Another Court Weighs in on Overstatement of Basis

Usually, the IRS has only 3 years from the due date of a return to commence an audit. However, if there is an omission of gross income of more than 25%, than the IRS has 6 years to act. A question that has been under debate for several years now is whether an overstatement of basis, which has the effect of minimizing gain of the sale of an item, is an omission of gross income.

The Court of Appeals for the 10th Circuit has now weighed in, finding that it is an omission of gross income. This brings the scorecard of appellate courts that have weighed in on the same matter to 3 (with the IRS) to 2 (opposed to the IRS).

In this case, the court upheld IRS regulations that treat an overstatement of basis as an omission from gross income. The U.S. Supreme Court, in a case it decided earlier this year (involving a different matter), set the standard for review of regulations. When the Tax Code is silent or ambiguous on a matter and IRS regulations are issued to resolve the ambiguity, a court is supposed to give considerable weight to the regulations (referred to as judicial deference) as long as they are a permissible construction of the statute.

Bottom line: With a split in the circuits, expect the matter to go to the U.S. Supreme Court for a resolution.

Source: Salman Ranch Ltd., 10^th Cir.