DocketNumber: Docket No. 25868-06
Citation Numbers: 134 T.C. 211, 2010 U.S. Tax Ct. LEXIS 14, 134 T.C. No. 11
Judges: WHERRY,COLVIN,WELLS,VASQUEZ,GOEKE,KROUPA,PARIS,GUSTAFSON,MORRISON,COHEN,GALE,THORNTON,MARVEL,HALPERN,HOLMES
Filed Date: 5/6/2010
Status: Precedential
Modified Date: 1/13/2023
An appropriate order will be issued.
R filed a motion to vacate the Court's prior decision and a motion to reconsider the Court's prior opinion. R's motions are premised on the retroactive application of temporary regulations issued after the Court issued its opinion and entered its decision.
*211 SUPPLEMENTAL OPINION
WHERRY,
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 *18 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 *213 period of limitations for assessing tax against Intermountain's partners. See
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".
This was not an issue of first impression. In
We adhered to our precedent in
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
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 * * *
Bolstered by the temporary regulations, respondent, on October *23 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
Motions to reconsider and to vacate are governed by
The decision to grant motions *24 to reconsider and to vacate lies within the discretion of the Court.
Importantly, an intervening change in the law can warrant the granting of both a motion to reconsider and a motion to *25 vacate. See
Respondent asks us to grant the motion to vacate in the "interests of justice" so that we "may grant the motion for reconsideration." Citing
Petitioner's concerns are noteworthy; 6 however, they do not persuade us to deny respondent's motions without first considering the applicability and potential impact of the temporary regulations. Ignoring the temporary regulations at this time would not dispel the evils envisioned by petitioner. Indeed, respondent could appeal our September 1, 2009, decision and ask the appellate court to consider the issue *27 of the temporary regulations in the first instance. Respondent has already done so in more than one case. 7 By neglecting the temporary regulations at this time we would not be protecting the integrity of the judicial system, as petitioner suggests, but merely failing to fully complete our work. We see no compelling reason to wield our discretion to that end. Moreover, we question petitioner's attempt to distinguish
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 *29 September 24, 2009."
The starting point for interpreting a regulatory provision is its plain meaning. See
Respondent argues to the contrary and in doing so begs the question 9 by advancing a notably convoluted interpretation of the effective/applicability date provisions: To determine whether the temporary regulations are applicable under the effective date provision, the Court must determine whether a six-year statute of limitations would be open for the taxable year at issue, as of September 24, 2009, without regard to what the standard *30 for applying the statute of limitations might be. If the six-year limitations period could be open under some standard as of September 24, 2009, then the temporary regulations apply.
Under respondent's interpretation, the Court must depart from our precedent in
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
Ordinarily, an agency's interpretation of its own regulation is controlling unless it is "plainly erroneous or inconsistent with the regulation."
*220 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 *33 24, 2009. 12*34 It would therefore be futile to grant respondent's motions to reconsider and to vacate, both of which are premised on the application of the temporary regulations to this case. While the foregoing establishes a plausible ground to rule against respondent's motions, it becomes compelling when combined with our discussion below. 13
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."
Petitioner asserts that the temporary regulations are only entitled to deference under
The temporary regulations were not issued on a blank slate. In its 1958 opinion in
"A court's prior judicial construction of a statute trumps an agency construction otherwise entitled to *222 [A]llowing a judicial precedent to foreclose an agency from interpreting an ambiguous statute * * * would allow a court's interpretation to override an agency's.
We are therefore directed to apply
When determining Congress' intent,
Therefore, in determining whether the Supreme Court in
Specifically, the Supreme Court found the legislative history *44 to be "persuasive evidence that Congress was addressing itself to the specific situation where a taxpayer actually
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
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 *48 another day.
In 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,
Reviewed by the Court.
COLVIN, WELLS, VASQUEZ, GOEKE, KROUPA, and PARIS, JJ., agree with this majority opinion.
*226 GUSTAFSON and MORRISON, JJ., did not participate in the consideration of this opinion.
COHEN,
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 *49 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,
HALPERN and HOLMES,
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. 1*51 Understandably, petitioner cries foul, arguing first and foremost that respondent cannot meet the high standards established by this Court for granting either a motion to vacate, see
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. 13. In fact, the temporary regulations provide: "The rules of this section apply to taxable years with respect *52 to which the applicable period for assessing tax did not expire before September *228 24, 2009."
