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Supreme Court affirms Home Concrete, says 6-year limitation period does not apply to overstated basis

 

By Sally P. Schreiber
April 25, 2012

On Wednesday, the U.S. Supreme Court affirmed the Fourth Circuit’s decision in Home Concrete & Supply, LLC, which had ruled that the extended six-year statute of limitation under Sec. 6501(e)(1)(A), which applies when a taxpayer “omits from gross income an amount properly includible” in excess of 25% of gross income does not apply when a taxpayer overstates its basis in property it has sold (Home Concrete & Supply, LLC, Sup. Ct. Dkt. No. 11-139 (U.S. 4/25/12), aff’g 634 F.3d 249 (4th Cir. 2011)).

The Supreme Court’s decision resolves a split in the courts, with most appellate courts and the Tax Court having held that overstating basis does not extend the statute. It does not answer clearly, however, the more controversial question involved in the case: whether courts should defer to administrative interpretations of the law. In 2010, the IRS issued Regs. Sec. 301.6501(e)-1(a)(1)(iii), which states that “an understated amount of gross income resulting from an overstatement of unrecovered cost or other basis constitutes an omission from gross income.” The regulation has been widely criticized as an overreach by the IRS in its attempt to overrule the courts’ interpretation of the statute.

In a majority opinion written by Justice Stephen Breyer, the Court’s decision is primarily a victory for stare decisis (the principle by which courts follow precedent and do not lightly overturn settled principles of law). According to Breyer, because the Court’s decision in Colony, Inc., 357 U.S. 28 (1958), interpreted language from the Internal Revenue Code of 1939 that was “materially indistinguishable” from that at issue here, the current Court could not give identical language a different interpretation without overruling Colony. Breyer dismissed as “fragile” and “weak” the government’s arguments that recent amendments to Sec. 6501 (although not to the language at issue here) meant that Congress intended to change the statutory rule interpreted in Colony, and that Colony should therefore not apply.

The majority opinion was joined in full by Chief Justice John Roberts and Justices Clarence Thomas and Samuel Alito, and in part by Justice Antonin Scalia.

Part IV of the opinion addressed Regs. Sec. 301.6501(e)-1(a)(1)(iii). Part IV-A discussed the government’s argument that its interpretation of the statute should be given deference when a statute is ambiguous, which the Colony Court clearly stated it was. Part IV-B firmly rejected the government’s argument, explaining that Colony interpreted the statute and there was no longer a different construction that would be consistent with that interpretation. 

Justice Scalia wrote that the Court should have stopped there, and he did not join in the final part of Justice Breyer’s decision, Part IV-C, which attempts to explain why an earlier judicial construction of a statute trumps a different agency construction only if the prior court decision involves an unambiguous statute. Scalia characterizes this part of the opinion thus: instead of finding “that the Treasury Department’s current interpretation was unreasonable,” the Court revised the meaning of Chevron (the most frequently cited case for judicial deference to regulations) “yet again in a direction that will create confusion and uncertainty.” His reaction to this part of the opinion suggests it will not answer the question about judicial deference to regulations, as had been hoped for when the Court granted certiorari.  

The dissenting opinion by Justice Anthony Kennedy (joined by Justices Ruth Bader Ginsburg, Sonia Sotomayor, and Elena Kagan) agreed with the government’s argument that the amendments to the statute since Colony was decided meant that the Colony decision should no longer apply. The dissent argued that an ambiguous provision should not have to be read the same after it was reenacted with additional language, which suggests that Congress would not only allow a different interpretation but may have even intended one.  

Sally P. Schreiber (sschreiber@aicpa.org) is a JofA senior editor.

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