. Boylan, of Washington, DC.Before LOURIE, BRYSON, and PROST, Circuit Judges.PROST, Circuit Judge.

The government appeals the U.S. Court of Federal Claims' judgment that the Internal Revenue Service's (“IRS's”) 2004 administrative adjustment of Plaintiffs' 1999 partnership return was time-barred. Grapevine Imports, Ltd. v. United States, 77 Fed.Cl. 505 (2007). The question is whether administrative adjustments in these circumstances are governed by the normal three-year statute of limitations, or whether they are controlled by a special six-year limitations period.

The Tax Code gives the IRS six years instead of three to adjust a return when the return “omits” some item that should have been included in “gross income.” Here, the Plaintiffs are accused of overstating their basis in certain capital assets via a tax shelter, and thus understating income from those assets' sale. The government argues that basis overstatement is an “omission from gross income” sufficient to trigger the extended limitations period. Plaintiffs contend that it is not.

The Court of Federal Claims' judgment relied on the Supreme Court's opinion in Colony, Inc. v. Commissioner of Internal Revenue, 357 U.S. 28, 78 S.Ct. 1033, 2 L.Ed.2d 1119 (1958). In Colony, the Supreme Court reviewed the precursor limitations statute and held that overstatement of basis was not an “omission from gross income,” and so did not trigger the extended limitations period. Following that precedent, the Court of Federal Claims granted judgment to Plaintiffs. In a separate case on similar facts, another panel of this court reached the same conclusion. Salman Ranch Ltd. v. United States, 573 F.3d 1362 (Fed.Cir.2009).

In the months following, the U.S. Department of the Treasury issued new regulations disputing the reasoning applied by the Court of Federal Claims, stating that the Colony decision did not conclusively resolve the statute's interpretation, and holding that the limitations period—properly interpreted—gave the government six years to bring claims of this type.

Because we hold that the new Treasury regulations are entitled to deference in interpreting the statutory language, and because we hold that, under the regulations' interpretation, the government's case is not time-barred, we reverse the Court of Federal Claims' judgment.

I. Background

A. Grapevine and the Tigues

This is a tax case. The story, for our purposes, begins in late 1999. Plaintiff Grapevine Imports, Ltd. (“Grapevine”) was a limited liability partnership with three partners. Taxpayers Joseph J. Tigue and Virginia B. Tigue, limited partners, each owned 49.5% partnership shares. Plaintiff T–Tech, Inc. (“T–Tech”) owned the remaining 1% as a general partner, and was also the partnership's tax matters partner. T–Tech, in turn, was wholly owned by Mr. Tigue.

The Tigues purportedly arranged to sell Grapevine (which owned an auto dealership) for upwards of $10 million. The government contends that the Tigues' collective tax basis in Grapevine at that time was about $1 million, so the sale would have resulted in significant taxable capital gains for the Tigues. From that starting point, a series of transactions took place that changed the tax picture significantly.

On December 9, 1999, the Tigues each sold short $5 million in U.S. Treasury Notes.¹ In a short sale, the seller sells some security that he does not actually own, normally by working with a lender to borrow securities at a set fee or rate for some period of time. The seller sells the borrowed securities; time passes. Then, just before he is due to return the securities to the lender, the seller buys equivalent securities using funds received from the earlier sale. He gives the equivalent securities to the lender, and the transaction is closed. See Zlotnick v. TIE Commc'ns, 836 F.2d 818, 820 (3rd Cir.1988) (describing short sales).

In this case, the initial phase of the Tigues' short sales brought in $9,978,119. Before the sales were closed, the Tigues conveyed these proceeds and the obligation to close the short sales to Grapevine.

In order to close the sales, Grapevine purchased Treasury Notes on the open market having face value of $10,000,003. Grapevine then conveyed the notes to the lender, closing the short sale. Because Grapevine paid more for the Treasury Notes than it received from the Tigues, Grapevine recorded a $21,884 loss on the transaction.

Shortly thereafter, on December 31, 1999, the Tigues sold Grapevine for $11,017,146, and the proceeds were delivered to the Tigues and T–Tech according to their partnership interests.

Grapevine filed its 1999 partnership tax return on April 19, 2000, showing a net short-term loss of $21,884 (attributable to the short sale). On or about April 17, 2000, the Tigues filed a joint federal income tax return in which they reported a long term capital loss of $45,077 from their sale of Grapevine. The Tigues' return claimed a basis in Grapevine of $10,961,317.

The government contends that Grapevine and the Tigues' returns were improper. It contends that the Tigues' reported capital loss stemmed from an unlawful overstatement of the Tigues' basis in Grapevine. By treating the conveyance of the short sale proceeds (the $9,978,119) as increasing basis, but failing to apply a corresponding basis reduction to account for Grapevine's new obligation to close the short sales, the Tigues managed to dramatically increase their basis in the partnership—and so reduce their capital gains—via economically meaningless transactions. In other words, the government accuses the Tigues, through Grapevine, of using a “Son of BOSS [‘Basis and Options Sales Strategy’]” tax shelter. See Kornman & Assocs. v. United States, 527 F.3d 443, 446 n. 2 (5th Cir.2008) (describing “Son of BOSS” tax shelters); I.R.S. Not.2000–44, 2000–2 C.B. 255 (further describing such shelters, and identifying them as improper “listed transactions”).

On December 17, 2004, the IRS issued a Final Partnership Administrative Adjustment (“FPAA”) to T–Tech that administratively reduced the Tigues' basis in Grapevine by $10 million for 1999, thus requiring recomputation of the partners' tax liability.

B. Judgment of the Court of Federal Claims

Grapevine challenged the FPAA in the Court of Federal Claims as untimely.² It argued that the Internal Revenue Code's statute of limitations for such adjustments was three years, and the IRS's adjustment was two years too late. See I.R.C. § 6501(a) (2004) (setting forth a general rule that the IRS may not assess tax more than three years after the taxpayer's return); id. § 6229(a) (2004) (reflecting the three-year rule for tax attributable to partnership items).³ The government disagreed, contending that Grapevine's overstatement of basis—which led to understatement of gain, and so underpayment of tax—triggered an extended six-year statute of limitations. See I.R.C. §§ 6501(e)(1)(A), 6229(c)(2) (2004).

The Court of Federal Claims sided with Grapevine and ruled the government's attempt at adjustment time-barred. The court noted that the Supreme Court had analyzed the question of whether overstatement of basis would lead to an extended limitations period under the precursor statute. See Colony, Inc. v. Comm'r of Internal Revenue, 357 U.S. 28, 32–38, 78 S.Ct. 1033, 2 L.Ed.2d 1119 (1958).

Colony was a fairly straightforward statutory interpretation case. The taxpayer was a corporation in the business of land sales. See Colony, Inc. v. Comm'r of Internal Revenue, 26 T.C. 30, 31, 1956 WL 878 (1956), rev'd, 357 U.S. 28, 78 S.Ct. 1033, 2 L.Ed.2d 1119 (1958). The corporation's 1946 and '47 tax returns overstated basis in certain land sales, and so understated the corporation's profits. The question was whether the IRS could assess deficiencies on those returns more than three but less than five years later (the extended limitations period was then five years). Colony, 357 U.S. at 30, 78 S.Ct. 1033.

The limitations statute interpreted in Colony resembled the law at issue here:

SEC. 275. PERIOD OF LIMITATION UPON ASSESSMENT AND COLLECTION.

Except as provided in section 276—

(a) General Rule.—The amount of income taxes imposed by this chapter shall be assessed within three years after the return was filed, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period.

...

(c) Omission from Gross Income.—If the 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, the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time within 5 years after the return was...