Swallows Holding v. Comm IRS ( 2008 )


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  •                                                                                                                            Opinions of the United
    2008 Decisions                                                                                                             States Court of Appeals
    for the Third Circuit
    2-15-2008
    Swallows Holding v. Comm IRS
    Precedential or Non-Precedential: Precedential
    Docket No. 06-3388
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    PRECEDENTIAL
    UNITED STATES COURT OF APPEALS
    FOR THE THIRD CIRCUIT
    No. 06-3388
    SWALLOWS HOLDING, LTD.
    v.
    COMMISSIONER OF INTERNAL REVENUE,
    Appellant
    On Appeal from the United States Tax Court
    (No. 02-08045)
    Argued on September 25, 2007
    Before: AMBRO, JORDAN and ROTH, Circuit Judges
    (Opinion filed February 15, 2008)
    Gilbert S. Rothenberg, Esquire (ARGUED)
    United States Department of Justice
    Appellate Section
    950 Pennsylvania Avenue, N. W.
    Washington, D. C. 20530
    Eileen J. O’Connor, Esquire
    Assistant Attorney General
    Richard T. Morrison, Esquire
    Deputy Assistant Attorney General
    Jonathan S. Cohen, Esquire
    Steven W. Parks, Esquire
    Attorneys, Tax Division
    United States Department of Justice
    P. O. Box 502
    Washington, DC 20044
    Counsel for Appellant
    Phillip L. Jelsma, Esquire (ARGUED)
    Luce, Forward, Hamilton & Scripps, LLP
    11988 El Camino Real, Suite 200
    San Diego, CA 92130
    Counsel for Appellee
    OPINION
    2
    ROTH, Circuit Judge:
    This case, grounded in the principles of administrative
    law, requires that we review the validity of an Internal Revenue
    Service (IRS) regulation. The Tax Court, in considering this
    regulation, analyzed it under the factors provided in National
    Muffler Dealers Ass’n v. United States, 
    440 U.S. 472
    , 477
    (1979), and concluded that the regulation was invalid. In
    coming to this conclusion, the Tax Court explained that the
    standard established in National Muffler had not been replaced
    by Chevron U.S.A., Inc. v. Natural Resources Defense Counsel,
    Inc., 
    467 U.S. 837
    (1984), and that the result under either
    standard would be the same. We do not agree with the outcome
    reached by the Tax Court. We have determined that the result
    would not be the same under Chevron analysis as it would be
    under National Muffler and that the regulation here should be
    given Chevron deference.
    I. Factual and Procedural Background
    The IRS has appealed a United States Tax Court decision
    that held Treas. Reg. 1.882-4(a)(3)(i) to be invalid. Petitioner-
    appellee Swallows Holdings, Ltd. (Taxpayer) is a Barbados
    corporation with two principal shareholders, Raimundo Arnaiz-
    Rosas and Aurora Elsa Arnaiz. On September 14, 1992,
    Taxpayer filed its first federal income tax return. In its return,
    Taxpayer reported that it held real property in San Diego,
    California. Between 1993 and 1996, Taxpayer generated rental
    3
    income from the San Diego property.1 It was not until 1999,
    however, that Taxpayer filed returns for tax years 1993, 1994,
    1995 and 1996.
    A foreign corporation, engaging in trade or business in
    the United States, is taxed on its taxable income that is
    connected with the conduct of that trade or business. 26 U.S.C.
    § 882(a). Deductions from income are allowed only if they are
    connected with the “income which is effectively connected with
    the conduct of a trade or business within the United States.”
    Section 882(c)(1)(a). However, foreign corporations that do not
    engage in a trade or business in the United States are taxed at a
    flat rate of thirty percent of any amount received from sources
    within the United States. Section 881(a). The Internal Revenue
    Code, generally speaking, does not allow these foreign
    corporations to claim deductions. Section 882(c)(2).
    Nevertheless, if a foreign corporation conducts real property
    activity in the United States, the foreign corporation can treat the
    income derived from the real property activity as income from
    a “trade or business,” thus qualifying the foreign corporation to
    claim tax deductions (e.g., interest and taxes) that are otherwise
    unavailable. Section 882(d)(1).
    1
    The real property located in San Diego remained vacant
    during the period of time that is relevant to this appeal.
    Taxpayer leased the property to an entity that used it as a landing
    zone for sky-diving adventures. See Swallows Holdings, Ltd. v.
    C.I.R., 
    126 T.C. 96
    , 101 (2006).
    4
    The dispute in this case arises from the filing deadlines
    set forth in Treas. Reg. 1.882-4(a)(3)(i),2 which the Secretary of
    the Treasury promulgated to supplement section 882(c)(2). The
    regulation requires that a foreign corporation file a return within
    eighteen months of the filing deadline set in section 6072 in
    order to claim the real property activity tax deductions. Here,
    Taxpayer filed the tax returns in question well after the
    expiration of the eighteen-month filing period.                The
    3
    Commissioner assessed tax deficiencies accordingly.
    Taxpayer challenged the Commissioner’s findings in the
    United States Tax Court, arguing that Treas. Reg. 1.882-
    4(a)(3)(i) was an invalid exercise of the Secretary’s rule-making
    authority. See Swallows Holdings, Ltd. v. C.I.R., 
    126 T.C. 96
    (2006). The Tax Court granted judgment in favor of Taxpayer,
    focusing its inquiry on the plain meaning of I.R.C. § 882(c)(2).
    Specifically, the court held that section 882(c)(2) requires that
    2
    Treas. Reg. 1.882-4(a)(3)(i) provides:
    If a return was filed for that immediately
    preceding taxable year, or if the current taxable
    year is the first taxable year of the foreign
    corporation for which a return is required to be
    filed, the required return for the current taxable
    year must be filed within 18 months of the due
    date as set forth in section 6072 and the
    regulations under that section . . . .
    3
    The Secretary determined that Taxpayer owed deficiencies
    for 1994, 1995, and 1996.
    5
    foreign corporations file “in the manner prescribed by subtitle
    F . . ..” 
    Id. at 107.
    The Tax Court’s interpretation of the statute
    centered on the meaning of the word “manner” in the absence of
    any explicit textual reference to “time.” The court found it
    persuasive that Congress did not draft the statute with the
    familiar phrase “time and manner.” The court noted that
    Congress placed “time” and “manner” together in several Code
    sections, indicating that when Congress intended a time limit to
    apply, it did so with the phrase “time and manner.” Because the
    court found that the plain meaning of “manner” did not
    inherently include an element of time, the court concluded that
    Congress did not intend section 882(c)(2) to embody a filing
    deadline. 
    Id. at 134-46.
    The court found that the meaning of the
    statutory text was plain and unambiguous. 
    Id. at 135.
    The court
    nonetheless continued its analysis and held that the Secretary’s
    interpretation of the statute to include a timely filing
    requirement in the language of Treas. Reg. 1.882-4(a)(3)(i) was
    unreasonable. 
    126 T.C. 137
    .
    Relying on its earlier opinion in Central Pa. Sav.
    Association & Subs. v. Commissioner, 
    104 T.C. 384
    , 392 (1995),
    the Tax Court determined that the standard established in
    National Muffler had not been replaced by Chevron and that the
    result under either standard would be the same. 
    Id. at 131.
    The
    court concluded that a consideration of the National Muffler
    factors demonstrated the unreasonableness of the Secretary’s
    interpretation of section 882(c)(2) to include the timely filing
    requirement. 
    Id. at 137.
    The Tax Court listed the six factors set
    out in National Muffler to consider in assessing the
    reasonableness of the agency action. The Tax Court described
    these factors as follows:
    6
    (1) whether the regulation is a substantially
    contemporaneous construction of the statute by
    those presumed to have been aware of
    congressional intent; (2) the manner in which a
    regulation dating from a later period evolved; (3)
    the length of time that the regulation has been in
    effect; (4) the reliance placed upon the regulation;
    (5) the consistency of the Secretary’s
    interpretations; and (6) the degree of scrutiny
    Congress has devoted to the regulation during
    subsequent reenactments of this statute.
    
