Court Opinion

ID: 3064569
Source: CourtListenerOpinion
Date Created: 2015-10-14 22:25:37.404162+00
Date Added: 2024-06-11T08:12:56.909726
License: Public Domain

FOR PUBLICATION
 UNITED STATES COURT OF APPEALS
      FOR THE NINTH CIRCUIT

BURTON O. BENSON; ELIZABETH C.       
BENSON,
                                           No. 07-72272
                      Petitioners,
               v.                          Tax Ct. No.
                                             12967-00
COMMISSIONER OF INTERNAL
                                             OPINION
REVENUE,
                      Respondent.
                                     
              Appeal from a Decision of the
                United States Tax Court

                  Argued and Submitted
       January 12, 2009—San Francisco, California

                   Filed March 31, 2009

       Before: J. Clifford Wallace, Jerome Farris and
          M. Margaret McKeown, Circuit Judges.

                 Opinion by Judge Farris

                           3871
                       BENSON v. CIR                    3873

                        COUNSEL

John M. Youngquist, San Francisco, California, for petition-
ers Burton Benson and Elizabeth Benson.

Ellen Page DeSole, Department of Justice, Tax Division,
Washington, D.C.; Michael J. Huangs, Department of Justice,
Tax Division, Washington, D.C.; Nathan J. Hochman, Assis-
tant Attorney General, for respondent Commissioner of Inter-
nal Revenue.

                         OPINION

FARRIS, Senior Circuit Judge:

   Burton and Elizabeth Benson, husband and wife, filed joint
tax returns between September 1994 and December 1995 for
3874                       BENSON v. CIR
the years 1989, 1990, 1993, and 1994.1 Burton was a retired
Navy admiral and engineer, and was the 100 percent owner
of Energy Research and Generation. ERG, a subchapter C
corporation, filed its own tax returns and paid its own taxes.
Burton Benson also owned a controlling interest—varying
between one-half and two-thirds in the years at issue—in New
Process Industries. NPI was a subchapter S corporation, or a
passthrough entity, and therefore filed information returns.
For tax purposes, its income was attributable to its equity
partners.

   NPI had no employees, and no written contracts with ERG,
but did maintain a bank account, certain patent rights, and
three parcels of real property in Oakland, California. During
the period at issue, ERG transferred millions of dollars to
NPI. In 1989, ERG received $483,098 from Hercules Aero-
space Co. for an equipment purchase, then transferred the
money to NPI. In 1990, NPI bought patent rights from ERG,
and then immediately licensed the rights back to ERG in a
retroactive licensing agreement. The result was that, in each
relevant year, 10 percent of ERG’s profits flowed to NPI for
“royalties.” The remainder of ERG’s profits in each relevant
year, less about $75,000, flowed to NPI for “engineering ser-
vices.” In each relevant year, ERG also paid rent to NPI for
the use of real property at two plants.

   These transactions were without economic substance. NPI
had no relation to the Hercules transaction; the licensing
agreement made no economic sense for ERG; there was no
evidence that NPI had performed engineering services suffi-
cient to justify the transfers; and ERG paid rent far in excess
of its contractual obligations. Thus, these transactions func-
tioned only to funnel money from ERG to NPI. Benson then
used NPI’s bank account funds for the “sole and exclusive
  1
   We base our factual discussion on the Tax Court’s unchallenged find-
ings of fact in its 2004 memorandum opinion.
                        BENSON v. CIR                      3875
benefit of himself and his family.” Benson v. Comm’r, 88
T.C.M. (CCH) 520 (2004).

   Where a corporation provides an economic benefit to a
shareholder with no expectation of reimbursement, the benefit
is a “constructive dividend” and is taxable income. Inland
Asphalt Co. v. Comm’r, 756 F.2d 1425, 1429 (9th Cir. 1985).
ERG’s payments to NPI were constructive dividends to the
Bensons.

   The Bensons also received constructive dividends directly
from ERG, without passing through NPI. These dividends
included a corporate paid life insurance policy; corporate paid
car expenses; “directors’ fees” paid directly to Benson family
members; corporate paid non-business travel expenses; corpo-
rate paid legal fees for personal matters; corporate paid recre-
ational expenses drawn from the “ERG-Recreation Fund”;
and finally the imputed value of ERG’s purchase of a large
plot of real estate immediately adjacent to the Bensons’ per-
sonal residence.

