WHERRY, Judge:
We issued an opinion and entered our decision in this case on September 1, 2009. Relying on Bakersfield Energy Partners, LP v. Commissioner, 128 T.C. 207 (2007), affd. 568 F.3d 767 (9th Cir. 2009), we decided that the adjustments made in respondent's final partnership administrative adjustment (FPAA) on which this case is based are barred by the general 3-year period of limitations in section 6501(a).
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 * * * [Intermountain's] partners' aggregate federal tax liability". Critically, respondent's determination revolved around Intermountain'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, 357 U.S. 28, 33 (1958), in which the Supreme Court was faced with identical language in section 6501(e)(1)(A)'s predecessor—section 275(c) of the Internal Revenue Code of 1939. See Bakersfield Energy Partners, LP v. Commissioner, supra at 215 ("We are unpersuaded by respondent's attempt to distinguish and diminish the Supreme Court's holding in Colony, Inc. v. Commissioner"). The Supreme Court's holding, as we described it, was "that the extended period of limitations applies to situations where specific income receipts have been `left out' in the computation of gross income and not when an understatement of gross income resulted from an overstatement of basis." Id. at 213. The Supreme Court had reviewed the statute's legislative history and determined that Congress had not intended
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, T.C. Memo. 2009-195. Accordingly, in our September 1, 2009, order and decision, we granted petitioner's motion for summary judgment and decided that the adjustments in respondent's FPAA were barred by the general 3-year limitations period. That was not the end of the matter, however.
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)-1T and 301.6501(e)-1T, 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)-1 and 301.6501(e)-1, 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)-1T and 301.6501(e)-1T, 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, 128 T.C. 207 (2007), and by the Courts of Appeals for the Ninth and Federal Circuits in Bakersfield Energy Partners, LP v. Commissioner, 568 F.3d 767 (9th Cir. 2009),
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, 70 T.C. 623, 626 (1978). Respondent urges us to reconsider the case, this time eschewing our prior precedent in favor of the temporary regulations. Petitioner counters that the temporary regulations are either inapplicable, invalid, or otherwise not entitled to deference. On November 25, 2009, we ordered the parties to file briefs. Pursuant to our order, the parties filed opening briefs on January 5, 2010. Petitioner and respondent filed reply briefs on January 27 and February 1, 2010, respectively.
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, 110 T.C. 440, 441 (1998) (motion to reconsider); Kun v. Commissioner, T.C. Memo. 2004-273 (motion to vacate). Motions to reconsider are generally "intended to correct substantial errors of fact or law and allow the introduction of newly discovered evidence that the moving party could not have introduced by the exercise of
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, T.C. Memo. 2008-185.
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, T.C. Memo. 2008-185, respondent further asserts that the issuance of the temporary regulations was an "unusual circumstance" warranting reconsideration of our September 1, 2009, opinion. Petitioner disagrees and attempts to distinguish Alioto v. Commissioner, T.C. Memo. 2008-185, noting that it involved "an act of [C]ongress * * *, not a regulation issued by Respondent, who was a litigant in the case." Along these lines, petitioner warns that "Granting Respondent's Motion under the circumstances of this case would give Respondent
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)-1T(b) and 301.6501(e)-1T(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, 156 F.3d 1076, 1080 (10th Cir. 1998) ("When the meaning of a regulatory provision is clear on its face, the regulation must be enforced in accordance with its plain meaning."). We concluded in our September 1, 2009, opinion 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. The plain meaning of the effective/applicability date provisions indicates that the temporary regulations do not apply to this case.
Respondent argues to the contrary and in doing so begs the question
Under respondent's interpretation, the Court must depart from our precedent in Bakersfield Energy Partners, LP v. Commissioner, 128 T.C. 207 (2007), affd. 568 F.3d 767 (9th
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, 519 U.S. 452, 461 (1997) (internal quotation marks omitted).
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, 440 U.S. 472, 477 (1979) (internal quotation marks omitted). Yet, the exact amount of deference owed to Federal tax regulations remains a source of debate.
Petitioner asserts that the temporary regulations are only entitled to deference under Skidmore v. Swift & Co., 323 U.S. 134, 140 (1944), because they are interpretive regulations. Respondent counters that the more deferential
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., 545 U.S. 967, 982 (2005).
"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:
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, 357 U.S. 28 (1958), found the statutory provision at issue to be unambiguous, we will consider the Court's analysis of both the statutory language and its legislative history.
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.
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.
COLVIN, WELLS, VASQUEZ, GOEKE, KROUPA, and PARIS, JJ., agree with this majority opinion.
