Tax Court Rejects Taxpayers’ Reliance on Home Concrete Decision

us_Tax_Court_fasces-with-red-ribbonIn Barkett v. Commissioner, 143 T.C. No. 6 (2014), the Tax Court held that gains reported from the sales of investments (not the amount realized) are used to determine whether the taxpayers understated gross income by more than 25% for purposes of the extended six-year statute of limitations under IRC § 6501(e)(1)(A).  The issue came before the Tax Court on the taxpayers’ motion for partial summary judgment.

In Barkett, the taxpayers realized more than $7 million from the sale of investments in 2006, and reported $123,00 in gain.  In 2007, the taxpayers realized more than $4 million from the sale of investments and reported $314,000 in gain.  The gross income reported in 2006 and 2007 was $271,440 and $340,591, respectively. The IRS issued a Notice of Deficiency more than three years but less than six years after taxpayers filed their 2006 and 2007 returns.

The IRS asserted that taxpayers omitted $629,850 and $432,957 in gross income for tax years 2006 and 2007, respectively.  The taxpayers stipulated to the amounts that were omitted but challenged the validity of the Notice of Deficiency on the grounds that the three year statute of limitations expired under IRC § 6501(a) and the amount omitted from gross income did not exceed the 25% threshold to extend the statute of limitations to six years under IRC § 6501(e).

The taxpayers’ relied upon the Supreme Court’s decision in United States v. Home Concrete & Supply, LLC, 566 U.S. ___, ___, 132 S. Ct. 1836 (2012), which invalidated a portion of Treas. Reg. § 301.6501(e)-1 and held that the six-year statute of limitations under IRC § 6501(e) does not apply to a taxpayer’s overstatement of basis.  The taxpayers argued that amounts realized should be included in the denominator of the 25% omitted calculation for purposes of IRC § 6501(e)(1)(A).

The Tax Court rejected the taxpayers’ interpretation of Home Concrete and held that gross income stated in the return only includes gains reported from investment property – the excess of the amount realized over the basis in the assets sold.  The Court cited Insulglass v. Commissioner, 84 T.C. 203 (1985) and Schneider v. Commissioner, T.C. Memo. 1985-139, stating that “capital gains, not the gross proceeds, are to be treated as the amount of gross income stated in the return for purposes of section 6501(e).”  The Court distinguished this case from the Intermountain line of cases that led to the Supreme Court’s decision in Home Concrete because those cases addressed when gross income is omitted from the return, not how to calculate gross income (the issue in this case).

Read the full Tax Court opinion here: Barkett v. Commissioner, 143 T.C. No. 6 (2014).

U.S. Supreme Court: Six-Year Statute of Limitations Does Not Apply to An Overstatement of Basis

In a huge win for the taxpayers in this case and many other similarly situated taxpayers, the U.S. Supreme Court handed down its opinion in United States v. Home Concrete & Supply, LLC yesterday. The Supreme Court affirmed the decision of the 4th Circuit Court of Appeals holding that the six-year statute of limitations applicable to unreported income, IRC 6501(e), did not apply when a taxpayer overstated basis, and thus understated income. The Supreme Court embraced the principle of stare decisis and followed its opinion in Colony, Inc. v. Commissioner, 357 U. S. 28 (1958) to decide the question.

The case was selected for consideration to resolve a split in the circuits that ostensibly began with the 9th Circuit’s decision in Bakersfield Energy Partners, LP v. Commissioner, 128 T.C. 207 (2007), affd. 568 F.3d 767 (9th Cir. 2009) but soon became known as the “Intermountain issue” after the Tax Court’s decision in Intermountain Insurance Service of Vail LLC v. Commissioner, 134 T.C. 211 (2010) which followed Bakersfield. The Intermountain decision came to exemplify a series of cases that received disparate treatment in the Courts of Appeals. The Court of Appeals came down in favor of the government in the 7th Circuit, the D.C. Circuit and the Federal Circuit though for different reasons. The 4th and 5th Circuit sided with the Tax Court and the 9th Circuit deciding that the 6 year statute of limitations did not apply to overstated basis. These cases attracted particular attention from both tax practitioners and the government because the overstated basis in each instance was the product of tax strategies (mostly Son of Boss transactions) that the government had listed or deemed abusive as a tax shelter.

The Supreme Court’s decision determined the straightforward question of whether an understatement of basis extends the traditional 3-year statute of limitations to 6 years under IRC 6501(e). It does not. However, many scholars and tax procedure wonks were hoping that the court would provide some guidance on the procedural validity and applicability of Treasury Regulation 301.6501(e)-1. Treas. Reg. 301.6501(e)-1 was promulgated as a temporary regulation in 2009 with a retroactive date of application to “correct” the 6-year statute of limitations controversy. The Temporary Regulation was published simultaneously with a Proposed Regulation to the same effect but without a pre-publication comment period. Some argued that such a move violated the Administrative Procedures Act (APA), notably among them Tax Court Judges Halpern and Holmes. (See their concurrence in the Tax Court’s Intermountain opinion.) The concern of many observers was not only the procedural validity of the regulation as promulgated but also whether an agency could promulgate a regulation that would have the effect of invalidating a Supreme Court interpretation of an ambiguous statute (which presumably this regulation would have done). The Supreme Court’s decision in National Cable & Telecommunications Assn. v. Brand X Internet Services, 545 U.S. 967 (2005), certainly suggested that the latter outcome was possible and the parties and amici briefed that issue extensively.

