4th Circuit Rules in Favor of Taxpayers in Son of Boss Case in Home Concrete v. United States

Feb 28, 2011   

The Fourth Circuit, in an opinion available here, has added itself to the list of Federal circuits in conflict by ruling that a basis overstatement does not qualify as an omission to income under IRC section 6501 that would increase the normal three year limitation period to six. Section 6501 can be viewed in full here. As we previously blogged (in two separate posts here and here), the Seventh Circuit and the Fifth Circuit recently decided the same issue with opposite conclusions.

The Fourth Circuit Court of Appeals held that the statutory issue was resolved by the Supreme Courts decision in Colony, rejecting the argument recently accepted by the Seventh Circuit in Beard found here. The Fourth Circuit concluded that “we join the Ninth and Federal Circuits and conclude that Colony forecloses the argument that Home Concretes overstated basis in its reporting of the short sale proceeds resulted in an omission from its reported gross income.”

Second, the Court held that the outcome was not changed by new Treasury regulations, and in any event, no deference would be given to the Treasury regulations because the Supreme Court had already conclusively construed the term “omission from gross income” in Colony and therefore there was no longer any room for the agency to resolve an ambiguity by regulation.

Judge Wilkinson, on behalf of the Fourth Circuit, further discussed the limits of Chevron deference in the wake of the Supreme Court’s decision in Mayo Foundation case, available here. According to Judge Wilkinson, Mayo “makes perfect sense” in giving “agencies considerable discretion in their areas of expertise.” However he emphasized that “it remains the case that agencies are not a law unto themselves. No less than any other organ of government, they operate in a system in which the last words in law belong to Congress and the Supreme Court.”

The IRS’s attempt to reverse Colony via Treasury regulation “pass[es] the point where the beneficial application of agency expertise gives way to a lack of accountability and a risk of arbitrariness.” He summarizes that “Chevron, Brand X, and more recently, Mayo Foundation rightly leave agencies with a large and beneficial role, but they do not leave courts with no role where the very language of the law is palpably at stake.”

The significance for taxpayers is that depending on where the taxpayer lives at the time his Petition for Redetermination is filed with the U.S. Tax Court, or which U.S. District Court he/she files a lawsuit against the U.S. Government, will govern the outcome of the case. Accordingly, unless and until this issue is resolved by the United States Supreme Court, two taxpayers with identical facts may have two different outcome based merely upon where they reside.

Lawyers at Fuerst Ittleman PL are experienced in handling tax litigation against both the IRS and the U.S. Department of Justice.