Six-Year Statute of Limitations for Basis Overstatements

Recent cases have created a split among the circuits on the question of whether a basis overstatement is an omission of gross income, and may therefore result in an extended statute of limitations. This lack of consensus has created continued uncertainty regarding the applicable statute of limitations resulting from basis overstatements. New Treasury Regulations and the application of a Supreme Court opinion this year have added a dramatic touch rarely encountered in tax matters.

The statute of limitations on the assessment of income tax generally begins to run upon the date of filing a (non-fraudulent) return, and usually lasts three years.¹ Careful computation of the statutory period is important because the statute of limitations can be used to defend against adverse claims made by the IRS. The taxpayer must prove the date the return was filed, and that the IRS assessed the deficiency after the expiration of the statute.² If an omission of income is greater than 25 percent of gross income, such an omission will subject the return to a longer, six-year statute of limitations.³ Adequate disclosure may negate the six-year statute.⁴ Such disclosure must be sufficient to apprise the IRS as to the nature and amount of the item in question. Although the recent cases provide little guidance in this regard, as discussed below, care should be taken to make full return disclosure in order to preserve this exception.