At my invitation, the two leading scholars on the intersection of tax and administrative law offer their initial observations on today's important 5-4 Supreme Court decision in United States v. Home Concrete & Supply, LLC, No. 11-139 (Apr. 25, 2012):
Kristin E. Hickman (Minnesota), The Taxpayer Wins, and the Court Avoids the Hard Questions:
For those who followed coverage of January’s oral argument, the Supreme Court’s decision this morning in United States v. Home Concrete & Supply, LLC will come as no surprise. In a 5-4 decision, with Justice Breyer writing for the majority, the Court affirmed the Fourth Circuit’s invalidation of Treas. Reg. § 301.6501(e)-1, holding that the Court’s earlier decision in Colony, Inc. v. Comm’r, 357 U.S. 28 (1958), “determines the outcome of this case” and that language in IRC § 6501(e)(1)(A) extending the limitations period for IRS deficiency assessments “does not apply to an overstatement of basis.” The dissent, written by Justice Kennedy, contended that the 1954 amendments to IRC § 6501(e) were meaningful, that Colony did not consider the 1954 amendments and thus does not control the outcome in Home Concrete, and that “there was room for the Treasury Department to interpret the new provision in” the manner that it did.
From there, the Court split three ways. Justice Breyer, joined by Chief Justice Roberts and Justices Thomas and Alito, spoke at some length regarding the relationship between Chevron deference and stare decisis – a.k.a., the Brand X question. For this plurality of the Court, the outcome of this case is determined at Chevron step one: Congress’s intent with § 6501(e) was clear at the time of Colony and continues to be clear now, at least in the Chevron sense of what it means for Congress’s intent to be clear. Brand X only authorized an agency to adopt regulations contrary to a judicial decision when a statute’s silence or ambiguity represents a congressional delegation of gap-filling authority to the agency. As a result, there was no need to resolve whether the Court ought to extend Brand X to Supreme Court decisions, although the plurality opinion seemed open to the idea. Likewise the four dissenters: By concluding that Colony did not apply at all, the dissenters were able to find § 6501(e) ambiguous and resolve the case at Chevron step two without actually deciding whether Brand X extends to Supreme Court decisions. Nevertheless, the dissenting opinion speaks of a “continuing dialogue among the three branches of Government on questions of statutory interpretation and application,” thus suggesting the theoretical possibility of extending Brand X. Finally, Justice Scalia writing in concurrence continued his outright rejection of the “ugly and improbable structure” created by Mead and Brand X. In short, while the Court offered plenty of rhetoric for administrative law aficionados to chew on, the Court went no further toward actually resolving the applicability of Brand X to its own opinions.
Meanwhile, none of the opinions said a word about the procedural question raised by the case: whether Treasury’s initial promulgation of Treas. Reg. § 301.6501(e)-1 as a temporary regulation with only post-promulgation notice and comment violates Administrative Procedure Act requirements or affects the applicability of Chevron deference. Judges Halpern and Holmes of the U.S. Tax Court concluded unequivocally in their Intermountain concurrence that temporary Treasury regulations violate the APA. The circuit courts in turn disagreed on the significance of the temporary origins of Treas. Reg. § 301.6501(e)-1: the Fifth Circuit submitted that post-promulgation notice and comment is inadequate and that Treasury regulations issued initially in temporary form would be ineligible for Chevron deference; the Seventh Circuit tentatively suggested the opposite; and the D.C. and Federal Circuits concluded that post-promulgation notice and comment cured or left moot any alleged procedural problems caused by Treasury’s use of temporary regulations. Thus, the procedural validity of temporary Treasury regulations and the final regulations that replace them remains up in the air, with hints of a developing circuit split and no guidance from the Supreme Court.
In sum, the Court resolved Home Concrete on the narrowest possible grounds. The Court is often wise in pursuing a minimalist approach. But the unresolved issues pose real problems for tax administration. Given the extensive attention the Brand X and APA questions received in the briefs and in several circuit court opinions, Home Concrete represents something of a missed opportunity for the Court to address these issues clearly and unequivocally.
Steve R. Johnson (Florida State), Initial Reflections on Home Concrete:
On April 25, 2012, the Supreme Court handed down its long awaited decision in United States v. Home Concrete & Supply, LLC ("HC"), resolving a circuit split as to Treasury's attempt to apply the § 6501(e) 6-year assessment limitations period to tax understatements attributable to overstatement of basis. The Court held for the taxpayer but was sharply divided: the plurality opinion written by Justice Breyer commanded four votes, Justice Scalia concurred, and four justices dissented in an opinion penned by Justice Kennedy.
Here are some thoughts about the decision. References to pages in the plurality opinion are noted as (P#), in the concurrence as (C#), and in the dissent as (D#).
First: Many had been concerned that the Court's 2011 decision in Mayo, especially when combined with other deferential rules, could fundamentally unbalance tax litigation, making Treasury regs nearly impervious to challenge. Those of this view should find some comfort in the fact that the Treasury regulation at issue in HC was invalidated. However, that relief should be mixed with caution. The government came within one vote of, via a regulation, overthrowing a prior Supreme Court decision (Colony) which had interpreted the statute. Will the courts be more receptive to regs in situations not involving Supreme Court precedent? The basis for such administrative efforts is the Court's 2005 Brand X decision. Only one justice (Scalia) showed a disposition to dispense with Brand X.
