Horowitz Summary of Home Concrete

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29/12 Argument preview: Can the Treasury Departments statutory interpretation trump the Court? : SCOTU

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Argument preview: Can the Treasury Departmentsstatutory interpretation trump the Court?

IntroductionDepending on how the Court resolves a threshold issue, United States v. Home Concrete & Supply, LLC(scheduled for oargument on January 17) could yield a decision of broad importance or instead one of interest only to tax lawyers. Theultimate issue concerns the scope of an extended statute of limitations applicable only to tax cases. The first possibleground for decision is purely a matter of interpreting the language of the tax statutes. But the government faces significanthurdles on that ground, notably the Courts 1958 decision in The Colony, Inc. v. Commissioner, which interpreted the samewords in a predecessor statute in accordance with the taxpayers position. If the Court rejects the governments position ththe statutory language alone is dispositive, the case will move to the second issue presented whether the Court mustadopt the governments statutory construction because Chevron requires it to defer to recently promulgated Treasuryregulations. A decision on that issue could be a significant administrative-deference precedent that would have broadramifications outside the tax context as well.BackgroundGenerally, the IRS has three years from filing to assess addi tional tax. Under 26 U.S.C. 6501(e)(1)(A), however, there isan extended six-year statute of limitations if the taxpayer omits from gross income a significant amount that it should haveincluded. A similar provision governing partnership tax returns is found at 26 U.S.C. 6229(c)(2). The question presentedin Home Concrete is whether the phrase omits from gross income includes a situation where a taxpayer overstates its taxbasis. (Basis is a tax concept that reflects adjusted cost; overstating the basis of sold property causes an understatemenof the gross income from the sale.)

The textual question in this case goes back almost seventy years. The 1939 Internal Revenue Code, which was latersuperseded by the 1954 Code, contained a provision with language identical to that of current Section 6501(e)(1)(A).Taxpayers argued that the extended statute of limitations applied only to a failure to list an item of gross income on thereturn. The government argued that the extended statute also applied when there was an overstatement of basis, becausethat leads to an understatement of gross income. The issue generated a circuit conflict and eventually made it to theSupreme Court in the Colonycase.In the meantime, Congress enacted the 1954 Code, which largely carried forward the previous statute. Congress did notchange the omits from gross income language, but it did add a new subsection that specifically defined gross income inthe case of a trade or business in a way that prevents an overstatement of basis from being an omission of gross income.Thereafter, the Colonycase arrived in the Supreme Court. Construing the 1939 Code, the Court ruled for the taxpayer,holding that the statute is limited to situations in which specific receipts or accruals of income are left outof the computatioof gross income. Little did the Court know that fifty years later litigants would be parsing i ts reasoning to see how the casfits into the framework ofChevron specifically, whether the ColonyCourt should be understood to have found the statutolanguage before it unambiguous. Two statements by the ColonyCourt are particularly relevant. First, the Court stated tha


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although the statutory text lends itself more plausibly to the taxpayers interpretation, it cannot be said that the language isunambiguous. The Court then found additional support for the taxpayer in the legislative history. Second, having beenurged by the parties to consider whether the new legislation shed any light on the meaning of the 1939 Code, the Courtstated that its conclusion was in harmony with the unambiguous language of the 1954 Code.Fast forward fifty years. The issue has lain dormant, as everyone assumed that Colonycontrolled the interpretation of theidentical language in the 1954 Code. The IRS learned that many taxpayers had engaged in a series of securitiestransactions that came to be known as a Son-of-BOSS transaction. Sparing you the gory details, the IRS views thistransaction as a tax avoidance scheme that manipulates certain tax rules to produce an artificially inflated basis. The IRShas successfully challenged these transactions, with the courts generally concluding that they lack economic substanceand therefore the taxpayers cannot take advantage of the apparent tax benefits. But in many cases, the standard three-yeastatute of limitations had expired before the IRS could challenge the tax treatment.

Accordingly, the IRS began to argue that the extended six-year statute of limitations applied to these transactions becausethey involved an overstatement of basis. It contended that Colonywas not controlling because the Courts decision shouldbe limited to the 1939 Code and that a different result should obtain in the Son-of-BOSS cases (which arise outside thetrade or business context and hence are not encompassed within the new subsection added in 1954). This argumentinitially fell flat in the courts, as the Tax Court and the Ninth and Federal Circuits held that Colonycontrols.The government then moved to Plan B. The Treasury Department issued temporary regulations interpreting the omits fromgross income language to include overstatements of basis. (These regulations have since been issued without materialchange as final regulations after a notice-and-comment period.) In a motion for reconsideration, the government then askethe Tax Court to reverse its position on the ground that an intervening change in the law required it to accord Chevrondeference to the new regulatory interpretation. The Tax Court was unimpressed, voting thirteen to zero against thegovernment in three different opinions resting on distinct grounds.Unfazed, the government filed appeals in several circuits and succeeded in generating a circuit conflict. One court agreedwith the governments statutory argument. Two courts ruled for the taxpayer, holding that afterColonythere was no

