## Facts

- Taxpayers used a transaction involving short sales of U.S. Treasury bonds and a partnership contribution that the IRS characterized as artificially inflating basis in partnership interests.
- In 1999, an asset sale generated substantial gain, but the taxpayers reported only a small gain by claiming a high basis.
- The 1999 returns were timely filed in April 2000.
- The IRS issued a Final Partnership Administrative Adjustment (FPAA) on September 7, 2006.
- The government asserted the six-year limitations period under 26 U.S.C. § 6501(e)(1)(A), contending the returns “omitted from gross income” more than 25% of the reported gross income.
- The taxpayers argued the alleged error was an overstatement of basis (a miscalculation of gain), not an omission of a gross-income item, so the three-year period in § 6501(a) controlled.
- Treasury issued regulations interpreting § 6501(e)(1)(A) to treat certain basis overstatements as omissions; the government relied on those regulations.

## Issues

1. Whether § 6501(e)(1)(A)’s six-year limitations period applies when gain is understated solely because the taxpayer overstated basis, rather than leaving out a specific item of gross income.
2. Whether Treasury regulations interpreting § 6501(e)(1)(A) to cover basis overstatements may receive deference and displace the Supreme Court’s prior construction of materially identical statutory language in *Colony, Inc. v. Commissioner*.

## Decision

- The Supreme Court affirmed the Fourth Circuit and held the IRS’s assessment time-barred under the three-year period.
- The Court held that § 6501(e)(1)(A) does not apply to overstatements of basis; it addresses omissions of items of gross income.
- The Court treated *Colony, Inc. v. Commissioner* as controlling because it construed materially identical language to exclude basis overstatements from the extended limitations period.
- The Court rejected the government’s reliance on later Treasury regulations because prior Supreme Court interpretation left no room for an agency to adopt a contrary construction of the same operative language.

## Legal Principles

- Under § 6501(e)(1)(A), the six-year assessment period applies when a taxpayer omits a properly includible item of gross income exceeding 25% of the gross income stated, not when the taxpayer understates gain by overstating basis.
- A basis overstatement that reduces reported gain is not, by itself, an “omission from gross income” within the meaning of § 6501(e)(1)(A).
- When the Supreme Court has already authoritatively construed materially identical statutory language, an agency cannot use later regulations to adopt an interpretation that conflicts with that construction.
- Stare decisis carries substantial weight in statutory interpretation; changes to a settled judicial construction are for Congress, not agency rulemaking.

## Conclusion

The Court held that overstating basis does not trigger § 6501(e)(1)(A)’s six-year assessment period and that Treasury could not, through later regulation, replace the Court’s prior interpretation of the same operative language; the IRS’s FPAA was therefore untimely under the three-year statute of limitations.


United States v. Home Concrete & Supply, LLC, 566 U.S. 478 (2012)