Fifth Circuit Rules against the United States in basis overstatement case – causing further rift between the Circuits in Son of BOSS cases

Feb 21, 2011   

On February 9, 2011, the Fifth Circuit Court of Appeals issued an opinion in a consolidated appeal in Daniel Burks, as Tax Matters Partner for Key Harbor Investment Partners v. United States. The full decision can be found here.

As in all of the recently discussed opinions, in Burks, again, the issue was whether the overstatement of basis was a reason for the IRS to use the substantial omission from gross income exception to the normal 3 year statute of limitation rule contained in IRC section 6501(a). Section 6501 can be view in full here.

However in ruling for the taxpayer, the Fifth Circuit concluded that an overstatement of basis is not an omission from gross income for purpose of the six year statute of limitations contained in IRC section 6501(e)(1)(A), and affirmed the Tax Court’s judgment in favor of the taxpayer and reversed the district court’s judgment in favor of the government. The 5th Circuit explained that an omission of an amount from the tax return or a misstatement of the nature of an item reported in a tax return that puts the government at a disadvantage in detecting the error in the taxpayers return that results in the six year statute of limitations contained in IRC section 6501(e)(1)(A). Because the nature of the item, in this case the basis of the partnership was included in the tax return, this gave the government with sufficient information to look into that specific item contained on the tax return. As long as there is not a fundamental change of nature of the item reported on the tax return, the disclosure of the item at issue on the tax return provides the government on notice of the item being reported and the three year normal limitations period under IRC section 6501(a) should apply.

The 5th Circuit’s decision is in direct conflict with an earlier ruling entered by the 7th Circuit, as we previously blogged here.

The attorneys at Fuerst Ittleman, PL have extensive experience litigating against the IRS and the U.S. Department of Justice “ Tax Division regarding tax shelters and statute of limitations.