Intermountain Insurance Service of Vail, Ltd. Liability Co. v. Commissioner

INTERMOUNTAIN INSURANCE SERVICE OF VAIL, LIMITED

LIABILITY COMPANY, THOMAS A. DAVIES, TAX MATTERS

PARTNER, PETITIONER v. COMMISSIONER OF

INTERNAL REVENUE, RESPONDENT *

Docket No. 25868–06. Filed May 6, 2010.

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 regula-

tions issued after the Court issued its opinion and entered its

decision. Held: R’s motions to reconsider and to vacate will be

denied.

Steven R. Anderson, for petitioner.

Gary J. Merken, for respondent.

SUPPLEMENTAL OPINION

WHERRY, Judge: We issued an opinion and entered our

decision in this case on September 1, 2009. Relying on

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

207 (2007), affd. 568 F.3d 767 (9th Cir. 2009), we decided

that the adjustments made in respondent’s final partnership

administrative adjustment (FPAA) on which this case is based

are barred by the general 3-year period of limitations in sec-

tion 6501(a). 1 See Intermountain Ins. Serv. of Vail, LLC v.

Commissioner, T.C. Memo. 2009–195. Respondent subse-

quently issued two temporary regulations, sections

301.6229(c)(2)–1T and 301.6501(e)–1T, Temporary Proced. &

Admin. Regs., 74 Fed. Reg. 49322–49323 (Sept. 28, 2009),

* 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.

211

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212 134 UNITED STATES TAX COURT REPORTS (211)

and on the basis of the application of those temporary regula-

tions to this case, filed motions to vacate our decision and to

reconsider our opinion. 2 The sole issue now before the Court

is whether the temporary regulations compel us to grant

respondent’s motions.

Background

The transactions at the heart of this case took place in

1999 and were reported on the 1999 Form 1065, U.S. Part-

nership 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 pre-

viously 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 * * * [Inter-

mountain’s] partners’ aggregate federal tax liability’’. Criti-

cally, respondent’s determination revolved around Inter-

mountain’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

2 In our Sept. 1, 2009, opinion, we noted that, although respondent argued that sec.

6501(e)(1)(A) applied, his arguments suggested that he meant to cite sec. 6229(c)(2) instead. See

Intermountain Ins. Serv. of Vail, LLC v. Commissioner, supra n.3. Sec. 6501(e)(1)(A) extends the

3-year period of limitations for assessing tax to 6 years from the due date or the date of the

tax return, whichever is later. See sec. 6501(a). For tax attributable to a partnership item,

the period of limitations remains open at least for 3 years after the date the partnership return

was filed or 3 years after the last day, disregarding extensions, for filing the partnership return,

whichever is later. See sec. 6229(a). Sec. 6229(c)(2) extends the sec. 6229(a) period. Although

there is no period of limitations within which the Commissioner must issue an FPAA, partner-

ship item adjustments made in an FPAA are time barred at the partner level if the FPAA is

not issued within the applicable period of limitations for assessing tax against a partner attrib-

utable to partnership items. See generally Curr-Spec Partners, L.P. v. Commissioner, 579 F.3d

391 (5th Cir. 2009), affg. T.C. Memo. 2007–289; Rhone-Poulenc Surfactants & Specialties, L.P.

v. Commissioner, 114 T.C. 533, 534–535, 542 (2000).

Respondent has not provided support for his argument that sec. 6501(e)(1)(A) or sec.

301.6501(e)–1T, Temporary Proced. & Admin. Regs., 74 Fed. Reg. 49322–49323 (Sept. 28, 2009),

applies to this case. Respondent has only addressed an omission from Intermountain’s partner-

ship return and time periods running from the filing of that return. Nevertheless, the parties

refer to the temporary regulations in tandem. Respondent states in his motion to reconsider that

‘‘The temporary regulations apply to petitioner’s 1999 tax year’’. For the purposes of this Opin-

ion, and because sec. 6501(e)(1)(A) and sec. 301.6501(e)–1T, Temporary Proced. & Admin. Regs.,

supra, could affect the outcome of this case if a partner’s period of limitations was still open

when the FPAA was issued, we will follow the parties’ lead and refer to the temporary regula-

tions in tandem.

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(211) INTERMOUNTAIN INS. SERV. v. COMMISSIONER 213

period of limitations for assessing tax against Intermoun-

tain’s partners. See secs. 6229(a), 6501(a). Respondent con-

ceded that the 3-year limitations period had expired but

argued that an extended 6-year period of limitations applied

instead as a result of Intermountain’s basis overstatement. 3

See secs. 6229(c)(2), 6501(e)(1)(A). A dispute over the proper

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

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’’. Sec.

6501(e)(1)(A) (taxpayer); see sec. 6229(c)(2) (partnership).

The focus of the parties’ dispute was whether an overstate-

ment of basis constitutes an omission from gross income for

purposes of triggering a 6-year limitations period.

This was not an issue of first impression. In Bakersfield

Energy Partners, LP v. Commissioner, supra, we held that a

basis overstatement was not an omission from gross income

for purposes of sections 6229(c)(2) and 6501(e)(1)(A). In

reaching our conclusion, we applied the holding of Colony,

Inc. v. Commissioner, 357 U.S. 28, 33 (1958), in which the

Supreme Court was faced with identical language in section

6501(e)(1)(A)’s predecessor—section 275(c) of the Internal

Revenue Code of 1939. See Bakersfield Energy Partners, LP

v. Commissioner, supra at 215 (‘‘We are unpersuaded by

respondent’s attempt to distinguish and diminish the

Supreme Court’s holding in Colony, Inc. v. Commissioner’’).

The Supreme Court’s holding, as we described it, was ‘‘that

the extended period of limitations applies to situations where

specific income receipts have been ‘left out’ in the computa-

tion of gross income and not when an understatement of

gross income resulted from an overstatement of basis.’’ Id. at

213. The Supreme Court had reviewed the statute’s legisla-

tive history and determined that Congress had not intended

3 The bar of the period of limitations is an affirmative defense, and petitioner bore the burden

of proof. See Rules 39, 142(a); see also Highwood Partners v. Commissioner, 133 T.C. 1, 9 (2009).

Petitioner established a prima facie case that the general 3-year period of limitations had ex-

pired as of the date the FPAA was issued in this case, and respondent conceded as much. Ac-

cordingly, and because respondent never suggested any other reason why the period of limita-

tions with respect to any partner remained open, the burden of going forward shifted to respond-

ent to establish that there was a greater-than-25-percent omission of gross income on a partner’s

or the partnership’s return. See Highwood Partners v. Commissioner, supra at 9; see also Inter-

mountain Ins. Serv. of Vail v. Commissioner, LLC, supra n.2.

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214 134 UNITED STATES TAX COURT REPORTS (211)

a basis overstatement to be an omission from gross income.

See Colony, Inc. v. Commissioner, supra at 33, 36.

We adhered to our precedent in Bakersfield Energy Part-

ners, LP v. Commissioner, supra, when we issued our Sep-

tember 1, 2009, opinion in this case. See Intermountain Ins.

Serv. of Vail, LLC v. Commissioner, T.C. Memo. 2009–195.

Accordingly, in our September 1, 2009, order and decision,

we granted petitioner’s motion for summary judgment and

decided that the adjustments in respondent’s FPAA were

barred by the general 3-year limitations period. That was not

the end of the matter, however.

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 sections

6229(c)(2) and 6501(e)(1)(A). See secs. 301.6229(c)(2)–1T and

301.6501(e)–1T, Temporary Proced. & Admin. Regs., supra.

These temporary regulations were simultaneously issued as

proposed regulations. See sec. 7805(e). On September 28,

2009, notice was published and comments were sought for

sections 301.6229(c)(2)–1 and 301.6501(e)–1, Proposed

Proced. & Admin. Regs., see Notice of Proposed Rulemaking

by Cross-Reference to Temporary Regulations, 74 Fed. Reg.

49354 (Sept. 28, 2009), and the temporary regulations were

published in the Federal Register, see secs. 301.6229(c)(2)–1T

and 301.6501(e)–1T, Temporary Proced. & Admin. Regs.,

supra.

