Supreme Court considers regulatory preference issue.

• Author: Click, David L.

Can the IRS issue regulations with retroactive effect? That is the central administrative issue in a case pending before the U.S. Supreme Court.

In January, the Supreme Court heard oral arguments in Home Concrete & Supply, LLC, 599 F. Supp. 2d 678 (E.D.N.C 2008), rev'd, 634 F.3d 249 (4th Cir. 2011), cert, granted, S. Ct. Diet. 11-139 (9/27/11). The immediate issue in the case is whether the statute of limitation on assessments, a three-year period in most instances, is extended to six years due to a substantial omission of income caused by an overstatement of basis. A second, and potentially more important, issue is the amount of deference courts are required to give to Treasury regulations.

Home Concrete involved an overstatement in basis of a partnership interest, which in turn generated a tax loss upon disposition of assets. The transaction giving rise to the tax loss occurred in 1999 and was reported on the 1999 partnership return filed in 2000. In 2004, the IRS received information that the Home Concrete partnership had engaged in what the IRS considered a tax shelter. The IRS audited the partnership under the unified audit procedures applicable to partnerships under the Tax Equity and Fiscal Responsibility Act of 1982, RL. 97-248, and issued a final partnership administrative adjustment disallowing the tax loss.

In most instances, the IRS has three years from the time a tax return is filed to assess an additional tax deficiency under Sec. 6501. Home Concrete filed its partnership tax return in April 2000, and, under normal circumstances, the IRS would have had until April 2003 to assess any additional tax through the tax matters partner under the unified audit procedures and, in turn, to the partners of Home Concrete. In this case, however, the IRS did not propose an assessment of tax until September 2006, more than three years after the normal statute of limitation on assessments had expired (but within six years of filing because the statute was tolled nearly a year for compliance with an IRS summons).

Under Sec. 6501(e), the IRS has six years to make a tax assessment if the taxpayer omits from gross income an amount in excess of 25% of the gross income stated on the return. The IRS took the position that, because the partnership had overstated basis in the partners' interests, there was a greater than 25% omission of gross income from the partnership's return. The IRS won in district court, but the Fourth Circuit reversed that...