   Of the Bensons’ tax returns for each of the years at issue,
none reported the constructive dividends. Of NPI’s informa-
tion returns for each of the same years, none reported the con-
structive dividends. In some instances, the NPI returns
referred to relevant transactions, but these references were
incomplete, misleading, or otherwise ambiguous. Transfers
pursuant to the exclusive licensing agreement were labeled as
“royalties,” the purported engineering services labeled as “en-
gineering services,” and the excessive rent labeled as “rent.”

   As a result of these deficiencies, the Internal Revenue Ser-
vice opened investigations of the Bensons’ 1993 return in
August 1995, and their other returns in March 1997. The Ser-
vice referred the Bensons’ audits to its criminal investigation
division in May 1997, but in August 2000, the Department of
Justice declined to prosecute.
3876                         BENSON v. CIR
   In September 2000, more than three but fewer than six
years after the returns were received, the Commissioner
issued the Bensons notices of alleged fraud and deficiency for
tax years 1989, 1990, and 1993. About a year later, the Com-
missioner issued a notice of deficiency for tax year 1994.

   The Bensons challenged the Commissioner’s determina-
tions in the Tax Court. The Tax Court found no evidence of
fraud, but mostly upheld the Commissioner’s substantive defi-
ciency determinations. In addition to the constructive divi-
dends, the Bensons failed to report miscellaneous income,
including forgiveness of debt and dividend income from an
account in their son’s name, and had made certain improper
deductions. Altogether, the Tax Court’s found that the Ben-
sons’ “omitted” gross income of $629,177 in 1989; $456,500
in 1990; $3,831,923 in 1993; and $469,713 in 1994. Based on
these figures, the total deficiencies were $139,889 for 1989;
$104,701 for 1990; $1,496,254 for 1993; and $140,714 for
1994.

   The Bensons filed a motion for reconsideration on the
grounds that the Commissioner’s assessment was time-barred
by 26 U.S.C. § 6501(a)’s customary three-year statute of limi-
tations. In response, the Tax Court issued a supplemental
opinion. It held that, because the income “omitted” was more
than 25 percent of the Bensons’ reported gross income for
each relevant year, the six-year statute of limitations applied
under § 6501(e).2 The court further found that, although the
Bensons’ misleading entries may have provided a “clue”
about deficiencies, the entries did not adequately apprise the
Commissioner of the nature or amount of the deficiencies, and
therefore, the “adequate disclosure” or “safe harbor” clause of
  2
   The statute reads, in pertinent part: “If the taxpayer omits from gross
income an amount properly includible therein which is in excess of 25 per-
cent of the amount of the gross income stated in the return, the tax may
be assessed . . . at any time within 6 years after the return was filed.” 26
U.S.C. § 6501(e)(1)(A).
                        BENSON v. CIR                      3877
§ 6501(e)(1)(A)(ii) did not apply.3 The Bensons timely bring
this appeal.

   [1] Interpretation of 26 U.S.C. § 6501 is a question of law
that we review de novo. Maciel v. Comm’r, 489 F.3d 1018,
1027 (9th Cir. 2007). Section 6501(a) requires the IRS, after
a return is filed, to assess taxes within three years. 26 U.S.C.
§ 6501(a). However, if the return omits gross income totaling
more than 25 percent of the amount stated in the return,
§ 6501(e) extends the statute of limitations to six years. 26
U.S.C. § 6501(e)(1)(A). The three-year limit under § 6501(a)
would bar assessment of deficient taxes for the Bensons’
1989, 1990, 1993, and 1994 returns. The six-year limit under
§ 6501(e) would not. The question is therefore whether the
IRS is entitled to the six-year limit for those returns.

   On appeal, the Bensons’ do not dispute that for each of
these years, their return did not properly account for income
in excess of 25 percent of the income stated on the return. Nor
do they dispute the Tax Court’s computations or figures.
Instead, the Bensons contend that their tax position was not
an “omission” of gross income under the statute, but a “re-
characterization” of the amounts in question.

