Statutes of limitation are where a lot of tax cases are won and lost. The general rule gives the IRS 3 years to assess. A bigger mistake gets it 6. United States v. Home Concrete & Supply, LLC is the Supreme Court case about which mistakes are big enough, and it is also a lesson in how quickly Congress can undo a taxpayer win.
The Facts
The Court took the facts as undisputed. The taxpayers filed their returns in April 2000. The returns overstated their basis in property they had sold, which understated the gain they reported. The understatement exceeded the statute's 25 percent threshold. The IRS asserted the deficiency within 6 years of filing but after 3 years. If the 6-year period applied, the IRS was on time. If not, it was too late.
At the time, § 6501(e)(1)(A) extended the period to 6 years when a taxpayer "omits from gross income an amount properly includible therein which is in excess of 25 percent of the amount of gross income stated in the return." The question was whether overstating basis counts as omitting income.
The Issue
Does an overstatement of basis that understates gain trigger the 6-year assessment period for omissions from gross income?
The Holding
No. Justice Breyer wrote for the Court: "Following Colony, Inc. v. Commissioner, 357 U.S. 28 (1958), we hold that the provision does not apply to an overstatement of basis. Hence the 6-year period does not apply."
The Reasoning
Colony already decided it
In 1958, in Colony, the Court interpreted the identical language in the 1939 Code. It held that overstating basis is not "omitting" income. "Omits" means to leave out; inflating basis is not leaving out a specific receipt. The Court in Colony also looked at legislative history and concluded Congress gave the IRS extra time only where a taxpayer's omission left the IRS "at a special disadvantage" because "the return on its face provides no clue to the existence of the omitted item." When the error is in an item disclosed on the return, the IRS has no such disadvantage.
The 1954 Code reenacted the same operative language. Giving it a different meaning now would effectively overrule Colony, which stare decisis counseled against.
The government's textual arguments were too thin
The government pointed to other parts of § 6501(e), including a clause defining gross income for a trade or business and a gift and estate provision using the word "items." The Court called these points "too fragile to bear the significant argumentative weight," adding that relying on one word change in another subsection "is like hoping that a new batboy will change the outcome of the World Series."
The regulation could not override Colony
Treasury issued a final regulation in December 2010, Treas. Reg. § 301.6501(e)-1, saying an overstatement of basis is an omission from gross income. The government argued that under the Chevron and Brand X doctrines, the agency could adopt a new interpretation of an ambiguous statute. The Court disagreed: "Colony has already interpreted the statute, and there is no longer any different construction that is consistent with Colony and available for adoption by the agency." Part IV-C of the opinion, explaining that point further, was joined by only a plurality. Justice Scalia concurred in part and in the judgment, writing among other things that "[i]t does not matter whether the word 'yellow' is ambiguous when the agency has interpreted it to mean 'purple.'"
What Congress Did Next
In July 2015, Congress amended the statute in Pub. L. 114-41, § 2005. Section 6501(e)(1)(B)(ii) now reads: "An understatement of gross income by reason of an overstatement of unrecovered cost or other basis is an omission from gross income." Congress also amended the adequate disclosure rule in § 6501(e)(1)(B)(iii) so that disclosure on the return no longer prevents an overstated basis amount from counting toward the 25 percent test.
The amendment applies to returns filed after July 31, 2015, and to earlier returns if the assessment period under prior law had not expired by that date. In other words, the result in Home Concrete is no longer the law for current returns.
What It Means for Taxpayers Today
Overstated basis now opens the six-year window
If you overstate basis by enough to understate gross income by more than 25 percent, assume the IRS has 6 years to assess, not 3. That matters for real estate sales, business sales and investment transactions where basis is complicated and records are thin.
How the 25 percent test is measured for a business
The Court walked through a related rule that still applies. For a trade or business, § 6501(e)(1)(B)(i) defines "gross income" for this test as the total amounts received or accrued from the sale of goods or services, before subtracting the cost of those sales. The Court gave an example: a merchant who leaves out $10,000 of revenue has not hit the 25 percent threshold if total revenue was more than $40,000, regardless of what the goods cost. Without that rule, gross income would be revenue minus cost, and the same $10,000 omission could look like a much larger percentage.
Disclosure no longer saves you on basis
Before 2015, adequate disclosure on the return could keep an amount out of the omission calculation. Section 6501(e)(1)(B)(iii) now excludes overstatements of basis from that disclosure exception. Accurate basis records are the only real protection.
There is another six-year trigger for foreign assets
Section 6501(e)(1)(A)(ii) also allows 6 years when an omission over $5,000 is attributable to foreign financial assets subject to reporting under § 6038D. Keep that in mind if you hold assets abroad.
Practical steps on basis
Basis disputes are won with paper. For real estate, keep the closing statement from the purchase, records of capital improvements, and depreciation schedules if the property was ever rented or used in business. For business interests and investments, keep the documents that establish what you paid and every later adjustment. If records are gone, reconstruct them before you file, not after an examiner asks. A number on a return that you cannot support is exactly the kind of item that now keeps the year open for six years.
Old cases still matter for old years
For returns whose assessment period had already expired by July 31, 2015, the pre-amendment rule from Home Concrete still controls. Those cases are mostly behind us, but the decision remains an important statement of how courts treat prior judicial interpretations of a statute, and of how Congress can respond. Compare Badaracco v. Commissioner on fraud and our article on the assessment statute of limitations.
Statute questions are worth checking every time
Whenever the IRS asserts a deficiency more than 3 years after a return was filed, ask which exception it is relying on: the 25 percent omission rule, the foreign asset rule, fraud, a failure to file, a signed extension, or something else. Each has its own elements, and each one can be tested against the facts. Statute of limitations defenses are complete defenses when they work.
The Bottom Line
The Supreme Court followed a 1958 precedent and told the IRS it could not stretch "omits" to cover overstated basis, and it would not let a regulation do the stretching either. Congress then did what the Court said only Congress could do. Today, inflated basis counts as omitted income, and the IRS gets six years to find it.