Daily Tax Update - April 25, 2012: US Supreme Court Holds That Six-Year Period Of Limitations Does Not Apply To An Overstatement Of Basis

US SUPREME COURT HOLDS THAT SIX-YEAR PERIOD OF LIMITATIONS DOES NOT APPLY TO AN OVERSTATEMENT OF BASIS:  The United States Supreme Court today issued its opinion in the case of United States v. Home Concrete & Supply, LLC, holding that the six-year period of limitations under section 6501(e)(1)(A) does not apply to an overstatement of basis.  In general, the Service must assess a deficiency against a taxpayer within a three-year period of limitations after the return is filed.  Section 6501(e)(1)(A) extends this period to six years when a taxpayer omits from gross income an amount in excess of 25 percent of the amount of gross income reported on the return.  The taxpayer in Home Concrete had overstated its basis in property that had been sold, thereby understating its gross income from the sale by an amount above the 25 percent threshold.  The Service assessed the resulting deficiency outside the three-year period of limitations but within the six-year period.  The district court upheld the Service’s position, but the Fourth Circuit reversed.  The 5-4 ruling upholds the Fourth Circuit’s decision, and resolves a split among the circuits.  Justice Breyer delivered the opinion of the Court; he was joined by Chief Justice Roberts and Justices Thomas and Alito as to the entire opinion and Justice Scalia as to part of the opinion.  Justice Scalia also filed a separate opinion.

  • The Court held that its prior decision in Colony, Inc. v. Commissioner, 357 US 28 (1958), determined the outcome of the case.  Colony involved a provision of the Internal Revenue Code of 1939 that had nearly identical language to that at issue in Home Concrete.  As the Home Concrete decision notes, the Colony Court had stated that the language at issue was "not 'unambiguous.'"  Looking to the legislative history, the Colony Court had held that the six-year period of limitations did not apply to overstatements of basis.  The Home Concrete Court held that, because the operative language was virtually identical, the principle of stare decisis counseled that section 6501(e)(1)(A) be given the same interpretation as its predecessor was given in Colony.
  • The Government pointed to Treas. Reg. § 301.6501(e)-1, promulgated in final form in 2010, which states that "an understated amount of gross income resulting from an overstatement of unrecovered cost or other basis constitutes an omission from gross income for purposes of section 6501(e)(1)(A)(i)."  The Government argued that the regulation constituted "an agency’s construction of a statute which it administers" and, therefore, should be given deference under Chevron and Mayo.  The Court held that the Service’s construction of the statute was not a permissible construction, since it was inconsistent with Colony.
  • In arguing that the regulation should be given deference, the Government relied on National Cable & Telecommunications Assn. v. Brand X Internet Services, 545 US 967 (2005).  The Brand X Court had stated that a "court’s prior judicial construction of a statute trumps an agency construction otherwise entitled to Chevron deference only if the prior court decision holds that its construction follows from the unambiguous terms of the statute . . . ."  Brand X, 545 US at 982.  In a section of the majority opinion joined by only three justices, the opinion distinguished Brand X.  In doing so, the plurality addresses the meaning of the word "unambiguous," drawing a line between its meaning pre- and post-Chevron.  In a concurring opinion, Justice Scalia criticizes the plurality decision as revising the meaning of Chevron "in a direction that will create confusion and uncertainty."
  • For additional information, contact:  J. Walker Johnson  - wjohnson@steptoe.com, Matthew D. Lerner - mlerner@steptoe.com, Philip R. West - pwest@steptoe.comMatthew J. Zinnmzinn@steptoe.com, or Aaron P. Nocjar - anocjar@steptoe.com

FINANCE TAX REFORM HEARING ON STATE AND LOCAL TAX AND FISCAL POLICY:  Today, the Senate Finance Committee held a hearing on "Tax Reform:  What it Means for State and Local Tax and Fiscal Policy."

