Free Cross Motion [Dispositive] - District Court of Federal Claims - federal

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IN THE UNITED STATES COURT OF FEDERAL CLAIMS

GRAPEVINE IMPORTS, LTD., and T-TECH, INC., as Tax Matters Partner Plaintiffs, v. UNITED STATES OF AMERICA, Defendant.

§ § § § § § § § § §

NO. 05-296T (Judge Allegra)

BRIEF SUPPORTING UNITED STATES' CROSS MOTION FOR PARTIAL SUMMARY JUDGMENT

Respectfully submitted,

GROVER HARTT, III Attorney of Record Tax Division U.S. Department of Justice 717 N. Harwood, Suite 400 Dallas, Texas 75201 (214) 880-9721 (Main) (214) 880-9741 (Fax) EILEEN J. O'CONNOR Assistant Attorney General MILDRED L. SEIDMAN Chief, Court of Fed. Claims Section CHRISTOPHER R. EGAN DAVID R. HOUSE Of Counsel November 28, 2005

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INDEX QUESTIONS PRESENTED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 STATEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 SUMMARY OF ARGUMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 ARGUMENT AND AUTHORITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 I. II. This Motion Satisfies the Applicable Standard for Summary Judgment . . . . . . . 11 The Limitations Period for Assessing the Tigues With 2000 Tax Attributable to Grapevine's 1999 Partnership Items is Open and Suspended . . . . . . . . . . . . . 11 A. Section 6501 Provides the General Limitations Period for Tax Assessments Attributable to Grapevine's Partnership Items . . . . . . . . . . 12 1. Grapevine's Construction of Section 6229 Confounds Supreme Court Precedent Controlling the Interpretation of Statutes of Limitations on the Government's Ability to Collect Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 The Plain Language of Section 6229 Establishes a Minimum Period Within Which the General Section 6501 Period Shall Not Expire . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Public Policy and Legislative History Support the Conclusion that Section 6229 Does Not Establish an Exclusive and Independent Limitations Period . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Grapevine Cites Irrelevant Dicta to Support its Flawed Interpretation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 The Court Does Not Have to Ignore the Plain Language of Subsection 6229(a) to Logically Apply Section 6229's Other Subsections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

2.

3.

4.

5.

B.

The Section 6501 Limitations Period for Assessing the Tigues with 2000 Tax Attributable to Grapevine's 1999 Partnership Items Has Not Expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 1. The IRS Initiated a 1999 Partnership Audit as a Prerequisite to Determining the Tigues' 2000 Individual Tax Assessment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

i

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2.

Section 6501's 3-Year Limitation Period for Assessment of the Tigues' 2000 Tax is Open and Suspended . . . . . . . . . . . . 32

C.

The IRS May Calculate Closed-Year Items to Determine Open-Year Assessments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 1. Section 6501's Plain Language Limits Tax Assessments, Not Tax Calculations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Public Policy Favors the Government's Ability to Calculate Prior-Year Partnership Items to Determine Current Year Assessments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Nothing in Section 6501 Prevents Courts From Adjudicating Prior-Year Matters Necessary to Establish a Claim's Validity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

2.

3.

III.

The Limitations Period for Assessing the Tigues with 1999 Tax Attributable to Grapevine's 1999 Partnership Items is Open and Suspended . . . . . . . . . . . . . 43 A. The Tigues Omitted Substantial Gross Income From Their 1999 Tax Return . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 1. The Tigues' Gross Income Includes Gain From Sale, Not Proceeds From Sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 Colony v. Commissioner's Gross Receipts Test Does Not Apply to the Tigues' Non-Business Income . . . . . . . . . . . . . . . . 46

2.

B.

The Tigues Did Not Adequately Disclose Their Omitted Income . . . . . 49

CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

CITATIONS Cases: AD Global Fund, LLC v. United States, 67 Fed. Cl. 657 (2005) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9, 13-16, 19-20, 22, 30, 33 American Net & Twine Co. v. Worthington, 141 U.S. 468 (1891) . . . . . . . . . . . . . . . . . 14 Andantech, L.L.C. v. Commissioner, 331 F.3d 972 (D.C. Cir. 2003) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9, 12-13, 19-21, 32, 34 Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (1986) . . . . . . . . . . . . . . . . . . . . . . . . . . 11 ii

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Bachner v. Comm'r, 81 F.3d 1274 (3d Cir. 1996) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Badaracco v. Commissioner, 464 U.S. 386 (1984) . . . . . . . . . . . . . . . . . . . . 13, 15-16, 41 Barenholtz v. United States, 784 F2d 375 (Fed. Cir. 1986) . . . . . . . . . . . . . . . . . . . . 36-38 Bay Way Holdings v. Commissioner, No. 5534-05 (Tax Ct. Filed Mar. 22, 2005) . . . . . 19 Blum v. Stevenson, 465 U.S. 886 (1984) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Bowers v. New York & Albany Lighterage Co., 273 U.S. 346 (1927) . . . . . . . . . . . . . . . 14 Bufferd v. Commissioner, 506 U.S. 523 (1993) . . . . . . . . . . . . . . . . . . . . . . . . . . 15, 32, 41 CC & F Western Operations L.P. v. Comm'r, 273 F.3d 402 (1st Cir. 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28, 44, 48-50 Callaway v. Comm'r, 231 F.3d 106 (2d Cir. 2000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Calumet Industries, Inc. v. Commissioner, 95 T.C. 257 (1990) . . . . . . . . . . . . . . . . . . . 37 Celotex Corporation v. Catrett, 477 U.S. 317 (1986) . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Colony, Inc. v. Commissioner, 357 U.S. 28 (1958) . . . . . . . . . . . . . . . . . . . . 14-15, 46-48 Colony v. Commissioner, 26 T.C. 30 (1965) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 E.I. du Pont de Nemours & Co. v. Davis, 264 U.S. 456 (1924) . . . . . . . . . . . . . 13-15, 41 Eidman v. Martinez, 184 U.S. 578 (1902) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14-15 Estate of Flandreau v. Comm'r, 994 F.2d 91 (2d Cir. 1993) . . . . . . . . . . . . . . . . . . . . . . 17 Estate of Fry v. Commissioner, 88 T.C. 1020 (1987) . . . . . . . . . . . . . . . . . . . . . . . . 50-51 Estate of Quick v. Commissioner, 110 T.C. 172 (1998) . . . . . . . . . . . . . . . . . . . . . . . . . 27 Falconwood Corp. v. United States, 422 Fed. Cl. 1339 (Fed. Cir. 2005) . . . . . . . . . . . 14 Foutz v. United States, 72 F.3d 802 (10th Cir. 1995) . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 G-I Holdings, Inc., In re, No. Civ.02-CV-3082 (WGB), 2003 WL 22273256, 92 A.F.T.R.2d 2003-6070 (D. N.J. Aug. 8, 2003) . . . . . . . . . . . . . . . . . . . . . . . . 19 Green v. Commissioner, 963 F.2d 783 (5th Cir. 1992) . . . . . . . . . . . . . . . . . . . . 17, 26, 40 Harris v. Commissioner, 99 T.C. 121 (1992), affd. 16 F.3d 75 (5th Cir. 1994) . . . . . . . 27 Hull v. United States, 146 F.3d 235 (4th Cir. 1998) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 J&J Fernandez Ventures, L.P. v. United States, No. 05-296T (Fed. Cl. filed Jan. 7, 2005) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Kaltreider Construction, Inc. v. United States, 303 F.2d 366 (3rd Cir. 1962) . . . . . . . . . 6 Kelley v. Price-Macemon, Inc., 992 F.2d 1408 (5th Cir. 1993), cert. denied, 510 U.S. 1043 (1994) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Kligfeld Holdings v. Commissioner, No. TL 21330-04 (Tax Ct. filed Nov. 8, 2004) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Lone Manor Farms v. Commissioner, 61 T.C. 436 (1974) . . . . . . . . . . . . . . . . . . . . . . . 37 Madison Recycling Assocs. v. Comm'r, 295 F.3d 280 (2d Cir. 2002) . . . . . . . . . . . . . . . 28 Magee v. United States, 68 Ct. Cl. 771 (1930) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Maxwell v. Commissioner, 87 T.C. 783 (1986) . . . . . . . . . . . . . . . . . . . . 12, 27, 31, 34-35 Mennuto v. Commissioner, 56 T.C. 910 (1971) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Monahan v. Comm'r, 321 F.3d 1063 (11th Cir. 2003) . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Monetary II L.P. v. Comm'r, 47 F.3d 342 (9th Cir. 1995) . . . . . . . . . . . . . . . . . . . . . . . . 28 Mullikin v. United States, 952 F.2d 920 (6th Cir. 1991), cert. denied, 506 U.S. 827 (1992) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 O'Gilvie v. United States, 519 U.S. 79 (1996) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Pacific Transport Co. v. Commissioner, 483 F.2d 209 (9th Cir. 1973) . . . . . . . . . . . . . 37 iii

