Lead Opinion
SUPPLEMENTAL OPINION
We issued an opinion and entered our decision in this case on September 1, 2009. Relying on Bakersfield Energy Partners, LP v. Commissioner,
Background
The transactions at the heart of this case took place in 1999 and were reported on the 1999 Form 1065, U.S. Partnership Return of Income, of Intermountain Insurance Service of Vail, LLC (Intermountain), filed on September 15, 2000. The details of the transactions are largely irrelevant to the issues we face today. Suffice it to say that in the previously mentioned FPAA that respondent issued on September 14, 2006, respondent determined that the transactions characterized as a tax shelter “were a sham, lacked economic substance and * * * [had] a principal purpose of * * * [reducing] substantially the present value of * * * [Inter-mountain’s] partners’ aggregate federal tax liability”. Critically, respondent’s determination revolved around Inter-mountain’s alleged overstatement of partnership basis.
Petitioner timely petitioned this Court for review of the FPAA and moved for summary judgment on the ground that respondent had issued the FPAA beyond the general 3-year
Generally, a 6-year limitations period is triggered when a taxpayer or partnership “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”. Sec. 6501(e)(1)(A) (taxpayer); see sec. 6229(c)(2) (partnership). The focus of the parties’ dispute was whether an overstatement of basis constitutes an omission from gross income for purposes of triggering a 6-year limitations period.
This was not an issue of first impression. In Bakersfield Energy Partners, LP v. Commissioner, supra, we held that a basis overstatement was not an omission from gross income for purposes of sections 6229(c)(2) and 6501(e)(1)(A). In reaching our conclusion, we applied the holding of Colony, Inc. v. Commissioner,
We adhered to our precedent in Bakersfield Energy Partners, LP v. Commissioner, supra, when we issued our September 1, 2009, opinion in this case. See Intermountain Ins. Serv. of Vail, LLC v. Commissioner,
On September 24, 2009, less than a month after our order and decision in this case, respondent and the Treasury Department issued temporary regulations under sections 6229(c)(2) and 6501(e)(1)(A). See secs. 301.6229(c)(2)-lT and 301.6501(e)-lT, Temporary Proced. & Admin. Regs., supra. These temporary regulations were simultaneously issued as proposed regulations. See sec. 7805(e). On September 28, 2009, notice was published and comments were sought for sections 301.6229(c)(2)-l and 301.6501(e)-l, Proposed Proced. & Admin. Regs., see Notice of Proposed Rulemaking by Cross-Reference to Temporary Regulations, 74 Fed. Reg. 49354 (Sept. 28, 2009), and the temporary regulations were published in the Federal Register, see secs. 301.6229(c)(2)-lT and 301.6501(e)-lT, Temporary Proced. & Admin. Regs., supra.
The temporary regulations provide, in pertinent part, that “an understated amount of gross income resulting from an overstatement of unrecovered cost or other basis constitutes an omission from gross income for purposes of * * * [sections 6229(c)(2) and 6501(e)(1)(A)].” See secs. 301.6229(c)(2)-1T and 301.6501(e)-1T, Temporary Proced. & Admin. Regs., supra. The interpretation espoused by the temporary regulations runs contrary to the interpretation adopted by this Court in Bakersfield Energy Partners, LP v. Commissioner,
Bolstered by the temporary regulations, respondent, on October 16, 2009, lodged — and on November 25, 2009, was permitted to file — an otherwise late motion to vacate our September 1, 2009, decision and a motion to reconsider our September 1, 2009, opinion. As the moving party, respondent bears the burden of proving entitlement to relief. See Kraasch v. Commissioner,
Discussion
I. Motions To Reconsider and To Vacate
Motions to reconsider and to vacate are governed by Rules 161 and 162, respectively. Those rules establish filing deadlines but provide no guidance on when the Court should grant or deny such motions. In the absence of more specific guidance, we look to caselaw and the Federal Rules of Civil Procedure. See Rule 1(b).
The decision to grant motions to reconsider and to vacate lies within the discretion of the Court. Estate of Quick v. Commissioner,
Importantly, an intervening change in the law can warrant the granting of both a motion to reconsider and a motion to vacate. See Alioto v. Commissioner,
Respondent asks us to grant the motion to vacate in the “interests of justice” so that we “may grant the motion for reconsideration.” Citing Alioto v. Commissioner,
Petitioner’s concerns are noteworthy;
Accordingly, we proceed to consider the applicability and potential impact of the temporary regulations to this case. If, as petitioner contends, the temporary regulations do not apply, are invalid, or are otherwise not entitled to deference, we will deny respondent’s motions because it would be pointless to grant them. If, on the other hand, the temporary regulations apply, are valid, and are entitled to deference, we would be required to ascertain whether, after considering all other factors, respondent’s motions should be granted. We turn first to whether the temporary regulations apply to this case.
The threshold issue in determining whether the temporary regulations apply to this case is whether the temporary regulations apply by their own terms. The “Effective/applicability date” provisions of the temporary regulations provide 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) and 301.6501(e)-lT(b), Temporary Proced. & Admin. Regs., supra.
