A New Batboy to Change the Outcome of the World Series: the Correct Application of United States v. Home Concrete & Supply, Llc and Treasury Regulation Section 301.6501(e)-1 to Future Overstatement of Basis Cases

• Publication year: 2021

92 Nebraska L. Rev. 185. A New Batboy to Change the Outcome of the World Series: The Correct Application of United States v. Home Concrete & Supply, LLC and Treasury Regulation Section 301.6501(e)-1 to Future Overstatement of Basis Cases

A New Batboy to Change the Outcome of the World Series: The Correct Application of United States v. Home Concrete & Supply, LLC and Treasury Regulation § 301.6501(e)-1 to Future Overstatement of Basis Cases

Bryson K. Gregory(fn*)

TABLE OF CONTENTS

I. Introduction .......................................... 186

II. Background ........................................... 190
A. Section 275(c) of the 1934 Revenue Act ............ 190
B. The Court in Colony Failed to Prevent Future Circuit Splits Regarding § 6501 of the 1954 Version of the Modern Tax Code ........................... 192
C. Level of Deference to Give IRS Regulations Issued During Pending Litigation ......................... 196

III. United States v. Home Concrete & Supply, LLC ........ 197
A. The Facts ......................................... 198
B. District and Appellate Court Proceedings .......... 199
C. Home Concrete Reaches the Supreme Court ........ 201

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IV. Analysis .............................................. 203
A. The Home Concrete Court Should Not Have Relied on Colony as Precedent ............................ 204
1. Son of BOSS Transactions Are Still Considered Omissions From Gross Income Under § 275(c). . 204
2. Congress's Intent to Prosecute Son of BOSS Transactions After Three Years Is Clear ....... 206
B. Courts Should Grant Deference to Treasury Regulation § 301.6501 ............................. 208
1. The Operative Language in §§ 275(c) and 6501Is Ambiguous, and the IRS Provided a Permissible Construction of These Regulations . 208
2. Home Concrete Decision Further ComplicatesChevron Analysis .............................. 209

V. Conclusion ............................................ 211

I. INTRODUCTION

At the end of The Natural, the main character, Roy Hobbs, has the chance to win the pennant for his baseball team, the Knights.(fn1) Prior to reaching the big game, Hobbs had established himself as a great baseball player by consistently hitting well.(fn2) Many onlookers attributed Hobbs's success to a bat called "Wonderboy," which he had made from a tree that had been split in half by a bolt of lighting.(fn3) Unfortunately, at the big game, Hobbs struck out on his first two at bats.(fn4) His third time at bat, however, with the game on the line, Hobbs's luck turned around. His first swing resulted in a foul ball that broke the glass of the announcer's box.(fn5) On his second swing, he hit a ball that looked to be a home run but instead veered off as a foul.(fn6) On his way back to the plate, Hobbs noticed that "Wonderboy" had split in half from the impact of the baseball.(fn7) Devastated, Hobbs turned to his batboy, Bobby Savoy.(fn8) Bobby returned from the dugout with a bat he had made with Hobbs called the "Savoy Special."(fn9) Using the "Savoy Special," Hobbs knocked the next pitch out of the park high enough to shatter the lights that illuminated the stadium.(fn10)

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Justice Breyer argued in his majority opinion in United States v. Home Concrete & Supply, LLC(fn11) that relying on a single word in a statute would be like "hoping that a new batboy will change the outcome of the World Series."(fn12) He was referring to the IRS's argument that, by leaving the word "amount" in a statute regarding the statute of limitations in tax cases, Congress intended for a certain group of taxpayers to be subject to a longer statute of limitations than the typical three years that is allowed for normal tax matters.(fn13) However, just as Hobbs managed to win the big game with the help of his batboy, the Supreme Court should defer to its own batboy, the IRS, when determining the meaning of a statute the Court has not previously interpreted.