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Phinney v. Chambers, 392 F.2d 680 (5th Cir. 1968) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 Phoenix Coal Co. v. Commissioner, 231 F.2d 420 (2d Cir. 1956) . . . . . . . . . . . . . . 36-37 Phoenix Electronics, Inc. v. United States, 164 F. Supp. 614 (D. Mass. 1958) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36, 39-40 Quick's Trust v. Commissioner, 54 T.C. 1336 (1970) . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Rhone-Poulenc Surfactants & Specialties, L.P. v. Commissioner, 114 T.C. 533 (2000) . . . . . . . . . . . . . . . . . . . . 9, 12-13, 16, 18-21, 24, 27, 29-31, 33-35, 49 Seatrain Shipbuilding Corp. v. Shell Oil Co., 444 U.S. 572 (1980) . . . . . . . . . . . . . . . . 26 Schneider v. Commissioner, 1985 Tax Ct. Memo LEXIS 488, at *9-11 . . . . . . . . . . 44-46 Skidmore, Owings & Merrill v. Canada Life Assurance Co., 907 F.2d 1026 (10th Cir. 1990) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Slovacek v. United States, 36 Fed. Cl. 250 (1996) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Smith v. Comm'r, 925 F.2d 250 (8th Cir. 1991) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Springfield Street Ry. Co. v. United States, 160 Ct. Cl. 111 (Ct. Cl. 1963) . . . . . . . 42-43 State Farming Co. v. Commissioner, 40 T.C. 774 (1963) . . . . . . . . . . . . . . . . . . . . . . . . 37 United Dominion Industries, Inc. v. U.S., 522 U.S. 822 (2001) . . . . . . . . . . . . . . . . . . . 13 United States v. Commonwealth Energy System, 235 F.3d 11 (1st Cir. 2000) . . . . . . . . 17 United States v. Greene-Thapedi, 398 F.3d 635 (7th Cir. 2005) . . . . . . . . . . . . . . . . . . . 17 United States v. Jenkens & Gilchrist, P.C., No. 03 C 5693, 2004 WL 1245802 (N.D. Ill. May 14, 2004) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6, 33 Washington v. Allstate Insurance Co., 901 F.2d 1281 (5th Cir. 1990) . . . . . . . . . . . . . . 11 West, In re, 5 F.3d 423 (9th Cir. 1994) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 White v. Aronson, 302 U.S. 16 (1937) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 White v. United States, 305 U.S. 218 (1938) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Wiener v. United States, 389 F.3d 152 (5th Cir. 2004) . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Statutes: 26 U.S.C.: § 61 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44, 48 § 61(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 § 722 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 § 733(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 § 752(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 § 752(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 § 6111 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40, 51 § 6214 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 § 6221 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11-12, 31, 34 § 6225 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31, 34 § 6225(a)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 § 6225(a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 § 6226(d)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12, 24, 32 § 6229 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 12, 17-28, 30, 34 iv

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§ 6229(a) . . . . . . . . . . . . . . . . . . . . . . . . 9, 12-15, 17-18, 22-25, 27-31, 33-34, 53 § 6229(b)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 § 6229(b)(1)(B) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 § 6229(b)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28-29 § 6229(c)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 § 6229(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20, 33-35 § 6229(e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 § 6229(f) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 § 6229(f)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22-23 § 6229(f)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 § 6229(h) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 § 6501 . . . . . . . . . . . . . . . . . . . 1-2, 12, 17-23, 25-27, 29-34, 36, 38, 43, 45, 47-50 § 6501(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2, 12, 17-18, 23, 27, 30-32, 36, 38 § 6501(c)(7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 § 6501(e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10, 20, 43-47, 49-51 § 6501(e)(1)(A)(i) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44, 47-48 § 6501(e)(1)(A)(ii) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48-49 § 6501(n)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 § 6501(o) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 § 6503 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 § 6503(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 § 6707A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40, 51 § 7609(e)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 26 U.S.C. (1939 Code): § 22 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 § 22(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 § 272 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 § 275 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46-47 § 275(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46-47 Miscellaneous: ARTHUR B. WILLIS ET AL., PARTNERSHIP TAXATION par. 1.04 (Current Through 2005, Supp. 1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Fed. R. Civ. P. 56(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 H.R. Rep. 102-63, Title IV, Subtitle C, Part II(3b), reprinted in 1992 WL 206185, at *142 (June 30, 1992) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 H.R. Rep. 102-63, Title IV, Subtitle C, Part II(5), reprinted in 1992 WL 206185, at *145 (June 30, 1992) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 IRS Chief Counsel Notice 2003-020, IRS CCN CC-2003-020, available at 2003 WL 24016805 (June 25, 2003) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 IRS Notice 2000-44, 2000-36 I.R.B. 255, 2000 WL 1138430 . . . . . . . . . . . . . . 39-40, 51 v

