Tax News

CCH (cch.taxgroup.com) reports:

 
The statute of limitations for assessing tax against married taxpayers who formed a partnership that engaged in a listed transaction but failed to properly disclose the transaction on their income tax return or the partnership's income tax return remained open by reason of Code Sec. 6501(c)(10), as added by American Jobs Creation Act of 2004 (P.L. 108-357) (Jobs Act).

  This provision extends the limitations period until one year after the required disclosure statement is provided. The taxpayer's contention that the effective date of Code Sec. 6501(c)(10) provided by Act Section 814(b) of the Jobs Act was inapplicable was rejected. Further arguments that regulations requiring the identification of listed transactions on a taxpayer's tax return were invalid as a result of IRS's failure to comply with various administrative requirements related to the issuance of the regulations also failed.

  In a transaction that occurred in 2001, the taxpayers generated funds through the short sale of borrowed Treasury notes and contributed the funds and obligation to cover the short sale to a partnership in exchange for partnership interests. They each claimed a basis in their partnership interest that included the short sale proceeds, unreduced by the obligation to cover the short sale. Upon disposition of their partnership interests, they claimed substantial tax losses even though there was no economic loss.

  The court determined that the transaction was a listed transaction because it was substantially similar to the Son-of-Boss transactions described in Notice 2000-44, 2000-2 CB 255. These transactions involve the generation of funds through the creation of a liability and the contribution of the funds or an asset purchased with the funds and the associated liability to a partnership without any adjustment in the basis of the partnership interest received for the liability.

  The taxpayers' filed their 2001 income tax return more than three years before the issuance of the IRS's final partnership administrative adjustment (FPAA). Consequently, the general limitations period had expired. The IRS, however, contended that the transaction was a listed transaction described in Code Sec. 6707A(c)(2) and that the failure of the partners or partnership to disclose the transaction on their tax returns triggered the extended limitation periods of Code Sec. 6501(c)(10). If a taxpayer fails to include a statement required under Code Sec. 6011 with respect to a listed transaction as defined in Code Sec. 6707A(c)(2), as added by the Jobs Act, Code Sec. 6501(c)(1) extends the limitations period until one year after the statement is provided.

 
Code Sec. 6501(c)(10) was made effective for tax years "with respect to which the period for assessing a deficiency did not expire before" October 22, 2004. On October 22, 2004, the period for assessing a deficiency with respect to the taxpayers' 2001 tax year was open. Therefore, if the effective date provided in Act Section 814(b) applied,Code Sec. 6501(c)(10) extended the limitations period for the taxpayers' 2001 tax year.

  However, the taxpayers argued that, because Code Sec. 6707A, which imposes a penalty for failure to include information with respect to a reportable or listed transaction as required by Code Sec. 6011, is effective for returns and statements the due date for which is after October 22, 2004, and which were not filed before that date, Code Sec. 6501(c)(10) cannot apply to any transaction for which a return or statement was due on or before October 22, 2004.

  The court rejected this argument noting the different purposes of the effective dates in the two provisions. Code Sec. 6707A was enacted to impose a penalty prospectively on a taxpayer who failed to meet the reporting requirements of Code Sec. 6011 with respect to listed transactions. The effective date of Code Sec. 6501(c)(10) was intended to keep open limitations periods that had not yet expired as of October 22, 2004, if the taxpayer failed to make the required Code Sec. 6011 disclosure of involvement in a listed transactions on a return that was due before that date.

  The court noted that extending an unexpired limitations period is not an impermissible retroactive action. Further, application of the effective date for Code Sec. 6707A to Code Sec. 6501(c)(10) would render the stated effective date of Code Sec. 6510(c) meaningless. If Congress had intended Code Sec. 6501(c)(10) to apply to a transaction for which a statement was due after October 22, 2004, it could have expressly done so.

  The court also rejected the taxpayers' arguments that Temporary Reg. §1.6011-4T, which applied to the tax year at issue and required disclosure of participation in listed transactions, was invalid by reason of the IRS's determination that the regulation was not a significant regulatory action requiring review by the Office of Management and Budget in accordance with Executive Order 12866, 3 C.F.R. 638 (1994). That Executive Order specifically denies taxpayers the authority to challenge such a determination.

  Further, the IRS's decision that the regulations would not have significant economic impact on a substantial number of small entities and was, therefore, exempted from the preparation of a regulatory flexibility analysis otherwise required by the Regulatory Flexibility Act (5 U.S.C. section 603-604) was proper. Finally, the use of a cross reference in the final regulations to incorporate the rules of the temporary regulations for transactions prior to the generally applicable effective date of the final regulations was not a violation of the notice and comment requirements of the Administrative Procedure Act.

BLAK Investments, 133 TC No. 19, Dec. 58,039

Other References:

 
Code Sec. 6011

  CCH Reference - 2009FED ¶35,141.70

 
Code Sec. 6501

  CCH Reference - 2009FED ¶38,967.328

  Tax Research Consultant

  CCH Reference - TRC FILEBUS: 3,052.20
CCH Reference - TRC PENALTY: 3,252.106