Lead Opinion
OPINION
This case is before the Court on petitioner’s motion for summary judgment filed September 28, 2009. Respondent filed an objection to petitioner’s motion on November 20, 2009. Petitioner filed a memorandum in support of its motion on July 27, 2010. The issue is whether the notice of final partnership administrative adjustment (FPAA) challenged in the petition was issued before the applicable period of limitations for assessing tax had expired. Our decision turns on whether the general 3-year period of limitations under section 6501(a) or the extended 6-year period of limitations under section 6229(c)(2) or section 6501(e)(1)(A)
Background
I. Undisputed Facts
The following facts are not in dispute. Petitioner, Carpenter Capital Management, LLC, is a Nevada limited liability company classified as a partnership for Federal income tax purposes. Petitioner is the tax matters partner of Carpenter Family Investments, LLC, an Oregon limited liability company classified as a partnership for Federal income tax purposes with its principal place of business in Salem, Oregon (the partnership).
At the end of its 2000 taxable year the partnership was owned as follows: Tommie Carpenter, 0.5 percent; Virginia Carpenter, 0.5 percent; petitioner, 99 percent. During the taxable year ending December 31, 2000, petitioner was owned as follоws: Tommie Carpenter, 75.25 percent and Virginia Carpenter, 24.75 percent. Accordingly, Tommie and Virginia Carpenter (the partners) ultimately were allocated all items of income, gain, loss, deduction, and credit of the partnership.
During its 2000 taxable year the partnership sold shares of stock of American Tower Corp. (atc), a publicly traded corporation listed on the New York Stock Exchange, for total proceeds of $29,608,861 (the stock sale). On or before October 15, 2001, the partnership timely filed Form 1065, U.S. Return of Partnership Income, for its taxable year ending December 31, 2000. On this information return the partnership reported gross proceeds of $29,608,861, an adjusted tax
On April 10, 2007, petitioner sent to respondent a Form 872-P, Consent to Extend the Time to Assess Tax Attributable to Partnership Items, executed on behalf of the partnership. Also on April 10, 2007, the partners sent to respondent an executed Form 872-1, Consent to Extend the Time to Assess Tax As Well As Tax Attributable to Items of a Partnership. On October 2, 2008, respondent issued an FPAA to petitioner, as tax matters partner of the partnership, for the partnership’s taxable year ending December 31, 2000.
II. The Theory of the FPAA
Respondent alleges that “the partnership exploited a complex series of basis-inflating tax avoidance transactions (a variant of the Son-of-BOSS shelter described in Notice 2000-44) beginning in December 1999.” See Notice 2000-44, 2000-
Son-of-BOSS is a variation of a slightly older alleged tax shelter known as BOSS, an acronym for “bond and options sales strategy.” There are a number of different types of Son-of-BOSS transactions, but what they all have in common is the transfer of assets encumbered by significant liabilities to a partnership, with the goal of increasing basis in that partnership. The liabilities are usually obligations to buy securities, and typically are not completely fixed at the time of transfer. This may let the partnership treat the liabilities as uncertain, which may let the partnership ignore them in computing basis. If so, the result is that the partners will have a basis in the partnership so great as to provide for large — but not out-of-pocket — losses on their individual tax returns. * * *
Respondent claims a Son-of-BOSS shelter is at work on account of a transfer to the partnership “of short sale proceeds of Treasury Notes and the obligation to close the open short sale position”. Respondent contends that this transfer “artificially stepped-up inside basis”. According to respondent: “As a result of the artificial step-up in basis in
III. Motion for Summary Judgment
Petitioner moved for summary judgment, arguing that the FPAA was not timely because it was issued after “The period of limitations imposed by I.R.C. § 6501 on assessment and collection of tax * * * [of] three years from the date the return to which the tax relates was filed.” Both the partnership’s information tax return and the partners’ joint income tax return were filed on or before October 15, 2001. The 3-year limitations period, if applicable, would have expired on or before October 15, 2004. Petitioner contends that “Because the FPAA was issued after October 15, 2004, respondent is precluded from assessing any tax attributable to items reported on the Partnership Tax Return.”
Petitioner further argues that the untimeliness of the FPAA invalidates petitioner’s and the partners’ consents to extend the limitations period. “Neither of the Forms 872 signed by petitioner or the Partners was executed before the expiration of the three-year period of limitations imposed by I.R.C. § 6501(a) or 6229(a).” As a result, according to petitioner, these consents cannot be used “to reopen the three-year period of limitations on assessment and collection of tax.” See sec. 6501(c)(4) (“Where, before the expiration of the time prescribed in this section for the assessment of any tax imposed by this title, * * * both the Secretary and the taxpayer have consented in writing to its assessment after such time, the tax may be assessed at any time prior to the expiration of the period agreed upon.” (Emphasis supplied.)); see also Romine v. Commissioner,
Respondent claims that the applicable period of limitations is not 3 years but 6 years, as provided in sections 6229(c)(2) and 6501(e)(1)(A).