The starting point for interpreting a regulatory provision is its plain meaning. See Walker Stone Co. v. Secy. of Labor,
Respondent argues to the contrary and in doing so begs the question
To determine whether the temporary regulations are applicable under the effective date provision, the Court must determine whether a six-year statute of limitations would be open for the taxable year at issue, as of September 24, 2009, without regard to what the standard for applying the statute of limitations might be. If the six-year limitations period could be open under some standard as of September 24, 2009, then the temporary regulations apply.
Under respondent’s interpretation, the Court must depart from our precedent in Bakersfield Energy Partners, LP v. Commissioner,
Essentially, the key, according to respondent, is 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. Distilled even further, respondent’s rationale suggests that the temporary regulations apply to this case because their application would trigger a 6-year limitations period. Respondent had phrased this argument more simply in his motion to reconsider: “The temporary regulations apply to petitioner’s 1999 tax year, because the period of limitations under sections 6229(c)(2) and 6501(e)(1)(A), as interpretated, in the regulations, remains open with respect to that year.” (Emphasis added.)
Ordinarily, an agency’s interpretation of its own regulation is controlling unless it is “plainly erroneous or inconsistent with the regulation.” Auer v. Robbins,
III. Judicial Deference
We next turn to whether the temporary regulations, if applicable, deserve judicial deference. Courts have long held that Federal tax regulations are entitled to some degree of deference. This is in recognition of the fact that “Congress has delegated to the [Secretary of the Treasury and his delegate, the] Commissioner [of Internal Revenue], not to the courts, the task of prescribing all needful rules and regulations for the enforcement of the Internal Revenue Code.” Natl. Muffler Dealers Association, Inc. v. United States,
Petitioner asserts that the temporary regulations are only entitled to deference under Skidmore v. Swift & Co.,
The temporary regulations were not issued on a blank slate. In its 1958 opinion in Colony, Inc., the Supreme Court interpreted the same statutory language and held that a basis overstatement was not an omission from gross income. Id. More than 50 years later, respondent and the Treasury Department issued the temporary regulations and reached the opposite conclusion. The question is whether we are bound by the agency’s construction of the statute in the temporary regulations or by the Supreme Court’s prior determination of congressional intent and the Internal Revenue Code’s requirements, as set forth in Colony, Inc. Assuming respondent is correct that the temporary regulations are entitled to Chevron deference, the answer to this question lies in Natl. Cable & Telecomms. Association v. Brand X Internet Servs.,
“A court’s prior judicial construction of a statute trumps an agency construction otherwise entitled to Chevron deference only if the prior court decision holds that its construction follows from the unambiguous terms of the statute and thus leaves no room for agency discretion.” Id. In so holding, the Supreme Court reasoned as follows:
[Allowing a judicial precedent to foreclose an agency from interpreting an ambiguous statute * * * would allow a court’s interpretation to override an agency’s. Chevron’s premise is that it is for agencies, not courts, to fill statutory gaps. * * * The better rule is to 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: Only a judicial precedent holding that the statute unambiguously forecloses the agency’s interpretation, and therefore contains no gap for the agency to fill, displaces a conflicting agency construction. [Id. at 982-983. 15 ]
We are therefore directed to apply Chevron step one by determining whether the Supreme Court in Colony, Inc. v. Commissioner, supra, found the statutory provision at issue to be unambiguous. If so, there is no gap left for the temporary regulations to fill with respect to the statutory provisions at issue here. The first step in Chevron’s two-step analysis is to ask “whether Congress has directly spoken to the precise question at issue.” Chevron U.S.A. Inc. v. Natural Res. Def. Council, supra at 842. “If the intent of Congress is clear, that is the end of the matter, for the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress.”
When determining Congress’ intent, Chevron instructs us to employ “traditional tools of statutory construction.” Id. at 843 n.9. Many courts, including the Courts of Appeals to which this case might be appealed,
Therefore, in determining whether the Supreme Court in Colony, Inc. v. Commissioner,
Specifically, the Supreme Court found the legislative history to be “persuasive evidence that Congress was addressing itself to the specific situation where a taxpayer actually omitted some income receipt or accrual in his computation of gross income, and not more generally to errors in that computation arising from other causes.” Id. at 33 (emphasis added). It further indicated that “this history shows to our satisfaction that the Congress intended an exception to the usual three-year statute of limitations only in the restricted type of situation already described [an omission of an item of gross income].” Id. at 36. “We think that in enacting § 275(c) Congress manifested no broader purpose than to give the Commissioner an additional two years to investigate tax returns in cases where, because of a taxpayer’s omission to report some taxable item, the Commissioner is at a special disadvantage in detecting errors.” Id.
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.
We next turn to petitioner’s concern that the temporary regulations would have an impermissible retroactive effect if we applied them in this case. Respondent attempts to defuse petitioner’s concern by arguing that the temporary regulations “are not retroactive as applied in this case” but that, even if they were, they would be permissibly retroactive. Thus, two issues emerge: First, whether the temporary regulations would have a retroactive effect if applied in this case, and second, if so, whether the retroactive effect would be permissible. However, in the light of our holdings above regarding the regulations’ effective date and their validity, we need not answer these questions to resolve respondent’s motions in this case. We therefore leave them for another day.
Conclusion
In the light of the above holdings, we find it unnecessary to address petitioner’s other concerns with respect to the temporary regulations. The Court has considered all of respondent’s contentions, arguments, requests, and statements. To the extent not discussed herein, we conclude that they are meritless, moot, or irrelevant.
