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IN THE UNITED STATES COURT OF FEDERAL CLAIMS GRAPEVINE IMPORTS, LTD., a Texas Limited Partnership, T-TECH, INC., a Texas Corporation as Tax Matters Partner, Plaintiffs, v. United States of America, Defendant. § § § § § § § § § §

Case No. 05-296T Judge Francis M. Allegra

PLAINTIFFS' RESPONSE TO UNITED STATES' CROSS MOTION FOR PARTIAL SUMMARY JUDGMENT AND REPLY TO THE GOVERNMENT'S OPPOSITION TO PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT

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TABLE OF CONTENTS TABLE OF AUTHORITIES ....................................................................................................... ii I. II. INTRODUCTION............................................................................................................. 1 ARGUMENT AND AUTHORITIES.............................................................................. 4 A. According to the Supreme Court, Taxing Acts, Including Provisions of Limitations Embodied Therein, Are to Be Construed Liberally in Favor of the Taxpayer. ......................................................................................... 4 Only Plaintiff's Interpretation of Section 6229 Makes Sense in the Statutory Scheme. ................................................................................................. 9 Section 6229's Exceptions Do Not Swallow the Rule. ...................................... 10 All Contemporaneous Legislative History Supports Plaintiffs' Interpretation of Section 6229............................................................................ 11 Even Under Section 6501, the Government Is Barred From Making Any Adjustments to the 2000 Tax Year. ........................................................... 11 The 6-year Limitations Periods Provided in Code Section 6501(e)(1) Does Not Operate to Extend the Limitations Period Beyond the Standard 3-year Period....................................................................................... 15 1. Section 6501(e)(1) Requires Both an "Omission" and "Gross Income" to Trigger the Six-Year Statute of Limitations..................... 16 a. Under Established Judicial Precedent, the Government's Proposed Adjustments to Mr. and Mrs. Tigue's Basis in Grapevine Do Not Constitute an Omission of Gross Income...... 16

B. C. D. E. F.

b. The Government's Attempt to Distinguish The Colony, Inc. Is Premised on a Mischaracterization of the Controlling Issue in this Case and the Supreme Court's Holding in The Colony, Inc. ...................................................................................... 19 c. The Definition of Trade or Business Gross Income in Section 6501(e)(1)(A)(i) Does Not Limit The Colony, Inc.......................... 20

d. The "Safe Harbor" Provision in Section 6501(e)(1)(A)(ii) Does Not Limit or Affect The Colony, Inc.'s Holding .................. 23 2. III. Mr. and Mrs. Tigue Have Adequately Disclosed the Sale of Grapevine on Their IRS Form 1040. .................................................... 24

CONCLUSION ............................................................................................................... 30

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TABLE OF AUTHORITIES Federal Cases AD Global Fund, LLC v. United States, 67 Fed. Cl. 657 (2005)...................................... 2, 4, 5, 10 American Net and Twine Co. v. Worthington, 141 U.S. 468 (1891) .............................................. 5 Badaracco v. Commissioner, 464 U.S. 386 (1984) ............................................................... passim Bachner v. Commissioner, 81 F.3d 1274 (3rd Cir. 1996)................................................................ 8 Barenholtz v. United States, 784 F.2d 375 (Fed. Cir. 1986)......................................................... 13 Benderoff v. United States, 398 F.2d 132 (8th Cir. 1968) ............................................................ 24 Bowers v. Comm'r, 273 U.S. 346 (1927) ........................................................................................ 5 Broughton Lumber Company v. Yeutter, 939 F.2d 1547 (Fed. Cir. 1991) ................................. 6, 7 Bufferd v. Commissioner, 506 U.S. 523 (1993).............................................................................. 6 Burbage v. Comm'r, 82 T.C. 546 (1984) ...................................................................................... 22 Calumet Industries v. Comm'r, 95 T.C. 257 (1990) ..................................................................... 13 Cardinal Life Ins. Co. v. United States, 300 F. Supp. 387 (N.D. Tex. 1969), rev'd on other grounds, 425 F.2d 1328 (5th Cir. 1970) ................................................................................... 25 CC&F Western Operations LP v. Comm'r, 273 F3d 402 (1st Cir. 2001)............................... 26, 27 Connelly v. Comm'r, 45 T.C.M. (CCH) 49 (1982) ....................................................................... 22 Davis v. Hightower, 230 F.2d 549 (5th Cir. 1956) ........................................................................ 18 E.I. Dupont De Nemours & Co. v. Davis, 264 U.S. 456 (1924) ..................................................... 5 Eidman v. Martinez, 184 U.S. 580 (1902) ...................................................................................... 5 Estate of Frane, 98 T.C. 341 (1992)............................................................................................. 24 Estate of Frye v. Comm'r, 88 T.C. 1020 (1987) ..................................................................... 27, 28 Flandreau v. Commissioner, 994 F.2d 91 (2nd Cir. 1993) .............................................................. 8 Foutz v. United States, 72 F.3d 802 (10th Cir. 1995) ...................................................................... 8 George Edward Quick Trust, 54 T.C. 1336 (1970) ................................................................ 24, 25 Gould v. Gould, 245 U.S. 151 (1917) ............................................................................................. 5 Green v. Commissioner, 963 F.2d 783 (5th Cir. 1992).................................................................... 8 Harlan v. Commissioner, 116 T.C. 31 (2001) .............................................................................. 16 Hoffman v. Commissioner, 119 T.C. 140 (2002).......................................................................... 16 Hull v. United States, 146 F.3d 235 (4th Cir. 1998) ........................................................................ 8 ii