On September 24, 2009, the Treasury Department and the Internal Revenue Service issued temporary Treasury regulations under Sections 6229(c)(2) and 6501(e)(1)(A) that clarify that an overstatement of basis relating to the disposition оf property, other than the sale of goods or services in a trade or business, constitutes an omission from gross income for purposes of Sections 6229(c)(2) and 6501(e)(1)(A).
Respondent argues that these temporary regulations, sections 301.6229(c)(2)-lT and 301.6501(e)-lT, Temporary Proced. & Admin. Regs., 74 Fed. Reg. 49322-49323 (Sept. 28, 2009), extend the limitations period for the partnership’s 2000 taxable year to 6 years because they “apply to taxable years with respect to which the applicable period for assessing tax, as interpreted in the temporary regulations, did not expire before September 24, 2009.”
Because “The FPAA * * * issued within the six-year period of limitations provided in Sections 6229(c)(2) and 6501(e)(1)(A), as further extended by consent,” respondent contends that the FPAA was timely.
Discussion
I. Introduction
We have previously held invalid the temporary regulations respondent cites. See Intermountain Ins. Serv. of Vail, LLC v. Commissioner,
II. Effective /Applicability Date Provisions: Placing the Horse Firmly in the Cart
The preamble to these final regulations asserts that “The Tax Court’s majority in Intermountain erroneously interpreted the applicability provisions of the temporary and proposed regulations”. T.D. 9511, 2011-
The temporary regulations provided that “The rules of this section apply to taxable years with respect to which the applicable period for assessing tax did not expire before September 24, 2009.” Secs. 301.6229(c)(2)-lT(b), 301.6501(e)-lT(b), Temporary Proced. & Admin. Regs., supra (emphasis supplied). In Intermountain Ins. Serv. of Vail, LLC v. Commissioner, supra at 218-219, we had commented on the “notably convoluted interpretation of the effective/applicability date provisions” required to cause the temporary regulations to apply to a case where the 3-year limitations period has already expired. We had remarked that the Commissioner’s attempt to apply the temporary regulations in that case “begs the question”. Id.
We fail to see how this semantic distinction in the effective/applicability date provisions between the final regulations and the temporary regulations, the verbal equivalent of the other side of the same coin, begets a response to the begged question.
Unlike the terse text of the final regulations’ effective/ applicability date provisions, the accompanying preamble contends at length that
The Internal Revenue Service will continue to adhere to the position that “the applicable period” of limitations is not the “general” three-year limitations period. * * * The expiration of the three-year period does not “close” a taxable year if a longer period applies. * * * [T.D. 9511, 2011-6 I.R.B. at 456 ; emphasis supplied.]
However, whether or not a longer period should, in fact, apply is the very subject matter, the sum and substance of the regulations.
III. Substantive Validity: Divining Congressional Intent
As we did previously when reviewing the temporary regulations, and as we now do in testing the final regulations, we “must judge the propriety of * * * [respondent’s] action solely by the grounds invoked by” him. SEC v. Chenery Corp.,
These two grounds are mutually exclusive. If the Colony holding has been statutorily confined to a trade or business context, it cannot any longer constitute the Supreme Court’s interpretation of current section 6501(e)(1)(A). Conversely, if Colony represents the Supreme Court’s own construction of this text, the holding must necessarily extend beyond just trade or business.
Respondent leads with the former contention, which he vociferously espouses, not just in the preambles to the temporary and final regulations, but also in his submissions on brief in this and other similar cases.
A. Trade or Business With Colony
The final regulations’ preamble reiterates respondent’s position, “set forth in the preamble to the temporary regulations”, that “the Supreme Court’s opinion in Colony v. Commissioner,
This case would, absent stipulation to the contrary, be appealable to the U.S. Court of Appeals for the Ninth Circuit. That court has rejected the argument that the Colony holding is properly construed as limited to the sale of goods and services in a trade or business. “There is no ground for suggesting that the Court intended the same language in § 275(c) to apply differently to taxpayers in a trade or business than to other taxpayers.” Bakersfield Energy Partners, LP v. Commissioner,
Congress did not change the language in the body of § 6501(e)(1)(A), which is identical to the language in § 275(c) that the Supreme Court construed in Colony. As a general rule, we construe words in a new statute that are identical to words in a prior statute as having the same meaning. * * * [Id. at 775.]