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Merten's Law of Federal Income Taxation, Vol. 1, § 3:09 (2005 ed.) . . . . . . . . . . . . . . 13 Senate Finance Committee's Technical Explanation of Finance Comm. Amend. to H.R. 11, Title IV, Subtitle C, Part B, 3(b), printed in 138 Cong. Rec. S11246, at *S11288 (July 29, 1992) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Senate Finance Committee's Technical Explanation of Finance Comm. Amend. to H.R. 11, printed in 138 Cong. Rec. S11246, Title IV, Subtitle C, Part B, 5, at *S11288 (July 29, 1992) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Treas. Reg. § 1.61-6(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 § 301.6111-1T . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40, 51

vi

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

NO. 05-296T (Judge Allegra)

BRIEF SUPPORTING UNITED STATES' CROSS MOTION FOR PARTIAL SUMMARY JUDGMENT The United States asks the court for a partial summary judgment determining that the adjustments listed in the IRS's 1999 Notice of Final Partnership Administrative Adjustment ("FPAA") are not barred by 26 U.S.C. § 6229 or § 6501. Plaintiff Grapevine Imports asserts that the "shall not expire" language in 26 U.S.C. § 6229 establishes an exclusive and independent period within which the IRS shall assess all tax attributable to partnership items, but every court that has directly addressed this question has held that section 6229 establishes only a minimum period within which the section 6501 general assessment period shall not expire. Grapevine also asserts that its 1999 partnership items are forever fixed because the IRS did not issue an FPAA within three years after Grapevine filed its partnership return,1 but courts have consistently held that the IRS may calculate closed-year items to determine open-year assessments. It was for that purpose that the 1999 FPAA was issued to Grapevine.

1

Complaint, par. 81-88.

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QUESTIONS PRESENTED 1. Has the limitations period for assessing the Tigues with 2000 tax attributable to Grapevine's 1999 partnership items expired? a. Does the "shall not expire" language in 26 U.S.C. § 6229(a) establish a minimum period within which the general assessment period in 26 U.S.C. § 6501(a) shall not expire or an exclusive and independent period within which the IRS shall assess all tax attributable to partnership items? b. Did section 6501's three-year limitations period for assessing 2000 tax against Joseph and Virginia Tigue expire before the IRS issued Grapevine a 1999 FPAA? Did the FPAA suspend the 2000 limitations period? c. Does section 6501's assessment limitation preclude the IRS from calculating Grapevine's 1999 partnership items to determine Joseph and Virginia Tigue's 2000 tax assessment? 2. Has the limitations period for assessing the Tigues with 1999 tax attributable to Grapevine's 1999 partnership items expired? a. Does section 6501's six-year limitations period for substantial omissions of income apply to the Tigues' 1999 tax year? b. Are the Tigues exempted from the six-year period because they otherwise adequately disclosed their omitted income?

Brief Supporting U.S. Cross M.S.J. Page 2 of 54

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STATEMENT Joseph and Virginia Tigue formed Grapevine Imports, Ltd. in March of 1996.2 Grapevine's general and tax matters partner was T-Tech, Inc., and its limited partners were Joseph J. Tigue and Virginia B. Tigue. T-Tech held a 1% interest, Joseph held 49.5% interest, and Virginia held a 49.5% interest.3 In 1999, Joseph and Virginia Tigue decided to sell their Grapevine partnership interests. In an apparent attempt to lower the tax they would have to recognize from that sale, they executed a series of transactions that the IRS refers to as a Son of BOSS tax shelter transaction.4 They first caused their wholly-owned Limited Liability Companies, JJT (Joseph J. Tigue) Meandering Investments and VBT (Virginia B. Tigue) Meandering Investments, to open a short sale on December 9, 1999, by borrowing treasury securities worth $9,978,119 and selling those securities for $9,978,119 in cash.5 One day later, on December 10th, the Tigues caused JJT and VBT to contribute the sale proceeds and short-sale obligation (i.e., the obligation to return the borrowed treasury securities to the short-sale lender) to Grapevine in return for a combined 99% LP interest in Grapevine.6 Grapevine then, on the same day, immediately satisfied the short-sale obligation by purchasing treasury notes for $10,000,003 and repaying those notes to the shortsale lender.7 These short-sale transactions lasted approximately twenty-four hours and netted the

Prop. Finding 1 citing Comp., par. 22 Grapevine was originally named "Westway Grapevine Imports, Ltd.", but its name was changed in October of 1997 to Grapevine Imports, Ltd. Id.
3 4

2

Prop. Finding 1 citing Grapevine 1999 Form 1065, attached as Gov. Ex. 5.

Prop. Finding 2 citing IRS Chief Counsel Notice 2003-020, IRS CCN CC-2003-020, available at 2003 WL 24016805 (June 25, 2003), for a general description of Son of BOSS tax shelters.
5 6 7

Prop. Finding 2(a) citing Comp., par. 24-25. Prop. Finding 2(b) citing Comp., par. 27-28. Prop. Finding 2(c) citing Comp., par 29-30. Brief Supporting U.S. Cross M.S.J. Page 3 of 54

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Tigues a $21,884 loss.8 The merits of this case9 involve how the Tigues, through their various entities, treated the contribution to Grapevine of the sale proceeds and obligation to close the short sale. The Tigues assert that the obligation to close the short sale was not a liability, but the United States asserts that it was. When a partner contributes an asset and a liability to a partnership, the partner's basis in the partnership is usually increased by the partner's carryover basis in the asset,10 decreased by the liability assumption,11 and increased by the partner's share of the liability assumed.12 When the partnership later satisfies the liability, the partner's basis is decreased by the partner's share of the liability.13 Thus, if the obligation to close the short sale was a liability, the basis adjustments from the proceeds and obligation contribution would have mostly offset each other. But if the obligation to close the short sale was not a liability, the proceeds contribution would have greatly increased JJT and VBT's basis in the partnership, and the obligation to close the short sale would not have offset it. The following chart demonstrates the results of these two positions. Grapevine asserts that the short-sale contributions increased JJT & VBT's combined basis in Grapevine by $9,978,119, but the IRS asserts that the short-sale contributions decreased JJT & VBT's basis by $21,884:14

8 9

Prop. Finding 2(d) citing $10,000,003 less $9,978,119 = $21,884.

