US Supreme Court to Rule on 6 Year IRS Audit for Tax Shelter

Oct 10, 2011   
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On September 27, 2011, the U.S. Supreme Court granted certiorari to determine whether an understatement of gross income attributable to an overstatement of basis in property is an "omi[ssion] from gross income" that can trigger the Internal Revenue Services (IRS) six-year statute of limitations.

Generally, the IRS has three years to assess additional tax if the Agency believes that the taxpayer’s return has understated the amount of tax owed. I.R.C. § 6501(a). However, the assessment period is extended to six years if the taxpayer "omits from gross income an amount properly includible therein . . . in excess of 25 percent of the amount of gross income stated in the [taxpayer’s] return." I.R.C. § 6501(e)(1)(A).

The case currently before the Supreme Court, U.S. v. Home Concrete & Supply, LLC, will hopefully clear up inconsistent lower court rulings regarding the amount of time the IRS has to challenge a tax shelter technique known as “Son-of-BOSS” (Bonds and Options Sales Strategy). The IRS argues that it should have six years to challenge Son-of-BOSS shelters. The Seventh, Federal, Tenth, and D.C. Circuits held that the six year statute of limitation applies, while the Fourth, Fifth, and Ninth Circuits have held that the three year statute of limitations applies.

The disputed Son-of-BOSS shelter was designed to artificially inflate the cost basis of an asset when sold, often through partnerships, allowing taxpayers to claim little to no capital gains. According to IRS estimates, this technique was used by more than 1,900 taxpayers leading to more than $6 billion in unpaid taxes.

In U.S. v. Home Concrete & Supply, LLC, a group of North Carolina taxpayers entered into a short sale of U.S. Treasury bonds and moved the transaction into a partnership which they subsequently sold.  In 2006, the IRS issued a Notice of Final Partnership Administrative Adjustment (FPAA) concluding that the taxpayers had improperly used a pass-through company to increase their cost basis, leaving them with a $69,000 gain on a sale of more than $10 million and requiring the taxpayers to pay $1.4 million. The taxpayers brought suit alleging the FPAA was barred by the general three-year limitations period in I.R.C. § 6501(a) and are seeking a refund.

Fuerst Ittleman will continue to monitor the progress of the abovementioned case along with new developments in tax law.  See our previous blogs on Son-of-BOSS tax shelters posted on February 21, 2011 and February 28, 2011. For more information, please contact us at