U.S. Supreme Court Holds That Extended Six-Year Statute of Limitations Is Not Triggered by an Overstatement of Basis

by Eversheds Sutherland (US) LLP
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On April 25, 2012, a divided five-to-four U.S. Supreme Court held in U.S. v. Home Concrete & Supply, LLC, et al., 566 U.S. ___, 2012 WL 1413964 (2012), that the extended six-year statute of limitations under IRC Section 6501(e)(1)(A) is not triggered by a taxpayer’s overstatement of basis in property, even if the overstatement of basis results in an understatement of gain greater than 25% of the gross income stated on the taxpayer’s return. The case is important for its substantive tax holding because it limits the ability of the Internal Revenue Service (IRS) to extend the general statute of limitations, which requires that any tax imposed by the Code be assessed within three years after the return was filed. The case is also important for its analysis regarding what level of deference should be afforded to Treasury regulations, specifically regulations attempting to retroactively interpret a statute in a manner inconsistent with established case law.

Majority Holds That Colony Must Be Followed

Section 6501(e)(1)(A) provides an exception to the general statute of limitations, extending it to six years if a “taxpayer omits from gross income an amount includible therein and . . . such amount is in excess of 25 percent of the amount of gross income stated in the return.” The Supreme Court ruled that the doctrine of stare decisis required it to interpret this statute in accordance with the Court’s holding in Colony, Inc. v. Commissioner, 357 U.S. 28 (1958), which had reviewed the predecessor to Section 6501(e)(1)(A) and held that a taxpayer’s overstatement of basis in property does not fall within the scope of the statute. The statute reviewed in Colony, however, was a provision of the Internal Revenue Code of 1939. The provision was recodified in the 1954 Code and two additional subsections were added.2 The government asserted that the 1954 additions justified a different interpretation of the statute. The Court disagreed with the government, finding the statutory argument “too fragile to bear significant argumentative weight.” Home Concrete at *5...

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