To reflect the foregoing,
An appropriate order will be issued.
Reviewed by the Court.
Notes
Unless otherwise indicated, all section references are to the Internal Revenue Code of 1986, as amended and in effect for the year at issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.
In our Sept. 1, 2009, opinion, we noted that, although respondent argued that sec. 6501(e)(1)(A) applied, his arguments suggested that he meant to cite sec. 6229(c)(2) instead. See Intermountain Ins. Serv. of Vail, LLC v. Commissioner, supra n.3. Sec. 6501(e)(1)(A) extends the 3-year period of limitations for assessing tax to 6 years from the due date or the date of the tax return, whichever is later. See sec. 6501(a). For tax attributable to a partnership item, the period of limitations remains open at least for 3 years after the date the partnership return was filed or 3 years after the last day, disregarding extensions, for filing the partnership return, whichever is later. See sec. 6229(a). Sec. 6229(c)(2) extends the sec. 6229(a) period. Although there is no period of limitations within which the Commissioner must issue an FPAA, partnership item adjustments made in an FPAA are time barred at the partner level if the FPAA is not issued within the applicable period of limitations for assessing tax against a partner attributable to partnership items. See generally Curr-Spec Partners, L.P. v. Commissioner,
Respondent has not provided support for his argument that sec. 6501(e)(1)(A) or sec. 301.6501(e)-1T, Temporary Proced. & Admin. Regs., 74 Fed. Reg. 49322-49323 (Sept. 28, 2009), applies to this case. Respondent has only addressed an omission from Intermountain’s partnership return and time periods running from the filing of that return. Nevertheless, the parties refer to the temporary regulations in tandem. Respondent states in his motion to reconsider that “The temporary regulations apply to petitioner’s 1999 tax year”. For the purposes of this Opinion, and because sec. 6501(e)(1)(A) and sec. 301.6501(e)-1T, Temporary Proced. & Admin. Regs., supra, could affect the outcome of this case if a partner’s period of limitations was still open when the FPAA was issued, we will follow the parties’ lead and refer to the temporary regulations in tandem.
The bar of the period of limitations is an affirmative defense, and petitioner bore the burden of proof. See Rules 39, 142(a); see also Highwood Partners v. Commissioner,
According to T.D. 9466, 2009-
See also Servants of the Paraclete v. Does,
Tax litigation is expensive, and respondent litigates with taxpayer-provided funds while petitioner and/or the limited liability company or its members must litigate with their own funds. If the law is allowed to change retroactively after a taxpayer has prevailed in one or more courts, thereby rendering their victory Pyrrhic, the perverse result will be to significantly discourage taxpayers from asserting their rights under the then-existing law.
See Brief for the Appellant at 14, Salman Ranch, Ltd. v. Commissioner, No. 09-9015 (10th Cir., Feb. 16, 2010); Brief for the Petitioner at 17-18, Commissioner v. M.I.T.A., No. 09-60827 (5th Cir., Mar. 3, 2010).
See, e.g., Smiley v. Citibank (S.D.), N.A.,
See IRS Chief Counsel Notice CC — 2010-001 (Nov. 23, 2009) stating:
The temporary regulations apply to taxable years with respect to which the applicable period of limitations for assessing tax did not expire before September 24, 2009. Accordingly, the temporary regulations apply to any docketed Tax Court case in which the period of limitations under sections 6229(c)(2) and 6501(e)(1)(A), as interpreted in the temporary regulations, did not expire with respect to the tax year at issue, before September 24, 2009, and in which no final decision has been entered.
See supra note 9.
See also Ariz. Pub. Serv. Co. v. U.S. EPA,
The Court recognizes that respondent may argue that the decisions we rely upon, Bakersfield Energy Partners, LP v. Commissioner,
We also recognize that respondent could amend the temporary regulations’ effective/applicability date provisions and file renewed motions to reconsider and to vacate based on those amended provisions, thereby extending this dispute to yet another case. See Murrell v. Shalala,
Respondent maintains that Colony, Inc. v. Commissioner,
In a concurring opinion, Justice Stevens suggested that this holding “would not necessarily be applicable to a decision by this Court that would presumably remove any pre-existing ambiguity.” Natl. Cable & Telecomms. Association v. Brand X Internet Servs.,
The second step of Chevron specifies as follows:
If, however, the court determines Congress has not directly addressed the precise question at issue, the court does not simply impose its own construction on the statute, as would be necessary in the absence of an administrative interpretation. Rather, if the statute is silent or ambiguous with respect to the specific issue, the question for the court is whether the agency’s answer is based on a permissible construction of the statute. [Chevron U.S.A. Inc. v. Natural Res. Def. Council,
In our Sept. 1, 2009, opinion, we indicated that, absent stipulation to the contrary, this case may be appealable to the Court of Appeals for the Eighth, Tenth, or D.C. Circuit. See Intermountain Ins. Serv. of Vail, LLC v. Commissioner,
The Supreme Court has sent mixed signals about the use of legislative history in Chevron step one. In Chevron itself, the Court considered legislative history as part of step one. Chevron U.S.A. Inc. v. Natural Res. Def. Council,
Although we have found no opinion in which a court considered legislative history when applying Brand X, we see no reason why a court — if it considers legislative history when applying Chevron step one — would not also consider it when applying Brand X.
