Overstatement of Basis and Gross Income: Application of the Six Year Statute of Limitations; from Colony to Home Concrete

• In Event: Session A: Taxes

Abstract

I.R.C. § 6501(e)(1)(A) extends the three year statute of limitations on assessment to six years when the taxpayer omits more than 25 percent of gross income from a tax return. More than 50 years ago, in Colony, the United Supreme Court held that, in a case involving an inventory dealer, omission of gross income under the 1939 Code meant an actual omission of gross income, without consideration of any omission caused by mathematical calculations, including the effect of an overstated cost of goods sold or basis. For the past 20 years, the IRS and some courts have argued that Colony should be limited to sales of inventory and not to sales of other property, and in the latter, an overstatement of basis should be considered in the computation of gross income. In December 2010, the Treasury promulgated Treas. Reg. §301.6501(e)-1 which specifically stated that an understated amount of gross income resulting from an overstatement of unrecovered cost or basis constitutes an omission from gross income. Then, this summer, in Home Concrete, the United States Supreme Court took the opportunity to address all the attacks against Colony including the 2010 Treasury Regulation. This manuscript analyzes Colony, its criticism, and Home Concrete.

Authors

• Robert Oliva, University of Arkansas-Little Rock

• Roger Dorsey, University of Arkansas at Little Rock