Free Response - District Court of Federal Claims - federal

Case 1:05-cv-00296-FMA

Document 73

Filed 01/15/2007

Page 1 of 6

IN THE UNITED STATES COURT OF FEDERAL CLAIMS GRAPEVINE IMPORTS, LTD., T-TECH, INC., as Tax Matters Partner Plaintiffs, v. UNITED STATES OF AMERICA, Defendant. § § § § § § § § § §

NO. 05-296T (Judge Allegra)

UNITED STATES OF AMERICA'S REPLY TO PLAINTIFFS' RESPONSE TO ITS BRIEF IN SUPPORT OF THE SIX-YEAR STATUTE OF LIMITATIONS Late in the afternoon of Friday, January 12, 2007, plaintiffs filed what they have called a response to our brief in support of the application of the six-year statute of limitations. This filing effectively leaves just two business days before the hearing on Thursday, January 18, 2007 for a reply. Moreover, since we had not understood the Court's scheduling order that called for simultaneous filing of briefs to contemplate responses or replies, plaintiffs' Friday filing comes as something of a surprise. Nevertheless, since plaintiffs have taken this step, we ask leave to submit a brief reply. I. After one sifts through the breathless hyperbole that pervades plaintiffs' response ("legal morass" ­ p.2; "thorny legal issues" ­ p. 3; "wreaks havoc" ­ p. 6)., what is left is a rather unsubtle belated, backdoor attempt to climb on board the legal argument they evidently ignored and waived. To be frank, once we realized that the old regulation under section 702 had a potential application to the issue before this Court for years prior to 1997, we wondered whether plaintiffs had simply failed to discover it or whether they agreed with us that it did not control

Case 1:05-cv-00296-FMA

Document 73

Filed 01/15/2007

Page 2 of 6

years after the amendment to section 6501(a). Since they had cited cases that had discussed its application to years before 19971, we were inclined to believe that they were aware of the old regulation but had concluded, as we did, that it no longer controlled. Now, however, plaintiffs have embarked upon a last-minute attempt to resurrect the regulation. The immediate and obvious answer to this gambit is that an earlier regulation cannot trump a subsequent statute. Plaintiffs seek to finesse this roadblock by shifting attention from the regulation to the statute it construes. The clear difference between the two exposes the flaw in their approach. Section 702(c) states "GROSS INCOME OF A PARTNER.-- In any case where it is necessary to determine the gross income of a partner for purposes of this title, such amount shall include his distributive share of the gross income of the partnership. (emphasis added) Nothing in section 702(c) is inconsistent with our position that the Court should look to gross income and not gross receipts in determining the application of the six-year statute. Indeed, the word "return" is not even mentioned in section 702(c). No repeal of this statute is implied or sought. Plaintiffs' strategy to divert the Court's attention from the regulation to the statute must fail. As we pointed out in our brief filed on December 20, 2006 (page 29, note 72), there is no conflict between section 702(c) and amended section 6501(a). It is only the 1960 regulation that addresses a partner being credited with his share of the partnership's gross receipts when calculating the size of his omission for purposes of section 6501(e)(1)(A). Treas. Reg. § 1.702-

Estate of Klein v. Commissioner, 537 F. 2d 701 (2d Cir. 1976), Hoffman v. Commissioner, 119 T.C. 140 (2002); and Harlan v. Commissioner, 116 T.C. 31 (2001) were all cited in plaintiffs' brief filed on December 20, 2006. Of course, as we pointed out on page 29 of our brief filed the same day, they all concern tax years prior to the 1997 amendment of section 6501(a). -2-