Second: Taxpayers may also take comfort from the treatment of reliance in HC. Taxpayers often challenge Treasury or IRS positional changes in part by arguing that they undercut reliance that taxpayers legitimately had as to the prior position. Justice Scalia advanced a reliance argument (S1,3 & 6). The four dissenters seemed to agree that reliance matters although they felt that, in this instance, the law was too unsettled to allow reasonable reliance (D8).
Third: Taxpayers may also take comfort in the Court's willingness to overrule the judgment of Treasury/IRS. Agency expertise is one of the traditional justifications for judicial deference to agencies, indeed it is one of Chevron's rationales. Yet the HC plurality remarked that, in Colony, "the Court was aware it was rejecting the expert opinion of the Commissioner" (P11), and HC itself does the same thing.
Fourth: The plurality opinion is inconsistent as to stare decisis. The plurality invoked stare decisis in saying that Colony had to be respected. But Colony also said that the statute was ambiguous, but the plurality explained away, that is, refused to treat with respect, that portion of Colony (see P10). The significance is that, under Brand X, an agency can overthrow a prior judicial decision as to an ambiguous statute.
Fifth: One of the most interesting set of issues raises by the HC briefs involved the extent to which tax regulations may be applied retroactively. Many had predicted that the HC decision would not deal with those issues in any depth, and that prediction proved accurate. The most we got was the dissent's statement: "Having worked no change in the law, and instead having interpreted a statutory provision without an established meaning, the Department's regulation does not have an impermissible retroactive effect." (D8) More could and should have been said. Retroactivity will be an issue in future cases.
Sixth HC illuminates several aspects of statutory interpretation. For example, the government had argued that Colony is not controlling because statutory changes after that case was decided showed the intention (or at least receptivity) of Congress to limiting or abrogating Colony. The statutory evidence adduced by the government showed an impressive ability to make much out of seemingly little. Most justices were not persuaded, though. The Court had many times previously cautioned against grand interpretational edifices built on very narrow legislative foundations. E.g., Whitman v. American Trucking Assns., Inc., 531 U.S. 457, 468 (2001) (legislative drafters do not "hide elephants in mouseholes"). Both the plurality and the concurrence took that approach in rejecting the government's "statutory changes" argument (P5 & 7, C6).
Seventh: Also as to statutory interpretation, there is interesting byplay between the concurrence and the dissent. It concerns a core question: what is the role of the courts as to interpreting statutes? The dissent advanced the proposition: "Our legal system presumes there will be continuing dialogue among the three branches of Government on questions of statutory interpretation and application." (D7); see also William D. Popkin, The Collaborative Model of Statutory Interpretation, 61 S. Cal. L. Rev. 541 (1988). Unsurprisingly, Justice Scalia rejected this "romantic, judge-empowering image," in favor of a "Congress is supreme; the role of the courts is to state the meaning of the instructions Congress gave" model (C5).
Eighth: A major set of aspects of HC involve Chevron and its spin-off Brand X. I and many other commentators have argued that Chevron is a doctrinal catastrophe that keeps getting worse year by year. Justice Scalia spoke to this point. Noting the problem identified in Fourth above and other problems, he saw the plurality's opinion as "revising yet again the meaning of Chevron -- and revising it yet again in a direction that will create confusion and uncertainty" (C3; see also C5).
Ninth: I and others have argued that Chevron's Step 1 isn't independent but merges into its Step 2. E.g., Matthew Stephenson & Adrian Vermeule, Chevron Has Only One Step, 95 Va. L. Rev. 597 (2009). Justice Scalia agrees with that view (C2 n.1).
Tenth: A recurring question is whether legislative history is considered at Chevron's Step 1 or its Step 2. Purposivist judges say the former; textualist judges say the latter (or would dispense with legislative history entirely). The plurality opinion was written by a purposivist. Unsurprisingly, Justice Breyer stressed that Step 1 involves all the traditional tools of interpretation (P10).
Eleventh: HC does clarify one aspect of Brand X. The Brand X opinion said that the subsequent regulation, if Chevron entitled, can trump the earlier case unless the case was based upon an unambiguous statute. Commentators have wondered whether the earlier case had to use the "magic words" that "the statute is unambiguous." Sensibly, HC seems to suggest that no magic words are required (see P10; C2).
Twelfth: One cannot read the HC opinions without seeing that old disagreements among the justices have not healed. The justices are still fuming and scrapping about them. These old disagreements include the point identified in Tenth above, Justice's Scalia's continuing belief that Brand X was wrongly decided, and the Scalia-Breyer clash in Mead as to whether we should have bright lines as to when Chevron does or does not apply (see C3).
Thirteenth: For decades, there has been dispute within the tax community between two camps. One sees the proper role for both agencies and courts as finding the "best answer" as to what the statute means. The other sees a range of possible answers and seeks to preserve space, even without underlying statutory change, for evolution of the rules, to reflect experience and changed conditions. HC reflects this dispute. The plurality and concurrence said essentially "Colony told us what the statute means, and there the matter ends" (P 4 & 11; C6); the dissent emphasized the necessity of administrative flexibility (D6-7).