The Court of Federal Claims denied the taxpayer’s argument that the assessment was subject to the three-year statute of limitations of IRC § 6501(a). The court said the six-year extended period of § 6501(e)(1)(A) applied because the overstated basis resulted in an over-25% omission from gross income.
The ruling is in accord with a Florida district court’s ruling in Brandon Ridge Partners v. U.S. , 100 AFTR2d 2007-5347 (“ Tax Matters,” JofA, Nov. 07, page 79). On the other hand, decisions in Bakersfield Energy Partners v. Commissioner , 128 TC no. 17, and Grapevine Imports Ltd. v. U.S. , 100 AFTR2d 2007-5065 (Court of Federal Claims), this past summer said an overstatement of basis was not sufficient to extend the three-year period.
In Salman , the partners entered into a suspected Son of BOSS transaction (so called because it is a variant of a shelter known as “Bond and Options Sales Strategy”) involving a short sale of U.S. Treasury notes. Based on the undisclosed short sale, the partners reported a stepped-up basis of $6,850,276 on sale proceeds of $7,188,588 for Salman Ranch in New Mexico. The gain of $338,312 was reported on the partnership’s 1999 return. On April 10, 2006, the IRS issued a Final Partnership Administrative Adjustment that increased the capital gain on the sale by $4,567,949. The IRS said this represented the amount by which the basis was inflated because of the partnership’s failure to reduce the basis by the liability necessary to close the short position on the undisclosed Treasury sale.
The court agreed that this was an omission from gross income. The judge wrote that such an omission “encompasses not only situations where an item of income is completely left out, but also situations where the…gross income is understated due to an error in calculation.” The court concluded that “gross income” in the context of a sale of property refers to the calculation of the gain by subtracting the basis from the proceeds of the sale.
The partnership was also not entitled to take advantage of the “safe harbor” provision of section 6501(e)(1)(A)(ii) because the Treasury short sale and the transfer to the partnership of the obligation to close the short position were not disclosed in the return.
The recent conflicting rulings on the interpretation of omissions of gross income under section 6501(e)(1)(A) assure this issue will continue to generate much discussion at the trial court level—at least until higher courts weigh in on the matter.
Salman Ranch v. U.S. , 100 AFTR2d 2007-6654
Prepared by JofA staff member Jeffrey Gilman, Esq.