Supreme Court Finds No Extended Limitations Period for Basis Overstatement

The U.S. Supreme Court recently held that an overstatement of basis did not trigger the extended six-year statute of limitations assessment period under Internal Revenue Code Section 6501(e)(1)(A) (United States v. Home Concrete & Supply LLC, U.S., No. 11-139, 4/25/12).

The Court in a 5-4 split decision affirmed a U.S. Court of Appeals for the Fourth Circuit decision holding that an understatement of income resulting from overstatement of basis in goods sold is not an omission from gross income triggering the extended assessment period.

Under Section 6501(e), the normal three (3) year statute is extended to six (6) years if the taxpayer omits gross income in excess of 25% of the amount stated on the return.  This decision essentially clarified the Court’s 1958 ruling in Colony, Inc. v. Commissioner in determining that misstatements of basis in property do not fall within the scope of Section 6501(e)(1)(A) which calls for the extended limitations period.  In addition, the decision rejected the Government’s argument that a recently promulgated Treasury Regulation interpreting the statute in its favor should be given deference since Colony had already interpreted the statute and any construction inconsistent with Colony was not available.

As the law continues to evolve on these matters, please note that this article is current as of date and time of publication and may not reflect subsequent developments. The content and interpretation of the issues addressed herein is subject to change. Cole Schotz P.C. disclaims any and all liability with respect to actions taken or not taken based on any or all of the contents of this publication to the fullest extent permitted by law. This is for general informational purposes and does not constitute legal advice or create an attorney-client relationship. Do not act or refrain from acting upon the information contained in this publication without obtaining legal, financial and tax advice. For further information, please do not hesitate to reach out to your firm contact or to any of the attorneys listed in this publication.

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