Choice "C" is correct. If the prior omission was nonfraudulent, the statute of limitations cannot be reopened after it has expired. To mitigate the unfair effects of the statute of limitations in some rare cases, a tax year can be reopened to avoid hardship for the taxpayer or the IRS. In the case in which an item is ruled deductible in a subsequent year after having been taken in a year now closed by the statute of limitations, the IRS will reopen the statute of limitations to disallow the deduction in the previous year.
Choices "d", "b", and "a" are incorrect. Each of these answers incorrectly addresses I and/or II.