Source: https://www.bna.com/no-basis-extending-n12884910218/
Timestamp: 2019-04-23 06:20:36+00:00

Document:
By Mitchell R. Kops, Esq., Shannon Smith Retzke, Esq., & Aaron T. Kriss, Esq.
Generally, under §6501(a), the IRS is permitted a three-year statute of limitations from the date a return is filed to examine such return and possibly pursue an audit. However, §6501(e)(1)(A) extends this period to six years if "the taxpayer omits from gross income an amount properly includible therein" and such amount exceeds 25% of the amount of gross income stated on the return. This particular statutory language has resulted in a hotly contested issue: whether the overstatement of tax basis constitutes an "omission" of gross income for purposes of extending the IRS's statute of limitations to examine a tax return. After much uncertainty created by Treasury regulations and conflicting cases decided by six different federal Circuit Courts of Appeal, the U.S. Supreme Court weighed in decisively on the issue in its ruling in Home Concrete & Supply, LLC v. U.S., decided on April 25, 2012.
The Supreme Court first examined this statute in the 1958 case of Colony, Inc. v. Comr. At issue in that case was a substantially identical provision of §6501(e)(1)(A) in the 1939 version of the Code. The Court found that Congress specifically used the word "omit" in the statute to mean left out or unmentioned, and therefore an overstatement of basis-which results in an understatement of income but is not itself an omission-did not qualify as an "omission" for purposes of the Code. Further, the Court looked at the reasoning behind the provision, which it held was designed to give the IRS additional time to examine returns in cases where the IRS "is at a special disadvantage" because "the return on its face provides no clue as to the existence of the omitted item." By comparison, the Court held that a basis overstatement does not put the IRS at such a disadvantage since the item itself-the property sold-is disclosed on the face of the return.
Despite the seemingly clear holding of Colony, this issue has been the subject of much recent litigation in light of Treasury regulations promulgated in 2009. In what appears to be a direct conflict with Colony, Regs. §301.6501(e)-1(a)(1)(iii) provides that an "understated amount of gross income resulting from an overstatement of unrecovered cost or other basis constitutes an omission from gross income for purposes of Section 6501(e)(1)(A)(i)." In the time since this regulation was promulgated, a deep split had developed at the federal Circuit Court level. The Fourth, Fifth, and Ninth Circuits had ruled to uphold the Colony decision, while the Seventh and Tenth had ruled that an overstatement of basis does constitute an omission of gross income. The Federal Circuit initially held consistently with Colony, but when confronted with the issue a second time ruled that an overstatement of basis constitutes an omission of gross income. As a result of this uncertainty created at the appellate level, the Supreme Court granted certiorari in the Fourth Circuit case of Home Concrete & Supply, LLC v. U.S.
The Supreme Court in Home Concrete framed the basic issue as whether any taxpayer who "overstates his basis in property that he has sold, thereby understating the gain that he received from its sale" has omitted from gross income an amount properly includible therein for purposes of §6501(e)(1)(A). Therefore, the Court clearly intended its decision to apply not only in narrow circumstances similar to the facts of the Home Concrete case-which concerned an illegal tax shelter-but to all taxpayers in any wide range of transactions.
The Court held that Colony is controlling precedent, thereby precluding an overstatement of basis from being considered an omission from gross income for purposes of §6501(e)(1)(A). In doing so, the Court rejected the two primary arguments put forth by the government: (1) that subtle changes to the language of the current version of the Code make Colony inapplicable, and (2) that Regs. §301.6501(e)-1(a)(1)(iii) should be afforded so-called "Chevron deference" and, in light of the Court's 2005 decision in National Cable & Telecommunications Association v. Brand X Internet Services, should carry the full force of law irrespective of the Colony decision.
The Court first rejected the government's claim that subtle tweaks to the Code have rendered Colony obsolete. In particular, the government argued that the change from the word "amount" to the word "item" in §6501(e)(2) suggested that Congress wished to expand the meaning of "amounts" to include an overstatement of basis. However, the Court noted that the changes pointed out by the government were not to §6501(e)(1)(A) itself but rather to "nearby parts" of the Code, and that "these points are too fragile to bear the significant argumentative weight the Government seeks to place upon them." In delivering the plurality opinion of the Court, Justice Breyer went so far as to say that putting such heavy emphasis on the use of the word "item" rather than "amount" in §6501(e)(2) "is like hoping that a new batboy will change the outcome of the World Series." Clearly, the Court was not impressed by this line of reasoning by the government.
The government made a somewhat more nuanced and persuasive argument regarding the validity of Regs. §301.6501(e)-1(a)(1)(iii), but this too was rejected by the Court. The government asserted that the Court's decision in the 2005 case of Brand X required that a court can only trump an agency decision if the statute itself is unambiguous, and that the Court in Colony expressly stated that "it cannot be said that the language [of the Code Section] is unambiguous." Therefore, the government concluded, the Court could not override the 2009 regulations in light of the Code section itself being ambiguous. However, the Court dismissed this argument by stating that: (1) the Colony Court's use of the word "unambiguous" does not necessarily carry the same weight as in cases decided post-Chevron; (2) elsewhere in the Colony opinion, the Court opined that its opinion was "in harmony" with the now "unambiguous language" of the newly enacted version of the Code; and (3) therefore, "there is every reason to believe that the Court [in Colony] thought that Congress had `directly spoken to the question at hand' and thus left" no gap for the regulations to fill. As a result, the Court held that Colony is controlling precedent that the 2009 regulations cannot override.
This ruling was a narrow 5-4 decision. Justice Scalia, in a pointed concurring opinion, concurred with the overall decision but disagreed strongly with the Court's analysis of the regulation's validity in light of Brand X. In Scalia's view, the Brand X decision added unnecessary complexity to this area of administrative law and should be abandoned. Instead, Scalia argued, Colony is determinative in this case and "[t]hat should be the end of the matter."
In the aftermath of the Home Concrete decision, the IRS has lost a major weapon in its arsenal for examining taxpayer returns. Barring a legislative act by Congress to change the statutory language of §6501(e)(1)(A), it appears that the IRS lacks any "basis" to apply a six-year statute of limitations where a taxpayer has overstated its tax basis but has not otherwise omitted items of gross income from its tax return.
For more information, in the Tax Management Portfolios, see Peyser, 627 T.M., Limitations Periods, Interest on Underpayments and Overpayments, and Mitigation, and in Tax Practice Series, see ¶3860, Statute of Limitations.

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