Although the merits of this case are not the subject of this motion, a brief description of the transactions at issue in this case may be helpful. 26 U.S.C. § 722 (partner's basis in partnership equals value of contributed proceeds plus partner's adjusted basis in contributed property). 26 U.S.C. §§ 752(b) (partnership's assumption of partner's debt treated like money distribution), 733(1) (money distribution decreases partner's basis in partnership).
12 13 14 11 10

26 U.S.C. § 752(a). 26 U.S.C. § 752(b). For simplicity, it is assumed that JJT & VBT's share of the partnership close obligation would be 100%. Brief Supporting U.S. Cross M.S.J. Page 4 of 54

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Basis of JJT & VBT's Interest in Grapevine Imports
Comparison of Short-Sale Obligation Treatments Obligation as Liability $9,978,119.00 ($10,000,003) $10,000,003 ($10,000,003) (21,884.00) Obligation as Non-Liability $9,978,119.00 9,978,119.00

Transaction Contribution of Sales Proceeds Partnership's Assumption of Short-Sale Obligation Partners' Share of Assumed Short-Sale Obligation Partnership's Close of Short Sale Total Basis

About two weeks after the short-sale transactions, on December 31, 1999, the Tigues caused JJT and VBT to sell their Grapevine partnership interests to an unrelated third party for $10,916,240.15 The IRS asserts that JJT and VBT should have recognized a $9,954,926 gain from this sale,16 but instead, they claimed a $45,077 loss.17 As the above chart shows, the Tigues asserted that the loss was justified because the contribution of the short-sale proceeds increased the basis of JJT and VBT's Grapevine partnership interests by $9,978,119. The Tigues combined this basis increase with the treasury short-sale loss and other adjustments to give JJT and VBT a total basis in their Grapevine partnership interests equal to $10,961,317.18 JJT and VBT then subtracted this $10,961,317 basis from the $10,916,240 of proceeds and recognized a $45,077 loss.19 The $45,077 loss flowed through to the Tigues' 1999 individual return, which
15 16

Prop. Finding 3 citing Comp., par. 31-32.

10,000,003 basis adjustment proposed by the IRS minus the $45,077 loss recognized by the Tigues equals $9,954,926. See Prop. Finding 10 citing Grapevine Notice of Final Partnership Administrative Adjustment, attached to Complaint (adjusting outside partnership basis by $10,000,003; Prop. Finding 3 citing Tigue 1999 Form 1040, attached as GOV. EX. 1 (showing $45,077 loss from sale of Grapevine partnership interest). Prop. Finding 3 citing Tigue 1999 Form 1040, attached as GOV. EX. 1. Joseph and Virginia Tigue treated JJT and VBT as flow through entities.
18 19 17

Id. Id. Brief Supporting U.S. Cross M.S.J. Page 5 of 54

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the Tigues filed on April 15, 2000.20 The Tigues combined this loss with other unrelated losses to create a total 1999 individual tax loss of $973,087.21 The Tigues carried their 1999 loss forward to 2000 along with a $1,127,481 net operating loss carried forward from 1998.22 During 2000, the Tigues accrued $730,161 of individual taxable income.23 The Tigues reduced this 2000 taxable income to zero, however, by using the 1998 loss carryforward.24 The Tigues filed their original 2000 individual tax return on August 17, 2001.25 On June 19, 2003, less than two years after the Tigues filed their 2000 return, the IRS issued a John Doe summons to the Tigues' tax consultants, Jenkens & Gilchrist.26 This summons requested information regarding Jenkens's Son of BOSS clients.27 The Department of Justice subsequently initiated a summons enforcement action in the Northern District of Illinois because Jenkens initially resisted this summons.28 On May 14, 2004, a court in the Northern District of Illinois ordered Jenkens to honor the summons by May 17, 2004.29 Jenkens did so by

20 21 22 23

Prop. Finding 4 citing Tigue 1999 Form 1040, attached as GOV. EX. 1; Prop. Finding 5 citing ¶ 84. Id. Prop. Finding 8 citing Tigue 2000 Amended Form 1040, attached as GOV. EX. 2.

Prop. Finding 9 citing Tigue 2000 Amended Form 1040, attached as GOV. EX. 2. Total line 22 income before NOL carryover equals 110,858 + 115,553 + 199,971 - 3000 + 296,979 + 395 + 8,405 + 1,000. Id. at pg. 1 and stmt. 1.
24 25

Id.

Prop. Finding 7 citing Comp., par. 86. The Tigues also filed an amended Form 1040 on October 18, 2003, but the amended return does not extend the assessment limitations period for 2000 assessment at issue in this case. See, e.g., Kaltreider Construction, Inc. v. United States, 303 F.2d 366, 368 (3rd Cir. 1962).
26 27 28

Prop. Finding 11 citing Johnson Declaration with attached Summons, attached as GOV. EX. 3. Id.

Prop. Finding 12 citing United States v. Jenkens & Gilchrist, P.C., No. 03 C 5693, 2004 WL 1245802 (N.D. Ill. May 14, 2004.
29

Id. Brief Supporting U.S. Cross M.S.J. Page 6 of 54

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providing the United States with two groups of documents related to Grapevine Imports' short sale transactions.30 About seven months after that, when it had finished sifting through the relationship between Grapevine Imports, Ltd., T-Tech, Inc., JJT Meandering Investments, L.L.C., VBT Meandering Investments, L.L.C., Joseph Tigue, and Virginia Tigue, the IRS issued a Notice of Final Partnership Administrative Adjustment to Grapevine Imports' tax matters partner, T-Tech, Inc., on December 17, 2004.31

SUMMARY OF ARGUMENT 1. Grapevine's attempts to avoid confronting the issues raised by its participation in the Son of BOSS tax shelter by means of its statute of limitations defense should be rejected. None of the limited set of facts necessary to decide whether this case should proceed to trial are in dispute. Summary judgment on this issue is, therefore, appropriate. Summary judgment is appropriate at this juncture in order to remove an issue with the potential to render meaningless the time and expense required to develop this case for trial. As we demonstrate in this brief, the limitations defense is without merit, but it would be irresponsible to proceed with this issue unresolved. 2. Because the section 6501 three-year statute of limitations for the IRS to assess taxes against the Tigues for their 2000 tax year was open, the FPAA the IRS issued to Grapevine's partners for its 1999 partnership year was not barred by limitations. The Service's examination

Id. citing Indices of Tigue Documents Produced by Jenkens & Gilchrist to the United States, attached as GOV. EX. 4. See also, Jenkens Opinion Letters issued to Joseph and Virginia Tigue, attached as GOV. EX. 6; Complaint, par. 42. In fact, Jenkens produced these kinds of documents for over a thousand taxpayers. Prop. Finding 13 citing Grapevine Notice of Final Partnership Administrative Adjustment, attached to Complaint. Brief Supporting U.S. Cross M.S.J. Page 7 of 54
31

30

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of the Tigues' 2000 year revealed that they had used a net operating loss ("NOL") from their 1998 year as a deduction to reduce and eliminate their taxable income in 2000. Under the rules governing NOL carry-forwards, the 1998 NOL should have been applied first as a deduction against any income the Tigues had in their 1999 year. The Tigues, however, reported no income in 1999, in spite of the sale of their highly appreciated interests in the Grapevine partnership, because they and Grapevine participated in a Son of BOSS tax shelter transaction that purported to eliminate the income they would have otherwise had to report. As we shall establish at the trial on the merits of this case, the Son of BOSS transaction had no validity, and the Tigues should have reported a substantial amount of taxable income in 1999. Some, but not all, of the tax liability owed on that income would have been reduced by the proper application of the 1998 NOL deduction. Consequently, the 1998 NOL deduction would have been completely absorbed, or eliminated, in 1999. When the 1998 NOL deduction is removed from the Tigues' 2000 tax return, a significant tax liability is due for that year. Under applicable law, the Service must first issue an FPAA to Grapevine's partners adjusting the "partnership item" that lies at the heart of this case before it may proceed to assert a tax liability against the individual partners. It did so on December 17, 2004. On that date, the three-year statute applicable to the Tigues' 2000 tax year was open. The Tigues had filed their Form 1040 Individual Income Tax Return for 2000 on August 17, 2001. The three-year period, however, had not run because the resistance of the law firm of Jenkens & Gilchrist to complying with the John Doe summons issued to it had tolled the Tigues' statute of limitations from December 19, 2003 until May 17, 2004, a period of 150 days. That period of time extended the three-year period for the Tigues' 2000 year to January 14, 2005. The FPAA
Brief Supporting U.S. Cross M.S.J. Page 8 of 54

