Opinion analysis: No six-year statute of limitation on overstatement of basis
on May 1, 2012 at 11:33 am
Last week the Court issued its decision in United States v. Home Concrete and Supply, LLC, ruling in favor of the taxpayer by a vote of five to four. The result is a definitive resolution of the particular tax dispute before the Court – whether the six-year statute of limitations applies to an overstatement of basis – but a much less definitive resolution of the broader administrative law issue implicated in the case.
The basic tax dispute revolved around the continuing vitality of the Court’s 1958 decision in The Colony, Inc. v. Commissioner. Generally, there is a three-year statute of limitations for the IRS to contest liabilities reported on tax returns, but the tax law has long provided for an expanded six-year statute of limitations when the return “omits from gross income” a substantial amount that should have been included. Interpreting a provision in the 1939 Internal Revenue Code, the Court held in Colony that this statutory language did not encompass situations where the tax return understates gross income because it overstates the taxpayer’s basis in an asset; thus, 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 Section 6501(e) of the current law (the 1954 Code), because changes elsewhere in that section suggested that Congress might have intended a different result in the 1954 Code.
The administrative law issue came into play because, after two courts of appeals had ruled that Colony controlled the interpretation of the 1954 Code, the government tried an end run around that precedent. The Department of the Treasury (of which the IRS is a part) issued regulations interpreting the “omits from gross income” language in the 1954 Code as including overstatements of basis, hence bringing them within the six-year statute of limitations. Under National Cable & Telecommunications Ass’n v. Brand X Internet Services, the government argued, an agency is empowered to issue regulations giving a statute a different interpretation than an existing court decision, so long as the court decision did not declare the statutory language unambiguous. Because the Colony opinion had indicated that the language in the 1939 Code, standing alone, was “not unambiguous,” the government argued that Treasury’s new regulations were entitled to Chevron deference, which would supplant any precedential effect that Colony would otherwise have on the interpretation of the 1954 Code provision.
Justice Breyer wrote the opinion for the Court, which the Chief Justice and Justices Alito and Thomas joined in full, but which Justice Scalia joined only in part. In particular, Justice Scalia joined Justice Breyer’s analysis of the basic tax issue, but departed from his analysis of the administrative law issue.
The opinion dealt straightforwardly with the basic tax dispute. First, the Court emphasized that the critical “omits from gross income” language in the current statute is identical to the 1939 Code language construed in Colony, and it recounted the Colony Court’s reasoning that led it to conclude that the language does not encompass overstatements of basis. Colony controls this case, the Court held, because it “would be difficult, perhaps impossible, to give the same language here a different interpretation without effectively overruling Colony, a course of action that basic principles of stare decisis wisely counsel us not to take.” 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.” The Court addressed each of these changes and concluded that none called for a different interpretation of the key language (and that one of the government’s arguments was “like hoping that a new batboy will change the outcome of the World Series”).
The Court then turned to the administrative law issue, reciting the government’s position that, under Brand X, the new regulations were owed deference despite the Court’s prior construction of the language in Colony. The opinion first responded to that position 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.”
Standing alone, that was not much of a response to the government’s Brand X argument, because Brand X said that the agency can adopt a different construction than a prior court decision so long as the statute was ambiguous. These two sentences were enough for Justice Scalia, however, and he ended his agreement with Justice Breyer’s opinion at this point. In a separate concurring opinion, Justice Scalia explained that he is adhering to the view expressed in his dissent in Brand X that an agency cannot issue regulations reinterpreting statutory language that has been definitively construed by a court.
With the other Justices in the majority not feeling free to ignore Brand X, Justice Breyer’s opinion (now a plurality opinion) then proceeded to explain why Brand X did not require a ruling for the government. According to the plurality, Brand X should be given a more nuanced reading than that urged by the government, one 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.’” Under Chevron jurisprudence, the opinion continued, unambiguous statutory language provides a “clear sign” that Congress did not delegate gap-filling authority to an agency, while ambiguous language provides “a presumptive indication that Congress did delegate that gap-filling authority.” That presumption is not conclusive, however, and thus this reading of Brand X leaves room for a court to conclude that a judicial interpretation of ambiguous statutory language can foreclose an agency from issuing a contrary regulatory interpretation. In support of that proposition, the plurality quoted 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.”
