                          T.C. Memo. 2000-286



                      UNITED STATES TAX COURT



   CC&F WESTERN OPERATIONS LIMITED PARTNERSHIP, CC&F INVESTORS,
INC., TAX MATTERS PARTNER, Petitioner v. COMMISSIONER OF INTERNAL
                        REVENUE, Respondent



     Docket No. 544-98.                    Filed September 8, 2000.



     William F. Nelson and Peter J. Genz, for petitioner.

     Dana E. Hundrieser and Lawrence C. Letkewicz, for

respondent.


                          MEMORANDUM OPINION

     COHEN, Judge:   Respondent issued a Notice of Final

Partnership Administrative Adjustment (FPAA) for 1990 for CC&F

Western Operations Limited Partnership (Western).   CC&F

Investors, Inc. (petitioner), the designated tax matters partner

for Western, filed a Petition for Readjustment of Partnership
                                 - 2 -


Items Under Code Section 6226.    After concessions, the sole

remaining issue is whether disclosures made in the 1990 Federal

income tax returns of Western and of partnerships in which

Western owned interests were adequate to apprise respondent of

the nature and amount of omitted items and, thereby, to preclude

the application of the 6-year period of limitations under section

6229(c)(2).   This issue is before the Court on cross-motions for

summary judgment pursuant to Rule 121.    The record shows, and the

parties agree, that there is no genuine issue of material fact.

Unless otherwise indicated, all section references are to the

Internal Revenue Code in effect for the year in issue, and all

Rule references are to the Tax Court Rules of Practice and

Procedure.

                            Background

     Western is a Delaware limited partnership whose principal

place of business was Boston, Massachusetts.    Petitioner is a

corporation organized under Delaware law.

     Western’s sole activity was selling, to a third-party buyer,

Western’s 84-percent partnership interests in CC&F Bellevue

Office Investment Co. (Bellevue), CC&F Cabot Plaza II Investment

Co. (Cabot Plaza), CC&F Chatsworth Investment Co. (Chatsworth),

CC&F Diamond Bar Investment Co. (Diamond Bar), CC&F Issaquah I

Investment Co. (Issaquah), CC&F Mira Loma Investment Co. (Mira

Loma), and CC&F Topanga Investment Co. (Topanga); Western’s
                               - 3 -


99-percent partnership interests in CC&F Vacant Land Associates I

(Vacant Land I), CC&F Vacant Land Associates II (Vacant Land II),

CC&F Vacant Land Associates III (Vacant Land III), CC&F Vacant

Land Associates IV (Vacant Land IV), and CC&F Vacant Land

Associates V (Vacant Land V); and 100 percent of the outstanding

stock of CC&F Stadium Properties, Inc. (Stadium).   The sale

occurred in two phases, the first on March 28, 1990, and the

second on April 26, 1990.   The agreement with the third-party

purchaser required that the underlying property of each

partnership be free and clear of all debt following the closing.

Thus, a portion of the proceeds paid into escrow was applied to

pay off all debt at the closing of the sale.

     On October 15, 1991, petitioner timely filed for Western a

Form 1065, U.S. Partnership Return of Income, for 1990.

Petitioner incorrectly reported a section 1231 loss of $3,196,339

from the sale of the partnership interests.    The sale of Stadium

stock was listed separately.   The reported loss from the sale of

the partnership interests was based on a reported amount realized

of $27,965,551 and basis of $31,161,890.   However, the sale

actually resulted in an aggregate net gain of $9,182,216.

     The partnerships that were sold by Western also filed tax

returns for 1990.   Except for Bellevue, each partnership that was

conveyed included a statement with its return as follows:
                                   - 4 -


          The above named partnership entity was terminated
     under Regulation Section 1.708-1(b)(ii) on [date of
     sale] when both the 84% [99% for Vacant Lands I through
     V], CC&F Western Operations, L.P. (Federal
     Identification Number XX-XXXXXXX), and the 16% [1% for
     Vacant Lands I through V] partner sold their entire
     interests in the partnership to an unrelated party.

Bellevue did not identify itself as having been sold to an

unrelated third party during 1990.         Each partnership that was

conveyed attached, to its Federal income tax return, a Schedule

K-1 for each of its partners.      On line B of the 12 Schedules K-1

of Western, the partnerships listed Western’s share of

partnership liabilities in the following amounts:

               Bellevue                $ 7,657,419
               Cabot Plaza                       0
               Chatsworth               23,552,592
               Diamond Bar               8,846,254
               Issaquah                  4,960,496
               Mira Loma                         0
               Topanga                      11,000
               Vacant Land   I          10,337,621
               Vacant Land   II          2,935,574
               Vacant Land   III           298,884
               Vacant Land   IV          1,866,711
               Vacant Land   V           9,492,939
                  Total                $69,959,490

Neither the 1990 Federal income tax return of Western nor the

returns of the partnerships that were conveyed disclosed that the

third-party purchaser paid or assumed Western’s liabilities.