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 * * * [sections

6229(c)(2) and 6501(e)(1)(A)].’’ See secs. 301.6229(c)(2)–1T

and 301.6501(e)–1T, Temporary Proced. & Admin. Regs.,

supra. The interpretation espoused by the temporary regula-

tions runs contrary to the interpretation adopted by this

Court in Bakersfield Energy Partners, LP v. Commissioner,

128 T.C. 207 (2007), and by the Courts of Appeals for the

Ninth and Federal Circuits in Bakersfield Energy Partners,

LP v. Commissioner, 568 F.3d 767 (9th Cir. 2009), 4 and

4 According to T.D. 9466, 2009–43 I.R.B. 551, 552, the temporary regulations are consistent

with a suggestion by the U.S. Court of Appeals for the Ninth Circuit in Bakersfield Energy Part-

ners, LP v. Commissioner, 568 F.3d 767, 778 (9th Cir. 2009), affg. 128 T.C. 207 (2007), that am-

biguity in the statutory language may make the statutes susceptible to reinterpretation through

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(211) INTERMOUNTAIN INS. SERV. v. COMMISSIONER 215

Salman Ranch Ltd. v. United States, 573 F.3d 1362 (Fed.

Cir. 2009), respectively. See T.D. 9466, 2009–43 I.R.B. 551,

552 (‘‘The Treasury Department and the Internal Revenue

Service disagree with these courts that the Supreme Court’s

reading of the predecessor to section 6501(e) in Colony

applies to sections 6501(e)(1)(A) and 6229(c)(2).’’).

Bolstered by the temporary regulations, respondent, on

October 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 Kraasch v. Commissioner, 70 T.C. 623, 626 (1978).

Respondent urges us to reconsider the case, this time

eschewing our prior precedent in favor of the temporary

regulations. Petitioner counters that the temporary regula-

tions are either inapplicable, invalid, or otherwise not enti-

tled to deference. On November 25, 2009, we ordered the par-

ties to file briefs. Pursuant to our order, the parties filed

opening briefs on January 5, 2010. Petitioner and respondent

filed reply briefs on January 27 and February 1, 2010,

respectively.

Discussion

I. Motions To Reconsider and To Vacate

Motions to reconsider and to vacate are governed by Rules

161 and 162, respectively. Those rules establish filing dead-

lines but provide no guidance on when the Court should

grant or deny such motions. In the absence of more specific

guidance, we look to caselaw and the Federal Rules of Civil

Procedure. See Rule 1(b).

The decision to grant motions to reconsider and to vacate

lies within the discretion of the Court. Estate of Quick v.

Commissioner, 110 T.C. 440, 441 (1998) (motion to

reconsider); Kun v. Commissioner, T.C. Memo. 2004–273

(motion to vacate). Motions to reconsider are generally

‘‘intended to correct substantial errors of fact or law and

allow the introduction of newly discovered evidence that the

moving party could not have introduced by the exercise of

regulations. We address this infra note 24.

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216 134 UNITED STATES TAX COURT REPORTS (211)

due diligence in the prior proceeding.’’ Knudsen v. Commis-

sioner, 131 T.C. 185, 185 (2008). ‘‘Reconsideration is not the

appropriate forum for rehashing previously rejected legal

arguments or tendering new legal theories to reach the end

result desired by the moving party.’’ Estate of Quick v.

Commissioner, supra at 441–442. Motions to vacate are gen-

erally not granted absent a showing of unusual cir-

cumstances or substantial error, e.g., mistake, inadvertence,

surprise, excusable neglect, newly discovered evidence, fraud,

or other reason justifying relief. See, e.g., Fed. R. Civ. P.

60(b); Brannon’s of Shawnee, Inc. v. Commissioner, 69 T.C.

999 (1978).

Importantly, an intervening change in the law can warrant

the granting of both a motion to reconsider and a motion to

vacate. See Alioto v. Commissioner, T.C. Memo. 2008–185. 5

In Alioto v. Commissioner, T.C. Memo. 2006–199, the Court

held that it lacked jurisdiction over ‘‘stand-alone’’ section

6015(f) cases. After Congress expanded the Court’s jurisdic-

tion to include such cases, see Tax Relief and Health Care

Act of 2006, Pub. L. 109–432, div. C, sec. 408, 120 Stat. 3061,

the taxpayer filed timely motions to reconsider and to vacate,

which the Court granted. See Alioto v. Commissioner, T.C.

Memo. 2008–185 (‘‘We agree that the Court correctly applied

the caselaw as it existed at the time the Court issued Alioto

I; however, we disagree that the motion for reconsideration

should be denied. After the Court’s decision in Alioto I the

law and the Court’s jurisdiction changed.’’ (Fn. ref. omitted.)).

Respondent asks us to grant the motion to vacate in the

‘‘interests of justice’’ so that we ‘‘may grant the motion for

reconsideration.’’ Citing Alioto v. Commissioner, T.C. Memo.

2008–185, respondent further asserts that the issuance of the

temporary regulations was an ‘‘unusual circumstance’’ war-

ranting reconsideration of our September 1, 2009, opinion.

Petitioner disagrees and attempts to distinguish Alioto v.

Commissioner, T.C. Memo. 2008–185, noting that it involved

‘‘an act of [C]ongress * * *, not a regulation issued by

Respondent, who was a litigant in the case.’’ Along these

lines, petitioner warns that ‘‘Granting Respondent’s Motion

under the circumstances of this case would give Respondent

5 See also Servants of the Paraclete v. Does, 204 F.3d 1005, 1012 (10th Cir. 2000); Cornell v.

Nix, 119 F.3d 1329, 1332–1333 (8th Cir. 1997); Matarese v. LeFevre, 801 F.2d 98, 106 (2d Cir.

1986); McGrath v. Potash, 199 F.2d 166, 167 (D.C. Cir. 1952).

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(211) INTERMOUNTAIN INS. SERV. v. COMMISSIONER 217

license to render litigation futile’’ because ‘‘In every case

where * * * [respondent] receives an adverse decision,

Respondent could simply restate its [sic] unsuccessful argu-

ment as a temporary regulation, and then request

reconsideration based upon the temporary regulation.’’

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 tem-

porary regulations. Ignoring the temporary regulations at

this time would not dispel the evils envisioned by petitioner.

Indeed, respondent could appeal our September 1, 2009, deci-

sion and ask the appellate court to consider the issue 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 pro-

tecting the integrity of the judicial system, as petitioner sug-

gests, 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

Alioto v. Commissioner, T.C. Memo. 2008–185, in this con-

text. 8

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 point-

less to grant them. If, on the other hand, the temporary regu-

lations 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.

6 Tax litigation is expensive, and respondent litigates with taxpayer-provided funds while peti-

tioner 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 dis-

courage taxpayers from asserting their rights under the then-existing law.

7 See Brief for the Appellant at 14, Salman Ranch, Ltd. v. Commissioner, No. 09–9015 (10th

Cir., Feb. 16, 2010); Brief for the Petitioner at 17–18, Commissioner v. M.I.T.A., No. 09–60827

(5th Cir., Mar. 3, 2010).

8 See, e.g., Smiley v. Citibank (S.D.), N.A., 517 U.S. 735, 744 n.3 (1996), which we cited in

our Nov. 25, 2009, order in this case granting respondent’s Oct. 16, 2009, motions for leave to

file out of time the motions to reconsider and to vacate.

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218 134 UNITED STATES TAX COURT REPORTS (211)

II. The Applicability of the Temporary Regulations

The threshold issue in determining whether the temporary

regulations apply to this case is whether the temporary regu-

lations 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 September 24, 2009.’’ Secs. 301.6229(c)(2)–1T(b)

and 301.6501(e)–1T(b), Temporary Proced. & Admin. Regs.,

supra.

The starting point for interpreting a regulatory provision is

its plain meaning. See Walker Stone Co. v. Secy. of Labor,

156 F.3d 1076, 1080 (10th Cir. 1998) (‘‘When the meaning of

a regulatory provision is clear on its face, the regulation

must be enforced in accordance with its plain meaning.’’). We

concluded in our September 1, 2009, opinion that the general

3-year limitations period of section 6501(a) was the

applicable period for assessing tax in this case and that it

had expired some time before September 14, 2006. The plain

meaning of the effective/applicability date provisions

indicates that the temporary regulations do not apply to this

case.

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 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 Bakersfield Energy Partners, LP v.

