Paul L. Caron

Friday, July 31, 2009

Fed. Cir. Rejects Application of 6-Year SOL to Overstatement of Basis in Tax Shelter

The Government suffered a major tax shelter setback yesterday when a divided (2-1) Federal Circuit reversed the Court of Federal Claims and held that the extended six-year statute of limitations for issuing a final partnership administrative adjustment under § 6501(e)(1)(A) did not apply to the omission of more than 25% of gross income from the return of a Son of BOSS tax shelter partnership.  Salman Ranch Ltd. v. United States, No. 2008-5053 (Fed. Cir. July 30, 2009):

[W]e conclude that the Supreme Court’s interpretation of the language “omits from gross income an amount properly includible therein” in § 275(c) [Colony, Inc. v. Commissioner, 357 U.S. 28 (1958).] controls the interpretation of the identical language in § 6501(e)(1)(A). For this reason, we hold that the alleged overstatement of the basis of Salman Ranch by the Partnership did not constitute an omission from gross income under § 6501(e)(1)(A). Accordingly, the IRS is not entitled to the benefit of the six-year statute of limitations set forth in § 6501(e)(1)(A). The three-year limitations period of § 6501(e)(1)(A) controls, which means that the FPAA was untimely and therefore invalid. Our holding today is consistent with the June 17, 2007 decision of the Ninth Circuit in Bakersfield Energy Partners, 568 F.3d at 778.

Judge Newman filed a 12-page dissent, concluding:

Colony was not a broad exoneration of inquiry, after three years, into items simply because they are denominated as “basis.” The Court of Federal Claims gave correct effect to the full text of § 6501(e)(1)(A), and nothing in its decision misconstrues the Court’s holding in Colony. The taxpayers herein omitted over 25% of their gross income, but did not provide sufficient information to apprise the Commissioner of the nature and amount of the omission. It seems clear that the criteria of § 6501(e)(1)(A) were met, extending the limitations period to six years. From my colleagues’ contrary ruling, I respectfully dissent.

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TaxProfs -- please speak out! In view of the statutory interpretations adopted by the Salman and Bakersfield courts, what conceivable purpose does the "trade or business" exception under IRC section 6501(e)(1)(A)(1) serve? Neither court answers that question.

Posted by: Anonymous | Jul 31, 2009 7:13:05 PM