Finding “that applying Colony to the 1954 Code would [not] render * * * superfluous” any provision of section 6501(e)(1)(A), id. at 776, the court went on to conclude that the Colony
holding controls our interpretation of the same language in § 275(c)’s successor provision, § 6501(e)(1)(A) of the 1954 Code. However sensible the IRS’s argument may be that a taxpayer can “omit ... an amount” of gain by overstating its basis, this argument is foreclosed by Colony. * * * [Id. at 778.]
The Court of Appeals for the Ninth Circuit’s opinion in Bakersfield was quickly followed by an opinion of the Court of Appeals for the Federal Circuit that also failed to “discern any basis for limiting Colony’s holding concerning the ‘omits from gross income’ language of I.R.C. § 275(c) to sales of goods or services by a trade or business.” Salman Ranch Ltd. v. United States,
These two Courts of Appeals have now been joined by the Courts of Appeals for the Fourth and Fifth Circuits, which have similarly declined to limit the Colony holding to a trade
The Court of Appeals for the Seventh Circuit, on the other hand, has sided with the Commissioner and limited the applicability of Colony to an omission from income of a trade or business. See Beard v. Commissioner,
Following the Commissioner’s judicial setbacks in Bakersfield and Salman Ranch, the Secretary issued the temporary regulations, seeking, as it were, to lay a regulatory foundation for respondent’s position that an overstatement of basis does constitute an omission from gross income under section 6501(e)(1)(A). Respondent claims that this regulatory project “is entitled to deference even if the agency’s interpretation may run contrary to the opinions in Bakersfield and Salman Ranch.” See T.D. 9466, 2009-
Amidst conflicting signals of legislative intent, Chevron and its progeny certainly require deference to the administering agency’s interpretation of the resulting statutory language. However, we know of no authority, and respondent cites none, that requires us to defer to the Commissioner’s determination of the applicability of Supreme Court precedent.
Respondent does not purport, at least not explicitly and unequivocally,
Such a conclusion, by itself, does not rule out Chevron deference to the regulations.
B. Colony’s Chevron Classification
In Intermountain Ins. Serv. of Vail, LLC v. Commissioner,
1. Invitation to Regulation
The Court of Appeals for the Ninth Circuit in Bakersfield Energy Partners, LP v. Commissioner,
However, “The Court of Appeals did not indicate definitively whether any such * * * regulations would actually trump the Supreme Court’s prior judicial construction.” Inter-mountain
With respect to the applicability of legislative history at Chevron step one, compare Natural Res. Def. Council v. U.S. EPA,
Regarding whether an agency’s interpretation can trump a prior Supreme Court construction of the same statutory language, compare Natl. Cable & Telecomms. Association v. Brand X Internet Servs.,
2. The Mayo Effect
We pause here to observe that the Supreme Court recently rejected a taxpayer challenge to section 31.3121(b)(10)-2, Employment Tax Regs., promulgated by the Treasury Department to define the word “student” in section 3121(b)(10). Mayo Found. v. United States,
The Supreme Court’s opinion in Mayo implies, by omission rather than affirmative statement, that a trial court’s investigation of congressional intent at Chevron step one be limited to the plain text of the statute. See id. at_,
Though Mayo tangentially addresses the first issue and appears to frown upon the use of legislative history at step one of a Chevron analysis, it is silent on the second issue of whether thе Supreme Court’s Brand X holding applies to its
By comparison, the Supreme Court’s Colony holding predates the regulations at issue here by over half a century. Fortunately, and as we explain infra Part IV, respondent’s indecision has spared us the ordeal of walking the plank and plumbing the depths of Brand X.
3. Filling the Gap
Gaps in congressional enunciation, whether intentional or inadvertent, can be filled by the Commissioner to dictate the underlying meaning. So long as the Commissioner is reasonable, Chevron implies, and Mayo confirms, that we permit him to complete Congress’ sentences, unless he contradicts the “unambiguously expressed intent of Congress.” Chevron U.S.A. Inc. v. Natural Res. Def. Council,
Where a court whose precedent is binding on us has previously interpreted the statutory language at issue, “if the prior court decision holds that its construction follows from the unambiguous terms of the statute”, Natl. Cable & Telecomms. Association v. Brand X Internet Servs., supra at 982, then “that is the end of the matter”, Chevron U.S.A. Inc. v. Natural Res. Def. Council, supra at 842. We, in turn, merely follow the precedent, which automatically “displaces a conflicting agency construction.” Natl. Cable & Telecomms. Association v. Brand X Internet Servs., supra at 983. For any court opinion of pr e-Chevron vintage, we must confront and overcome the Chevron classification challenge on our own, without deference to annotations or commentary that the Commissioner may provide.
