United States v. Home Concrete & Supply, LLC

Taxpayers must report as income gains derived from property transactions, determined using appropriate basis. See 26 U.S.C. § 61(e)(3). 26 U.S.C. § 6501(e)(1)(A) provides the Internal Revenue Service (“IRS”) with an extended six year period to levy additional tax should it find a failure to report any income. See26 U.S.C. § 6501(e)(1)(A). Petitioner United States argues that both the plain language of § 6501(e)(1)(A) and the Supreme Court's 1958 Colony, Inc. v. Commissioner decision indicate application of the extended period, even if income omission occurred via basis overstatement. See Brief for Petitioner, United States at 14. The United States further argues that Final Treasury Regulation 301.6501(e)-1, which specifically provides for the extended period for basis overstatement omissions, applies here and should be afforded judicial deference. See id.at 27–28. Respondent Home Concrete objects, arguing that Colony forecloses the United States’ interpretation of 6501(e)(1)(A), and that the final regulation is invalid and should not be given deference. See Brief for Respondent at 22, 44–45.

Interpreting the Statutory Language of 26 U.S.C. 6501(e)(1)(A)

The United States first asserts that Home Concrete’s basis adjustment for its sale transaction is essentially the same “omi[ssion] from gross income” as understating the sale price, thus triggering the extended assessment period under the plain language of § 6501(e)(1)(A). See Brief for Petitioner, United States at 18–20. The United States next points to § 6501(e)(1)(A)(i), which provides that, for property sold in the course of business, the extended period applies only for specific items of sale price understatements. Seeid. at 20–21. The United States argues that subparagraph (i)—to avoid superfluity—must be an exception to the general rule of § 6501(e)(1)(A) that provides for the extended period for all omissions of income, which would include those from basis overstatements. See id. at 21–23. The United States further distinguishes §6501(e)(1)(A) by pointing to § 6501(e)(2), a mirror provision that provides for an extended period for omission of “items” from gross income. Seeid. at 23. The United States argues that, because § 6501(e)(1)(A) uses the word “amounts” rather than “items,” it should be read to include all types of income understatements, including basis overstatements, and not just discrete “items.” See id. at 23–24.

Home Concrete argues that, although Colony recognized that an overstated basis has the same effect as an omitted item, the word “omits”—used instead of alternatives like “reduces”—denies basis overstatements' inclusion within § 6501(e)(1)(A)’s meaning. See Brief for Respondent, Home Concrete & Supply, LLC, et al. at 23–24. Home Concrete also asserts that subparagraph (i) is not an exception but a special rule, and thus that, rather than reinventing what the general rule does not cover, it spells out the application of the general rule to specific cases of trade or business sales. Seeid. at 30–31. Home Concrete contends that, because subparagraph (i) would not have applied to the Colony facts, the Colony Court’s statement that its interpretation of former § 275 was “in harmony with” § 6501(e)(1)(A) could not be one that adopts the United States’ reading of § 6501(e)(1)(A): as a general rule with a trade or business exception. See id. at 32. Home Concrete also points to the 1965 change of § 6501’s heading to “Substantial Omission of Items” to show congressional intent to include only omitted discrete items for the extended period. See id. at 35.

The United States then addresses the Colony case, which held that § 6501(e)(1)(A)’s predecessor—Section 275 of the 1939 Code—did not include omissions in the form of basis overstatement. See Brief for Petitioner, United States at 44. The United States first argues that the Colony Court neither addressed potential congressional intent to change § 275 with § 6501(e)(1)(A) nor performed a contextual analysis of former § 275 relevant to § 6501(e)(1)(A) because of new provisions like subparagraph (i)—facts that render Colony moot here. See id.at 48–50. The United States further claims that Colony’s conclusion does not run parallel with § 6501(e)(1)(A) generally, but only with subparagraph (i) for two reasons: First, because the Colony Court stated that the language in § 6501(e)(1)(A) was ambiguous, its later reference to the “unambiguous language of § 6501(e)(1)(A)” must point only to subparagraph (i) to avoid contradiction; second, although the taxpayers in Colony sold land and ostensibly would not fall under subparagraph (i), they were actually in the business of selling land as real estate developers. See id.at 51–52.

