Intermountain Insurance Service of Vail v. Commissioner of Internal Revenue Service

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued April 5, 2011 Decided June 21, 2011

No. 10-1204

INTERMOUNTAIN INSURANCE SERVICE OF VAIL, LIMITED

LIABILITY COMPANY AND THOMAS A. DAVIES, TAX MATTERS

PARTNER,

APPELLEES

v.

COMMISSIONER OF INTERNAL REVENUE SERVICE,

APPELLANT

Appeal from the United States Tax Court

Gilbert S. Rothenberg, Acting Deputy Assistant Attorney

General, U.S. Department of Justice, argued the cause for

appellant. With him on the briefs were Michael J. Haungs and

Joan I. Oppenheimer, Attorneys.

Brian F. Huebsch argued the cause for appellees. With

him on the brief was Steven R. Anderson.

Roger J. Jones, Andrew R. Roberson, and Kim Marie

Boylan were on the brief for amicus curiae Bausch & Lomb

Incorporated in support of appellees.

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Before: SENTELLE, Chief Judge, TATEL, Circuit Judge,

and RANDOLPH, Senior Circuit Judge.

Opinion for the court filed by Circuit Judge TATEL.

TATEL, Circuit Judge: The Commissioner of Internal

Revenue and Intermountain Insurance Service of Vail

disagree about Intermountain’s 1999 gross income to the tune

of approximately $2 million, a disagreement arising from

Intermountain’s sale of assets and centering primarily on the

Commissioner’s conclusion that Intermountain inflated its

basis in those assets. But deciding whether Intermountain

inflated its basis must wait for another day because we must

first answer an antecedent question: did the Commissioner

wait too long to adjust Intermountain’s gross income?

Although the Commissioner usually must make such an

adjustment within three years, sections 6501(e)(1)(A) and

6229(c)(2) of the Internal Revenue Code give the

Commissioner up to six years if the 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.” (emphasis added). Because

in this case the Commissioner waited nearly six years after

Intermountain filed its 1999 tax return, the adjustment was

timely only if a basis overstatement can result in an “omission

from gross income” for purposes of these two provisions. Id.

Believing it does not, the Tax Court granted summary

judgment to Intermountain. For the reasons set forth in this

opinion, we reverse.

I.

The key tax concept at issue in this case is “basis.” Basis

refers to a taxpayer’s capital stake in an item of property—

generally the amount the taxpayer paid to obtain it, as

adjusted by various other factors. 26 U.S.C. § 1012. When a

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taxpayer sells property, he realizes gain from that sale, and

that gain contributes to gross income. Id. § 61(a)(3). But the

taxpayer’s gain from the property sale is not the sale price (or

in technical terms, the “amount realized”) but rather the sale

price minus basis. Id. § 1001. Given the role basis plays in

calculating gross income, a higher basis translates into a lower

gross income. In the real world, of course, people generally

prefer a higher gross income. But when dealing with the tax

collector, lower gross income means a smaller tax bill.

Taxpayers, therefore, prefer a higher basis.

The question this case presents is whether a taxpayer who

overstates basis in sold property and therefore understates

gross income triggers the extended statute of limitations

periods. (For the sake of brevity, we will sometimes refer to

the issue as whether a basis overstatement constitutes an

omission from gross income under the relevant provisions.)

This issue “arises in the context of the now infamous Son of

BOSS tax shelter,” which shields income from taxation by

artificially inflating basis. Appellant’s Br. 4 (internal

quotation marks and citations omitted). As amicus Bausch &

Lomb accurately observes, however, our resolution of this

case will “apply equally to all taxpayers . . . without regard to

the nature of the underlying transaction.” Amicus’s Br. 7; see

also Wilmington Partners v. Comm’r, No. 10-4183 (2d Cir.

filed Oct. 13, 2010). Conscious of that, and because we agree

with the Tax Court that “[t]he details of the transactions are

largely irrelevant to the issues we face today,” we shall refer

to those details only to the extent necessary to explain our

disposition of this case. Intermountain Ins. Serv. of Vail,

L.L.C. v. Comm’r, 134 T.C. 211, 212 (2010) (“Intermountain

II”).

The Commissioner accuses Intermountain Insurance

Service of Vail of using a Son of BOSS tax shelter to avoid

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taxes on approximately $2 million of income. Intermountain

realized that income on August 1, 1999 when it sold its assets

for $1,918,844. On its 1999 Tax Return, filed on September

15, 2000, Intermountain reported a loss from this sale of

$11,420, an amount it calculated by subtracting its purported

basis in the sold assets ($2,061,808) from the sale proceeds

($1,918,844) and the recaptured depreciation ($131,544).

Believing Intermountain had artificially inflated its basis in

those assets, thus converting a substantial gain into a loss, the

IRS mailed Intermountain a Final Partnership Administrative

Adjustment (abbreviated FPAA and pronounced “F-Paw” in

tax-speak) on September 14, 2006, nearly six years after

Intermountain had filed its 1999 Tax Return. The FPAA

concluded that certain Intermountain transactions “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.” Id. at 4 (quoting the FPAA) (alterations in the

original). As a result, the FPAA adjusted Intermountain’s

basis to $0.

Intermountain petitioned the Tax Court and moved for

summary judgment, arguing that the FPAA was untimely

because the IRS mailed it after the expiration of the standard

three year statute of limitations provided for in 26 U.S.C.

§§ 6501(a) and 6229(a) (2000). Insisting that the FPAA was

in fact timely, the Commissioner contended that

Intermountain’s return triggered the extended six year

limitations period, available in the case of any taxpayer, 26

U.S.C. § 6501(e)(1)(A) (2000), or any partnership, 26 U.S.C.

§ 6229(c)(2) (2000), who “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.”

(emphasis added). The alleged omissions to which the

Commissioner pointed were almost all overstatements of

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basis. The key question for the Tax Court, then, was whether

such overstatements qualify as omissions from gross income

under sections 6501(e)(1)(A) and 6229(c)(2) and thus trigger

the six year limitations period. Contending they do not,

Intermountain relied on an earlier tax court decision,

Bakersfield Energy Partners v. Commissioner, 128 T.C. 207

(2007), aff’d, 568 F.3d 767 (9th Cir. 2009), which had applied

the Supreme Court’s decision in Colony, Inc. v.

Commissioner, 357 U.S. 28 (1958). In Colony, the meaning of

which is central to this case, the Supreme Court interpreted

“omits from gross income” in section 6501(e)(1)(A)’s

predecessor to exclude basis overstatements. Id. The Tax

Court agreed with Intermountain that Colony applies to

sections 6501(e)(1)(A) and 6229(c)(2) and that basis

overstatements are not “omissions from gross income.”

Intermountain Ins. Serv. of Vail, L.L.C.. v. Comm’r, 98

T.C.M. (CCH) 144, 2009 WL 2762360 (2009)

(“Intermountain I”). Accordingly, the court granted

Intermountain summary judgment. Id.

Shortly after the Tax Court’s grant of summary

judgment—and implicitly contradicting that decision—the

Internal Revenue Service issued temporary regulations that

interpret the phrase “omits from gross income” in sections

6501(e)(1)(A) and 6229(c)(2) to include basis overstatements

outside the trade or business context. 26 C.F.R.

