Question for the Tax Court
Does a basis overstatement constitute a substantial omission from gross income that can trigger and extended 6-year period of limitations. See secs. 6229(c)(2), 6501(e)(1)(A). (2).
On their 1999 Form 1065, U.S. Partnership Return of Income, Intermountain claimed a stepped-up $2,061,808 basis in the assets it had sold on August 1, 1999. The return was filed on September 15, 2000. (2).
Almost 6 years later, on September 14, 2006, [the I.R.S.] issued a notice of final partnership administrative adjustment (FPAA) with respect to Intermountain's 1999 tax year . . . [I]ntermountain had . . . overstated capital contributions by $2,197,696, [and] overstated outside partnership basis by $2,061,808 . . . . (3).
The taxpayer cites Bakersfield Energy Partners, LP v. Commissioner, 128 T.C. 207 (2007), affd. 568 F.3d 767 (9th Cir. 2009), for the proposition that a basis overstatement cannot trigger an extended 6-year period of limitations . . . . (3).
The I.R.S. asserts that we decided Bakersfield incorrectly and urges us to overrule it. (3).
The Code does not provide a period of limitations within which the Commissioner must file an FPAA. However, any partnership item adjustments made in an FPAA will be time barred at the partner level if the Commissioner does not issue the FPAA within the applicable period of limitations for assessing tax attributable to partnership items. (4).
The general period of limitations for assessing tax is 3 years from the filing of a Federal income tax return. Sec. 6501(a). That period is extended to 6 years "If the taxpayer omits from gross income an amount propertly includible therein which is in excess of 25 percent of the amount of gross income stated in the return." Sec. 6501(e)(1)(A). (5).
In Bakersfield . . . [W]e applied the Supreme Court's holding Colony, Inc. v. Commissioner, 357 U.S. 28, 33 (1958), and stated that "the extended period of limitations applies to situations where specific income receipts have been 'left out' in the computation of gross income and not when an understatement of gross income resulted from an overstatement of basis." (7).
This issue is obviously bugging the I.R.S. This is the third case I have seen in the last two weeks where they asked the court to overrule Bakersfield. As indicated by the citation, Bakersfield was affirmed by the Ninth Circuit. The Ninth Circuit's opinion is consistent with the Federal Circuit's opinion in Salman Ranch Ltd. v. Commissioner, ___ F.3d ___, ___ (Fed. Cir., July 30, 2009) (slip op. at 28). (7).