May 22, 2012

By Brian R. Harris

The recent U.S. Supreme Court decision in United States v. Home Concrete & Supply, LLC, Sup. Ct. No. 11-139 (Apr. 25, 2012) is a victory for taxpayers on the statute of limitations for federal tax assessments. The Supreme Court held that an overstatement of basis is not an omission of gross income under 26 U.S.C. 6501(e)(1)(A) that extends the statute of limitations for the Commissioner to assess a tax deficiency from three years to six years. The case also provides important guidance to tax professionals about how to interpret the Internal Revenue Code.

The Commissioner generally must assess a tax deficiency within three years after the tax return is due or filed, whichever is later. 26 U.S.C. 6501(a). There are several exceptions to this general rule, one of which is that if the taxpayer omits gross income by more than 25% of what is stated on the return, then the statute of limitations is extended from 3 years to 6 years. 26 U.S.C. 6501(e)(1)(A). The position of the IRS has been that an overstatement of basis can constitute an omission of gross income. In Home Concrete, the Supreme Court resolved this issue in the taxpayer's favor and held that an overstatement of basis did not constitute an omission of gross income and therefore did not extend the statute of limitations.

In reaching its holding in Home Concrete, the Supreme Court followed its prior decision in Colony, Inc. v. Commissioner, 357 U.S. 28 (1958), which interpreted a virtually indistinguishable section in the prior version of the Internal Revenue Code. Colony held that a taxpayer omits income by leaving specific receipts or accruals of income out of the computations of gross income and that overstating basis was not the same as omitting income. The majority in Home Concrete found that it would be difficult, if not impossible, to give the same statutory language a different interpretation without overruling Colony, which it was not willing to do because of stare decisis, the doctrine of respecting and following prior judicial decisions.

Home Concrete is a significant case not just for the result but also because it stands as a restriction on the Treasury Department's power to make regulations that interpret the Internal Revenue Code. The Treasury Department had recently promulgated a regulation on this specific issue. The Treasury Department's regulation was unequivocal that an understatement of gross income resulting from an overstatement of basis constituted an omission of gross income. In Home Concrete, the Government argued that its regulation overturned Colony's interpretation of the statute and controlled the outcome of the case. In making this argument, the Government relied upon the so-called "Chevron deference" given to an agency's construction of a statute that it administers, which was recently reaffirmed in the tax context in Mayo Foundation for Medical Ed. and Research v. United States, 131 S. Ct. 704 (2011).

The Supreme Court rejected the Government's argument by stating: "In our view, Colony has already interpreted the statute, and there is no longer any different construction that is consistent with Colony and available for adoption by the agency." Justice Breyer wrote for a 5-4 majority, however, he did not garner a majority for the subsection discussing why the Treasury's regulation did not overrule Colony. Home Concrete, therefore, does not definitively foreclose the possibility that there is some instance in which an agency could promulgate a valid regulation that overrules a prior judicial interpretation of a statute. This means that the contours of Chevron deference and the scope of agency rulemaking authority remain unresolved and will continue to be litigated in the federal courts.

In the meantime, individual and corporate taxpayers whose gross income is dependent on transactions that take into account basis can be more confident that the statute of limitations may indeed close after three years. Moreover, Home Concrete also serves as a reminder to tax professionals that while the IRS has broad rulemaking authority, that authority has limits. The Treasury Regulations are not the definitive interpretation of the Internal Revenue Code, and they must be viewed in conjunction with any relevant judicial decisions.

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This Akerman Practice Update is intended to inform firm clients and friends about legal developments, including recent decisions of various courts and administrative bodies. Nothing in this Practice Update should be construed as legal advice or a legal opinion, and readers should not act upon the information contained in this Practice Update without seeking the advice of legal counsel. Prior results do not guarantee a similar outcome.