                        T.C. Memo. 2009-253



                      UNITED STATES TAX COURT



     UTAM, LTD., DDM MANAGEMENT, INC., TAX MATTERS PARTNER,
                          Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 24762-06.              Filed November 9, 2009.



     James F. Martens, Michael B. Seay, and Kelli H. Todd, for

petitioner.

     Edsel Ford Holman, Jr., for respondent.



                        MEMORANDUM OPINION


     KROUPA, Judge:   This partnership-level matter is before the

Court on petitioner’s motion for summary judgment as supplemented

and respondent’s cross-motion for partial summary judgment,
                                 -2-
respectively filed under Rule 121.1    Respondent issued UTAM, Ltd.

(partnership) a notice of final partnership administrative

adjustment (FPAA) for 1999 on October 13, 2006, which is beyond

the general 3-year periods for assessment under sections 6229(a)

and 6501(a).   We must decide whether a basis overstatement

constitutes a substantial omission from gross income that can

trigger an extended 6-year assessment period under section

6229(c)(2) or section 6501(e)(1)(A).     We hold that the extended

assessment period does not apply to an overstatement of basis in

this case and follow Bakersfield Energy Partners, LP v.

Commissioner, 128 T.C. 207 (2007), affd. 568 F.3d 767 (9th Cir.

2009).2   Accordingly, we shall grant petitioner’s motion for

summary judgment and deny respondent’s cross-motion for partial

summary judgment.

                            Background

     The following facts have been assumed solely for purposes of

resolving the pending motions.   David Morgan created several

entities for both tax and non-tax related purposes.    Mr. Morgan’s

first business enterprise was Success Life, a life insurance

agency based in Austin, Texas.   As Success Life expanded into

real estate and other ventures, Mr. Morgan merged Success Life
     1
       All section references are to the Internal Revenue Code
(Code) in effect for the year at issue, and all Rule references
are to the Tax Court Rules of Practice and Procedure, unless
otherwise indicated.
     2
       Respondent does not argue that the regulations under sec.
301.6501(e)-1T, Temp. Proced. & Admin. Regs., 74 Fed. Reg. 49321
(Sept. 28, 2009), apply.
                                -3-
into UTA Management, Inc. (UTA Management), an S corporation he

solely owned.   Mr. Morgan decided, because of the Texas franchise

tax on S corporations, to transfer the business of UTA Management

to a limited partnership.   Mr. Morgan created UTAM, Ltd., a

limited partnership consisting of two partners, UTA Management

and DDM Management, Inc. (DDMM), an S corporation owned by Mr.

Morgan and his family.   Shortly after the partnership’s

formation, an unrelated insurance company offered to purchase all

outstanding partnership interests.

     Before the sale occurred, UTA Management artificially

inflated its basis in the partnership from $2,764,685 to

$41,105,132 through a series of transactions constituting what is

now known as a “Son of BOSS” tax shelter.   These transactions

reduce or eliminate capital gains by creating artificial losses

through the transfer of assets laden with significant liabilities

to a partnership.   Here, UTA Management increased its basis by

contributing $38,158,500 in cash along with short sale positions

of $38 million in U.S. Treasury Notes to the partnership.     UTA

Management included the cash contributions in computing its new

partnership basis but excluded the short sale position because

the liability could not be determined at the time of transfer.

     UTA Management and DDMM sold their partnership interests for

$27,848,493 and $350,000 respectively.   DDMM reported a $318,187

gain from the sale on its Federal tax return for 1999.     UTA

Management elected to treat the sale of its partnership interest
                                -4-
as a deemed sale of partnership assets under section 338(h)(10)

and reported a $13,256,639 loss.3

     As previously stated, respondent issued the FPAA beyond the

general 3-year assessment periods.    Respondent determined that

UTAM “was a sham” and found UTA Management’s basis overstatement

presented issues that must be addressed at the partnership level.

Respondent therefore reversed all of UTAM’s income items, expense

items, and capital transactions and adjusted UTA Management’s

outside partnership basis to zero.

     Petitioner challenges the timeliness of the FPAA arguing

that the general 3-year assessment periods had already expired

when respondent issued the FPAA.    Petitioner argues that a basis

overstatement cannot trigger an extended 6-year period of

assessment under either section 6229(c)(2) or section

6501(e)(1)(A) citing Bakersfield Energy Partners, LP v.

Commissioner, supra.   Respondent asserts that we decided

Bakersfield incorrectly and urges us to overrule it.    We decline

to do so.

     Appeal of this case lies with the Court of Appeals for the

D.C. Circuit, and no case in the D.C. Circuit contradicts our

prior holdings on the contested issue.




     3
      This is calculated by subtracting UTA Management’s claimed
basis ($41,105,132) from the amount it received for its interest
in the partnership ($27,848,493).
                                      -5-
                                  Discussion

       This is yet one more Son of BOSS case before the Court on

the parties’ cross-motions for full or partial summary judgment

on the issue whether the FPAA was timely if issued after the

general 3-year periods expired.         Both parties agree that the

facts are not in dispute.         We must apply the law to the facts.

We begin with the general rules for the limitations period.

       The Code does not provide a limitations period within which

the Commissioner must issue an FPAA.           See Curr-Spec Partners, LP

v. Commissioner, 579 F.3d 391 (5th Cir. 2009), affg. T.C. Memo.

2007-289; Rhone-Poulenc Surfactants & Specialties, LP v.

