United States v. Home Concrete & Supply, LLC

2012-04-25

Headline: Court rules that overstating a property’s purchase cost does not trigger the six-year audit window, blocking late IRS assessments that occurred after the normal three-year deadline

Holding: The Court held that overstating a property’s basis does not count as omitting income under the statute, so the six-year extended assessment period does not apply to those returns.

Real World Impact:

Blocks IRS use of a six-year audit window when taxpayers inflate property cost to reduce reported gains.
Makes certain late tax assessments invalid if they arrive after the three-year deadline.
Limits the reach of a Treasury rule that sought to treat overstated basis as omitted income.

Topics: tax audits, statute of limitations, reporting of property sales, Treasury regulations

Summary

Background

The dispute involved individual taxpayers who filed returns in April 2000 that overstated the basis (purchase cost) of property they had sold. Because that overstatement reduced the reported gain, the returns understating income exceeded the statute’s 25% threshold. The Commissioner asserted a tax deficiency after the ordinary three-year limit but within a six-year window that the tax code sometimes provides for large omissions from income.

Reasoning

The central question was whether inflating a property’s basis — thereby understating gain — counts as “omitting from gross income” and so triggers the six-year assessment period. Justice Breyer’s opinion follows this Court’s earlier decision in Colony, Inc. v. Commissioner (1958) and holds that an overstatement of basis is not an omission of a specific income amount. The opinion rejects the Government’s argument that a Treasury regulation issued in 2010, which treats overstated basis as an omission, can overturn Colony. The Court reasons that Colony’s interpretation controls and leaves no gap for the agency to fill under the usual deference rules.

Real world impact

As a practical matter, the ruling means the Commissioner’s late assessments in these facts were not timely and cannot be sustained. The decision preserves the three-year default limitations period in cases where taxpayers disclosed items on the face of their return but reported incorrect basis amounts. It also limits the ability of a Treasury regulation to change a longstanding judicial interpretation when that interpretation resolved the same statutory language.

Dissents or concurrances

Justice Scalia agreed with the judgment but differed on some reasoning; Justice Kennedy (joined by three others) dissented, arguing the 1954 revisions and the Treasury regulation reasonably allow the six-year period to apply.