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OVERSTATING PARTNERSHIP BASIS DOES NOT EXTEND STATUTE OF LIMITATIONS.

Posted by Admin Posted on Feb 14 2011

The Internal Revenue Codes provides includes a "statute of limitations" which says the IRS typically has three years to audit a return.  If the taxpayer understates gross income by 20% or more, that time limit is extended to 6 years.

There has been an open question about whether overstating the basis of a partnership interest is the same as not reporting gross income.  Overstating the basis may allow the taxpayer to deduct additional losses in the current year.  Now two Ciruit Courts of Appeal have ruled that it is not always the same, and the 3 year statute applies.

In the most recent case, the 5th Circuit had to distinguish its ruling from prior case holding that the six year statute applied. In the earlier case, the Court felt the overstatement disguised the basic nature of the transaction. In the new decision (based on a "Son of BOSS" tax strategy), the Court concluded the underlying nature of the transaction was adequately explained in the return, so the 3 year statute applied.

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