    Id. at 137
    (citing National 
    Muffler, 440 U.S. at 477
    ).
    The Tax Court found that the Secretary’s action failed to
    meet several of the National Muffler factors: the regulation was
    not a substantially contemporaneous construction of the statute;
    the regulation evolved after the Fourth Circuit Court of Appeals
    and the Board of Tax Appeals had repeatedly and consistently
    held that the statute did not include a timely filing requirement;4
    the regulations were issued after multiple reenactments of the
    statutory text; the Secretary’s statement accompanying the
    issuance of the regulations flew in the face of the prior court
    holdings and was a departure from the Secretary’s previous
    4
    See Georday Enter. v. Comm’r, 
    126 F.2d 384
    (4 th Cir. 1942);
    Blenheim Co. v. Comm’r, 
    125 F.2d 906
    (4 th Cir. 1942); Ardbern
    Co. v. Comm’r, 
    120 F.2d 424
    (4 th Cir. 1941); Taylor Sec. Inc. v.
    Comm’r, 
    40 B.T.A. 696
    (1939); Anglo-American Direct Tea
    Trading Co. v. Comm’r, 
    38 B.T.A. 711
    (1938).
    7
    interpretation of the 1957 regulations; and the statute had been
    reenacted several times without change to the governing
    statutory language. 
    Id. at 137
    -38. As a result, the court held
    that the regulation was an unreasonable exercise of the
    Secretary’s statutory power. Thus, the Tax Court ruled in favor
    of Taxpayer, holding that I.R.C. § 882(c)(2) did not include a
    filing deadline and that Taxpayer was entitled to the rental
    activity deductions. The IRS appealed.
    II. Discussion
    A. Jurisdiction
    We have jurisdiction to review the final judgment of the
    Tax Court pursuant to I.R.C. § 7482(a)(1); see also New York
    Football Giants, Inc. v. C.I.R., 
    349 F.3d 102
    , 105-06 (3d Cir.
    2003). We exercise plenary review over the Tax Court’s legal
    conclusions but will only set aside factual findings that are
    clearly erroneous. Capital Blue Cross v. C.I.R., 
    431 F.3d 117
    ,
    123-24 (3d Cir. 2005).
    B. Applicability of Chevron
    The crucial issue before us is whether the Tax Court
    erred in applying National Muffler rather than Chevron when
    evaluating the validity of Treas. Reg. 1.882-4(a)(3)(i). We hold
    that the Tax Court erred in applying National Muffler to the
    extent that the National Muffler factors are inconsistent with
    Chevron analysis.
    8
    In Chevron, the Supreme Court reasoned that the
    judiciary was to afford an agency discretion to interpret
    ambiguous provisions of the agency’s organic or enabling
    statute. In what has become familiar administrative law
    parlance, the Chevron Court set forth a two step analysis:
    When a court reviews an agency’s
    construction of the statute which it administers, it
    is confronted with two questions. First, always, is
    the question whether Congress has directly
    spoken to the precise question at issue. 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 [Chevron Step one]. If, however, the
    court determines Congress has not directly
    addressed the precise question at issue, the court
    does not simply impose its own construction of
    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
    Step two].
    
