The Internal Revenue Service issued a notice of proposed rulemaking (NRPM) and temporary regulations, effective September 24, 2009, defining an "omission from gross income" for purposes of the six-year statute of limitations for assessment of tax.
Those who participated in son-of-boss partnership shelters (described in Notice 2000-44) that claimed a phantom loss generated by an overstated basis claimed that the statute of limitations had run because an overstatement of basis was not an omission from gross income. (An omission of gross income that exceeds 25% of the income stated on the return gets you into penalty territory.)
These regs are to clarify the Service's view that an overstatement of basis is an omission of gross income. As every student in my "baby tax" class knows, gross income includes gains from sales of property. Gains are determined by subtracting basis from amount realized. An overstatement of basis thus will trigger an understatement of gain (or even a loss) and hence an omission of that understated amount from gross income. But courts do odd things in tax cases. As the Service notes in the NPRM:
[T]he United States Court of Appeals for the Ninth Circuit and Federal Circuit recently construed section 6501(e)(1)(A) in cases outside the trade or business context contrary to the interpretation provided in these temporary regulations, holding that an``omission'' does not occur by an overstatement of basis. Bakersfield Energy Partners v. Commissioner, 568 F.3d 767 (9th Cir. 2009); Salman Ranch Ltd v. United States, 573 F.3d 1362 (Fed. Cir. 2009). The Treasury Department and the Internal Revenue Service disagree with these courts that the Supreme Court's reading of the predecessor to section 6501(e) in Colony applies to sections 6501(e)(1)(A) and 6229(c)(2). When Congress enacted the 1954 Internal Revenue Code, it was aware of the disagreement among the courts that existed at the time regarding the proper scope of section 275(c) of the 1939 Internal Revenue Code. The changes that Congress enacted as part of the 1954 Internal Revenue Code predated the Supreme Court's opinion in Colony and were intended to resolve the matter for the future. Therefore, by amending the Internal Revenue Code, including the addition of a special definition of ``gross income'' with respect to a trade or business, Congress effectively limited what ultimately became the holding in Colony, to cases subject to section 275(c) of the 1939 Internal Revenue Code. Moreover, under section 6501(e)(1)(A) of the 1954 Internal Revenue Code, which remains in effect under the 1986 Internal Revenue Code, when outside of the trade or business context, the definition of ``gross income'' in section 61 applies. In this regard, the Treasury Department and the Internal Revenue Service agree with the opinions in Home Concrete & Supply, LLC v. United States, 599 F.Supp.2d 678, 690 (E.D.N.C. 2008)(overstatement of basis can constitute an omission from gross income for purposes of the six-year period of limitations) and Brandon Ridge Partners v. United States, 2007-2 U.S.T.C. (CCH) ] 50,573, 100 [[Page 49322]]