Jurisdiction, 28 U.S.C. § 1508 (re: 28 U.S.C. § 6226 petition); Summary Judgment , RCFC 56(c); Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. No. 97-248, 96 Stat. 324 (1982) (codified as amended in scattered sections of 26 U.S.C.); 26 U.S.C. § 743 (adjustment to basis of partnership property); 26 U.S.C. § 754 (election to adjust partnership basis); 26 U.S.C. § 6223(a)(2) (notice to partners of administrative adjustment); 26 U.S.C. § 6225(a)(1) (re: partnership item assessment period); 26 U.S.C. § 6226(a) (time period to readjust partnership items); 26 U.S.C. § 6229(c)(1) (time period for administrative adjustment of a final partnership item); 26 U.S.C. § 6501(c)(1) (exceptions to time period for false or fra udulent returns, with
the intent to evade tax )

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# In the United States Court of Federal Claims

No. 10-244 Filed: October 29, 2013

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* BASR PARTNERSHIP, by and through, * WILLIAM F. PETTINATI, SR., * Tax Matters Partner, *

* Plaintiff, *

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* THE UNITED STATES, *

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Defendant. *

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Thomas A. Cullinan , Sutherland Asbill & Brennan LLP, Atlanta, Georgia, Counsel for Plaintiff.

Jacob E. Christensen , United States Department of Just ice, Tax Division, Court of Federal Claims Section, Washington, D.C ., Counsel for the Government.

REVISED MEMORANDUM OPIN ION AND FINAL ORDER

BRADEN

, Judge

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This case concerns a petition filed in the Un ited States Court of Federal Claims, pursuant to 28 U.S.C. § 1508, for a readjustment and refund of federal taxes paid, plus interest. The pending motion for summary judgment requests that the court determine that the refund, plus interest, is due, because a January 20, 2010 Inte rnal Revenue Service (“IRS”) Notice of Final Partnership Administrative Adju stment (“FPAA”) was timebarred by 26 U.S.C. § 6229(c)(1). In2 the alternative, the pending motion argues that the FPAA is timebarred, because none of the taxpayers had the requisite intent to trigger the extended statute of limitations period in 26 U.S.C. § 6501(c)(1).

I. RELEVANT FACTUAL BACKGROUND. 1

In 1999, Erwin Mayer, a partner in the law firm of Jenkens & Gilchrist, advised William F. Pettinati, Sr. and Mr. Pettinati’s accountant, John C. Malone, about the tax consequences of the sale of Page Printing Co. (“ Page”). Page was a bus iness owned by 1) Mr. Pettinati, 2) his wife and 3) gift trusts for the benefit of their sons, William F. Pettinati, Jr. and Andrew Pettinati (“the Gift Trusts”). Gov’t Ex. 5; Pl. PFOF ¶ 14; Gov’t Resp. App. C at 46 (9/26/12 William F. Pettinati, Sr. Dep.).

Mr. Malone summarized his understanding of th e tax plan, indicating that it included the following steps:

1. A Family General Partne rship will be created. 2. A short sale of Treasury securities is conducted by each family member. 3. [The] stock of [Page] and the short sale will be contributed by the four family stockholders into the family partnership. 4. An S-corporation[ 2 ] will be created. 5. The partnership interests will be contributed to th e S-corporation.

1 The relevant facts discu ssed herein were derived from: the April 16, 2010 Complaint (“Compl.”); BASR Partnership’s December 11, 2 012 Proposed Findings Of Undisputed Material Facts (“Pl. PFOF”); the Government’s January 2, 2013 Proposed Findings Of Uncontroverted Fact (“Gov’t PFOF”); the appe ndices to the Government’s January 22, 2013 Response To
Plaintiff’s Motion For Summar y Judgment (“Gov’t Resp. App. A-K”), including exhibits contained in Gov’t Resp. App. G (“Gov’t Exs. 1-95”); and BASR’s February 11, 2013 Reply.

2 Under the I.R.C., “the term ‘S corporation’ means, with respect to any taxable year, a small business corporation for whic h an election under section 1362(a) is in effect for such year.” I.R.C. § 1361(a)(1). A “small business corpor ation,” in turn, is defined as a domestic corporation which is not an inelig ible corporation and which does not:

(A) have more than 100 shareholders,

(B) have as a shareholder a person (oth er than an estate, a trust described in subsection (c)(2), or an organization described in s ubsection (c)(6)) who is not an individual,

(C) have a nonresident alie n as a shareholder, and

(D) have more than 1 class of stock.

26 U.S.C. § 1361(b)(1).3 6. Such contribution triggers the IRC §754 basis step-up for the Page stock. 7. The short sale is closed out, creating a minor gain or loss. 8. The Page stock may then be sold to your printing business buyer by the family partnership.

Gov’t Ex. 5 at G12.

On May 24, 1999, the BASR Partnership (“BASR ”) was formed as a general partnership
under the laws of Texas. 3 Pl. PFOF ¶ 1. The partners in BASR were:

Bingle Investments LLC, a Delaware limite d liability company, the sole member of which was William F. Pettinati, Sr., who also was designated BASR’s Tax Matters Partner, as defined in I.R.C. § 6231(a)(7);

Falba Investments LLC, a Delaware limite d liability company, the sole member of which was Virginia Pettinati, William F. Pettinati, Sr.’s wife;

Winding Oak Investments LLC, a Delaware limited liability company, the sole
member of which was Pettinati 1998 Gift Trust fbo/William F. Pettinati, Jr.; and

Watermill Investments LLC, a Delaware limited liability company, the sole
member of which was Pettinati 1998 Gift Trust fbo/Andrew Pettinati.

Pl. PFOF ¶¶ 2, 4.

On June 10, 1999, each of BASR’s partners contributed cash and short positions in United States Treasury Notes to BASR. Pl. PFOF ¶ 13. “BASR’s partners took the position that the contribution of the short positions in U.S. Treasury Notes increased the partners’ outside

bases 4 in BASR by approximately $6,638,100.” Pl. PFOF ¶ 13. On June 12, 1999, each of the

3 The Government contends that BASR wa s not a valid partnership for federal tax purposes and that the partnership agreement wa s not signed until July 15, 1999. Gov’t PFOF at

18.

