On January 17, 2012, the US Supreme Court heard arguments in United States v. Home Concrete & Supply, LLC, a case dealing with a US Treasury Department regulation and its interpretation, bringing together tax law, administrative law and questions of the constitutionality of agency actions. In December 2006, the Internal Revenue Service (IRS) was faced with a conundrum: the agency sought to bring charges of "overstatement of basis" against Home Concrete & Supply, LLC and several other taxpayers, based on their 1999 tax returns. The catch? The particular regulation the IRS was seeking to enforce, 26 USC § 6501(a), has a three-year statute of limitations, which in the case against Home Concrete expired in April 2003. The IRS then turned to another regulation within the tax code, 26 USC § 6501(e)(1)(A), which has a six-year statute of limitations, and attempted to claim that the "overstatement of basis" qualified as a violation under that regulation, which deals with omissions from gross income. Unfortunately for the IRS, the US Court of Appeals for the Ninth Circuit in Bakersfield Energy Partners, LP v. Commissioner of Internal Revenue and the US Court of Appeals for the Federal Circuit in Salman Ranch Ltd. v. United States both struck this down, based on the Supreme Court's ruling in Colony Inc. v. Commissioner of Internal Revenue, which held that a regulation substantively identical to the one the IRS was attempting to use against Home Concrete did not include "overstatement of basis" under its purview.
The IRS's next step was to issue Treasury Regulation § 301.6501(e)-1, which fixes their problem by simply including an "overstatement of basis" as an omission from gross income, thus getting it under the six-year statute of limitations umbrella. The taxpayers responded by arguing that this is unconstitutional, and that it defies federal agency practice and Supreme Court precedent.
Federal agencies are tasked with carrying out the laws issued by Congress, but they may not exceed the powers granted to them by creating legislation themselves. In order to keep the actual legislating in the hands of Congress, there are specific standards for how much discretion the agencies have when it comes to interpreting the laws. In Chevron USA Inc. v. Natural Resources Defense Council, Inc., the Supreme Court came up with a way to delineate the parameters: if a law is passed and Congress specifically addresses how to implement policy relating to a certain issue within its language, there is no deference to federal agencies when it comes to dealing with that issue they must follow the law as it is written. If, however, the language in the statute is ambiguous, or if there is no language at all regarding an issue, the agency has the discretion to make regulations based on "a permissible construction" of the statute.
Unfortunately for the IRS, the very first step in the Chevron process may halt its attempt to change its interpretation of the regulation in order to catch Home Concrete under the longer statute of limitations. The statute the IRS is attempting to change (26 USC § 6501(e)(1)(A)) is identical to another statute that previously went through the Chevron process in the Colony decision, and it was found to be unambiguous by the Court then. That Colony was decided before Chevron and its subsequent test most likely does not matter the process the Colony Court went through to come to its decision fulfills all the requirements of Chevron, and the conclusion would be the same even had it come after the test was promulgated. The taxpayers are thus arguing that the IRS has no room to interpret the statute differently from its original determination, and thus the Court should not afford the IRS's new regulation the deference normally accorded such agency regulations, unless Congress itself decides to alter the statute first.
Relying on the Court's decision in National Cable & Telecommunications Association v. Brand X Internet Services, the government argues that unless a statute unambiguously forecloses a particular interpretation of a statute, conflicting Court precedent will not displace that interpretation. The taxpayers argue in response that the decision in Brand X means that the only time a court's interpretation of a statute trumps an agency's is when the court's interpretation is based on its holding that the statute is unambiguous, and further, that the Court's holding in Colony that the statute was unambiguous applies here.
If the Chevron analysis of the statute determines that it is on its face ambiguous and goes on to the second step of the process, the IRS's subsequent interpretation must be considered a "permissible construction of the statute." The taxpayers will be quick to point out what the Court stated in Bowen v. Georgetown University Hospital, when faced with a Chevron "step two" question: "[d]eference to what appears to be nothing more than an agency's convenient litigating position" is "entirely inappropriate." The government will need to show that the new regulation is a permissible reading of the statute, and, perhaps by showing that all of the formal processes for rule-making were followed, overcome the specter of their timing against the looming lawsuit in the process.
The outcome of this case will be important for many reasons it may either reaffirm the place of Chevron in the administrative law scheme or evidence a potential shift in how agency regulations are evaluated by the courts 28 years after that ruling. It may signal uncertainty in the tax code for taxpayers, or it may reaffirm a regulatory position that the IRS finds troubling. Regardless, the coming decision will be an important one for the government and taxpayers alike.
Elizabeth Milito serves as Senior Executive Counsel with the National Federation of Independent Business (NFIB) Small Business Legal Center. NFIB is the leading small business association representing 350,000 small and independent businesses nationwide. Milito is responsible for managing litigation and amicus work for NFIB.
Suggested citation: Elizabeth Milito, Statutory Ambiguity and Judicial Deference to the IRS, JURIST - Hotline, Jan. 28, 2012, http://jurist.org/hotline/2012/01/elizabeth-milito-irs-chevron.php.
This article was prepared for publication by Sean Gallagher, an assistant editor for JURIST's professional commentary service. Please direct any questions or comments to him at firstname.lastname@example.org