An interesting issue has been batted back and forth in the courts for several years related to the matter of whether overstatement of basis is equivalent to omission of gross income, for purposes of determining whether the three year or six year statute of limitations applies. And the Supreme Court has recently agreed to review a decision of the Fourth Circuit on the question.
In The Colony, Inc. v. Commissioner, the Supreme Court held that the longer statute applies to situations in which specific income receipts have been “left out” of the computation of gross income, as opposed to basis or deduction overstatement. The spate of tax shelter cases which have recently come to the fore (largely resulting from basis enhancement techniques devised by some of the large accounting and law firms) once again embroiled the courts, with mixed results. And in December, 2010, IRS issued final regulations pursuant to which an understated amount of gross income resulting from an overstatement of unrecovered cost or other basis is (in IRS’ view) an omission of gross income for purposes of the six year statutory period.
The Fourth and Fifth circuits, as well as the Tax Court have held that an overstatement of basis does not constitute an omission of gross income. But the Seventh, Tenth, District of Columbia and Federal circuits have agreed with IRS that an overstatement of basis is an omission of gross income.
So, stay tuned for the Supreme Court’s final word, when it rules on the case of Home Concrete & Supply, LLC.