Another Federal Court of Appeals Weighs In On The Applicability Of The Six-Year Statute Of Limitations Period To An Overstatement Of Basis

The U.S. Court of Appeals for the D.C. Circuit recently reversed two U.S. Tax Court decisions and held that an overstatement of basis constitutes an omission from gross income that is subject to the six-year statute of limitations period under sections 6229(c)(2) and 6501(e)(1)(A). These decisions further the conflict among the appellate courts regarding the applicability of the extended limitations period.

On June 21, 2011, another U.S. Court of Appeals weighed in on the dispute between taxpayers and the Internal Revenue Service (IRS) as to whether an overstatement of basis constitutes an omission from gross income that triggers the six-year statute of limitations period under sections 6229(c)(2) and 6501(e)(1)(A) of the Internal Revenue Code. In Intermountain Ins. Serv. of Vail, LLC v. Commissioner, No. 10-1204 (D.C. Cir. 2011) (Intermountain II), rev'g T.C. Memo 2009-195 (Intermountain I), and UTAM, Ltd. v. Commissioner, No. 10-1262 (D.C. Cir. 2011), rev'g T.C. Memo 2009-253, the U.S. Court of Appeals for the District of Columbia reversed the U.S. Tax Court's decision and held that an overstatement of basis does constitute an omission from gross income that is subject to a six-year statute of limitations period.

The IRS generally has three years from the date the taxpayer filed its tax return to assess a tax against a taxpayer. However, if a taxpayer omits an item from gross income on its return that is in excess of 25 percent of the amount of gross income stated on the return, the period for assessment is extended from three years to six years. Various U.S. Courts of Appeals have issued decisions on the matter in 2011, and the results have been mixed.

Background

Disputes between taxpayers and the IRS regarding whether an overstatement of basis can subject a taxpayer to a six-year statute of limitations period have made their way through the courts since 2009. In that year, the U.S. Courts of Appeals for the Ninth Circuit and the Federal Circuit decided in Bakersfield Energy Partners, LP v. Commissioner, 568 F.3d 767 (9th Cir. 2009), aff'g 128 T.C. 207 (2007), and Salman Ranch Ltd. v. United States, 573 F.3d 1362 (Fed. Cir. 2009), rev'g 79 Fed. Cl. 189 (2007) (Salman Ranch I), respectively, that an overstatement of basis does not constitute an omission from gross income that triggers a six-year statute of limitations period. The courts in Bakersfield Energy and Salman Ranch I relied on the Supreme Court of the United State's decision in...