Both parties also refer to the Supreme Court’s observation that “the conclusion we reach is in harmony with the unambiguous language of § 6501(e)(1)(A) of the Internal Revenue Code of 1954.” Colony, Inc. v. Commissioner,
Hearings Before the House Comm, on Ways and Means, 73d Cong., 2d Sess. 139, 149 (1934); H. Rept. 704, 73d Cong., 2d Sess. 35 (1934), 1939-1 C.B. (Part 2) 554, 580; S. Rept. 558, 73d Cong., 2d Sess. 43-44 (1934), 1939-1 C.B. (Part 2) 586, 619.
We recognize that Colony, Inc. v. Commissioner,
See supra note 2; Intermountain Ins. Serv. of Vail, LLC v. Commissioner,
Respondent suggests that the U.S. Court of Appeals for the Ninth Circuit, in Bakersfield Energy Partners, LP v. Commissioner,
The Court of Appeals did not indicate definitively whether any such temporary regulations would actually trump the Supreme Court’s prior judicial construction. This may flow from the possibly unresolved issue of whether legislative history should be considered when applying Chevron step one. Compare Natural Res. Def. Council v. U.S. EPA, supra at 603 (“An examination of the statutory language and its legislative history assists us in this inquiry [Chevron step one]”.), with Schneider v. Chertoff,
Concurrence Opinion
concurring: I concur in the result in this case. I would reach the same result, however, on narrower grounds relating to motions to vacate and reconsider or untimely motions to amend pleadings. Moreover, I would adopt petitioner’s distinction of Alioto v. Commissioner,
I would defer discussion of the difficult and divisive issues regarding retroactive regulations, temporary regulations promulgated without notice and an opportunity for comment, and the degree of deference to which these regulations and Treasury regulations generally are entitled. Many cases to be decided in the future, including those now on appeal, will necessarily present those issues. This petitioner should not bear the burden of relitigating this case on a playing field unilaterally redesigned by the adverse party after petitioner has prevailed at this level.
Concurrence Opinion
concurring in the result only:
I. Introduction
Respondent asks that, “in the interests of justice”, we vacate our order and decision so that we may reconsider our opinion “to correct a substantial error of law” resulting from the “unusual circumstance” of the Secretary’s issuing temporary regulations ostensibly overruling the authority on which we relied 23 days earlier in deciding this case.
Since the majority has chosen to address the effective date of the temporary regulations and their substantive validity, we feel compelled to comment. We are persuaded by neither of the majority’s analyses and would, before addressing any aspect of substantive validity, consider first the logically prior question of the procedural validity of the temporary regulations. With respect to that question, we believe that petitioner has the better argument.
II. Applicability of the Temporary Regulations
The majority concludes: “The plain meaning of the effective/applicability date provisions indicates that the temporary regulations do not apply to this case.” Majority op. p. 218. In fact, the temporary regulations provide: “The rules of this section apply to taxable years with respect to which the applicable period for assessing tax did not expire before September
Tax year . 1999
Return filed . Sept. 15, 2000
FPAA mailed. Sept. 14, 2006
Petition filed . Dec. 4, 2006
Order/decision . Sept. 1, 2009
Temp. regs. effective date . Sept. 24, 2009
Section 6229(a) provides that, except as otherwise provided in the section, the period of limitations for making assessments with respect to partnership items is 3 years. Section 6229(c)(2) substitutes 6 years for 3 years in the case of a substantial omission of income. The period for making assessments — whether 3 years or 6 years — is suspended by the mailing of an FPAA until our decision in the case becomes final (or, if no petition is filed, the period to petition expires) and for 1 year thereafter. See sec. 6229(d). Because of respondent’s motion to vacate order and decision, our decision in this case has not yet become final.
The majority claims: “The plain meaning of the temporary regulations’ effective/applicability date provisions indicates that the temporary regulations do not apply to this case because the applicable period of limitations expired before September 24, 2009.” Majority op. p. 220. According to respondent, the applicable period of limitations did not expire before September 24, 2009, because, as a result of the temporary regulations, “the applicable period for assessing tax” is the 6-year period prescribed by section 6229(c)(2), which 6-year period had not run on September 14, 2006, when the FPAA was mailed. The filing of the petition then suspended the running of that 6-year period to and beyond September 24, 2009. The majority counters: “We concluded in our September 1, 2009, opinion [which antedates the September 24, 2009, temporary regulations] that the general 3-year limitations period of section 6501(a) was the applicable period for assessing tax in this case and that it had expired some time before September 14, 2006.” Majority op. p. 218. It adds: “The plain meaning of the effective/applicability date provisions indicates that the temporary regulations do not apply to this case.” Majority op. p. 218.
SEC. 7805(b). Retroactivity of Regulations or Rulings — The Secretary may prescribe the extent, if any, to which any ruling or regulation, relating to the internal revenue laws, shall be applied without retroactive effect. [Sec. 7805(b) (pre-1996).]