§§ 301.6501(e)-1T; 301.6229(c)(2)-1T (2010). The Service

reasoned that because I.R.C. section 61(a)’s standard

definition of “gross income” includes “gains derived from

dealings in property,” 26 U.S.C. § 61(a)(3), and because such

gains are ordinarily calculated by subtracting basis from the

amount realized, id. § 1001, “outside the context of a trade or

business, any basis overstatement that leads to an

understatement of gross income under section 61(a)

constitutes an omission from gross income for purposes of

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sections 6501(e)(1)(A) and 6229(c)(2).” Definition of

Omission from Gross Income, T.D. 9466, 74 Fed. Reg.

49,321, 49,321 (Sept. 28, 2009). As for Colony, the Service

concluded that it applies only to section 6501(e)(1)(A)’s

predecessor, pointing out that Congress had enacted section

6501(e)(1)(A) four years before the Supreme Court decided

Colony and had, at that time, added an amendment (limited to

the trade or business context) designed to address the very

same issue later addressed in Colony. Id. Relying on those

temporary regulations, the Commissioner moved the Tax

Court for reconsideration and to vacate its grant of summary

judgment. Denying that motion, the Tax Court found the

temporary regulations inapplicable to Intermountain because

the standard three year statute of limitations had expired prior

to September 24, 2009, the temporary regulations’

applicability date. Intermountain II, 134 T.C. at 218–20. The

Tax Court went on to hold that even assuming the regulations

applied, because Colony “ ‘unambiguously forecloses the

agency’s interpretation’ of sections 6229(c)(2) and

6501(e)(1)(A),” that decision “displaces [the Commissioner’s]

temporary regulations.” Id. at 224 (quoting Nat’l Cable &

Telecomms. Ass’n v. Brand X Internet Servs., 545 U.S. 967,

983 (2005)). For exactly the same reasons, the Tax Court also

granted summary judgment to another petitioner, UTAM.

UTAM, Ltd. v. Comm’r, 98 T.C.M. (CCH) 422, 2009 WL

3739456 (2009).

The Commissioner has appealed the Tax Court decisions

in both cases, and because they raise many of the same issues,

we scheduled oral argument for both on the same day before

the same panel. Although formally resolving only

Intermountain’s case here, we also address UTAM’s

arguments about whether a basis overstatement constitutes an

omission from gross income. In a separate opinion also

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released today, we address issues unique to that case. UTAM,

Ltd. v. Comm’r, No. 10-1262, (D.C. Cir. June 21, 2011).

II.

Determining whether basis overstatements constitute

omissions from gross income and thus trigger the extended

statute of limitations has long provoked debate, the history of

which is critical to understanding this case. Congress first

established the applicable extended statute of limitations in

1934 when it added section 275(c) to the tax code. See

Revenue Act of 1934, ch. 277, 48 Stat. 680, 745, § 275(c)

(codified at 26 U.S.C. § 275(c) (1934)). Section 275(c)

lengthened the standard three year period, 26 U.S.C. § 275(a)

(1934), to five years for omissions from gross income,

providing as follows:

Omission from gross income

If the taxpayer omits from gross income an

amount properly includible therein which is in

excess of 25 per centum of the amount of gross

income stated in the return, the tax may be

assessed, or a proceeding in court for the

collection of such tax may be begun without

assessment, at any time within 5 years after the

return was filed.

Id.

In the 1940s and 1950s, the courts of appeals divided

over how to interpret section 275(c). The Sixth Circuit held

that a basis overstatement qualifies as an omission from gross

income, thus triggering the extended period. See, e.g., Reis v.

Comm’r, 142 F.2d 900, 902–03 (6th Cir. 1944). The Tax

Court interpreted “omits from gross income” similarly. See,

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e.g., Estate of Gibbs v. Comm’r, 21 T.C. 443 (1954); Am.

Liberty Oil Co. v. Comm’r, 1 T.C. 386 (1942). But the Third

Circuit reached the opposite conclusion in Uptegrove Lumber

Co. v. Commissioner, 204 F.2d 570 (3d Cir. 1953). The

taxpayer in that case, a manufacturing corporation, had

accurately reported gross sales, but had then mistakenly

calculated profits by subtracting from the gross sales figure an

inflated amount for the cost of goods sold. Uptegrove Lumber

Co., 204 F.2d at 571. Although recognizing “real ambiguity”

in the statute, the Third Circuit nonetheless concluded based

on section 275(c)’s legislative history that a taxpayer omits an

amount from gross income only when the taxpayer fails to

report an item of gross sales, not when the taxpayer overstates

the cost of that item and thus understates gross income. Id. at

571–73.

One year after Uptegrove Lumber, in 1954, Congress,

apparently responding to the circuit split, added two new

subsections to section 275(c) as part of a major recodification

of the 1939 tax code. Internal Revenue Code of 1954, 68 Stat.

730, Pub. L. 83-591 (Aug. 16, 1954). In doing so, Congress

also renumbered section 275 as section 6501. Id. The

amended text (as relevant to this case) reads:

Omission from gross income. . . .

If the taxpayer 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, the tax may be

assessed, or a proceeding in court for the

collection of such tax may be begun without

assessment, at any time within 6 years after the

return was filed. For the purposes of this

subparagraph—

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(i) In the case of a trade or business,

the term “gross income” means the

total of the amounts received or

accrued from the sale of goods or

services (if such amounts are

required to be shown on the return)

prior to diminution by the cost of

such sales or services; and

(ii) In determining the amount omitted

from gross income, there shall not

be taken into account any amount

which is omitted from gross

income stated in the return if such

amount is disclosed in the return,

or in a statement attached to the

return, in a manner adequate to

apprise the Secretary of the nature

and amount of such item.

26 U.S.C. § 6501(e)(1)(A) (1954). Notably, new

subsection (i) substantially tracks Uptegrove Lumber’s

holding by excluding basis overstatements from the category

of omissions from gross income. The amendment, however,

used a different mechanism to achieve that result. The Third

Circuit had interpreted the phrase “omits from gross income”

to exclude basis overstatements, but Congress literally took

basis out of section 6501(e)(1)(A)’s equation, redefining

“gross income” to mean gross receipts rather than gross

receipts minus the cost of goods sold. One other difference is

particularly important. Although Uptegrove Lumber involved

a manufacturing corporation, its reasoning is not limited to

that context. By contrast, and of critical significance to this

case, subsection (i) applies only “[i]n the case of a trade or

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business.” Finally, section 6501(e)(1)(A) lengthened the

extended statute of limitations from five to six years.

