Taxpayer filed its return with an overstated basis for certain property. More than 3 years later, the IRS levied a deficiency based on the overstated basis. The 4th Circuit held overstated basis was not omitted income and thus the 3 years statute of limitations applied. The Court, 5-4, affirmed. The majority held a prior case which held identical language in a previous version of the Internal Revenue Code did not include omitted basis in income controlled. A plurality also rejected claims that the IRS had authority to overturn the construction based on ambiguous language pursuant to administrative law principals under Chevron and Brand X. Justice Scalia argued Brand X should be overturned and pre-Chevron authoritative statutory constructions followed whether or not the same outcome under modern approaches would result. The dissent argued the prior statutory construction did not control given the additions to the relevant portion of the Code, the language is therefore ambiguous and deference should have been given to the IRS regulation.
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