Overstatement Of Basis Ruled Not An Omission Of Gross Income To Extend The Three Year Statute Of Limitations

In a win for the taxpayers, the Supreme Court decided, on April 25, 2012, the case of United States versus Home Concrete & Supply, LLC, and upheld a lower Circuit Court’s decision that an overstatement of tax basis was not an omission of gross income for purposes of the six year statute of limitations.

Ordinarily, a tax return deficiency must be assessed by the IRS against a taxpayer within three years after a return is filed. However, this period know as a statue of limitations) is extended to six years when a taxpayer “omits an amount from gross income which is in excess of 25 percent of the gross income stated in the return.” The taxpayer in Home Concrete Case overstated the basis of certain property sold, and as a result, understated the gain received from the sale. The IRS Commissioner asserted in Circuit Court that the deficiency was within the six year period, but the Circuit Court ruled in favor of the taxpayers.

The IRS pursued the case to the Supreme Court who also ruled in favor of the taxpayers and based its decision in the 1958 Case of Colony, Inc. which determined that the overstatement of basis did not fall within the scope of the longer statute. In the Colony case, the Commissioner had made a similar assertion that the taxpayer had understated the gross profits by overstating the basis in property sold after the three year period of limitation had run out. The Court interpreted the language in the Internal Revenue Code to determine that overstatement of basis in property did not fall within the scope of the statute. The Court also examined various congressional reports in reaching their decision.

In addition, the Supreme Court rejected recently issued Treasury Regulations in favor of Colony’s interpretation of the statute. The Court’s decision was long awaited and resulted in a definitive resolution on this specific tax issue.

Should you have any questions on this Case and the computation of basis in property, please consult you Marcum Tax Advisor.