In a letter to the Senate Finance Committee, attorneys

supporting the Third Circuit’s approach stated their “belie[f]

that sub[section] (i) . . . w[as] proposed to reflect the rule of

reason announced by cases like Uptegrove Lumber Company

v. Commissioner.” An Act to Revise the Internal Revenue

Laws of the United States: Hearing on H.R. 8300 Before the

S. Comm. on Finance, 83d Cong. 984–85 (1954) (letter from

Harry N. Wyatt, D’Ancona, Pflaum, Wyatt & Riskind) (added

to the hearing record at the direction of the Committee

Chairman, id. at 961) (“Wyatt Letter”). Worried that the new

provisions would not apply to open tax years governed by the

pre-1954 tax code, they asked the Committee to make the new

subsections retroactive and to indicate that the amendments

merely clarified section 275(c). Id. But to no avail—the

House and Senate Reports characterized subsections (i)

and (ii) as “changes from existing law,” and Congress

nowhere indicated that section 6501(e)(1)(A) would apply

retroactively. H.R. Rep. No. 83-1337, at 503 (1954), reprinted

in 1954 U.S.C.C.A.N. 4017, 4562; S. Rep. No. 83-1622, at

558 (1954), reprinted in 1954 U.S.C.C.A.N. 4621, 5233.

Left unresolved, therefore, was which interpretation—the

Third Circuit’s or the Sixth Circuit and the Tax Court’s—

applied to section 275(c) of the 1939 Code. Over the next

several years, other circuits embraced the Third Circuit’s

approach, but the Sixth Circuit stuck with its earlier rule.

Compare, e.g., Davis v. Hightower, 230 F.2d 549 (5th Cir.

1956) (an overstatement of basis is not an omission from

gross income), with Colony, Inc. v. Comm’r, 244 F.2d 75 (6th

Cir. 1957) (an overstatement of basis is an omission from

gross income), rev’d, 357 U.S. 28 (1958). In light of this

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continued circuit split, the Supreme Court granted certiorari in

Colony.

Starting with section 275(c)’s text, the Supreme Court

explained that “[a]lthough we are inclined to think that the

statute on its face lends itself more plausibly to the taxpayer’s

interpretation”—i.e., that basis overstatements are not

omissions from gross income—“it cannot be said that the

language is unambiguous.” Colony, Inc., 357 U.S. at 33. The

Court therefore looked to section 275(c)’s legislative history,

where it found “persuasive evidence” that Congress, when

adding section 275(c) in 1934, never intended it to apply to

basis overstatements. Id. Relying on these textual and

legislative sources, the Court reasoned that “in enacting

s[ection] 275(c) Congress manifested no broader purpose than

to give the Commissioner an additional two years to

investigate tax returns in cases where . . . the Commissioner is

at a special disadvantage in detecting errors [because] the

return on its face provides no clue to the existence of the

omitted item.” Id. at 36. Believing that “the Commissioner is

at no such disadvantage” when a taxpayer fully reports gross

receipts but inflates the costs associated with those receipts,

the Court concluded that basis overstatements fell beyond

section 275(c)’s scope. Id. at 36–37. Finally, the Court

buttressed its construction of section 275(c) by comparing it

to newly enacted section 6501(e)(1)(A) in the 1954 Code.

“[W]ithout doing more than noting the speculative debate

between the parties as to whether Congress [in 1954]

manifested an intention to clarify” section 275(c)’s meaning,

as the taxpayer had argued, “or to change” that meaning, as

the Commissioner had argued, the Court observed: “the

conclusion we reach is in harmony with the unambiguous

language of § 6501(e)(1)(A) of the Internal Revenue Code of

1954.” Id. at 37.

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Colony thus closed the first round in the debate over

whether a basis overstatement counts as an omission from

gross income, that question having been “resolved for the

future” (at least in the trade or business context) by Congress

when it enacted section 6501(e)(1)(A) and “for earlier taxable

years” (seemingly for all taxpayers) by Colony itself. Id. at

32. Between 1954 and 2010, Congress reenacted section

6501(e)(1)(A) repeatedly and without change. See, e.g., Tax

Reform Act of 1986, Pub. L. No. 99-514, 100 Stat. 2085

(1986). In addition, as part of the Tax Equity and Fiscal

Responsibility Act of 1982, Congress added section

6229(c)(2) to create an extended statute of limitations period

for omissions from gross income appearing (or rather, not

appearing) on partnership returns. Pub. L. No. 97-248, § 402,

96 Stat. 324, 659 (1982). That new section tracks section

6501(e)(1)(A)’s language but without subsections (i) or (ii):

Substantial omission of income.—If any

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 its return, subsection (a) shall

be applied by substituting ‘6 years’ for ‘3

years’.

26 U.S.C. § 6229(c)(2) (1982). At oral argument,

Intermountain suggested that only section 6229(c)(2), not also

section 6501(e)(1)(A), applies to this case. Oral Arg. Tr.

15:13–16:01. But Intermountain never made this argument in

its brief nor has it ever argued, not in the tax court and not on

appeal, that the two sections have different meanings outside

the trade or business context. Intermountain II, 134 T.C. at

212 n.2. Accordingly, we treat as forfeited any argument that

section 6501(e)(1)(A) and its implementing regulation have

no applicability to this case. See Potter v. District of

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Columbia, 558 F.3d 542, 550 (D.C. Cir. 2009) (argument

raised for first time on appeal is forfeited); Ark Las Vegas

Rest. Corp. v. NLRB, 334 F.3d 99, 108 n. 4 (D.C. Cir. 2003)

(argument raised for first time at oral argument is forfeited).

Similarly treating as forfeited any argument that the two

sections might have different meanings outside the trade or

business context, we shall focus our analysis on the earlier

enacted section 6501(e)(1)(A).

All of this brings us nearly to the present. The latest

round in the debate over whether a basis overstatement

constitutes an omission from gross income has arisen in the

last several years, largely in the context of entities, such as

Intermountain, that the Commissioner believes took

advantage of Son of BOSS tax shelters. See, e.g., Bakersfield

Energy Partners v. Comm’r, 568 F.3d 767 (9th Cir. 2009),

aff’g 128 T.C. 207 (2007); Salman Ranch Ltd. v. United

States, 573 F.3d 1362 (Fed. Cir. 2009) (“Salman Ranch I”).

But see Wilmington Partners v. Comm’r, No. 10-4183 (case

involving whether basis overstatement triggers extended

limitations period but no Son of Boss tax shelter allegation).

Because all agree that subsection (i)’s redefinition of gross

income unequivocally answers this question “in the case of a

trade or business,” this debate centers entirely on entities,

such as Intermountain (and UTAM), who operate outside that

context.

In several such cases, including this one, the Tax Court

concluded that Colony controls this latest debate. See

Intermountain I, 98 T.C.M. (CCH) 144; see also Bakersfield,

128 T.C. 207. Although some district courts had held

otherwise, by the time the Tax Court granted Intermountain’s

motion for summary judgment, the Ninth and Federal Circuits

had agreed with it. Compare Burks v. United States, No. 3:06-

cv-1747-N, 2009 WL 2600358 (N.D. Tex. June 13, 2008)

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(basis overstatement is an omission from gross income),

rev’d, 633 F.3d 347 (5th Cir. 2011), and Home Concrete &

Supply, L.L.C. v. United States, 599 F. Supp. 2d 678

(E.D.N.C. 2008) (same), rev’d, 634 F.3d 249 (4th Cir. 2011),

with Salman Ranch I, 573 F.3d 1362 (basis overstatement is

not an omission from gross income), and Bakersfield, 568

F.3d 767 (9th Cir. 2009) (same).