4 “The term ‘outside basis’ . . . refer[s] to the aggregate adjusted bases of all of the partners’ interests in the partnership.” 1 A RTHUR B. W ILLIS & P HILIP F. P OSTLEWAITE

, P ARTNERSHIP T AXATION § 5.04[1] (7th ed. 2011). Section 754 provi des that the partnership can elect to step up its basis as a re sult of a transfer of interest by sale or exchange, according to I.R.C. § 743. Section 743 pr ovides, in relevant part:

In the case of a transfer of an interest in a partnership by sale or exchange or upon the death of a partner, a partners hip with respect to which the election provided in section 754 is in effect or which has a substantial built-in loss immediately after such transfer shall--

(1) increase the adjusted basis of the partnership property by the

excess of the basis to the transferee partner of his in terest in the4 aforementioned partners contribute d ninety-nine percent of their respective interests in BASR, as a capital contribution to Cypre ss Investments Inc., a Delaware corporation, resulting in the termination of the May 24, 1999 BASR and the creation of a new BASR. 5 Pl. PFOF ¶¶ 3, 4. On the same date, Mr. Pettinati, Sr ., his wife, and the Gift Trusts contributed their Page Printing Company stock (“Page st ock”) to the new BASR. 6 Pl. PFOF ¶ 12. On or around August 17, 1999, BASR sold its Page stock to Nationwide Graphics, Inc. (“Nationwide”) for $4,828,771 and received a promissory note from Nationw ide, then valued at $2,069,474. Pl. PFOF ¶ 12.

Subsequently, Mr. Pettinati, in his capacity as the Tax Matters Partner, filed the BASR partnership return for the year ended June 12, 1999, and the IRS stamped the return as received on October 12, 2000. Pl. PFOF ¶ 19(a). He also f iled the BASR partnership return for the year ended December 12, 1999, and the IRS stamped the return as received on October 12, 2000. Pl. PFOF ¶ 19(b). In addition, Mr. and Mrs. Pettinati filed a joint individual income tax return for 1999, which was stamped as received on October 12, 2000. Pl. PFOF ¶ 19(c). William F. Pettinati, Jr., as trustee of the Pettinati 1998 Gift Trust F/B/O William F. Pettinati, Jr., also filed the trust’s income tax return for 1999, which wa s stamped as received on October 18, 2000. Pl. PFOF ¶ 19(d). And Andrew Pettinati, as truste e of the Pettinati 1998 Gift Trust F/B/O Andrew Pettinati, filed the trust’s income tax return for 1999, which was stamped as received on October 12, 2000. Pl. PFOF ¶ 19(e). Likewise, William F. Pe ttinati, Sr. filed Cypress Investments, Inc.’s income tax return for 1999, which was stam ped as received on October 12, 2000. Pl. PFOF ¶ 19(f). All of the aforementioned federa l tax returns were prepared by Mr. Malone, a certified public accountant and partner in the fi rm Malone & Bailey PLLC. Pl. PFOF ¶ 15. In addition, Mr. Malone signed the tax returns of BA SR and its partners; not Jenkens & Gilchrist. Pl. PFOF ¶ 18. 7

partnership over his proportionate shar e of the adjusted basis of the partnership property[.]

26 U.S.C. § 743(b).

“The term ‘inside basis’ . . . refer[s] to the aggregate adjusted bases of all of the partnership’s property.” 1 A RTHUR B. W ILLIS & P HILIP F. P OSTLEWAITE

, P ARTNERSHIP
T AXATION § 5.04[1] (7th ed. 2011).

5 The Government contends that the ne w BASR was not a valid partnership. Gov’t PFOF
at 19.

6 The Government contends that these cont ributions occurred on or after June 16, 1999.

Gov’t PFOF at 21.

7 The extent of Mr. Malone’s role in preparing BASR’s federal income tax returns is in dispute. Compare Pl. PFOF ¶ 17 (“[W]henever John Mal one disagreed with the advice of Jenkens & Gilchrist regarding th e reporting of transactions on the tax returns, John Malone’s determination prevailed[.]”), with Gov’t PFOF at 24-25 (“[T]her e is no instance in which ‘Malone’s determination prevailed’ over the inst ructions he received regarding the manner in
which the tax scheme should be reported to the IRS[.]”).5 On August 8, 2006, the IRS initiated an audit of BASR’s returns for the tax years ended June 12, 1999 and December 22, 1999. Pl. PFOF ¶ 20.

On January 20, 2010, the IRS issued a Fina l Partnership Administrative Adjustment (“FPAA”) for the tax years ended June 12, 1999 and December 22, 1999. Pl. PFOF ¶ 22.

II. PROCEDURAL HISTORY.

On April 16, 2010, BASR, by and through its Tax Matters Partner, filed a Complaint in
the United States Court of Federal Claims seeking a refund of $735,533 on federal taxes paid, plus interest. Compl. ¶ 7(a). The Comp laint alleges that th e January 20, 2010 FPAA was untimely, pursuant to I.R.C. §§ 6229, 6501, and that no penalties may be assessed, pursuant to I.R.C. § 6662, because the IRS’s disallowance of tax benefits was not attributable to a valuation misstatement. Compl. ¶¶ 7(c), (d). In additio n, the Complaint alleges that the IRS erred in determining that:

(i) neither BASR nor its partners esta blished the existence of BASR as a partnership as a matter of fact; (ii) BASR is disregarded because it had no business purpose other than tax avoidance, lacked economic substance, and constitutes an economic sham for federal income tax purposes; (iii) the transactions giving rise to th e basis in the stock of [Page] claimed on the federal income tax returns of the pa rtners of BASR are disregarded because they had no business purpose other th an tax avoidance, lacked economic substance, and constituted an economic sham for federal income tax purposes; (iv) BASR violated the intent of Subchapter K of the Code and, consequently, pursuant to Treas. Reg. Sec. 1.701-2, all transactions engaged in by BASR are treated as engaged in directly by its partners, the U.S. Treasury Note positions contributed to or assumed by BASR are treated as never having been contributed to or assumed by BASR, and a ny gains or losses realized by BASR on such positions are treated as havi ng been realized by the partners; (v) BASR violated the intent of Subc hapter K of the C ode and pursuant to Treas. Reg. Sec. 1.701-2, BASR should be disregarded and all transactions engaged in by BASR should instead be tr eated as engaged in directly by its
partners; (vi) neither BASR nor its partners entered into the U.S. Treasury Note positions or purchased the U.S. Treasury Notes with a profit motive for purposes of Code Section 165(c)(2); (vii) the U.S. Treasury Note positions constitute an arrangement under Code Section 465(b)(4) to lim it the exposure to risk of loss, and neither BASR nor its partners established any other amount s considered to be at risk that would allow the partners to deduct losses ar ising from or in connection with BASR; (viii) even if the proceeds of the U. S. Treasury Note pos itions are treated as contributed to BASR by its partners, the amount tr eated as contributed should be reduced by the amounts paid by the part ners for the purchase of other U.S.6 Treasury Note positions, and the partne rs’ bases in BASR should be reduced accordingly; (ix) the adjusted bases of the a ssets contributed to BASR are not established under Code Section 723, and th e partners' adjusted bases in their respective partnership interests are not esta blished in an amount greater than zero; (x) for purposes of determining gain or loss from the sale, exchange, or liquidation of BASR interests, the partners ' bases are not established in an amount greater than zero; (xi) the obligation to cl ose short sales of U.S. Treasury Notes transferred
to BASR constituted lia bilities for purposes of Code Section 752; (xii) the assumption of obligations to close short sales of U.S. Treasury Notes by BASR constituted a constructive contribution of cash by the partners under Code Sections 722 and 752(a); (xiii) the assumption of obligations to close short sales of U.S. Treasury Notes by BASR constituted a constructive distribution of cash to the partners under Code Sections 733(1) and 752(b); (xiv) BASR's election to adjust the basis of its assets under Code Section 743(b) adjusted the partners’ basis by $0, as there was no exce ss of outside over inside basis; (xv) the adjustments of partnershi p items of BASR for the tax years ending June 12, 1999 and December 22, 1999 are attributable to a tax shelter for which no substantial authority has been established or for which there was no showing of reasonable belief by BASR or its partners that the position taken was more likely than not the correct tr eatment of the transactions; and (xvi) the underpayments of tax were attributable to substantial understatements of income tax, gross va luation misstatements, or negligence resulting in the imposition of pena lties pursuant to Code Section 6662.

Compl. ¶ 7(b).

On July 16, 2010, the Government filed a Moti on To Stay Proceedings until the United States Court of Appeals for the Fede ral Circuit issued a decision in Grapevine Imports,
Ltd. v. United States , No. 2008-5090, since an issue in that case was whether an alleged overstatement of basis by a partnership was an omission from gross income for purposes of I.R.C. §§ 6501(e) or 6229(c)(1). On July 22, 2010, the court denied the Government’s July 16, 2010 Motion because BASR did not join in th e Government’s Motion. On August 10, 2010, the
Government filed an Answer. On August 31, 2010, BASR filed a Response.

On October 1, 2010, the parties filed a Joint Pr eliminary Status Report. On October 7, 2010, the court filed a Scheduling Order.

On March 11, 2011, our appellate court held in Grapevine Imports, Ltd. v. United States
that an overstatement of basis constitutes an omission from gr oss income for the purposes of I.R.C. § 6229(c)(2). See Grapevine Imports, Ltd. v. United States

, 636 F.3d 1368, 1384 (Fed. Cir. 2011), vacated , 132 S. Ct. 2099 (2012).7 On May 13, 2011, the parties filed a Joint Motion To Stay until, inter alia , the United States Court of Appeals for the Federal Circu it rendered a decision on th e request for rehearing and rehearing en banc . On May 16, 2011, the court granted the May 13, 2011 Motion. On June 6, 2011, the United States Court of Appeals for the Federal Circ uit denied the request for rehearing and rehearing en banc

.

On June 25, 2012, the parties filed a Joint Status Report, in which the Government acknowledged that the first defense a sserted in the August 10, 2010 Answer, i.e. , that the statute of limitations remained open, because BASR’s overstatement of its basis in Page was a substantial omission from gross income, was “no longer viable” in light of the United States Supreme Court’s decision in United States v. Home Concrete & Supply LLC , 132 S. Ct. 1836 (2012) (holding that an overstateme nt of basis in sold property doe s not constitute an omission from income, for statute of limitations purposes ). On June 29, 2012, the court lifted the May 16, 2011 stay.

On September 4, 2012, BASR filed a Motion To Compel answers to interrogatories. On the same day, the Government filed a Motion Fo r A Protective Order. Following a hearing on September 6, 2012, the court granted the Gove rnment’s September 4, 2012 Motion, rendering BASR’s September 4, 2012 Motion moot.

On November 16, 2012, BASR filed a Mo tion For Summary Judgment (“Pl. Mot.”), together with exhibits (“Pl. Exs. A–V”). On January 22, 2013, the Gove rnment filed a Response (“Gov’t Resp.”), with appendices and exhibits. On February 11, 2013, BASR filed a Reply (“Pl. Reply”) and exhibits.

On November 16, 2012, BASR filed Proposed Findi ngs Of Undisputed Material Facts. On January 22, 2013, the Government filed Pr oposed Findings Of Uncontroverted Fact. 8 On February 11, 2013, BASR filed a Response.

On March 5, 2013, the Government filed a Mo tion For Leave To File A Memorandum Of Supplemental Authority (“Gov’t Supp. Memo”) . On March 21, 2013, BASR filed a Response (“Pl. Supp. Memo”).

On July 29, 2013, the court heard oral argum ent on BASR’s Motion (“7/29/13 TR at 1– 71”). On September 13, 2013, BASR filed a Moti on For Leave To File A Memorandum Of Applicable Supplemental Authority, in which it advised the court of a recent decision by the United States Court of Appeals for the Fifth Circuit. On September 27, 2013, the Government filed a Response.

8 In the Government’s Proposed Findings of Uncontroverted Fact, it states that the
“United States does not assert that the Pettinatis (William Sr., Virginia, William Jr., and Andrew) themselves possessed an ‘intent to ev ade tax’ within the meaning of § 6501(c)(1).” Gov’t PFOF at 27 (emphasis added).8 III. DISCUSSION.

