144 T.C. No. 11
Tax Ct.2015Background
- Charles C. Carroll (tax matters partner) and family owned appreciated real estate through an S corporation (CCFH). To extract the real estate without recognizing built‑in gain they implemented a Son‑of‑BOSS basis‑boost scheme using a sham partnership (CNT) and short‑sale/repo mechanics in late 1999.
- Parties stipulated that CNT and the Son‑of‑BOSS components were shams; some intermediate entities (LLCs) were disregarded; CCFH itself was a bona fide operating S corporation that actually held the properties.
- Tax filings: CNT filed two Forms 1065 for short 1999 periods; CCFH filed Form 1120S but did not report gain that would arise if CCFH had distributed appreciated property; individual shareholders did not report passthrough gain.
- Commissioner issued an FPAA (August 25, 2008) zeroing CNT’s reported basis, contributions, distributions, and disallowing related losses; also asserted accuracy‑related penalties under I.R.C. §6662.
- Primary issues: (1) whether the six‑year limitations period under I.R.C. §6501(e)(1)(A) applies (timeliness); (2) whether the step‑transaction and sham doctrines require disregarding CCFH’s distribution (i.e., whether gain must be recognized under I.R.C. §311(b)); (3) adequacy of disclosure; and (4) applicability of §6662 penalties given reliance on professional advice.
Issues
| Issue | Carroll's Argument | Commissioner (Respondent) Argument | Held |
|---|---|---|---|
| Timeliness: whether §6501(e)(1)(A) six‑year period applies to partners’ 1999 returns | FPAA untimely; respondent is "bootstrapping" omissions from other returns and from transactions outside CNT’s short tax period | The partnership adjustments, if sustained, create passthrough §311(b) gain that partners omitted >25% of gross income, so six‑year rule applies | Step‑transaction collapse means CCFH distributed property and partners omitted passthrough gain; Home Concrete limits exclusion of items attributable solely to basis overstatement; §6501(e) applies to Charles and Garnet Carroll only (Cadman and Craig’s limitations had expired) |
| Substance/Single‑transaction treatment: whether to disregard CCFH distribution as part of an integrated sham | Because the series was an integrated sham, all steps (including the distribution/gain) should be disregarded and CCFH remain treated as owner | Step‑transaction doctrine collapses the steps; distribution was the end‑result transfer and had nontax substance, so gain must be recognized | Court applied step‑transaction; collapsed steps into a direct transfer from CCFH to individuals; did not disregard that transfer—gain stands |
| Definition of omission & adequate disclosure under §6501(e)(1)(A)(ii) | Any omitted gain is solely attributable to basis overstatement from the Son‑of‑BOSS (so Home Concrete bars §6501(e)); returns/351 statement adequately disclosed the transactions | Some portion of omitted §311(b) gain cannot be explained by basis overstatement; the returns did not disclose fair‑market value appreciation, so disclosure safe harbor fails | Home Concrete prevents treating amounts that are merely basis‑overstatement as omissions, but $623,284 of §311(b) gain remained unaccounted for; Carrolls failed to adequately disclose the appreciation; thus §6501(e) applies for the Carrolls only |
| Accuracy‑related penalty (§6662): whether 20%/40% penalty applies | Petitioner (as TMP) reasonably and in good faith relied on independent professional advice (Myers, Crowley); therefore no penalty | Commissioner showed valuation/basis overstatements triggering the valuation‑misstatement rules; penalties warranted absent reasonable cause/good faith | Commissioner met production burden for valuation misstatement penalty, but Mr. Carroll established reasonable cause and good faith reliance on attorney Myers (competent, independent, conducted due diligence); penalty disallowed for Carroll |
Key Cases Cited
- United States v. Home Concrete Supply, LLC, 566 U.S. 478 (2012) (an ‘‘omission’’ requires leaving an item out entirely; overstated basis that merely understates gain is not an omission under §6501(e))
- Woods v. Commissioner, 571 U.S. 31 (2013) (Tax Court may determine valuation‑misstatement penalties in partnership‑level proceedings where sham partnership and basis overstatement are at issue)
- Rhone‑Poulenc Surfactants & Specialties, L.P. v. Commissioner, 114 T.C. 533 (2000) (for TEFRA partners, limitations is the longer of §6229 or §6501; partner‑level omissions can preserve longer assessment periods)
- Gregory v. Helvering, 293 U.S. 465 (1935) (foundational substance‑over‑form/sham transaction principles)
- Knetsch v. United States, 364 U.S. 361 (1960) (economic sham doctrine: transactions that have no substance apart from tax benefits are disregarded)
- Commissioner v. Court Holding Co., 324 U.S. 331 (1945) (tax consequences depend on substance of transaction)