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Hyde v. Comm'r, 64 T.C. 300 (1975)............................................................................................ 22 Indian Towing Company v. United States, 350 U.S. 61 (1955)...................................................... 4 Interworld, Ltd. v. Comm'r, 979 F.2d 868 (D.C. Ct. 1992) .......................................................... 21 Irwin v. Dept. of Veterans Affairs, 498 U.S. 89 (1990) .............................................................. 6, 8 Jones v. United States, 526 U.S. 227 (1999) ................................................................................ 11 Kretchmar v. United States, 9 Cl. Ct. 191 (1985)......................................................................... 16 Lazarus v. United States, 136 Cl. Ct. 283 (1956) ......................................................................... 30 Lucias v. United States, 474 F.2d 565 (5th Cir. 1973)..................................................................... 8 Lyta J. Morris, 25 T.C.M. (CCH) 1248 ........................................................................................ 25 Lone Manor Farms, Inc. v. Comm'r, 61 T.C. 436 (1974) ............................................................ 13 Mennuto v. Comm'r, 56 T.C. 910 (1971) ..................................................................................... 13 Mullikin v. United States, 952 F.2d 920 (6th Cir. 1991).................................................................. 8 O'Gilvie v. United States, 519 U.S. 79 (1996) ........................................................................ 6, 7, 8 Pacific Transport Co. v. Comm'r, 483 F.2d 209 (9th Cir. 1973) .................................................. 13 Phinney v. Chambers, 392 F.2d 680 (5th Cir. 1968) .................................................................... 24 Phoenix Coal Co. v. Comm'r, 231 F.2d 420 (2nd Cir. 1956)....................................................... 13 Rhone-Poulenc Surfactants & Specialties L.P. v. Commissioner, 114 T.C. 533 (2000), appeal dismissed and rem'd, 249 F.3d 175 (3d Cir. 2001) .................................................................... 9 Rose v. Comm'r, 24 T.C. 755 (1955) ............................................................................................ 28 Schneider v. Comm'r, 49 T.C.M. (CCH) 1032 ................................................................. 21, 22, 23 Shea v. United States, 754 F.2d 338 (Fed. Cir. 1985)..................................................................... 6 Smith v. Commissioner, 925 F.2d 250 (8th Cir. 1991) ................................................................... 8 Stone Container Corp. v. United States, 229 F.3d 1345 (Fed. Cir. 2000) .................................. 3, 6 The Colony, Inc. v. Commissioner, 357 U.S. 28 (1958) ........................................................ passim The State Farming Company, Inc. v. Comm'r, 40 T.C. 774 (1963) ............................................. 13 United States v. Commonwealth Energy Sys., 235 F.3d 11 (1st Cir. 2000)..................................... 8 United States v. Green-Thapedi, 398 F.3d 635 (7th Cir. 2005)...................................................... 8 United States v. Kubrick, 444 U.S. 111 (1979)............................................................................... 4 United States v. Updike, 281 U.S. 489 (1930) .......................................................................... 5, 30 United States v. Vogel Fertilizer Co., 455 U.S. 16 (1982) ........................................................... 11 Univ. Country Club, Inc. v. Comm'r, 64 T.C. 460 (1969) ...................................................... 24, 30

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Walker v. Commissioner, 46 T.C. 630 (1966) ........................................................................ 16, 24 West v. United States, 5 F.3d 423 (9th Cir. 1993) ........................................................................... 8 White v. Commissioner, 991 F.2d 657 (10th Cir. 1993) ................................................................ 25 Young v. United States, 535 U.S. 43 (2002) ................................................................................... 8

Statutes 26 U.S.C. § 6031(a) ...................................................................................................................... 14 26 U.S.C. § 6229(f)....................................................................................................................... 10 26 U.S.C. § 6501(e)(1)(A) ............................................................................................................ 16

Federal Regulations Treas. Reg.§ 1.6011-4 (as amended, Dec. 29, 2003) .................................................................... 14 Legislative Materials Pub. L. 108-357, Title VIII §815(a), 118 Stat. 1575-55; 1581-83................................................ 14

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IN THE UNITED STATES COURT OF FEDERAL CLAIMS GRAPEVINE IMPORTS, LTD., a Texas Limited Partnership, T-TECH, INC., a Texas Corporation as Tax Matters Partner, Plaintiffs, v. United States of America, Defendant. § § § § § § § § § §

Case No. 05-296T Judge Francis M. Allegra

PLAINTIFFS' RESPONSE TO UNITED STATES' CROSS MOTION FOR PARTIAL SUMMARY JUDGMENT AND REPLY TO THE GOVERNMENT'S OPPOSITION TO PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT Plaintiffs Grapevine Imports, Ltd. ("Grapevine") and T-Tech, Inc. ("T-Tech") (collectively "Plaintiffs") submit this Response to the United States' Cross Motion for Partial Summary Judgment and Reply to the Government's Opposition to Plaintiff's Motion for Summary Judgment filed on November 28, 2005 (the "Government's Response"). In support of the Plaintiffs' Motion for Summary Judgment and this Reply, Plaintiffs will show the Court as follows: I. INTRODUCTION

The Government erroneously believes that it can challenge any partnership item relating to any tax period whatsoever by issuing a final partnership administrative adjustment on the basis of Section 6501, regardless of the fact that the statute of limitations specifically prescribed for partnership level items in Section 6229(a) has expired. The transactions the Government wants to challenge here all occurred in 1999. The Government's proposed adjustments all relate to partnership level items that were reported on Grapevine's partnership return, which was filed on

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or before April 19, 2000.1 Consequently, the Section 6229(a) period of limitations expired on April 19, 2003. The Government issued its Notice of Final Partnership Administrative

Adjustment to T-Tech, Inc., adjusting Grapevine Imports, Ltd.'s 1999 partnership items on December 17, 2004 (the "FPAA")2, one year and eight months after the end of the 3-year limitations period prescribed by Section 6229(a) for partnership items. The Government does not adequately respond to Plaintiffs' arguments regarding the genesis and purpose of the presumptions applicable to tax laws and statutes of limitation. Instead, the Government invites this Court to ignore direct Supreme Court interpretative guidance on the proper manner to construe taxing statutes of limitation. Further, almost every circuit court of appeals decision the Government has cited reconciles with Plaintiff's correct analysis of the precedents involving waivers of sovereign immunity in general, and waivers of the sovereign's right to assess and collect taxes through taxing statutes of limitation in particular. In the end, the only way the Government can prevail on its interpretation of Section 6229 is through the incorrect application of Badaracco3 to sustain its "convoluted,"4 "labyrinthine,"5 "complicated,"6 and less than likely7 interpretation of Section 6229. Only Plaintiffs'

interpretation of Section 6229 is consistent with Supreme Court interpretative guidance and makes sense in light of Section 6229's plain language. The Government's interpretation also requires this Court to read suspension language into Section 6229(d) that is simply not there. Furthermore, only Plaintiff's interpretation makes sense when considering the language of other

1 2

See Gov't's Proposed Findings of Uncontroverted Facts ("Gov't Findings")¶ 6. See Gov't Findings ¶ 13. 3 Badaracco v. Commissioner, 464 U.S. 386 (1984). 4 AD Global Fund, LLC v. United States, 67 Fed. Cl. 657, 676 (2005). 5 Id. at 676. 6 Id. at 675. 7 See id. ("The court finds plaintiff's interpretations to be more likely.") PLAINTIFFS' RESPONSE TO UNITED STATES' CROSS MOTION FOR PARTIAL SUMMARY JUDGMENT AND REPLY TO THE GOVERNMENT'S OPPOSITION TO PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT
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Internal Revenue Code provisions. And, only Plaintiffs' interpretation of Section 6229 makes sense in light of Congress' express goals in enacting it, as evidenced by the contemporaneous legislative materials and influential interpretative authorities. Incredibly, the Government's Response also invites this Court to accept the arguments rejected by the Supreme Court in direct challenge to the holding in The Colony, Inc. v. Commissioner,8 which provides that only an omission of gross income can work to extend the Section 6501 limitations period from three to six years. Here, the Government cannot establish that Mr. and Mrs. Tigue omitted gross income from their 1999 federal income tax return. Moreover, the transactions at issue were adequately disclosed and therefore preclude the Government from asserting the 6-year statute of limitations. In light of this, the Court should determine that the facts of this case cannot, as a matter of law, trigger Section 6501(e)'s six-year period of limitation. The Federal Circuit would decline the Government's invitation to ignore Supreme Court guidance: As a subordinate federal court, [this court does] not share the Supreme Court's latitude in disregarding the language in its own prior opinions . . . "once the [Supreme] Court has spoken, it is the duty of other courts to respect that understanding of the governing rule of law."9 The Government's Response also incorrectly carries the undercurrent that Plaintiffs' statute of limitations defense to the Government's attempts to collect taxes should be rejected because it is procedural rather than substantive, and significant harm to the Treasury would result from Plaintiff prevailing.10 In this regard, the Supreme Court has stated:
8 9