A. Jurisdiction.

I.R.C. § 6226(a)(3) provides that the tax matters partner, within ninety days after the day on which a FPAA is mailed to the tax matters partner, “may file a petition for a readjustment of the partnership items for such taxa ble year with . . . the [United St ates] Court of Federal Claims.” I.R.C. § 6226(a)(3). Congress has afforded the United States Court of Federal Claims “jurisdiction to hear and to render judgmen t upon any petition under section 6226 . . . of the Internal Revenue Code of 1986.” 28 U.S.C. § 1508.

BASR’s April 16, 2010 Complaint was filed by William F. Pettinati, Sr., in his capacity as the tax matters partner, eighty-six days after the IRS filed the January 20, 2010 FPAA. Compl. ¶ 2. Therefore, the court has jurisdic tion to adjudicate the claims alleged therein. See
Stobie Creek Investments LLC v. United States , 608 F.3d 1366 (Fed. Cir. 2010) (authorizing adjudication of claims brought by and through th e tax matters partner under I.R.C. § 6226).

B. Standing.

The United States Supreme Court has held that “the question of standing is whether the litigant is entitled to have the c ourt decide the merits of the dis pute or of particular issues.” Warth v. Seldin, 422 U.S. 490, 498 (1975). Standing mu st be determined “as of the

commencement of suit.” Rothe Dev. Corp. v. Dep't of Def., 413 F.3d 1327, 1334 (Fed. Cir. 2005). The party invoking federa l jurisdiction bears the burden of establishing standing. See Lujan v. Defenders of Wildlife, 504 U.S. 555, 560–61 (1992). Specif ically, “a plaintiff must show [that] it has suffered an ‘injury in fact’ that is . . . concrete and particularized and . . . actual or imminent, not conjectural or hypothetical; . . . the injury is fairly tr aceable to the challenged action of the defendant; and . . . it is likely, as oppos ed to merely speculative, that the injury will be redressed by a favorable decision.” Friends of the Earth, Inc. v. Laidlaw Envtl. Serv., Inc., 528 U.S. 167, 180–81 (2000) (citations omitted).

The April 16, 2010 Complaint alleges that BASR has suffered an “injur y in fact” that is concrete and particularized, traceable to the IRS’s filing the January 20, 2010 FPAA, and redressable by a favorable decision. Compl. ¶¶ 1–7. Accordingly, BASR, through its tax matters partner, has established standing to seek an adjudication of the claims alleged in the April 16, 2010 Complaint.

C. Standard Of Review For Summary Judgment.

On a motion for summary judgment, the movi ng party must establish that there is no genuine issue of material fact, and that the movi ng party is entitled to judgment as a matter of
law. See Duramed Pharms., Inc. v. Paddock Labs., Inc., 644 F.3d 1376, 1380 (Fed. Cir. 2011);

see also RCFC 56(c). Only genuine disput es of material fact that mi ght affect the outcome of the suit preclude entry of summary judgment. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986) (“As to materiality, the substantive la w will identify which facts are material. Only disputes over facts that might affect the outcome of the suit under the governing law will9 properly preclude the entry of summary judgment. Factual disputes that are irrelevant or unnecessary will not be count ed.”). The “existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported moti on for summary judgment.” Id. at 247-48. “Courts are required to view the facts a nd draw reasonable inferen ces ‘in the light most favorable to the party opposing th e [summary judgment] motion.’” Scott v. Harris , 550 U.S. 372, 378 (2007) (quoting Saucier v. Katz , 533 U.S. 194, 201 (2001)).

D. The Relevant Statutes.

The relevant statues in this cas e are I.R.C. § 6229 and I.R.C. § 6501.

I.R.C. § 6501, in relevant part, provides:

(a) General rule.--Ex cept as otherwise prov ided in this secti on, the amount of any tax imposed by this title shall be assessed within 3 years after the return was filed (whether or not such return was filed on or after the date prescribed) or, if the tax is payable by stamp, at any time after such tax became due and before the expiration of 3 years after the date on whic h any part of such tax was paid, and no proceeding in court without assessment fo r the collection of such tax shall be begun after the expiration of such period. Fo r purposes of this chapter, the term “return” means the return required to be filed by the taxpayer (and does not include a return of any person from whom the taxpayer has received an item of income, gain, loss, deduction, or credit).

* * *

(c) Exceptions.-- (1) False return.--In the case of a false or fraudulent return with the intent to evade tax, the tax may be assessed, or a proceeding in court for collection of such tax may be begun without assessment, at any time.

26 U.S.C. § 6501(a), (c)(1).

I.R.C. § 6229, in relevant part, provides:

(a) General rule.--Except as otherwise provided in this section, the period for assessing any tax imposed by subtitle A with respect to a ny person which is attributable to any partnership item (or affected item) for a partnership taxable year shall not expire before the date which is 3 years after the later of--

(1) the date on which the partnershi p return for such taxable year was filed, or (2) the last day for filing such retu rn for such year (determined without regard to extensions).

* * *10 (c) Special rule in case of fraud, etc.-- (1) False return.--If any partner has, with the intent to evade tax, signed or participated directly or indirectly in th e preparation of a part nership return which

includes a false or fraudulent item— (A) in the case of partners so signing or participating in the preparation of the return, any tax imposed by subtitle A wh ich is attributable to any partnership item (or affected item) for the partnership taxable year to which the return relates may be assessed at any time, and

(B) in the case of all other partners , subsection (a) shall be applied with respect to such return by substituting “6 years” for “3 years”.

26 U.S.C. § 6229(a), (c)(1).

E. Issues Raised By Plaintiff’s November 16, 2012 Motion For Summary Judgment.

1. The Parties’ Arguments

BASR’s November 16, 2012 Motion For Summary Judgment raises two interrelated issues. First, whether the IRS’s January 20, 2010 FPAA was timebarred, because I.R.C. § 6229(c)(1), instead of I.R.C. § 6501(c)(1), gover ns the period within which the IRS may issue a FPAA. Second, assuming, arguendo

, that I.R.C. § 6501(c)(1) gov erns IRS’s issuance of a FPAA, that statute does not apply in this case, because the Government does not contend that the taxpayer had “the intent to evade tax” or that the taxpayer “signe d or participated directly or indirectly in the preparation of a partnership return which includes a false or fraudulent item.” I.R.C. § 6229(c)(1).