Since then, the Supreme Court has issued its Mayo opinion, which focuses exclusively on the statutory text at Chevron step one and suggests (by negative implication) a disfavor of using legislative history at that stage. We are not persuaded, however, that after Mayo, any judicial construction that examines legislative history is automatically relegated to a Chevron step two holding by that fact alone.
Mayo’s directive to move “inexorably” from an ambiguity to Chevron step two is reserved for the “typical case”. More importantly, the ambiguity Mayo talks about is not any textual ambiguity per se, but an ambiguity in congressional intent that remains after searching the “statutory text * * * [for] insight into how Congress intended” the language at issue to apply. Mayo Found. v. United States,
Whatever Mayo may or may not prescribe (or proscribe) with respect to legislative history at Chevron step one, surely that prescription (and proscription) comes too late for the “many hundreds of past statutory decisions”, Natl. Cable & Telecomms. Association v. Brand X Internet Servs., supra at 1018 (Scalia, J., dissenting), that have in fact looked at legislative history, including Colony.
Chevron restrains “Judges, [who] are not experts in the field, and are not part of either political branch of the Government * * * [from reconciling] competing political interests * * * on the basis of * * * [their] personal policy preferences.” Chevron U.S.A. Inc. v. Natural Res. Def.
Brand Xs principle for deciding whether or not “A court’s prior judicial construction of a statute trumps an agency construction otherwise entitled to Chevron deference * * * follows from Chevron itself.” Id. at 982. Thus, Brand X does not introduce any substantive constraints on judicial statutory construction independent of, and in addition to, Chevron’s warning to “federal judges — who have no constituency — * * * to respect legitimate policy choices made by those who do.”
For “deossification” of judiciary’s historical “un-wisdom” to proceed, what would matter, then, are not the tools a court had employed in constructing the statute,
We do not consider the Court of Appeals for the Ninth Circuit’s observation that the Supreme Court in Colony had “acknowledged that the statutory language was ambiguous,” Bakersfield Energy Partners, LP v. Commissioner,
IV. Respondent’s Difficulty Does by His Own Indecision Grow
Respondent persists in drawing a sheathed sword to attack a statute of limitations defense to an alleged abusive Son-of-BOSS sheltering transaction.
Respondent may desire to repeal Colony in the name of Brand X. If so, he should decisively say as much. SEC v. Chenery Corp., supra at 196 (“If the administrative action is to be tested by the basis upon which it purports to rest, that basis must be set forth with such clarity as to be understandable.”).
Respondent declares in the final regulations’ preamble that “The interpretation adopted by the Supreme Court in Colony represented that court’s interpretation of the phrase [‘omits from gross income’] but not the only permissible interpretation of it.” T.D. 9511, 2011 —
The appeal to Brand X in the final regulations’ preamble is further attenuated by a preceding statement that reiterates respondent’s position that Colony “dealt with an omission from gross income in the context of a trade or business under the predecessor of section 6501(e)” and no longer “applies to sections 6501(e)(1) and 6229(c)(2)”. Id.
“It will not do for a court to be compelled to guess at the theory underlying the agency’s action”. SEC v. Chenery Corp., supra at 196-197. Even if we read the Supreme Court’s recent Mayo opinion as a license to categorize most judicial constructions that discuss legislative history as Chevron step two decisions, respondent has yet to unabashedly accept the Court of Appeals for the Ninth Circuit’s invitation and issue regulations that unequivocally repudiate the Colony holding. Unless and until he does so, his hands must remain tied.
V. Conclusion
When enacting section 6501(e)(1)(A) in 1954, Congress could not possibly have foreseen the development of the tax shelter industry and the use of complex devices, such as Son-of-BOSS transactions, which seek to artificially inflate bases of partnership assets to achieve tax alchemy. Much as we
The Court of Appeals for the Ninth Circuit tells us that Colony controls the meaning of the phrase “omits from gross income” as it now appears in section 6501(e)(1)(A). Bakersfield Energy Partners, LP v. Commissioner,
To reflect the foregoing,
An appropriate order and decision will be entered.
Reviewed by the Court.
Notes
Section references are to the Internal Revenue Code of 1986, as amended and in effect for the tax year at issue.