COHEN, J., 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, T.C. Memo. 2008-185, emphasizing the difference between congressional action there and what occurred here.
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.
GALE, THORNTON, and MARVEL, JJ., agree with this concurring opinion.
HALPERN and HOLMES, JJ., concurring in the result only:
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.
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.
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, 113 T.C. 309, 327 (1999), affd. 305 F.3d 976 (9th Cir. 2002). Here, undoubtedly, the Secretary did specify something with respect to the retroactivity (applicability) of the temporary regulations; viz, the rules therein "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)-1T(b), 301.6501(e)-1T(b), Temporary Proced. & Admin. Regs., supra. Perhaps the majority believes that the Secretary drafted the temporary regulations intending to limit retroactivity to taxable years for which the 3-year period of limitations had not expired on September 24, 2009, but he (unlike the majority) realizes that that meaning is less than plain and now has changed his mind and is taking advantage of his lack of clarity to pull a fast one.
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., 545 U.S. 967 (2005)), (2) the Secretary has no authority retroactively to overrule the Supreme Court (also implicating Brand X), or (3) even if he does have those authorities, under the so-called law of the case doctrine, we need not acknowledge the temporary regulations in this case. If the majority believes any of those things, then it should explain itself. If not, then it should abandon its effective date analysis (which the majority itself describes only as "a plausible ground to rule against respondent's motions", majority op. p. 220) and address petitioner's well-founded argument that respondent cannot satisfy the high standards established by this Court for granting either a motion to vacate or a motion to reconsider or simply ground its decision on its reason (which we question) for finding the temporary regulations invalid.
In Bakersfield Energy Partners, LP v. Commissioner, 568 F.3d 767, 778 (9th Cir. 2009), affg. 128 T.C. 207 (2007), the Ninth Circuit acknowledged that the Supreme Court in Colony, Inc. v. Commissioner, 357 U.S. 28 (1958), had
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, 467 U.S. 837 (1984), Nat. Muffler Dealers Association, Inc. v. United States, 440 U.S. 472 (1979), or merely Skidmore v. Swift & Co., 323 U.S. 134 (1944);
• 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, 467 U.S. at 842-843; and
• an analysis of the additional question we have to answer after Brand X, 545 U.S. at 984: Did the Supreme Court hold in Colony that its interpretation of the key phrase "omits from gross income an amount properly includible therein" is "the only permissible reading" of the statute?
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, 126 T.C. 96, 180-181 (2006) (Holmes, J., dissenting) (listing circuit conflicts), vacated and remanded 515 F.3d 162 (3d Cir. 2008) (holding regulations entitled to Chevron deference).
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.
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, 467 U.S. at 842. If so, stop. Step two: If Congress has not directly spoken to the question or if what it has said
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, 557 U.S. ___, ___, 129 S.Ct. 2458, 2469 (2009) (implying the statutory text is how Congress speaks directly on an issue); Natl. R.R. Passenger Corp. v. Boston & Me. Corp., 503 U.S. 407, 417 (1992) (comparing the agency's construction only to the statutory text at step one); K Mart Corp. v. Cartier, Inc., 486 U.S. 281, 291 (1988) ("If the agency regulation is not in conflict with the plain language of the statute, a reviewing court must give deference to the agency's interpretation of the statute." (citing United States v. Boyle, 469 U.S. 241, 246 n.4 (1985)));
• consideration only if the text is unclear—Zuni Pub. Sch. Dist. No. 89 v. Dept. of Educ., 550 U.S. 81, 93 (2007) ("if the intent of Congress is clear and unambiguously expressed by
• legislative history used at step one as a traditional tool— FDA v. Brown & Williamson Tobacco Corp., 529 U.S. 120, 130-155 (2000); Pauley v. BethEnergy Mines, Inc., 501 U.S. 680, 697-699 (1991); Pension Benefit Guar. Corp. v. LTV Corp., 496 U.S. 633, 649-650 (1990).