Commissioner, 128 T.C. 207 (2007), affd. 568 F.3d 767 (9th

9 See IRS Chief Counsel Notice CC–2010–001 (Nov. 23, 2009) stating:

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 tem-

porary regulations 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 year at issue, before September 24, 2009, and in which no final

decision has been entered.

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(211) INTERMOUNTAIN INS. SERV. v. COMMISSIONER 219

Cir. 2009), which held that a 3-year limitations period

applies under the circumstances of this case. We must then

launch a quest for some hypothetical standard that could

trigger a 6-year limitations period. If we discover such a

standard—and the temporary regulations conveniently

supply us with one—then we must apply that standard to

determine whether the period of limitations in this case

could have been open as of September 24, 2009. If the limita-

tions period could have been open under the hypothetical

standard, then the temporary regulations apply to this case.

Essentially, the key, according to respondent, is not

whether the limitations period was actually open on Sep-

tember 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 sections 6229(c)(2) and

6501(e)(1)(A), as interpretated in the regulations, remains

open with respect to that year.’’ (Emphasis added.) 10

Ordinarily, an agency’s interpretation of its own regulation

is controlling unless it is ‘‘plainly erroneous or inconsistent

with the regulation.’’ Auer v. Robbins, 519 U.S. 452, 461

(1997) (internal quotation marks omitted). 11 Here, however,

the Court concludes that respondent’s interpretation of the

temporary regulations’ effective/applicability date provisions

is erroneous and inconsistent with the regulations. Specifi-

cally, we find the interpretation to be irreparably marred by

circular, result-driven logic and the wishful notion that the

temporary regulations should apply to this case because

Intermountain was involved in what he believes was an abu-

sive tax transaction. For these reasons, we refuse to accord

respondent’s interpretation deferential treatment.

10 See

supra note 9.

11 See

also Ariz. Pub. Serv. Co. v. U.S. EPA, 562 F.3d 1116, 1123 n.5 (10th Cir. 2009); Solis

v. Summit Contractors, Inc., 558 F.3d 815, 823 (8th Cir. 2009); Estate of Focardi v. Commis-

sioner, T.C. Memo. 2006–56 (‘‘Our view is further supported by the well-established principle

that the judiciary should accord substantial deference to the Commissioner’s interpretation of

Treasury regulations’’).

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220 134 UNITED STATES TAX COURT REPORTS (211)

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 24, 2009. 12 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

III. Judicial Deference

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 dele-

gate, the] Commissioner [of Internal Revenue], not to the

courts, the task of prescribing all needful rules and regula-

tions for the enforcement of the Internal Revenue Code.’’

Natl. Muffler Dealers Association, Inc. v. United States, 440

U.S. 472, 477 (1979) (internal quotation marks omitted). Yet,

the exact amount of deference owed to Federal tax regula-

tions remains a source of debate.

Petitioner asserts that the temporary regulations are only

entitled to deference under Skidmore v. Swift & Co., 323

U.S. 134, 140 (1944), because they are interpretive regula-

tions. Respondent counters that the more deferential

12 The Court recognizes that respondent may argue that the decisions we rely upon, Bakers-

field Energy Partners, LP v. Commissioner, 568 F.3d 767 (9th Cir. 2009), and Salman Ranch

Ltd. v. United States, 573 F.3d 1362 (Fed. Cir. 2009), holding that the limitations period had

expired before Sept. 24, 2009, do not, in his opinion, make it so. There are 11 other Courts of

Appeals and the Supreme Court still to be heard from, and by accepting as settled law the Ba-

kersfield and Salman Ranch results our rationale may, in respondent’s view, also beg the ques-

tion. Respondent, however, cites no court authorities equivalent to those of the appellate court

decisions, and although he cites the temporary regulations, courts have traditionally determined

the meaning of statutes. See Chevron U.S.A. Inc. v. Natural Res. Def. Council, 467 U.S. 837,

843 n.9 (1984) (stating that ‘‘The judiciary is the final authority on issues of statutory construc-

tion’’). Thus we believe our position is appropriate. We address in section III below why in addi-

tion to Bakersfield Energy Partners, LP v. Commissioner, supra, and Salman Ranch Ltd. v.

United States, supra, we conclude that the 3-year limitations period applied to this case before

Sept. 24, 2009.

13 We also recognize that respondent could amend the temporary regulations’ effective/applica-

bility 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 Murrell v. Shalala,

43 F.3d 1388, 1389 (10th Cir. 1994).

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(211) INTERMOUNTAIN INS. SERV. v. COMMISSIONER 221

standard in Chevron U.S.A. Inc. v. Natural Res. Def. Council,

467 U.S. 837, 842–843 (1984), applies and that, if not, then

the temporary regulations at least fall under Natl. Muffler

Dealers Association, Inc. We need not resolve the parties’ dis-

pute on this issue because, even if the temporary regulations

are entitled to review under Chevron, they face a formidable

obstacle to deference—Colony, Inc. v. Commissioner, 357 U.S.

28 (1958). 14

The temporary regulations were not issued on a blank

slate. In its 1958 opinion in Colony, Inc., the Supreme Court

interpreted the same statutory language and held that a

basis overstatement was not an omission from gross income.

Id. More than 50 years later, respondent and the Treasury

Department issued the temporary regulations and reached

the opposite conclusion. The question is whether we are

bound by the agency’s construction of the statute in the tem-

porary regulations or by the Supreme Court’s prior deter-

mination of congressional intent and the Internal Revenue

Code’s requirements, as set forth in Colony, Inc. Assuming

respondent is correct that the temporary regulations are enti-

tled to Chevron deference, the answer to this question lies in

Natl. Cable & Telecomms. Association v. Brand X Internet

Servs., 545 U.S. 967, 982 (2005).

‘‘A court’s prior judicial construction of a statute trumps an

agency construction otherwise entitled to Chevron deference

only if the prior court decision holds that its construction fol-

lows from the unambiguous terms of the statute and thus

leaves no room for agency discretion.’’ Id. In so holding, the

Supreme Court reasoned as follows:

14 Respondent maintains that Colony, Inc. v. Commissioner, 357 U.S. 28 (1958), does not con-

trol the interpretation of secs. 6229(c)(2) and 6501(e)(1)(A), see T.D. 9466, supra, and that, in

any event, the Supreme Court’s and respondent’s constructions are not necessarily inconsistent.

We held otherwise in Bakersfield Energy Partners, LP v. Commissioner, 128 T.C. 207 (2007),

and in our Sept. 1, 2009, opinion in this case. See Intermountain Ins. Serv. of Vail, LLC v. Com-

missioner, T.C. Memo. 2009–195. We rejected respondent’s arguments in the process, and re-

hashing them now even in this context is not necessary. See Estate of Quick v. Commissioner,

110 T.C. 440, 441 (1998). As we noted previously, we are hesitant to contradict the Supreme

Court’s ruling in Colony. See Intermountain Ins. Serv. of Vail, LLC v. Commissioner, supra n.5.

The Supreme Court has advised lower courts that ‘‘If a precedent of this Court [the Supreme

Court] has direct application in a case, yet appears to rest on reasons rejected in some other

line of decisions, the * * * [lower courts] should follow the case which directly controls, leaving

to this Court the prerogative of overruling its own decisions.’’ Rodriguez de Quijas v. Shearson/

Am. Express, Inc., 490 U.S. 477, 484 (1989). We rule that our analysis here of the legislative

history behind the Colony decision provides further, and we believe determinative, support for

those opinions.

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222 134 UNITED STATES TAX COURT REPORTS (211)

[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. Chevron’s premise is that it is for agencies, not courts, to fill

statutory gaps. * * * The better rule is to hold judicial interpretations con-

tained in precedents to the same demanding Chevron step one standard

that applies if the court is reviewing the agency’s construction on a blank

slate: Only a judicial precedent holding that the statute unambiguously

forecloses the agency’s interpretation, and therefore contains no gap for the

agency to fill, displaces a conflicting agency construction. [Id. at 982–

983. 15]

We are therefore directed to apply Chevron step one by

determining whether the Supreme Court in Colony, Inc. v.

Commissioner, supra, found the statutory provision at issue

to be unambiguous. If so, there is no gap left for the tem-

porary regulations to fill with respect to the statutory provi-

sions at issue here. The first step in Chevron’s two-step anal-

ysis is to ask ‘‘whether Congress has directly spoken to the

precise question at issue.’’ Chevron U.S.A. Inc. v. Natural

Res. Def. Council, supra at 842. ‘‘If the intent of Congress is

clear, that is the end of the matter, for the court, as well as

the agency, must give effect to the unambiguously expressed

intent of Congress.’’ 16 Id. at 842–843.

