Court Of Appeals Widens Circuit Divide on Basis Overstatement as to the Six Year Statute Of Limitations

Feb 07, 2011   

On January 26, 2011, Judge Evans in writing for the 7th Circuit held that an overstatement of basis is an omission of income under Internal Revenue Code section 6501(e) thereby triggering a six year (as compared to three year) statute of limitations under section 6501(a). The trial court ? the U.S. Tax Court ? held that under U.S. Supreme Court precedent the overstatement of basis is not an omission of income for purposes of the extended statute of limitations.

The 7th Circuit distinguished the Supreme Court case of Colony, Inc. v. Comm’r, 357 U.S. 28 (1958) and noted that that Colony is factually distinguishable and did not control. The 7th Circuit pointed to changes in section 6501(e)(1)(A). In particular, the court noted the addition of two subsections (i) and (ii) that address the situation faced by the Supreme Court in Colony . Subsection (i) addresses when ?there is an omission of an actual receipt or accrual in a trade or business situation.? Subsection (ii) ?provides a safe harbor for improperly completed returns where the return on its face still provides a ?clue? to the omitted amount.?

The Court noted that some courts have found Colony not to apply to basis overstatements. See, e.g., Phinney v. Chambers, 392 F.2d 680 (5th Cir. 1968); Home Concrete & Supply, LLC v. United States, 599 F. Supp. 2d 678 (E.D. N.C. 2008), appeal docketed, No. 09-2353 (4th Cir. Dec. 9, 2009); Burks v. United States, 2009 WL 2600358 (N.D. Tex. June 13, 2008), appeal docketed, No. 09-11061 (5th Cir. Oct. 26, 2009); Brandon Ridge Partners v. United States, 100 A.F.T.R. 2d 2007-5347, 2007 WL 2209129 (M.D. Fla. Jul. 30, 2007).

While other courts have found Colony to apply. See, e.g., Salman Ranch Ltd. v. United States, 573 F.3d 1362 (Fed. Cir. 2009); Bakersfield Energy Partners LP v. Commissioner of Internal Revenue, 568 F.3d 767 (9th Cir. 2009); Grapevine Imports, Ltd. v. United States, 77 Fed. Cl. 505 (2007), appeal docketed, No. 2008-5090 (Fed. Cir. June 27, 2008).

The full decision can be found here:

http://www.ca7.uscourts.gov/tmp/551FETWN.pdf

The significance for taxpayers is that depending on where the taxpayer lives at the time his Petition for Redetermination is filed with the U.S. Tax Court, or which U.S. District Court he/she files a lawsuit against the U.S. Government, will govern the outcome of the case. Accordingly, two taxpayers with identical facts may have two different outcome based merely upon where they reside.

Lawyers at Fuerst Ittleman PL are experienced in handling tax litigation against both the IRS and the U.S. Department of Justice.