Home Concrete first points out that, since Colony actually involved a real estate sale not held as inventory, Colony cannot be said to limit its holding solely to overstatements of sales costs. See Brief for Respondent, Home Concrete & Supply at 25. Home Concrete next notes that Congress has had ample opportunity to overrule Colony’s interpretation, and that its later actions on this matter, such as the reenactment of § 6501 in the 1986 Code revisions, point to its ratification of Colony. Seeid. at 33–34. Home Concrete seeks to refute the United States’ contention that the Colony Court found the statutory language both ambiguous and unambiguous at the same time by pointing out that the Court, after first recognizing a possible ambiguity in the text, then proceeded to analyze available evidence to find the text unambiguous. See id. at 36–37. Finally, Home Concrete argues that Colony applies with full force in this case because Colony provided the backdrop for Congress to enact the 1954 Tax Code; the parties relied on the 1954 amendments, which led the Court to reject Section 275(c)’s application to the facts of the case. See id. at 33–34.

Applicability of Treasury Regulation 301.6501(e)-1

Home Concrete argues that the regulation's statutory interpretation is invalid because the Colony Court already determined that Congress spoke directly to the issue at hand. See Brief for Respondent, Home Concrete & Supply at 37. Home Concrete contends that the regulation does not actually clarify the existing unambiguous law of Colony—it retroactively changes it. See id. at 41–42. Home Concrete asserts that the IRS is generally prohibited from enacting retroactive statutory provisions—including related regulations—and that such an ambiguously retroactive change of law constitutes an abuse of discretion. See id. at 46–48. Home Concrete further argues that, even if § 6501(e)(1)(A) were subject to interpretation, the regulation substantively alters grounded case law, and that any attempt to formalize this alteration as a “clarification” would allow agencies to make end-runs around case law interpretations. See id. at 42–43. Finally, Home Concrete points out that the regulation was issued without a notice-and-comment period—a procedural defect. See id. at 50.

The United States first asserts that the regulation was validly promulgated because the Treasury Department followed all required procedures—including notice-and-comment periods. See Brief for Petitioner, United States at 28–29. Alternatively, the United States argues that the procedural compliance argument is irrelevant because the challenged regulation was temporary, and was replaced by the final regulation currently in force. See id. at 29–30. The United States contends that the regulation is not impermissibly retroactive and is actually a clarification, arguing that—as a procedural rather than substantive provision—the regulation pronounces the true nature of § 6501(e)(1)(A), rather than reconfiguring it. See id. at 40–42. The United States further asserts that, even if it were retroactive, the regulation represents a permissive exercise of Treasury Department interpretive power. See id. at 42–43. Finally, the United States asserts that it does not matter that the Treasury Department promulgated the regulation in response to litigation because the suits indicated the need for administrative guidance. See id. at 40.

Home Concrete notes that Colony—the law at the time of the regulation’s 2009 passage—calls for a three year assessment period, which would no longer be “open” when the regulation took effect. SeeBrief for Respondent, Home Concrete & Supply at 39–40. Home Concrete further notes that this expired assessment period cannot “reopen” just because a case is pending on the matter, otherwise the government could always circumvent a statute of limitations by filing another claim post-expiration. See id. at 40. Home Concrete argues that the regulation, even if valid, should not be given deference. See id. at 48. First, Home Concrete contends that the regulation was impermissibly issued to bolster the litigation position of the IRS—a major party in this pending litigation. See id.Second, Home Concrete argues that the regulation is based on faulty interpretations of the underlying statutory language, contradicting both Colony and its subsequent legislative ratifications. See id. at 49.

The United States contends that the IRS challenge to Home Concrete’s returns in 2006 constituted a “pending case” that falls under the regulation’s province because the suit was still pending when the regulation became applicable on September 24, 2009. See Brief for Petitioner, United States at 29–31. The United States next argues that, to the extent that §6501(e)(1)(A) is ambiguous, the regulation—as a reasonable interpretation of the underlying statutory language—must be granted deference. See id. at 37–38. The United States further asserts that, although the taxable year in question is 1999 - and thus a six year period would expire in 2006 - the issuance by the IRS of a final partnership administrative adjustment in 2006 to the taxpayer stalled the period, bringing this dispute within the bounds of the regulation. See id. at 33–34. Finally, the United States worries that the regulation’s purpose - to clarify several other similar disputes in various courts of appeal - would be rendered moot under Home Concrete’s reading of the applicability provision, without reference to what the regulation actually says. See id. at 34–37.