Vince Nardone: Tax and Controversy

United States Tax Court to IRS - Basis overstatement is not omission of income.

In Kenneth Beard v. Commissioner, TC Memo 2009-184 the Tax Court held that an overstatement of basis is not an omission of gross income for purposes of Internal Revenue Code section 6501.  Why is that important?  Well, Section 6501 provides that, unless extended or suspended, the statute of limitations on assessment for income taxes is three years from the later of when the return was filed or the return's due date.  One exception, however, is where the original return as filed omitted gross income in an amount exceeding 25% of the gross income that was stated on the return, the three-year rule is replaced with a six-year rule.  Thus, the IRS can go back 6 years rather than 3 years if this exception applies.

In Beard,the IRS had determined that the taxpayer had overstated his basis in two S corporations sold during the taxable year 1999, thus causing an understatement of gross income by more than 25 percent of the amount stated in the taxpayer's return.  The issue for decision was whether, under those circumstances, the taxpayer's actually omitted income, giving rise to an an extended 6-year period of limitations.  The court recognized that the general definition of gross income in the context of a trade or business meant the total of the amounts received or accrued from the sale of goods or services.  The IRS tried to argue that the overstatement of basis in a context outside of the sale of goods or services should constitute an omission from gross income.  Rejecting that argument, the court held that the taxpayers did not omit income from their return.  Therefore, the taxpayers were not subject to the 6-year period of limitations.  Great result for the taxpayers.

See the full case attached.Download Basis and sol - as of August 19, 2009

United States Tax Court to IRS - Basis overstatement is not omission of income.

In Kenneth Beard v. Commissioner, TC Memo 2009-184 the Tax Court held that an overstatement of basis is not an omission of gross income for purposes of Internal Revenue Code section 6501.  Why is that important?  Well, Section 6501 provides that, unless extended or suspended, the statute of limitations on assessment for income taxes is three years from the later of when the return was filed or the return's due date.  One exception, however, is where the original return as filed omitted gross income in an amount exceeding 25% of the gross income that was stated on the return, the three-year rule is replaced with a six-year rule.  Thus, the IRS can go back 6 years rather than 3 years if this exception applies.

In Beard,the IRS had determined that the taxpayer had overstated his basis in two S corporations sold during the taxable year 1999, thus causing an understatement of gross income by more than 25 percent of the amount stated in the taxpayer's return.  The issue for decision was whether, under those circumstances, the taxpayer's actually omitted income, giving rise to an an extended 6-year period of limitations.  The court recognized that the general definition of gross income in the context of a trade or business meant the total of the amounts received or accrued from the sale of goods or services.  The IRS tried to argue that the overstatement of basis in a context outside of the sale of goods or services should constitute an omission from gross income.  Rejecting that argument, the court held that the taxpayers did not omit income from their return.  Therefore, the taxpayers were not subject to the 6-year period of limitations.  Great result for the taxpayers.

See the full case attached.Download Basis and sol - as of August 19, 2009