    Chevron, 467 U.S. at 842-43
    . Courts, including the Supreme
    Court, have operated under this general framework post-
    Chevron. See, e.g., Nat’l Cable & Telecomm. Ass’n. v. Brand X
    Internet Serv., 
    545 U.S. 967
    , 980-81 (2005); United States v.
    9
    Mead Corp., 
    533 U.S. 218
    , 226 (2001); Woodall v. Fed. Bureau
    of Prisons, 
    432 F.3d 235
    , 248-49 (3d Cir. 2005); George Harms
    Const. Co. v. Chao, 
    371 F.3d 156
    , 161 (3d Cir. 2004); Robert
    Wood Johnson Univ. Hosp. v. Thompson, 
    297 F.3d 273
    , 281-82
    (3d Cir. 2002). In accordance with this precedent, we will
    proceed to determine if this case should be reviewed under
    Chevron.
    Our inquiry would be a simple one if, as the Tax Court
    suggested, the result of this case would be the same regardless
    of which standard we apply. This, however, is not the case. The
    Tax Court relied heavily on factors that, although relevant to the
    National Muffler standard, are not mandatory or dispositive
    inquiries under Chevron. As we set out above, the Tax Court
    reasoned that the challenged regulation was not a
    contemporaneous construction of the statute; the Tax Court
    found that the Fourth Circuit Court of Appeals and the Board of
    Tax Appeals had interpreted the statute as not including a timing
    element, and the Tax Court relied on the existence of several re-
    enactments of the statute without any change to the governing
    statutory language.5
    5
    We take time to note that the Tax Court and the Taxpayer
    erroneously rely on the legislative re-enactment doctrine.
    Legislative re-enactment is a doctrine under which “Congress is
    presumed to be aware of an administrative or judicial
    interpretation of a statute and to adopt that interpretation when
    it re-enacts a statute without change.” Reese Bros., Inc. v.
    United States, 
    447 F.3d 229
    , 238 (3d Cir 2006). Application of
    this doctrine is appropriate only when “an agency’s statutory
    10
    Even if we were to assume that all of these observations
    are true, conclusive reliance on them is misplaced. When
    Chevron deference is owed, Chevron’s demands are clear. If the
    statutory text is ambiguous, an agency is given the discretion to
    promulgate rules that interpret the ambiguous provisions.
    Judicial deference to an agency’s rule-making authority ends
    only when the agency’s construction of its statute is
    unreasonable. Accordingly, we now consider whether Chevron
    deference is appropriate here.6
    construction has been fully brought to the attention of the public
    and the Congress, and the latter has not sought to alter that
    interpretation although it has amended the statute in other
    respects, then presumably the legislative intent has been
    correctly discerned.” 
    Id. (citations omitted).
    Taxpayer has not
    met this burden. Accordingly, we find that legislative re-
    enactment doctrine is inapplicable here.
    6
    In reaching this conclusion, we agree with a recent Second
    Circuit opinion, which reviewed the validity of a Treasury
    Regulation issued by the IRS. See McNamee v. I.R.S., 
    488 F.3d 100
    (2d Cir. 2007). The regulation at issue in McNamee
    dictated a limited liability company’s ability to elect certain tax
    treatment. Rather than apply National Muffler, the Second
    Circuit placed the inquiry within the purview of Chevron, Mead
    and Brand X. Although the court cited to National Muffler, it
    did not apply its six-factor balancing test, and it did not assert
    that National Muffler was governing by itself. Instead, the court
    simply used National Muffler to explain that an agency’s
    interpretation of an ambiguous provision must be reasonable, a
    11
    C. Chevron Analysis
    We note that Chevron deference will not be extended to
    all agency action. 
    Mead, 533 U.S. at 229-31
    . Mead teaches that
    Chevron deference is appropriate only in situations where
    “Congress would expect the agency to be able to speak with the
    force of law . . ..” 
    Id. at 229
    (emphasis added). When Congress
    does not intend a particular agency action to wield the force of
    law, Skidmore deference may be appropriate.7 Thus, Mead
    requires that we assess the legal effect of Treas. Reg. 1.882-
    4(a)(3)(i), which was promulgated under I.R.C. § 7805. Section
    7805, which is a general grant of power to the Secretary,
    provides:
    Except where such authority is given by this title
    to any person other than an officer or employee of
    the Treasury Department, the Secretary shall
    prescribe all needful rules and regulations for the
    proposition that is not at odds with Chevron’s core teachings.
    7
    Skidmore deference is derived from the Supreme Court’s
    holding in Skidmore v. Swift & Co., 
    323 U.S. 134
    (1944). Under
    Skidmore, a court will determine the amount of deference to
    afford agency action based on an evaluation of several factors.
    The factors include “the thoroughness evident in [an agency’s]
    consideration, the validity of [an agency’s] reasoning, [an
    agency’s] consistency with earlier and later pronouncements,
    and all those factors which give [an agency] power to persuade,
    if lacking the power to control.” 
    Id. 12 enforcement
    of this title, including all rules and
    regulations as may be necessary by reason of
    any alteration of law in relation to internal
    revenue.
    We note first that the deference owed to regulations
    issued under I.R.C. § 7805(a) has been described over the years
    in different ways. In National Muffler, of course, the Supreme
    Court listed factors such as whether the regulation was
    contemporaneous with the statute, the age of the regulation, and
    the consistency of its 
    interpretation. 440 U.S. at 477
    . More
    recently, however, in United States v. Cleveland Indians
    Baseball Co., 
    532 U.S. 200
    , 219 (2001), the Court remarked that
    “we defer to the Commissioner’s regulations as long as they
    ‘implement the congressional mandate in some reasonable
    manner.’” 
    Id. at 219
    (quoting United States v. Correll, 
    389 U.S. 299
    , 306-07 (1967).8
    In Armstrong World Inds., Inc. v. Comm’r, 
    974 F.2d 422
    ,
    430 (3d Cir. 1992), this Court considered the validity of a
    regulation issued under section 7805(a). We cited to Chevron,
    8
    The Court in Cleveland Indians, in fact, went on to quote
    National Muffler, not for the factors listed by the Tax Court in
    this case for determining deference, but for the overall concept
    that “Congress has delegated to the [Commissioner], not to the
    courts, the task of prescribing all needful rules and regulations
    for the enforcement of the Internal Revenue 
    Code.” 532 U.S. at 219
    (quoting National 
    Muffler, 440 U.S. at 477
    ) (brackets in
    original).
    