We have said: “Under section 7805(b) [pre-1996], there is a presumption that every regulation will operate retroactively, unless the Secretary specifies otherwise.” UnionBanCal Corp. v. Commissioner,
The temporary regulations apply to taxable years with respect to which the applicable period of limitations for assessing tax did not expire before September 24, 2009. Accordingly, the temporary regulations apply to any docketed Tax Court case in which the period of limitations under sections 6229(c)(2) and 6501(e)(1)(A), as interpreted in the temporary regulations, did not expire with respect to the tax year at issue, before September 24, 2009, and in which no final decision has been entered. [Emphasis added.]
If that is what the Secretary meant, then what ground can there be for the majority to conclude that the temporary regulations do not apply to this case because “the applicable period for assessing tax” was a 3-year period that expired before September 24, 2009? The possibilities appear to be that the majority believes either that (1) the Secretary has no authority under any circumstance to overrule the Supreme Court’s interpretation of a statute (which implicates the Supreme Court’s decision in Natl. Cable & Telecomms. Association v. Brand X Internet Servs.,
In Bakersfield Energy Partners, LP v. Commissioner,
rejected the same interpretation the IRS is proposing in this case. The IRS may have the authority to promulgate a reasonable reinterpretation of an ambiguous provision of the tax code, even if its interpretation runs contrary to the Supreme Court’s “opinion as to the best reading” of the provision. Nat’l Cable & Telecomms. Ass’n v. Brand X Internet Servs.,545 U.S. 967 , 982-83,125 S.Ct. 2688 ,162 L.Ed.2d 820 (2005); accord Swallows Holding, Ltd. v. Comm’r,515 F.3d 162 , 170 (3d Cir. 2008). We do not.
We think this is a signal that courts should be especially careful about not deferring to new regulations that address this old problem. Instead, the majority engages in a fullblown analysis of the substantive validity of the regulations even after concluding they do not apply because the regulations are prospective only. The analysis has three parts;
• Sidestepping the longrunning issue of whether Treasury regulations are entitled to deference under Chevron U.S.A., Inc. v. Natural Res. Def. Council,
• an assertion that Chevron step one allows, and perhaps requires, consideration of legislative history in determining “whether Congress has directly spoken to the precise question at issue”, Chevron,
• an analysis of the additional question we have to answer after Brand X,
We agree with the majority that it is wise for us as a trial court to avoid the issue of what level of deference to give this regulation. See Swallows Holding, Ltd. v. Commissioner,
We are particularly cautious about the majority’s possible reliance on Rodriguez de Quijas v. Shearson/Am. Express,
We think that the problems of how to use legislative history in a Chevron analysis and the effect of Brand X on reinterpreting old Supreme Court tax cases are both much more complicated than the majority lets on.
A.
The Chevron test seems quite simple. Step one: Determine “whether Congress has directly spoken to the precise question at issue.” Chevron USA, Inc. v. Natural Res. Def. Council,
But Chevron's simplicity ends there.
We focus first on the use of legislative history in Chevron step one: Chevron tells lower courts to use the “traditional tools of statutory construction” to determine if Congress has spoken on the precise issue. Id. at 843 n.9. But how does Congress “speak”? Is it only in the enacted language and its context within a statute, or does it include committee reports, floor speeches, staff-prepared material, and postenactment commentary in later Congresses? And if courts are directed to employ legislative history, when can they do so — only if the text is ambiguous; only if it shows congressional intent clearly contrary to the plain meaning of the text; or whenever it would be helpful in figuring out the meaning, or maybe the purpose, of the act?
These are far-from-settled issues. As other courts have noted, the Supreme Court itself has sent what seem to be mixed signals:
• No consideration at step one — Coeur Alaska, Inc. v. Se. Alaska Conservation Council,
• consideration only if the text is unclear — Zuni Pub. Sch. Dist. No. 89 v. Dept. of Educ.,
• legislative history used at step one as a traditional tool— FDA v. Brown & Williamson Tobacco Corp.,
There are even a fair number of cases that make it difficult to discern whether the Court is consulting legislative history at step one or step two.
The majority does acknowledge this difficulty, but discerns a recent trend toward using legislative history in some way in step one, majority op. note 18. We think the matter is less clear. Here’s the current circuit court breakdown:
• First Circuit—Perez-Olivo v. Chavez,
• Second Circuit—Cohen v. JP Morgan Chase & Co.,
• Third Circuit—United States v. Geiser,
• Fourth Circuit—Compare Dominion Res., Inc. v. United States,
• Sixth Circuit—Compare Johnson City Med. Ctr. v. United States,
• Seventh Circuit—Compare Univ. of Chi. Hosps. v. United States,
• Eighth Circuit—Compare Ark. AFL-CIO v. FCC,
• Ninth Circuit—Compare Natural Res. Def. Council, Inc. v. U.S. EPA,
• Tenth Circuit—Anderson v. U.S. DOL,
• Eleventh Circuit—Guar. Fin. Servs., Inc. v. Ryan,
• D.C. Circuit—Sierra Club v. EPA,
• Federal Circuit—Amber-Messick v. United States,
B.