See infra note 15, discussing the current procedural posture of Intermountain Ins. Serv. of Vail, LLC v. Commissioner,
By their terms, the final regulations purport to apply to this case. Other than minor stylistic changes in the effective/applicability provisions, which we discuss infra Pt. II, and largely conforming changes in the accompanying preambles, which we discuss infra Pt. IV, the final and temporary regulations are identical. Therefore, we have decided not to delay these proceedings for supplemental briefing on the final regulations before ruling on their (in)validity. We note that to date neither party has asked for leave to file such briefs. By comparison, the Commissioner promptly filed notices of supplemental authority calling attention to the Supreme Court’s opinion in Mayo Found. v. United States,
The final regulations’ preamble goes on to assert that “Consistent with that position [which assumes their substantive validity], the final regulations apply to taxable years with respect to which the six-year period for assessing tax under section 6229(c)(2) or 6501(e)(1) was open on or after September 24, 2009.” T.D. 9511, 2011-
Respondent insists “these regulations are not retroactive”. T.D. 9511, 2011 —
Perhaps mindful of that experience, respondent now argues that he is no longer looking back. Instead, he claims that he is, in effect, glancing sideways, and appears to wield the circular logic of the effective/applicability date provisions as the round and polished shield of Perseus in which he can safely view the Gorgon’s reflection.
Sec. 7805(b) and its caption of “Retroactivity of Regulations” notwithstanding, in the conventional linear temporal mode, changes in legal rules have only prospective impact. “At least until we devise time machines, a change can have its effects only in the future.” Bergerco Can. v. U.S. Treasury Dept.,
Chenery sweeps wider than the Administrative Procedure Act’s “basis and purpose” requirement, 5 U.S.C. sec. 553(c) (2006). Requiring an agency to give reasons for its rulemaking will not itself ensure that review of the rule will be limited to those reasons. Legislation or trial court decisions can both be subsequently sustained on other grounds. See, e.g., U.S. R.R. Ret. Bd. v. Fritz,
This provision, without changes in text, has since been redesignated sec. 6501(e)(l)(B)(i) by the Hiring Incentives to Restore Employment Act of 2010, Pub. L. 111-147, sec. 513(a)(1), 124 Stat. 111. The provision states that “In the case of a trade or business, the term ‘gross income’ means the total of the amounts received or accrued from the sale of goods or services (if such amounts are required to be shown on the return) prior to diminution by the cost of such sales or services”. Since bases of goods or services sold by a trade or business do not affect its gross income, an overstatement of any such basis will not constitute omission from gross income.
See infra note 10.
See infra Pt. IV.
See, e.g., Burks v. United States,
The Court of Appeals for the Federal Circuit has since decided to accord the regulations at issue here Chevron deference. See Grapevine Imps., Ltd. v. United States,
Salman Ranch [does not] mandate any different conclusion. This court there closely analyzed both the updated statute and its legislative history to determine whether divergence from Colony was warranted. It made no separate holding that the statute was unambiguous for purposes of Chevron step one * * *. [Id. at 1378; citation omitted.]
Grapevine does not reject the court’s prior reading of Colony in Salman Ranch. Since <eSalman Ranch preceded the issuance of Treasury regulations interpreting this statute”, Grapevine characterized the court’s task in Salman Ranch “different from ours.” Id. at 1377. Finding Colony “no bar” to granting the regulations Chevron deference, Grapevine concludes that “Salman Ranch notwithstanding, we will defer to the Treasury Department’s interpretation in applying § 6501(e)(1)(A).” Id. at 1381. As we explain infra note 28, we have concluded to the contrary that Colony is a “bar” to Chevron deference.
Cf. infra Discussion, Pt. IV, discussing respondent’s “vague and indecisive” attempt to supplant the Colony holding with a contrary interpretation of the statutory text in current sec. 6501(e)(1)(A).
See Beard v. Commissioner,
The Fifth Circuit Court of Appeals * * * found that the 6-year period of limitations applied to a fiduciary income tax return on which the nature of an item of income was misstated. The Commissioner was at a disadvantage identifying the error in the reporting of the transaction in issue in Phinney because the fiduciary tax return listed the item of income without disclosing its receipt in an installment sale. * * * [UTAM, Ltd. v. Commissioner, supra.]
The Court of Appeals for the Fifth Circuit in Burks appears to validate our reading of Phinney and faults Beard’s interpretation of the case. See Burks v. United States,
The Court of Appeals for the Tenth Cirсuit in Hernandez-Carrera v. Carlson,
The Commissioner has appealed to the appropriate Courts of Appeals Intermountain Ins. Serv. of Vail, LLC v. Commissioner,
As pointed out supra note 13 and the accompanying text, the Court of Appeals for the Seventh Circuit has recently rejected the conclusion reached in Bakersfield and Salman Ranch Ltd. v. United States,
See Grapevine Imps., Ltd. v. United States, supra at 1376 (discussed supra note 11, holding that in the absence of the regulations, Colony controls the interpretation of sec. 6501(e)(1)(A), but since “Chevron review of the new Treasury regulations * * * [compels that] the Treasury regulations are entitled to Chevron deference * * -i' [, they constitute] new intervening authority 1 ! * [that] require us to depart from * :|- * [Colony]”); cf. Beard v. Commissioner, supra at 623 (highlighting the volume of ink that “has been spilled in the briefs over whether temporary Treasury Regulation Section 301.6501(e)-lT(a)(l)(iii) would be entitled to Chevron deference if Colony were found to be controlling”, the court declined to reach that issue “Because we find that Colony is not controlling”).
