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Editor's Note: View blog discussion on this site of, and hyperlink to, the January 17th oral arguments before the Supreme Court: SCOTUS Showdown: Oral Arguments Heard in Home Concrete Case
For some time now, the tax bar has been wringing its hands with frustration over when, and under what circumstances, overstated basis constitutes substantial omission from gross income. This issue percolates around the core of IRC Section 6501(e) and related regulations affecting the six-year limitations period for tax assessments, extended from the standard three-year limitations period and applied when overstated basis yields omissions from gross income. But when exactly does that happen and on what judicial authority can taxpayers and practitioners rely in specific circumstances? Because of a deep split in authority in multiple appellate decisions involving a myriad of factual scenarios, no one really knows the answer for sure.
Now that the U.S. Supreme Court has granted certiorari (on September 27, 2011) to review the Fourth Circuit's decision in Home Concrete & Supply LLC v. United States, 634 Fed 249 (4th Cir, 2011), it would appear that the prayers of practitioners and taxpayers will be answered. The Supreme Court will hear oral arguments on January 17, 2012. Home Concrete & Supply Company has filed its brief, urging the Court to affirm the Fourth Circuit's holding that an overstatement of basis resulting in an understatement of income wasn't an omission from gross income for purposes of extending the limitations period for tax assessment. (TaxAnalysts® Tax Notes Today, TNT 243-29 (Dec. 19, 2011))
Jeremiah Coder implies in his analysis that the High Court's selection of Home Concrete could militate in favor of taxpayers, at least relatively so, because many expected the Court to choose to review the Seventh Circuit's holding in Beard v. Comm'r, 2011 U.S. App. LEXIS 8007 (7th Cir. 2011). See Supreme Court Grants Certiorari to Settle Overstated Basis Assessment Period Debate, 2011 TNT 188-1, TaxAnalysts® (Sept. 28, 2011). There have been four petitions for certiorari. Altogether, four circuit appellate decisions have favored application of the extended six-year limitations period. Meanwhile, appellate decisions coming out of the Fourth (including Home Concrete & Supply LLC v. United States) and Fifth circuits have favored taxpayer positions for the standard three-year limitations period for assessments.
It is more than plausible that Home Concrete got the High Court's nod for review instead of Beard or Grapevine Imports, Ltd. v. United States, 636 F.3d 1368 (Fed. Cir. 2011) because of Home Concrete's broader scope in addressing regulatory issues. (See 2011 TNT 188-1 (comments by Patrick J. Smith of Ivins, Phillips & Barker, Chartered). See also analysis by Jeremiah Coder in News Analysis: Fighting for Supreme Court Review of the Six-Year Statute, 2011 TNT 160-1, TaxAnalysts® (August 18, 2011).)
In Home Concrete, the taxpayers had 1999 filed tax returns reporting a short sale of partnership assets involving a stepped-up and adjusted basis of their partnership interests. The tax returns reported the basis components of the underlying transactions. The IRS did not issue a Final Partnership Administrative Adjustment (FPAA) until 2006. First, in ruling in favor of the government, the district court had held that the taxpayers omitted from gross income amounts properly included for IRC Section 6501(e)(1)(A) purposes, that the taxpayers could not rely on the safe harbor provision, and that the extended six-year limitations period, not the standard three-year limitations period, applied to issuance of the FPAA as timely.
On appeal, the Fourth Circuit reversed, applying principles enunciated in COLONY, INC. v. COMMISSIONER OF INTERNAL REVENUE, 357 U.S. 28 (U.S. 1958), a decision holding tthat an overstatement of basis in assets resulting in an understatement of reported gross income does not constitute an "omission" from gross income for purposes of extending the general three-year statute of limitations for tax assessments. Home Concrete further held that Treas. Reg. § 301.6501(e)-1, a regulation made effective during this litigation, could not be invoked to support application of the six-year limitations period because the regulation itself explicitly did not apply to the 1999 tax year in issue. Moreover, Home Concrete held that deference to Treas. Reg. § 301.6501(e)-1 was not required. Deference to regulatory authority, a principle established in Chevron, U.S.A., Inc. v. NRDC, Inc., 467 U.S. 837 (U.S. 1984), applies where the underlying statute is ambiguous. Here, the Fourth Circuit ruled that IRC Section 6501(e)(1)(A) is unambiguous and that Chevron deference to Treas. Reg. § 301.6501(e)-1 was not called for.
Administrative Procedure Act Compliance Considerations
An amicus brief in support of the Fourth Circuit's holding, filed by Professor Kristin Hickman at the University of Minnesota Law School, analyzes the viability of Treas. Reg. § 301.6501(e)-1 in the context of §553 of the Administrative Procedure Act. (See TaxAnalysts® Tax Notes Today, TNT 247-15, December 23 2011.) In broad terms Professor Hickman asserts that promulgation of the regulation reversed the APA §553 standard by instead executing "interim-final rulemaking." Simply stated, "interim-final rulemaking" refers to legally binding rules that are issued without notice and comment, but that are accompanied by a promise to consider comments that are received later and to consider making changes in adopting replacement final rules. Id.
Moreover, Professor Hickman views Treasury's reliance on IRC § 7805(e) to excuse noncompliance with APA procedural requirements as misplaced, arguing instead that § 7805(e) provisions limit Treasury with extra requirements to publish a notice of proposed rulemaking immediately after adopting temporary regulations without public notice and comment, and to act upon submitted comments within three years. Id., citing Michael Asimow, Public Participation in the Adoption of Temporary Treasury Regulations, 44 Tax Law. 343, 363 (1991). Professor Hickman sees this interpretation of IRC § 7805(e) to be in keeping with its adoption by Congress as a part of the Taxpayer Bill of Rights.
In general, the stage set by the Fourth Circuit would seem to augur well for taxpayer reliance on the standard three-year limiitations period for assessments, especially in view of the Home Concrete focus on the impact of restrictions on Chevron deference principles applied to regulatory authority. A great deal rides on the final outcome as we all stay tuned.
RELATED LINKS: For further input on IRC Section 6501(e) principles and insights into the January 17th oral argument, see:
Lexis Tax Advisor -- Federal Code Explanations § 6501(e)
Home Concrete: Impressions from the Oral Argument (by Kristin E. Hickman, University of Minnesota Law School) - TaxAnalysts® Tax Notes Today, January 30, 2012
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