The fundamental problem in this area — and it’s not one that we as a trial court can possibly solve on our own — is that legislative history is a “traditional tool of statutory interpretation” most commonly used when the language of a statute is ambiguous on some point. But if the language of a statute is ambiguous, Chevron tells us to read that ambiguity as a delegation of authority to fill the resulting gap with a regulation. Looked at this way, Colony’s resort to legislative history in the first place shows a gap that the Secretary is ipso facto allowed to fill. If so, then the Supreme Court’s sentence “it cannot be said that the language is unambiguous”, Colony, Inc. v. Commissioner,
One way to read the many decisions using legislative history in step one of Chevron is as another check on agency discretion — another way of finding a lack of ambiguity in congressional intent. But the confusion in this area becomes a muddle when one adds in the analysis of whether a pre-Brand X precedent that uses legislative history is an analysis that, under Brand X, precludes the choice made by the agency in a regulation. Pay particular attention to the passage from Brand X that the majority quotes, majority op. p. 221: “A court’s prior judicial construction of a statute trumps an agency construction otherwise entitled to Chevron deference only if the prior court decision holds that its construction follows from the unambiguous terms of the statute and thus leaves no room for agency discretion.” Brand X,
It is at least possible that the emphasized language is a direction to lower courts to distinguish pre-Brand X precedents that resorted to legislative history from those that relied on plain-language analysis as a way of distinguishing between precedents that allow for their own regulatory supersession from those that do not. It would suggest in this
Consider AARP v. EEOC,
Then out popped a contrary regulation from the EEOC. The District Court judge faced with the regulation-vs.-precedent question reasoned that
Brand. X clarified the Chevron standard itself. In applying Chevron’s first step to the regulation at issue in Brand X, the Supreme Court did not ask merely whether Congress had “spoken to the precise question at issue,” Chevron,467 U.S. at 843 , * * * but rather “whether the statute’s plain terms ‘directly address the precise question at issue.’” Brand X,125 S.Ct. at 2702 * * * [AARP v. EEOC,390 F. Supp. 2d at 445 .]
The District Court then analyzed the pre-regulation precedent on point, and concluded that “Like its arguments from legislative history, the * * * [Third Circuit’s] appeals to general congressional intent and the balancing of competing policy considerations would seem unnecessary if its decision were the only permissible construction of the statute.” Id. at 450 n.10; see also, e.g., Mayo Found. for Med. Educ. & Research v. United States,
AAlRP is certainly not the last possible word on this subject. There may well be a distinction between using legislative history to supply the meaning of a particular word or phrase and using legislative history to discern the purpose or goal of the statute in which Congress placed that word or phrase so as to be able to best construe it in a particular case. Judge Easterbrook, in his landmark taxonomy on uses of legislative history, In re Sinclair,
Used in this way, legislative history in step one may present fewer problems. Rereading Colony, Inc. v. Commissioner,
New courts have explicitly considered and employed this possible distinction, and we would not necessarily advocate its use here. The conclusion we would draw is simply that the rules for reexamining precedents after Brand X are quite uncertain. We don’t believe it is beyond the capability of the Tax Court to address such issues with the necessary subtlety, but the majority doesn’t even try.
We won’t try either, since we prefer to climb onto firmer ground.
IV. Procedural Validity of the Temporary Regulations
That firmer ground, and the reason we are able to concur in our colleagues’ result, is that these regulations are procedurally invalid under the Administrative Procedure Act (APA), 5 U.S.C.A. secs. 551-559, 701-706 (West 2007 & Supp. 2009), as amended by the Patient Protection & Affordable Care Act, Pub. L. 111-148, sec. 6402, 124 Stat. 756 (2010), which governs rulemaking even by the Secretary.
The APA requires agencies to publish contemplated rules to allow the public to make comments on their content and
In the case of these regulations, the Secretary stated his legal authority for the rules — the section 6501(e) regulation was issued under section 7805 and the section 6229 regulation was issued under sections 7805 and 6230(k). The Secretary didn’t publish the regulations 30 days before their effective date, but respondent argues — and the majority essentially concedes — that the Secretary’s power to make retroactive rules under section 7805(b) (pre-1996) applies. But the Secretary did not seek comments before publishing these temporary regulations, nor did he claim good cause for skipping this step.
Respondent first argues that the APA itself excuses his failure to put the regulations through notice and comment. The Administrative Procedure Act, 5 U.S.C. section 553(b), provides:
this subsection does not apply—
(A) to interpretative rules, general statements of policy, or rules of agency organization, procedure, or practice * * *
The APA provides similar exemptions from the prepublication requirement. Id. sec. 553(d).
Respondent does not rely on any argument that these regulations are mere statements of policy or rules of Treasury’s organization, procedure, or practice. For the regulations to be valid, then, we must find they are interpretive rules, or we have to accept respondent’s alternative argument that
A. The Interpretive Exception
The Treasury Decision containing the regulations, without claiming a particular exception,
The Tax Court often labels as “interpretive” those regulations that the Secretary issues under the general authority of section 7805(a), in contrast to “legislative” regulations, by which we and other tax specialists mean those regulations issued under a more specific authority from Congress.
