The Tax Court, in a division opinion, denied motions to reconsider and vacate its prior decision that held that a final partnership administrative adjustment was untimely because a basis overstatement didn't trigger the six-year statute of limitations and has rejected the retroactive application of temporary regs, holding the regs invalid. Intermountain Ins. Serv. of Vail, LLC v. Comm'r, 2010 U.S. Tax Ct. LEXIS 14 (T.C. May 6, 2010). TaxAnalysts® 2010 TNT 88-12.
The Tax Court held that Temporary Regs 301.6229(c)(2)-1T and 301.6501(e)-1T did not apply, finding the Commissioner's "... interpretation of the temporary regulations' effectvie/applicability date provisions [to be] erroneous and inconsistent with the regulations." The Court found also that Treasury's interpretation of IRC 6229 § (c)(2) and IRC § 6501 (e)(1)(a) was foreclosed and theTemporary Regs were otherwise not valid because the U.S. Supreme Court's construction of these statutes in COLONY, INC. v. COMMISSIONER OF INTERNAL REVENUE, 357 U.S. 28 (U.S. 1958) followed from legislative history clarifying statutory text and explicating congressional intent.
Background - Tax Court's 2009 Decision
In 2009, the tax matters partner for Intermountain Insurance Service of Vail, LLC (Intermountain) moved for summary judgment, asserting that a basis overstatement was not a substantial omission from gross income to apply the IRC 6229 § (c)(2) six-year limitations period extension and that the IRC 6229 § (a) three-year period of limitations had already expired when the Commissioner of Internal Revenue issued a notice of final partnerhsip administrative adjustment (FPAA). Intermountain Ins. Serv. of Vail, L.L.C. v. Comm'r, T.C. Memo 2009-195 (T.C. 2009).
The motion for summary judgment was granted.
Certain transactions made by Intermountain increased tax basis before business assets were sold. Nearly six years later, the Commissioner issued a final partnership administrative adjustment (FPAA), asserting that Intermountain had overstated capital contributions by nearly $2.2 million and outside partnership basis by over $2 million.
The Tax Court had previously held that a basis overstatement was not an omission from gross income, and had applied the U.S. Supreme Court's holding in COLONY, INC. v. COMMISSIONER OF INTERNAL REVENUE, 357 U.S. 28 (U.S. 1958). Colony established that the extended period of limitations applies to situations where specific income receipts have been "left out" in the computation of gross income, but not when an understatement of gross income results from an overstatement of basis. The allegedly overstated basis was not an omission from gross income under IRC § 6501 (e)(1)(a) or IRC 6229 § (c)(2).
The Commissioner had argued the court should not rely on the decision in COLONY, INC. v. COMMISSIONER OF INTERNAL REVENUE, 357 U.S. 28 (U.S. 1958), asserting that the Supreme Court did not interpret the applicable version of the statute and that its holding was nevertheless limited to situations involving trade or business income from the sale of goods or services, the Tax Court was unpersuaded by the attempt to distinguish and diminish the Supreme Court's holding in Colony.