1

Case 1:05-cv-00296-FMA

Document 73

Filed 01/15/2007

Page 3 of 6

1(c)(2). Nothing in section 702(c) mandates the interpretation set forth in the regulation. Since the Tigues themselves only reported their share of Grapevine's gross income (99 percent of its $45,077 loss) on their 1040, it is rather ironic for them now to claim the benefit of this superceded regulation. Contrary to their statement on page 4 of their response, it is not "novel" for a statute to change the result reached in earlier cases or a regulation. Their next statement that section 702(2) must also be "overturned" is simply wrong. On page 9 of their response, the plaintiffs offer a precis on how statutes that appear to be in conflict with each other are to be construed. Because sections 702(c) and 6501(a) are not in conflict, this discussion is unnecessary. In fact, it is the plaintiffs' proposed interpretation of section 6501(a) that would create a conflict between it and section 6501(e). The section 6501(a) definition of what constitutes a return "for purposes of this chapter" could not be any clearer or more unequivocal. Yet plaintiffs would have this Court give "return" a different meaning in section 6501(e) that would include a return filed by a taxpayer's pass-through entity ­ in direct conflict with the last sentence of section 6501(a) added by the 1997 amendment. Their position creates a conflict between statutes; not ours. We are also compelled to point out that their reliance on two administrative statements by the Internal Revenue Service on page 11 of their response is unavailing. The plain language of the statute passed in 1997 must control. In addition, the citation to the action on decision in 2002 relates to Harlan v. Commissioner, 116 T.C. 31 (2001), a case that involved a tax year before the amendment of section 6501(a). Next, plaintiffs proceed to their "jurisdictional" argument which seems to rest upon their expansive statement that "Treasury Regulation 1.702-1(c)(2) provides the only jurisdictional

-3-

Case 1:05-cv-00296-FMA

Document 73

Filed 01/15/2007

Page 4 of 6

tether between this partnership proceeding and Section 6501(e)." Plaintiffs' Response, page 12. From here, they jump to a discussion partnership items and affected items. What a regulation promulgated in 1960 has to do with concepts that entered the Internal Revenue Code with TEFRA in 1982 is never explained. The point plaintiffs are really arguing becomes clear when they later (page 14) say that a "court hearing a TEFRA proceeding has no jurisdiction to make partner-specific factual determinations, and can only make determinations that affect the partnership as a whole." Essentially, they are attempting to reargue their view that the period of limitations for assessing taxes owed by individual taxpayer- partners does not control and that section 6229 does control. This Court, like every other court that has considered this proposition, has rejected it.2 Whether plaintiffs like it or not, that decision is now law of the case. Finally, plaintiffs insist upon getting in one last punch in favor of their Colony, Inc. v. Commissioner, 357 U.S. 28 (1958) theory. Since nothing new is offered, no reply is needed. II. In view of the Court's denial of plaintiffs' motion to compel and decision that the report and deposition testimony of Cheryl Kiger are irrelevant to the matters to be taken up during the hearing on January 18, 2007, we believe that it would be helpful if the Court were to give the parties some guidance at the beginning of that hearing. The line between "what is reported in the return" and the disclosure issue may become confused. In addition, we intend to object to the

This Court has also turned aside plaintiffs' reliance (page 15 of their response) on cases like Weiner v. United States, 389 F. 3d 152(5th Cir. 2004). "Moreover, in terms of persuasiveness, each of these references is unaccompanied by critical analysis, suggesting that the courts were not focused on the issue involving the interplay between sections 6229(a) and 6501. Grapevine Imports, Ltd. v. United States, 71 Fed. Cl. 324, 330 (2006). -4-

2

Case 1:05-cv-00296-FMA

Document 73

Filed 01/15/2007

Page 5 of 6

admission of the Supplemental Report of Gerald Songy or any testimony related to its contents. Although styled a "supplemental" report, the report is plainly and unmistakably a rebuttal report that seeks to challenge portions of Ms. Kiger's expert report. Since her report will not be coming into evidence, there is no need for Mr. Songy to shadow box with it. We make this point now to avoid any suggestion that plaintiffs could be surprised by the objection. CONCLUSION The Tigues, individual taxpayers, failed to report far in excess of 25 percent of their gross income on their Form 1040 -- the only relevant return. The trade or business exception to section 6501(e)(1)(A) does not apply. Limitations on their 1999 year are open, and this case should proceed.

Respectfully Submitted, /s/ Grover Hartt, III GROVER HARTT, III Attorney of Record Tax Division U.S. Department of Justice 717 N. Hardwood, Suite 400 Dallas, Texas 75201 (214) 880-9721 (Main) (214) 880-9741 (Fax) EILEEN J. O'CONNOR Assistant Attorney General DAVID D. GUSTAFSON Chief, Court of Fed. Claims Section CHRISTOPHER R. EGAN Of Counsel

-5-

Case 1:05-cv-00296-FMA

Document 73

Filed 01/15/2007

Page 6 of 6

CERTIFICATE OF SERVICE I hereby certify that on January 15, 2007, I electronically filed the foregoing document with the Clerk of the Court using the ECF system, which will send notification of such filing to the following: Todd Welty Meadows, Owens, Collier, Reed, Cousins & Blau, L.L.P 901 Main Street, Suite 3700 Dallas, Texas 75202

/s/ Grover Hartt, III GROVER HARTT, III

-6-