Tax Court Sustains Partnership Adjustments after Son-of-BOSS Transactions; Taxpayers Avoid Penalties

In CNT Investors, LLC v. Commissioner, No. 27539-08 (March 23, 2015), the tax court sustained the IRS's final administrative adjustments imposed on a partnership. The taxpayers involved in the case owned appreciated property - i.e. funeral homes - through an S corporation. They organized a partnership and caused the S corporation to contribute the funeral homes to the partnership. After a series of transactions, the individual taxpayers held the real estate through the partnership. These transactions, in the aggregate, purportedly allowed the taxpayers to create an outside basis in the partnership without recognizing the built-in gain attributable to the funeral homes.

However, the taxpayers conceded that the partnership and the related "son-of-BOSS transactions" were shams and argued that the period for assessment essentially had passed. The tax court disagreed, concluding that the assessment period had remained open. Moreover, although the IRS sought to assess a gross valuation misstatement penalty under section 6662 of the Code, the tax court concluded that taxpayers' reliance on advice of counsel, in this case, demonstrated reasonable cause and good faith within the meaning of section 6664(c). Accordingly, no penalty was imposed on the taxpayers for what otherwise would have been a gross undervaluation of tax.