357 U.S. 28 (1958). Stone Container Corp. v. United States, 229 F3d 1345, 1349-50 (Fed.Cir. 2000) (internal citations omitted) (rejecting taxpayer's request to ignore dicta in Supreme Court decision). 10 Government Response at 7. PLAINTIFFS' RESPONSE TO UNITED STATES' CROSS MOTION FOR PARTIAL SUMMARY JUDGMENT AND REPLY TO THE GOVERNMENT'S OPPOSITION TO PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT
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Statute of limitations, which "are found and approved in all systems of enlightened jurisprudence . . . represent a pervasive legislative judgment that it is unjust to fail to put the adversary on notice to defend within a specified period of time and that "the right to be free of stale claims in time comes to prevail over the right to prosecute them."

*

*

*

We should regard the plea of limitations as a "meritorious defense in itself serving a public interest."11 Courts are not "self-constituted guardians of the Treasury" and should not too narrowly construe a waiver of the sovereign's right to collect taxes.12 The executive, not the judiciary, is obligated to protect the Treasury by timely examining tax returns and asserting the Government's claims within the congressionally intended period. Plaintiffs respectfully request that this Court not interpret Congressional intent in enacting Section 6229 in a convoluted, labyrinthine or less than likely manner to give the executive an untimely, second bite at the apple. II. A. ARGUMENT AND AUTHORITIES

According to the Supreme Court, Taxing Acts, Including Provisions of Limitations Embodied Therein, Are to Be Construed Liberally in Favor of the Taxpayer.

The Government's Response simply dismisses, without analysis, the genesis of the presumptions regarding statutory construction. In contrast, Plaintiffs' Memorandum in Support of Plaintiffs' Motion for Summary Judgment ("Plaintiffs' MSJ"), explains13 the foundation of the seemingly-opposed presumptions cited in the recent decision of AD Global Fund, LLC v. United States14 that generally taxing statutes are interpreted in the taxpayer's favor while statutes of
11 12

United States v. Kubrick, 444 U.S. 111, 117 (1979) (internal citations omitted). Indian Towing Company v. United States, 350 U.S. 61, 69 (1955). 13 See Plaintiffs' MSJ at 11-24. 14 AD Global Fund, LLC, 67 Fed. Cl. at 675. PLAINTIFFS' RESPONSE TO UNITED STATES' CROSS MOTION FOR PARTIAL SUMMARY JUDGMENT AND REPLY TO THE GOVERNMENT'S OPPOSITION TO PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT
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limitation are interpreted in the Government's favor.

The AD Global Court incorrectly

determined that when these two presumptions collide, the presumption in favor of the Government should win the day.15 As the Supreme Court has held, "taxing acts, including provisions of limitation embodied therein, [are] to be construed liberally in favor of the taxpayer."16 The Government's Response did little to address Plaintiffs' arguments, which consistent with the doctrine of stare decisis reconcile American Net and Twine Co. v. Worthington,17 Eidman v. Martinez,18 Gould v. Gould,19 E.I. Dupont De Nemours & Co. v. Davis,20 Bowers,21 Updike,22 The Colony, Inc.23 and Badaracco v. Commissioner.24 As Plaintiff's MSJ states: Bowers makes clear that the proper inquiry is to first determine whether the Government intended to bar its ability to assess or collect taxes through the enactment of a limitations period. This intention should be clearly expressed and strictly construed in the government's favor. Once having found that the government intended to be barred, the limitations period is then construed under normal rules of construction to effectuate congressional intent. This may include, in appropriate cases, interpretation in favor of the taxpayer if the limitations period is a part of a taxing statute.25 Importantly, Plaintiffs interpretation of the proper method for (1) determining whether Congress intended to bar its sovereign right to assess and collect taxes, and (2) determining the metes and bounds of a congressionally intended bar, is consistent with the established Supreme

15 16

See id. at 693-94. United States v. Updike, 281 U.S. 489, 496 (1930) (citing Bowers v. New York & Albany Lighterage Co., 273 U.S. 346, 349 (1927)) ). 17 141 U.S. 468 (1891). 18 184 U.S. 580 (1902). 19 245 U.S. 151 1917). 20 264 U.S. 456 (1924). 21 273 U.S. 346 (1927). 22 281 U.S. 489, 496 (1930). 23 357 U.S. 28 (1958). 24 464 U.S. 386 (1984). 25 Plaintiff's MSJ at 18. PLAINTIFFS' RESPONSE TO UNITED STATES' CROSS MOTION FOR PARTIAL SUMMARY JUDGMENT AND REPLY TO THE GOVERNMENT'S OPPOSITION TO PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT
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Court authority. For example, in Irwin v. Dept. of Veterans Affairs,26 the Supreme Court reiterated that waivers of sovereign immunity must be "unequivocally expressed" (i.e., strictly construed); however, once Congress has made such a waiver, the courts must not "assume the authority to narrow the waiver that Congress intended," or construe the waiver "unduly restrictively."27 Thus, the Supreme Court in Irwin held that Congress' waiver of sovereign immunity included "the same rebuttable presumption of equitable tolling applicable to suits against private defendants" even though a "strict construction" of the statute in the Government's favor did not include equitable tolling.28 The Government's Response states that the presumption mentioned in Badaracco29 -- that statutes of limitation should be construed in favor of the Government -- should be followed here because other cases, namely Bufferd v. Commissioner30 and O'Gilvie v. United States,31 have cited to it.32 As discussed in Plaintiffs' MSJ, the issue in Badaracco was whether Congress had manifested its intent to be barred by a limitations period, not how to construe a congressionally intended bar.33 Here, there is no dispute that Congress intended Section 6229 as a bar; the dispute is about the interpretation of the bar: whether it is exclusive or simply an extension of Section 6501.
26 27