When determining Congress’ intent, Chevron instructs us

to employ ‘‘traditional tools of statutory construction.’’ Id. at

843 n.9. Many courts, including the Courts of Appeals to

which this case might be appealed, 17 have accepted the use

of legislative history as an important element in Chevron

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 ambi-

guity.’’ Natl. Cable & Telecomms. Association v. Brand X Internet Servs., 545 U.S. 967, 1003

(2005) (Stevens, J., concurring). Justice Stevens’ suggestion has indeed sparked debate over the

applicability of Brand X. Although that debate is still largely open, we note, without approval

or disapproval, that the U.S. Court of Appeals for the Tenth Circuit has held that Brand X does

apply when the prior judicial construction is the Supreme Court’s. See Hernandez-Carrera v.

Carlson, 547 F.3d 1237, 1248 (10th Cir. 2008) (‘‘[W]e conclude that the holding of Brand X ap-

plies whether the judicial precedent at issue is that of a lower court or the Supreme Court.’’).

16 The second step of Chevron specifies as follows:

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 nec-

essary in the absence of an administrative interpretation. Rather, if the statute is silent or am-

biguous with respect to the specific issue, the question for the court is whether the agency’s an-

swer is based on a permissible construction of the statute. [Chevron U.S.A. Inc. v. Natural Res.

Def. Council, 467 U.S. at 843; 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 Inter-

mountain Ins. Serv. of Vail, LLC v. Commissioner, T.C. Memo. 2009–195 n.4 (citing Golsen v.

Commissioner, 54 T.C. 742, 757 (1970), affd. 445 F.2d 985 (10th Cir. 1971)). We did not answer

the question of proper venue and do not do so now. Id.

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(211) INTERMOUNTAIN INS. SERV. v. COMMISSIONER 223

step one. See, e.g., Anderson v. U.S. Dept. of Labor, 422 F.3d

1155, 1180 (10th Cir. 2005) (‘‘To determine whether Congress

had an intent on the precise question at issue, courts utilize

the traditional tools of statutory construction, including the

statutory language and legislative history.’’). 18

Therefore, in determining whether the Supreme Court in

Colony, Inc. v. Commissioner, 357 U.S. 28 (1958), found the

statutory provision at issue to be unambiguous, we will con-

sider the Court’s analysis of both the statutory language and

its legislative history. 19 Respondent calls attention to the

Supreme Court’s statement that ‘‘Although we are inclined to

think that the statute on its face lends itself more plausibly

to the taxpayer’s interpretation, it cannot be said that the

language is unambiguous.’’ 20 Colony, Inc. v. Commissioner,

supra at 33. In doing so, respondent ignores the Supreme

Court’s subsequent review of, and reliance on, the statute’s

legislative history. Although the Supreme Court initially

found the statutory provision ambiguous, that was only a

preliminary conclusion before considering the statute’s legis-

lative history. After thoroughly reviewing the legislative his-

tory, 21 the Supreme Court concluded that Congress’ intent

18 See Catawba County v. EPA, 571 F.3d 20, 35 (D.C. Cir. 2009) (‘‘To be sure, a statute may

foreclose an agency’s preferred interpretation despite such textual ambiguities if its structure,

legislative history, or purpose makes clear what its text leaves opaque.’’); North Dakota ex rel.

Olson v. Ctrs. for Medicare & Medicaid Servs., 403 F.3d 537, 539–540 (8th Cir. 2005); see also

Miccosukee Tribe of Indians v. United States, 566 F.3d 1257, 1273 (11th Cir. 2009); New York

v. U.S. Dept. of Health & Human Servs.’ Admin. for Children & Families, 556 F.3d 90, 97 (2d

Cir. 2009); Natural Res. Def. Council v. U.S. EPA, 526 F.3d 591, 603 (9th Cir. 2008); Wheatland

Tube Co. v. United States, 495 F.3d 1355, 1359–1360 (Fed. Cir. 2007); Succar v. Ashcroft, 394

F.3d 8, 22–23 (1st Cir. 2005). But see United States v. Geiser, 527 F.3d 288, 292 (3d Cir. 2008);

Bankers Life & Cas. Co. v. United States, 142 F.3d 973, 983 (7th Cir. 1998).

The Supreme Court has sent mixed signals about the use of legislative history in Chevron

step one. In Chevron itself, the Court considered legislative history as part of step one. Chevron

U.S.A. Inc. v. Natural Res. Def. Council, 467 U.S. at 862. It has continued to do so in more

recent opinions, and we deduce that it intends to continue this practice. See Gen. Dynamics

Land Sys., Inc. v. Cline, 540 U.S. 581, 587–590, 600 (2004); see also Zuni Pub. Sch. Dist. No.

89 v. Dept. of Educ., 550 U.S. 81, 90–91 (2007). Nevertheless, on occasion, the Court has stopped

short of employing traditional tools of statutory construction, including legislative history. See

Negusie v. Holder, 555 U.S. ll, ll, 129 S. Ct. 1159, 1183 (2009) (Thomas, J., dissenting).

19 Although we have found no opinion in which a court considered legislative history when

applying Brand X, we see no reason why a court—if it considers legislative history when apply-

ing Chevron step one—would not also consider it when applying Brand X.

20 Both parties also refer to the Supreme Court’s observation that ‘‘the conclusion we reach

is in harmony with the unambiguous language of § 6501(e)(1)(A) of the Internal Revenue Code

of 1954.’’ Colony, Inc. v. Commissioner, 357 U.S. at 37. We decline both parties’ requests to at-

tach meaning to that statement.

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), 1939–1 C.B. (Part 2) 554, 580; S. Rept. 558,

73d Cong., 2d Sess. 43–44 (1934), 1939–1 C.B. (Part 2) 586, 619.

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224 134 UNITED STATES TAX COURT REPORTS (211)

was clear and that the statutory provision was unambiguous.

Id. at 33, 36.

Specifically, the Supreme Court found the legislative his-

tory to be ‘‘persuasive evidence that Congress was addressing

itself to the specific situation where a taxpayer actually

omitted some income receipt or accrual in his computation of

gross income, and not more generally to errors in that com-

putation arising from other causes.’’ Id. at 33 (emphasis

added). It further indicated that ‘‘this history shows to our

satisfaction that the Congress intended an exception to the

usual three-year statute of limitations only in the restricted

type of situation already described [an omission of an item

of gross income].’’ Id. at 36. ‘‘We think that in enacting §

275(c) Congress manifested no broader purpose than to give

the Commissioner an additional two years to investigate tax

returns in cases where, because of a taxpayer’s omission to

report some taxable item, the Commissioner is at a special

disadvantage in detecting errors.’’ Id.

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

Colony, Inc. v. Commissioner, supra, ‘‘unambiguously fore-

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

6501(e)(1)(A) and displaces respondent’s temporary regula-

tions. 22 See Natl. Cable & Telecomms. Association v. Brand

X Internet Servs., supra at 983. Consequently, the temporary

regulations 23 are invalid and are not entitled to deferential

treatment. 24

22 We recognize that Colony, Inc. v. Commissioner, 357 U.S. 28 (1958), predated both Chevron

U.S.A. Inc. v. Natural Res. Def. Council, supra, and Natl. Cable & Telecomms. Association v.

Brand X Internet Servs., supra, so that the Supreme Court could not have been aware of the

standards against which its opinion would be tested. We agree, however, with the U.S. Court

of Appeals for the Fourth Circuit, which stated that ‘‘[w]e * * * do not hold that a court must

say in so many magic words that its holding is the only permissible interpretation of the statute

in order for that holding to be binding on an agency.’’ Fernandez v. Keisler, 502 F.3d 337, 347

(4th Cir. 2007).

23 See supra note 2; Intermountain Ins. Serv. of Vail, LLC v. Commissioner, T.C. Memo. 2009–

195 n.3.