  • The witnesses were:
    • Mr. Frank Sammartino (Congressional Budget Office)
    • Dr. Kim Rueben (Urban-Brookings Tax Policy Center)
    • Mr. Walter Hellerstein (University of Georgia School of Law)
    • Mr. Joseph Henchman (Tax Foundation)
    • Mr. Sanford Zinman (Zinman Accounting, White Plains, NY)
  • In his opening remarks, Committee Chairman Max Baucus said, "We need to make sure our federal, state and local tax systems are working together.  As part of tax reform, we should ask how we can help states collect taxes owed and how we can encourage standard rules to protect taxpayers from multiple taxes and needless complexity."
  • Ranking Member Orrin Hatch said, "The rush for new tax dollars that too often characterizes the federal legislative process, oftentimes leaves issues involving federal-state tax coordination by the wayside.  But we cannot forget that the policies being discussed today touch-on fundamental constitutional principles of federalism and separation of powers.  And if we are to do no harm it is important to hold hearings such as this one."  Hatch added, "Also, it is important to recall that the states are already receiving significant support from federal taxpayers.  According to the Joint Committee on Taxation, federal deductions for state and local taxes will diminish federal taxes by around $347 billion from 2011 to 2015.  These deductions are generally regarded as helping states to leverage spending by minimizing the true cost of state and local government.  As someone dedicated to states’ rights, I believe that a state should be free to set its own tax and spending policies. But with rights come responsibilities.  And state officials need to take responsibility for their own spending decisions."
  • Mr. Sammartino’s testimony focused on two aspects of current policy: "(1) the use of tax-preferred bonds by state and local governments for subsidizing investment in capital-intensive projects for such things as highways, water resources, and school buildings and (2) the deductibility of state and local taxes."
  • Dr. Rueben’s remarks focused "on the current structure of state and local tax systems and how uncertainty about federal tax policy affects state and local governments’ ability to forecast their own revenues," as well as "how the federal tax code affects state and local budgets and how fundamental changes in the federal tax code may affect state and local governments."
  • Mr. Hellerstein’s testimony provided "an overview of federal‐state tax coordination in an effort to assist this Committee in determining the appropriate role of Congress with regard to matters of state taxation."  Mr. Hellerstein stated, "If my testimony has an overriding theme, it may be best captured by Justice Holmes’s wise observation that 'a page of history is worth a volume of logic.'  The historical record of federal‐state tax coordination provides important lessons regarding the risks and rewards of such coordination and, consequently, guidance for evaluating current and future initiatives for such coordination."  Mr. Hellerstein also addressed vertical federal‐state tax coordination in connection with concurrent federal and state taxation of wealth transfers and of income, horizontal federal‐state tax coordination in connection with federal efforts to harmonize or restrain state income, excise, and property taxes, and pending congressional proposals for federal‐state tax coordination.
  • Mr. Henchman stated, "The power -- to limit state tax authority—is not a power to use lightly.  There are many components of state tax systems that, frankly, are none of Congress’s business, even if they are good or bad public policy.  Those aspects of state tax systems are neither motivated by protectionism nor have the effect of raiding revenue from out-of-staters should be left alone as part of our commitment to fifty simultaneous laboratories for policy experiments to paraphrase Justice Brandeis.  If bad state policy can be corrected by the political pressure of voting resident taxpayers or by the economic pressure of the out-migration of people and dollars, it ought to be left to the states to handle."
  • Mr. Zinman provided an overview of complexities for both individuals and businesses created by state tax rules.  He also commented on nexus issues, stating that "There is a strong need for federal oversight of state sales and use tax to insure that all states are able to collect their proper tax revenue."
  • In connection with the hearing, the Joint Committee on Taxation has released Present Law and Background Information Related to State and Local Government Finance.
  • Testimony can be accessed here.
  • For additional information, contact Philip R. West - pwest@steptoe.com or  Amanda Varma - avarma@steptoe.com

MISCELLANEOUS GUIDANCE RELEASED:

Revenue Procedure 2012-25 provides issuers of qualified mortgage bonds, as defined in section 143(a) of the Internal Revenue Code, and issuers of mortgage credit certificates, as defined in section 25(c), with (1) nationwide average purchase prices for residences located in the United States, and (2) average area purchase price safe harbors for residences located in statistical areas in each state, the District of Columbia, Puerto Rico, the Northern Mariana Islands, American Samoa, the Virgin Islands, and Guam.

TAX BILL INTRODUCED APRIL 24TH:

H.R.4605: To amend the Internal Revenue Code of 1986 to extend the eligibility of activities in Puerto Rico for the deduction for income attributable to domestic production activities.
Sponsor: Rep Pierluisi, Pedro R. [PR] (introduced 4/24/2012)      Cosponsors (None)
Latest Major Action: 4/24/2012 Referred to House committee. Status: Referred to the House Committee on Ways and Means

INTERNAL REVENUE SERVICE - CIRCULAR 230 DISCLOSURE:
As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.

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