U.S. v. Home Concrete & Supply

[1] Whether an understatement of gross income attributable to an overstatement of basis in sold property is an "omi[ssion] from gross income" that can trigger the extended six-year assessment period; and [2] whether a final regulation promulgated by the Department of the Treasury, which reflects the IRS's view that an understatement of gross income attributable to an overstatement of basis can trigger the extended six-year assessment period, is entitled to judicial deference.

Stephen R. Chandler and Robert L. Pierce were the sole shareholders of respondent Home Oil and Coal Company, Inc. (Home Oil). To maximize tax liability they formed respondent Home Concrete; Supply, LLC (Home Concrete), purchased and immediately transferred US Treasury notes to Home Oil, and then transferred nearly all Home Oil assets to Home Concrete. When Chandler, Pierce and Home Concrete filed federal taxes they inflated new inside basis to report only a modest gain of $69,125 on on the $10.6 million sale of its assets. In 2000, the IRS issued a notice of these transactions turning a sizeable capital gain into a smaller taxable gain or even a capital loss. In 2004, the IRS offered a settlement to 1200 taxpayers. In September 2006, the IRS issued a Final Partnership Administrative Adjustment (FPAA) against Home Concrete calling it a sham company. Respondents challenged the FPAA, arguing that it was issued after the expiration of the three-year assessment period provided by 26 U.S.C. 6501(a). The district court granted partial summary judgment to the IRS. The court of appeals reversed.

The Internal Revenue Code defines the term gross income to include “[g]ains derived from
dealings in property,” 26 U.S.C. 61(a)(3). By representing their bases in Home Concrete to be much larger than they actually were, Chandler and Pierce omitted from their returns substantial amounts of gain, and thus of gross income. Section 6501(e)(2) gives the IRS six years from the filing of a tax return to assess additional tax if the taxpayer omits items includible in the gross estate. The rationale for extending the assessment period is that such omissions are often difficult to detect. Petitioner argues that the Court’s decision in Colony, Inc. v. Commissioner does not control this case.