Paul L. Caron

Saturday, March 12, 2011

Federal Circuit Exacerbates Split on Overstatement of Basis and 6-Year SOL

The Federal Circuit yesterday exacerbated the split in the circuits in holding that a taxpayer's overstatement of basis was an omission of income under § 6501(e) and thus triggered the six-year statute of limitations. Grapevine Imports Ltd. v. United States, No. 2008-5090 (Fed. Cir. Mar. 11, 2011).

Kristin Hickman (Minnesota):

Whereas the Seventh Circuit in Beard found that the statute unambiguously supports the government, and other circuits have found that the statute unambiguously (especially in light of Colony) supports the taxpayers, the Federal Circuit in Grapevine concludes that the statute is ambiguous and, in light of Mayo, Brand X, and Chevron, defers to the government. The court only briefly addresses the procedural shortcomings of the regulations at issue, concluding that any procedural flaws of the temporary Treasury regulations were rendered moot when Treasury issued the final regulations.

Miller & Chevalier Tax Appellate Blog, Federal Circuit Adds to Intermountain Conflict by Deferring to New Regulations That Apply Six-Year Statute to Overstatements of Basis:

The Federal Circuit has ruled for the government in Grapevine, throwing the circuits into further disarray by adopting an approach that differs from all three of the courts of appeals that have previously addressed the Intermountain issue subsequent to the issuance of the new regulations.  Becuase the Federal Circuit had already rejected the government’s construction of the statute in Salman Ranch, the Grapevine case starkly posed the question whether the new regulations had the effect of requiring the court to disregard its prior decision and reach the opposite result.  As we previously reported, at oral argument the day after the decision in Mayo Foundation, the government told the Federal Circuit that Mayo compelled that result.  The court has now agreed. ...

The Grapevine decision is significant in the specific context of the Intermountain cases, as it virtually ensures that a circuit conflict on the issue will persist even if the Seventh Circuit reconsiders its decision in Beard.  And it is the first appellate decision to address in detail the merits of the government’s primary argument that it can overturn the prior adverse decisions in this area by regulation.  More generally, the case is a great illustration of Treasury’s power under the combination of Mayo and Brand X.  The Federal Circuit was keenly aware of the implications of its decision, summarizing it as follows:  “This case highlights the extent of the Treasury Department’s authority over the Tax Code.  As Chevron and Brand X illustrate, Congress has the power to give regulatory agencies, not the courts, primary responsibility to interpret ambiguous statutory provisions.”   Presumably, Treasury will continue to test the limits of how far it can go in exercising that “primary responsibility.”

Miller & Chevalier Tax Appellate Blog, Seventh Circuit to Consider Petition for Rehearing in Beard:

On March 7, the taxpayer filed a petition for rehearing en banc with the Seventh Circuit in Beard, emphasizing that both the Fifth and Fourth Circuits had explicitly disagreed with that decision and reached the opposite result on the Intermountain issue.  Although courts of appeals often deny such petitions without a response, the Seventh Circuit almost immediately directed the government to file a response, which is due March 23.

Today’s pro-government decision by the Federal Circuit in Grapevine perhaps takes a little steam out of the possibility of rehearing since a circuit conflict will likely persist even if the Seventh Circuit rehears the case and reverses itself.

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