Disagreeing with those circuits, the Commissioner issued

the temporary regulations, described supra at 5–6, that

interpreted sections 6501(e)(1)(A) and 6229(c)(2) to mean

that outside the trade or business context an overstatement of

basis constitutes an omission from gross income, thus

triggering the extended six year statute of limitations.

Simultaneously, the Commissioner issued proposed final

regulations identical to the temporary regulations. Notice of

Proposed Rulemaking, Definition of Omission from Gross

Income, 74 Fed. Reg. 49,354 (Sept. 28, 2009). Approximately

a year later, and after soliciting comments, the Commissioner

withdrew the temporary regulations and replaced them with

largely identical final regulations. See 26 C.F.R.

§§ 301.6501(e)-1; 301.6229(c)(2)-1; see also Definition of

Omission from Gross Income, T.D. 9511, 75 Fed. Reg.

78,897 (Dec. 17, 2010). The Commissioner now contends that

these regulations are entitled to Chevron deference and so

control the question in this case.

Since the Commissioner issued the final regulations,

several of our sister circuits have weighed in on the basis

overstatement debate. The Fourth and Fifth Circuits have now

joined the Ninth and Federal Circuits in holding that Colony’s

interpretation of section 275(c) applies to sections

6501(e)(1)(A) and 6229(c)(2). See Home Concrete & Supply,

L.L.C. v. United States, 634 F.3d 249, 255 (4th Cir. 2011);

Burks v. United States, 633 F.3d 347, 352–59 (5th Cir. 2011).

15

The Fourth and Fifth Circuits also rejected the

Commissioner’s reliance on the final regulations. Home

Concrete & Supply, 634 F.3d at 255–58; Burks, 633 F.3d at

359–61. By contrast, the Seventh Circuit concluded that

Colony does not control and that the Commissioner’s

interpretation of sections 6501(e)(1)(A) and 6229(c)(2) so

aligns with Congress’s clear intent that the Commissioner had

no need even to rely on the regulations. Beard v. Comm’r, 633

F.3d 616 (7th Cir. 2011). Finally, the Federal Circuit, which

had previously found Colony controlling in the absence of

IRS regulations, held that because that decision provides only

the best, but not the exclusive, construction of the phrase

“omits from gross income,” the regulations displaced Colony.

See Grapevine Imps., Ltd. v. United States, 636 F.3d 1368

(Fed. Cir. 2011) (applying Brand X, 545 U.S. 967); see also

Salman Ranch, Ltd. v. Comm’r, __ F.3d __, 2011 WL

2120044 (10th Cir. 2011) (“Salman Ranch II”) (same). In

considering this case, we have taken due account of our sister

circuits’ analyses.

In addition, in 2010 Congress amended sections

6501(e)(1)(A) and 6229(c)(2). See Hiring Incentives to

Restore Employment Act, Pub. L. No. 111-147, 124 Stat. 71,

112. In this opinion, we interpret the version of those sections

applicable to 1999, the tax year at issue in this case. See 26

U.S.C. §§ 6501(e)(1)(A), 6229(c)(2) (2000).

III.

As the Supreme Court just recently made clear, courts

assessing Treasury regulations that interpret the tax code, as

we do here, must apply the two-step framework of Chevron,

U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837,

842–43 (1984). See Mayo Found. for Med. Educ. & Research

v. United States, __ U.S. __, 131 S. Ct. 704, 713–14 (2011).

Employing “traditional tools of statutory construction,”

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Chevron, 467 U.S. at 843 n.9, we begin our Chevron analysis

by “determin[ing] whether Congress has unambiguously

foreclosed the agency’s statutory interpretation.” Vill. of

Barrington v. Surface Transp. Bd., 636 F.3d 650, 659 (D.C.

Cir. 2011) (internal quotation marks omitted). If it has not,

then at Chevron’s second step, we “ask[] whether the

[Commissioner’s] rule is a ‘reasonable interpretation’ of the

enacted text.” Mayo Found., 131 S. Ct. at 714 (quoting

Chevron, 467 U.S. at 844).

Although we ordinarily begin a Chevron step one inquiry

with the statute’s text, given the peculiar circumstances of this

case, we must first assess Colony’s relevance to the question

presented. Indeed, Intermountain’s argument largely “starts

and ends” with Colony. Oral Arg. Tr. 15:07–15:08. Because

“[a]t new [section] 6501(e)(1)(A) Congress adopted the exact

same language the Supreme Court interpreted in Colony,”

Intermountain claims we need do nothing more than apply

Colony’s holding to this case. Appellees’ Br. 39.

Intermountain is, of course, correct that in 1954 Congress

transferred essentially all of section 275(c)’s text into section

6501(e)(1)(A), and then added two new subsections. Had the

meaning of the transferred text been well-established—either

because the text itself was unambiguous or because, although

it was ambiguous, the courts and Treasury had consistently

interpreted it—then we would agree with Intermountain that

this case is easy. We would simply assume Congress intended

the text to convey that established pre-reenactment meaning.

See Davis v. United States, 495 U.S. 472, 482 (1990) (noting

that “Congress’ reenactment of the statute . . ., using the same

language, indicates its apparent satisfaction with the

prevailing interpretation of the statute” where the prevailing

interpretation had first been offered by the Commissioner of

Internal Revenue and then been consistently “relied on” by

the courts).

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But we face a far different set of circumstances because

the language Congress borrowed from section 275(c) was not

only understood to be ambiguous, see, e.g., Uptegrove

Lumber, 204 F.2d at 571 (noting “real ambiguity” in section

275(c)’s text), but had been interpreted one way by the Sixth

Circuit and another by the Third. Compare Reis, 142 F.2d at

902–03, with Uptegrove Lumber, 204 F.2d at 571. Moreover,

clearly aware of that debate, Congress added subsection (i) to

section 6501(e)(1)(A) to resolve it. See supra at 8–10; see

also Colony, 357 U.S. at 32 (noting that the basis

overstatement debate had been “resolved for the future by

[section] 6501(e)(1)(A)”); Pet’r’s Reply Br. 8, Colony, Inc.,

357 U.S. 28 (1958) (No. 306), 1958 WL 91877 (explaining

that subsection (i) will “prevent future controversies as to the

applicability of the extended limitation period in ‘cost of

goods sold’ cases”); Wyatt Letter at 984–85 (expressing the

“belie[f] that sub[section] (i) . . . w[as] proposed to reflect the

rule of reason announced by cases like Uptegrove Lumber

Company v. Commissioner”). As the Seventh Circuit aptly

observed, “Congress, when revising [the provision at issue

here], was responding not to a unifying decision such as

Colony, but rather to the confusion throughout the circuits.”

