Beard v. COMMISSIONER OF INTERNAL REVENUE
2011 U.S. App. LEXIS 1575
7th Cir.2011Background
- Beards participated in a 1999 short sale of U.S. Treasury Notes, transferring proceeds and closing obligations to two S-corporations (MMCD and MMSD) in which Beard was majority owner.
- On the same day, MMCD and MMSD sold the notes and closed out the short positions; Beard sold his ownership interests in both companies.
- Beards reported 1999 long‑term capital gains from the sales, calculating gains using inflated outside bases in MMCD and MMSD due to the short sale treatment.
- Beards’ 1999 returns did not show that MMCD/MMSD had assumed the liability to cover the short positions, thus inflating bases.
- In 2006, the IRS issued a deficiency notice reducing the bases by the transferred liability, thereby increasing taxable gains by about $12.16 million; the tax court granted summary judgment for Beard, relying on Colony.
- The Seventh Circuit reverses, holding that Colony does not control in this context and that an overstated basis can be an omission from gross income under 6501(e)(1)(A), triggering a six‑year statute of limitations.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether overstatement of basis is an omission from gross income under 6501(e)(1)(A). | Beard argues overstatement of basis does not constitute an omission. | IRS argues overstatement of basis is an omission under §6501(e)(1)(A). | Yes; an inflated basis is an omission. |
| Whether Colony governs the interpretation of §6501(e)(1)(A) after amendments and changes in the 1954 Code. | Colony should control, precluding six‑year extensions. | Colony does not control due to amendments; subsections (i) and (ii) restructure the analysis. | No; Colony not controlling; statute read as gestalt with subsections (i)–(ii). |
| Role of subsections (i) and (ii) of §6501(e)(1)(A) in determining omissions. | Subsection (i) is unnecessary in non‑trade contexts. | Subsection (i) clarifies gross income for trade/business; subsection (ii) provides a safe harbor. | Subsections (i) and (ii) clarify the broader statutory meaning; inflation of basis is an omission. |
Key Cases Cited
- Colony, Inc. v. Commissioner, 357 U.S. 28 (1958) (overstatement of basis not an omission in Colony; context-specific holding)
- Bakersfield Energy Partners LP v. Commissioner of Internal Revenue, 568 F.3d 767 (9th Cir. 2009) (addressed applicability of Colony after 1954 Code revisions; debate over omission concept)
- Salmon Ranch Ltd. v. United States, 573 F.3d 1362 (Fed. Cir. 2009) (discussed interpretation of §6501(e)(1)(A) and subsections (i)/(ii))
- Phinney v. Chambers, 392 F.2d 680 (5th Cir.1968) (early view supporting six-year extension for omissions or misstatements of income)