    13 467 U.S. at 842-44
    , to support the need to determine if
    “‘Congress has directly spoken to the precise question at issue,’
    and if the intent of Congress is unambiguously expressed, we
    must give that intent effect.” 
    Id. at 430
    (quoting 
    Chevron, 467 U.S. at 843
    ). Again quoting Chevron, we went on to state that
    “[i]f the question has not been directly addressed, we then look
    to whether ‘the agency’s answer is based on a permissible
    construction of the statute.’” Under this standard, we concluded
    that the regulation, promulgated under section 7805(a), was not
    “unreasonable, arbitrary, capricious, or contrary to the plain
    language of the Code,” 
    id. at 442,
    and held the regulation to be
    valid.
    As we did in Armstrong World Industries, we will look
    to Chevron here to determine the validity of Treas. Reg. 1.882-
    4(a)(3)(i).
    Taxpayer argues, however, that the Secretary
    promulgated an interpretive regulation and that interpretive
    regulations, as a class, do not merit Chevron deference. We
    disagree. When determining whether Congress intends a
    particular agency action to carry the force of law, our inquiry
    does not hinge solely on the type of agency action involved.
    Rather, “[d]elegation of such authority may be shown in a
    variety of ways, as by an agency’s power to engage in
    adjudication or notice-and-comment rule-making, or by some
    other indication of a comparable congressional intent.” 
    Mead, 533 U.S. at 227
    . There is no per se rule that relegates
    interpretive rules to the realm of Skidmore. Here, the Secretary
    opened the rule to public comment, a move that is indicative of
    agency action that carries the force of law. 
    Id. at 229
    -30; Cleary
    v. Waldman, 
    167 F.3d 801
    , 808 (3d Cir.1999).9 Accordingly,
    9
    This Court has extended Chevron deference to interpretive
    rules in the past. See, e.g., Mercy Catholic Med. Ctr. v.
    14
    the resulting regulation is entitled to Chevron deference if it
    survives Chevron’s two prong inquiry.10
    Thompson, 
    380 F.3d 142
    , 154-55 (3d Cir. 2004) (noting that
    although informal interpretations are not entitled to Chevron
    deference, formal interpretations, authorized to carry the “force
    of law,” are properly placed within Chevron’s purview); George
    Harms Const. Co. v. Chao, 
    371 F.3d 156
    , 161 (3d Cir. 2004)
    (determining that after Mead, agency interpretations are entitled
    to Chevron deference if the Mead “force of law” test is met);
    Elizabeth Blackwell Health Ctr. for Women v. Knoll, 
    61 F.3d 170
    , 182 (1995) (reasoning, pre-Mead, that Chevron “deference
    is appropriate here even though the Secretary’s interpretation is
    not contained in a ‘legislative rule’”).
    10
    This conclusion is in accord with the treatment our sister
    circuits have given to rules promulgated under I.R.C. § 7805, or
    its predecessor. See, e.g., McNamee v. Department of Treasury,
    