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issued on December 17, 2004 was not barred by limitations. 3. The Tax Equity and Fiscal Responsibility Act of 1982 ("TEFRA") added a regime of partnership audit procedures to the Internal Revenue Code. Among them is section 6229(a) which provides a minimum period of three years after a partnership return is filed for the Service to assess taxes attributable to a partnership item. Section 6229(a), however, does not impose a maximum period of limitations on the assessment of taxes against partners. Indeed, partnerships do not pay taxes on income resulting from their operations. The tax consequences of transactions conducted by partnerships like Grapevine "flow through" to their partners like the Tigues. Limitations on the assessment of partners are, of course, governed by section 6501. In a fully reviewed decision, the Tax Court held that when the statute of limitations on the assessment of a partner was open, an FPAA issued to a partnership as the first step in establishing the liability to be asserted against that partner was timely.32 Several years later, the Tax Court adhered to this decision in another case and was affirmed by the D.C. Circuit.33 Now, a judge on this court has reached the same conclusion.34 These decisions are sound, and they are fully consistent with the substantial body of law permitting the Service to challenge the validity of an item in a closed tax year in order to propose a liability in an open tax year. Because the language of these two statutes is plain, this Court need look no further than them and the cases that have considered their interrelationship. To the extent that the Court cares to review legislative history, it is consistent with the decisions reached by the courts.

32 33 34

Rhone-Poulenc Surfactants and Specialties, L.P. v. Commissioner, 114 T.C. 533 (2000). Andantech, L.L.C. v. Commissioner, 331 F.3d 972 (D.C. Cir. 2003) . AD Global Fund, LLC v. United States, 67 Fed. Cl. 657 (2005). Brief Supporting U.S. Cross M.S.J. Page 9 of 54

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4. The Tigues 1999 tax year is also open by virtue of the six-year period for assessing tax liabilities when taxpayers make substantial omissions from the gross income they report on the returns they file with the IRS.35 Application of the six-year statute to the Tigues' is simple and direct. In 1999, they reported a loss of $973,087 to the IRS. Contrary to what they stated on their return, the Tigues actually had a net gain of $9,954,926 on the sale of their Grapevine partnership interests. Both the Tigues and the Grapevine partnership they owned and controlled failed to disclose on the returns they filed with the IRS the essential details of the Son of BOSS tax shelter. They failed to disclose that the Tigues as partners had opened the short sale transaction and instead made it appear that their Grapevine partnership had done so. They also failed to reveal that in addition to the proceeds of that short sale which the Tigues as partners contributed to Grapevine, the Tigues also contributed the obligation to close the sale to Grapevine, which essentially wiped out any increase in basis they might have had in their partnership. Instead, what the Tigues and Grapevine reported to the IRS was a relatively innocuous short sale by Grapevine resulting in a nominal loss of $21,884. This deception effectively concealed the true nature of the Son of BOSS tax shelter they relied upon to escape taxation on their substantial gain from the sale of their interests in Grapevine.

35

26 U.S.C. § 6501(e). Brief Supporting U.S. Cross M.S.J. Page 10 of 54

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ARGUMENT AND AUTHORITIES I. THIS MOTION SATISFIES THE APPLICABLE STANDARD FOR SUMMARY JUDGMENT The United States submits that there is no genuine issue of material fact and that it is entitled to judgment as a matter of law.36 A genuine issue of material fact exists only where there is sufficient evidence favoring the nonmoving party for the trier of fact to find for that party.37 The mere existence of some factual dispute will not defeat summary judgment; only

disputes over facts that might affect the outcome of the case will bar summary judgment.38 None of the relevant facts necessary to decide whether this case should proceed to trial are in dispute. In fact, most of the relevant facts come directly from Grapevine's complaint. The other facts come from tax returns filed by Grapevine and its partners, summons materials created and produced by Grapevine's tax advisor, and the District Court's orders in United States v. Jenkens & Gilchrist, P.C., No. 03 C 5693, 2004 WL 1245802 (N.D. Ill. May 14, 2004).

II.

THE LIMITATIONS PERIOD FOR ASSESSING THE TIGUES WITH 2000 TAX ATTRIBUTABLE TO GRAPEVINE'S 1999 PARTNERSHIP ITEMS IS OPEN AND SUSPENDED The IRS intends to assess the Tigues with 2000 tax attributable to adjustments of

Grapevine's 1999 partnership items. The IRS issued a 1999 FPAA as a prerequisite to this 2000 assessment because 26 U.S.C. § 6221 requires the IRS to determine partnership adjustments as

Fed. R. Civ. P. 56(c), Celotex Corporation v. Catrett, 477 U.S. 317 (1986); Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (1986); Washington v. Allstate Insurance Co., 901 F.2d 1281, 1286 (5th Cir. 1990).
37 38

36

Kelley v. Price-Macemon, Inc., 992 F.2d 1408, 1413 (5th Cir. 1993), cert. denied, 510 U.S. 1043 (1994).

Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-8 (1986); Skidmore, Owings & Merrill v. Canada Life Assurance Co., 907 F.2d 1026, 1027 (10th Cir. 1990). Brief Supporting U.S. Cross M.S.J. Page 11 of 54

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part of an entity-level partnership proceeding.39 Section 6226(d)(1) allows individual partners to challenge this proceeding by asserting that the limitations period "with respect to such person" for assessing tax attributable to partnership items has expired,40 but the following parts explain that the Tigues' 2000 assessment limitation period is open and suspended.

A.

Section 6501 Provides the General Limitations Period for Tax Assessments Attributable to Grapevine's Partnership Items Section 6501 of the Internal Revenue Code provides the general limitations period for the

assessment of "any tax imposed by [Title 26]."41 Grapevine asserts that section 6229(a) somehow excepts this general limitations period, but section 6229(a) contains no exception language. Instead, the plain language of section 6229(a) provides safe harbor period within which the general section 6501 period shall not expire.

1.

