Originally published April 25, 2012
Keywords: taxation, statue of limitations, capital gains, statute of limitations
Today the Supreme Court issued one decision, described below, of interest to the business community.
Taxation—Statute of Limitations
United States v. Home Concrete & Supply, LLC, No. 11-139 (previously discussed in the September 27, 2011 Docket Report).
The Supreme Court held today in United States v. Home Concrete & Supply, LLC, No. 11-139, that an overstatement of the taxpayer's basis in a partnership interest, which thereby limits the capital gains tax on a sale of that interest, is not an "om[ission] from gross income" under 26 U.S.C. § 6501(e)(1)(A). The overstatement is therefore subject to the ordinary three-year statute of limitations for tax deficiencies, 26 U.S.C. 6501(a), rather than the special six-year limitations period that applies to certain omissions under Section 6501(e)(1)(A).
Justice Breyer wrote an opinion, most of which was joined by Chief Justice Roberts and Justices Scalia, Thomas, and Alito, and was to that extent the opinion of the Court. A portion of Justice Breyer's opinion was joined only by Chief Justice Roberts and Justices Thomas and Alito, and thus reflects the views merely of a plurality of the Court. Justice Scalia wrote an opinion concurring in part and concurring in the judgment. The majority held that the case is controlled by the Court's decision in Colony, Inc. v. Commissioner, 357 U.S. 28 (1958), which interpreted identical language in an earlier version of the tax code to apply only when "specific receipts or accruals of income are left out of the computation of gross income," not when gross income is understated through other means.
Although it did not agree on a single rationale for doing so, a majority of the Court also held that the Colony holding has not been superseded by a subsequent Treasury Department regulation providing that "omission from gross income" includes an understatement of gross income attributable to an overstatement of basis. Writing for the four-Justice plurality, Justice Breyer concluded that, although there is "linguistic ambiguity" in the statute, deference to the agency's interpretation is not warranted under Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U. S. 837 (1984), given the principle of stare decisis and the Court's prior determination in Colony that Congress had "directly spoken" to the issue, and had thus left no statutory gap to be filled by agency regulations. Slip op. 10. In his concurrence, Justice Scalia rejected that reasoning but agreed with the result; in his view, once a statute has been interpreted by a court on de novo review, administrative agencies may not adopt a contrary interpretation. Concurrence 1.
Justice Kennedy wrote a dissenting opinion, which was joined by Justices Ginsburg, Sotomayor, and Kagan. The dissenters argued that, although the "central language" of the statute is identical to the language interpreted in Colony, Dissent 3, changes in the surrounding text suggest that Congress may have intended it to reach a broader range of transactions than was encompassed by the prior version of the tax code. Therefore, in the dissent's view, "there was room for the Treasury Department to interpret the new provision" as applying to an overstatement of basis. Id. at 5. Applying established principles of administrative law, the dissenting Justices would have deferred to the agency's view under Chevron and adopted its interpretation, according to which the statute applies to transactions that understate gross income through an overstatement of basis.
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