Washington Tax Alert July 19, 2007 (Statute of limitations — overstated basis)

Washington Tax Alert from Don Barnes, [email protected]
July 19, 2007

The Court of Federal Claims issued a decision this week holding that the normal three-year statute of limitations applied, rather than the six-year statute of limitations, where a taxpayer’s gross income was understated by more than 25% as a result of an overstatement of basis in a partnership interest. Grapevine Imports, Ltd. v. United States , Fed. Cl. July 17, 2007. The Tax Court had reached a similar conclusion in another case last month. Bakersfield Energy Partners, LP v. Commissioner , 128 T.C. No. 17 (June 14, 2007).

These decisions are applicable where a taxpayer has overstated its basis in any asset, including a partnership interest, stock in a corporation, or opening inventory. However, if the overstated basis is the result of an erroneous accounting method, the Service can make an adjustment on examination that includes amounts attributable to taxable years closed by the statute of limitations.

Nevertheless, the holdings in these two cases regarding the statute of limitations are relevant for FIN 48 purposes.