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 |
The majority claims: "The plain meaning of the temporary regulations' effective/applicability date provisions indicates that the temporary regulations do not *53 apply to this case because the applicable period of limitations expired before September 24, 2009." Majority op. pp. 15-16. 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
*229 Since the temporary regulations do not define the term "applicable period for assessing tax" (by stating whether the regulation itself *54 is to be taken into account in determining the applicable period), the meaning of the term is less than plain, so it must be construed. What ground is there, then, for the majority to conclude that the effective date language of the temporary regulations precludes their application to this case? In other words, how can it construe the expression "the applicable period for assessing tax" to mean "the 3-year period for assessing tax"? Perhaps the majority has in mind 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.
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
In rejected the same interpretation the IRS is proposing in this case. The IRS may have the authority to promulgate a reasonable reinterpretation of an ambiguous provision of the tax code, even if its interpretation runs contrary to the Supreme Court's "opinion as to the best reading" of the provision.
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 *59 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 . An assertion that . An analysis of the additional question we have to answer after
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
We are particularly cautious about the majority's possible reliance on
We think that the problems of how to use legislative history in a
A.
The
But
We focus first on the use of legislative history in
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-- . Consideration only if the text is unclear-- . Legislative history used at step one as a traditional tool--
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 *66 less clear. Here's the current circuit court breakdown: . First Circuit-- . Second Circuit-- . Third Circuit-- . Fourth Circuit--Compare *235 . Fifth Circuit-- . Sixth Circuit--Compare . Seventh Circuit--Compare . Eighth Circuit--Compare . Ninth Circuit--Compare . Tenth Circuit-- . Eleventh Circuit-- . D.C. Circuit-- . Federal Circuit--
B.
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,
One way to read the many decisions using legislative history in step one of
It is at least possible that the emphasized language is a direction to lower courts to distinguish
Consider
Then out popped a contrary regulation from the EEOC. The District Court judge faced with the regulation *71 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."
Used in this way, legislative history in step one may present fewer problems. Rereading
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
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),
The APA requires agencies to publish contemplated rules to allow the public to make comments on their content and *239 effect.
In the case of these regulations, the Secretary stated his legal authority for the rules--the
Respondent first argues that the APA itself excuses his failure to put the regulations through notice and comment. The Administrative Procedure Act, this subsection does not apply-- (A) to interpretative rules, general statements of policy, or rules of agency organization, procedure, or practice *76 * * *
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 *240 Congress waived the APA's notice-and-comment requirement for temporary tax regulations.
The Treasury Decision containing the regulations, without claiming a particular exception, 8 states: "It also has been determined that
The Tax Court often labels as "interpretive" those regulations that the Secretary issues under the general authority of
But "interpretive" means something different in administrative law. Berg, "Judicial Deference to Tax Regulations: A Reconsideration in Light of
Courts have applied various tests to distinguish between legislative and interpretive rules, *80 but the D.C. Circuit's test in *242 (1) whether in the absence of the rule there would not be an adequate legislative basis for enforcement action or other agency action to confer benefits or ensure the performance of duties, (2) whether the agency has published the rule in the Code of Federal Regulations, (3) whether the agency has explicitly invoked its general legislative authority, or (4) whether the rule effectively amends a prior legislative rule. If the answer to any of these questions *81 is affirmative, we have a legislative, not an interpretive rule.
Though
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
We would therefore conclude that both
The second part of the
The second is that these regulations effectively changed (or *86 at least tried to change) existing law.
But we don't need to puzzle this out.
*245 Thus, although the regulations may be "interpretive" according to the common usage in the sense that they set forth respondent's interpretation of the underlying statutes, and "interpretive" according to tax-law usage in the sense that one of them was issued under
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
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, *90 nor does the legislative history state that it has. The legislative history does note that the Secretary *246 commonly issued temporary regulations with immediate effect, but this alone hardly suggests Congress meant to waive notice and comment for all temporary regulations. 17*91 The legislative history does not even mention the APA, and both the Supreme Court and the APA itself provide that exceptions to the APA's terms cannot be inferred--much less inferred from an absence in the legislative history: Recognizing the importance of maintaining a uniform approach to judicial review of administrative action * * * we have closely examined the * * * claim for an exception to that uniformity. * * * [Congress has specified] in the APA that "no subsequent legislation shall be held to supersede or modify the provisions of this Act except to the extent that such legislation shall do so expressly."
