In Grapevine Imps. Ltd. v. United States, 2011 U.S. App. LEXIS 4967 (Fed. Cir. Mar. 11, 2011), the partnership asserted that the extended limitations period under former I.R.C. §§ 6229, 6501 for an omission from gross income did not apply to the alleged overstatement of basis of the partnership. The government argued that the overstatement of basis resulted in the partnership reporting less income which was an omission of gross income. The appellate court held that the extended limitations period applied to the adjustment of the partnership's return since new regulations, which were entitled to deference, properly interpreted the statutes to include overstatement of basis as an omission of gross income. Although prior caselaw interpreted the statutes to indicate otherwise, the statutes were nonetheless ambiguous concerning the treatment of overstated basis, and the new regulations reasonably interpreted the statute to provide for treatment of overstated basis differently than income from a trade or business. Further, the new regulations properly applied retroactively to the partnership's tax year, the period for adjusting the partnership was tolled during the appeal, and it was not fundamentally unfair to apply the new regulations to the partnership return.
The order granting summary judgment to the partnership was reversed, and the case was remanded for further proceedings.
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