BASIS OVERSTATEMENT DOES NOT TRIGGER 6 YEAR STATUTE OF LIMITATIONS

Under the Internal Revenue Code, the statute of limitations imposed on the IRS for assessing additional income tax is 3 years after the later of the date the tax return was filed or the due date of the tax return. However, a 6-year period of limitations applies when a taxpayer omits from gross income an amount that's greater than 25% of the amount of gross income stated in the return.

In a recent case before the Court of Appeals for the Federal Circuit, the taxpayer had overstated its adjusted basis in reporting gain from a disposition of property. This overstatement of basis resulted in less gain being reported then was determined to be due. The issue before the Court was whether an understatement of gain relating to an overstatement of basis is an "omission from gross income" giving rise to the extended 6-year period of limitations. Similar rules apply in regard to partnership audits, which rules applied in this case.

Reversing the Court of Claims, the Court of Appeals held that the 6-year statute of limitations did not apply. The Court relied on the U.S. Supreme Court case of Colony Inc. v. Comm., 357 US 28 (1958) wherein the U.S. Supreme Court had indicated that the statutory language refers to 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.

The Ninth Circuit Court of Appeals ruled similarly in 2009, so the IRS will likely have to concede this point in the future.

Salman Ranch Ltd. et al. v. U.S., 104 AFTR 2d ¶ 2009-5190 (CA FC 7/30/2009)