Courts do not agree on IRS regulation
Several courts are addressing the legality of an IRS regulation, with mixed results.
 
Late last year, the IRS issued final regulations describing conditions under which it will be allowed six years – instead of the normal three years – to assess additional tax if you overstate the cost or tax basis in an asset you have sold.
 
An overstatement of basis leads to an understatement of gain or overstatement of loss on the sales transaction. The IRS regulations contend that if the basis overstatement results in more than 25 percent of your income being reported, then the six-year limitations period applies.
 
Several courts had held that a basis overstatement is not an omission of gross income for this purpose. In response to these decisions, the IRS issued the new regulations to clarify that an omission can arise from a basis overstatement.
 
Now more courts are addressing the regulations. Both the Tax Court and the Court of Appeals for the Fourth Circuit have rejected the regulations. On the other hand, the Federal Circuit upheld the regulations, and the Seventh Circuit has viewed them favorably.
 
It seems likely that this issue will be headed to the Supreme Court for final resolution.

Several courts are addressing the legality of an IRS regulation, with mixed results.

Late last year, the IRS issued final regulations describing conditions under which it will be allowed six years – instead of the normal three years – to assess additional tax if you overstate the cost or tax basis in an asset you have sold.

An overstatement of basis leads to an understatement of gain or overstatement of loss on the sales transaction. The IRS regulations contend that if the basis overstatement results in more than 25 percent of your income being reported, then the six-year limitations period applies.

Several courts had held that a basis overstatement is not an omission of gross income for this purpose. In response to these decisions, the IRS issued the new regulations to clarify that an omission can arise from a basis overstatement.

Now more courts are addressing the regulations. Both the Tax Court and the Court of Appeals for the Fourth Circuit have rejected the regulations. On the other hand, the Federal Circuit upheld the regulations, and the Seventh Circuit has viewed them favorably.

It seems likely that this issue will be headed to the Supreme Court for final resolution.

 
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