We note, without judging, the Commissioner’s asserted ability to command Chevron deference to, and establish Brand X primacy for, regulations that rearrange the tax outcome of a transaction well after that transaction’s economic consequences have been realized. See Natl. Cable & Telecomms. Association v. Brand X Internet Servs., supra at 982 (“Chevron’s premise is that it is for agencies, not courts, to fill statutory gaps.”). This ace-in-the-hole can trump the best laid plans of honest and cynical taxpayers and deter both from asserting their “Code-given” rights. For an example of how after-the-fact changes in tax law can render Pyrrhic hard-fought, time-consuming, and expensive litigation victories, see Hellerstein, “Is ‘Internal Consistency* Foolish?: Reflections on an Emerging Commerce Clause Restraint on State Taxation”, 87 Mich. L. Rev. 138, 144-145 n.33 (1988) (discussing the eventual futility of an initially successful Commerce Clause challenge in Tyler Pipe Indus., Inc. v. Wash. Dept. of Revenue,
On the inadvisability of a blanket prohibition against consulting legislative history, see Harrison v. N. Trust Co.,
As we explain infra Pt. IV, we do not have to engage in an analysis of predicting whether the impact of the Brand X holding stops at the doors of the Supreme Court since respondent’s “vague and indecisive” appeal to Brand X fails to meet the “clear and understandable basis” test of SEC v. Chenery Corp.,
Malting this determination with respect to court opinions that were handed down well before the Supreme Court had announced and developed the Chevron framework poses a unique challenge. Specifically, “it is sometimes difficult to determine whether pr e-Chevron decisions are based upon ‘Chevron step one’ (the plain command of the statute) or upon ‘Chevron step two’ (a permissible construction of the statute).” Home Concrete & Supply, LLC v. United States,
Brand X leaves unspecified the term “unambiguous terms of the statute”. At least as far as tax law is concerned, determining the true meaning of many statutory terms, and ascertaining whether or not they are ambiguous, entails consulting legislative history. See, e.g., Livingston, “Congress, the Courts, and the Code: Legislative History and the Interpretation of Tax Statutes”, 69 Tex. L. Rev. 819, 832 (1991) (“The tax legislative process differs in several important respects from the model assumed in most interpretative theories. These differences include * * * the reliance on an extraordinary volume of legislative history (committee reports, floor colloquies, and so on) to explain and supplement the statutory language.”).
In Grapevine Imps., Ltd. v. United States,
Brand Xs premise may very well be that “Article III courts * * * sit to render decisions that can be reversed or ignored by executive officers.” Natl. Cable & Telecomms. Association v. Brand X Internet Servs., supra at 1017 (Scalia, J., dissenting). We do not, however, presume that Brand X bestows upon us, a statutory court, the power to sit in judgment on decisions rendered by the highest constitutional court in “statutory-construction cases involving agency-administered statutes” and designate these decisions “agency-reversible”, solely on the basis of an absence of dicta disclaiming the centrality of legislative history to the Court’s conclusions. Id. at 1018-1019.
Brand X would, in fact, “hold judicial interpretations contained in precedents to the same demanding Chevron step one standard that applies if the court is reviewing the agency’s construction on a blank slate”, Natl. Cable & Telecomms. Association v. Brand X Internet Servs.,
We find validation for this classification in the recent opinions in Home Concrete & Supply, LLC v. United States,
As discussed supra notes 11 and 17, the Court of Appeals for the Federal Circuit has in Grapevine Imps., Ltd. v. United States,
Grapevine is therefore the only case thus far that both accepts Colony as controlling the interpretation of sec. 6501(e)(1)(A) and allows the Commissioner to reach a contrary result by regulation. “That the Supreme Court * * * [has] strongly reasoned for a certain interpretation of these statutes does not mean their inherent ambiguity has been wiped away.” Grapevine Imps., Ltd. v. United States, supra at 1379. The contrast with the Brand X “caveat” of Justice Stevens, who had authored Chevron for a unanimous Supreme Court, that “a decision by this Court *• * * would presumably remove any pre-existing ambiguity”, Natl. Cable & Telecomms. Association v. Brand X Internet Servs., supra at 1003 (Stevens, J., concurring), could not be starker. Regardless, we respectfully disagree with the Court of Appeals for the Federal Circuit, which declined to classify Colony as a Chevron step one holding because “The Court did not find that there was no other reasonable interpretation” of the statutory language contained in current sec. 6501(e)(1)(A). Grapevine Imps., Ltd. v. United States, supra at 1379. For the reasons set forth supra notes 26 and 27 and the accompanying text, we believe Colony represents an explication of unambiguous congressional intent rather than a policy choice “resolving the competing interests which Congress itself either inadvertently did not resolve, or intentionally left to be resolved by the agency charged with the administration of the statute in light of everyday realities.” Chevron U.S.A. Inc. v. Natural Res. Def. Council,
See also supra note 5 discussing respondent’s denial of the retroactive character of the regulations.