    488 F.3d 100
    , 106 (2d Cir. 2007) (“Because Congress has
    delegated to the Commissioner to promulgate ‘all needful rules
    and regulations’ [in I.R.C. § 7805(a)] . . . we must defer to his
    regulatory interpretations of the Code so long as they are
    reasonable”); Hospital Corp. of America v. C.I.R., 
    348 F.3d 136
    ,
    140-41 (6th Cir. 2003) (reasoning that general grant of authority
    under I.R.C. §7805(a) still prompts judicial deference to rules
    promulgated thereunder); Bankers Life & Cas. Co. v. United
    States, 
    142 F.3d 973
    , 982-83 (7th Cir. 1998) (reasoning that
    Chevron is appropriate analysis for interpretive IRS
    regulations); United States v. Cook, 
    494 F.2d 573
    , 574 (5th Cir.
    1974) (“A Treasury Regulation which is a reasonable
    interpretation of a section of the Internal Revenue Code has the
    effect of law.”).
    15
    1. Chevron Step One: Ambiguity of the
    Statutory Text
    First, previous judicial interpretations of I.R.C.
    §882(c)(2) do not preempt our analysis in determining if the
    statute is ambiguous. Taxpayer argues that our analysis is
    unnecessary pursuant to the Supreme Court’s holding in
    National Cable & Telecommunications Ass. v. Brand X Internet
    Services, Inc., 
    545 U.S. 967
    (2005). Brand X, however, held
    that “[o]nly a judicial precedent holding that the statute
    unambiguously forecloses the agency’s interpretation, and
    therefore contains no gap for the agency to fill, displaces a
    conflicting agency construction.” 
    Id. at 982-83.
    No such
    opinion exists in this case.11 Accordingly, we are not bound by
    previous judicial interpretations of I.R.C. § 882(c)(2).
    Under Chevron, if the statutory language is clear and
    unambiguous, our inquiry ends and the plain meaning of the
    statute governs the 
    action. 467 U.S. at 842-43
    . If, however, the
    statutory provision is ambiguous, such ambiguity is viewed as
    an implicit congressional delegation of authority to an agency,
    11
    Taxpayer heavily relies on Anglo-American Tea Trading
    Co. v. C.I.R., 
    38 B.T.A. 711
    (1938). The court in Anglo-
    American did not purport to adopt or apply the unambiguous
    meaning of the word “manner.” Rather, the court detailed the
    interpretive confusion that courts confronted. Only after
    detailing this confusion did the court decide that no timing
    element was applicable. 
    Id. at 714;
    see also Ardbern Co. v.
    C.I.R., 
    120 F.2d 424
    , 426-27 (relying on Ango-American
    without applying “unambiguous meaning”). The Tax Court
    acknowledged this fact, noting that previous judicial
    constructions “did not state explicitly that they were applying
    the unambiguous meaning of the word ‘manner’ . . ..” Swallows
    Holding, 
    126 T.C. 145
    .
    16
    allowing the agency to fill the gap with a reasonable regulation.
    MCI Telecomm. Corp. v. Bell Atlantic-Pa., 
    271 F.3d 491
    , 515-
    16 (3d Cir. 2001). The inquiry into the ambiguity of a statutory
    provision must begin with the text of the statute. The text of
    I.R.C. § 882(c)(2) reads in pertinent part:
    A foreign corporation shall receive the benefit of
    the deductions and credits allowed to it in this
    subtitle only by filing or causing to be filed with
    the Secretary a true and accurate return, in the
    manner prescribed in subtitle F, including therein
    all information which the Secretary may deem
    necessary for the calculation of such deductions
    and credits.
    Our inquiry focuses on the requirement that foreign
    companies file “with the Secretary a true and accurate return, in
    the manner prescribed in subtitle F.” Taxpayer argues that the
    word “manner” does not by its nature include a timing element,
    thus indicating that Congress did not intend for a filing deadline
    to exist. This is an overly narrow interpretation of “manner.”
    Courts that have interpreted “manner” as used in I.R.C. §
    882(c)(2) and its predecessors have struggled over whether
    “manner” includes a timing element, which indicates that the
    language is not clear and unambiguous. Compare Anglo-
    American Tea Trading Co. v. C.I.R., 
    38 B.T.A. 711
    , 714 (1938)
    (discussing divergent conclusions and adopting interpretation
    that excludes a “timing” element), with Espinosa v. Comm’r,
    