     On October 14, 1997, more than 3 years but less than 6 years

from the date of filing of Western’s return, respondent sent the

FPAA to petitioner, determining that there was unreported gain on

the sale of the partnership interests.
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                            Discussion

     Under the general rule set forth in section 6501, the

Internal Revenue Service is required to assess tax or send a

notice of deficiency within 3 years after a Federal income tax

return is filed.   See sec. 6501(a).    In the case of a tax imposed

on partnership items, however, section 6229 sets forth special

rules to extend the period of limitations prescribed by section

6501 in situations where the partnership tax return was filed

later than an individual partner’s return.       See sec. 6501(o)(2);

Rhone-Poulenc Surfactants & Specialties v. Commissioner, 114 T.C.

533, 540 (2000).

     Section 6229 provides in pertinent part:

          SEC. 6229(a). General Rule.--Except as otherwise
     provided in this section, the period for assessing any
     tax imposed by subtitle A with respect to any 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 partnership return
          for such taxable year was filed, or

               (2) the last day for filing such return
          for such year (determined without regard to
          extensions).

                   *   *    *    *      *    *      *

          (c) Special Rule in Case of Fraud, Etc.--

                   *   *    *    *      *    *      *

               (2) Substantial omission of income.--If any
          partnership omits from gross income an amount
                              - 6 -


          properly includible therein which is in excess of
          25 percent of the amount of gross income stated in
          its return, subsection (a) shall be applied by
          substituting “6 years” for “3 years”.

Section 6229, like other statutes of limitation, receives strict

construction in favor of the Government when taxpayers seek to

have it applied to bar the Government’s rights.   See Badaracco v.

Commissioner, 464 U.S. 386, 391 (1984); E.I. Du Pont De Nemours &

Co. v. Davis, 264 U.S. 456, 462 (1924); Rhone-Poulenc Surfactants

& Specialties v. Commissioner, supra at 540.

     In drafting section 6229, Congress did not intend to create

a completely separate statute of limitations for assessments

attributable to partnership items.    See Rhone-Poulenc Surfactants

& Specialties v. Commissioner, supra at 545.    Instead, section

6229 merely supplements section 6501, and, although section 6229

does not repeat all of the terms and provisions already set forth

in section 6501, the adequate disclosure provision of section

6501(e)(1)(A)(ii) is encompassed in section 6229(c)(2).

Consequently, the precedents interpreting section

6501(e)(1)(A)(ii) are equally applicable to section 6229(c)(2).

Section 6501(e)(1)(A)(ii) states:

          (ii) In determining the amount omitted from gross
     income, there shall not be taken into account any
     amount which is omitted from gross income stated in the
     return if such amount is disclosed in the return, or in
     a statement attached to the return, in a manner
     adequate to apprise the Secretary of the nature and
     amount of such item. [Emphasis added.]
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     Petitioner contends that the 1990 Federal income tax return

and the Federal income tax returns of the partnerships that were

conveyed supplied respondent with a clue as to the nature and

amount of gain that was omitted from the Western return, and,

thus, the 6-year period of limitations under section 6229(c)(2)

does not apply.   Petitioner concedes that the omitted gain from

the sale of the partnership interests exceeds 25 percent of the

amount of gross income stated in the 1990 Federal income tax

return of Western.

     Respondent argues that neither the 1990 return nor the

returns of the partnerships that were conveyed provide adequate

disclosure, and, therefore, the 6-year period of limitations is

applicable.   Respondent concedes that the Federal income tax

returns of the partnerships that were conveyed should be

considered along with the 1990 tax return of Western for purposes

of determining whether an adequate disclosure has been made.    See

Walker v. Commissioner, 46 T.C. 630, 637-638 (1966).

     In Colony, Inc. v. Commissioner, 357 U.S. 28, 37 (1958), the

Supreme Court, although interpreting section 275(c), I.R.C. 1939,

the predecessor of section 6501(e), specifically stated that the

result that it reached is in harmony with the language of section

6501(e)(1)(A):

          We think that in enacting section 275(c) Congress
     manifested no broader purpose than to give the
     Commissioner an additional 2 years [now 3] to
                                - 8 -


     investigate tax returns in cases where, because of a
     taxpayer’s omission to report some taxable item, the
     Commissioner is at a special disadvantage in detecting
     errors. In such instances the return on its face
     provides no clue to the existence of the omitted item.
     On the other hand, when, as here, the understatement of
     a tax arises from an error in reporting an item
     disclosed on the face of the return the Commissioner is
     at no such disadvantage. * * * [Id. at 36; emphasis
     added.]

     This Court has held that, in setting out the “clue”

standard, the Supreme Court did not mean a clue sufficient to

intrigue the likes of Sherlock Holmes, or a clue that involved a

detailed revelation of each and every underlying fact.    See Quick

Trust v. Commissioner, 54 T.C. 1336, 1347 (1970), affd. 444 F.2d

90 (8th Cir. 1971).    Disclosure of omitted material can be

adequate without disclosing exact dollar amounts.    See University

Country Club, Inc. v. Commissioner, 64 T.C. 460, 470 (1975).     The

proper application of the rule is whether the need for an

adjustment is “reasonably” apparent from the face of the Federal

income tax return.    See id. at 471.

