Courts disagree on IRS ruling

The courts continue to be confounded over the question of whether an overstatement of basis that causes an understatement of gain or overstatement of loss on the sale of an asset is an event that allows the IRS to invoke the six-year statute of limitations. 

The tax law generally provides that the IRS may not assess an income tax liability more than three years after the later of (a) the due date of the tax return or (b) the date the tax return is actually filed. However, a six-year period of limitations applies when the return omits an amount of gross income that exceeds 25 percent of the gross income stated on the return.

The IRS believes, and has issued regulations that state, that a basis overstatement causes an omission of gross income. Therefore, if the basis overstatement causes the gross income omission to exceed the 25 percent threshold, the IRS will invoke the six-year statute of limitations.

A number of courts have reviewed this question, some siding with the IRS and some holding the regulations invalid. In the most recent case, Intermountain Insurance Service of Vail (June 21, 2011), the U.S. Court of Appeals for the District of Columbia has reversed the Tax Court and validated the regulations.

In upholding the IRS interpretation, the District of Columbia joins the Court of Appeals for the Federal Circuit and the U.S. Courts of Appeals for the 7th and 10th Circuits. The 4th and 5th U.S. Circuit Courts of Appeals have struck down the regulations. In a case involving similar facts, but predating the regulations, the 9th Circuit ruled that a basis overstatement did not constitute an income omission.

It seems likely that the United States Supreme Court will be asked to render the final verdict on this contentious issue.

© 2018 Apex CPAs & Consultants, Inc.   |   1652 E. Main Street, Suite 100, Saint Charles, Illinois 60174  |   Tel 630.584.4555
Admin   |   Upload Docs  |   Client Login