Academic journal article Journal of Business and Behavior Sciences

The Supreme Court's Decision in Home Concrete Is Distinguished by the Tax Court's Ruling That It Did Not Affect the Calculation of Gross Income

Academic journal article Journal of Business and Behavior Sciences

The Supreme Court's Decision in Home Concrete Is Distinguished by the Tax Court's Ruling That It Did Not Affect the Calculation of Gross Income

Article excerpt

INTRODUCTION

The debate over whether an understatement of gain due to an overstatement of basis in property sold constitutes an omission from gross income triggering an extended statute of limitations for tax assessment has been debated as far back as the 1930's and resulted in splits among the courts of appeals and a seminal decision by the Supreme Court in Colony, Inc. v. Comm., 357 U.S. 28; 78 S. Ct. 1033; 2 L.Ed. 2d 1119 (1958) {Colony). In U.S. v. Home Concrete & Supply, LLC, et al., 566 U.S. _; 132 S.Ct. 1836; 182 L.Ed 2d 746 (2012) {Home Concrete), in a 5-4 decision, the Supreme Court resolved a Rubik's Cube of issues. It ruled that an understatement of gain due to an overstatement of basis in property sold outside the trade or business context (hereinafter referred to as an overstatement of basis) is not an omission from gross income for purposes of extending the normal three year statute of limitations for tax assessments to six years, pursuant to Section 6501(e)(1)(A) of the Internal Revenue Code of 1986, as amended (Code). Code § 6501(e)(1)(A) applies when there is an omission from gross income greater than twenty-five percent of the gross income reported on the tax return.

In Home Concrete, the Supreme Court analyzed its decision in Colony, interpreting Code § 275(c) of the Internal Revenue Code of 1939 (1939 Code), winch at the time at issue in Home Concrete existed as Code § 6501(e)(1)(A) and today exists as Code § 6501(e)(1)(A) and (B) due to the amendments made to the Code in 2010. The language in Code § 6501(e)(1)(A) dates back to the Revenue Act of 1934 and was codified in the 1939 Code. It was recodified as Code § 6501(e)(1)(A) in the Internal Revenue Code of 1954. All references to the Internal Revenue Code herein, unless otheiwise noted, are to the 1986 Internal Revenue Code, as amended, prior to the amendment of Code § 6501(e) in 2010.

The task before the Supreme Court in Home Concrete was complicated by the fact that the Treasury Department issued temporary regulations in 2009 and final regulations in 2010, providing in part that an overstatement of basis is an omission from gross income triggering the six-year SOL. The Court ruled that this part of the regulation was invalid. Its interpretation of Colony impacted whether the final regulations were afforded deference pursuant to Chevron U.S.A. Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837 (1984) {Chevron). This added to the Rubik's Cube of issues dealing with the tensions between the judicial and administrative roles of government and stare decisis versus Chevron deference.

In Barkett v. Comm., 143 T.C. No. 6 (2014), the Tax Court was faced with the issue of whether or not Home Concrete also invalidated a portion of the regulation providing that the term gross income, as it relates to the sale of an investment asset, includes gain from the sale (amount realized minus adjusted basis of the property), as opposed to just the amount realized, for purposes of determining the amount of gross income reported in the return. Relying on its precedents and the regulation, it held that gross income includes gains as opposed to the entire amount realized, and applied the six-year SOL. Before analyzing Home Concrete and Barkett, a review of the relevant provisions of the Code is necessary.

OVERVIEW OF THE RELEVANT PROVISIONS OF THE CODE

The key language in Code § 6501(e)(1)(A) interpreted in Home Concrete is omits from gross income. Barkett inteipreted gross income as it relates to the amount of gross income stated in the return. Congress first provided for an extended SOL due to omissions from gross income with the addition of § 275(c) to the tax code, which was codified in 1934 and 1939. Code § 275 in the 1939 Code provided, in relevant part:

"(c) Omission from Gross Income.-If the taxpayer omits from gross income an amount properly includible therein which is in excess of 25 per centum of the amount of gross income stated in the return, the tax may be assessed, . …

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