Six-year statute of limitation for substantial omissions of income.

• Author: Davidson, Andrew

Recently, the IRS indicated in Chief Counsel Advice (CCA) 201333008 that an estimated amount of flowthrough S corporation K-1 income did not constitute proper disclosure per Sec. 6501(e) and therefore the taxpayer's return was subject to an extended six-year statute of limitation due to a substantial omission of income.

According to the CCA, a taxpayer filed Form 1040, U.S. Individual Income Tax Return, in year 1 reporting an estimated amount of S corporation income from a named S corporation because the S corporation had not yet filed a tax return. In year 4, after the normal three-year statute of limitation had expired, the S corporation filed Form 1120S, U.S. Income Tax Return for an S Corporation, for year 1 showing that the taxpayer's actual distributive share of the S corporation's income was more than 125% greater than the amount originally reported on the taxpayer's return.

Generally, Sec. 6501(a) permits the IRS three years from the date the tax return was filed to assess any tax. However, Sec. 6501(e)(1) extends the period to six years when there is a substantial omission of income, defined as 25% or more of the taxpayer's gross income on the return, unless proper disclosure had been made to the IRS on the original return.

In Estate of Fry, 88 T.C. 1020 (1987), the Tax Court said that to constitute proper disclosure, "Wile statement must be sufficiently detailed to alert the [IRS] to the nature of the transaction so that the decision as to whether to select the return for audit may be a reasonably informed one." The Eighth Circuit in Benderoff, 398 F.2d 132 (8th Cir. 1968), said that "the corporate information return on Form 1120S must be considered along with the taxpayers' individual returns in resolving the issue of adequate disclosure." So if a Form 1120S has not been filed with the IRS, adequate disclosure has not been made, the CCA stated. Further, the Tax Court in In-sulglass Corp., 84 T.C. 203 (1985), ruled that if a late Form 1120S is not filed until after...