RESPONDENT: Home Concrete & Supply, LLC, et al.
LOCATION: Home Concrete & Supply
DOCKET NO.: 11-139
DECIDED BY: Roberts Court (2010-2016)
LOWER COURT: United States Court of Appeals for the Fourth Circuit
CITATION: 566 US (2012)
GRANTED: Sep 27, 2011
ARGUED: Jan 17, 2012
DECIDED: Apr 25, 2012
Gregory G. Garre - for the respondents
Malcolm L. Stewart - Deputy Solicitor General, Department of Justice, for the petitioner
Facts of the case
Plaintiffs Stephen R. Chandler and Robert L. Pierce were the sole shareholders of Home Oil and Coal Company, Inc. In 1999, Pierce contemplated selling his share of the business and sought professional advice in an effort to minimize tax liability generated by the sale of his interest in Home Oil. Each of the taxpayers initiated short sales of United States Treasury Bonds for $7,472,405. They then transferred the proceeds from that sale to Home Concrete as capital contributions. Home Concrete then closed the short sales by purchasing and returning essentially identical Treasury Bonds on the open market for $7,359,043. This transaction created "outside basis," or how much the partner's investment was worth according to tax rules, equal to the amount of the proceeds the taxpayers contributed.
Home Oil then transferred its assets to Home Concrete as a capital contribution. The taxpayers (except Home Oil) then transferred percentages of their partnership interests in Home Concrete to Home Oil as capital contributions. Home Concrete then sold substantially all of its assets to a third party purchaser for $10,623,348. The taxpayers timely filed their tax returns for 1999 in April 2000. Home Concrete elected to step-up its inside basis, or the amount that the partnership tax records compute for each partner, to equal the taxpayers' outside basis. Home Concrete again adjusted its inside basis to $10,527,250.53, including the amount of short sale proceeds earlier contributed by the taxpayers. As a result Home Concrete reported a $69,125.08 gain from the sale of its assets.
The IRS did not investigate until June 2003. As a result of their investigation, the IRS determined that the partnership was formed "solely for the purposes of tax avoidance by artificially overstating basis in the partnership interests of its purported partners." On September 7, 2006 the IRS issued a Final Partnership Administrative Adjustment (FPAA), in which they decreased to zero the taxpayers' reported outside bases in Home Concrete. This substantially increased the taxpayers' taxable income. Plaintiff taxpayers brought action against Internal Revenue Service (IRS) seeking to recover the increase.
As a general matter, the Internal Revenue Service (IRS) has three years to assess additional tax if the agency believes that the taxpayer's return has understated the amount of tax owed. That period is extended to six years, however, if the taxpayer omits from gross income an amount which is in excess of 25 percent of the amount of gross income stated in the taxpayer's return. During the trial the Treasury Department passed a regulation stating that the six-year period for assessing tax remains open for "all taxable years… that are the subject of any case pending before any court of competent jurisdiction… in which a decision had not become final." The U.S. Court of Appeals for the Fourth Circuit disagreed and found in favor of the plaintiffs.
1. Can an understatement of gross income attributable to an overstatement of basis in sold property qualify as an "omi[ssion] from gross income" that triggers the extended six-year assessment period?
2. Is a final regulation from the Department of the Treasury reflecting the IRS's view that an understatement of gross income attributable to an overstatement of basis which can trigger the extended six-year assessment period entitled to judicial deference?
Media for United States v. Home Concrete & SupplyAudio Transcription for Oral Argument - January 17, 2012 in United States v. Home Concrete & Supply
Audio Transcription for Opinion Announcement - April 25, 2012 in United States v. Home Concrete & Supply
John G. Roberts, Jr.:
Justice Breyer has our opinion this morning in case 11-139, United States versus Home Concrete and Supply.
Stephen G. Breyer:
Well, this is tax case and the Tax Code provides that ordinarily, the Government has to assess a deficiency against a taxpayer within “three years after the return was filed,” but that three years can be extended to six years, where the taxpayer “omits from gross income an amount that's pretty large.”
Now, the question here is, does this extension omits from gross income an amount that's 25% or whatever?
The question is whether that extension applies when the taxpayer overstates the basis in property that he sold and that has the effect of understating his income.
Well, we hold that this overstatement of basis is not within the word of the statute, an omission of an amount from the taxpayer's gross income.
So, it does not apply, I mean three years, not six.
In a -- the previous case, Colony v. Commissioner, which this Court decided in 1958, the Court considered a similar question, involving similar language in a similar provision of the earlier Code, the 1939 Internal Revenue Code rather than 1954.
The Court there held that the language of the statute, in particular, that word omit when read in light of its history showed that the extended six-year period did not apply when the taxpayer understated his income by overstating his basis.
Considerations of stare decisis lead us to reach the same conclusion here.
Now, to reach that conclusion, we have -- we considered the Government's claim that later changes in -- related that other parts of the statute require a different conclusion, but we weren't convinced by that claim.
The Government also pointed out that we should defer to a Treasury regulation, interpreting the language and it interprets the language in the way favorable to the Government namely, that the six years should apply, but we don't accept that argument either.
We think that the Court in Colony meant its interpretation of that word “omit” to constitute a definitive understanding of what Congress meant by those words which then reappear in the 1954 Code and that fact that it was meant to be definitive by Congress in the Court's view forecloses the agency's more recent and different interpretation of the words.
We explain this further in our opinion.
We affirm the similar conclusion of the Fourth Circuit.
Justice Scalia has filed an opinion concurring in part and concurring in the judgment.
Justice Kennedy has filed a dissenting opinion joined by Justice Ginsburg, Justice Sotomayor, and Justice Kagan.