Beard, 633 F.3d at 622. Under these circumstances, we

cannot simply assume that the Congress that enacted section

6501(e)(1)(A) understood the phrase “omits from gross

income” in the same way as the Congress that originally

enacted section 275(c). Cf. Jama v. Immigration & Customs

Enforcement, 543 U.S. 335, 349 (2005) (refusing to presume

that Congress had incorporated purportedly settled

interpretations of a statute when reenacting it where “[n]either

of the two requirements for congressional ratification [had

been] met . . . : Congress did not simply reenact [the statute]

without change, nor was the supposed judicial consensus so

broad and unquestioned that we must presume Congress knew

of and endorsed it”). Nor can we assume that the Supreme

18

Court’s 1958 interpretation of that phrase’s pre-1954, pre-

reenactment meaning necessarily applies post-1954, post-

reenactment. Accordingly, before applying Colony to section

6501(e)(1)(A), we must determine whether the Supreme

Court even considered how Congress in 1954 understood the

text it borrowed from section 275(c).

Significantly, the Court concluded that the one source of

continuity between section 275(c) and section

6501(e)(1)(A)—the statutes’ essentially identical text—was

indeterminate. After all, the Court explained, “it cannot be

said that the language [of section 275(c)] is unambiguous.”

See Colony, 357 U.S. at 33 (emphasis added). As a result, the

Court ultimately relied on a different source, one not shared

by section 275(c) and section 6501(e)(1)(A)—namely, section

275(c)’s legislative history. By contrast, the Court considered

neither section 6501(e)(1)(A)’s legislative history nor the

context in which Congress passed that provision. This was no

mere oversight. Colony and the Commissioner both cited

these materials and debated whether Congress in 1954 had

endorsed Colony’s or the Commissioner’s interpretation of

the relevant text. Pet’r’s Br. 23–24, Colony, 357 U.S. 28

(1958) (No. 306), 1958 WL 91875; Resp’t’s Br. 23–24,

Colony, 357 U.S. 28 (1958) (No. 306), 1958 WL 91876;

Pet’r’s Reply Br. 6–8, Colony, Inc., 357 U.S. 28 (1958) (No.

306), 1958 WL 91877. The Court expressly declined to

resolve this debate, however, viewing it as entirely

“speculative.” Colony, 357 U.S. at 37 (“And without doing

more than noting the speculative debate between the parties as

to whether Congress [in 1954] manifested an intention to

clarify or to change the 1939 Code . . . .”).

Nor do the Court’s few references to section

6501(e)(1)(A) suggest it actually considered that provision’s

potentially distinctive meaning. Indeed, the Court first

19

mentioned the new statute in order to explain that although

the question presented had been “resolved for the future by

[section] 6501(e)(1)(A) of the Internal Revenue Code of

1954,” it had nonetheless granted certiorari because that

question remained unresolved “for earlier taxable years” still

governed by section 275(c). Colony, 357 U.S. at 32. Rather

than signaling that it was interpreting both the pre- and post-

1954 tax code, this passage strongly suggests that the Court

was focusing on section 275(c), not section 6501(e)(1)(A).

Intermountain’s sole argument to the contrary focuses on

Colony’s only other reference to section 6501(e)(1)(A), in

which the Court “observe[d] that the conclusion we reach

[about the meaning of section 275(c)] is in harmony with the

unambiguous language of [section] 6501(e)(1)(A) of the

Internal Revenue Code of 1954.” Id. at 37. Because the Court

cited only section 6501(e)(1)(A), not that section’s new

subsections, Intermountain insists that the Court must have

been referring to section 6501(e)(1)(A)’s principal

paragraph—i.e., the one at issue in this appeal. According to

Intermountain, then, the “harmony” the Court observed was

between its holding and the meaning of the phrase “omits

from gross income” in section 6501(e)(1)(A).

The problem with Intermountain’s reading is that it

makes this passage incomprehensible. In that passage, the

Court called section 6501(e)(1)(A)’s text “unambiguous,”

even though earlier in the opinion it had characterized section

275(c)’s text as ambiguous. See Colony, 357 U.S. at 33 (“[I]t

cannot be said that the language [of section 275(c)] is

unambiguous.” (emphasis added)). Intermountain would thus

have us believe that within the span of just four pages of the

U.S. Reports, the Supreme Court illogically described

essentially identical text as both ambiguous and unambiguous.

We think a far more sensible reading is that the Court was

20

referring only to section 6501(e)(1)(A)’s new subsection (i).

After all, subsection (i) is certainly “unambiguous” and, by

redefining gross income to mean gross receipts, subsection (i)

provides a rule “in harmony” with Colony’s holding. Colony,

357 U.S. at 37. Indeed, both Colony and the Commissioner

made exactly this point to the Court, explaining that

“[s]ubsection (i) expressly spells out the construction of

Section 275(c) contended for by” Colony. Pet’r’s Br. 24,

Colony, 357 U.S. 28 (1958) (No. 306), 1958 WL 91875; see

also Pet’r’s Reply Br. 8, Colony, Inc., 357 U.S. 28 (1958)

(No. 306), 1958 WL 91877 (explaining that subsection (i) will

“prevent future controversies as to the applicability of the

extended limitation period in ‘cost of goods sold’ cases”);

Resp’t’s Br. 23–24, Colony, 357 U.S. 28 (1958) (No. 306),

1958 WL 91876. Of course, there are differences between

Colony’s holding and subsection (i). Most important for our

purposes, subsection (i) applies only to the sale of goods or

services in the trade or business context, while nothing in

Colony suggests that the Court’s holding is so limited. But

given that Colony described itself as a taxpayer in a trade or

business with income from the sale of goods or services—i.e.,

as falling within subsection (i)’s scope had the subsection

applied pre-1954—the Court had no reason to remark on this

particular divergence. See Comm’r’s Reply Br. 6–7, UTAM,

Ltd. v. Comm’r, No. 10-1262 (D.C. Cir. Feb. 28, 2011)

(reviewing how Colony described itself in its briefs to the tax

court and the Supreme Court); see also Salman Ranch II, __

F.3d __, 2011 WL 2120044, at *6 (explaining that Colony

would have fit within the scope of subsection (i)); Beard, 633

F.3d at 620 (same).

In sum, to the extent the Court in Colony referred to

section 6501(e)(1)(A), it did so only to acknowledge that it

was interpreting section 275(c) consistently with the new

subsection (i) that Congress had added in 1954 to address the

21

same issue prospectively in the trade or business context.

Because that observation does not directly control the

question presented here, and because it otherwise seems clear

to us that the Court in Colony dealt only with the limited task

of interpreting section 275(c) of the 1939 code for cases

arising under that code, we believe the Court left unresolved

the issue now before us—namely, how to interpret section

6501(e)(1)(A)’s “omits from gross income” language in cases

that fall beyond subsection (i)’s scope. It is to that question

that we now turn, keeping in mind that we may only reject the

Commissioner’s interpretation at Chevron step one if

Congress has unambiguously foreclosed it. Vill. of

Barrington, 636 F.3d at 659.

