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By Kimberly Stanley, J.D., LL.M. *
In Mayo Found. for Med. Educ. & Research v. United States, 131 S. Ct. 704 (U.S. 2011), the U.S. Supreme Court addressed a narrow tax issue involving medical residents and Social Security tax on wages. The issue was part of a larger discussionregarding the validity of federal regulations. In United States v. Home Concrete & Supply, LLC, 132 S. Ct. 1836 (U.S. 2012), the U.S. Supreme Court continued the debate around federal regulations that began with the Mayo decision in 2011. The Court addressed the circumstances in which a federal agency may amend a regulation to support its litigation position that is contrary to prior court precedent. Both opinions give practitioners important new guidance when seeking to invalidate a disadvantageous federal regulation...
 The Home Concrete Decision
The central issue in Home Concrete concerned the statute of limitations on the assessment of an income tax deficiency under IRC Section 6501(e)(1)(A). Generally, the government must assess a tax deficiency within three years after the taxpayer files his or her return. [IRC Section 6501(a).] This three-year period is extended, however, if the taxpayer "omits" from reported gross income more than 25 percent of his income, in which case the limitations period for assessment goes from three to six years. [IRC Section 6501(e)(1)(A).] In Home Concrete, the issue was whether the three- or six-year statute of limitations applies when the taxpayer overstates his basis when reporting his gain on the sale of property. By overstating basis, the taxpayer understates the gain he receives on the sale, and, according to the Government, this constitutes an omission of income warranting application of the six-year statute of limitations...
 Home Concrete Clarifies Treasury's "Gap-Filling Authority"
In the Mayo decision, the Court acknowledged that an administrative agency has the power to formulate policy and make rules "to fill any gap left, implicitly or explicitly, by Congress." And in an earlier opinion, Nat'l Cable & Telecomms. Ass'n v. Brand X Internet Servs., 545 U.S. 967 (U.S. 2005), the Court had explained that a "court's prior judicial construction of a statute trumps an agency construction otherwise entitled to Chevron deference only if the prior court decision holds that its construction follows from the unambiguous terms of the statute . . . ." In Home Concrete, the Government seized on these prior Court rulings to validate its new regulation, adopted in the midst of litigation on the issue, that an understatement of basis triggers the six-year statute of limitations...
... [T]he Court held that "there is every reason to believe" that, despite some lack of clarity, the statute "directly spoke to the question at hand," because the Colony Court found "persuasive indications" that Congress intended overstatements of basis to fall outside the statute's scope. There being no statutory gap to fill, the Government's gap-filling regulation could not change Colony's interpretation of the statute...
Home Concrete shows that the Court still will invalidate a regulation that runs contrary to clear statutory language, and reiterates the principle underlying stare decisis that taxpayers ought to be able to rely on long-standing statutory interpretations. Thus, while an agency rule can overthrow a prior judicial decision as to an ambiguous statute, it cannot do so where the statutory language is clear...
* Kimberly Stanley, J.D., LL.M. is Associate Dean and Professor of Law for the LL.M. Taxation Program at Golden Gate University School of Law in San Francisco, CA. She has served as a clerk for the U.S. Tax Court and was an appellate attorney with the U.S. Department of Justice's Tax Division. She also has significant private practice experience in tax litigation and tax controversy.
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RELATED LINKS: For further discussion on the Home Concrete and Mayo decisions, see:
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