Grapevine's Construction of Section 6229 Confounds Supreme Court Precedent Controlling the Interpretation of Statutes of Limitations on the Government's Ability to Collect Taxes

Grapevine commits the first 13 pages of its Argument and Authorities to an extended exegesis of "decades of Supreme Court precedent"42 and concludes that its "natural reading" of section 6229(a) can escape the "slavish adherence"43 to the commonly understood rule that statutes of limitation on the Government's ability to collect taxes are to be strictly construed in

26U.S.C. § 6221; Maxwell v. Commissioner, 87 T.C. 783 (1986); Rhone-Poulenc Surfactants & Specialties, L.P. v. Commissioner, 114 T.C. 533, 552 (2000).
40 41

39

26 U.S.C. § 6226(d)(1).

26 U.S.C. § 6501(a). See also Andantech, L.L.C. v. Commissioner, 331 F.3d 972, 976-977 (D.C. Cir. 2003) (" The plain language of § 6501 compels its application to all assessments.")
42 43

Grapevine MSJ Brief, at 11. Id. at 24. Brief Supporting U.S. Cross M.S.J. Page 12 of 54

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its favor, i.e., against limitation. Two of the three decisions that are directly adverse to the interpretation of section 6229(a) Grapevine urges upon this Court refer to the frequently cited Supreme Court opinion in Badaracco v. Commissioner.44 In that case, the Court expressly applied the general rule of E.I. du Pont de Nemours & Co. v. Davis45 that statutes of limitation are strictly construed in favor of the Government to the particular situation of tax cases. A more accurate characterization of the courts' subsequent adherence to this rule in tax cases would be uniform and consistent rather than "slavish." Grapevine's attempt to emancipate itself from this rule is unavailing and unnecessary. Here, we shall explain why it is unavailing; later, we shall explain that it is unnecessary because the Court need not resort to this rule to decide the limitations issue in favor of the Government. Much of Grapevine's confusion is attributable to its failure to distinguish adequately between the types of tax statutes courts are asked to interpret. It is true a body of case law holds that statutes imposing a tax on a party or an item receive an interpretation in favor of the taxpayer if an ambiguity is encountered.46 Most of the cases cited by Grapevine fall into this category. However, it is equally elementary that statutes concerning deductions, exemptions, and exclusions from gross income are construed against the taxpayer.47 The issue before this

464 U.S. 386 (1984). The two cases are Rhone-Poulenc Surfactants, supra, at p. 540 and AD Global, supra, at p. 693. The third of the relevant opinions, Andantech, supra, endorses Rhone-Poulenc Surfactants but does not repeat its analysis.
45 46

44

264 U.S. 456, 462 (1924).

As explained by AD Global, the opinions on this point are not uniform. See 67 Fed. Cl. at 691-694, discussing, inter alia, White v. United States, 305 U.S. 218 (1938)(affirming a decision by the Court of Claims). See e.g.. Merten's Law of Federal Income Taxation, Vol. 1, § 3:09 (2005 ed.) and the many cases there cited. This distinction between the type of tax statute being interpreted and the appropriate party against whom it will be construed was noted by Justice Stevens in his dissent in United Dominion Industries, Inc. v. U.S., 522 U.S. 822, 839 n. 1 (2001). Brief Supporting U.S. Cross M.S.J. Page 13 of 54
47

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Court, of course, does not involve whether a tariff should be imposed on gilling twine48, whether the estate of a deceased subject of the King of Spain who never resided in the United States is susceptible to an inheritance tax49, or whether a jigsaw puzzle is subject to an excise tax imposed on "games."50 What it does involve is whether the Government's assertion of a tax liability against individuals who participated in a tax shelter via a TEFRA partnership is barred by limitations. This is a different kind of tax case, and it is subject to a different rule of construction. Grapevine's search for a theory ultimately takes it back to a case decided during the administration of President Benjamin Harrison, the disposition of which depended "upon a construction of the tariff act of March 3, 1883."51 The "decades of Supreme Court precedent" Grapevine believes support its construction of Section 6229(a) come to an end approximately half a century ago with Colony, Inc. v. Commissioner.52 Unlike most of the cases cited by Grapevine,53 both Colony and the 1927 opinion in Bowers v. New York & Albany Lighterage Co.,54 do relate to limitations issues. Neither provide support for Grapevine's view of section 6229(a). In Bowers, the Court cited the general rule of du Pont v. Davis to construe statutes of limitations in favor of the

48 49 50 51 52 53

American Net & Twine Co. v. Worthington, 141 U.S. 468 (1891)(Footnote 46 of Grapevine's Brief). Eidman v. Martinez, 184 U.S. 578 (1902)(Footnote 51 of Grapevine's Brief). White v. Aronson, 302 U.S. 16 (1937)(Footnote 44 of Grapevine's Brief). American Net & Twine, supra, at p.471. 357 U.S. 28 (1958).

Grapevine cites one case in this section of its brief that is not a Supreme Court decision. Like most of its Supreme Court cases, however, The Falconwood Corp. v. United States, 422 Fed. Cl. 1339 (Fed. Cir. 2005), does not involve a statute of limitations. See AD Global, supra, 67 Fed. Cl. 692 and 694, note 46.
54

273 U.S. 346 (1927). Brief Supporting U.S. Cross M.S.J. Page 14 of 54

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Government and Eidman's instruction to interpret tax laws in favor of taxpayers.55 Although the Court had been asked to rule that "distraint" was not included within a "proceeding" barred by the applicable period of limitations by construing the statute in favor of the Government, the Court held that it was "clear" that distraint was included within proceeding. Just as clearly, the Court did not rely upon either the rules of du Pont v. Davis or Eidman to reach its decision. In Colony, the Court did not mention, much less discuss, any precepts for construing tax statutes generally or statutes of limitations ­ in spite of its comment that "it cannot be said that the language [of the statute] is unambiguous."56 In AD Global, the most recent of the three cases that have unanimously rejected Grapevine's view of section 6229(a), the court determined that the statute was ambiguous and adhered to the rule that statutes of limitations will be construed to permit the Government to pursue tax collection.57 Although we respectfully submit it is clear that the issuance of the FPAA to Grapevine is timely, it is also clear that the AD Global court applied the correct rule governing the resolution of ambiguities in limitations upon tax collection. That rule, the rule of du Pont v. Davis, was applied by the Supreme Court in Badaracco v. Commissioner, supra, a tax case involving a limitations issue. Moreover, the Court has adhered to Badaracco in at least two subsequent tax cases. In Bufferd v. Commissioner, the Court confronted an issue somewhat similar to the one in this case and held that the Service could assert a deficiency against an individual whose tax year was open even though the deficiency was based upon an incorrect tax treatment by a "pass-through entity"

55 56 57

273 U.S. at 350. 357 U.S. at 33. 67 Fed. Cl. at 694. Brief Supporting U.S. Cross M.S.J. Page 15 of 54

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(an S corporation) whose year was closed.58 Although the Court did not find the relevant statute ambiguous, it noted that Badaracco would have applied in that event.59 A few years later, the Court found a statute limitations on the recovery of erroneous tax refunds "admits of both interpretations," but held in favor of the Government's interpretation, citing Badaracco among other authorities.60 The "natural reading" corollary Grapevine seeks to add to Badaracco's rule was not mentioned. Grapevine seeks to create a corollary that permits it to avoid the general rule through its reading of Badaracco "and its predecessors".61 As we have seen, most of the predecessors upon which it relies are not really germane to the issue at hand. The reality which intrudes upon Grapevine's theory is that Badaracco and subsequent courts have not embraced it. If a statute of limitations on the Government's ability to collect a tax admits of two interpretations, the Supreme Court, the court in Rhone-Poulenc Surfactants, the court in AD Global, and numerous other courts hold that the it should be construed in favor of the Government. Among courts of appeals that held adhered to Badaracco in these situations are the following:

58 59 60 61

506 U.S. 523 (1993). Id. at 527, n. 6. O'Gilvie v. United States, 519 U.S. 79, 91-92 (1996). Grapevine MSJ Brief, at 14. Brief Supporting U.S. Cross M.S.J. Page 16 of 54

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Circuit First Second Third Fourth

Case United States v. Commonwealth Energy System , 235 F.3d 11, 13 (1st Cir. 2000) Estate of Flandreau v. Comm'r , 994 F.2d 91, 94 (2d Cir. 1993) Bachner v. Comm'r , 81 F.3d 1274, 1279 (3d Cir. 1996) Hull v. United States , 146 F.3d 235, 238 (4th Cir. 1998) Green v. Comm'r , 963 F.2d 783,789 (5th Cir. 1992) Mullikin v. United States , 952 F.2d 920, 926 (6th Cir. 1991), cert. denied , 506 U.S. 827 (1992) United States v. Greene-Thapedi , 398 F.3d 635, 637-638 (7th Cir. 2005) Smith v. Comm'r , 925 F.2d 250, 254 (8th Cir. 1991)

Holding Limitations did not bar pursuit of an erroneous refund Limitations did not bar adjustments regarding estate tax liability Employer's filing of W-2 does not trigger running of limitations Taxpayers' two-year period to file suit began when their waiver of notice of disallowance was filed Limitations began to run when individuals filed their returns; not when S corporation filed its return Penalties against accountant who prepared 941 returns not barred by limitations Limitations did not bar pursuit of an erroneous refund Limitations did not bar amendment of Commissioner's answer to assert additional tax liability in Tax Court proceeding Period during which taxpayer was in a prior bankruptcy proceeding not included in calculation of limitations Government entitled to benefit from amendment of limitations period on collection from six to ten years

Fifth

Sixth Seventh Eighth

Ninth In re West , 5 F.3d 423, 426 (9th Cir. 1994) Tenth Foutz v. United States , 72 F.3d 802, 806 (10th Cir. 1995)

Accordingly, Grapevine's approach to section 6229(a) is flawed from the beginning.

2.

The Plain Language of Section 6229 Establishes a Minimum Period Within Which the General Section 6501 Period Shall Not Expire

Regardless of the principle that statutes limiting the collection of tax should be strictly construed in favor of the government, the Court may determine the meaning of sections 6501(a) and 6229(a) by looking directly to their plain language:

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26 U.S.C. § 6501(a) "Except as otherwise provided in this section, the amount of any tax imposed by this title shall be assessed within 3 years after the return was filed...the term `return' means the return required to be filed by the taxpayer (and does not include a return of any person from whom the taxpayer has received an item of income, gain, loss, deduction, or credit)." [Emphasis added.]

26 U.S.C. § 6229(a) "Except as otherwise provided in this section, the period for assessing any tax imposed by subtitle A with respect to any person which is attributable to any partnership item (or affected item) for a partnership taxable year shall not expire before the date which is 3 years after the later of-(1) the date on which the partnership return for such taxable year was filed, or (2) the last day for filing such return for such year (determined without regard to extensions)." [Emphasis added.]

Section 6501 states that any tax imposed by the Internal Revenue Code "shall be assessed" within three years after the taxpayer's return is filed.62 It provides no exception for tax attributable to partnership items. Section 6229, on the other hand, plainly states that the general assessment period for tax attributable to partnership items "shall not expire before" the date three years after the partnership return is filed.63 Thus, section 6229 acts as a possible extension of the general section 6501 period.64 Section 6501(n)(2) confirms this interpretation by referring readers to section 6229 "[f]or extension of [section 6501's limitations] period in the case of partnership items."65 Grapevine asserts that section 6501 does not apply to the Tigues' 2000 tax assessments

62 63 64

26 U.S.C. § 6501(a). 26 U.S.C. § 6229(a).

Rhone-Poulenc Surfactants and Specialties, L.P. v. Commissioner, 114 T.C. 533, 542 (2000). For example, if a partner files his tax return, but the partnership does not, section 6229 would extend the section 6501 period.
65

26 U.S.C. § 6501(n)(2) (emphasis added). See also, Rhone, 114 T.C. at 542. Brief Supporting U.S. Cross M.S.J. Page 18 of 54

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because 26 U.S.C. § 6229 is an independent and exclusive statute of limitations, but fifteen of the eighteen judges who have considered this issue disagree with that assertion:66

Judicial Positions on 6229
6229 Establishes Minimum Period Within Which 6501 Period Shall Not Expire Judge Court Case Sentelle D.C. Circuit Andantech (2003) Henderson D.C. Circuit Andantech (2003) Garland D.C. Circuit Andantech (2003) Miller U.S. Court of Federal Claims AD Global (2005) Ruwe U.S. Tax Court Rhone-Poulenc (2000) (Majority) Wells U.S. Tax Court Rhone-Poulenc (2000) (Majority) Cohen U.S. Tax Court Rhone-Poulenc (2000) (Majority) Chiechi U.S. Tax Court Rhone-Poulenc (2000) (Majority) Vasquez U.S. Tax Court Rhone-Poulenc (2000) (Majority) Gale U.S. Tax Court Rhone-Poulenc (2000) (Majority) Thornton U.S. Tax Court Rhone-Poulenc (2000) (Majority) Marvel U.S. Tax Court Rhone-Poulenc (2000) (Majority) Halpern U.S. Tax Court Rhone-Poulenc (2000) (Concurrence) Whalen U.S. Tax Court Rhone-Poulenc (2000) (Concurrence) Beghe U.S. Tax Court Rhone-Poulenc (2000) (Concurrence) 6229 Establishes Independent Period Judge Court Parr U.S. Tax Court Chabot U.S. Tax Court Foley U.S. Tax Court

Decision Rhone-Poulenc (2000) (Dissent) Rhone-Poulenc (2000) (Dissent) Rhone-Poulenc (2000) (Dissent)

As the above chart shows, all of the courts and the vast majority of judges that have considered this issue agree that section 6501 establishes the general limitations period within which all tax