Chenery may demand less than crystal clarity of purpose, but at least when applied at Chevron step two it should require more than muddled thinking. Chevron deference appears incompatible with an agency asking a court to choose between two or more alternative validating grounds. See Interstate Commerce Commn. v. Bhd. of Locomotive Engrs.,
While we agree with Judge Thornton that there is no need to address the final regulations, it is because, as Judge Wherry notes, see majority op. note 3, “respondent can reasonably be expected to cite and rely on the final regulations * * * in any appeal” that we think it would be better to ask the parties their views on the validity of the final regulations before trying to hold them invalid. There are different standards for reviewing the procedural validity of temporary and permanent regulations, and there is some risk to both parties that we are making arguments neither would choose to malee on his or its own.
Concurrence Opinion
concurring: This Court’s prior decisions, beginning with Bakersfield Energy Partners, LP v. Commissioner,
Concurrence Opinion
concurring:
I. Introduction
We have joined Judge Thornton’s concurring opinion, which would grant petitioner’s motion for summary judgment
II. Chevron Step One
Judge Wherry classifies Colony as a Chevron step one decision principally on the basis of our analysis in Inter-mountain. Majority op. p. 391. In Intermountain,
In so holding, 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, the Supreme Court’s opinion in Colony, Inc. v. Commissioner, supra, “unambiguously forecloses the agency’s interpretation” of sections 6229(c)(2) and 6501(e)(1)(A) and displaces respondent’s temporary regulations. See Natl. Cable & Telecomms. Association v. Brand X Internet Servs., * * * [545 U.S. 967 , 983 (2005) (Brand X)]. Consequently, the temporary regulations are invalid and are not entitled to deferential treatment. [Id.] fin. refs, omitted.]
While the majority in Intermountain dutifully cited Brand X, it paid insufficient attention to the Supreme Court’s specific instruction that “A court’s prior judicial construction * * * trumps an agency construction * * * only if the prior
The appropriate focus of any application of Brand X is the prior opinion’s holding, specifically whether it held that its interpretation of a provision “[followed] from the unambiguous terms of the statute”.
Colony is a pre-Chevron case, and the Supreme Court did not have to decide whether its interpretation of the statute was the only reasonable one (i.e., that the statute was unambiguous, or clear) or merely the best one. The first inquiry, seeking meaning, is, for that reason, problematic when applied to Colony. It is even more so for us, a national, trial-level Court, because the Supreme Court has not spoken clearly on the issue of legislative history in the Chevron framework and the situation in the Courts of Appеals is muddled. See Intermountain,
III. Chenery
Supplementing our analysis in Inter mountain, Judge Wherry addresses the contingency that we may have been wrong there in deciding that Colony is a Chevron step one holding. Even if it is not, he says, the Supreme Court’s decision in Chenery would still invalidate the final regulations. Majority op. pp. 394-395. In Bakersfield Energy Partners, LP v. Commissioner,
The problem is that the APA itself requires no “unequivocal” statement; it requires only “a concise general
The Secretary did explain his basis for the final regulations. He recognized authority for his substantive view of a broad, general definition of gross income. T.D. 9511, 2011-
The Secretary also made his purposes clear: To supersede the, in his view, erroneous view of the Courts of Appeals for the Ninth and Federal Circuits that Colony is not limited to the trade or business context under the predecessor of section 6501(e)(1), id., and to address Intermountain’s holding that the Supreme Court’s interpretation in Colony is the only permissible interpretation of the statutory language (“omits from gross income”) in sections 6229(c)(2) and 6501(e)(1)(A), id.