498 U.S. 89 (1990). Id. at 94-96. (citations omitted). 28 Id. at 95-96; see also Shea v. United States, 754 F.2d 338, 340 (Fed. Cir. 1985)("The government has strongly urged upon us the principle that, absent express consent by Congress waiving sovereign immunity, interest does not run on a claim against the United States. We agree with the Government on this important point. However, it is irrelevant here, where the dispute concerns not whether interest runs against the United States but how the interest is to be calculated.") (italics original); and Broughton Lumber Company v. Yeutter, 939 F.2d 1547, 1552 (Fed. Cir. 1991) ("Under the controlling precedent for this court it is well-established that waivers of sovereign immunity are to be strictly construed . . . . However, in as much as there is an express waiver of sovereign immunity in the George Act, we must be careful not to construe the scope of the waiver `unduly restrictively.'") (italics original) , and Stone Container, 229 F.3d at 1352. 29 464 U.S. 386 (1984). 30 506 U.S. 523 (1993). 31 519 U.S. 79 (1996). 32 See Government's Response at 15-17. 33 See Plaintiffs' MSJ at 21-24. PLAINTIFFS' RESPONSE TO UNITED STATES' CROSS MOTION FOR PARTIAL SUMMARY JUDGMENT AND REPLY TO THE GOVERNMENT'S OPPOSITION TO PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT
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In Bufferd, the Supreme Court cited Badaraco in a footnote after discerning that the statutory language at issue was plain.34 There, the taxpayer claimed that an s-corporation return filed prior to TEFRA, as opposed to his individual return, started Section 6501(a)'s period of limitation running.35 Of course, the taxpayer's argument would have required reading language into Section 6501(a) for his benefit, namely that Section 6501's reference of "the return" referred to both an individual's and an s-corporation's return.36 The Supreme Court had little difficulty determining that Congress did not intend for the s-corporation return to start the limitations period; instead, Congress "plainly" intended the individual shareholder's return to start the limitations period.37 As in Badarraco, the taxpayer was looking for--not interpreting--a waiver of the Government's right to pursue the assessment and collection of taxes. Under those

circumstances, a court is bound to strictly construe the statute in the Government's favor. In O'Gilvie v. United States,38 the taxpayer claimed that the Government's erroneous refund action was untimely if the statute of limitation began running from the date the Government mailed the refund checks.39 The Government argued that the period of limitation began running on the date the taxpayers received the refund checks, not the date on which they were mailed, which made the suit timely.40 The Court noted that the statute at issue "admits of both interpretations," but observed that the law ordinarily provides that "an action to recover mistaken payments of money accrues upon the receipt of payment."41 The Supreme Court only mentioned Badaracco in passing after it had already decided that the cause of action accrued
34 35

See Bufferd, 506 U.S. at 527 n.6. See id. at 527. 36 See id. 37 See id. 38 519 U.S. 79 (1996). 39 Id. at 90-91. 40 Id. 41 Id. at 91 (citations and quotations omitted). PLAINTIFFS' RESPONSE TO UNITED STATES' CROSS MOTION FOR PARTIAL SUMMARY JUDGMENT AND REPLY TO THE GOVERNMENT'S OPPOSITION TO PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT
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upon receipt, not mailing, based on common law principles and the decisions of other authorities.42 Given this long-standing precedents on recovery of mistaken payments, "Congress must be presumed to draft [the erroneous refund] limitations period in light of this background principle."43 O'Gilvie, therefore, makes the "realistic assessment of legislative intent"44 to start the limitations period from the date the cause of action accrues rather than a prior date.45 The Government's Response does not even recognize, let alone examine, these jurisprudential foundations in any detail. Instead, it simply states that the presumption in favor of the Government exists and that other courts have cited to it.46 At least part of the confusion in this area is attributable to many courts' reflexive recitation of presumptions without explaining whether the presumption was actually followed to reach the decision or whether the presumption merely did not conflict with a result reached on other grounds.47 In the final analysis, the
Id. Young v. United States, 535 U.S. 43, 49-50 (2002).. 44 See Irwin, 498 U.S. at 95. 45 O'Gilvie, 519 U.S. at 91. 46 See Government's Response. at 15-17. 47 See United States v. Commonwealth Energy Sys., 235 F.3d 11, 14-16 (1st Cir. 2000) (same issue as O'Gilvie: determining limitations period starts on date refund check clears the Treasury ­ presumption reflexively cited); United States v. Green-Thapedi, 398 F.3d 635, 637-39 (7th Cir. 2005) (same issue as O'Gilvie: determining limitations period starts on date refund check clears the Treasury or limitation period should not start before cause of action accrued ­ presumption reflexively cited); Green v. Commissioner, 963 F.2d 783 (5th Cir. 1992) (same issue as Bufferd) ); Hull v. United States, 146 F.3d 235, 238-39 (4th Cir. 1998) (noting general principals of waiver of sovereign immunity and deciding case based upon ordinary, readily understood meaning of terms); Foutz v. United States, 72 F.3d 802, 805-06 (10th Cir. 1995) (basing decision on structure of statutes and prior Supreme Court precedent on point regarding extensions of limitations period ­ presumption reflexively cited in support of decision on other ground) ); Flandreau v. Commissioner, 994 F.2d 91, 93-94 (2nd Cir. 1993) (court rejected taxpayer's claim that statute of limitations on gift had run as issue before the court did not involve the gift ­ presumption cited for proposition that whether congress intended a bar must be strictly construed); Smith v. Commissioner, 925 F.2d 250, 254 (8th Cir. 1991) (limitations period remained open due to either extensive or pending tax court proceeding ­ presumption reflexively cited); Mullikin v. United States, 952 F.2d 920, 925-929 (6th Cir. 1991) (rejecting claim that Congress intended a limitations bar for section 6701 penalties when statute made no express reference to limitations period and legislative history of 6701 indicates that it was enacted as part of anti-fraud provisions of tax code for which no limitations periods apply ­ presumption correctly cited and utilized in decision); Bachner v. Comm'r, 81 F.3d 1274, 1279-1282 (3rd Cir. 1996) (consistent with Lucias v. United States, 474 F.2d 565 (5th Cir. 1973): rejected claim that W-2 filed by employer was a "return" starting the limitations period ­ presumption correctly cited and relied upon); cf West v. United States, 5F.3d 423, 425-26 (9th Cir. 1993) (rejecting plain language interpretation as inconsistent with congressional intent ­ presumption improperly cited and relied upon as partial justification for refusing to implement plain language).
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Supreme Court's guidance is clear on the issue at hand: Section 6229 should be construed in a natural, direct manner, giving words their ordinary meaning and resisting attempts to alter this literal construction by incorporating Section 6501 into this plain language. Even under the Government's construction of Section 6229 as an extension of Section 6501; the statute is a bar; consequently, to the extent there is any ambiguity, it should be construed in Plaintiff's favor. Section 6229, therefore, is the exclusive, separate statute of limitations for partnership items. B. Only Plaintiff's Interpretation of Section 6229 Makes Sense in the Statutory Scheme.

The Government continues to assert erroneously that the plain language of Section 6229(a) supports its interpretation. Plaintiffs' MSJ addresses the language in Section 6229(a) and explains that Plaintiff's interpretation reflects congressional intent. We refer the Court to that analysis, but note the following in particular: Even a casual reading of Section 6229 defeats the Government's interpretation of Section 6229(a) and its "plain language" argument. As noted throughout Plaintiffs' MSJ, too many discrepancies, inconsistencies and complexities develop under the Government's reading of Section 6229(a). At the end of the day, the Government simply makes too much of the fact that Congress used the language "shall not expire before" in Section 6229(a). Congress could have worded the limitations period in Section 6229(a) in many different ways. Prior to Rhone-Poulenc, no one argued that the language in Section 6229(a) does not create a separate statute of limitations. And, the IRS itself was "unwilling to defend cases on the basis of the limitations period under Section 6501 still being open."48

48

See I.R.S. Litigation Guideline Memorandum TL-73 (Rev.) at 32 n.15; Plaintiffs' MSJ at 59-60, App. 420.

