Amended return - past statute of limitations - Homework Question

[jasdlm]

Hello. I am participating in a class discussion (MS in Accting). The facts are as follows:

Taxpayer invested $100k in a stock; company declared bankruptcy

Taxpayer claimed the stock as worthless in the year the company declared bankruptcy (yes, erroneously) and took a $100,000 loss

4 years later, taxpayer received $40,000 from the bankruptcy trustee.

Issue: Should taxpayer a) amend the 1040, report the $40,000 income in the current year or c) do nothing

I have already posted my discussion response, so please no one worry that I am trying to cheat. However, I am really curious to get opinions from those who are experienced.

In my post, I argued that the taxpayer should not amend the 1040 (statute of limitations not extended to 6 years because the 9th Circuit held in 2009 that overstatement of basis was NOT equivalent to understatement of income). I argued that there was no fraud, even though the taxpayer erred in declaring the stock worthless. I do realize that the IRS disagrees with this position, and that another appeals Court held to the contrary in March of this year. I also argued that the taxpayer should include the $40,000 on his current year's income tax return - schedule D with 0 basis.

I spent substantial time researching, and I could not find any information about the appropriateness of amending a return where the taxpayer owes money (plenty of information regarding taxpayer receiving a refund) and the statute of limitations has passed. I assume the return could still be amended? Is it appropriate to claim the $40,000 on the current year's 1040?

Thanks to anyone willing to respond.

[Pacun]

Report income on the current year.

There is no statutue of limitations when you owe money. You can amend any year if you owe the IRS. Technically, this is a good answer but I think there is an exception and that makes answer b the best answer.

[jasdlm]

Would it be appropriate to report the income on schedule D and give it long-term treatment? It seems to me that the only difference in that approach and amending the 4 year old return is penalty and interest and the opening of the return for examination.

[Pacun]

"Taxpayer claimed the stock as worthless in the year the company declared bankruptcy (yes, erroneously) and took a $100,000 loss"

Since you are saying that he erroneously claimed the loss, you should amend.

[jainen]

>>taxpayer received $40,000 from the bankruptcy trustee.<<

As this is a hypothetical question, the answer can be as theoretical as you like. In my opinion, the scenario does not provide enough information. Did the $40,000 constitute a return on investment, corporate earnings, interest on a settlement amount, or what?