24 Respondent suggests that the U.S. Court of Appeals for the Ninth Circuit, in Bakersfield

Energy Partners, LP v. Commissioner, 568 F.3d 767 (9th Cir. 2009), invited respondent to issue

the temporary regulations. The Court of Appeals acknowledged that the Supreme Court in Col-

ony, Inc. v. Commissioner, supra, found sec. 275(c) to be ambiguous and stated that ‘‘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.’’ Bakersfield Energy Partners, LP v. Commissioner, supra at

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(211) INTERMOUNTAIN INS. SERV. v. COMMISSIONER 225

IV. Retroactivity

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 regula-

tions ‘‘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 regu-

lations 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 another

day.

Conclusion

In the 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 state-

ments. To the extent not discussed herein, we conclude that

they are meritless, moot, or irrelevant.

To reflect the foregoing,

An appropriate order will be issued.

Reviewed by the Court.

COLVIN, WELLS, VASQUEZ, GOEKE, KROUPA, and PARIS, JJ.,

agree with this majority opinion.

778 (quoting Natl. Cable & Telecomms. Association v. Brand X Internet Servs., 545 U.S. at 983).

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

Chevron step one. Compare Natural Res. Def. Council v. U.S. EPA, supra at 603 (‘‘An examina-

tion of the statutory language and its legislative history assists us in this inquiry [Chevron step

one]’’.), with Schneider v. Chertoff, 450 F.3d 944, 955 n.15 (9th Cir. 2006) (‘‘Although we cannot

consider legislative history under the first prong of Chevron, * * * we note that the Secretary’s

regulation subverts the very intent of the Nursing Relief Act.’’). In any event, we will not specu-

late as to the precise meaning of the Court of Appeals’ statement, particularly when, as in this

case, we are not bound by that court’s caselaw because this case is not appealable, absent stipu-

lation to the contrary, to that court. See Golsen v. Commissioner, 54 T.C. at 757.

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226 134 UNITED STATES TAX COURT REPORTS (211)

GUSTAFSON and MORRISON, JJ., did not participate in the

consideration of this opinion.

COHEN, J., concurring: I concur in the result in this case.

I would reach the same result, however, on narrower grounds

relating to motions to vacate and reconsider or untimely

motions to amend pleadings. Moreover, I would adopt peti-

tioner’s distinction of Alioto v. Commissioner, T.C. Memo.

2008–185, emphasizing the difference between congressional

action there and what occurred here.

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 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, JJ., agree with this

concurring opinion.

HALPERN and HOLMES, JJ., concurring in the result only:

I. Introduction

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 tem-

porary regulations ostensibly overruling the authority on

which we relied 23 days earlier in deciding this case. 1

Understandably, petitioner cries foul, arguing first and fore-

most that respondent cannot meet the high standards estab-

lished by this Court for granting either a motion to vacate,

see Taylor v. Commissioner, T.C. Memo. 1987–403, or a

1 The temporary regulations in question (the temporary regulations) are secs. 301.6229(c)(2)–

1T and 301.6501(e)–1T, Temporary Proced. & Admin. Regs., 74 Fed. Reg. 49322 (Sept. 28, 2009).

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(211) INTERMOUNTAIN INS. SERV. v. COMMISSIONER 227

motion to reconsider, see Estate of Quick v. Commissioner,

110 T.C. 440, 441 (1998). The majority finds no reason to

resolve the merits of that argument, however, because, it

says, even if it were to deny the motions on that ground,

respondent might appeal our decision and, ‘‘[b]y neglecting

the temporary regulations at this time[,] we would not be

protecting the integrity of the judicial system * * * but

merely failing to fully complete our work.’’ Majority op. p.

217. The majority then proceeds to hold that the temporary

regulations are both prospective (and therefore inapplicable

to this case) and, because they are unambiguously in conflict

with the statute, invalid. Principles of judicial restraint

counsel against making unnecessarily broad pronouncements

when a case can be fully resolved on a narrower ground. Cf.

Greater New Orleans Broad. Association, Inc. v. United

States, 527 U.S. 173, 184 (1999) (discussing constitutional

interpretation). Moreover, by discrediting the substance of

the temporary regulations themselves, the majority has

assured petitioner a trip to a Court of Appeals that he might

avoid were we simply to stamp the motions denied or to dis-

pose of them on grounds particular to this case, as Judge

Cohen suggests. 2

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.

II. Applicability of the Temporary Regulations

The majority concludes: ‘‘The plain meaning of the effec-

tive/applicability date provisions indicates that the tem-

porary regulations do not apply to this case.’’ Majority op. p.

218. In fact, the temporary regulations provide: ‘‘The rules of

this section apply to taxable years with respect to which the

applicable period for assessing tax did not expire before Sep-

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 Alioto v. Commissioner, T.C.

Memo. 2008–185, but it does not stop to explain or to resolve those questions. Majority op. p.

217.

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228 134 UNITED STATES TAX COURT REPORTS (211)

tember 24, 2009.’’ Secs. 301.6229(c)(2)–1T(b), 301.6501(e)–

1T(b), Temporary Proced. & Admin. Regs., 74 Fed. Reg.

49322, 49323 (Sept. 28, 2009). The relevant dates are as fol-

lows:

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

Section 6229(a) provides that, except as otherwise provided

in the section, the period of limitations for making assess-

ments with respect to partnership items is 3 years. Section

6229(c)(2) substitutes 6 years for 3 years in the case of a

substantial omission of income. The period for making

assessments—whether 3 years or 6 years—is suspended by

the mailing of an FPAA until our decision in the case becomes

final (or, if no petition is filed, the period to petition expires)

and for 1 year thereafter. See sec. 6229(d). Because of

respondent’s motion to vacate order and decision, our deci-

sion in this case has not yet become final.

The majority claims: ‘‘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 24, 2009.’’ Majority op. p. 220. According to

respondent, the applicable period of limitations did not expire

before September 24, 2009, because, as a result of the tem-

porary regulations, ‘‘the applicable period for assessing tax’’

is the 6-year period prescribed by section 6229(c)(2), which 6-

year period had not run on September 14, 2006, when the

FPAA was mailed. The filing of the petition then suspended

the running of that 6-year period to and beyond September

24, 2009. The majority counters: ‘‘We concluded in our Sep-

tember 1, 2009, opinion [which antedates the September 24,

2009, temporary regulations] that the general 3-year limita-

tions period of section 6501(a) was the applicable period for

assessing tax in this case and that it had expired some time

before September 14, 2006.’’ Majority op. p. 218. It adds:

‘‘The plain meaning of the effective/applicability date provi-

sions indicates that the temporary regulations do not apply

to this case.’’ Majority op. p. 218.

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(211) INTERMOUNTAIN INS. SERV. v. COMMISSIONER 229

Since the temporary regulations do not define the term

‘‘applicable period for assessing tax’’ (by stating whether the

regulation itself 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

section 7805(b), as applicable to the temporary regulations. 3

As so applicable, the section reads:

SEC. 7805(b). RETROACTIVITY OF REGULATIONS OR RULINGS.—The Sec-

retary may prescribe the extent, if any, to which any ruling or regulation,

relating to the internal revenue laws, shall be applied without retroactive

effect. [Sec. 7805(b) (pre-1996).]

We have said: ‘‘Under section 7805(b) [pre-1996], there is a

presumption that every regulation will operate retroactively,

unless the Secretary specifies otherwise.’’ UnionBanCal Corp.

v. Commissioner, 113 T.C. 309, 327 (1999), affd. 305 F.3d 976

(9th Cir. 2002). Here, undoubtedly, the Secretary did specify

something with respect to the retroactivity (applicability) of

the temporary regulations; viz, the rules therein ‘‘apply to

taxable years with respect to which the applicable period for

assessing tax did not expire before September 24, 2009.’’

Secs. 301.6229(c)(2)–1T(b), 301.6501(e)–1T(b), Temporary

Proced. & Admin. Regs., supra. Perhaps the majority believes

that the Secretary drafted the temporary regulations

intending to limit retroactivity to taxable years for which the

3-year period of limitations had not expired on September 24,

2009, but he (unlike the majority) realizes that that meaning

is less than plain and now has changed his mind and is

taking advantage of his lack of clarity to pull a fast one.

3 In 1996, sec. 7805(b) was amended by the Taxpayer Bill of Rights 2, Pub. L. 104–168, sec.

1101(a), 110 Stat. 1468 (1996), to limit the retroactive application of Treasury tax regulations.