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Section 6229(f)(1) provides the explanation as to why Congress chose to use the "shall not expire before" language in Section 6229(a).49 Congress simply intended to prevent a

taxpayer from shortening the Section 6229(a) statute of limitations by converting partnership items to non-partnership items.50 The Government's interpretation of Section 6229(f)(1) in this context is "labyrinthine."51 The Government's attempt to reconcile its interpretation of Section 6229(a) with other portions of Section 6229 is woefully inadequate.52 Section 6229(b)(3) (Coordination with

Section 6501(c)(4)) is superfluous under the Government's "convoluted"53 reading of Section 6229(a). Section 6229(b)(1)(B), which authorizes the tax matters partner to extend the

limitations period for all partners, cannot be given effect under the Government's interpretation. Other discrepancies in the Government's proposed reading of Section 6229 are discussed in Plaintiff's MSJ.54 C. Section 6229's Exceptions Do Not Swallow the Rule.

The Government argues that Plaintiffs improperly focus on the entity theory of partnership taxation and ignores the aggregate theory, which treats partnerships as an aggregate of its separate partners.55 The Government provides no support for its assertion that Congress intended Section 6229(a) to follow the aggregate and not the entity theory. contemporaneous interpretations of Section 6229(a) support the entity theory. In fact, all

49 50

See Plaintiff's MSJ at p. 30. See IRC § 6229(f)(1). 51 See AD Global Fund, 67 Fed. Cl. at 675. 52 See Plaintiffs' MSJ at pp. 28 to 44 for a complete and comprehensive discussion. 53 See AD Global Fund, 67 Fed. Cl. at 676. 54 See Plaintiff's MSJ at pp 28-44. 55 See Government's Response at 24. PLAINTIFFS' RESPONSE TO UNITED STATES' CROSS MOTION FOR PARTIAL SUMMARY JUDGMENT AND REPLY TO THE GOVERNMENT'S OPPOSITION TO PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT
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The Government's Response cites to several portions of Section 6229, claiming that Congress wanted different limitations periods to apply to different partners.56 The portions cited, however, apply in fairly unusual circumstances.57 The Government takes what was clearly intended to be the exception (i.e., that different partners may have different limitations periods under limited circumstances) and proposes to make it the rule. This turns Section 6229 on its head. More importantly, all of these exceptions are contained in Section 6229 itself and make no mention of Section 6501. D. All Contemporaneous Legislative History Supports Plaintiffs' Interpretation of Section 6229.

All contemporaneous legislative and interpretative materials support the conclusion, and only the conclusion, that Section 6229(a) provides an exclusive period of limitations for partnership items.58 The Government does not dispute this fact. Notably, the Government fails to explain why the Court should disregard the Joint Committee's explanation of Section 6229(a).59 Instead, the Government's Response relies on comments made by Congress ten years after the passage of TEFRA, which is understandably, of questionable validity.60 E. Even Under Section 6501, the Government Is Barred From Making Any Adjustments to the 2000 Tax Year.

Even if the Court rules that Section 6501 provides the applicable statute of limitations for partnership items, the statute of limitations for Mr. & Mrs. Tigue's 2000 tax year is nevertheless

56 57

See id. (citing Section 6229(b)(1), (c)(1), (e), (f), and (h)). See id. 58 See Plaintiffs' MSJ at 44-57. 59 Information regarding the identity of the particular Joint Committee members and their individual roles was not presented to or considered by the Court in AD Global. 60 See Jones v. United States, 526 U.S. 227, 238 (1999)("[S]ubsequent history is a hazardous basis for inferring the intent of an earlier Congress."(internal quotations omitted)) ; United States v. Vogel Fertilizer Co., 455 U.S. 16, 34 (1982)("[I]t is the intent of the Congress that [enacted the provision], not the views of the subsequent Congress . . . that are controlling.") . PLAINTIFFS' RESPONSE TO UNITED STATES' CROSS MOTION FOR PARTIAL SUMMARY JUDGMENT AND REPLY TO THE GOVERNMENT'S OPPOSITION TO PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT
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closed under Section 6501.61 The Government incorrectly argues that the IRS's issuance of a final partnership administrative adjustment ("FPAA") tolls the Section 6501 statute of limitations for Mr. and Mrs. Tigue's 2000 tax year under Section 6229(d). We have addressed this issue at length in our initial brief and pause here only to refer the court to that analysis.62 Interestingly, the Government does not respond to the Supreme Court's holding in Badaracco that "[w]here Congress has intended only a temporary suspension of the running of the statute of limitations period, it has had no difficulty drafting statutory provisions that unambiguously accomplish this result."63 Contrary to the Supreme Court, the Government's Response effectively argues that Congress does not know how to unambiguously suspend Section 6501 and asks this Court to read language into the suspension provision of Section 6229(d) (i.e., a reference to Section 6501) that is not there. Significantly, this ignores the unambiguous wording of Section 6503 providing that certain TEFRA related notices of deficiencies, not FPAAs, suspend Section 6501.64 The Government's argument regarding its ability to calculate closed year items to determine open-year assessments reflects circular reasoning on the part of the Government and should be rejected. The Government Response cites only to Section 6501 and construing case law as authority for the proposition that it may calculate closed year items to determine openyear assessments and, therefore, assumes the very thing at issue in this case (i.e., whether Section 6229 or Section 6501 provides the applicable limitations period).65 Each of the cases cited by the Government addresses the application of either Section 6501 or its predecessor, Section 275

61 62

The statute of limitations for Mr. and Mrs. Tigue' 1999 years is also closed and is discussed below. See Plaintiff's MSJ at pp. 71 to 79. 63 Badaracco, 464 U.S. at 395(citing Section 6503). 64 See Plaintiff's MSJ at 72-78. 65 See Government's Response at 37. PLAINTIFFS' RESPONSE TO UNITED STATES' CROSS MOTION FOR PARTIAL SUMMARY JUDGMENT AND REPLY TO THE GOVERNMENT'S OPPOSITION TO PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT
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of the 1939 Code, to the particular facts of the case and do not involve or mention Section 6229 or any of the TEFRA provisions.66 Plaintiffs' MSJ explains that the Government has no authority under Section 6229 to issue an FPAA for a closed year simply to make adjustments to a non partnership item NOL deduction claimed by a partner in a later year.67 Section 6229 includes no special provisions for NOLs or similar adjustments, and none can be read into it. Section 6229 differs dramatically from Section 6501 in the sense that Section 6501 contemplates a statute of limitations that affects only individual taxpayers, whereas the limitations period in Section 6229, under Plaintiffs' interpretation, affects multiple taxpayers (i.e, all of the partners). Plaintiffs' MSJ further

