Supreme Court Rules IRS Waited Too Long to Pursue Investors in Alleged Tax Shelter
Recently, in Home Concrete & Supply LLC, a divided U.S. Supreme Court held that the three-year period for assessing unpaid taxes applied to investors in a Son-of-BOSS transaction, and not the extended six-year statute of limitation period. This case involved the interpretation of section 6501(a) of the Internal Revenue Code.
The Government argued the taxpayer had “omissions” from gross income of more than 25 percent and the extended six-year statute of limitations applied. In following Colony Inc. v. Commissioner, 357 U.S. 28 (1958), the majority of the U.S. Supreme Court concluded that the taxpayer’s overstatement of basis, which may have resulted in underreported income, did not constitute an “omission” of gross income within the meaning of the extended six-year statute of limitations.
As one of its arguments, the Government pointed to Regulations section 301.6501(e)–1, issued in 2010, which redefined an “omission” from gross income to include a basis overstatement. The Government argued that the regulation constituted “an agency’s construction of a statute which it administers.” The majority of the court did not accept this argument, stating that Colony had already interpreted the statute, and there was no longer any different construction that is consistent with Colony and available for adoption by the agency.
The IRS views Son-of-BOSS transactions as abusive tax shelters and takes the position that such transactions impermissibly inflate the basis of the assets sold, and thus, result in the underreporting of gross income. The IRS has identified approximately 1800 taxpayers believed to have engaged in Son-of-BOSS transactions, but in certain cases, did not properly send out notices asserting unpaid taxes within three years from the time the transactions were reported on the taxpayers’ tax return.
In 2010, the IRS issued regulations redefining a basis overstatement as an “omission” from gross income, so it could pursue those taxpayers who had been notified after the three-year statute of limitations period. Home Concrete & Supply LLC,
potentially affects those taxpayers who engaged in Son-of-BOSS transactions, as well as other transactions which were structured to create inflated tax basis for the purposes of creating losses or reducing gains, and have not yet
settled with the IRS.
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