UTAM, Ltd. v. Commissioner
396 U.S. App. D.C. 94
| D.C. Cir. | 2011Background
- David Morgan formed Success Life and merged it into UTAM, a nearly sole owner S corporation, then contributed UTAM assets into UTAM, a newly formed partnership with UTAM owning 99% and DDM Management 1%.
- Morgan engaged in short-sale transactions of Treasury notes to inflate UTAM's outside basis in UTAM, transferring proceeds and obligation to UTAM to boost basis by about $38 million, later offset by UTAM purchasing notes for just over $38 million resulting in an overall loss.
- UTAM's 1999 partnership return reflected a large loss due to the inflated outside basis; Morgan filed a 1999 individual return reporting the flow-through loss on October 16, 2000.
- In 2006, the IRS mailed a notice of final partnership administrative adjustment (FPAA) to DDM Management, adjusting UTAM's outside basis to zero and deeming the short-sale transactions an economic sham.
- DDM Management challenged the FPAA in Tax Court, which held a limitation-period issue based on §6501(a) and Colony; the case was appealed to the D.C. Circuit.
- The court resolves two issues: (1) whether the six-year assessment period applies to understatements arising from basis overstatements (holding that it does apply, following Intermountain), and (2) whether the FPAA tolls a partner's §6501 period (holding that FPAA tolls the open period under §6229/d).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Does basis overstatement trigger the six-year period? | UTAM argues no extended period for basis overstatements. | IRS (Intermountain) supports six-year trigger for such understatement. | Six-year period applies. |
| Does FPAA mailing toll a partner's §6501 period? | UTAM contends FPAA cannot toll if the §6229(a) period had expired. | IRS contends §6229(d) tolls the partner's open §6501 period. | FPAA tolls the partner's open §6501 period; judgment reversed and remanded. |
Key Cases Cited
- Colony, Inc. v. Commissioner, 357 U.S. 28 (1958) (extended period for substantial omission not triggered by basis overstatement)
- Andantech, L.L.C. v. Comm'r, 331 F.3d 972 (D.C. Cir. 2003) (6229(a) does not set maximum period; 6501 controls; tolling by §6229(d))
- Rhone-Poulenc Surfactants & Specialities, L.P. v. Comm'r, 114 T.C. 533 (2000) (district tax court on tolling of period by FPAA)
- Am. Boat Co. v. United States, 583 F.3d 471 (7th Cir. 2009) (outside basis and partnership item concepts in tax basis)