explains why this very significant difference precludes the IRS from reading into Section 6229 any exceptions to the standard 3-year limitations period in Section 6229(a) for NOL adjustments.68 The Government does not appear to disagree with this argument as it has made no assertions or arguments to the contrary. Instead it relies solely on Section 6501 and

construing authority -- none of which involve any TEFRA provisions -- to support its argument. For this reason, if the Court correctly determines that Section 6229, rather than Section 6501, provides the applicable statute of limitations, this argument necessarily fails.
In fact, each one of the cases involves tax years that pre-date the 1982 enactment of the TEFRA provisions and therefore do not involve application of the unique TEFRA provisions. See Pacific Transport Co. v. Comm'r, 483 F.2d 209 (9th Cir. 1973)(addressing whether IRS could disallow NOL carryback from 1959 to 1957 and 1958); Phoenix Coal Co. v. Comm'r, 231 F.2d 420 (2d Cir. 1956)(addressing whether IRS could determine deficiency for 1946 tax year on the basis of reducing NOL carried over from 1945 attributable to a recomputation of the tax liability in 1945); Barenholtz v. United States, 784 F.2d 375 (Fed. Cir. 1986)(addressing whether IRS could make upward adjustments to income for 1971 to 1974 tax years to determine tax liability for 1975, 1976 and 1977); Calumet Industries v. Comm'r, 95 T.C. 257 (1990)(addressing whether IRS could recompute the amount of an NOL in 1981 that was carried back to 1979 in order to assess a deficiency for 1979 year); Lone Manor Farms, Inc. v. Comm'r, 61 T.C. 436 (1974)(addressing whether IRS could recompute tax liability for 1967 tax year in assessing deficiency for 1969 year) ; Mennuto v. Comm'r, 56 T.C. 910 (1971)(addressing whether IRS could recompute tax liability for 1969 tax year to adjust investment credit carryover in 1967); The State Farming Company, Inc. v. Comm'r, 40 T.C. 774 (1963)(addressing whether IRS was precluded from redetermining tax liability for 1952 in order to compute proper NOL carryover to 1953 and 1955) . 67 See Plaintiffs' MSJ at p. 50. 68 See id. PLAINTIFFS' RESPONSE TO UNITED STATES' CROSS MOTION FOR PARTIAL SUMMARY JUDGMENT AND REPLY TO THE GOVERNMENT'S OPPOSITION TO PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT
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Alternatively, if the Court correctly determines that issuance of the FPAA did not toll the Section 6501 statute of limitations for the 2000 year, the Section 6501 statute of limitations for 2000 has expired.69 The Government's argument that it may recompute tax in a closed year (i.e. Grapevine's 1999 tax year) to determine the tax liability in an open year (Mr. and Mrs. Tigue's 2000 tax year) accomplishes nothing because the 2000 year expired no later than January 14, 2005.70 The Government's Response attempts to bolster its argument by straining against its administrative burden and "stealth reporting" policy arguments.71 But, the Government leaves out one important fact. Partnerships and individual taxpayers are required to file returns with the IRS on an annual basis.72 The Government determines what should be reported on those returns.73 The IRS always has the option of auditing a partnership return within the 3-year period provided in Section 6229(a), and as the new regulations under Section 6011 adequately illustrate,74 the IRS may require the disclosure of specific transactions or information that the Government deems audit worthy. In short, the Government controls the information that is required to be reported for the purpose of selecting returns for audit. When viewed in this light, the Government's "stealth reporting" and administrative burden policy arguments ring hollow. The Government's allegations that Grapevine engaged in "stealth reporting" and inferences that Grapevine or Mr. and Mrs. Tigue failed to comply with the tax advisor reporting

69

According to the Government's brief, the statute of limitations for the 2000 tax year expired January 14, 2005 if the FPAA did not operate to toll the statute of limitations. See Government's Response at p. 35. 70 See supra note 67. 71 See id. 72 See IRC § 6031(a). 73 See id. 74 See Treas. Reg.§ 1.6011-4 (as amended, Dec. 29, 2003). PLAINTIFFS' RESPONSE TO UNITED STATES' CROSS MOTION FOR PARTIAL SUMMARY JUDGMENT AND REPLY TO THE GOVERNMENT'S OPPOSITION TO PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT
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obligations under Section 6111 are outrageous.75 Neither Section 6111 nor Section 6707A have any application to either Grapevine or Mr. and Mrs. Tigues' 1999 or 2000 returns.76 These provisions were not effective until 2004, well after the returns at issue were filed.77 In addition, neither Mr. and Mrs. Tigue nor Grapevine qualify as tax advisors subject to Section 6111.78 Grapevine and Mr. and Mrs. Tigue properly completed their returns. The Government's Response also argues that partners may always choose between prior year benefits and the uncertainty of IRS review.79 This argument possesses superficial appeal at best. Most partnerships involve multiple partners and under the Government's theory, all of the partners would have to monitor, and have some control over, the other partners' tax returns. An FPAA affects not only the partner claiming the benefits, but also every other partner in the partnership. Under the Government's interpretation, if one partner took a tax benefit in a later year, every partner would be required to assert their individual Section 6501 statute of limitations as a defense for every affected year or risk waiving it.80 TEFRA clearly does not contemplate this result. F. The 6-year Limitations Periods Provided in Code Section 6501(e)(1) Does Not Operate to Extend the Limitations Period Beyond the Standard 3-year Period.

Assuming that Section 6501 provides the applicable statute of limitations for partnership items, the 3-year statute of limitations under Section 6501 for Mr. and Mrs. Tigue's 1999 tax

75 76

See Government's Response at p. 54. See IRC §§ 6111, 6707A. 77 See American Jobs Creation Act of 2004, Pub. L. 108-357, Title VIII, §§ 811, 815, 118 Stat. 1575-77; 1581-83, at Appendix 15. 78 See IRC §§ 6111. 79 See Govt's MSJ. at p. 40. 80 See Plaintiffs' MSJ at pp. 62-63. PLAINTIFFS' RESPONSE TO UNITED STATES' CROSS MOTION FOR PARTIAL SUMMARY JUDGMENT AND REPLY TO THE GOVERNMENT'S OPPOSITION TO PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT
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year has clearly expired.81 The 6-year statute of limitations does not apply to the Government's proposed adjustments as they do not represent an omission of income as contemplated by Section 6501(e)(1). The Government bears the burden of proof in asserting the 6-year statute of

limitations. 82 The uncontroverted facts in this case make clear that the Government cannot, as a matter of law, satisfy this burden. 1. Section 6501(e)(1) Requires Both an "Omission" and "Gross Income" to Trigger the Six-Year Statute of Limitations

Section 6501(e)(1) provides that if a taxpayer omits from gross income an amount properly includible therein which is in excess of 25 percent of the amount of gross income stated in the return, tax may be assessed within 6 years after the return was filed.83 Three elements must be present before the 6-year limitations provision applies. First, there must be an "omission."84 Second, the omission must exist with respect to "gross income."85 Third, the omitted gross income must exceed 25% of the amount of gross income stated in the taxpayer's return.86 The formula may also be expressed as an equation: Gross Income Omitted/Gross Income Stated on The Return = More than 25%.87 a. Under Established Judicial Precedent, the Government's Proposed Adjustments to Mr. and Mrs. Tigue's Basis in Grapevine Do Not Constitute an Omission of Gross Income
88

