Supreme Court Holds Six-Year Statute Of Limitations Does Not Apply To Overstatement Of Basis

In a significant taxpayer victory, the Supreme Court of the United States, in United States v. Home Concrete & Supply, LLC, No. 11-139 (Apr. 25, 2012), held that an overstatement of basis does not constitute an omission from gross income that triggers the six-year statute of limitations period under section 6501(e)(1)(A) of the Internal Revenue Code. The Internal Revenue Service (IRS) generally has three years from the date the taxpayer filed its tax return to assess a tax against a taxpayer. However, if a taxpayer omits an item from gross income on its return that is in excess of 25 percent of the amount of gross income stated on the return, the period for assessment is extended from three years to six years. In holding that an overstatement of basis does not constitute an omission for this purpose, Home Concrete invalidates final U.S. Department of Treasury (Treasury) regulations issued in 2010 that would have applied the extended six-year statute of limitations to overstatement of basis transactions retroactively.

Background

Disputes between taxpayers and the IRS regarding whether an overstatement of basis can subject a taxpayer to the extended six-year statute of limitations period have made their way through the courts since 2009.

Multiple federal appeals courts addressed this issue and were split. The Ninth, Fourth and Fifth Circuits held that an overstatement of basis is not an omission from gross income that is subject to the six-year statute of limitations period. See Bakersfield Energy Partners, LP v. Commissioner, 568 F.3d 767 (9th Cir. 2009), aff'g 128 T.C. 207 (2007); Home Concrete & Supply, LLC v. United States, 634 F.3d 249 (4th Cir. 2011); and Burks v. United States, 633 F.3d 347 (5th Cir. 2011). However, the Seventh, Tenth, Federal and District of Columbia Circuits all held that an overstatement of basis is an omission from gross income that triggers the six-year statute of limitations period. See Beard v. Commissioner, 633 F.3d 616 (7th Cir. 2011); Grapevine Imports, Ltd. v. United States, 636 F.3d 1368 (Fed. Cir. 2011); Salman Ranch Ltd. v. Commissioner, No. 09-9015 (10th Cir. 2011); Intermountain Ins. Serv. of Vail, LLC v. Commissioner, No. 10-1204 (D.C. Cir. 2011), rev'g T.C. Memo 2009-195; and UTAM, Ltd. v. Commissioner, No. 10-1262 (D.C. Cir. 2011), rev'g T.C. Memo 2009-253.

In 2010, while multiple cases on the issue were in litigation, the IRS and Treasury issued final regulations providing that "an understated...