The 1996 amendment is effective with respect to regulations that relate to statutory provisions

enacted on or after July 30, 1996. See id. sec. 1101(b), 110 Stat. 1469. The parties seem to agree

(and the majority does not dispute) that the 1996 amendment does not apply to the temporary

regulations since the statutory provisions in question, secs. 6229(c)(2) and 6501(e)(1)(A), were

enacted before that date. Sec. 301.6229(c)(2)–1T, Temporary Proced. & Admin. Regs., supra, was

issued under the authority of both secs. 6230(k) and 7805, while sec. 301.6501(e)–1T, Temporary

Proced. & Admin. Regs., supra, was issued solely under the authority of sec. 7805. T.D. 9466,

74 Fed. Reg. 49322.

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230 134 UNITED STATES TAX COURT REPORTS (211)

There is of course no evidence to support that dubious

theory. We believe that the Secretary meant the temporary

regulations to apply if either the 3-year or 6-year period of

limitations were open on September 24, 2009, but that he

was inartful in saying so. Such a reading is supported by IRS

Chief Counsel Notice CC–2010–010 (Nov. 23, 2009), which, in

relevant part, states:

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 sections

6229(c)(2) and 6501(e)(1)(A), as interpreted in the temporary regulations,

did not expire with respect to the tax year at issue, before September 24,

2009, and in which no final decision has been entered. [Emphasis added.]

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 Natl. Cable & Telecomms.

Association v. Brand X Internet Servs., 545 U.S. 967 (2005)),

(2) the Secretary has no authority retroactively to overrule

the Supreme Court (also implicating Brand X), or (3) even if

he does have those authorities, under the so-called law of the

case doctrine, we need not acknowledge the temporary regu-

lations in this case. If the majority believes any of those

things, then it should explain itself. If not, then it should

abandon its effective date analysis (which the majority itself

describes only as ‘‘a plausible ground to rule against respond-

ent’s motions’’, majority op. p. 220) and address petitioner’s

well-founded argument that respondent cannot satisfy the

high standards established by this Court for granting either

a motion to vacate or a motion to reconsider or simply

ground its decision on its reason (which we question) for

finding the temporary regulations invalid.

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(211) INTERMOUNTAIN INS. SERV. v. COMMISSIONER 231

III. The Deference Muddle

In Bakersfield Energy Partners, LP v. Commissioner, 568

F.3d 767, 778 (9th Cir. 2009), affg. 128 T.C. 207 (2007), the

Ninth Circuit acknowledged that the Supreme Court in

Colony, Inc. v. Commissioner, 357 U.S. 28 (1958), had

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 con-

trary to the Supreme Court’s ‘‘opinion as to the best reading’’ of the provi-

sion. Nat’l Cable & Telecomms. Ass’n v. Brand X Internet Servs., 545 U.S.

967, 982–83, 125 S.Ct. 2688, 162 L.Ed.2d 820 (2005); accord Swallows

Holding, Ltd. v. Comm’r, 515 F.3d 162, 170 (3d Cir. 2008). We do not.

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 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 Chevron U.S.A.,

Inc. v. Natural Res. Def. Council, 467 U.S. 837 (1984), Nat.

Muffler Dealers Association, Inc. v. United States, 440 U.S.

472 (1979), or merely Skidmore v. Swift & Co., 323 U.S. 134

(1944);

• an assertion that Chevron step one allows, and perhaps

requires, consideration of legislative history in determining

‘‘whether Congress has directly spoken to the precise ques-

tion at issue’’, Chevron, 467 U.S. at 842–843; and

• an analysis of the additional question we have to answer

after Brand X, 545 U.S. at 984: Did the Supreme Court hold

in Colony that its interpretation of the key phrase ‘‘omits

from gross income an amount properly includible therein’’ is

‘‘the only permissible reading’’ of the statute?

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 Swallows Holding, Ltd. v. Commissioner, 126

T.C. 96, 180–181 (2006) (Holmes, J., dissenting) (listing cir-

cuit conflicts), vacated and remanded 515 F.3d 162 (3d Cir.

2008) (holding regulations entitled to Chevron deference).

We are particularly cautious about the majority’s possible

reliance on Rodriguez de Quijas v. Shearson/Am. Express,

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232 134 UNITED STATES TAX COURT REPORTS (211)

Inc., 490 U.S. 477 (1989), see majority op. note 14, as an

additional justification for invalidating the regulations. We

agree of course that ‘‘the Supreme Court has advised lower

courts that ‘if a precedent of this Court * * * has direct

application in a case, yet appears to rest on reasons rejected

in some other line of decisions, the * * * [lower courts]

should follow the case which directly controls’’. See majority

op. note 14. But this rule, which the Ninth Circuit alluded

to in Bakersfield, is not what is at issue here. It is not our

Court, but the Secretary, who is reaching a different conclu-

sion about the phrase ‘‘omits from gross income an amount

properly includible therein’’. The validity of the regulation

after Brand X cannot depend entirely on whether prior

caselaw conflicts with a later regulation. As the Tenth Cir-

cuit recently reasoned: ‘‘When a court tentatively resolves an

ambiguity in a statute that an agency is empowered to

administer, such a resolution carries the force of law until an

agency issues a definitive interpretation of the kind that

would ordinarily warrant Chevron deference.’’ Hernandez-

Carrera v. Carlson, 547 F.3d 1237, 1246 (10th Cir. 2008)

(upholding regulation contrary to Supreme Court decision

after applying Brand X). We simply can’t reasonably assert,

a quarter-century after Chevron and, now, after Brand X,

that ‘‘courts have traditionally determined the meaning of

statutes,’’ majority op. note 12, if by that we mean that an

agency with regulatory power cannot definitively resolve

ambiguous statutory language. 4

We think that the problems of how to use legislative his-

tory in a Chevron analysis and the effect of Brand X on

reinterpreting old Supreme Court tax cases are both much

more complicated than the majority lets on.

A.

The Chevron test seems quite simple. Step one: Determine

‘‘whether Congress has directly spoken to the precise ques-

tion at issue.’’ Chevron USA, Inc. v. Natural Res. Def.

Council, 467 U.S. at 842. If so, stop. Step two: If Congress

has not directly spoken to the question or if what it has said

4 Hernandez-Carrera v. Carlson, 547 F.3d 1237, 1246 (10th Cir. 2008), seems to be the first

case to test Brand X’s effect on Supreme Court precedent. But we ought not to simply state

that we take no position on the question in one footnote, majority op. note 15, while seeming

to assert the contrary view in another, majority op. note 14.

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(211) INTERMOUNTAIN INS. SERV. v. COMMISSIONER 233

is ambiguous, then determine if the agency’s interpretation

is ‘‘based on a permissible construction of the statute.’’ Id. at

843.

But Chevron’s simplicity ends there. 5

We focus first on the use of legislative history in Chevron

step one: Chevron tells lower courts to use the ‘‘traditional

tools of statutory construction’’ to determine if Congress has

spoken on the precise issue. Id. at 843 n.9. But how does

Congress ‘‘speak’’? Is it only in the enacted language and its

context within a statute, or does it include committee

reports, floor speeches, staff-prepared material, and

postenactment commentary in later Congresses? And if

courts are directed to employ legislative history, when can

they do so—only if the text is ambiguous; only if it shows

congressional intent clearly contrary to the plain meaning of

the text; or whenever it would be helpful in figuring out the

meaning, or maybe the purpose, of the act?

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—Coeur Alaska, Inc. v. Se.

Alaska Conservation Council, 557 U.S. ll, ll, 129 S. Ct.

2458, 2469 (2009) (implying the statutory text is how Con-

gress speaks directly on an issue); Natl. R.R. Passenger Corp.

v. Boston & Me. Corp., 503 U.S. 407, 417 (1992) (comparing

the agency’s construction only to the statutory text at step

one); K Mart Corp. v. Cartier, Inc., 486 U.S. 281, 291 (1988)

(‘‘If the agency regulation is not in conflict with the plain lan-

guage of the statute, a reviewing court must give deference

to the agency’s interpretation of the statute.’’ (citing United

States v. Boyle, 469 U.S. 241, 246 n.4 (1985)));

• consideration only if the text is unclear—Zuni Pub. Sch.