The Colony, Inc.

makes clear that the alleged overstatement of basis on the sale of

property does not constitute an omission of gross income where gross receipts from the sale are
The FPAA was issued more than 3 years after the date that Mr. and Mrs. Tigue filed their 1999 return. See Plaintiff's Proposed Findings ¶ 7, 13. 82 See Kretchmar v. United States, 9 Cl. Ct. 191, 204-05 (1985); Hoffman v. Commissioner, 119 T.C. 140, 146 (2002); Harlan v. Commissioner, 116 T.C. 31, 39 (2001); Walker v. Commissioner, 46 T.C. 630, 637 (1966). 83 See IRC § 6501(e)(1)(A). 84 See id. 85 See id. 86 See id. 87 See Harlan, 116 T.C. at 40. 88 357 U.S. 28 (1958) PLAINTIFFS' RESPONSE TO UNITED STATES' CROSS MOTION FOR PARTIAL SUMMARY JUDGMENT AND REPLY TO THE GOVERNMENT'S OPPOSITION TO PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT
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fully disclosed on the return. In The Colony, Inc., the taxpayer reported a capital gain recognized on the sale of real property.89 The IRS assessed a deficiency because the taxpayer improperly capitalized certain expenses, which caused an overstatement of adjusted basis in the real properties sold. The Government argued that the extended 5-year limitations period under the predecessor of Section 6501 applied.90 That provision extended the limitations period to 5 years where the taxpayer "omit[ted] from gross income an amount properly includible therein which is in excess of 25 per centum of the amount of gross income stated in the return."91 The Supreme Court held that the 5-year limitations period was not triggered.92 The Supreme Court found persuasive evidence in the legislative history that "Congress was addressing itself to the specific situation where a taxpayer actually omitted some income receipt or accrual in his computation of gross income, and not more generally to errors in that computation arising from other causes."93 The Supreme Court also rejected the Government's argument, which focused on whether or not the amount of "gross income" was understated by 25%.94 According to the Supreme Court, the Government's argument would be reinforced somewhat if, in reading the statutory provision at issue, "one touches lightly on the word `omits' and bears down hard on the words `gross income.' "95 Under the facts presented, the Supreme Court determined that the taxpayer did not omit any gross income for purposes of extending the

89 90

Id. at 30. Id. 91 Id. at 29. This language appears almost verbatim in Section 6501(e)(1). 92 Id. at 38. 93 Id. at 33 (emphasis added). 94 See id. 95 See id. at 32. PLAINTIFFS' RESPONSE TO UNITED STATES' CROSS MOTION FOR PARTIAL SUMMARY JUDGMENT AND REPLY TO THE GOVERNMENT'S OPPOSITION TO PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT
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3-year limitations period.96 In closing, the Supreme Court noted that its holding was in harmony with the current Section 6501.97 The Colony, Inc. is dispositive of any assessment against Mr. and Mrs. Tigue for the 1999 tax year. Both cases involve the sale of an asset where the taxpayer allegedly overstated basis. Just as the taxpayer in The Colony, Inc., Mr. and Mrs. Tigue disclosed the sale of their Grapevine partnership interests on their 1999 Form 1040, the full amount realized on the sale, their adjusted bases in the interests sold, and the resulting capital loss.98 No meaningful distinction exists

between the facts of this case and those at issue in The Colony, Inc. If the Supreme Court determined that no omission existed under the facts in The Colony, Inc., it is impossible to see how an omission could exist under the facts of this case. The Government's Response, therefore, is a direct challenge to controlling Supreme Court precedent. Moreover, the six-year statute of limitations does not apply to mere differences in opinion as to legal construction as exists in this case. The Fifth Circuit Court of Appeals' held in Davis v. Hightower,99 a decision cited in The Colony, Inc.,100 that an omission from gross income does not occur where the taxpayer "accurately fills in every blank space provided for his use in the income tax form, . . . and arrives at an incorrect computation of the tax only by reason of a difference between him and the Commissioner as to the legal construction to be applied to a disclosed transaction" (emphasis added).101 The instant case involves proposed adjustments resulting from a difference in opinion as to the legal construction that should be applied in
96 97

Id. at 36. See id. at 37. 98 Plaintiffs' Additional Proposed Findings of Fact ¶ 1. On Schedule D of their 1999 federal income tax return, Mr. and Mrs. Tigue reported gross proceeds from the sale of the partnership of $10,916,240.00 and a basis of $10,961,317.00. 99 230 F.2d 549 (5th Cir. 1956). 100 See The Colony, Inc., 357 U.S. at 31, n.2. 101 Davis, 230 F.2d at 553. PLAINTIFFS' RESPONSE TO UNITED STATES' CROSS MOTION FOR PARTIAL SUMMARY JUDGMENT AND REPLY TO THE GOVERNMENT'S OPPOSITION TO PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT
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determining the basis of Mr. and Mrs. Tigue's interests in Grapevine. Like the taxpayer in Davis, Mr. and Mrs. Tigue "filled in every blank" on their tax return, fully disclosing the sale of their Grapevine interests, including the amount realized, their claimed bases in the interests sold, and their claimed capital loss on the sale. Mr. and Mrs. Tigue did not therefore omit any gross income from their return for purposes of the 6-year statute of limitations. b. The Government's Attempt to Distinguish The Colony, Inc. Is Premised on a Mischaracterization of the Controlling Issue in this Case and the Supreme Court's Holding in The Colony, Inc.

The Government's Response attempt to distinguish the Supreme Court's holding in The Colony, Inc. is premised on a patent mischaracterization of both the controlling issue in this case and the Supreme Court's holding. The Government's Response defines the controlling issue as follows: "The determination of whether a taxpayer meets this 25 percent threshold focuses on the definition of `gross income.' "102 Then the Government focuses on the definition of "gross income" under Section 61 of the Internal Revenue Code.103 The Government's Response also notes that Section 275, which was at issue in The Colony, Inc., made no attempt to define gross income, whereas Section 6501 does in the case of a trade or business.104 Essentially, the Government makes the same arguments rejected by the Supreme Court in The Colony, Inc. On brief in The Colony, Inc., the Government argued that the 5-year statute of limitations by its terms applied to an omission from "gross income."105 "Total proceeds of sales," argued the Government, "are not properly includible [in gross income]; gains from sales

See Government's Response at p. 44. See id. 104 See id. at 47-48. 105 See Brief For Respondent, The Colony, Inc. v. Comm'r., 357 U.S. 28 (1958) (No. 306), available at Plaintiffs' MSJ, App. 519.
103

102

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are."106 The Government cited to other portions of the Code which defined the terms "gross income" to include "gains derived from sales" and "`gain from the sale' of property . . . as the excess of the amount realized from the sale (total sales proceeds) over the adjusted basis (essentially cost) of the property . . . ," -- just as the Government does in this case.107 The Supreme Court rejected this approach. Instead, the Supreme Court focused on the definition of the word "omits" and determined that there had been no omission of gross income.108 Contrary to the Government's assertions in this case, the Supreme Court in The Colony, Inc. did not base its holding on any particular definition of "gross income." In fact, the Supreme Court accepted the Government's definition of gross income as gross receipts minus basis.109 The Colony, Inc. cannot be distinguished, therefore, on the basis of the definition of "gross income" as the Government argues. As a result, even if gross income was understated in this case, the 6-year statute still does not apply because there was no omission of any income. The Colony, Inc. is clear. c. The Definition of Trade or Business Gross Income in Section 6501(e)(1)(A)(i) Does Not Limit The Colony, Inc.

