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Client Alert.
May 4, 2012
Reasserting Its Role as Final Interpreter of the Law,
the Supreme Court Rejects IRS "Fighting Regulation"
in United States v. Home Concrete & Supply, LLC, et al.
By Robert A.N. Cudd, Edward L. Froelich, James E. Merritt and Bernie J. Pistillo
On April 25, 2012, the Supreme Cour t issued a 5-4 opinion, written b y Justice Breyer, concluding that Treas ury
Regulation § 301.6501(e)-1(a)(iii) was invalid. The regulation required o verstatements of basis to be treated as
substantial omissions of gross incom e under Internal Revenue Code § 6501( e)(1)(A) to the extent such over statements
resulted in a reduction of income ex ceeding 25% of the reported gross inc ome. Under this Code section, a six -year
statute of limitations period on assess ment of tax would then apply to the ret urn, reflecting the overstated bas is instead of
the general three-year limitations period. 1 The Court’s rejection of the regulation was based on (i) the princ iple of stare
decisis in respect of the 1958 S upreme Court opinion on point, Colo ny, Inc. v. Commissioner, 357 U.S. 28 , and (ii) a
clarification of its deference juris prudence. With last year’s high court d ecision in Mayo Foundation for Medical Education
& Research v. United States (“May o”), in which the Court uphel d notice and comment regulations in view of ambiguous
statutory language, and the 2005 decis ion in National Cable & Telecommun ications Association v. Brand X I nternet
Services (“Brand X”), which endorsed agency rules over c ontrary prior judicial decisions, the G overnment likely
anticipated victory in this case. It cam e close. The Court issued a 5-4 decis ion. Justice Scalia provided the fi fth vote for
the majority, joining all but one subpar t of Justice Breyer’s opinion, an d also wrote a separate concurrence. Justice
Kennedy penned the dissent, which reasoned that amendm ents to the Code since Colony indicate d that the relevant
provision now had a different meaning. As a result of the decision, on Apri l 30, the Court disposed of nine cas es,
including vacating Government-f avorable decisions in the Tenth, D.C., an d Federal Circuits.
ISSUANCE OF FINAL REGULATIO NS
The Treasury and IRS promulgated the reg ulation at issue in an attempt to sal vage audits involving certain tax shelt ers
that apparently depended upon an overs tatement of basis to achieve the d esired tax benefit. Faced with a th ree-year
limitations period, the IRS was prev ented from assessing a number of t axpayers who had engaged in these s helter
transactions. The remedy, which the T reasury found readily at hand, was to promulgate what are commonl y called
“fighting regulations.” The IRS had pr eviously attempted to litigate the posi tion that the statute itself provided f or the basis
overstatement rule and later issued tem porary regulations to support that position. The judiciary was not ent irely
receptive to either approach. See Sa lman Ranch Ltd. v. United States, 57 3 F.3d 1362 (Fed. Cir. 2009) (reje cting IRS’s
proposed construction of statute) and Intermountain Insurance Servic e of Vail v. Commissioner, 134 T.C. 11 (2010)
(holding temporary regulations were in valid). (The Tax Court was later r eversed by the D.C. Circuit, 650 F.3 d 691 (D.C.
Cir. 2011).)
1 The purpose of this enhanced limitations period is to allow the IRS extra time to discover the omission in the return which is less susceptible to
discovery on audit.