The plurality then ruled that the Court in Colony had concluded that Congress had definitively resolved the legal issue and left no gap to be filled by a regulatory interpretation. Given its analysis of the scope of Brand X, the plurality explained that the Colony Court’s statement (thirty years before Chevron) that the statutory language was not “unambiguous” did not necessarily leave room for the agency to act. Rather, the Colony Court’s opinion as a whole – notably, its view that the taxpayer had the better interpretation of the statutory language and its examination of the legislative history – showed that the Court believed that Congress had not “left a gap to fill.” Therefore, “the Government’s gap-filling regulation cannot change Colony’s interpretation of the statute,” and the Court today is obliged by stare decisis to follow it.
Justice Kennedy’s dissent, joined by Justices Ginsburg, Sotomayor, and Kagan, reached a different conclusion on the basic tax dispute. The dissent looked at the statutory changes made in the 1954 Code and concluded that they are “meaningful” and “strongly favor” the conclusion that the “omits from gross income” language in the 1954 Code should not be read the way the Colony Court read that same language in the 1939 Code. Given that view, the administrative law issue – and the resolution of the case – becomes easy. The dissent stated that the Treasury regulations are operating on a blank slate, construing a statute different from the one construed in Colony, and therefore they are owed Chevron deference without the need to rely on Brand X at all.
Justice Scalia’s concurring opinion declared a pox on both houses. He was extremely critical of the plurality’s approach, accusing it of “revising yet again the meaning of Chevron . . . in a direction that will create confusion and uncertainty.” He also criticized the dissent for praising the idea of a “continuing dialogue among the three branches of Government on questions of statutory interpretation,” when the right approach should be one in which “Congress prescribes and we obey.” Justice Scalia concluded: “Rather than making our judicial-review jurisprudence curiouser and curiouser, the Court should abandon the opinion that produces these contortions, Brand X. I join the judgment announced by the Court because it is indisputable that Colony resolved the construction of the statutory language at issue here, and that construction must therefore control.
The Home Concrete decision provides a clear resolution of the specific tax question presented. The six-year statute of limitations does not apply to overstatements of basis. The multitude of cases pending administratively and in the courts that involve this issue will now be dismissed as untimely, leaving the IRS unable to recover what it estimated as close to one billion dollars in unpaid taxes. Although the retroactive nature of the Treasury regulations was a significant point of contention in the litigation, retroactivity did not play a role in the final resolution. Thus, Treasury does not have the ability to use its regulatory authority to extend the six-year statute to overstatements of basis even prospectively. Any such extension will have to come from Congress.
The effect of the decision on administrative law is considerably more muddled. The plurality’s view appears to weaken Brand X, as courts may now be 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 so lower courts may treat the plurality opinion as controlling. On the other hand, Justice Breyer’s opinion emphasizes the fact 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.
The tax law gives the Internal Revenue Service (IRS) only a limited amount of time, known as a statute of limitations, to challenge a taxpayer’s statement on his tax return of the amount of tax that he owes. Ordinarily, that period is three years, but the law provides that it is six years in certain circumstances where it is unusually difficult for the IRS to determine that it has a disagreement with the taxpayer’s approach. In this case, the Court considered whether a particular situation – where the taxpayer has overstated its original cost of a piece of property – falls within the three-year category or instead within the six-year category. Adhering to the interpretation of the same language in an old Supreme Court decision involving a slightly different law, the Court held that the three-year statute of limitations applies. The result is that it is too late for the IRS to contest the tax liability of a large group of taxpayers that participated in certain similar deals and, according to the IRS, did not properly report the tax consequences of those deals.