While Judge Wherry recognizes the Secretary’s dual purposes of (1) limiting Colony to a trade or business circumstance and (2) failing that, establishing his authority under Brand X to supersede the Supreme Court’s interpretation of the phrase “omits from gross income”, he finds neither adequate. Majority op. p. 381. The first, he believes, attempts to usurp the courts’ function of interpreting the Supreme Court’s opinions. We agree. See Bakersfield Energy Partners, LP v. Commissioner, supra. The second, he believes, is fatally equivocal, principally because of the preamble’s reference to “a new statutory setting.” Majority op. p. 396. For him, that is an unacceptable ambiguity: does the Secretary really mean he cаn trump the Supreme Court’s interpretation in Colony
First, it must be kept in mind that the Secretary’s reference to a new statutory setting arises only in the context of his rebuttal of our holding in Intermountain that the Supreme Court’s opinion in Colony was the only permissible interpretation of the statute. Following the Secretary’s recital of the Supreme Court’s statement in Colony that the term “omits from gross income” is ambiguous, which he states “meaning * * * susceptible to more than one reasonable interpretation”, he references Brand X and states that the Secretary and the IRS are permitted to adopt another reasonable interpretation of the term, “particularly as it is used in a new statutory setting.” T.D. 9511, 2011-
Moreover, neither Chenery nor the apa requires crystal clarity of purpose. We think that it is reasonably clear from the preamble to the final regulations that the Secretary believes that, relying on Brand X, he can come to a different conclusion as to the meaning of section 6501 than the Supreme Court did in Colony. And despite Judge Wherry’s assertions to the contrary, Chenery asks no more. He is right
Finally, we recognize that, having accepted Judge Wherry’s criticism of the Secretary’s first rationale (limiting Colony) and rejected his criticism of the second (reliance on Brand X), we are left with a mixed basket of correct and incorrect rationales for an agency’s decision, which might provide sufficient reason for a court to invalidate the agency’s action. E.g., Intl. Union, UMW v. U.S. Dept. of Labor,
IV. Conclusion
We have made clear that we would not characterize Colony as a Chevron step one holding. If called upon to do so, we would also find Chenery inapplicable. Nonetheless, since the temporary regulations are invalid per Intermountain, we have to concur with the Court’s disposition of petitioner’s motion for summary judgment.
E.g., Intermountain Ins. Serv. of Vail, LLC v. Commissioner,
Judge Wherry’s report in this case was referred to the Court Conference by the Chief Judge pursuant to the authority of sec. 7460(b). It was reviewed by the Court Conference, and Judge Wherry’s disposition of petitioner’s motion for summary judgment prevailed because all of the Judges voting at the Court Conference either were for the report or concurred in the result. A majority of the voting Judges authoring or joining an opinion, however, agree with Judge Thornton that, to grant the motion, we should go no further than to reiterate our historical position that the statute unambiguously precludes respondent’s interpretation.
Judge Wherry hints, majority op. note 23, that there might be different rules for resorting to legislative history in tax cases, citing with approval Prof. Livingston’s 20-year-old observation that “The tax legislative process differs in several important respects from the model assumed in most interpretive theories.” Livingston, “Congress, the Courts, and the Code: Legislative History and the Interpretation of Tax Statutes”, 69 Tex. L. Rev. 819, 832 (1991). This may be true, but the Supreme Court unanimously warned us just earlier this year that “we are not inclined to carve out an approach to administrative review good for tax law only. To the contrary, we have expressly ‘[r]ecogniz[ed] the importance of maintaining a uniform approach to judicial review of administrative action.”’ Mayo Found. v. United States, 562 U.S._,_,
This point is made in Note, “Implementing Brand X: What Counts as a Step One Holding?”, 119 Harv. L. Rev. 1532, 1536 (2006).
Id.
Sec. 275(c), I.R.C. 1939.
See supra note 5.
An explicit-statement approach is suggested by the author in Case Comment, “Administrative Law — Chevron Deference — Federal Tax Court Holds Pre-Chevron Judicial Construction of Statute Precludes Subsequent Agency Interpretation if Prior Construction Was Premised on Legislative History.—Intermountain Insurance Service of Vail, LLC v. Commissioner, No. 25868-06,
We recognize that the Courts of Appeals have addressed this issue and have reached varying results. Grapevine Imps., Ltd. v. United States,
Judge Wherry is right, of course, that “Chenery sweeps wider than the Administrative Procedure Act’s ‘basis and purpose’ requirement, * * * agency action can be upheld only on the ground previously advanced by the agency.” Majority op. note 6. But there cannot be any other grounds in this case — never having asked respondent his views on the matter, he cannot possibly advance justifications in favor of the regulations different from those in the preamble to the regulations.
More recently, in validating the final regulations, the Court of Appeals for the Federal Circuit found the Supreme Court’s opinion in Colony, Inc. v. Commissioner,
Judge Wherry disagrees, believing we cannot choose between alternative grounds. See majority op. note 30. In support of this view, he cites Holland v. Natl. Mining Association,