BASR recognizes that Congress authorized the IRS to assess federal taxes, “at any time” if “any partner has, with the intent to evade tax, si gned or participated direc tly or indirectly in the preparation of a partnership return which includes a false or fr audulent item[.]” I.R.C. § 6229(c)(1). And, I.R.C. § 6229(c)(1) require s that at least one pa rtner in a partnership must have the intent to evade the payment of fede ral taxes in order for th e partnership return to be considered fraudulent for purposes of the exte nded statute of limitations. Pl. Mot. at 11-12 (citing Transpac Drilling Venture 1983-2 v. United States , 83 F.3d 1410, 1415 (Fed. Cir. 1996) (The “purpose of the ‘intent to evade taxes’ re quirement [in I.R.C. § 6229(c)(1)] is to protect limited partners from an extension of the Commissioner’s time for assessing additional taxes against them where the partner who signed the return did not know that it contained false items.”)). Because the Government, in this case, does not contend th at any BASR partner intended to evade federal taxes, ipso facto , the statute governing the pe riod during which the IRS may issue a FPAA is I.R.C. § 6229(c)(1). Pl. Mot. at 12; see also Pl. Mot. Ex. T ¶ 71 (“[T]he
United States does not assert that the Pettinatis (William Sr., Virginia, William Jr., and Andrew) themselves possessed an ‘intent to evade tax’ within the meaning of § 6501(c)(1)[.]”); Gov’t PFOF at 27 (same).11 Although the Government contends that I.R.C. § 6501(c)(1) governs the time period during which the IRS may assess federal taxes on a partnership return, BASR argues that interpretation is wrong, because I.R.C. § 6501(c)(1) provides that the period in which the IRS may issue a FPAA can be extended only where ther e is “a false or fraudulent return with the intent to evade tax.” Pl. Mot. at 14; Pl. Repl y at 2-3 (citing I.R.C. § 6501(n)(2) (“For extension of the period in the case of partnership items . . . see sec tion 6229.”)); 7/29/13 TR at 7-8 (BASR’s Counsel: “Congress’ clear intent [was] that at least one partner in the partnership must
intend to evade tax in order for the statute of limitations to be extended with respect to a fraudulent partnership item.”). As the United St ates Court of Appeals for the Federal Circuit

held in Prati v. United States , 603 F.3d 1301 (Fed. Cir. 2010): “Sections 6501 and 6229 do not operate independently to allow a taxpayer to assert one in is olation and thereby render an otherwise timely assessment untimely.” Id . at 1307. Therefore, the Government cannot rely on “[s]ection 6501(c)(1) without regard to the more detailed rule s for fraudulent part nership items in [s]ection 6229(c)(1).” Pl. Reply at 3-4. For this reason, BASR adds that “no court has ever applied [s]ection 6501(c)(1) instead of [s]ection 6229(c)(1) to determine whether the statute of limitations is extended in a case involving an alle gedly fraudulent tax return.” Pl. Reply at 5 (citing, inter alia

, Transpac Drilling , 83 F.3d at 1412-15 (applying I. R.C. § 6229(c)(1) to a partnership, “even though it was organized and operated for imprope r or illicit purposes.”)). Moreover, it would be erroneous for the court to apply I.R.C. § 6501(c)(1) to partnership returns,
because it would render sect ion 6229(c)(1) superfluous and vi olate the rule of statutory interpretation that “‘all parts of a statute, if at a ll possible, are to be given effect.’” Pl. Reply at 6 (quoting Weinberger v. Hynson, Westcott & Dunning, Inc. , 412 U.S. 609, 633 (1973)); see also 7/29/13 TR at 13 (BASR Counsel re: same). In addition, ruling that I.R.C. § 6501(c)(1) governs the period in which the IRS may issue a FPAA would violate the ru le that “the specific governs the general” because I.R.C. § 6229(c)(1) app lies only to partnership returns, whereas I.R.C. § 6501(c)(1) applies to fraudulent retu rns in general. Pl. Reply at 6 n.2 (quoting RadLAX Gateway Hotel, LLC v. Amalgamated Bank , 132 S. Ct. 2065, 2070-71 (2012)). For this reason,
the United States Tax Court has rejected the application of the general rule of I.R.C. § 6501 to avoid the specific requirements of I. R.C. § 6229. Pl. Reply at 4-5 (citing Ginsburg v. Comm’r

, 127 T.C. 75 (2006) (holding that I.R.C. §§ 6229(a) and 6229(b)(3) prohibit the IRS from extending the time period on a FPAA regarding part nership items based on an agreement with the taxpayer under I.R.C. § 6501(c)(4), unless the partnership agreement explicitly states that it applies to partnership items)); 7/29/13 TR at 11 (BASR Counsel re: same).

The Government responds that I.R.C. § 6229(c)(1) “may extend but not shorten, the applicable limitations period for assessing tax under § 6501.” Gov’t Resp. at 26 (citing I.R.C. § 6501(n)(2) (“For extension of period in the case of partnership items . . ., see section 6229.”)); see also AD Global Fund, LLC v. United States , 481 F.3d 1351, 1354 (Fed. Cir. 2007) (“Section 6501 simply cross-references § 6229(a) as an ‘extension’ of period for partnership items.”). Therefore, the starting point for dete rmining the time period during which the IRS may assess taxes on a partnership return is I.R.C. § 6501. Gov’t Resp. at 26 (citing Bufferd v. Comm’r , 506 U.S. 523, 527 (1993) (holding that I. R.C. § 6501’s three-year statute of limitations commences with the filing of a taxpayer’s return, instead of the filing date of the pass-through entity)). Th erefore, I.R.C. § 6229(c)(1) does not displace I.R.C. § 6501(c)(1). Gov’t Resp. at 27 (citing AD Global Fund , 481 F.3d at 1354 (“§ 622 9(a) does not create an independent statute of limitations [for taxes attributable to part nership items].”); Prati , 603 F.3d12 at 1307 (“Sections 6501 and 6229 do not operate independently to a llow a taxpayer to assert one in isolation and thereby render an otherwise ti mely assessment untimely.”)). In other words, I.R.C. § 6501 is applicable to all income tax returns, including where the “‘ tax [is] imposed for partnership items

. . . . No exception is provided for assessme nt of taxes for partnership items. ’” Gov’t Resp. at 27-28 (quoting AD Global , 481 F.3d at 1354 (emphasis added by Gov’t)). Therefore, the Government’s view is that AD Global and Prati foreclose BASR’s argument that I.R.C. § 6229(c)(1) displaces I.R.C. § 6501(c)(1) with respect to partnership items. 7/29/13 TR at 30-31 (Government Counsel: “[ a]s the Federal Circuit in AD Global explained, [I.R.C. § 6229] does not create an independent statute of limitations but se ts a maximum time period for assessments to be made.”). Furthermore, th is interpretation does not render I.R.C. § 6229 superfluous, because of the “myriad of potential situations involving a fraudulent partnership return in which the false partnership item is not allocable to the partners or is not reported on their individual returns.” Gov’t Resp. at 28.