Dist. No. 89 v. Dept. of Educ., 550 U.S. 81, 93 (2007) (‘‘if the

intent of Congress is clear and unambiguously expressed by

5 Commentators have not been kind to judges. See, e.g., Sunstein, ‘‘Chevron Step Zero’’, 92 Va.

L. Rev. 187, 221 (2006) (caselaw in ‘‘chaos’’); Eskridge & Baer, ‘‘The Continuum of Deference:

Supreme Court Treatment of Agency Statutory Interpretations from Chevron to Hamdan’’, 96

Geo. L.J. 1083, 1157 (2008) (caselaw ‘‘a mess’’); Hickman, ‘‘A Problem of Remedy: Responding

to Treasury’s (Lack of) Compliance with Administrative Procedure Act Rulemaking Require-

ments’’, 76 Geo. Wash. L. Rev. 1153, 1200 (2008) (Hickman, ‘‘A Problem of Remedy’’) (‘‘a mess’’);

Beermann, ‘‘End the Failed Chevron Experiment Now: How Chevron Has Failed and Why It

Can and Should Be Overruled’’, 42 Conn. L. Rev. 779, 808 (2010) (‘‘confusing’’); Murphy, ‘‘Judi-

cial Deference, Agency Commitment, and Force of Law’’, 66 Ohio St. L.J. 1013, 1022 (2005) (a

‘‘confusing mess’’).

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234 134 UNITED STATES TAX COURT REPORTS (211)

the statutory language at issue, that would be the end of our

analysis.’’); Dept. of HUD v. Rucker, 535 U.S. 125, 132 (2002)

(‘‘reference to legislative history is inappropriate when the

text of the statute is unambiguous’’); Sutton v. United Air

Lines, Inc., 527 U.S. 471, 482 (1999) (declining to consider

legislative history when text was clear);

• legislative history used at step one as a traditional tool—

FDA v. Brown & Williamson Tobacco Corp., 529 U.S. 120,

130–155 (2000); Pauley v. BethEnergy Mines, Inc., 501 U.S.

680, 697–699 (1991); Pension Benefit Guar. Corp. v. LTV

Corp., 496 U.S. 633, 649–650 (1990).

There are even a fair number of cases that make it difficult

to discern whether the Court is consulting legislative history

at step one or step two. 6

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 less

clear. Here’s the current circuit court breakdown:

• First Circuit—Perez-Olivo v. Chavez, 394 F.3d 45, 50 n.2

(1st Cir. 2005) (okay in step one ‘‘merely * * * to confirm

that it does not resolve the [statutory] ambiguity’’); Succar v.

Ashcroft, 394 F.3d 8, 22–23 (1st Cir. 2005) (okay in step one);

• Second Circuit—Cohen v. JP Morgan Chase & Co., 498

F.3d 111, 122–124 (2d Cir. 2007) (noting reluctance to rely

on legislative history in step one, but then doing it);

• Third Circuit—United States v. Geiser, 527 F.3d 288, 293

(3d Cir. 2008) (excludes legislative history in step one);

• Fourth Circuit—Compare Dominion Res., Inc. v. United

States, 219 F.3d 359, 365 (4th Cir. 2000) (okay in step one),

and Brown & Williamson Tobacco Corp. v. FDA, 153 F.3d

155, 162 (4th Cir. 1998) (same), affd. 529 U.S. 120 (2000),

with Granutec, Inc. v. Shalala, 46 U.S.P.Q.2d 1398, 1404

(4th Cir. 1998) (unpublished decision) (only in step two);

6 As numerous commentators have concluded, the application of Chevron has developed not

necessarily in a consistent direction. See, e.g., United States v. Riverside Bayview Homes, Inc.,

474 U.S. 121, 131 (1985) (‘‘our review is limited to the question whether it is reasonable, in light

of the language, policies, and legislative history of the Act’’); Chem. Manufacturers Association

v. Natural Res. Def. Council, Inc., 470 U.S. 116, 126 (1985) (‘‘we conclude that the statutory lan-

guage does not foreclose the agency’s view of the statute. We should defer to that view unless

the legislative history or the purpose and structure of the statute clearly reveal a contrary in-

tent on the part of Congress.’’). See generally Coke v. Long Island Care at Home, Ltd., 376 F.3d

118, 127–129 (2d Cir. 2004) (describing the problem and considering legislative history in both

steps, but ‘‘without attaching primacy’’ in step one), vacated 546 U.S. 1147 (2006).

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(211) INTERMOUNTAIN INS. SERV. v. COMMISSIONER 235

• Fifth Circuit—Sierra Club v. U.S. FWS, 245 F.3d 434,

443 n.51 (5th Cir. 2001) (okay in step one (citing INS v.

Cardoza-Fonseca, 480 U.S. 421, 449 (1987)));

• Sixth Circuit—Compare Johnson City Med. Ctr. v.

United States, 999 F.2d 973, 976 (6th Cir. 1993) (okay in step

one even if statute is clear), with Alliance for Cmty. Media

v. FCC, 529 F.3d 763, 778 (6th Cir. 2008) (consider in step

two);

• Seventh Circuit—Compare Univ. of Chi. Hosps. v. United

States, 545 F.3d 564, 569 (7th Cir. 2008) (refusing to consider

legislative history after finding statute unambiguous), with

Khan v. United States, 548 F.3d 549, 556 (7th Cir. 2008) (‘‘we

proceed to Chevron’s second step. * * * In this step, we can

take into account extrinsic sources such as legislative his-

tory.’’);

• Eighth Circuit—Compare Ark. AFL–CIO v. FCC, 11 F.3d

1430, 1440 (8th Cir. 1993) (allows legislative history in step

one, but only if intent is not clear from the statute’s plain

language), with Mayo Found. for Med. Educ. & Research v.

United States, 568 F.3d 675, 681–682 (8th Cir. 2009) (consid-

ering legislative history in step two);

• Ninth Circuit—Compare Natural Res. Def. Council, Inc.

v. U.S. EPA, 526 F.3d 591, 603 (9th Cir. 2008) (considering

legislative history in step one), with Schneider v. Chertoff,

450 F.3d 944, 955 n.15 (9th Cir. 2006) (courts cannot con-

sider legislative history in step one);

• Tenth Circuit—Anderson v. U.S. DOL, 422 F.3d 1155,

1180 (10th Cir. 2005) (okay in step one); Cliffs Synfuel Corp.

v. Norton, 291 F.3d 1250, 1257 (10th Cir. 2002) (same); Utah

v. Babbitt, 53 F.3d 1145, 1148 (10th Cir. 1995) (same);

• Eleventh Circuit—Guar. Fin. Servs., Inc. v. Ryan, 928

F.2d 994, 1003–1004 (11th Cir. 1991) (use in step one after

finding statute ambiguous);

• D.C. Circuit—Sierra Club v. EPA, 551 F.3d 1019, 1027

(D.C. Cir. 2008) (legislative history okay in step one even to

create ambiguity); Am. Bankers Association v. Natl. Credit

Union Admin., 271 F.3d 262, 267 (D.C. Cir. 2001) (same);

Natural Res. Def. Council, Inc. v. Browner, 57 F.3d 1122,

1126–1127 (D.C. Cir. 1995) (same); and

• Federal Circuit—Amber-Messick v. United States, 483

F.3d 1316, 1323–1324 (Fed. Cir. 2007) (used in both steps);

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236 134 UNITED STATES TAX COURT REPORTS (211)

Star-Glo Associates, LP v. United States, 414 F.3d 1349, 1356

(Fed. Cir. 2005) (used in step one).

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, Chevron tells us to read that ambi-

guity as a delegation of authority to fill the resulting gap

with a regulation. Looked at this way, Colony’s resort to

legislative history in the first place shows a gap that the Sec-

retary is ipso facto allowed to fill. If so, then the Supreme

Court’s sentence ‘‘it cannot be said that the language is

unambiguous’’, Colony, Inc. v. Commissioner, 357 U.S. at 33,

triggered not only that Court’s own look at legislative his-

tory, but the authority of the Secretary to issue the regula-

tion we have before us.

One way to read the many decisions using legislative his-

tory in step one of Chevron is as another check on agency

discretion—another way of finding a lack of ambiguity in

congressional intent. But the confusion in this area becomes

a muddle when one adds in the analysis of whether a pre-

Brand X precedent that uses legislative history is an analysis

that, under Brand X, precludes the choice made by the

agency in a regulation. Pay particular attention to the pas-

sage from Brand X that the majority quotes, majority op. p.