In the end, the Supreme Court invalidated the regulation on the narrow ground that did not apply because of the precedent established in Colony, Inc. It did not address the validity of the regulation’s promulgation under the APA or the broader question of whether a regulation could invalidate a Supreme Court interpretation. Presumably those questions will be left for another day.

Read the Supreme Court Opinion here:
U.S. v. Home Concrete & Supply, LLC., Docket No. 11-139 (April 25, 2012)

Supreme Court Hears the Home Concrete Arguments Today

For those who have been following the Intermountain cases, i.e., the series of Tax Court and Courts of Appeals cases dealing with the interpretation of the six-year statute of limitation for under reported income (trying not to blatantly pick a side with that language), the Supreme Court will hear oral arguments in Home Concrete today.

For great coverage of the issues and the arguments that may be presented today visit Tax Appellate Blog.

U.S. Supreme Court: Cert. Granted in 6 Year Statute of Limitations Case

The U.S. Supreme Court has granted certiorari in Home Concrete & Supply v. United States, a decision of the 4th Circuit Court of Appeals on the much litigated application of the 6-year statute of limitations. Home Concrete was the first of the 6 year statute cases (also known as the Intermountain cases) to reach the Supreme Court. When the Court selected Home Concrete for hearing it was also presented with the opportunity to hear similar cases from the Federal Circuit (Grapevine) and 7th Circuit (Beard) but apparently has put those petitions on hold pending the decision in Home Conrete.

For more visit Tax Appellate Blog.

D.C. Circuit: Issuance of an FPAA tolls Statute of Limitations for Individual Partners

The Court of Appeals for the D.C. District reversed the Tax Court holding that a final partnership administrative adjustment (FPAA) issued after the initial three-year assessment period for partnerships under IRC §6229(a) had expired still tolls the period for assessment (statute of limitations) for individual partners under IRC §6501.  The Circuit Court relied upon the language of IRC § 6229(d), which suspends certain assessments following the issuance of an FPAA, and its previous holding in Andantech, L.L.C. v. Commissioner, 331 F.3d 972 (D.C. Cir. 2003).

Read the opinion here:
UTAM, Ltd. v Commissioner, Docket No. 10-1262 (D.C. Cir. June 21, 2011)

D.C. Circuit: Six Year Statute of Limitations Applies to Overstatements of Basis

The Court of Appeals for the District of Columbia Circuit reversed the Tax Court on the question of whether or not the six year statute of limitations under sections 6229(c)(2) and 6501(e)(1)(A) applied to an overstatement of basis. The Court of Appeals followed the rationale of other recent government victories on this issue, see Grapevine (Fed. Cir.) and Beard (7th Cir.). The Court of Appeals also adopted the government’s argument that Chevron deference apply to the government’s regulation (adopted after litigation began) interpreting the application of the six year statute.

Read the opinion here.
Intermountain Insurance Service of Vail, LLC v. Commissioner, Docket No. 10-1204 (D.C. Cir. June 21, 2011)

For more about this opinion visit Tax Appellate Blog and Tax Prof Blog.

Tax Court: 6 Year Statute of Limitations Still Does Not Apply to Understated Basis Cases

The U.S. Tax Court in a reviewed opinion, accompanied by two concurrences, rejects the applicability of final Treas. Reg. Sec. 301.6229(c)(2)-1(b) and follows its opinions in Intermountain Insurance Service of Vail v. Commissioner and Bakersfield Energy Partners, LP v. Commissioner to hold that the 6 year statute of limitations does not apply to an understatement of income. The majority opinion, sua sponte, considered the final regulations in light of the U.S. Supreme Court’s opinion in Mayo Foundation v. United States.

Read the Tax Court’s opinion here:
Carpenter Family Investments, LLC v. Commissioner, 136 T.C. No. 17 (2011)

Federal Circuit: 6 Year Statute of Limitations Applies to Overstatements of Basis

The Federal Circuit relies upon Mayo Foundation to find for the government on the 6 year statute of limitations issue in Grapevine v. United States, Docket 08-5090 (Fed. Cir., March 11, 2011). The Grapevine rationale differs from that put forth by the same court in Salman Ranch Ltd. v. United States, No. 2008-5053 (Fed. Cir. July 30, 2009), (when it found for the taxpayer) and by the other circuits who have considered the same issue.

For commentary on this opinion visit Tax Appellate Blog.

Read the opinion here:
Grapevine v. United States, Docket 08-5090 (Fed. Cir., March 11, 2011)

Fifth Circuit: Overstated Basis is Not Omitted Income for the 6-Year Statute of Limitations

The hits keep on coming. The Fifth Circuit joins the growing chorus from the Courts of Appeals holding that an overstatement of basis does not equal an omission of income and the 6 year statute of limitations does not apply.

Read the opinion here:
Burks v. United States, No. 09-11061 (5th Cir. Feb. 9, 2011)