Statute of Limitations – Substantial Omission from Gross Income

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In the September 12, 2009 newsletter, Taxing Lessons featured T.C. Memo. 2009-195, Intermountain Insurance Service of Vail, LLC (click here to view the newsletter). The case covered the question of whether the standard three year statute of limitations for assessing tax applies to an overstatement of basis.

In a new case (134 T.C. No. 11, Intermountain Insurance Service of Vail, LLC) the court reaffirmed its decision-and declared regulations the IRS issued in the interim invalid.

Here’s a recap: In T.C. Memo. 2009-195, the IRS attempted to make corrections to the taxpayer’s 1999 income tax return six years after the return was filed. The taxpayer argued that the correction should not be allowed because the IRS waited too long to make the assessment. The IRS claimed a six year statute of limitations applied to the change at issue, which involved an overstatement of the basis of an asset, leading to a loss.

The court decided for the taxpayer, saying a basis overstatement is not an omission from gross income, which would trigger the six year statute.

The IRS responded by issuing temporary, retroactive regulations asserting that an overstatement of basis can create a substantial omission of gross income for purposes of the six year statute of limitations for assessments–effectively creating an interpretation of the law to support the position in T.C. Memo. 2009-195. The IRS then asked the court to reconsider T.C. Memo. 2009-195, which led to 134 T.C. No. 11.

In 134 T.C. No. 11 (Intermountain Insurance Service of Vail, LLC) the court reaffirmed the decision reached in the initial opinion. In addition, because a 1958 Supreme Court case (Colony) dealing with this exact issue supports the decision, the court found that the temporary regulations were invalid.

Taxing Lesson: When researching tax law issues, remember that judicial precedent is a primary authority, and can carry as much weight as IRS regulations.

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