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, 394 F.3d 45, 50 n.2 (1st Cir. 2005) (okay in step one "merely * * * to confirm that it does not resolve the [statutory] ambiguity"); Succar v. Ashcroft, 394 F.3d 8, 22-23 (1st Cir. 2005) (okay in step one);
• Second Circuit—Cohen v. JP Morgan Chase & Co., 498 F.3d 111, 122-124 (2d Cir. 2007) (noting reluctance to rely on legislative history in step one, but then doing it);
• Third Circuit—United States v. Geiser, 527 F.3d 288, 293 (3d Cir. 2008) (excludes legislative history in step one);
• Fourth Circuit—Compare Dominion Res., Inc. v. United States, 219 F.3d 359, 365 (4th Cir. 2000) (okay in step one), and Brown & Williamson Tobacco Corp. v. FDA, 153 F.3d 155, 162 (4th Cir. 1998) (same), affd. 529 U.S. 120 (2000), with Granutec, Inc. v. Shalala, 46 U.S.P.Q.2d 1398, 1404 (4th Cir. 1998) (unpublished decision) (only in step two);
• Sixth Circuit—Compare Johnson City Med. Ctr. v. United States, 999 F.2d 973, 976 (6th Cir. 1993) (okay in step one even if statute is clear), with Alliance for Cmty. Media v. FCC, 529 F.3d 763, 778 (6th Cir. 2008) (consider in step two);
• Seventh Circuit—Compare Univ. of Chi. Hosps. v. United States, 545 F.3d 564, 569 (7th Cir. 2008) (refusing to consider legislative history after finding statute unambiguous), with Khan v. United States, 548 F.3d 549, 556 (7th Cir. 2008) ("we proceed to Chevron's second step. * * * In this step, we can take into account extrinsic sources such as legislative history.");
• Eighth Circuit—Compare Ark. AFL-CIO v. FCC, 11 F.3d 1430, 1440 (8th Cir. 1993) (allows legislative history in step one, but only if intent is not clear from the statute's plain language), with Mayo Found. for Med. Educ. & Research v. United States, 568 F.3d 675, 681-682 (8th Cir. 2009) (considering legislative history in step two);
• Ninth Circuit—Compare Natural Res. Def. Council, Inc. v. U.S. EPA, 526 F.3d 591, 603 (9th Cir. 2008) (considering legislative history in step one), with Schneider v. Chertoff, 450 F.3d 944, 955 n.15 (9th Cir. 2006) (courts cannot consider legislative history in step one);
• Tenth Circuit—Anderson v. U.S. DOL, 422 F.3d 1155, 1180 (10th Cir. 2005) (okay in step one); Cliffs Synfuel Corp. v. Norton, 291 F.3d 1250, 1257 (10th Cir. 2002) (same); Utah v. Babbitt, 53 F.3d 1145, 1148 (10th Cir. 1995) (same);
• Eleventh Circuit—Guar. Fin. Servs., Inc. v. Ryan, 928 F.2d 994, 1003-1004 (11th Cir. 1991) (use in step one after finding statute ambiguous);
• D.C. Circuit—Sierra Club v. EPA, 551 F.3d 1019, 1027 (D.C. Cir. 2008) (legislative history okay in step one even to create ambiguity); Am. Bankers Association v. Natl. Credit Union Admin., 271 F.3d 262, 267 (D.C. Cir. 2001) (same); Natural Res. Def. Council, Inc. v. Browner, 57 F.3d 1122, 1126-1127 (D.C. Cir. 1995) (same); and
• Federal Circuit—Amber-Messick v. United States, 483 F.3d 1316, 1323-1324 (Fed. Cir. 2007) (used in both steps);
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, 357 U.S. at 33, triggered not only that Court's own look at legislative history, but the authority of the Secretary to issue the regulation we have before us.
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, 545 U.S. at 982 (emphasis added).
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, 390 F.Supp.2d 437 (E.D. Penn. 2005), affd. on other grounds 489 F.3d 558 (3d Cir. 2007). In an earlier case, the Third Circuit held that the Age Discrimination in Employment Act banned treating retirees who were eligible for Medicare differently from those who were not in providing health benefits. See Erie County Retirees Association v. County of Erie, 220 F.3d 193 (3d Cir. 2000). The Court carefully reviewed the legislative history to reach its conclusion. See id. at 205-208.
Then out popped a contrary regulation from the EEOC. The District Court judge faced with the regulation-vs.-precedent question reasoned that
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, 503 F.Supp.2d 1164, 1174 (D. Minn. 2007) (drawing similar distinction in light of Brand X), revd. 568 F.3d 675 (8th Cir. 2009).
AARP 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, 870 F.2d 1340, 1342 (7th Cir. 1989), suggested that legislative history may be used as a dictionary of sorts—to determine Congress's objective rather than subjective intent. Id. at 1343 ("`we ask, not what
Used in this way, legislative history in step one may present fewer problems. Rereading Colony, Inc. v. Commissioner, 357 U.S. 28 (1958), with this distinction in mind might lead one to conclude that the Court was using legislative history to discern the best reading of ambiguous statutory language in light of the specific problems its drafters had in mind. See id. at 33-35. If so, the holding of Colony is not that "omission" necessarily means "omission of a particular item", but only that that's the best reading until and unless a regulation clarifying the admitted ambiguity of "omits from gross income an amount properly includible therein" is validly issued.
