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Friday, April 27, 2012

Supreme Court Resolves §6501 Limitations Issue but Deference Accorded to Treasury Regulations Remains Somewhat Murky

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 The U.S. Supreme Court’s 5-4 decision in U.S. v. Home Concrete & Supply LLC, v. Comr., No. 11-139 (S. Ct. 4/25/12) seems clear enough – an overstatement of an asset’s basis resulting in an understatement of gain on its sale is not an “omission from gross income” of 25% or more for purposes of §6501(e)(1)(A) such that the normal three-year statute of limitations on assessment is extended to six years. Justice Breyer, writing for the majority, found that the Court’s earlier decision in Colony, Inc. v. Comr., 357 U.S. 28 (1958) -- interpreting a provision of the 1939 Code that was materially indistinguishable from the language at issue in current §6501(e)(1)(A) -- controlled the present case. Finding to the contrary effectively would have overruled Colony, a course of action that “basic principles of stare decisis wisely counsel us not to take,” Breyer noted.

What remains somewhat unclear following the decision is the degree of deference that should be accorded to the Government in issuing regulations that address ambiguous statutes or fill statutory gaps. In Home Concrete, the IRS asserted that its interpretation of the statute and Colony in Regs. §301.6501(e)-1 -- which clearly provided that “an understated amount of gross income resulting from an overstatement of unrecovered cost or other basis constitutes an omission from gross income” – should be granted deference under Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984) and Mayo Foundation for Medical Ed. and Research v. U.S., 131 S. Ct. 704 (2011) (in which the Court definitively ruled that only Chevron principles applied when determining the deference to be given Treasury regulations). Justice Breyer concluded that, “Colony already has interpreted the statute, and there is no longer any different construction that is consistent with Colony and available for adoption by the agency.” Citing National Cable & Telecommunications Assn. v. Brand X Internet Services, 545 U.S. 967 (2005), the Court explained that a court’s prior judicial interpretation of a statute trumps an agency’s construction otherwise entitled to Chevron deference only if the prior court decision follows from the unambiguous terms of the statute. The Court further explained that, although it is for agencies rather than courts to fill statutory gaps, the fact that a statute is unambiguous means that “there is no gap for the agency to fill” and thus “no room for agency discretion.”

Following the Mayo decision, many practitioners believed that the decision would be a “green light” of sorts for Treasury to aggressively exercise its rule-making authority, much like its position in issuing Regs. §301.6501(e)-1. However, Home Concrete would seem to place some limits on Treasury’s efforts. The extent of those limits may not be entirely clear, however, at least according to the dissenting opinions of Justices Scalia and Kennedy in Home Concrete. Justice Scalia observed that, having decided to stand by Colony and Brand X, the majority should have found that the Treasury’s current interpretation of §6501(e)(1)(A) was unreasonable in order to reach its decision. Justice Scalia noted that, “instead of doing what Brand X would require-however, the plurality manages to sustain the justifiable reliance of taxpayers by revising yet again the meaning of Chevron – and revising it yet again in a direction that will create confusion and uncertainty.” Justice Scalia’s takeaway from Home Concrete is that, post-Chevron, a finding of ambiguity is accompanied by a finding of agency authority to resolve the ambiguity, but pre-Chevron, that was not the case, a false premise he believes. Justice Scalia concluded that, “rather than making the Court’s judicial review jurisprudence curiouser and curiouser, the Court should abandon the opinion that produces these contortions, Brand X.”

For his part, Justice Kennedy, with whom Justices Ginsburg, Sotomayor and Kagan joined, believed that revisions to §6501(e)(1)(A) enacted as part of the 1954 revision of the Code were meaningful and thus left room for Treasury’s interpretation in the regulations. Citing Brand X’s conclusion that a judicial construction of an ambiguous statute does not foreclose an agency’s later, inconsistent interpretation of the same provision, Justice Kennedy observed that there was a “serious difficulty” in the majority’s insisting that an ambiguous provision had to be read the same way even after it had been re-enacted with additional language suggesting that Congress would allow for a different interpretation. Justice Kennedy concluded that the majority’s approach foreclosed later interpretations of a law that had changed in relevant ways, and that the majority had gone too far in “constricting Congress’ ability to leave agencies in charge of filling statutory gaps.”

[Editor’s Note: Although not addressed by the Court in Home Concrete, §6229(c)(2) and the regulations thereunder, which reference §6501(e)(1)(A) in the context of TEFRA cases, presumably should be read and interpreted in the same manner following the decision.]

For a further discussion of §6501(e)(1)(A), see 627 T.M., Limitations Periods, Interest on Underpayments and Overpayments, and Mitigation. For a further discussion of §6229(c)(2), see 624 T.M., Audit Procedures for Pass-Through Entities.

Kenneth S. Savell, J.D. LL.M (Tax)
IRS Practice and Procedure Group
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