    107 T.C. 146
    , 156 (1996) (reasoning that provision embodied
    some “cut-off” period, even if not expressly stated).
    Moreover, Congress uses “manner” without “time” in
    other sections of the Code, and, in some of these situations,
    “manner” has been interpreted to implicitly include a timing
    element. See I.R.C. §§ 179(c), 835(c)(2). In these provisions,
    17
    Congress did not use the phrase “time and manner,” yet the
    Secretary promulgated valid regulations that include temporal
    components. See Treas. Reg. §§ 1.179-5(a(, 1.826-1(a)(3)(i).
    Thus, Congress does not uniformly use the phrase “time and
    manner” when it desires a particular Code provision to embody
    a timing element. Rather, we find “manner,” depending on the
    context, may be a comprehensive term.
    As used in this instance, the word “manner” may be
    defined as “a characteristic or customary way of acting.”
    W EBSTER’S D ICTIONARY 724 (9th Ed. 1986). Under this
    definition, the provision is not a clear and unambiguous
    expression of congressional intent, as one’s “customary way of
    acting” may include an element of timeliness. Further,
    Congress’s use of “manner” in I.R.C. § 882(c)(2) prompts
    contextual ambiguity. We could read “manner” to refer to
    subtitle F, which itself includes timing elements. Alternatively,
    we could read this provision as indicating that Congress did not
    wish the timing requirements of subtitle F to apply. Reading the
    statute this way would not foreclose the Secretary from
    promulgating a regulation that sets a filing deadline. Instead, it
    would only restrict the Secretary from promulgating a regulation
    that would embody the timing elements of subtitle F.
    As a result, we hold that Congress’s use of the word
    “manner” creates ambiguity. Therefore, Congress has not
    “spoken to the precise question at issue.” 
    Chevron, 467 U.S. at 843
    . Rather, because we find I.R.C. § 882(c)(2) to be
    ambiguous, the Secretary was justified in promulgating a rule
    that prescribed a filing deadline.
    2. Chevron Step 2 - Reasonableness of the
    Secretary’s Action
    Our inquiry is not yet at its end, as we will only defer to
    18
    the Secretary’s action if it is a permissible construction of I.R.C.
    § 882(c)(2). See 
    Woodall, 432 F.3d at 248
    (citing 
    Chevron, 467 U.S. at 842-43
    ). We “need not conclude that the agency
    construction was the only one it permissibly could have adopted
    to uphold the construction, or even the reading the court would
    have reached if the question had arisen in a judicial proceeding.”
    
