On April 25, 2012, a divided Supreme Court held in United States v. Home Concrete & Supply, LLC, et al, that an overstatement of basis in property did not create an omission of gross income on its return for purposes of extending the three year statute of limitations on assessment to six years. In so holding, the Court relied on its prior decision in Colony Inc. v. Commissioner and affirmed the Fourth Circuit’s holding.

For regulated investment companies with voluminous sale transactions that only attach summary capital gain information to their Form 1120-RIC, Home Concrete resolves an ambiguity as to whether the three year (rather than the six year) statute of limitations applies when there is a substantial basis overstatement (e.g., arising from wash sale errors). The IRS position has been that in determining whether there is a more than 25 percent omission from gross income, gross gains (not gross sale proceeds) are the relevant measure. The contrary argument has been, if gross sale proceeds are reported, there could be no “omission” from gross income even if a basis overstatement results in gain being underreported by more than 25 percent of gross income. Even if the six year statute of limitations would otherwise apply because of a basis overstatement, Treas. Reg. §301.6501(e)-1(a)(1)(iv) further provides, “An amount shall not be considered as omitted from gross income if information sufficient to apprise the Commissioner of the nature and amount of the item is disclosed in the return, including any schedule or statement attached to the return.” If only summary capital gain information is disclosed on Form 1120-RIC, the IRS might contend that the fund failed to provide sufficient information to avail itself of this exception and thus have been subject to the six-year statute. In a broader context, this decision may create uncertainty as to whether the IRS has to show that Congress gave it the authority to interpret an ambiguity in a particular statute.

In Home Concrete, the taxpayer reported an overstated basis for property sold on its 1999 income tax return. As a result of the overstated basis, the gross income received on the sale of the property was overstated by more than 25 percent of the amount of gross income appearing on the return. The IRS issued a notice of deficiency outside the general three year limitations period for assessment in reliance on IRC Section 6501(e)(1)(A), which extends the three year statute of limitations to six years when there is an omission of gross income in excess of 25 percent of the amount of gross income on the return.

The district court agreed with the IRS assessment; however, the Fourth Circuit reversed the district court based on the Supreme Court’s decision in Colony. In Colony, the Court interpreted “materially indistinguishable language” from IRC Section 6501(e)(1)(A) and found that the inclusion of the word “omit” in the statute, unlike the words “reduces” or “understates,” means “to leave out or unmentioned.” The Court noted that the purpose of extending the statute of limitations because of a taxpayer’s omission to report some taxable item was to give the Commissioner additional time to investigate the tax returns where he is at a special disadvantage.

The Government tried to dissuade the Court from relying on Colony by directing the Court to differences in other provisions of the 1954 Code. The Government suggested that these differences favored a different interpretation of Colony. The Court rejected these arguments calling the points “too fragile to bear the significant argumentative weight the Government seeks to place upon them.” Additionally, the Government steered the Court to Treasury Regulation Section 301.6501(e)-1, promulgated in final form in December 2010 (while Home Concrete was being litigated), which, in a departure from Colony, states “an understated amount of gross income resulting from an overstatement of unrecovered cost or other basis constitute an omission of gross income.” Treas. Reg. §301.6501(e)-1(a)(1)(iii). Further, the Government noted, the Treasury Regulation is an “agency’s construction of a statute which it administers,” quoting Chevron, U.S.A. Inc. v. Natural Resources Defense Council, Inc. The Court also rejected this argument, observing “Colony has already interpreted the statute, and there is no longer any different construction that is consistent with Colony and available for adoption by the agency.”

Finally, the Court held that Colony concluded Congress did not leave a gap to fill in the statute, and so did not give gap-filling authority to an agency. Therefore, stare decisis requires that the Court follow that interpretation. Accordingly, taxpayer’s overstatement of basis and resulting understatement of gross income do not trigger the extended limitations period of Section 6501(e)(1)(A).

In a concurring opinion, Justice Scalia noted that the plurality opinion revises the meaning of Chevron and adds “confusion and uncertainty” to its meaning. The plurality, Scalia added, suggests that post-Chevron, a finding of ambiguity should be accompanied by a finding of agency authority to resolve the ambiguity, but pre-Chevron that was not so. Scalia suggested “Post-Chevron cases do not ‘conclude’ that Congress wanted the particular ambiguity resolved by the agency; that is simply the legal effect of ambiguity – a legal effect that should obtain whenever the language is in fact (as Colony found) ambiguous.”

The dissent disagreed with the plurality’s reliance on Colony because the new provisions in the Tax Code, which were discussed by the Government, lead to a permissible conclusion that the language would have a different meaning going forward, which meaning could be consistent with the interpretation by the Treasury Department in the Treasury Regulations. Further, such interpretation would not have an impermissible retroactive effect.

In light of the Court’s holding in Home Concrete, the Court issued summary dispositions for five petitions that sought review of circuit court decisions that held contrary to the Court's decision - it granted certiorari to the five petitions, vacated the circuit court decisions and remanded the cases to the circuit courts for reconsideration in light of Home Concrete. Further, it denied certiorari to four petitions the Government filed to challenge circuit court decisions holding that a basis overstatement did not constitute an omission from gross income for purposes of triggering the extended limitations period for assessment.

Home Concrete is clearly a victory for taxpayers. To the extent Treasury Regulation Section 301.6501(e)-1 conflicts with Colony, it is invalid. But, as Scalia suggests, Home Concrete creates confusion and uncertainty for tax practitioners trying to understand Chevron. Looking forward, does an agency have to show that Congress gave it authority to interpret an ambiguity? Additionally, must a court first determine that a statute is ambiguous before it can find that a statute delegates to an agency the power to resolve an ambiguity?

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