See Andantech, L.L.C. v. Commissioner, 331 F.3d 972 (D.C. Cir. 2003); AD Global Fund, LLC v. United States, 67 Fed. Cl. 657 (2005) (Judge Miller has certified the 6229 issue for interlocutory appeal); Rhone-Poulenc Surfactants and Specialties, L.P. v. Commissioner, 114 T.C. 533 (2000). Similar issues are pending before Judge Baskir in J& J Fernandez Ventures, L.P. (summary judgment briefing in process), and before Judge Mark Holmes in Kligfeld Holdings (summary judgment briefing completed) and Bay Way Holdings (summary judgment briefing in process). J&J Fernandez Ventures, L.P. v. United States, No. 05-296T (Fed. Cl. filed Jan. 7, 2005); Kligfeld Holdings v. Commissioner, No. TL 21330-04 (Tax Ct. filed Nov. 8, 2004); Bay Way Holdings v. Commissioner, No. 5534-05 (Tax Ct. filed Mar. 22, 2005). Both Kligfeld and Bayway are appealable to the Ninth Circuit. See also, In re G-I Holdings, Inc., No. Civ.02-CV-3082 (WGB), 2003 WL 22273256, 92 A.F.T.R.2d 2003-6070 (D. N.J. Aug. 8, 2003) (upholding Rhone on collateral estoppel grounds because there was no "need" for a "new determination"). Brief Supporting U.S. Cross M.S.J. Page 19 of 54

66

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shall be assessed.67 Section 6229, on the other hand, provides only a minimum period within which the section 6501 period for assessments attributable to partnership items shall not expire.68 In their opinions, these judges explain that plain language, policy, and legislative history all support the conclusion that section 6229 does not establish an independent and exclusive limitations period. In Rhone Poulenc Surfactants and Specialties, L.P. v. Commissioner, for example, the United States Tax Court thoroughly explained the relationship between 6501 and 6229 in a fully reviewed opinion.69 In that case, the partnership filed its 1990 tax returns by September 17, 1991, and the IRS issued an FPAA over three years later on September 12, 1997.70 The IRS asserted that the FPAA was timely because the partner's section 6501(e) six-year limitations period for substantial omission was open when the FPAA was issued.71 The partnership, on the other hand, asserted that the FPAA was untimely because the section 6229 three-year period had expired before the FPAA was issued. The partnership asserted that section 6229 established an independent and exclusive limitations period for tax assessments attributable to partnership items. The Tax Court disagreed. It held that section 6501, not section 6229, "unequivocally"

See Andantech, 331 F.3d at 976 ("plain language of § 6501 compels its application to all assessments...no exceptions for partnership items"); Rhone, 114 T.C. at 542 ("6501 unequivocally provides the period of limitations within which any tax imposed by the Internal Revenue Code shall be assessed"); AD Global, 67 Fed. Cl. at 694 (asserted ambiguity resolved in favor of government). The concurrence in Rhone agreed that section 6501 is the general statute of limitations for tax attributable to partnership items, and that section 6229 provides only a minimum period within which the 6501 period shall not expire. Id. at 558. The concurrence disagreed, however, with the majority's conclusion that, under section 6229(d), an FPAA suspends the section 6501 period. Id. at 559-564. Andantech, 331 F.3d at 977 ("the language of § 6229, rather than simply stating a three-year statute of limitations, indicates by the use of the term 'shall not expire' that the provision is intended to dictate a minimum period, but not an absolute restriction"); Rhone, 114 T.C. at 542 ("6229 provides a minimum period of time for the assessment of any tax attributable to partnership items").
69 70 71 68

67

Rhone, 114 T.C. 533. Id. at 536-537. Id. at 537. Brief Supporting U.S. Cross M.S.J. Page 20 of 54

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provided the general limitations period governing tax assessments attributable to partnership items.72 Section 6229, on the other hand, provided only a "minimum" period within which the section 6501 period shall not expire.73 In other words, section 6229 did not replace or except the general limitations period provided by section 6501; it provided a possible extension of the 6501 period.74 Therefore, the six-year limitations period provided by section 6501(e) was available, and the partnership's summary judgment motion was denied.75 In a later case, Andantech, L.L.C. v. Commissioner, the D.C. Circuit agreed with and commended the Tax Court's analysis in Rhone.76 The D.C. Circuit held that the Tax Court's analysis was "reasonable, persuasive, and ultimately convincing."77 The D.C. Circuit analyzed sections 6501 and 6229 and held that "[t]he plain language of § 6501 compels its application to all assessments."78 The D.C. Circuit stressed that "[t]here are no exceptions for partnership items mentioned in the provision."79 Section 6229, on the other hand, "rather than simply stating a three-year statute of limitations, indicates by the use of the term `shall not expire' that the provision is intended to dictate a minimum period, but not an absolute restriction."80 In sum, the D.C. Circuit held that the Rhone analysis was "mandated by the plain language of [section 6229]."81

72 73 74 75 76 77 78 79 80 81

Id. at 542. Id. at 542. Id. at 542. Id. at 550-551. Andantech, 331 F.3d 972. Id. at 977. Id. at 976. Id. at 977. Id. at 977. Id. at 976. Brief Supporting U.S. Cross M.S.J. Page 21 of 54

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In the most recent case to address this issue, AD Global Fund v. United States, Judge Miller in the Court of Federal Claims considered AD Global's attempts to confuse section 6229's plain language. Nevertheless, Judge Miller held that any ambiguity should be "resolved in favor of the Government."82 Judge Miller explained that the taxpayer's arguments did not "overcome the strong presumption in favor of allowing the Government to collect the taxes."83 Grapevine attempts to escape the plain meaning of "shall not expire before" by asserting that the language merely prevents taxpayers from using section 6229(f)(1) to shorten the section 6229(a) limitations period.84 Section 6229(f)(1) states that the limitations period for tax attributable to partnership items converted to non-partnership items "shall not expire before" one year after the conversion. Even though section 6229(f)(1) provides a minimum period within which the general limitations period for tax attributable to partnership items shall not expire, Grapevine asserts that section 6229(f)(1) could somehow shorten the general period. To prevent this, Grapevine asserts that section 6229(a) must also provide a minimum period within which the general period shall not expire. In other words, Grapevine asserts that section 6229(a) provides a safe harbor to prevent the section 6229(f)(1) safe harbor from shortening it. Grapevine's explanation turns section 6229 into a circular limitations calculation that does not compute. Section 6229(a) would provide a minium period within which the section 6229(f)(1) period would not expire, and section 6229(f)(1) would provide a minimum period within which the section 6229(a) period would not expire­­two safe harbors without a general period to keep safe. The language Congress chose for section 6501 exposes the fallacy of

82 83 84

AD Global, 67 Fed. Cl. at 671-676. AD Global, 67 Fed. Cl. at 694. Grapevine MSJ Brief, at Part V(C)(c). Brief Supporting U.S. Cross M.S.J. Page 22 of 54

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Grapevine's reasoning. In section 6501, Congress chose to make a provision similar to section 6229(f)(1), section 6501(c)(7), a safe harbor of a general period instead of a safe harbor of a safe harbor. Section 6501(c)(7) states that the limitations period for additional tax attributable to return amendments "shall not expire before" sixty days after the amended return is filed.85 Under Grapevine's reasoning, this section 6501(c)(7) safe harbor would require section 6501(a) to contain the "shall not expire before" language. Notwithstanding Grapevine's notions, Congress chose a rational limitations scheme where section 6501(c)(7) provides a minimum period­"shall not expire before"­within which the general section 6501(a) period­"shall be assessed"­does not expire. Congress continued this rational limitations scheme in section 6229 where it used sections 6229(a) and 6229(f)(1) to establish additional minimum periods within which the general