4th CIRCUIT HOLDS 6 YEAR SOL NOT APPLICABLE TO PARTNERSHIP BASIS ISSUES

No sooner had the ink dried on the 7th Circuit's decision in Beard, that the Fourth Circuit Court of Appeals in Home Concrete & Supply et. al. v. United States (No. 09-2353, February 7, 2011) held that it will follow Colony, Inc. v. Commissioner, 357 U.S. 28 (1958) and will not defer to Treasury Reg. 301.6501(e)-1(e) even after the recent Supreme Court's decision in Mayo Foundation for Medical Education and Research v. United States, 562 U.S. __, No. 09-837, slip op. at 6-7 (Jan. 11, 2011).  Colony held that an overstatement of basis in assets resulting in an understatement of reported gain and gross income does not constitute an "omission" from gross income in extending the three (3) year statute of limitations to six (6) years under section 6501(e)(1)(A) of the Internal Revenue Code.  Consequently, there is now a significant split of authority among the Circuit Courts as to whether the retroactively promulgated Reg. 301.6501(e)-1(e) will have legal effect in the IRS's war on tax shelters, and in particular with respect to adjusted basis cases arising from partnership "liquidating" distributions of assets with overstated basis due to sham treatment or partnership lack of business purpose or economic substance.  Numerous cases involving this issue are pending in other Circuit Courts of Appeal and more is sure to come.

SEVENTH CIRCUIT OVERTURNS TAX COURT ON 6 YEAR STATUTE

On January 26th, the Seventh Circuit Court of Appeals overturned the U.S. Tax Court's prior rulings, and held that the IRS is entitled to apply a six (6) year statute of limitations to basis overstatements on income tax returns.  The Seventh Circuit found that the Supreme Court's decision in Colony Inc. v. Commissioner, 357 U.S. 28 (1958) was distinguishable and not controlling.  The Seventh Circuit's decision, entitled Beard v. Commissioner, ___ F.7th ___, No. 09-3741, 2011 WL 222249 (Jan. 26, 2011), is the IRS's first victory on the SOL issue in the Federal Circuit Courts of Appeal.  This issue is pending in several other Circuits so it is not likely to be the last word on the issue.  But the ruling effectively provides the IRS with a powerful argument for more time to challenge basis issues in its war on tax shelters, such as Son of Boss and other partnership basis strips.  For a copy of the case, direct your request to wce@ceclaw.com.