Thursday, December 03, 2009

IRS REFUSES TO GIVE UP ON OVERSTATED BASIS STATUTE OF LIMITATIONS ISSUES

We have previously reviewed two cases that have held that a reduction in gain arising from an erroneous overstated tax basis in an asset is NOT an omission from gross income that can give rise to an extended six year statute of limitations for gross income omissions of 25% or more. Salman Ranch Ltd. et al. v. U.S., 104 AFTR 2d ¶ 2009-5190 (CA FC 7/30/2009); Bakersfield Energy Partners, LP, Robert Shore, Steven Fisher, Gregory Miles and Scott McMillan, Partners other than the Tax Matters Partner, 128 TC No. 17 (2007). Nonetheless, the IRS has refused to be cowed by these decisions.

In September, the IRS issued new Temporary Regulations that will treat such basis overstatements as omissions from gross income for this purpose (Reg. § 301.6501(e)-1T(a)(1) ,  Reg. § 1.6229(c)(2)-1T(a)(1) ,  T.D. 9466, 09/24/2009).  The IRS has further signaled its enthusiasm for this issue by issuing a directive to IRS attorneys litigating these issues to contact the Office of Associate Chief Counsel (Procedure and Administration) to coordinate responses to the issue in light of the new Temporary Regulations.

Apparently, the IRS intends to pursue these issues, even in jurisdictions with court decisions hostile to the IRS’ position. The Temporary Regulations were crafted to take advantage of language in cases that had previously ruled in favor of the IRS on the issue. Whether the adoption of Temporary Regulations will now convince courts in those jurisdictions that were previously hostile to the IRS’ position remains to be seen.

Chief Counsel Notice 2010-001

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