Tuesday, February 8, 2011
No sooner had the ink dried on the 7th Circuit's decision in Beard, that the Fourth Circuit Court of Appeals in Home Concrete & Supply et. al. v. United States (No. 09-2353, February 7, 2011) held that it will follow Colony, Inc. v. Commissioner, 357 U.S. 28 (1958) and will not defer to Treasury Reg. 301.6501(e)-1(e) even after the recent Supreme Court's decision in Mayo Foundation for Medical Education and Research v. United States, 562 U.S. __, No. 09-837, slip op. at 6-7 (Jan. 11, 2011). Colony held that an overstatement of basis in assets resulting in an understatement of reported gain and gross income does not constitute an "omission" from gross income in extending the three (3) year statute of limitations to six (6) years under section 6501(e)(1)(A) of the Internal Revenue Code. Consequently, there is now a significant split of authority among the Circuit Courts as to whether the retroactively promulgated Reg. 301.6501(e)-1(e) will have legal effect in the IRS's war on tax shelters, and in particular with respect to adjusted basis cases arising from partnership "liquidating" distributions of assets with overstated basis due to sham treatment or partnership lack of business purpose or economic substance. Numerous cases involving this issue are pending in other Circuit Courts of Appeal and more is sure to come.