Basis OverStatement Is Now Retroactively Subject To The 6-year Statute of Limitations Period
by Victoria Majors Jones, CPA on 06/02/11
In a recent Court of Appeals case for the Tenth Circuit, the court held that IRS properly determined that an overstatement of basis is an omission of gross income for purposes of the 6-year limitations period of Code Sec. 6501(e)(1)(A) under retroactively effective regs. (Salman Ranch, LTD; Frances Koenig, Tax Matters Partner, (CA 10 05/31/2011 107 AFTR 2d)
Code Sec. 6501(a) provides generally that a IRS adjustment of a taxpayer's income tax liability may not be made more than 3 years after the later of the date the tax return was filed or the due date of the tax return. However, under Code Sec. 6501(e)(1)(A), 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.Although, basis has in the past been considered by the courts to be a deduction and not part of the definition of gross income, it appears that the Salaman Ranch case gives the IRS the power to apply the 6 year limitation period when a taxpayer overstates basis.
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