2011 Decisions Impacting IRS Tax Return Investigations

2011 Decisions Impacting IRS Tax Return Investigations

Decisions in two Courts of Appeals in 2011 bear on defining what constitutes an omission from gross income on a submitted return and what limitations period applies to IRS return investigations. Analyses by the Fourth and Seventh Circuits turned in different ways on principles enunciated in COLONY, INC. v. COMMISSIONER OF INTERNAL REVENUE, 357 U.S. 28 (U.S. 1958).

On January 26, 2011, the Seventh Circuit ruled as valid the Service's application of the six-year statute of limitations to investigate a tax return, rather than the standard three-year period, to a Son-of-BOSS (Bond and Option Sales Strategy) transaction and the overstatement on a tax return of basis related to the transaction. Beard v. Comm'r, 2011 U.S. App. LEXIS 1575 (7th Cir. 2011).  The transaction in issue was held to be an omission from gross income for extended six-year limitations period purposes under IRC Section 6501(e). The grant of summary judgment by the tax court was therefore reversed.

Using a short sale to artificially increase the basis of a partnership interest before selling the interest limits the capital gains tax on the sale. This practice constitutes a Son-of-BOSS transaction, which has been invalidated as lacking economic substance in Notice 2000-44 (I.R.S. 2000)

The transaction In Beard involved purchases of Treasury Notes and short sale transfers to two companies in which the taxpayer had a majority interest. The Seventh Circuit distinguished Beard from COLONY, INC. v. COMMISSIONER OF INTERNAL REVENUE, 357 U.S. 28 (U.S. 1958), which upheld the standard three-year statute of limitations. Therefore, the court held that Colony was not controlling because there were key differences between transaction dynamics involved in Beard vis a vis Colony. The Seventh Circuit's interpretation focused on congressional intent underlying IRC Section 6501(e)(1)(A)(i) and (ii) in view of those differences.

On the other hand, in Home Concrete & Supply, LLC v. United States, 2011 U.S. App. LEXIS 2334 (4th Cir. N.C. Feb. 7, 2011), the Fourth Circuit held that no item was actually left off the return at issue. Here, too, the case involved an overstatement of basis, this time involving short sale proceeds yielding more than 25 percent of the tax liability. But the argument advanced by the Service in this case was grounded in reliance on Treas. Reg. 301.6501(e)-1(a)(1)(iii) (2010). Specifically, the backdrop of this reliance was formed by the preamble to Treasury Decision 9511 (I.R.S. 2010). The preamble indicates that the six-year period remains open for "all taxable years . . . that are the subject of any case pending before any court of competent jurisdiction..." 

The court held that this reliance was misplaced: Even if the six-year statute of limitations applied, the district court had ruled that the "period for assessing tax" had long since expired. Congressional intent behind IRC Section 6501 was to close the period for assessing tax within six years after a return is filed, except in cases of fraud. Therefore, deference to any interpretation Treas. Reg. 301.6501(e)-1(a)(1)(iii) (2010) may impart to the meaning of IRC Section 6501(e)(1)(A) was not called for. (See Chevron, U.S.A., Inc. v. NRDC, Inc., 467 U.S. 837, at 842-843)

LEXIS.com users can view the enhanced version:

Discover the features and benefits of LexisNexis® Tax Center

For quality Tax & Accounting research resources, visit the LexisNexis® Store

...

RELATED LINKS: For additional discussion, see:

Discover the features and benefits of LexisNexis® Tax Center

For quality Tax & Accounting research resources, visit the LexisNexis® Store