But “interpretive” means something different in administrative law. Berg, “Judicial Deference to Tax Regulations: A Reconsideration in Light of National Cable, Swallows Holding, and Other Developments”, 61 Tax Law. 481, 486-487 (2008) (“the Administrative Procedure Act (apa) draws the line between legislative and other regulations differently [than tax law].” (fn. ref. omitted)). In administrative law, “interpretive” is a label reserved for regulations that “advise the public of the agency’s construction of the statutes and rules which it administers.” Clark, U.S. Dept, of Justice,
Courts have applied various tests to distinguish between legislative and interpretive rules, but the D.C. Circuit’s test in Am. Mining Cong. v. Mine Safety & Health Admin.,
(1) whether in the absence of the rule there would not be an adequate legislative basis for enforcement action or other agency action to confer benefits or ensure the performance of duties, (2) whether the agency has published the rule in the Code of Federal Regulations, (3) whether the agency has explicitly invoked its general legislative authority, or (4) whether the rule effectively amends a prior legislative rule. If the answer to any of these questions is affirmative, we have a legislative, not an interpretive rule. [Id. at 1112.]
These four ways of finding agency intent have developed over time. A subsequent case in the D.C. Circuit rejected the second way, calling publication in the CFR merely a “snippet of evidence of agency intent”, and rejecting a claim that rules were legislative based on publication alone.
Though American Mining’s, test is not universally accepted, the case reconciles the precedents well and is accepted by at least two of the three potential appellate courts here. See, e.g., U.S. Telecomm. Association v. FCC,
American Mining asks first whether a particular agency has the authority to issue rules having the force of law. The Secretary does — Congress delegated authority to him in various Code sections to create rules and regulations. Section 7805(a) contains the broadest of these delegations, allowing promulgation of “all needful rules and regulations for the enforcement of this title”. (“[T]his title” in section 7805(a) refers the entire Internal Revenue Code.) Such regulations carry the force of law, because the Code imposes penalties for failing to follow them. Sec. 6662(b); see also Merrill & Watts, supra at 477.
And it is also obvious that the regulations in this case, if valid, would bind both respondent and petitioner. We have held that both temporary and final regulations have the force of law, and we give both the same weight. See Schaefer v. Commissioner,
We would therefore conclude that both section 7805(a) and the various more specific Code sections delegate legislative authority to the Secretary.
2. Did the Secretary Intend To Issue Regulations With the Force of Law?
The second part of the American Mining test asks whether the agency intended the regulations to have the force of law. If we go through American Mining’s list of the specific ways an agency can show it intends a rule to have the force of law, we find that two are present here. The first is the Secretary’s invocation of his general authority to issue regulations,
The second is that these regulations effectively changed (or at least tried to change) existing law. American Mining phrased this factor as amending “a prior legislative rule.” This leads to another question left unanswered and unaddressed by the majority: Does Brand X require an agency’s interpretation to be embodied in a legislative rather than an interpretive rule to trump an existing judicial interpretation? Even assuming an agency interpretation can displace the Supreme Court’s, see Hernandez-Carrera v. Carlson,
But we don’t need to puzzle this out. American Mining tells us: “If the answer to any of these questions is affirmative, we have a legislative, not an interpretive rule.” Am. Mining,
B. Section 7805(e) and the APA
Though the Secretary did not subject the regulations to notice and comment, he did issue identical proposed regulations and a Notice of Proposed Rulemaking (NPRM) at the same time as the temporary regulations, as required by section 7805(e)(1). This section directs the Secretary, when issuing temporary regulations, to issue a simultaneous NPRM and sets a 3-year expiration date for all temporary regulations. The legislative history of that section, respondent says, shows that Congress was aware of the Secretary’s procedures of issuing temporary regulations that were effective immediately but without notice and comment.
We do not agree. First we note that nothing in the text of the statute suggests that the notice-and-comment requirement has been waived, nor does the legislative history state that it has. The legislative history does note that the Secretary
Recognizing the importance of maintaining a uniform approach to judicial review of administrative action * * * we have closely examined the * * * claim for an exception to that uniformity. * * * [Congress has specified] in the APA that “no subsequent legislation shall be held to supersede or modify the provisions of this Act except to the extent that such legislation shall do so expressly.” 5 USC § 559. * * * The APA was meant to bring uniformity to a field full of variation and diversity. * * * [Dickinson v. Zurko,527 U.S. 150 , 154—155 (1999).]
Respondent may think that section 7805(e) makes him special when it comes to rulemaking, but the APA makes it clear that he is not.
Giving the public the opportunity to participate through notice and comment is important in giving regulations legitimacy. See United States v. Mead Corp.,
Because these regulations were issued under sections 6230(k) and/or 7805, they are binding and legislative as a matter of administrative law. We would therefore invalidate them on procedural grounds for failure to comply with the APA.
A court should not entirely ignore invalidated regulations — but we cannot give them binding force.
The temporary regulations in question (the temporary regulations) are secs. 301.6229(c)(2)-1T and 301.6501(e)-1T, Temporary Proced. & Admin. Regs., 74 Fed. Reg. 49322 (Sept. 28, 2009).
In its haste to protect the integrity of the judicial system and to fully complete its work, the majority “question[s]” petitioner’s attempts to distinguish Alioto v. Commissioner,
In 1996, sec. 7805(b) was amended by the Taxpayer Bill of Rights 2, Pub. L. 104-168, sec. 1101(a), 110 Stat. 1468 (1996), to limit the retroactive application of Treasury tax regulations. The 1996 amendment is effective with respect to regulations that relate to statutory provisions enacted on or after July 30, 1996. See id. sec. 1101(b), 110 Stat. 1469. The parties seem to agree (and the majority does not dispute) that the 1996 amendment does not apply to the temporary regulations since the statutory provisions in question, secs. 6229(c)(2) and 6501(e)(1)(A), were enacted before that date. Sec. 301.6229(c)(2)-1T, Temporary Proced. & Admin. Regs., supra, was issued under the authority of both secs. 6230(k) and 7805, while sec. 301.6501(e)-1T, Temporary Proced. & Admin. Regs., supra, was issued solely under the authority of sec. 7805. T.D. 9466, 74 Fed. Reg. 49322.