Generally speaking, taxpayers may legally seek to reduce their tax liability by creating the appearance of a financial loss.(fn14) This practice is referred to as a "tax shelter" and is a strategy that is often promoted in the business world.(fn15) Although most tax shelters, such as transferring money to personal retirement accounts, are permissible,(fn16) some have been outlawed.(fn17) The Bond Option Sales Strategy (Son of BOSS) is one such shelter.(fn18) A Son of BOSS shelter generally refers to a transaction in which a taxpayer artificially inflates his or her basis in a piece of property in order to show a loss in the subsequent sale of such property.(fn19) President Barack Obama recently brought more attention to Son of BOSS tax shelters by issuing a press release implying that Mitt Romney was involved in various Son of BOSS schemes while on the board of Marriott International.(fn20)

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In 2000, the IRS effectively prohibited Son of BOSS tax shelters by enacting Notice 2000-44.(fn21) This notice provides examples of partnership transactions that must be reported to the IRS.(fn22) If partnerships do not report these transactions, known as "listed transactions," the partnerships "may be subject to the penalty under § 6707(a) and to the penalty under § 6708(a)."(fn23) Although it is clear that the use of Son of BOSS tax shelters is illegal, there remains a question of whether the IRS has longer than the typical three-year statute of limitations to prosecute a taxpayer who takes advantage of a Son of BOSS tax shelter.(fn24)

The Supreme Court first addressed the issue of whether the statute of limitations is extended for Son of BOSS cases in Colony, Inc. v. Commissioner.(fn25) In Colony, the Court determined that a Son of BOSS transaction did not constitute an omission of income; therefore, the IRS only had three years to prosecute such cases.(fn26) The Court in Colony based its decision on language from § 275(c), which Congress enacted as part of the 1939 version of the Internal Revenue Code to prevent taxpayers from omitting income from their tax returns.(fn27) Unfortunately, this left the question of whether § 6501, the successor statute to § 275(c), should also be read to prohibit the IRS from prosecuting Son of BOSS transactions after the three-year statute of limitations.(fn28)

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The IRS issued a regulation interpreting § 6501 to mean the IRS could prosecute taxpayers for Son of BOSS transactions after the typical three-year statute of limitations.(fn29) However, the Court in United States v. Home Concrete & Supply, LLC(fn30) refused to recognize the regulation and instead held that the Court in Colony had already interpreted § 6501; therefore, there was no more room for the IRS to interpret the statute.(fn31) By extension, the Court in Home Concrete held that the IRS should only be allowed three years to prosecute a taxpayer who unlawfully takes advantage of a Son of BOSS taxshelter.(fn32)

This Note argues the Court in Colony did not interpret § 6501 regarding Son of BOSS shelters,(fn33) and therefore, the IRS was free to issue its own interpretation of the statute before the Home Concrete decision.(fn34) Furthermore, the Home Concrete Court should have relied on the IRS's interpretation of the statute, and that interpretation should now be the governing authority regarding Son of BOSS shelters.(fn35)

This Note analyzes two issues presented in the Home Concrete decision: First, it examines whether the language "omits from gross income" as found in I.R.C. § 6501(e) includes Son of BOSS shelters. Second, it discusses whether the Court should grant deference to the IRS regarding treasury regulations it releases during pending litigation. Part II of this Note gives the history and background of the dispute regarding the correct statute of limitations on Son of BOSS tax shelters. Part III describes the Home Concrete case. Finally, Part IV explains why courts should grant an extended statute of limitations for overstatement of basis cases and why courts should give deference to IRS regulations even if they are proposed while the IRS is a party in pending litigation.

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II. BACKGROUND

A. Section 275(c) of the 1934 Revenue Act

When Congress enacted § 275(c) as part of the Revenue Act of 1934, it opened the floodgates for litigation regarding the proper statute of limitations for overstatement of basis cases.(fn36) Section 275(c) states in pertinent part:

If the taxpayer omits from gross income an amount properly includible therein which is in excess of 25 per centum of the amount of gross income stated in the return, the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time within 5 years after the return was filed.(fn37)

Congress incorporated virtually the same language into the 1939 Internal Revenue Code, which later became the statute at issue in Colony.(fn38)

Gross income includes the "[t]otal income from all sources before deductions, exemptions, or other tax reductions."(fn39) A taxpayer's basis is "the total cost of acquiring [an] asset, including the purchase price plus commissions and other related expenses, less depreciation and other adjustments."(fn40) In a Son of BOSS transaction, a taxpayer inflates the basis he or she has in a piece of property, which effectively reduces the amount of income the taxpayer receives on paper for the transaction.(fn41)

Almost immediately after Congress created § 275(c), courts began to question whether the...