The Government selects this case to test the proposition that the fraudulent intent required to extend the statute of limitations under I.R.C. § 6501(c)(1) is not limited to the taxpayer. Gov’t Resp. at 16-23. This view finds support in City Wide Transit, Inc. v. Comm’r

, 709 F.3d 102 (2d Cir. 2013), where a federal appellate court held th at a tax prepar er’s fraudulent intent triggered the statute of limitations extension in I.R.C. § 6501(c)(1), even where the preparer’s primary motive was his own be nefit rather than the taxpayer’s. Id . at 108 (“It is of no consequence that [the preparer] evaded C ity Wide’s taxes for his own benefit[.]”); see also Gov’t Supp. Memo at 1. 9 In this case, although Erwin Mayer was not the tax preparer, “[h]e was essentially the puppet master of . . . John Malone, who actually si gned this return.” 7/29/13 TR at 36 (Government Counsel).

The Government then reasons that, if Congress intended to limit the scope of I.R.C. § 6501(c) only to situations where the taxpayer had fraudulent intent, Congress would have written that requirement into th e statute. Gov’t Resp. at 17 (citing Allen v. Commissioner

, 128 T.C. 37, 40 (2007) (“Nothing in the plain meaning of the st atute suggests the limitations period is extended only in the case of the taxpayer’s fraud. The st atute keys the extension to the fraudulent nature of the return, not to the identi ty of the perpetrator of the fraud.”)). As the Allen
court observed:

The version of the Revenue Act of 1934 that passed the House Ways and Means
Committee would have amended this section to read: “If the taxpayer . . . files a

9 BASR counters that the City Wide Transit case determined only th at the Commissioner successfully established in that case by clear and convincing ev idence that the tax preparer intended to evade tax. Pl. Supp. Memo at 2; see also City Wide Transit , 709 F.3d at 107 (describing the “very narrow questio n” at issue before the federal a ppellate court). In fact, City Wide’s counsel conceded at oral argument that the tax preparer’s fraud would trigger the statute of limitations extension in I.R.C. § 6501(c)(1), ev en if City Wide “did not know of the preparer’s defalcations; [and] (2) . . . did not sign or knowingl y allow to be filed a false return,” so the court did not confront that question. See City Wide , 709 F.3d at 107 n.3. For that reason, the appellate court issued an opinion “without deciding whether certain factua l situations might arise that
sever the tax payer’s liability from the tax- preparer’s wrongdoing.” Id.13 false or fraudulent return with intent to evade tax . . . the tax may be assessed . . . at any time.” H.R. 7835, 73d Cong., 2d Sess. Sec. 276(a) (1934) (as passed by House, Feb. 21, 1934). The Senate Committee on Finance discarded this language, however, with no discussi on. The enacted version continued to focus on the return with no express require ment that the fra ud be the taxpayer’s and remains the language in sec. 6501(c)(1) today.

Id . at 39 n.3.

The Government also contends that the Allen court’s interp retation is supported by the United States Supreme Court’s observation that “limitations statutes barring the collection of taxes otherwise due and unpaid are strictly construed in favor of the Government.”
Badaracco v. Comm’r , 464 U.S. 386, 391 (1984); see also Bufferd , 506 U.S. at 527 n.6 (noting that courts should accept the Government’s r easonable construction of a limitations statute “absent convincing grounds fo r rejecting it”). Moreover, a purposive interpretation of I.R.C. § 6501(c)(1) supports the Allen court’s approach. Gov’t Res p. at 19-21; 7/29/13 TR at 35 (Government Counsel: “[T]he statut e is designed to protect the IRS’ s ability to a ssess tax when there is a fraudulent return.”).

As a result, the Government in sists that the fraudulent intent of an agent of the taxpayer should trigger the statute of limitations extension in I.R.C. § 6501(c)(1), because the taxpayer is responsible for filing a return and paying any tax due. Gov’t Resp. at 21 (citing Allen , 128 T.C. at 41 (stating that the taxpayer’s duty “cannot generally be avoided by relying on an agent”)); see also Am. Properties, Inc. v. Comm’r , 28 T.C. 1100, 1117 (1957) (“[T]axpayers must bear the responsibility for the failures of their agents.”). In this case, William Pettin ati, Sr. testified that he did not verify the accuracy of the facts in the opinion letters. Gov’t Resp. App. C (9/26/2012 Dep. of William Pettinati, Sr.) at 130-31 (“Q: Did you—did you attempt to verify at that time whether these facts were accurate? . . . A: My an swer is—did I personally? No, I did not.”). Therefore, the Government argues that the Pettinatis “shirked thei r responsibility to make a good faith effort to correctly report their true tax liabilit y.” Gov’t Resp. at 22. Consequently, the
Pettinatis should not benefit from their wi llful ignorance. Gov’t Resp. at 22.

In addition, the Government urges the court to adopt the reasoning in Allen , because the nation’s tax system relies on self-reporting of taxes owed and, as the Supreme Court has recognized, “fraud cases ordinarily are more difficu lt to investigate than cases marked for routine

tax audits.” Badaracco , 464 U.S. at 398; see also Lucia v. United States , 474 F.2d 565, 570-71 (5th Cir. 1973) (observing that in “specific instances where the self-assessment system is thwarted, . . . Congress has provided that time will not bar assessment or collection proceedings until [an accurate] return is filed.”). Therefore, whether the falsity or fraudulence of a return is due to the taxpayer’s intent or another involved in the return’s preparation, the IRS “labors under the same disadvantage in ascertaining and assessi ng the correct tax liability and has the same

need for an extended limitations period.” Gov’t Resp. at 20.