     The 1990 Federal income tax return of Western informed

respondent that a sale of partnership interests had occurred and

that petitioner had used an amount realized equal to $27,965,551

in reporting gain.    Petitioner claims that statements in the

returns for the partnerships that were conveyed clearly disclose

that Western, at the time of sale, was liable for $69,959,490 of

combined debt.   Petitioner argues that, because payment or
                              - 9 -


assumption of debt by a purchaser is includable in the amount

realized, respondent should have been on notice that the actual

amount realized might be equal to or greater than the debt of

Western, and, therefore, was understated by at least $41,993,939

in the calculation of the loss on the Federal income tax return.

     Petitioner’s argument assumes that it is reasonable to

expect an agent for the Internal Revenue Service to sort through

12 unique and different partnership tax returns to find each

Schedule K-1 issued specifically for Western, and to tally all of

Western’s nonrecourse and other liabilities.    Petitioner’s

argument then assumes that an agent should be able to compare the

amount of liabilities to the disclosed amount realized on the

Federal income tax return of Western, and glean from that

comparison that the amount realized is understated by the

difference between the total liabilities listed on the Schedules

K-1 and the amount reported on the return of Western.

Petitioner’s argument surpasses the bounds of reasonableness.

The purpose behind the adequate disclosure doctrine is to allow

the Commissioner an extra 3 years to assess a deficiency in

situations where a taxpayer’s failure to report income puts the

Commissioner at a special disadvantage in detecting errors.    See

Colony, Inc. v. Commissioner, supra at 36.     The omission in this

case created just that type of disadvantage.    Presumably even the

sophisticated preparers of the returns, who were familiar with
                              - 10 -


the details of the transactions, did not recognize that

substantial income was omitted.

     Colony, Inc. v. Commissioner, supra, upon which petitioner

relies heavily, does not support petitioner’s arguments.      Colony

involved the interplay between "gross receipts" and "gross

income”.   All of the receipts of a sale of real property had been

disclosed, but cost of goods sold had been overstated.    Under

these circumstances, the Supreme Court held that there was not an

omission from gross income within the meaning of the applicable

statute because, in computing the 25-percent threshold, Congress

intended omission of gross income to refer to an understatement

of amount realized rather than net gain.   See id. at 1038.

     Our holding is consistent with the decision of this Court in

Estate of Knox v. Commissioner, T.C. Memo. 1961-129, revd. on

another issue 323 F.2d 84 (5th Cir. 1963).   In Estate of Knox, a

corporation owning real property was liquidated, and the assets

were distributed to the shareholders.   Because an election was

not filed within 30 days after the adoption of the plan of

liquidation, the distribution that was received by the

shareholders should have been reported as income on their

individual tax returns.   The taxpayer, a 60-percent shareholder,

failed to include the distribution in income.   The taxpayer

failed to report that the corporation had been liquidated on her

income tax return but attached a schedule claiming that the
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taxpayer had acquired a 60-percent interest in real property and

was entitled to a depreciation deduction for 60 percent of the

improvements.   The Commissioner sent a notice of deficiency after

the expiration of the 3-year period of limitations.    The taxpayer

argued that her reporting of depreciation fully apprised the

Commissioner of all of the facts necessary to make a

determination of deficiency.    This Court held, however, that such

reporting was not adequate because there was no mention of the

liquidation of the corporation on the tax return.    See id.

     Our holding is also consistent with the opinion of the Court

of Appeals in Phinney v. Chambers, 392 F.2d 680 (5th Cir. 1968).

In Phinney, a taxpayer incorrectly claimed a stepped-up basis in

her one-half interest in a community-owned installment note

issued in exchange for stock.    The full value of the note had

been included in the estate of her deceased husband for estate

tax purposes.   When the note was paid in full, the taxpayer

reported, on her individual income tax return, that the amount

collected was a sale of stock with an amount realized equal to

basis.   When the Commissioner disallowed the stepped-up basis,

more than 3 years but less than 6 years after the taxpayer filed

her return, the taxpayer argued that she had adequately disclosed

the transaction on her Federal income tax return.    The Court of

Appeals held that the taxpayer had not given the Commissioner a

chance to challenge the taxpayer’s contentions, because the
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taxpayer had failed to mention the stepped-up basis anywhere in

the return.   See id. at 684.

     Like the taxpayers in Estate of Knox and Phinney, petitioner

has failed to provide enough information to allow an examining

agent to reasonably identify the underreporting of gain.    In

order to qualify for relief under the adequate disclosure

exception to section 6229(c)(2), the disclosures on the return

have to be more directly related to the omitted income than what

was disclosed by petitioner.

     We have considered all remaining arguments made by

petitioner for a result contrary to that expressed herein, and,

to the extent not discussed above, they are irrelevant or without

merit.   Respondent’s motion for summary judgment will be granted,

and petitioner’s motion for summary judgment will be denied.

     To reflect the foregoing,

                                          An appropriate order and

                                     decision will be entered.
