On April 25, 2012, the United States Supreme Court handed down a taxpayer-friendly decision that prevents the Internal Revenue Service (“IRS”), in certain cases, from having extra time to charge for unpaid taxes. In cases where a taxpayer has overstated its basis in property sold, even if by more than 25%, the statute of limitations for the IRS should be no more than three years from the date the taxpayer filed its return. The decision, U.S. v. Home Concrete & Supply, LLC,1 serves to emphasize a distinction between an overstatement of basis and an understatement of income.
As a general rule, the IRS has three years from the time of filing of a tax return to assess a deficiency against a taxpayer.2 When the taxpayer omits more than 25% of gross income reported, the period is extended to six years.3 The issue before the Supreme Court in Home Concrete & Supply was whether an overstatement of basis was an amount omitted from gross income, and the Court ruled with a resounding “no.”
Briefly summarized, the facts and law in Home Concrete & Supply were as follows: Several taxpayers filed their 1999 tax returns in April 2000. The returns overstated the basis of certain property the taxpayers sold and consequently understated the gross income that the taxpayers received from the sale. The understatement exceeded the 25% threshold and the Commissioner assessed the deficiency within the extended six-year period, but outside the three-year period. Unless the six-year statute of limitations applied, the Government could not have assessed the deficiency. The Court ruled that the six-year statute of limitations did not apply because an overstatement of basis is not an amount omitted from gross income. In so holding, it relied primarily on Colony, Inc. v. Commissioner.4 In Colony, the Supreme Court interpreted a provision of the Internal Revenue Code of 1939 containing language materially indistinguishable from the language at issue in Home Concrete & Supply. It held that a taxpayer’s misstatements resulting in the overstatement of basis in property did not fall within the statute’s scope. The Court recognized that such overstatement wrongly understated the taxpayer’s income, but concluded that the phrase “omits… an amount” limits the statute’s scope to situations in which specific receipts are left out of income computations. The Court in Home Concrete & Supply further noted that while the statute’s language was not unambiguous, the statutory history revealed Congressional intent to restrict the extended period to situations where a taxpayer “failed to disclose” or “left out” items of income. Interpreting the statute differently, the Court stated, would require overruling Colony and constitute a course of action contrary to stare decisis.
Notable dicta in Home Concrete & Supply indicated that the Supreme Court may refuse to respect an agency interpretation of even an ambiguous statute when that statute lacks any “gap” for the agency to fill. When the IRS pointed to a Treasury Regulation that departed from Colony and interpreted overstatements of basis as constituting omissions of income, 5 the Court responded that the regulation did not trump Colony because the Court in Colony “thought that Congress had ‘directly spoken to the question at hand,’ and thus left ‘[no] gap for the agency to fill.’”6 The Court conceded that an agency may be entitled to Chevron deference7 where Congress explicitly left a statutory gap, but added that where Congress used ambiguous language without intending a “gap,” an agency interpretation will not trump the Court’s.