As a general rule, the statute of limitations on income tax returns is three years, extended to six years under section 6501 for a substantial omission of gross income. Courts in recent tax shelter litigation involving overstatement of basis have declined to apply the longer period. However, a recent district court decision in Florida extended the statute in a "Son of BOSS" basis dispute.
Nelson Jefferson was the majority owner of Florida Electronic Supply Inc. (FES), an S corporation. To sell his low-basis stock, he engaged in a tax shelter the IRS has labeled "Son of BOSS"--a variation on an earlier scheme known as Bond and Options Sales Strategy In simple terms, these transactions use a new partnership, a contingent liability and a section 754 election to create an increase in basis to eliminate gain.
In November 1998, Jefferson formed Brandon Ridge Partners and Brandon Ridge Inc., an S corporation. He contributed to the partnership his FES stock and the $3.2 million proceeds of a short sale of Treasury securities, along with an obligation to cover the sale. The partnership in turn contributed an interest in nearly all its assets to Brandon Ridge Inc., which Jefferson claimed allowed the partnership to increase its basis by $3.2 million. Then the partnership sold the FES shares to a third party for $3.3 million, on which it claimed only a $31,000 gain on its 1998 return, which it filed in September 1999. Jefferson filed his individual return that October.
In February 2006, the IRS adjusted the gain to $3.2 million. (An earlier summons to the now-defunct law firm of Jenkins & Gilchrist allowed the Service to meet the six-year limit.) Jefferson argued that the three-year statute of limitations barred the adjustment, pointing out that the Tax Court in Bakersfield Energy Partners and Court of Federal Claims in Grapevine Imports had ruled in taxpayers' favor On this issue this year (see "You Say Omit, I Say Understate," JofA...