On April 25, 2012, the Supreme Court issued a 5-4 opinion, written by Justice Breyer, concluding that Treasury Regulation § 301.6501(e)-1(a)(iii) was invalid. The regulation required overstatements of basis to be treated as substantial omissions of gross income under Internal Revenue Code § 6501(e)(1)(A) to the extent such overstatements resulted in a reduction of income exceeding 25% of the reported gross income. Under this Code section, a six-year statute of limitations period on assessment of tax would then apply to the return, reflecting the overstated basis instead of the general three-year limitations period. The Court’s rejection of the regulation was based on (i) the principle of stare decisis in respect of the 1958 Supreme Court opinion on point, Colony, Inc. v. Commissioner, 357 U.S. 28, and (ii) a clarification of its deference jurisprudence. With last year’s high court decision in Mayo Foundation for Medical Education & Research v. United States (“Mayo”), in which the Court upheld notice and comment regulations in view of ambiguous statutory language, and the 2005 decision in National Cable & Telecommunications Association v. Brand X Internet Services (“Brand X”), which endorsed agency rules over contrary prior judicial decisions, the Government likely anticipated victory in this case. It came close. The Court issued a 5-4 decision. Justice Scalia provided the fifth vote for the majority, joining all but one subpart of Justice Breyer’s opinion, and also wrote a separate concurrence. Justice Kennedy penned the dissent, which reasoned that amendments to the Code since Colony indicated that the relevant provision now had a different meaning. As a result of the decision, on April 30, the Court disposed of nine cases, including vacating Government-favorable decisions in the Tenth, D.C., and Federal Circuits.
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