Tax Controversy Alert
[Note: More detailed versions of this analysis can be found on the Miller & Chevalier Tax Appellate Blog and on SCOTUSblog.]
The Supreme Court last month ruled 5-4 in favor of the taxpayer in United States v. Home Concrete and Supply, LLC, No. 11-139 (April 25, 2012), thus putting an end to the widespread litigation concerning whether the extended six-year statute of limitations of section 6501(e) applies to an overstatement of basis. The Tax Court first resolved that issue in favor of the taxpayer by a 13-0 vote in Intermountain Ins. Serv. of Vail, L.L.C. v. Comm'r, 134 T.C. 211 (2010), rev'd, 650 F.3d 691 (D.C. Cir. 2011). Subsequently, however, four of six courts of appeals ruled for the government, leading to Supreme Court review of the issue. The Court's opinion was authored by Justice Breyer and joined in full by three other Justices, but Justice Scalia joined only in part. That splintered vote yields a definitive resolution of the basic tax issue, but less definitive guidance on the broader administrative law issues implicated in the case.
The statutory construction issue turned on the continuing vitality of the Court's decision in The Colony, Inc. v. Commissioner, 357 U.S. 28 (1958). Colony held that the "omits from gross income" language in the predecessor of section 6501(e) in the 1939 Code did not encompass overstatements of basis, and hence the extended six-year statute of limitations did not apply in those situations. The government argued that Colony did not control the interpretation of the same language in current section 6501(e), because changes elsewhere in that section suggested that Congress might have intended a different result in the 1954 Code.
The administrative law issues came into play because, after two courts of appeals had ruled that Colony controlled the interpretation of the 1954 Code, Treasury issued regulations interpreting the "omits from gross income" language in the 1954 Code to reach a different result and the IRS applied that regulatory interpretation to all open tax years. Under National Cable & Telecommunications Ass'n v. Brand X Internet Services, 545 U.S. 967 (2005), the government argued, an agency is empowered to issue regulations that define a statute differently from an existing court decision, so long as the court decision did not declare the statutory language unambiguous. Because the Colony opinion had stated that the 1939 Code language standing alone was "not unambiguous," the government argued (and the D.C., Federal, and Tenth Circuits agreed) that Treasury's new regulations are entitled to Chevron deference that overrides any precedential effect that Colony would otherwise have had in interpreting the current statute.
The Court's Opinion
Justice Breyer's opinion for the Court dealt straightforwardly with the basic tax issue, finding that Colony controlled the interpretation of identical language in the 1954 Code. With respect to the statutory changes made elsewhere in section 6501(e), the Court concluded that "these points are too fragile to bear the significant argumentative weight the Government seeks to place upon them." (That conclusion was the major point of disagreement with the four dissenting Justices, who concluded that those changes are "meaningful" and "strongly favor" the conclusion that the 1954 Code should not be interpreted the same way that the Court interpreted the 1939 Code in Colony.)
The Court then turned to the government's argument that, under Brand X, the new regulations were owed deference despite Colony. The opinion first answered with a two-sentence subsection: "We do not accept this argument. In our view, Colony has already interpreted the statute, and there is no longer any different construction that is consistent with Colony and available for adoption by the agency." These two sentences sufficed for Justice Scalia, who explained in a separate concurring opinion that he is adhering to the view expressed in his dissent in Brand X – namely, that an agency cannot issue regulations reinterpreting statutory language that has been definitively construed by a court.
Those two sentences were not enough for the other Justices in the majority, however, because Brand X said that an agency can adopt a construction different from that provided in a prior court decision so long as the statute was ambiguous. Justice Breyer's opinion then proceeded to explain why this principle did not lead to a ruling for the government, despite the Colony Court's observation that the text was "not unambiguous." Because Justice Scalia did not join this portion of the opinion, it represents the view of only four Justices and is characterized as a "plurality opinion" whose reasoning is not necessarily controlling in future cases.