Hernandez-Carrera v. Carlson,
Commentators have not been kind to judges. See, e.g., Sunstein, “Chevron Step Zero”, 92 Va. L. Rev. 187, 221 (2006) (caselaw in “chaos”); Eskridge & Baer, “The Continuum of Deference: Supreme Court Treatment of Agency Statutory Interpretations from Chevron to Hamdan”, 96 Geo. L.J. 1083, 1157 (2008) (caselaw “a mess”); Hickman, “A Problem of Remedy: Responding to Treasury’s (Lack of) Compliance with Administrative Procedure Act Rulemaking Requirements”, 76 Geo. Wash. L. Rev. 1153, 1200 (2008) (Hickman, “A Problem of Remedy”) (“a mess”); Beermann, “End the Failed Chevron Experiment Now: How Chevron Has Failed and Why It Can and Should Be Overruled”, 42 Conn. L. Rev. 779, 808 (2010) (“confusing”); Murphy, “Judicial Deference, Agency Commitment, and Force of Law”, 66 Ohio St. L.J. 1013, 1022 (2005) (a “confusing mess”).
As numerous commentators have concluded, the application of Chevron has developed not necessarily in a consistent direction. See, e.g., United States v. Riverside Bayview Homes, Inc.,
When Treasury regulation drafters find good cause to skip notice and comment, Internal Revenue Manual pt. 32.1.5.4.7.5.1(4) (Aug. 11, 2004) directs them to include the following text in the regulations: “‘These regulations are necessary to provide taxpayers with immediate guidance. Accordingly, good cause is found for dispensing with notice and public comment pursuant to 5 U.S.C. 553(b) and (c)”\ This thin a justification might or might not work, but it is absent from these regulations or the related Treasury Decision. See T.D. 9466, 74 Fed. Reg. 49321 (Sept. 28, 2009). Respondent concedes in his reply brief that he is not relying on this exception.
The Treasury Decision does say thafc the regulations contain a “reasonable interpretation” of the statutory provisions. T.D. 9466, 74 Fed. Reg. 49321, 49322 (Sept. 28, 2009). Perhaps this was the Secretary’s attempt to claim the interpretive exception, but it makes little difference as the APA doesn’t require an explicit assertion of the interpretive-rule exception.
Even by this bright-line rule, however, the applicable regulation isn’t clearly interpretive in the tax-law sense. Though the parties refer to the two regulations in tandem, section 6229 governs partnerships, meaning that the regulation applicable here is section 301.6229(c)(2)-1T, Temporary Proced. & Admin. Regs. See majority op. note 2. This regulation was issued under two sources of authority — section 7805 and 6230(k). The tax-law definition of interpretive has largely been limited to regulations issued solely under section 7805. See Asimow, “Public Participation in the Adoption of Temporary Tax Regulations”, 44 Tax Law. 343, 358 (1991); see also Berg, “Judicial Deference to Tax Regulations: A Reconsideration in Light of National Cable, Swallows Holding, and Other Developments”, 61 Tax Law. 481, 485-486 (2008).
Though the Attorney General’s Manual is not a source of binding law, its definitions are useful as near-contemporaneous constructions of the APA. See Bowen v. Georgetown Univ. Hosp.,
See Warder v. Shalala,
One scholar noted that it was common for some agencies to publish any rule with “legal effect” in the CFR (and recognized this phrase was broader than the “force of law”), and that the court didn’t want to discourage this practice because it is beneficial to the public. 1 Pierce, Administrative Law Treatise, sec. 6.4, at 453 (5th ed. 2010).
The Eighth Circuit addressed the characterization of interpretive versus legislative rules in Drake v. Honeywell, Inc.,
But in Howard E. Clendenen, Inc. v. Commissioner,
The Brand X framework also suggests this result. In Brand X, the Court weighed a prior judicial interpretation against “an agency construction otherwise entitled to Chevron deference”. Natl. Cable & Telecomms. Association v. Brand X Internet Servs.,
Nearly 30 years ago, in Wing v. Commissioner,
Prior law had allowed temporary regulations to linger for a very long time, to the point that courts were beginning to notice a pattern of the Secretary’s growing reliance on temporary regulations without ever finalizing or repealing them. See, e.g., Fleming v. Commissioner,
Though issuing a simultaneous NPRM and seeking post-effective comments is consistent with respondent’s argument, Congress may have intended this to apply only to temporary regulations that already fit into an exception to the APA, especially considering that a need for temporary regulations would normally be expected in emergency or good-cause situations.
Respondent does point to some cases where temporary regulations were relied upon despite not undergoing notice and comment, see UnionBanCal Corp. v. Commissioner,
If respondent had successfirlly promulgated interpretive rules, we would reach this same point.