The Supreme Court ruled in favor of a company in a significant tax-related ruling that limited the ability of the Internal Revenue Service to pursue taxpayers over tax shelter cases for more than three years, as opposed to six.
The case, United States v. Home Concrete & Supply, involved a North Carolina company that used a so-called Son of BOSS tax shelter, the successor to an earlier tax shelter known as bond and option sales strategies, used to create losses on paper to offset actual profits. The IRS has been cracking down on the complex tax shelters for about 12 years, forcing over 1,165 taxpayers to settle with the IRS by 2005, according to Reuters. But the schemes are often complex to enforce and argue in court.
The Home Concrete tax case involved the limits of the government’s ability to collect tax deficiencies stemming from the taxpayer’s overstatement of the basis in property. The question before the high court was whether the IRS must assess the owed taxes within the ordinary three-year time limit, or a longer six-year time period that the government argued should apply.
The law firms Latham & Watkins and Womble Carlyle Sandridge & Rice represented the taxpayers before the Supreme Court after the court granted review of the case, and the court ruled Wednesday in their clients’ favor in a 5-4 opinion written by Justice Stephen Breyer.
The justices essentially ruled that the IRS could not use an extended six-year statute of limitations to pursue such cases, but must confine itself to three years. The IRS currently has approximately 30 other Son of BOSS cases that it has also been pursuing for approximately $1 billion in tax revenue, according to Reuters.
The case involved a limited liability company set up by a pair of businessmen. The IRS began to audit them in 2006 for a 1999 tax return that they filed in 2000. While they lost in a district court ruling, they prevailed in an appeals court ruling last year, which the Supreme Court upheld.
“Ordinarily, the government must assess a deficiency against a taxpayer within ‘three years after the return was filed,’” wrote Breyer. “The three-year period is extended to six years, however, 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 before us is whether this latter provision applies (and extends the ordinary three-year limitations period) when the taxpayer overstates his basis in property that he has sold, thereby understating the gain that he received from its sale. Following Colony, Inc. v. Commissioner, we hold that the provision does not apply to an overstatement.”
The Latham team was led by partner Gregory Garre, who argued the case, with partners J. Scott Ballenger, Lori Alvino McGill (all of the Washington, D.C. office) and Roger Jones and Counsel Andy Roberson (based in the firm’s Chicago office) on the briefs. The Womble Carlyle team included Mark Wiley, Rick Rice, Michael Cashin, Jennifer Lyday of Winston-Salem, N.C., and Robert Numbers of Raleigh, N.C.
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