Opinion ID: 206582
Heading Depth: 2
Heading Rank: 2

Heading: Judgment of the Court of Federal Claims

Text: Grapevine challenged the FPAA in the Court of Federal Claims as untimely. [2] It argued that the Internal Revenue Code's statute of limitations for such adjustments was three years, and the IRS's adjustment was two years too late. See I.R.C. § 6501(a) (2004) (setting forth a general rule that the IRS may not assess tax more than three years after the taxpayer's return); id. § 6229(a) (2004) (reflecting the three-year rule for tax attributable to partnership items). [3] The government disagreed, contending that Grapevine's overstatement of basiswhich led to understatement of gain, and so underpayment of taxtriggered an extended six-year statute of limitations. See I.R.C. §§ 6501(e)(1)(A), 6229(c)(2) (2004). The Court of Federal Claims sided with Grapevine and ruled the government's attempt at adjustment time-barred. The court noted that the Supreme Court had analyzed the question of whether overstatement of basis would lead to an extended limitations period under the precursor statute. See Colony, Inc. v. Comm'r of Internal Revenue, 357 U.S. 28, 32-38, 78 S.Ct. 1033, 2 L.Ed.2d 1119 (1958). Colony was a fairly straightforward statutory interpretation case. The taxpayer was a corporation in the business of land sales. See Colony, Inc. v. Comm'r of Internal Revenue, 26 T.C. 30, 31, 1956 WL 878 (1956), rev'd, 357 U.S. 28, 78 S.Ct. 1033, 2 L.Ed.2d 1119 (1958). The corporation's 1946 and '47 tax returns overstated basis in certain land sales, and so understated the corporation's profits. The question was whether the IRS could assess deficiencies on those returns more than three but less than five years later (the extended limitations period was then five years). Colony, 357 U.S. at 30, 78 S.Ct. 1033. The limitations statute interpreted in Colony resembled the law at issue here: SEC. 275. PERIOD OF LIMITATION UPON ASSESSMENT AND COLLECTION. Except as provided in section 276 (a) General Rule.The amount of income taxes imposed by this chapter shall be assessed within three years after the return was filed, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period. . . . (c) Omission from Gross Income.If the taxpayer omits from gross income an amount properly includible therein which is in excess of 25 per centum of the amount of gross income stated in the return, the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time within 5 years after the return was filed. Internal Revenue Code of 1939 § 275, 53 Stat. 1, 86-87 (1939). In determining whether the phrase omits from gross income encompasses an overstated basis, the Supreme Court noted, [I]t cannot be said that the language is unambiguous. In these circumstances we turn to the legislative history of § 275(c). Colony, 357 U.S. at 33, 78 S.Ct. 1033. Turning to that history, Colony found in the legislative reports a number of statements indicating that Congress merely had in mind failures to report particular income receipts and accruals, and did not intend the five-year limitation to apply whenever gross income was understated. Id. at 35, 78 S.Ct. 1033. The Court concluded that the purpose of the extended limitations period was to give the government extra time to discover items that had been entirely omitted from returnsnot to recover for items that, though included, were misstated. Id. at 36, 78 S.Ct. 1033. On that basis, the Court held for the taxpayer and ruled that overstatement of basis was not an omission from gross income. Returning to this case's time before the Court of Federal Claims, Grapevine argued that Colony controlled, and the government's case was time-barred. The government tried to resist Colony's application. It argued that Colony properly applied only to income from the sale of goods and services by a trade or business, and not other income. [4] The basis of this argument was that the modern Tax Code differs from the statute analyzed in Colony. Notably, the updated code sets forth a test similar to that in Colony but explicitly limits that test to the trade or business context. I.R.C. § 6501(e)(1)(A)(i) (2004). The government argued that Colony should be similarly limited to the trade or business context. It urged that this was Congress's intent, and pointed out that the taxpayer in Colony was in the business of land sales. The Court of Federal Claims disagreed, noting several reasons why Colony still controlled even outside the trade or business context. See Grapevine, 77 Fed.Cl. at 510-12. The court also noted that the Supreme Court had discussedbriefly§ 6501(e)(1)(A) in the Colony opinion: And without doing more than noting the speculative debate between the parties as to whether Congress manifested an intention to clarify or to change the 1939 Code, we observe that the conclusion we reach is in harmony with the unambiguous language of § 6501(e)(1)(A) of the Internal Revenue Code of 1954. Colony, 357 U.S. at 37, 78 S.Ct. 1033. The 1954 revision to § 6501(e)(1)(A) brought the language to essentially its modern posture. Consistent with the Supreme Court's note, the Court of Federal Claims went on to determine that Congress's enactment of § 6501(e)(1)(A) did not operate to limit Colony's holding. Accordingly, on April 23, 2008, the court entered judgment dismissing the government's claims concerning the 1999 tax return as time-barred. The government timely appealed.