Tax Law and Business Organization Strategy

Florida District Court contradicts Tax Court and Federal Court of Claims on 6-year Statute of Limitations

In what is probably another case of "bad facts make bad law," a Florda District Court allowed the IRS to proceed to the merits in a "Son of BOSS" case, despite the IRS' making it's assessment against the taxpayer more than 3 years after the taxpayer filed a return.  Brandon Ridge Partners v. U.S., (CA Fl 7/30/2007) 100 AFTR 2d ¶2007-5107.

The case contradicts two recent decisions, one in the Federal Claims Court (Grapevine Imports Ltd. v. U.S., (Ct. Fed. Cl., 7/17/2007) 100 AFTR 2d ¶2007-5065) and the other in the Tax Court (Bakersfield Energy Partners, LP, (6/14/2007) 128 TC No. 17. Both of these recent cases relied on the Supreme Court's decision in Colony Inc v. Com., (1958, S Ct) 1 AFTR 2d 1894 , 357 US 28. In Colony the Supreme Court held that the 6-year statute does not apply unless there has been an omission of an item of gross income, not simply the overstatement of basis or cost of the item sold. Under that reasoning, if you report the gross amount of the sales proceeds from each sale, there can be no omission of gross income, which is necessary for the 6-year statute to apply.

The District Court's reasoning in Brandon RIdge seems quite strained, probably because it takes a maze-like path to find a distinction from the prior decisions that is no more than the size of a pin hole if the distinction exists at all. Not only does it hold, contrary to the Supreme Court, Tax Court, and Court of Claims, that the reporting of an improper amount of gain amounts to an omission of gross income, but it also holds that reporting of the gross amount of the sales proceeds is not sufficient to adquately apprise the IRS that an omission of gross income has occurred. (Adquate disclosure of the omission is also sufficient to prevent the 6-year statute from applying.)

The moral of the story: If you have a situation, like Son of BOSS, where the IRS claims the 6 year statute of limitations applies because of overstating basis or cost of an item sold, you are better off fighting the statute of limitation issue in the Tax Court than the District Court (particularly if that DIstrict Court happens to be in Florida).

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