Contrary to the Government's Response, Section 6501(e)(1)(A)(i) does not operate to limit the Supreme Court's holding in The Colony, Inc., or otherwise render it inapplicable to the
See id at p. 16, Plaintiffs' MSJ, App. 537. See id at p. 15, Plaintiffs' MSJ, App. 536. 108 See The Colony, Inc., 357 U.S. at 32. 109 In two parts of the opinion, the Supreme Court recognizes the distinction between "gross receipts" and "gross income." In one part, the Supreme Court states "where a cost item is overstated, as in the case before us, gross income is affected to the same degree as when a gross-receipt item of the same amount is completely omitted from a tax return." See The Colony, Inc., 357 U.S. at 32. In another part, the Supreme Court addressed the Government's legislative history arguments and stated, "As rebutting these persuasive indications that Congress merely had in mind failures to report particular income receipts and accruals, and did not intend the five-year limitation to apply whenever gross income was understated, the Commissioner stresses the occasional use of the phrase `understates gross income' in the legislative materials." See id. at 35 (emphasis added). Thus, the Supreme Court clearly did not base its holding on any determination that "gross income" for purposes of the 6 year statute of limitations should be construed as referring to gross receipts. The Government's characterization of the holding in The Colony Inc. as "conclud[ing] that gross income must be defined as gross receipts," therefore, reflects a mischaracterization, or perhaps a misunderstanding, of the holding. See Government's Response at p. 48.
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facts of this case. Section 6501(e)(1)(A)(i) states, "in the case of a trade or business, the term `gross income' means the total of the amounts received or accrued from the sale of goods or services (if such amounts are required to be shown on the return) prior to diminution by the cost of such sales or services . . . ."110 On its face, this provision is intended to define gross income and does not reflect any change to the fundamental requirement that there be an omission of income in order for the 6-year statute of limitations to apply. The case of Schneider v.

Comm'r,111 cited in the Government's Response illustrates how this provision reconciles with the Supreme Court's holding in The Colony, Inc. In Schneider, the Commissioner alleged and the taxpayer conceded that $23,184.42 was omitted from the taxpayer's return.112 The only issue was whether the gross sales price from the sale of real estate in the amount of $18,500, which was sold at a loss, should be included in the "amount of gross income stated in the return" (i.e., the denominator of the Section 6501(e) equation) in determining if the 25% threshold was satisfied for purposes of the 6-year statute of limitations.113 If it was includable, the amount of omitted gross income would not exceed 25% of gross income reported in the taxpayer's return.114 Thus, the taxpayer argued that the gross sales proceeds of $18,500 from the sale of the property should be included in the "amount of gross income stated in the return."115

110 111

IRC § 6501(e)(1)(A)(i). 49 T.C.M (CCH) 1032, (1985). Tax Court memorandum opinions have no precendential effect. See Interworld, Ltd. v. Comm'r, 979 F.2d 868, 878 n, 9 (D.C. Cir. 1992). 112 See id at 1033. 113 See id. 114 See id, n. 3.. 115 See id. PLAINTIFFS' RESPONSE TO UNITED STATES' CROSS MOTION FOR PARTIAL SUMMARY JUDGMENT AND REPLY TO THE GOVERNMENT'S OPPOSITION TO PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT
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The Tax Court disagreed, citing to the definition of "gross income" in Section 61 of the Internal Revenue Code.116 The Court determined that, under the Section 61 definition of "gross income," neither capital losses nor gross proceeds could be included in the computation of gross income.117 The Court therefore concluded that in arriving at gross income stated in the return under Section 6501(e), the taxpayer's computation was unaffected by capital losses sustained or gross proceeds from the sale.118 Neither Section 6501(e)(1)(A)(i) nor the Tax Court's holding in Schneider are inconsistent with the Supreme Court's holding in The Colony, Inc. or its application to the facts of this case. The Colony, Inc. dealt with the question of whether there had been an omission of income (the numerator portion of the equation) whereas Schneider dealt with the question of the amount that should be included in the "gross income stated in the return" (i.e., the denominator portion of the equation). Likewise, Section 6501(e)(1)(A)(i) deals strictly with the definition of gross income, which becomes quite relevant in determining the denominator portion of the equation as in Schneider, but does not undertake to define the circumstances under which an omission of gross income will be deemed to have occurred. On this latter question, The Colony, Inc. remains the controlling authority.

See id. at 1034-35. See id .at 1034. 118 See id. In a footnote, the Court made a loose statement in dictum that, "[i]n determining whether there has been an omission of income under Section 6501(e), capital gains rather than gross proceeds are taken into account," and cited to Burbage v. Comm'r, 82 T.C. 546, 558 (1984) and Hyde v. Comm'r, 64 T.C. 300, 305 (1975). See id. at 1034, n.5. However, the cases that the Court cited to do not support that proposition. The issue in each of those cases was whether the omitted income exceeded 25%, not whether gross income was omitted. See Burbage, 82 T.C. at 558; Hyde, 64 T.C. at 305, n.6. This is essentially same issue in Scheider. The question of whether income is omitted is controlled by The Colony Inc. Notably, in a separate memorandum opinion, the Tax Court strongly suggested that the "gross receipts" approach to determining applicability of 6-year statute of limitations would apply to a capital gains transaction. See Connelly v. Comm'r, 45 T.C.M. (CCH) 49, 53, n.7 (commenting that its utilization of the "gross receipts" test on the basis of its conclusion that Petitioner's husband was engaged in a trade or business and was not simply an investor was "not intended to imply that if he had fallen into the latter category, the gross receipts test would necessarily not be applied in view of the broad sweep of section 6501(e)(1)(A) . . . .")
117

116

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The facts of this case are not like those in Schneider where gross income was admittedly omitted from a return with the only question being whether the omission exceeded 25% of gross income reported on the return. In this case, there has been no omission. Under The Colony, Inc., there can be no omission where the sale of an asset and gross receipts from that sale are included on the return. Therefore, neither Schneider nor the definition of "gross income" under either Section 61 or Section 6501(e)(1)(A)(i) have any relevance to this case. Furthermore, removing Section 6501(e)(1)(A)(i), which does not apply to the proposed adjustments in this case,119 from Section 6501 en