Few 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.
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:
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
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., 995 F.2d 1106 (D.C. Cir. 1993), has become the "dominant standard". Hickman, "Coloring Outside the Lines", supra at 1766; see also 1 Pierce, Administrative Law Treatise, sec. 6.4, at 454 (5th ed. 2010) (citing adoption of the test in six circuits including the Tenth and D.C. Circuits).
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, 400 F.3d 29, 34-35 (D.C. Cir. 2005); Mission Group Kan., Inc. v. Riley, 146 F.3d 775, 784 (10th Cir. 1998).
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, 105 T.C. 227, 229 (1995). Both temporary and final regulations give rise to penalties. Sec. 6662(b); sec. 1.6662-3(b)(2), Income Tax Regs.; Hickman, "Coloring Outside the Lines", supra at 1738-1739. And both general- and specific-authority regulations also give rise to penalties, so the Secretary's issuance of these regulations under section 7805 makes no difference. Hickman, "Coloring Outside the Lines", supra at 1762-1763 ("Regulations that bind both the government and regulated parties are legislative, whether promulgated pursuant to specific or general statutory authority." (citing Shalala v. Guernsey Meml. Hosp., 514 U.S. 87, 99 (1995), and several other sources)).
We would therefore conclude that both section 7805(a) and the various more specific Code sections delegate legislative authority to the Secretary.
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, 547 F.3d 1237 (10th Cir. 2008), we think the answer must be yes, in part because when there is otherwise binding judicial precedent, an agency interpretation asserting a contrary interpretation amounts to a change in the law.
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, 995 F.2d at 1112. So even if our reasoning on this second way of finding agency intent is wrong, it remains true that the Secretary explicitly invoked his legislative authority in promulgating these regulations and Congress entrusted him with that power. That makes them legislative.
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
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., 533 U.S. 218, 230 (2001); Christensen v. Harris County, 529 U.S. 576, 587 (2000); Chrysler Corp. v. Brown, 441 U.S. at 316; see also Hickman, "A Problem of Remedy: Responding to Treasury's (Lack of) Compliance with Administrative Procedure Act Rulemaking Requirements", 76 Geo. Wash. L. Rev. 1153, 1201 (2008) (Hickman, "A Problem of Remedy") ("The APA and its notice-and-comment rulemaking procedures reflect congressional goals of simultaneously facilitating government rulemaking and protecting individual rights through public participation."); id. at 1204 ("While perhaps less than ideal, the APA notice-and-comment process, coupled with judicial review of the agency's adherence to that process, serves as a second-best proxy for the legislative process when Treasury or any other agency seeks to bind the public with regulations having the force and effect of the statutes they purport to interpret.").
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.
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 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.
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, 467 U.S. at 843; fn. refs. omitted.]
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, 467 U.S. at 862. It has continued to do so in more recent opinions, and we deduce that it intends to continue this practice. See Gen. Dynamics Land Sys., Inc. v. Cline, 540 U.S. 581, 587-590, 600 (2004); see also Zuni Pub. Sch. Dist. No. 89 v. Dept. of Educ., 550 U.S. 81, 90-91 (2007). Nevertheless, on occasion, the Court has stopped short of employing traditional tools of statutory construction, including legislative history. See Negusie v. Holder, 555 U.S. ___, ___, 129 S.Ct. 1159, 1183 (2009) (Thomas, J., dissenting).
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, 450 F.3d 944, 955 n.15 (9th Cir. 2006) ("Although we cannot consider legislative history under the first prong of Chevron, * * * we note that the Secretary's regulation subverts the very intent of the Nursing Relief Act."). In any event, we will not speculate as to the precise meaning of the Court of Appeals' statement, particularly when, as in this case, we are not bound by that court's caselaw because this case is not appealable, absent stipulation to the contrary, to that court. See Golsen v. Commissioner, 54 T.C. at 757.
But in Howard E. Clendenen, Inc. v. Commissioner, 207 F.3d 1071, 1074 (8th Cir. 2000), affg. T.C. Memo. 1998-318, the Eighth Circuit may have held that regulations that the Secretary issued without specific authority do not have the force of law, though it did refer to them as law, see id. ("Congress considered then-existing law—namely, Section 402(e)(3), together with its regulations"), and appeared to give them legal effect, id. at 1075 (citing the regulations for its conclusions without further sources).