In this case, the use of limited liability companies to engage in the short sales enabled the
Pettinatis not to disclose “on their individual retu rns that they had received and contributed short sale proceeds to a partnership, which might have led to an IRS audit.” Gov’t Resp. at 20.14 Similarly, the transaction was structured so that the Pettinatis’ returns did not reveal that their reported gains were lower as the result of a step-up in ba sis. Gov’t Resp. at 21. I.R.C. § 6501(c)(1) was intended to eliminate the st atute of limitations for the assessment of tax in exactly this kind of situati on. Gov’t Resp. at 19. For this reason, the United States Court of Appeals for the Federal Circuit has held that th e statute of limitations extensions authorized under I.R.C. § 6229(c)(1) are operative, even where the signer of the part nership return intends to evade his partners’ taxes, not his own. See Transpac , 83 F.3d at 1414 (explaining that “the statute itself . . . refers only to the ‘intent to evade taxes’”). Since I.R.C. § 6501(c)(1), like I.R.C. § 6229(c)(1), “refers only to the ‘intent to evade taxes,’” it should be interpreted in the same way. Gov’t Resp. at 23. As such, the Pettinatis’ individual tax returns were “false or fraudulent,” within the meaning of I.R.C. § 6501(c )(1), because they included a false item known

to be untrue and based on an intent to cheat or deceive the Government. Gov’t Resp. at 38.

2. The Court’s Resolution

The United States Court of Appeals for the Fe deral Circuit has held that I.R.C. § 6501 and I.R.C. 6229(a) should be read together, so that the three-year base-line statute of limitations is I.R.C. § 6501, but I.R.C. § 6229(a) provides a “m inimum period for assessments of partnership items” that may be extended. See AD Global Fund , 481 F.3d at 1354 (citing Andatech

L.L.C. v. Comm’r , 331 F.2d 972, 976-77 (D.C. Cir. 2003) (“The plain language of § 6501 compels its applications to all assessments.”) (emphasis added)). In short, I.R.C. § 6229(a) establishes “a minimum period during which the period for tax assessments for partnerships may not end,” although “[t]his minimum period may e xpire before or after the maximum period provided in § 6501.” Id . at 1354. In Prati , our appellate court emphasized once again: “Sections 6501 and 6229 operate in tandem to provide a single limitations period . When an assessment of tax involves a partnership item or an affected item, section 6 229 can extend the time period that
the IRS otherwise has available under se ction 6501 to make that assessment.” Prati

, 603 F.3d at 1307 (emphasis added); see also Irvine v. United States , 2013 WL 4766541 (C.A. Tex. at *4) (stating that the “reasoning” in Prati was “logical a nd persuasive”).

Reading I.R.C. § 6501 and I.R.C. § 6229(c )(1) together, the court looks first to I.R.C. § 6501, which requires the IRS to assess a ny federal tax due within three years after a return is filed, unless the return was “false or fraudulent with the intent to evade tax.” I.R.C. § 6501(c)(1). In this case , the tax returns at issue were filed and received by the IRS in 2000. Therefore, for the IRS to be able to assess federal taxes after 2003, the return must be

“false or fraudulent . . . with the intent to evade tax[.]” I.R.C. § 6501(c)(1). 10

I.R.C. § 6501(a) defines “return” as “the return to be filed by the taxpayer (and does not include a return of any person fr om whom the taxpayer received an item of income gain, loss, deduction, or credit).” 26 U.S.C. § 6501(a) (em phasis added). Because the language of 6501(a) is expressly limited to a return filed by the “t axpayer,” the fraudulent intent referenced in I.R.C. § 6501(c) is by implication limited to fra ud by the taxpayer. As such, the IRS is bound by the standard three-year limitations period in I. R.C. § 6501(a), unless the taxpayer possesses fraudulent intent, or unless I.R.C. § 6229 applies. I.R.C. § 6229(a) likewise contains a three-year

10 The FPAA, however, was filed on January 20, 2010.15 limitations provision for partnership returns, but also incl udes a “special rule in case of fraud.” I.R.C. § 6229(c). The text of this rule uses the term “f alse return,” which is defined as one where “any partner has, with the intent to evade tax, signe d or participated directly or indirectly in the preparation of a partners hip return which includes a false or fr audulent item.” I.R.C. § 6229(c).

In this case, there is no question that BASR’s partnership return included false or fraudulent items. But, the Government does not contend that “the Pettinatis (William Sr., Virginia, William Jr., and Andrew) themselves po ssessed an ‘intent to evade tax’ within the meaning of 6501(c)(1)[.]” Pl. Ex. T (10/15/12 Gov’t Resp. to Pl. 1st Set of Requests for Admission ¶ 71 at 24); see also Answer ¶ 16(a)(b) (stating that BASR’s return was “false or fraudulent,” because of the “shelter transactions in this case fra udulently structured by attorneys
of the defunct law firm of Jenkins & Gilc hrist with the intent to evade tax.”); see also id . ¶ 16(c) (“Based on fraudulent tax opinions issued by Erwin Mayer, an atto rney in Jenkins & Gilchrist’s Chicago office, and according to his further instruc tions[.]”). Moreover, the legislative history of I.R.C. 6501(c)(1) supports the view that it is the taxpayer who must have “the intent to evade tax,” because the text of I.R.C. § 6501(c)(1) is the same as the “false or fr audulent with intent to evade the tax” language found in the Revenue Act of 1918, § 250(b), (d), 40 Stat. 1057, 1083 (1919). Pl. Reply at 10 (stating that the taxpayer is not liable for a penalty, “if the return is made in good faith and the understatement of the amount in the return is not due to any fault of the taxpayer” (quoting section 250(b), 40 Stat. at 1083)). In addition, “false or fraudulent with intent to evade the tax” had the same meaning in Revenue Act section 250( d), the predecessor to I.R.C. § 6501(c).