ambiguity for the Treasury Department to interpret and thus no room for deference. Three courts ruled for the governmenton Chevron deference grounds. The Court granted certiorari in Home Concrete to resolve the conflict.ArgumentsWith respect to the meaning of the statute, the taxpayer rests primarily on Colony, characterizing the IRS as havingoverruled that decision. The taxpayer argues that its reliance on stare decisis is buttressed by Congresss reenactment othe same statutory language in later years, thereby putting a legislative stamp on the Courts interpretation of the wordsomits from gross income in Colony.The government in turn argues that Colonyis irrelevant because it involved a different statute, which was materiallychanged in 1954 when Congress added a subsection making clear that there is no extended statute of limitations foroverstatements of basis by a trade or business. Implicit in Congresss decision to make that addition was its understandinthat overstatements of basis would be covered outside of the trade or business context; otherwise, the new provision wouldbe superfluous. The taxpayer responds that the new subsection is not superfluous and that it is absurd to conclude that th1954 Code cut back on taxpayers statute of limitations protections when the only changes made to the statute favoredtaxpayers.

In addition to the Colony-related arguments, both sides argue that their position reflects the best reading of the statutory texand purpose. The taxpayer argues that omits means leaving something out, while the government emphasizes thatoverstatements of basis inevitably cause an understatement (that is, an omission of a portion) of gross income.The taxpayer makes a couple of other narrow arguments that could theoretically divert the Court from reaching thedeference issue: (1) the regulations were procedurally defective; and (2) by their terms, the regulations do not apply whenthe three-year statute of limitations had already expired before the regulations were promulgated. These arguments did noprevail in any court of appeals, and the Court is unlikely to adopt them, which would lead the Court to the deference issue.Back in 1971, the Second Circuit stated that the Commissioner may not take advantage of his power to promulgateretroactive regulations during the course of litigation for the purpose of providing himself with a defense based on thepresumption of validity accorded to such regulations. Basically, the government argues that the Courts Chevronurisprudence has overridden this view. In Smiley v. Citibank, N.A., the Court afforded deference to a regulation in a casethat was already pending when the regulation was issued, stating that it was irrelevant whether the regulation was prompteby litigation. In National Cable & Telecommunications Assn v. Brand X Internet Services, the Court afforded deference to

regulation that overturned existing court of appeals precedent, holding that a courts prior judicial construction of a statutetrumps an agency construction otherwise entitled to Chevron deference only if the prior court decision holds that itsconstruction follows from the unambiguous terms of the statute and thus leaves no room for agency discretion. Put thosetwo together, the government argues, and there is no justification for failing to defer to Treasurys interpretation becauseColonyhad described the 1939 statute as not unambiguous.Not so fast, says the taxpayer, arguing that, afterColony, the law was settled and there was no ambiguity that couldpermissibly be clarified by regulation. Smileyis different, because the regulation there did not overturn a previously settleinterpretation. Brand Xis not applicable because Colonyis properly read as having held that Congress did unambiguouslexpress its intent not to include overstatements of basis. More generally, the taxpayer contends that the retroactive effect othe governments position is a bridge too far that is not authorized by these precedents. Among the several amicus briefssupporting the taxpayer, the brief of the American College of Tax Counsel focuses on this point, asserting that retroactivefighting regulations designed to change the outcome of pending litigation are inconsistent with the highest traditions of therule of law and should not be afforded Chevron deference.

Analysis


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At the end of the day, the deference issue may turn on the Courts comfort level with the amount of authority the governmeis asking courts to concede to agencies particularly an agency frequently in a position to advance its fiscal interestthrough regulations that will affect its own litigation. That general topic has been flagged in the court of appeals opinions.In the Federal Circuit decision holding that the new regulation trumped that courts precedent, the court observed that thecase highlights the extent of the Treasury Departments authority over the Tax Code because Congress has the power togive regulatory agencies, not the courts, primary responsibil ity to interpret ambiguous statutory provisions. Conversely,Judge Wilkinson cautioned in his concurring opinion in this case that agencies are not a law unto themselves, but mustoperate in a system in which the last words in law belong to Congress and the Supreme Court. In his view, thegovernments invocation ofChevron deference in this case wrongly pass[es] the point where the beneficial application ofagency expertise gives way to a lack of accountability and risk of arbitrariness.In recent years, the Court has not evinced much concern over the amount of power that its Chevron jurisprudence has give

to agencies, but this case could induce it to take a closer look. Justice Scalias position wi ll be of particular interest.Justice Scalia was an early force in the development ofChevron deference, but recently he has expressed someuneasiness about its scope. He dissented in Brand X, commenting that the decision was creating a breathtaking novelty:udicial decisions subject to reversal by executive officers. And just last June, he noted in a concurring opinion in Talk

America, Inc. v. Michigan Bell Telephone Co., that he would be open to reconsideringAuer v. Robbins (a decision that heauthored in 1997) because its rule of extreme deference to an agencys interpretations of its own regulations encouragesthe agency to enact vague rules which give it the power, in future adjudications, to do what it pleases.

Posted in U.S. v. Home Concrete & Supply, Featured, Merits CasesRecommended Citation: Alan Horowitz,Argument preview: Can the Treasury Departments statutory interpretation trumpthe Court?, SCOTUSblog (Jan. 14, 2012, 12:00 PM), http://www.scotusblog.com/2012/01/argument-preview-can-the-treasu

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