Partners v. Comm'r of Internal Revenue
| Decision Date | 14 June 2007 |
| Docket Number | No. 4204–06.,4204–06. |
| Parties | BAKERSFIELD ENERGY PARTNERS, LP, Robert Shore, Steven Fisher, Gregory Miles and Scott McMillan, Partners other than the Tax Matters Partner, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
A Notice of Final Partnership Administrative Adjustment (FPAA) for the year 1998 was sent in 2005, determining that the basis of property sold by P was overstated. R contends that the overstatement of basis is an omission of gross income and that, therefore, the 6–year period of limitations in sec. 6501(e)(1)(A), I .R.C., applies. There are no other exceptions to the normal 3–year period of limitations applicable to the individual partners.
Held: The overstatement of basis is not an omission of gross income for purposes of sec. 6501(e)(1)(A), I.R.C . Colony, Inc. v. Commissioner, 357 U.S. 28, 78 S.Ct. 1033, 2 L.Ed.2d 1119 (1958), followed.
Steven Ray Mather and Elliott Hugh Kajan, for petitioners.
Lloyd T. Silverzweig, for respondent.
In a Notice of Final Partnership Administrative Adjustment (FPAA) sent October 4, 2005, respondent determined that Bakersfield Energy Partners, LP (BEP), had overstated its basis in certain gas reserves sold during the taxable year 1998, thus causing an understatement of partnership income by more than 25 percent of the amount stated in the return. The issue for decision is whether, under those circumstances, the overstatement of basis constitutes an omission of income giving rise to an extended 6–year period of limitations. This issue has been presented by petitioners' motion for summary judgment and respondent's motion for partial summary judgment. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the year in issue.
For purposes of the pending motions, the following facts have been assumed. The petitioning partners are all partners in BEP. BEP's principal place of business was in California at the time the petition was filed. Prior to April 1, 1998, BEP owned an interest in an oil and gas property with Harcor, an unrelated company. After a proposed sale of the oil and gas property to another unrelated entity, Seneca Resources, fell through, the petitioning partners decided to restructure the ownership of BEP. To effect this new structure, on April 1, 1998, the petitioning partners sold their partnership interests in BEP to Bakersfield Resources, LLC (BRLLC), an entity that had been formed by the petitioning partners.
The petitioning partners recognized the gain from the sale of their BEP partnership interests under the installment method. For all tax years beginning in 1998, the petitioning partners have reported the gain from this sale under the installment method.
The sale of the petitioning partners' BEP partnership interests caused a termination of BEP's tax year pursuant to section 708. BEP made an election under section 754 to adjust the basis of the partnership assets (the inside basis) to equal BRLLC's basis on its newly acquired BEP partnership interest (the outside basis) pursuant to section 743(b). The section 754 election and the transaction resulting in the section 743(b) basis adjustments were disclosed in statements attached to BEP's partnership return for the short-year period from April 1 through December 31, 1998 (the 9812 Form 1065).
On the 9812 Form 1065, U.S. Partnership Return of Income, BEP reported total income as follows:
+-------------------------------------------------------------+
¦1¦a¦Gross receipts or sales ¦ ¦
+-+-+-----------------------------------------------+---------¦
¦ ¦b¦Less returns and allowances ¦ ¦
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¦2¦ ¦Cost of goods sold ¦ ¦
+-+-+-----------------------------------------------+---------¦
¦3¦ ¦Gross profit ¦ ¦
+-+-+-----------------------------------------------+---------¦
¦4¦ ¦Ordinary income (loss) from other partnerships ¦$273,262 ¦
+-+-+-----------------------------------------------+---------¦
¦5¦ ¦Net farm profit (loss) ¦ ¦
+-+-+-----------------------------------------------+---------¦
¦6¦ ¦Net gain (loss) from Form 4797 ¦1,993,034¦
+-+-+-----------------------------------------------+---------¦
¦7¦ ¦Other income (loss) ¦ ¦
+-+-+-----------------------------------------------+---------¦
¦8¦ ¦Total income (loss) ¦2,266,296¦
+-------------------------------------------------------------+
On Form 4797, Sales of Business Property, BEP reported sale of the oil and gas properties in issue as follows:
Attached to BEP's 9812 Form 1065 was a Statement Regarding a Partnership Technical Termination as follows:
Pursuant to IRC Sec. 708(b)(1)(B) and the regulations thereunder, Bakersfield Energy Partners, LP terminated on April 1, 1998. On that date, certain partners sold over a 50% ownership interest in the partnership's capital and profits to Bakersfield Resources, LLC * * *. On April 7, 1998, Bakersfield Resources, LLC acquired additional partnership interests through purchases. These transactions resulted in a new partnership for federal income tax purposes (the “new” partnership retains the same federal employer identification number).
As reflected within the capital accounts, the partnership books were restated to reflect the value of the assets as required in the regulations under IRC 704. As reflected within this return, in the event of a sale of these assets, proper adjustments have been made to reflect the tax basis and the proper taxable gain.
Also attached was a Section 754 Election Statement as follows:
The partnership hereby elects, pursuant to IRC Section 754, to adjust the basis of partnership property as a result of a distribution of property or a sale or exchange of a partnership interest as provided in IRC Sections 734(b) and 743(b).
The FPAA in this case was sent October 4, 2005. The notice adjusted BEP's ordinary income as follows:
The adjustment was explained as follows:
Bakersfield Energy Partners, LP has failed to establish that it had a basis greater than $0 in the gas reserves it sold during the taxable year 1998. It has been determined that any optional basis adjustment under section 743(b) was the result of a sham transaction, a transaction lacking economic substance that had no business purpose and no economic effect and/or was availed for tax avoidance purpose and should not be respected for tax purposes.
Petitioners filed a motion for summary judgment on the ground that the FPAA was issued after the applicable period of limitations had expired. Petitioners contend that overstatement of basis is not an omission from gross income for purposes of the extended period of limitations under section 6501(e)(1)(A) or, in the alternative, that the amount omitted was “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.” Sec. 6501(e)(1)(A)(ii). Respondent has moved for partial summary judgment, agreeing that the material facts necessary to determine whether the overstatement of basis is an omission from gross income are not in dispute. Respondent contends, however, that the question of adequate disclosure on the return involves a dispute as to material facts.
The parties have now stipulated facts as to each partner in the partnership, to the effect that they are unaware of any exception to the normal 3–year period of...
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