Therefore, the court has determined that the m eaning of “intent to evade tax,” as that text is used in I.R.C. § 6501(c) , is limited to inst ances in which the taxpayer ha s the requisite intent to

commit fraud. 11 Because the Government conceded that the taxpayers in this case did not have that intent, I.R.C. § 6501(a) governs the time peri od in which the IRS may assess federal tax by a FPAA in this instance; that assessment must have taken place within three years, i.e. , by 2003. Notwithstanding concerns articu lated by the Government, the references in I.R.C. § 6501 to fraudulent intent are solely those of the “taxpayer,” and as such, th e court must interpret the plain and unambiguous meaning of the statute. See Hartford Underwriters Inc. Co. v. Union Planters Bank, N.A. , 530 U.S. 1, 6 (2000) (“[W]hen the statute's la nguage is plain, the sole function of the
courts—at least where the dis position required by the text is not absurd—is to enforce it according to its terms.”).

The United States Court of Appeals for the S econd Circuit, however, has taken a different approach to interpreting I.R. C. § 6501 by conducting a factual inquiry into whether a tax attorney’s fraud is “secondary or re mote to the fraudulent returns.” See City Wide Transit , 709
F.3d at 108. In City Wide Transit , a tax preparer’s fraud, as refl ected in a corporate taxpayer’s return, was deemed to require application of I.R.C. § 6501(c)(1)’s statute of limitations. Id. at
107-08. That federal appellate court, however, opined that it would have ruled differently if the understatement of income on the company’s tax re turn stemmed from a fraud perpetrated against the company and was unrelated to the preparing of the return. Id. at 108 (“If that had been the

11 See Gillespie v. United States , 231 Ct. Cl. 851, 852 (1982) ( per curiam ) (“The term ‘fraud,’ as used in [another partnership tax cas e], means intentional wrongdoing on the part of a taxpayer, motivated by a specific purpose to evad e a tax known or believed to be owing.”)).16 case, [the preparer’s] fraud on the company would have caused the company to file a false return, and we would not assume that the compa ny intended to evade a tax by filing that false return.”). I.R.C. § 6501(c)(1)’s extension of the statute of limitations, however, applied, because the wrongdoer “was not a third party unrelated to the preparation and filing of the returns.” Id. (citing IRS Chief Counsel Advisory 201238026, 2012 WL 4261126 (June 2012) (advising that I.R.C. § 6501(c)(1)’s statute of limitations would not apply to the personal tax liability of a “shareholder who did not take pa rt in the fraud reflected on th e S-Corporation’s Form 1120S tax return”)). The Second Ci rcuit’s approach is anal ogous to how other federal appellate courts have
dealt with the inno cent spouse problem. See Estate of Upshaw v. Comm’r , 416 F.2d 737, 742-43 (7th Cir. 1969) (holding the innocent wife liabl e for deficiencies on a joint return that her husband filed fraudulently and with the intent to evade tax); Vannaman v. Comm’r , 54 T.C. 1011, 1018 (1970) (“[E]ven if the joint-filing husb and is the only one who committed fraud in filing the return and making any underpayment . . . the bar of the statute of limitations is still removed from the deficiencies determined against the wife.”); but see Jackson v. Comm’r , 23 T.C.M. (CCH) 2022 (1964) (holding that the husb and’s fraud with intent to evade tax on his
individual and business returns did not toll the statute of limitations with respect to deficiencies on his wife’s individual return, even t hough she was a 45% owner of the business), aff'd , 380 F.2d 661 (6th Cir. 1967).

These cases, however, are not binding upon this court. 12 Therefore, unless and until the United States of Appeals for the Federal Circuit holds that the court shou ld undertake the factual inquiry suggested in City Wide Transit to ascertain whether the tax attorneys’ fraud was “secondary or remote,” 13 the court must interpret I.R.C. § 650 1(c)(1) and I.R.C. § 6229(c)(1), as written, where the plain meaning of the text “intent to evade tax” in I.R.C. § 6501(c)(1) is no
different from how that text a ppears in I.R.C. § 6229(c)(1). See Morrison-Knudsen Constr. Co. v. Dir., Office of Workers’ Comp. Programs, U.S. Dep’t of Labor , 461 U.S. 624, 633 (1983) (“[A] word is presumed to have the same meanin g in all subsections of the same statute.”).

That is not to say that the Government di d not advance a number of persuasive policy arguments why I.R.C. § 6501(c)(1) needs to be am ended, particularly in light of the practical impediments to the discovery of tax fraud. See Badaracco , 464 U.S. at 398. Th e integrity of our constitutional system, however, rests on each br anch of the federal government performing the function specified therein. The function of the c ourt is to interpret, not re-write, the law. See United States v. Byrum , 408 U.S. 125 (1972) (“When a pr inciple of taxation requires

12 Likewise, the court observes th at the Government’s reliance on Allen is misplaced, because the Tax Court relied on a failed legisl ative proposal as evidence that Congress considered and rejected requiring the taxpayer to ha ve the requisite intent to evade paying federal

taxes. Compare Gov’t Resp. at 18 with Cent. Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A. , 511 U.S. 164, 187 (1994) (“ Failed legislative propos als are a particularly dangerous ground on which to rest an inte rpretation of a . . . statute.”).

13 Even if the court were persuade d to adopt the reasoning employed by City Wide

Transit , the facts in this case are different. Here, unlike the tax preparer in City Wide Transit

, Mr. Mayer neither signed nor pr epared the returns at issue. Pl. Ex. H at APP-100 (9/25/12 Malone Dep.).17 reexamination, Congress is better equipped than a court to define precisely the type of conduct which results in tax consequences. When courts readily undertake such ta sks, taxpayers may not rely with assurance on what appear to be established rules[.]”); see also id. at 135.

For the reasons discussed herein, Plaint iff’s November 16, 2012 Motion For Summary Judgment is granted, under 26 U.S.C. § 6501(c)(1), in stead of 26 U.S.C. § 6229(c)(1). Pursuant to Rule 58, the Clerk of Court is directed to en ter judgment in favor of Plaintiff as follows: The adjustments and accuracy-relat ed penalties set forth in th e Notice of Final Partnership Administrative Adjustment (“FPAA”), dated Ja nuary 20, 2010, issued to BASR Partnership are

not sustained on the basis that the FPAA was untimely issued. It is therefore determined that there are no adjustments to partnership items or accuracy-related penalties for BASR Partnership’s tax periods ende d June 12, 1999, and December 22, 1999.

IT IS SO ORDERED.

s/ Susan G. Braden
SUSAN G. BRADEN Judge