6-Year Limitation Does Not Apply To Basis Overstatement

The Supreme Court in U.S. v. Home Concrete and Supply, LLC, 80 U.S.L.W. 3078 (U.S. 2012) has held that an overstatement of basis resulting in understated income is not an omission of gross income subject to the six year limitation on assessment of tax under Internal Revenue Code Section 6501(e)(1)(A).

Code Section 6501(a) generally provides that an assessment of income tax may not be made more than three years after the taxpayer filed its tax return. However, under Code Section 6501(e)(1)(A), a six year period of limitations applies when a taxpayer omits from gross income an amount that is greater than 25% of the amount of gross income stated on the return. In 2010, while the IRS was litigating the limitations issue, it issued final regulations providing that an overstatement of basis that resulted in an understatement of income was an omission from gross income for purposes of the six year period for assessing tax.

The Supreme Court found that the language in Section 6501(e)(1)(A) was nearly identical to its predecessor statute which was addressed in its earlier decision in Colony, Inc. v. Commissioner, 357 U.S. 28 (1958). The Court in Colony held that the extended period of limitations applied to situations where specific income receipts have been left out in the computation of gross income and not where an item had been overstated. The Court declined to give deference to the treasury regulations issued by the IRS concluding that the regulations were inconsistent with its decision in Colony. The Court’s decision came in the context of a “Son of BOSS” tax shelter case where the taxpayer overstated his basis in a partnership interest, resulting in an understatement of income. The IRS failed to make a deficiency assessment within three years of the filing of the tax return, but issued a notice to the taxpayer before the six year statute of limitations had elapsed.