   [2] In Colony, Inc. v. Comm’r, 357 U.S. 28, 36-38 (1958),
the Supreme Court held that the extended limitations period
in the predecessor statute to § 6501(e)(1)(A) did not apply
where a taxpayer understated gross profits he earned on the
sale of real property, because he erroneously overstated his
basis in the property. The court explained that the extended
limitations period was meant to address “the specific situation
where a taxpayer actually omitted some income receipt or
accrual in his computation of gross income, and not more
generally to errors in that computation arising from other
causes.” Id. at 33.
  3
   The Bensons do no challenge the Tax Court’s ruling under
§ 6501(e)(1)(A)(ii) on appeal.
3878                    BENSON v. CIR
  [3] The Court defined “omit” to mean “to leave out or
unmentioned.” Id. at 32; see also Bakersfield Energy Part-
ners, LP v. Comm’r, 128 T.C. 207, 213 (2007) (distinguishing
between an overstatement of basis in an asset sold and an
“omission” under § 6501(e)); Grapevine Imports, Ltd. v.
United States, 77 Fed. Cl. 505, 512 (2007) (holding that an
overstated basis in property sold did not create “omitted”
gross income).

  [4] In reporting their gross income, the Bensons left out the
ERG disbursements and NPI transfers that were later held to
be constructive dividends. The Bensons’ failure to report the
dividends in their tax returns did not result from an overstate-
ment of basis or other technical miscalculation, nor were the
amounts accounted for elsewhere in the returns. Rather, the
Bensons did not include these amounts in their returns at all.
Thus, under the Supreme Court’s definition in Colony, the
Bensons “omitted” gross income, and the extended limitations
period applies.

   The Bensons’ reliance on our precedents’ interpretation of
the statutory language is misplaced. In Slaff v. Comm’r, 220
F.2d 65 (9th Cir. 1955), a case we decided before Colony but
which was cited approvingly therein, we held that the
extended limitations period did not apply to a taxpayer who
erroneously reported that he owed no taxes on income
accrued overseas. The extended period did not apply because
the taxpayer made “full disclosure” of the disputed amounts,
actually writing on his return: “income received $3,300;
exempt . . . therefore no taxable income.” Id. at 68. Similarly,
in Lawrence v. Comm’r, 258 F.2d 562 (9th Cir. 1958), we
held that although a taxpayer did not include certain income
as taxable, the extended limitations period did not apply
because the taxpayer “made a full disclosure of his ‘position’
with respect to his gross income on his income tax return.”

  [5] These cases indicate that the extended limitations period
does not apply where a taxpayer made an error in his or her
                        BENSON v. CIR                      3879
computation of gross income, yet fully disclosed the amounts
underlying the error elsewhere in the tax return. These cases
do not preclude application of the extended limitations period
here. Unlike the taxpayers in Slaff and Lawrence, the Bensons
did not disclose any of the amounts underlying their error.

   [6] The Bensons argue that it would be “absurd to think”
they should be required to report amounts which, according
to their tax position at the time they filed their returns, were
not gross income. Only after they had filed their tax returns,
they observe, were the various ERG and NPI transfers con-
strued to be gross income. However, it is undisputed that the
Bensons’ tax position was erroneous. The amounts were
“properly includible” as gross income pursuant to
§ 6501(e)(1)(A), irrespective of the Bensons’ mistaken belief
to the contrary.

   The Bensons also argue that Colony can be read to preclude
the application of the extended limitations period because the
Commissioner was able to discover the unreported income,
despite their omissions. For this proposition, the Bensons cite
the Court’s language stating that the extended limitations
period was meant to give the Commissioner additional time
to “investigate tax returns in cases where, because of a tax-
payer’s omission to report some taxable item, the Commis-
sioner is at a special disadvantage in detecting errors.”
Colony, 357 U.S. at 36. The Bensons argue that the Commis-
sioner was at no such special disadvantage here, as evidenced
by the fact that the Commissioner actually detected the errors,
and therefore the six-year period should not apply. However,
the Supreme Court’s gloss on the statutory language does not
alter the statute’s plain language, which simply provides that
the Commissioner is afforded extra time whenever a taxpayer
“omits” a certain amount from his or her gross income. 26
U.S.C. § 6501(e)(1)(A). The Bensons omitted the constructive
dividends from their tax returns.

  AFFIRMED.