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Has Your Statute of Limitations Really Expired?
Final regulations "clarify" that basis overstatements can trigger the extended six-year limitations period. This judicial deference comes after the cases of Intermountain, Mayo and now Beard. In its no holds barred fight against Son of Boss tax shelters, the IRS issued final regulations on 14 December 2010 reinforcing its position that, outside the trade or business context, an understatement of gross income due to an overstatement of basis constitutes an "omission" of gross income that can trigger the extended six-year period of limitations for assessing tax. Taxand US analyses the new regulations set by the IRS and the effect this will have on future cases.
This is a highly contentious area with far-reaching implications for all taxpayers, regardless of whether they're involved in Son of Boss disputes. At issue is a shift by the courts to show greater deference to the tax regulations, thus making taxpayer challenges more difficult and shifting more power to the IRS. Will this spawn more aggressive litigating tactics by the IRS? It appears girded for a battle that may eventually be fought in the Supreme Court.
In the meantime, a Pandora's box has been opened, leaving taxpayers uncertain of whether their returns are safely beyond the grasp of the IRS and what that means. FIN 48 exposures may need to be reassessed. Buyers may need to consider additional diligence or contractual protections, and escrow arrangements may need to be held open longer. Litigation and uncertainty will continue and, as a result, the origin of basis has taken on a greater importance and should be analysed carefully.
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