Focusing first on section 6501(e)(1)(A)’s relevant text—

“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”—we are, though not

technically bound by Colony, see supra 16–21, nonetheless

inclined to agree with the Supreme Court’s judgment that this

text, even read in isolation, is susceptible to both the

Commissioner’s and Intermountain’s interpretations. Colony,

357 U.S. at 33 (“[I]t cannot be said that the language [of

section 275(c)] is unambiguous”). But even if we disagreed

with the Court, once that text is read in the context of the new

subsection (i), added in 1954, we think the Commissioner’s

reading quite possibly better. Remember that subsection (i)

expressly redefines “gross income” in the trade or business

context such that overstatements of basis cannot themselves

trigger the extended statute of limitations. Because

Intermountain’s interpretation of section 6501(e)(1)(A)’s

principal paragraph would accomplish exactly the same result

but for all taxpayers, including those engaged in a trade or

business, its interpretation renders subsection (i) largely

redundant. In effect, Intermountain contends that Congress

22

added a provision designed to exempt basis overstatements

even though it believed that the existing language already

accomplished exactly that goal. Because we generally

presume Congress does not add provisions that simply

replicate what the statute already does, see Stone v. INS, 514

U.S. 386, 397–98 (1995), we believe it at least plausible that

in 1954 Congress understood the “omits from gross income”

language to include basis overstatements and added

subsection (i) as an exception limited to the trade or business

context.

Resisting that conclusion, Intermountain points out that

“gross income” plays two different roles in section

6501(e)(1)(A), only one of which its interpretation makes

superfluous. Specifically, subsection (i)’s gross income

definition affects not only what counts as an “omission from

gross income,” but also whether a taxpayer’s total omissions

exceed 25 percent “of the amount of gross income stated in

the return,” thus triggering the extended period. 26 U.S.C. §

6501(e)(1)(A) (emphasis added). Because its interpretation of

“omits from gross income” in no way encroaches on

subsection (i)’s second role, Intermountain contends, any

redundancy between that interpretation and subsection (i)’s

first role is irrelevant.

Intermountain’s point is well taken, but it fails to account

fully for subsection (i)’s first role—the one its interpretation

admittedly makes irrelevant and that actually led Congress to

add subsection (i) in the first place. Recall that Congress

added subsection (i) amidst a debate that had divided the

courts of appeals and that specifically revolved around

whether basis overstatements constituted omissions from

gross income. See supra 7–10. Given that context, it seems

obvious that Congress intended subsection (i) to resolve that

debate in the taxpayers’ favor, though only in the trade or

23

business context. Indeed, that is exactly how the amendment

was contemporaneously understood by the amendment’s

supporters, by the parties who argued Colony, and by the

Supreme Court itself. See supra 17 (citing Colony, 357 U.S. at

32; Pet’r’s Reply Br. 8, Colony, Inc., 357 U.S. 28 (1958) (No.

306), 1958 WL 91877; Wyatt Letter at 984–85). Thus,

although Intermountain is technically correct that its

interpretation avoids turning subsection (i) into surplusage,

we agree with the Seventh Circuit that it nonetheless

“certainly diminishe[s]” the provision’s independent

significance in a way seemingly at odds with Congress’s

original intent. Beard, 633 F.3d at 622; see also Babbitt v.

Sweet Home Chapter of Cmtys. for a Great Or., 515 U.S. 687,

701 (1995) (“When Congress acts to amend a statute, we

presume it intends its amendment to have real and substantial

effect.” (internal quotation marks omitted)).

Perhaps recognizing this problem, the Ninth Circuit

suggested that Congress enacted subsection (i) only to clarify

the statute’s previous meaning, not to change it. See

Bakersfield, 568 F.3d at 776. According to this theory,

Congress believed the phrase “omits from gross income”

already excluded basis overstatements yet passed

subsection (i) to make that understanding unmistakably clear.

But this theory is hardly robust enough to satisfy Chevron

step one’s demanding burden. Moreover, section

6501(e)(1)(A)’s House and Senate Committee reports both

directly contradict this so-called clarification theory by

characterizing subsection (i) as a “change[] from existing

law” that “redefine[s]” gross income in the trade or business

context. H.R. Rep. No. 83-1337, at 503 (1954), reprinted in

1954 U.S.C.C.A.N. at 4562; S. Rep. No. 83-1622, at 558

(1954), reprinted in 1954 U.S.C.C.A.N. at 5233. We are thus

unpersuaded that Congress intended subsection (i) as a mere

clarification.

24

Finally, Intermountain argues that even if the “omits from

gross income” language had an ambiguous meaning when

passed in 1954, Congress has since ratified the application of

Colony’s interpretation to sections 6501(e)(1)(A) and

6229(c)(2). In support, it points out that Congress reenacted

section 6501(e)(1)(A) many times and that it enacted section

6229(c)(2)—all after the Court in Colony definitively

interpreted section 275(c)’s corresponding language. This

theory, however, collides with our understanding of Colony as

interpreting only section 275(c). See supra 16–21. Given that

the Supreme Court limited itself to interpreting section

6501(e)(1)(A)’s predecessor, we have no reason to presume

from Congress’s silence that it treated that opinion as having

authoritatively interpreted section 6501(e)(1)(A) itself. Nor do

we see any clear reason to treat section 6229(c)(2) differently,

especially since it seems likely that when first enacting that

section, Congress intended it to have the same meaning as

still-operative section 6501(e)(1)(A) rather than that of long-

since defunct section 275(c).

In a post-argument letter filed pursuant to Federal Rule of

Appellate Procedure 28(j), Intermountain offers a variation on

this reenactment theory based on “the Commissioner’s prior

position [i.e., before the Son of BOSS controversy] on the

import and effect of the Supreme Court’s decision in Colony.”

Appellees’ 28(j) Letter 1, Apr. 11, 2011. Intermountain’s

unsolicited attempt to introduce a new legal theory based on

long-available sources neither included in its brief nor even

raised at oral argument comes far too late to warrant our

attention. See United States ex rel. Miller v. Bill Harbert Int’l

Const., Inc., 608 F.3d 871, 878 n.1 (D.C. Cir. 2010) (treating

as forfeited arguments raised for the first time in a post-oral

argument 28(j) letter unless based on new authority).

25

In sum, because the Court in Colony never purported to

interpret section 6501(e)(1)(A); because section

6501(e)(1)(A)’s “omits from gross income” text is at least

ambiguous, if not best read to include overstatements of basis;

and because neither the section’s structure nor its legislative

history nor the context in which it was passed nor its

reenactment history removes this ambiguity, we conclude

that, outside the trade or business context, nothing in section

6501(e)(1)(A) unambiguously forecloses the Commissioner

from interpreting “omissions from gross income” as including

basis overstatements. We reach the same conclusion with

respect to section 6229(c)(2) in light of Intermountain’s

failure to timely raise any argument that the two provisions

should be interpreted differently outside the trade or business

context. See supra 12–13.

IV.

Given this conclusion, we would ordinarily next analyze

the Commissioner’s interpretation of sections 6501(e)(1)(A)

and 6229(c)(2) under Chevron step two. But Intermountain

insists that the Commissioner’s interpretation is entitled to no

Chevron deference at all. Specifically, it argues that the

regulations were promulgated in a manner that lacked “ ‘the

fairness and deliberation that should underlie a

pronouncement’ meriting Chevron deference” given that the

“Commissioner[] reactive[ly] issu[ed] . . . the [regulations]

immediately following the rejection of his identical litigating

position by two Courts of Appeals and the Tax Court.”

