On April 25, 2012, the Supreme Court issued its decision in U.S. v. Home Concrete & Supply, LLC, et al, ruling against the IRS on the question of whether a basis overstatement could trigger the 6 year statute of limitations on assessment. IRC § 6501(a) requires that the IRS assess tax within three years of the filing date of the return. However, subsection 6501(e)(1)(A)(i) extends that period to six years if the taxpayer omits from gross income an amount in excess of 25% of the gross income stated on the return. In Home Concrete, the taxpayer had overstated its basis in property, which resulted in an understatement of reported gain on a transaction and thus a greater than 25% understatement of gross income. The IRS did not assess additional tax until after the three-year statute of limitations lapsed, but argued that the lower gain that resulted from the basis overstatement constituted an “omission” in excess of 25%, and thus applied the six-year statute.
The Court sided with the taxpayer, holding that an overstatement of basis was not an “omission” within the meaning of the statute. Justice Breyer, writing for the plurality, found that the Court had interpreted a substantially-identical statute in an earlier case (Colony, Inc. v. Comm’r, 357 U.S. 28 (1958)) which found that an overstatement of basis was not an “omission” for the purposes of extending the statute of limitations; omissions under 6501(e)(1)(A)(i) must be the absence of an item, not a misstatement thereof.
The decision also implicitly limits the ability of the IRS to overturn judicial statutory construction via regulations. The Service had argued that, under Chevron, the regulation specifically including basis understatement was a valid interpretation of the statute. The Court ruled that in the face of judicial statutory interpretation an agency can only “fill the gaps” – provide meaning where there is ambiguity. Here, the Court’s prior decision in Colony had left no gaps to fill.