Client Alert

Recent Rulings Favor Taxpayers Statute of Limitations Defense

September 02, 2009

Douglas Schaaf, Stephen Turanchik and Erika Mayshar

In three recent court decisions, taxpayers have prevailed in blocking federal tax assessments on the grounds that the governments assessments were untimely. These rulings represent a series of taxpayer victories and provide some much-needed clarity on the question of whether overstated basis can trigger an extended statute of limitations.

In each case the Internal Revenue Service had made an assessment of tax after the expiration of the normal three-year statute of limitations, and argued that a six-year statute of limitations applied because the taxpayers overstated basis constituted a substantial omission of gross income within the meaning of Internal Revenue Code Section 6501(e). Section 6501(e) allows the government to assess additional tax within an extended six-year period where the taxpayer omits an amount from gross income that exceeds 25 percent of the gross income as stated in the return.

While the IRS had sometimes prevailed with this argument in the past, this year the argument was rejected by the U.S. Tax Court, U.S. Court of Appeals for the Federal Circuit, and U.S. Court of Appeals for the Ninth Circuit. Each of these courts held that an overstatement of basis on a tax return is not equivalent to omitting an item of income, and therefore does not allow the government additional time to assess tax.

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