Appellees’ Br. 37 (quoting United States v. Mead Corp., 533

U.S. 218, 230 (2001)). Embracing this argument, amicus

Bausch & Lomb quotes the Second Circuit’s decision in

Chock Full O’ Nuts Corp. v. United States: “[T]he

Commissioner may not take advantage of his power to

promulgate retroactive regulations during the course of

litigation for the purpose of providing himself with a defense

26

based on the presumption of validity accorded to such

regulations.” 453 F.2d 300, 303 (2d Cir. 1971).

Notwithstanding the rhetorical force of this argument, we

agree with the Commissioner that it runs afoul of binding

Supreme Court precedent that has, for all practical purposes,

superseded Chock Full O’ Nuts. As a general matter, the

Supreme Court has made crystal clear that it is utterly

“irrelevant” to the question of whether Chevron deference is

due “[t]hat it was litigation which disclosed the need for the

regulation.” Smiley v. Citibank (South Dakota), N.A., 517 U.S.

735, 741 (1996). Indeed, just this Term, while granting

Chevron deference to another Treasury regulation interpreting

the tax code, the Supreme Court explained that “we have

found it immaterial to our analysis that a regulation was

prompted by litigation.” Mayo Found., 131 S. Ct. at 712

(internal quotation marks omitted). Nor, the Court has held,

does it matter that the agency promulgating the regulation is a

party in the very case that prompted the regulation and that

the agency, having lost in the lower courts, now seeks to rely

on the regulation to reverse its loss on appeal. Confronting

exactly that scenario in United States v. Morton, the Court

reasoned that even “assuming the promulgation of [the

regulation] was a response to this suit, that demonstrates only

that the suit brought to light an additional administrative

problem of the type that Congress thought should be

addressed by regulation.” 467 U.S. 822, 835 n.21 (1984).

Indeed, according to the Commissioner, that is exactly the

case here where “[f]or almost 50 years, no problems regarding

Colony’s application of [section] 6501(e)(1)(A) outside the

trade-or-business context occurred until 2007, when the Tax

Court . . . and the Court of Federal Claims . . . applied Colony

to block application of the six-year assessment period to

understated capital gain resulting from basis overstatements.”

Appellant’s Br. 48 (referring to Bakersfield, 128 T.C. 207 and

27

Grapevine Imports, 77 Fed. Cl. 505 (2007), rev’d, 636 F.3d

1368). Thus bound by exactly on-point Supreme Court

precedent, we reject Intermountain’s argument.

The partnership in the companion case, UTAM, offers

another argument for denying Chevron deference to the

Commissioner—namely, that “[i]nterpreting a statute of

limitations [like the ones here] is outside Treasury’s

expertise.” Appellee UTAM’s Br. 34, UTAM, Ltd., No. 10-

1262 (D.C. Cir. Feb. 7, 2011). UTAM finds some support for

this argument in a Third Circuit decision ruling Chevron

inapplicable to INS’s interpretation of a statute of limitations

because “a statute of limitations is a general legal concept

with which the judiciary can deal at least as competently as

can an executive agency.” Bamidele v. INS, 99 F.3d 557, 562

(3d Cir. 1996). Expressly rejecting that analysis, the Fourth

Circuit recognized that statutes of limitations may be

embedded within complex and deeply interconnected

regulatory systems, thus requiring “precisely the sort of

agency expertise to which Chevron requires the courts to

defer.” See Asika v. Ashcroft, 362 F.3d 264, 271 n.8 (4th Cir.

2004). Although this circuit has yet to decide whether or

under what circumstances to give Chevron deference to

agency interpretations of statutes of limitations, we find the

Fourth Circuit’s reasoning more persuasive than the Third’s,

at least in the context of this case. Cf. Kennecott Utah Copper

Corp. v. Dep’t of Interior, 88 F.3d 1191, 1210 (D.C. Cir.

1996) (assuming without deciding that Chevron deference

was owed an Interior regulation interpreting a statute of

limitations); Nat’l Grain & Feed Ass’n v. OSHA, 845 F.2d

345, 346 (D.C. Cir. 1988) (per curiam) (suggesting that

Chevron deference would be owed to an OSHA regulation

interpreting a statute of limitations were OSHA to later issue

one). The interpretive question here is exactly like the one

described by the Fourth Circuit, involving, as it does, the

28

Commissioner’s complex administrative system for assessing

tax deficiencies and his expert interpretation of technical

statutory language (“omits from gross income”).

Arriving at last at Chevron step two, our task is easy.

Intermountain’s only argument that the Commissioner’s

interpretation is unreasonable is that it conflicts with Colony.

But having held that Colony applies neither to section

6501(e)(1)(A) nor to section 6229(c)(2), see supra 16–21, we

see nothing unreasonable in the Commissioner’s decision to

diverge from Colony’s holding.

V.

Finally, Intermountain and UTAM advance several

arguments for why the regulations neither apply to

Intermountain (or UTAM) nor were validly promulgated. We

consider each in turn.

Reiterating an argument on which the Tax Court relied,

Intermountain first contends that the Commissioner’s

regulations are inapplicable to this case under their own

“effective/applicability date” provisions. Those provisions

state:

Effective/applicability date. . . . [T]his section

applies to taxable years with respect to which

the period for assessing tax was open on or

after September 24, 2009.

26 C.F.R. §§ 301.6501(e)-1(e)(1); 301.6229(c)(2)-1(b)

(2011); see also 26 C.F.R. §§ 301.6501(e)-1T(b) (2009);

301.6229(c)(2)-1T(b) (The temporary regulations in effect

when the Tax Court ruled included a slightly different version

of this provision which, with the changes italicized, stated:

“The rules of this section apply to taxable years with respect

29

to which the applicable period for assessing tax did not expire

before September 24, 2009.”). In the preamble to the final

regulations, the Commissioner interpreted the phrase “the

period for assessing tax” to include “all assessment periods

Congress has provided, including the six-year period,”

Appellant’s Reply Br. 28, meaning “the final regulations

apply to taxable years with respect to which the six-year

period for assessing tax under section 6229(c)(2) or

6501(e)(1) was open on or after September 24, 2009,” T.D.

9511, 75 Fed. Reg. at 78,898. The preamble, in turn, explains

that a taxable year is “open” if, among other things, it is the

“subject of any case pending before any court of competent

jurisdiction . . . in which a decision had not become final

(within the meaning of section 7481).” Id. Finally, section

7481 provides, in effect, that a decision is not final “until the

last bell has rung in the last court.” Appellant’s Reply Br. 29.

In other words, according to the Commissioner, the

regulations apply at least to any taxpayer or partnership

whose case was pending in any court at any level on or after

September 24, 2009, which all agree includes Intermountain.

See also IRS Chief Counsel Notice CC-2010-001 (Nov. 23,

2009) (interpreting “the temporary regulations [to] apply to

any docketed Tax Court case in which the period of

limitations under sections 6229(c)(2) and 6501(e)(1)(A), as

interpreted in the temporary regulations, did not expire with

respect to the tax years at issue, before September 24, 2009,

and in which no final decision has been entered.”).

