Tax Court Sticking with Three Year Statute on Basis Overstatements

Originally published on Passive Activities and Other Oxymorons on April 27th, 2011.
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Carpenter Family Investments, LLC, et al. v. Commissioner, 136 T.C. No. 17

The fight over whether a six year statute applies to basis overstatements, which I posted on , earlier today continues.  The Tax Court has ruled that the three year statute applies.  This particular cases is appealable to the Ninth Circuit.


When enacting section 6501(e)(1)(A) in 1954, Congress could not possibly have foreseen the development of the tax shelter industry and the use of complex devices, such as Son-of-BOSS transactions, which seek to artificially inflate bases of partnership assets to achieve tax alchemy. Much as we may be tempted, we cannot speculate on how the Congress that enacted section 6501(e)(1)(A) would have meant it to apply in the present-day context. To paraphrase Justice Holmes, we do not inquire what the legislature would have meant. Cf. Holmes, “The Theory of Legal Interpretation”, 12 Harv. L. Rev. 417, 419 (1899), reprinted in Collected Legal Papers 207 (1920) (”We do not inquire what the legislature meant; we ask only what the statute means.”). In this case, we do not even ask what the statute means; we merely ask what the Court of Appeals for the Ninth Circuit and the Supreme Court have told us the statute means.

The Court of Appeals for the Ninth Circuit tells us that Colony controls the meaning of the phrase “omits from gross income” as it now appears in section 6501(e)(1)(A). Bakersfield Energy Partners, LP v. Commissioner, 568 F.3d at 778. And the Supreme Court has told us, in Colony, that this phrase does not include an overstatement of basis. We thus hold that only a 3- year limitations period under section 6501(a) applies here. Consequently, we hold the FPAA issued after the expiration of this 3-year period to be untimely. We further hold petitioner's and the partners' consents executed after the FPAA was issued to be invalid. We will therefore grant petitioner's motion for summary judgment. The Court has considered all of respondent's contentions, arguments, requests, and statements. To the extent not discussed herein, we conclude that they are meritless, moot, or irrelevant.

Presumably, we haven't heard the last on this issue.