Ninth Circuit Remands Case to Consider Novel Limitations Period Argument.
(Parker Tax Publishing May 19, 2014)

The Ninth Circuit vacated and remanded a Tax Court decision, which had held that the standard three-year (rather than a six-year) statute of limitations period applied, so that the Tax Court could consider a "novel" IRS argument that the Tax Court failed to consider the first time around. Beverly Clark Collection, LLC v. Comm'r, 2014 PTC 209 (9th Cir. 4/29/14).

The IRS issued to Beverly Clark Collection, LLC (BCC) a Notice of Final Partnership Administrative Adjustment (FPAA) for tax years 1999 and 2000, and sought to make adjustments to BCC's partnership tax returns, and to the individual returns of tax matters partner Nelson Clark and his wife, Beverly, for tax years 1999 and 2000. The timeliness of the FPAA depended on whether the standard three-year period of limitations for tax assessment applied or, instead, an extended six-year period. The IRS argued that the extended period should apply, but the Tax Court held otherwise.

Under Code Sec. 6501(e)(1)(A)(i), the applicability of the six-year period turns on whether the taxpayer omits from gross income an amount that is properly includible, and on whether that amount is greater than 25 percent of the amount of gross income stated in the return. To support its position that the extended period had been triggered, the IRS made two distinct arguments before the Tax Court. First, it argued that Nelson and Beverly had failed to disclose more than $10 million in proceeds earned through the March 2000 liquidation and sale of BCC. This argument hinged on the IRS's claim that the Clarks' purported sale in December 1999 of an 80.01 percent interest in BCC to an entity named the Fausset Trust was a sham transaction. Because this transaction was illegitimate, the IRS argued, the Clarks earned the full gain from the sale of BCC in March 2000 and therefore they should have disclosed this gain on their returns for that year. In the alternative, the IRS argued that the Clarks had overstated their basis in BCC, which amounted to an omission from gross income sufficient to trigger the extended limitations period. The Tax Court addressed only the overstated basis argument and granted summary judgment in favor of Nelson in his capacity as BCC's tax matters partner. The IRS appealed.

On appeal, the IRS conceded that an overstatement of basis cannot constitute an omission from gross income under Code Sec. 6501(e)(1)(A)(i), in light of the Supreme Court's rejection of that theory in U.S. v. Home Concrete & Supply, LLC, 132 S. Ct. 1836 (2012). However, the IRS claimed that its other argument provided a valid foundation for applying the extended six-year limitations period and that the Tax Court erred in ignoring it.

Although it could have reviewed the case anew, the Ninth Circuit concluded that it would be helpful for the Tax Court to have the first chance at addressing the IRS's remaining argument. BCC argued that the IRS's argument lacked both precedential and factual support, and thus urged the Ninth Circuit to affirm the Tax Court's grant of summary judgment in its favor. However, according to the Ninth Circuit, the novelty of the IRS's argument "bolstered the good sense" in allowing the Tax Court, with its unique expertise in interpreting the Internal Revenue Code, to consider it first.

For a discussion of the statute of limitations period, see Parker Tax, ¶260,130. (Staff Editor Parker Tax Publishing)

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