Intermountain argues that the Commissioner’s

interpretation essentially requires us to apply the regulations

before determining whether they are even applicable—an

approach the Tax Court characterized as “irreparably marred

by circular, result-driven logic.” Intermountain II, 134 T.C. at

219. Instead, Intermountain argues, we must first apply the

applicability provision based not on the new law set out in the

30

regulations’ other provisions, but rather on the law as it

existed before the regulations were issued. Because

Intermountain believes that Colony represents the pre-

regulation state of the law, and because under Colony only the

three year statute of limitations would have applied,

Intermountain insists that the only relevant “period for

assessing tax” expired, and so closed, before September 24,

2009. According to Intermountain, then, the regulations do

not even reach this case.

We grant the highest level of deference to an agency’s

interpretation of its own regulations, deferring unless the

interpretation is “plainly erroneous or inconsistent with the

regulation.” Auer v. Robbins, 519 U.S. 452, 461 (1997)

(internal quotation marks omitted). Although Intermountain’s

critique has some force, we think it ultimately insufficient to

overcome this extraordinarily deferential standard of review.

To begin with, Intermountain’s argument depends in

significant part on the notion, rejected above, that before the

regulations issued, Colony applied to sections 6501(e)(1)(A)

and 6229(c)(2). But because the pre-regulation state of the

law was neither settled nor clear, the Commissioner could

reasonably read each of the regulations’ provisions, including

the applicability provision, in light of the others. Moreover,

we have no doubt that the Commissioner intended from the

moment these regulations issued to apply them to cases

pending as of September 24, 2009, leaving us confident that

this interpretation is no “post-hoc rationalization[].” Bowen v.

Georgetown Univ. Hosp., 488 U.S. 204, 212 (1988) (internal

quotation marks omitted). After all, the regulations were

prompted by, among other things, this and other similar

pending cases; the interpretation was first articulated in a

Chief Counsel’s Notice shortly after publication of the

temporary regulations and while the final regulations’

comment period remained open; and the Commissioner

31

announced his definitive interpretation in the preamble to the

final regulations. In sum, although the Commissioner created

a needlessly complex problem for himself by drafting a fairly

cryptic applicability provision, his interpretative solution is

neither plainly erroneous nor inconsistent with the regulation.

The regulations thus apply to this case.

Intermountain next contends that applying the regulations

under the circumstances of this case would make them

impermissibly retroactive. This is so, Intermountain says,

because the regulations change settled law—namely,

Colony’s interpretation of sections 6501(e)(1)(A) and

6229(c)(2)—thus disrupting the expectations of taxpayers or

partnerships who filed returns for tax years prior to the

regulations’ effective date. We disagree. Because Colony

never applied to section 6501(e)(1)(A) or section 6229(c)(2),

see supra 16–21, there was no settled law for the regulations

to change. Given our treatment of Colony, the most

Intermountain might have argued is that the regulations raise

a different sort of retroactivity issue, i.e., that they bring

clarity to an area of the law that had been ambiguous during

the tax year at issue in this case. But because neither

Intermountain nor UTAM makes this particular argument, we

decline to consider it. United States v. Reeves, 586 F.3d 20, 26

(D.C. Cir. 2009) (declining to address an argument not argued

on appeal).

Focusing next on the regulatory process, UTAM and

amicus Bausch & Lomb urge us not to apply the final

regulations because, they say, the Commissioner failed to

keep an “open mind” during the notice-and-comment period.

Ordinarily, we evaluate an agency’s so-called open

mindedness only when it issues final regulations without the

requisite comment period and then tries to cure that

Administrative Procedure Act violation by holding a post-

32

promulgation comment period. See, e.g., Advocates for

Highway & Auto Safety v. Fed. Highway Admin., 28 F.3d

1288, 1291–93 (D.C. Cir. 1994). Here, the Commissioner

simultaneously issued immediately effective temporary

regulations and a notice of proposed rulemaking for identical

final regulations and then held a 90-day comment period

before finalizing the regulations. According to UTAM and

Bausch & Lomb, that procedure, although typical of the

Commissioner’s practice, violates the Administrative

Procedure Act, thus requiring an open-mindedness inquiry.

Even assuming the applicability of this framework,

however, we believe the final regulations were validly

promulgated. UTAM and Bausch & Lomb criticize the

Commissioner for the preamble’s “silen[ce] regarding the

numerous arguments” advanced in voluminous related

litigation, Amicus’s Br. 14–15, and for “ma[king] only

immaterial changes” in response to those comments, Appellee

UTAM’s Br. 55. But an open-mindedness review focuses not

on whether the Commissioner responded to litigants, but

rather on whether he has “afforded the comments [received

during the comment period] particularly searching

consideration.” Advocates for Highway & Auto Safety, 28

F.3d at 1292 (emphasis added) (internal quotation marks

omitted). Moreover, “[w]hile changes and revision are

indicative of an open mind, an agency’s failure to make any

does not mean its mind is closed.” Id. Here, the

Commissioner received only one comment, which

characterized the proposed regulations as having “retroactive

effect ‘in that taxable years which had closed are now

reopened.’ ” T.D. 9511, 75 Fed. Reg. at 78,898 (quoting

comment received). Responding to this comment in the

preamble to the final regulations, the Commissioner

“disagreed with the characterization of the regulations as

retroactive” and noted that “[t]he final regulations have been

33

clarified to emphasize that they only apply to open tax years,

and do not reopen closed tax years.” Id. This last response

appears to mean that although the regulations apply to

pending cases such as this one, they have no applicability to

cases such as Bakersfield Energy Partners, 568 F.3d 767, in

which the Commissioner lost and declined to appeal. The

Commissioner also responded to the commenter’s reliance on

the 1996 amendments to section 7805(b), which prohibit the

Commissioner from making certain regulations retroactive.

Specifically, the Commissioner explained that those

amendments have no applicability to the statutory provisions

interpreted by the regulations and, in any event, that “these

regulations are not retroactive.” T.D. 9511, 75 Fed. Reg. at

78,898. Given the Commissioner’s “searching consideration”

of the comment, we have no doubt that he kept the requisite

open mind. Advocates for Highway & Auto Safety, 28 F.3d at

1292 (internal quotation marks omitted).

VI.

In sum, the Commissioner’s regulations were validly

promulgated, apply to this case, qualify for Chevron

deference, and pass muster under the traditional Chevron two-

step framework. Because the Tax Court concluded otherwise

and failed to apply the Commissioner’s interpretation of

sections 6501(e)(1)(A) and 6229(c)(2), we reverse that court’s

grant of summary judgment. In addition, we remand for the

Tax Court to consider Intermountain’s alternative argument,

made in the tax court but unaddressed there, that

Intermountain avoided triggering the extended statute of

limitations by “adequately disclos[ing] to the IRS the basis

amount it applied in connection with the transaction at issue.”

Appellees’ Br. 57 (emphasis added) (relying on section

6501(e)(1)(A)(ii)).

So ordered.