    Chevron, 467 U.S. at 843
    n.11. Often, a promulgated rule is the
    culmination of intense debate between the agency, Congress,
    other members of the Executive Branch and the public. Rules
    represent important policy decisions, and should not be
    disturbed if “‘this choice represents a reasonable
    accommodation of conflicting policies that were committed to
    the agency’s care by the statute . . ..’” 
    Id. at 845
    (quoting United
    States v. Shimer, 
    367 U.S. 374
    , 382-83 (1961)). Further,
    Chevron deference is “even more appropriate in cases” that
    involve a “‘complex and highly technical regulatory program .
    . ..’” Robert 
    Wood, 297 F.3d at 282
    (quoting Thomas Jefferson
    Univ. v. Shalala, 
    512 U.S. 504
    , 512 (1994)). The Code is
    indisputably complex and technical, and we will adjust our
    inquiry accordingly.
    In this case, the Secretary has promulgated a rule that
    creates an eighteen-month window within which foreign
    companies must file a federal tax return in order to claim rental
    activity tax deductions. Taxpayer argues that previous cases
    upholding the disallowance of deductions under I.R.C. §
    882(c)(2) involved filing deadlines that permitted at least a two
    year window within which foreign corporations could have filed
    timely tax returns. From this, Taxpayer draws the conclusion
    that it is unreasonable for the Secretary to promulgate a rule
    with a filing period of less than two years. We find Taxpayer’s
    argument to be unpersuasive. The Secretary will, under the
    current regulation, allow a foreign company to file eighteen
    months after the filing was originally due. Moreover, because
    I.R.C. § 6072(c) already provides for a five and one-half month
    19
    filing period, foreign companies have, in practice, twenty-three
    and one-half months to submit a “timely” return. It is not
    unreasonable for the Secretary to impose such a deadline.
    Additionally, we believe that drawing this temporal line
    is a task properly within the powers and expertise of the IRS.
    Chevron recognizes the notion that the IRS is in a superior
    position to make judgments concerning the administration of the
    ambiguities in its enabling statute. In this case, the IRS found
    that eighteen months served as a balance between its desire for
    compliance with the federal tax laws and a foreign corporation’s
    desire to obtain valuable tax deductions. Therefore, we hold
    that the eighteen-month filing window created by Treas. Reg.
    1.882-4(a)(3)(i) is a reasonable exercise of the Secretary’s
    authority.
    III. Conclusion
    For the forgoing reasons, we will vacate the judgment of
    the Tax Court and remand this case for further proceedings in
    accordance with this opinion.
    20
    

Document Info

Docket Number: 06-3388

Filed Date: 2/15/2008

Precedential Status: Precedential

Modified Date: 10/13/2015

Authorities (27)

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Mercy Catholic Medical Center v. Tommy G. Thompson, ... , 380 F.3d 142 ( 2004 )

Reese Brothers, Inc. v. United States , 447 F.3d 229 ( 2006 )

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Ardbern Co. v. Commissioner of Internal Revenue , 120 F.2d 424 ( 1941 )

United States v. Joel E. Cook , 494 F.2d 573 ( 1974 )

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