United States: Supreme Court To Resolve Statute Of Limitations For Overstatements Of Tax Basis

We have previously reported on several cases where courts have addressed the amount of time the Internal Revenue Service ("IRS") has to assess a tax deficiency if the taxpayer overstates the income tax basis of an asset that he has sold. Normally, the IRS has 3 years from the date on which a tax return is filed to assess additional tax with respect to the tax year covered by the return. If the taxpayer omits an amount of gross income from his tax return, however, that is more than 25% of the amount of gross income reported on the return, the IRS has 6 years within which to assess additional tax.

A number of tax-advantaged transactions that were popular in the late 1990s and early 2000s resulted in the income tax basis of an asset being increased before the asset was sold. These transactions have led to considerable litigation over whether the overstatement of tax basis is the same thing as an understatement of gross income. Over time, a split has developed among the various circuits of the United States Court of Appeals. In our last edition, we reported on two recent cases where the Court of Appeals upheld a regulation the government issued to help its own position on this issue.

When different circuits of the Court of Appeals take different positions on the same issue, the Supreme Court often accepts one of the cases to resolve the split and that is what has happened here. On September 27, 2011, the Supreme Court agreed to hear the case Home Concrete Supply LLC v. United States, where the Court of Appeals for the Fourth Circuit held in favor of the taxpayer that an overstatement of basis was not the same thing as an understatement of gross income. The Supreme Court will answer that question and will also determine the validity of the government's self-help regulation which says that an overstatement of basis is an omission of gross income. We will report on the outcome when the Supreme Court renders its decision.

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