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The U.S. Supreme Court recently held, in United States v.
Home Concrete & Supply, LLC, that an overstatement of
basis does not constitute an omission from gross income that
results in application of the extended six year statute of
limitations. In general, the IRS must assess a deficiency
against a taxpayer within three years after a tax return is
filed. The three-year period is extended to six years when
the taxpayer omits an amount from gross income that exceeds 25
percent of the gross income amount stated on the return.
Home Concrete invalidated the Treasury regulation
promulgated during the course of the case, which provided that an
understated amount of gross income resulting from an overstatement
of unrecovered cost or other basis constitutes an omission from
gross income. The Supreme Court found that its earlier
decision in Colony, Inc. v. Comr., 357 U.S. 28 (1958)
governed. The relevant statute had not changed in any
meaningful way. The Court explained that the key phrase in
the statute, "omits . . . an amount," limits the
statute's scope to instances in which the taxpayer leaves
specific receipts or accruals of income out of the computation of
gross income. While the Court noted that the statute was not
unambiguous, the legislative history indicates Congress's
intent that the extended statute of limitations only apply to
situations in which a taxpayer fails to report an item of income
and not where the taxpayer only overstates deductions or
offsets. Only then is the government at the special
disadvantage which the longer period sought to remedy - where the
tax return provides no clue of the existence of the omitted
item.
The Supreme Court also rejected the IRS's argument that the
Court should give deference to the Treasury regulation under the
Chevron and Mayo Foundation rules. Once
Colony interpreted the statute, the Treasury was no longer
free to adopt a different construction.
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The Internal Revenue Service has recently published an IRS Large Business & International Directive, which updates an earlier directive to field agents addressing the examination of capitalization and repair costs issues.
A state cannot include income in the apportionable base and then exclude the receipts and related factors that generated that very same income from the apportionment formula.
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