Update: U.S. Tax Court Sides with Fourth Circuit on Statute of Limitations Circuit Court Split

           On April 5^th, we gave you the gritty details on the Fourth Circuit’s side of the Circuit Court split when it comes to the issue of the statute of limitations and the overstatement of basis.  Yesterday, the United States Tax Court handed down its ruling in Carpenter Family Investments, LLC v. Commissioner of Internal Revenue which serves another blow to the IRS. 

            Like the Fourth Circuit, the Tax Court ruled that the general three year statute of limitations for assessing tax applies when a taxpayer is determined to have overstated his basis.  The facts in this case centers on the sale of shares of stock by an Oregon-based partnership.  In 2000, the partnership sold certain shares of stock and reported a modest gain of just over $6,000.00.  The partners timely filed its 2000 joint income tax return and properly reported the gain from the sale of stock.  In October 2008, the IRS issued a final partnership administrative adjustment (FPAA) asserting that the partnership had participated in transactions that artificially stepped-up the inside basis, resulting in an omission from gross income pursuant to Sections 6229 and 6501 of the Internal Revenue Code and application of the extended six-year statute of limitations for assessing the unpaid tax.  According to the IRS, the partnership adjustment was timely.  The taxpayers begged to differ. 

             The Tax Court ruled in favor of the partnership and found that Colony v. Commissioner, the 1958 Supreme Court case, controlled.  The Tax Court also relied on the Ninth Circuit’s interpretation of Colony in Bakersfield Energy Partners, L.P. v. Commissioner, decided in 2009.  See  568 F.3d 767.   In the U.S. Tax Court and Ninth Circuit Court of Appeals, the standard three year statute of limitations applies to the assessment of tax when a taxpayer is found to have understated basis. 

            Based on the Circuit discrepancies in interpreting the statute and case law, we may soon see a petition for certiorari granted by the U.S. Supreme Court.  We will continue to keep you updated.