What Is the Statute of Limitations for the Overstatement of the Income Tax Basis of an Asset?
In general, the IRS has a period of three years from the later of the due date of a federal income tax return or the date on which it is actually filed to assess additional taxes with respect to that return. However, this period is extended to six years if the amount of gross income omitted from the return exceeds 25% of the amount of gross income actually reported on the return. IRC § 6501(e)(1)(A). Many of the aggressively marketed tax shelter transactions of the 1990’s resulted in the creation of artificially high basis in assets that could then be sold to create losses in order to offset other income or gains. A question arises whether overstating the basis of an asset is equivalent to omitting gross income from the return. In Bakersfield Energy Partners, L.P. v. Commissioner, decided in June, the Tax Court held that only the three-year statute of limitations applies to situations where the taxpayer has deducted an artificial loss as a result of having overstated his tax basis in a