Commissioner, 114 T.C. 533, 534-535 (2000).          Partnership item

adjustments will be time barred at the partner level, however, if

the Commissioner does not issue the FPAA within an applicable

period for assessing tax attributable to partnership items.

Curr-Spec Partners, LP v. Commissioner, supra at 398; Rhone-

Poulnec Surfactants & Specialities, LP v. Commissioner, supra at

535.       The Commissioner must generally assess a tax or issue a

notice of deficiency within a 3-year period after a taxpayer

files his or her return.       Secs. 6501(a), 6503(a).     The Code

provides a specific rule governing the adjustment of partnership

items.4      Sec. 6229(a), (d).    The general 3-year assessment
       4
      Partnership items include any item of income, gain, loss,
deduction, or credit that subtit. A requires the partnership to
take into account for the taxable year, to the extent that
                                                   (continued...)
                                -6-
periods extend to six years if the taxpayer (or partnership)

omits an amount properly includable in gross income that exceeds

25 percent of the amount of gross income stated in the return.

Secs. 6501(e)(1)(A), 6229(c)(2).   The additional three years is

necessary because the Commissioner is at a special disadvantage

to discover an omission of items from a return as opposed to

including items that reduce taxable income.    See Colony, Inc. v.

Commissioner, 357 U.S. 28, 36 (1958); Taylor v. United States,

417 F.2d 991, 993 (5th Cir. 1969).

     Respondent concedes that he issued the FPAA after the

general 3-year assessment periods expired.    Respondent argues

this Court maintains jurisdiction because a basis overstatement

by the partnership extends the period for assessing tax under

either section 6229(c)(2) or section 6501(e)(1)(A).    Respondent

admits there was no such omission in the partnership’s tax return

for 1999 but claims that UTA Management omitted an item from

gross income by overstating the basis of its investment in the

partnership by $37,857,494.   He therefore argues the FPAA was

timely because the alleged overstated basis on UTA Management’s

return extended the limitations period for assessing an income

tax deficiency against Mr. Morgan, the sole shareholder of UTA


(...continued)
regulations provide that the item is more appropriately
determined at the partnership level than at the partner level.
See sec. 6231(a)(3); see also sec. 301.6231(a)(3)-1(a), Proced. &
Admin. Regs.
                                  -7-
Management, to six years.   Petitioner counters that Bakersfield

Energy Partners, LP v. Commissioner, 128 T.C. 207 (2007) controls

this case, and asserts that even if UTA Management’s basis was

overstated, that alone is not an omission from gross income.

     We have held that a basis overstatement is not an omission

from gross income.   See id. at 213-215.    In Bakersfield we

applied the Supreme Court’s holding in Colony, Inc. v.

Commissioner, supra, and stated that the extended limitations

period applies where “specific income receipts have been ‘left

out’ in the computation of gross income and not when an

understatement of gross income resulted from an overstatement of

basis.”   Bakersfield Energy Partners, LP v. Commissioner, supra

at 213 (paraphrasing Colony, Inc. v. Commissioner, supra).

     The Court of Appeals for the Ninth Circuit affirmed our

Opinion in Bakersfield, 568 F.3d at 778.     The Court of Appeals

for the Federal Circuit also recently held that Colony controlled

the disposition of a section 6501(e)(1)(A) case involving a basis

overstatement.   Salman Ranch Ltd. v. United States, 573 F.3d

1362, 1377 (Fed. Cir. 2009); see also Intermountain Ins. Serv. of

Vail, LLC v. Commissioner, T.C. Memo. 2009-195; Beard v.

Commissioner, T.C. Memo. 2009-184.      These cases have all

concluded that mere overstatement of basis does not trigger the

extended period of limitations.
                                 -8-
     Respondent relies on Phinney v. Chambers, 392 F.2d 680 (5th

Cir. 1968).    The Fifth Circuit Court of Appeals in Phinney found

that the 6-year period of limitations applied to a fiduciary

income tax return on which the nature of an item of income was

misstated.    The Commissioner was at a disadvantage identifying

the error in the reporting of the transaction in issue in Phinney

because the fiduciary tax return listed the item of income

without disclosing its receipt in an installment sale.       Phinney

is not directly on point and does not persuade this Court to

overrule Bakersfield.

     Respondent further argues that the Supreme Court holding in

Colony is limited to the context of trade or business income from

the sale of goods or services.     Respondent asserts that Colony

should not apply because petitioner was not in the trade or

business of selling partnership interests.      This Court rejected

the same argument in Bakersfield.      Neither the language nor the

rationale of Colony can be limited to the sale of goods or

services by a trade or business.       Bakersfield Energy Partners, LP

v. Commissioner, 128 T.C. at 215.

     Finally, respondent argues that the Court should focus on

the definition of the phrase “gross income,” not on the

definition of the word “omits” when interpreting the phrase

“omits from gross income.”    The Supreme Court, however, attached

importance to the word “omits” in determining whether the
                                -9-
limitations period should be extended.    See Colony, Inc. v.

Commissioner, supra at 32.   This Court finds no “omission” from

gross income such as would trigger an extended period for

assessment.

     We have considered all arguments made in reaching our

decision, and, to the extent not mentioned, we conclude that they

are moot, irrelevant, or without merit.   We conclude that neither

the partnership nor any of its partners omitted gross income from

a return so as to make applicable the extended assessment period

of section 6229(c)(2) or section 6501(e)(1)(A).     We therefore

find that the limitations period for assessing tax against

petitioner has expired.

                                           An appropriate order and

                                      decision will be entered for

                                      petitioner.