*247 Giving the public the opportunity to participate through notice and comment is important in giving regulations legitimacy. See
Giving the public a chance to comment only after making the regulations effective does not comply with the APA. See, e.g.,
Because these regulations were issued under
A court should not entirely ignore invalidated regulations--but we cannot give them binding force. 19 See
*. This opinion supplements our previously filed opinion in Intermountain Ins. Serv. of Vail, LLC v. Commissioner, T.C. Memo. 2009-195.↩
1. Unless otherwise indicated, all section references are to the Internal Revenue Code of 1986, as amended and in effect for the year at issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩
2. In our Sept. 1, 2009, opinion, we noted that, although respondent argued that
Respondent has not provided support for his argument that
3. The bar of the period of limitations is an affirmative defense, and petitioner bore the burden of proof. See
4. According to
5. See also
6. Tax litigation is expensive, and respondent litigates with taxpayer-provided funds while petitioner and/or the limited liability company or its members must litigate with their own funds. If the law is allowed to change retroactively after a taxpayer has prevailed in one or more courts, thereby rendering their victory Pyrrhic, the perverse result will be to significantly discourage taxpayers from asserting their rights under the then-existing law.↩
7. See Brief for the Appellant at 14,
8. See, e.g.,
9. See 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
10. See
11. See also
12. The Court recognizes that respondent may argue that the decisions we rely upon,
13. We also recognize that respondent could amend the temporary regulations' effective/applicability date provisions and file renewed motions to reconsider and to vacate based on those amended provisions, thereby extending this dispute to yet another case. See
14. Respondent maintains that
15. In a concurring opinion, Justice Stevens suggested that this holding "would not necessarily be applicable to a decision by this Court that would presumably remove any pre-existing ambiguity."
16. The second step of 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. [Fn. refs. omitted.]
17. In our Sept. 1, 2009, opinion, we indicated that, absent stipulation to the contrary, this case may be appealable to the Court of Appeals for the Eighth, Tenth, or D.C. Circuit. See
18. See
The Supreme Court has sent mixed signals about the use of legislative history in
19. Although we have found no opinion in which a court considered legislative history when applying
20. Both parties also refer to the Supreme Court's observation that "the conclusion we reach is in harmony with the unambiguous language of
21. Hearings Before the House Comm. on Ways and Means, 73d Cong., 2d Sess. 139, 149 (1934); H. Rept. 704, 73d Cong., 2d Sess. 35 (1934),
22. We recognize that
23. See
24. Respondent suggests that the U.S. Court of Appeals for the Ninth Circuit, in
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
1. The temporary regulations in question (the temporary regulations) are
2. In its haste to protect the integrity of the judicial system and to fully complete its work, the majority "question[s]" petitioner's attempts to distinguish
3. In 1996,
4.
5. Commentators have not been kind to judges. See, e.g., Sunstein, "
6. As numerous commentators have concluded, the application of
7. When Treasury regulation drafters find good cause to skip notice and comment,
8. The Treasury Decision does say that the regulations contain a "reasonable interpretation" of the statutory provisions.
9. Even by this bright-line rule, however, the applicable regulation isn't clearly interpretive in the tax-law sense. Though the parties refer to the two regulations in tandem,
10. Though the Attorney General's Manual is not a source of binding law, its definitions are useful as near-contemporaneous constructions of the APA. See
11. See
12. One scholar noted that it was common for some agencies to publish any rule with "legal effect" in the CFR (and recognized this phrase was broader than the "force of law"), and that the court didn't want to discourage this practice because it is beneficial to the public. 1 Pierce, Administrative Law Treatise, sec. 6.4, at 453 (5th ed. 2010).↩
13. The Eighth Circuit addressed the characterization of interpretive versus legislative rules in
But in
14. The
15. Nearly 30 years ago, in
16. Prior law had allowed temporary regulations to linger for a very long time, to the point that courts were beginning to notice a pattern of the Secretary's growing reliance on temporary regulations without ever finalizing or repealing them. See, e.g.,
17. Though issuing a simultaneous NPRM and seeking post-effective comments is consistent with respondent's argument, Congress may have intended this to apply only to temporary regulations that already fit into an exception to the APA, especially considering that a need for temporary regulations would normally be expected in emergency or good-cause situations.
18. Respondent does point to some cases where temporary regulations were relied upon despite not undergoing notice and comment, see
19. If respondent had successfully promulgated interpretive rules, we would reach this same point.↩
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