TAX NEWS - 
2010
IRS Tax: Tax court refuses to reconsider on partnership statute of limitations
Factual background
In this case, the IRS issued an FPAA for an understatement of tax liability that was a result of Intermountain Insurance Service of Vail LLC's ("taxpayer's") overstatement of basis. IRS conceded that the three-year statute of limitations under Section 6501(a) had expired, but argued that the six-year limitation period under Section 6501(e)(1)(A) applied. Section 6501(e)(1)(A) provides that if the taxpayer omits an amount in excess of 25 percent from gross income, the assessment period is extended to six years.
The Tax Court had previously held that six-year assessment statute did not apply to the taxpayer's case under the rationale of Colony, Inc. v. Commissioner, 357 U.S. 28 (1958) because the taxpayer's understatement arose from an overstatement of basis, rather than understatement of gross receipts. Following the Court's first decision, the IRS issued temporary and proposed regulations, Sections 301.6229(c)(2)-1T and 301.6501(e)-1T. The temporary regulations provide that outside the context of a trade or business, any basis overstatement that leads to an understatement of gross income under IRC Section 61(a) constitutes an omission from gross income for purposes of IRC Sections 6501(e)(1)(A) and 6229(c)(2). The IRS, on the basis of those temporary regulations, filed motions to vacate and to reconsider.
IRS motion to reconsider and vacate denied
The Tax Court denied the motion to reconsider and vacate. In denying the motion, the majority concluded that the temporary regulations did not apply in this case because the year at issue had expired prior to the regulations' effective date. The effective date provisions state that the rules "apply to taxable years with respect to which the applicable period for assessing tax did not expire before September 24, 2009."
If the normal three year period of limitations were controlling, the taxpayer's 1999 tax year was not open on September 24, 2009. The IRS argued that assessment statute would be open on September 24, 2009 if the six-year period applied. As phrased by the court, the IRS argued that the question was "not whether the limitations period was actually open on September 24, 2009, under then-applicable law but whether the limitations period could have been open on that date under hypothetical law . . . [suggesting] that the temporary regulations apply to this case because their application would trigger a 6-year limitations period." The Court rejected this argument as circular, stating that "interpretation to be irreparably marred by circular, result-driven logic and the wishful notion that the temporary regulations should apply to this case because Intermountain was involved in what he [the Commissioner] believes was an abusive tax transaction." The court thus refused to give the IRS' interpretation deference.
Temporary regulations are invalid and not entitled to judicial deference
Based on the Supreme Court's holding in Colony, Inc. v. Commissioner, the majority next concluded that the temporary regulations are invalid and not entitled to judicial deference. The court reasoned that intepreteive regulaions are entitled to juducial deference under Chevron U.S.A. Inc. v. Natural Res. Def. Council, 467 U.S. 837 (1984), only if they fill a gap created by statutory ambiguity. However, a court's prior judicial construction of a statute trumps agency construction otherwise entitled to Chevron deference if the prior court decision holds that its construction follows from the unambiguous terms. In Colony, the "Supreme Court found that the statute's legislative history clarified its otherwise ambiguous text and, as a result, explicated Congress' intent and the meaning of the statutory provision. Thus, [Colony] . . . 'unambiguously forecloses the agency's interpretation' of sections 6229(c)(2) and 6501(e)(1)(A) and displaces [Treasury's] temporary regulations'."
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