According to the plurality, Brand X should be given a more nuanced reading that looks to whether a prior judicial decision found a statute to be "unambiguous" in the sense that the court concluded that Congress intended to leave "‘no gap for the agency to fill' and thus ‘no room for agency discretion.'" That conclusion need not rest entirely on the statutory text; rather, Congress's intent can be divined using the "traditional tools of statutory construction." The plurality then ruled that the Court in Colony had concluded that Congress had definitively resolved the legal issue. The Colony Court's opinion as a whole – notably, its view that the taxpayer had the better interpretation of the statutory language and had additional support from the legislative history – showed that the Court believed that Congress had not "left a gap to fill," even if the language standing alone was "not unambiguous." Therefore, the Court was obligated to follow Colony and could not defer to the regulation. (By contrast, the dissenters believed that regular Chevron deference applied because the regulation interpreted a statute that was meaningfully different from the statute interpreted in Colony.)
Impact of the Decision
Home Concrete definitively resolves the specific tax issue. The six-year statute of limitations does not apply to overstatements of basis. The courts therefore will dismiss as untimely the multitude of cases pending administratively and in the courts that involve IRS challenges to Son-of-BOSS shelters commenced after the three-year statute of limitations had expired. That holding will apply to future tax years as well. Although the retroactive nature of the Treasury regulations was a significant point of contention in the Home Concrete litigation, retroactivity did not play a role in the final resolution. The Court simply held that Colony is controlling and leaves no room for Treasury to construe the "omits from gross income" language differently. Thus, it will require Congressional action to extend the six-year statute to overstatements of basis even prospectively.
The effect of the decision on administrative law generally is considerably more muddled. First, a couple of observations on what the Court did not do. It did not signal any retreat from Mayo Foundation for Medical Ed. and Research v. United States, 131 S. Ct. 704 (2011). Treasury regulations addressed to tax issues will continue to be judged under the same Chevron deference principles that apply to regulations issued by other agencies. Furthermore, as noted above, the Court did not rely on the retroactive aspect of the regulations. Thus, the decision does not provide guidance one way or another on the extent to which Treasury is constrained in its ability to apply regulations to earlier tax years.
What the Court did do, however, is weaken the authority of Brand X. Under the reasoning of Justice Breyer's plurality opinion, courts are now free to decline to defer to a regulatory interpretation that construes ambiguous statutory language – if the court concludes that a prior court decision, using "traditional tools of statutory construction" that go beyond the text, determined that Congress intended to resolve the issue rather than leave a gap for the agency to fill. Although there were only four votes for that proposition, Justice Scalia's approach would lead him to agree with such a result just as he did in Home Concrete, so lower courts will likely treat the plurality opinion as controlling on this point. There is, however, some room for debate about the scope of the Home Concrete reasoning. Justice Breyer's opinion emphasized that Colony was decided long before Chevron, and lower courts may disagree regarding its impact when the court decision at issue is post-Chevron and, in particular, post-Brand X. At a minimum, the Home Concrete decision should make agencies less confident in their ability to use regulations to overturn judicial interpretations of statutes and should give taxpayers more ammunition to challenge such regulations if necessary.
In addition, the Home Concrete opinion could prove somewhat useful to taxpayers trying to oppose Chevron deference to regulations, even outside the Brand X context where a favorable judicial interpretation exists. Justice Breyer's opinion relied in part on footnote 9 of Chevron, which states that "[i]f a court, employing traditional tools of statutory construction, ascertains that Congress had an intention on the precise question at issue, that intention is the law and must be given effect." That citation supports the proposition that Chevron step 1 analysis can always look beyond the statutory text – a proposition that is certainly not front and center in more recent Chevron jurisprudence. If that portion of Justice Breyer's opinion had commanded a majority, it would be extremely significant because it would justify a court deciding that a statute whose text standing alone is ambiguous nonetheless leaves no room for agency interpretation, so long as other tools of statutory construction show that Congress intended to resolve the issue rather than leaving a gap for the agency. In contrast to the Brand X analysis, however, the plurality opinion cannot be treated as controlling on this point because Justice Scalia would surely look askance at a decision that used legislative history to find a lack of ambiguity at Chevron step 1. But by the same token, the dissenters had no occasion to address this point, so we do not know if any of them would have agreed with Justice Breyer's approach. For now, it is fair to say that Justice Breyer has heightened the visibility and potential importance of Chevron footnote 9, but that Home Concrete alone probably will not yield a significant change in how courts approach Chevron step 1.
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