221: ‘‘A court’s prior judicial construction of a statute trumps

an agency construction otherwise entitled to Chevron def-

erence only if the prior court decision holds that its construc-

tion follows from the unambiguous terms of the statute and

thus leaves no room for agency discretion.’’ Brand X, 545

U.S. at 982 (emphasis added).

It is at least possible that the emphasized language is a

direction to lower courts to distinguish pre-Brand X prece-

dents that resorted to legislative history from those that

relied on plain-language analysis as a way of distinguishing

between precedents that allow for their own regulatory

supersession from those that do not. It would suggest in this

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(211) INTERMOUNTAIN INS. SERV. v. COMMISSIONER 237

case the Supreme Court’s use of legislative history in Colony

would not trump an agency construction.

Consider AARP v. EEOC, 390 F. Supp. 2d 437 (E.D. Penn.

2005), affd. on other grounds 489 F.3d 558 (3d Cir. 2007). In

an earlier case, the Third Circuit held that the Age Discrimi-

nation in Employment Act banned treating retirees who were

eligible for Medicare differently from those who were not in

providing health benefits. See Erie County Retirees Associa-

tion v. County of Erie, 220 F.3d 193 (3d Cir. 2000). The Court

carefully reviewed the legislative history to reach its conclu-

sion. See id. at 205–208.

Then out popped a contrary regulation from the EEOC. The

District Court judge faced with the regulation-vs.-precedent

question reasoned that

Brand X clarified the Chevron standard itself. In applying Chevron’s first

step to the regulation at issue in Brand X, the Supreme Court did not ask

merely whether Congress had ‘‘spoken to the precise question at issue,’’

Chevron, 467 U.S. at 843, * * * but rather ‘‘whether the statute’s plain

terms ‘directly address the precise question at issue.’ ’’ Brand X, 125 S.Ct.

at 2702 * * * [AARP v. EEOC, 390 F. Supp. 2d at 445.]

The District Court then analyzed the pre-regulation prece-

dent on point, and concluded that ‘‘Like its arguments from

legislative history, the * * * [Third Circuit’s] appeals to gen-

eral congressional intent and the balancing of competing

policy considerations would seem unnecessary if its decision

were the only permissible construction of the statute.’’ Id. at

450 n.10; see also, e.g., Mayo Found. for Med. Educ. &

Research v. United States, 503 F. Supp. 2d 1164, 1174 (D.

Minn. 2007) (drawing similar distinction in light of Brand X),

revd. 568 F.3d 675 (8th Cir. 2009).

AARP is certainly not the last possible word on this sub-

ject. There may well be a distinction between using legisla-

tive history to supply the meaning of a particular word or

phrase and using legislative history to discern the purpose or

goal of the statute in which Congress placed that word or

phrase so as to be able to best construe it in a particular

case. Judge Easterbrook, in his landmark taxonomy on uses

of legislative history, In re Sinclair, 870 F.2d 1340, 1342 (7th

Cir. 1989), suggested that legislative history may be used as

a dictionary of sorts—to determine Congress’s objective

rather than subjective intent. Id. at 1343 (‘‘ ‘we ask, not what

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238 134 UNITED STATES TAX COURT REPORTS (211)

this man meant, but what those words would mean in the

mouth of a normal speaker of English, using them in the cir-

cumstances in which they were used.’ ’’ (quoting Holmes,

‘‘The Theory of Legal Interpretation’’, 12 Harv. L. Rev. 417,

417–419 (1899))). Seen in this light, legislative history should

be used to discover the statute’s ‘‘original meaning’’, rather

than the intent of the individual congressman. Id. at 1343

(‘‘An opinion poll revealing the wishes of Congress would not

translate to legal rules’’).

Used in this way, legislative history in step one may

present fewer problems. Rereading Colony, Inc. v. Commis-

sioner, 357 U.S. 28 (1958), with this distinction in mind

might lead one to conclude that the Court was using legisla-

tive history to discern the best reading of ambiguous statu-

tory language in light of the specific problems its drafters

had in mind. See id. at 33–35. If so, the holding of Colony

is not that ‘‘omission’’ necessarily means ‘‘omission of a par-

ticular item’’, but only that that’s the best reading until and

unless a regulation clarifying the admitted ambiguity of

‘‘omits from gross income an amount properly includible

therein’’ is validly issued.

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 Brand X are quite

uncertain. We don’t believe it is beyond the capability of the

Tax Court to address such issues with the necessary sub-

tlety, but the majority doesn’t even try.

We won’t try either, since we prefer to climb onto firmer

ground.

IV. Procedural Validity of the Temporary Regulations

That firmer ground, and the reason we are able to concur

in our colleagues’ result, is that these regulations are proce-

durally invalid under the Administrative Procedure Act

(APA), 5 U.S.C.A. secs. 551–559, 701–706 (West 2007 & Supp.

2009), as amended by the Patient Protection & Affordable

Care Act, Pub. L. 111–148, sec. 6402, 124 Stat. 756 (2010),

which governs rulemaking even by the Secretary.

The APA requires agencies to publish contemplated rules to

allow the public to make comments on their content and

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(211) INTERMOUNTAIN INS. SERV. v. COMMISSIONER 239

effect. 5 U.S.C. sec. 553(b) and (c) (2006). To ensure meas-

ured, informed rulemaking, the agency is then required to

take those comments into consideration before promulgating

a final rule. Id. sec. 553(c). The publication of the rule must

occur ‘‘not less than 30 days before its effective date’’. Id. sec.

553(d). The agency must also provide ‘‘reference to the legal

authority under which the rule is proposed’’. Id. sec.

553(b)(2). And these minimum requirements may be modified

or superseded only if Congress does so expressly. Id. sec. 559.

In the case of these regulations, the Secretary stated his

legal authority for the rules—the section 6501(e) regulation

was issued under section 7805 and the section 6229 regula-

tion was issued under sections 7805 and 6230(k). The Sec-

retary didn’t publish the regulations 30 days before their

effective date, but respondent argues—and the majority

essentially concedes—that the Secretary’s power to make

retroactive rules under section 7805(b) (pre-1996) applies.

But the Secretary did not seek comments before publishing

these temporary regulations, nor did he claim good cause for

skipping this step. 7

Respondent first argues that the APA itself excuses his

failure to put the regulations through notice and comment.

The Administrative Procedure Act, 5 U.S.C. section 553(b),

provides:

this subsection does not apply—

(A) to interpretative rules, general statements of policy, or rules of

agency organization, procedure, or practice * * *

The APA provides similar exemptions from the prepublication

requirement. Id. sec. 553(d).

Respondent does not rely on any argument that these

regulations are mere statements of policy or rules of Treas-

ury’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

7 When Treasury regulation drafters find good cause to skip notice and comment, Internal

Revenue Manual pt. 32.1.5.4.7.5.1(4) (Aug. 11, 2004) directs them to include the following text

in the regulations: ‘‘ ‘These regulations are necessary to provide taxpayers with immediate guid-

ance. Accordingly, good cause is found for dispensing with notice and public comment pursuant

to 5 U.S.C. 553(b) and (c)’ ’’. This thin a justification might or might not work, but it is absent

from these regulations or the related Treasury Decision. See T.D. 9466, 74 Fed. Reg. 49321

(Sept. 28, 2009). Respondent concedes in his reply brief that he is not relying on this exception.

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240 134 UNITED STATES TAX COURT REPORTS (211)

Congress waived the APA’s notice-and-comment requirement

for temporary tax regulations.

A. The Interpretive Exception

The Treasury Decision containing the regulations, without

claiming a particular exception, 8 states: ‘‘It also has been

determined that section 553(b) of the * * * [APA] does not

apply to these regulations.’’ T.D. 9466, 74 Fed. Reg. 49321,

49322 (Sept. 28, 2009). Respondent argues this is because

these regulations are interpretive rules (as opposed to legis-

lative or substantive rules), merely clarifying the phrase

‘‘omitted from gross income’’ without changing existing law.

Respondent also argues that these regulations are interpre-

tive because they were issued pursuant to the general grant

of authority in section 7805 rather than under a specific

grant of authority directing the Secretary to issue a regula-

tion with specified content.

The Tax Court often labels as ‘‘interpretive’’ those regula-

tions that the Secretary issues under the general authority

of section 7805(a), in contrast to ‘‘legislative’’ regulations, by

which we and other tax specialists mean those regulations

issued under a more specific authority from Congress. 9

But ‘‘interpretive’’ means something different in adminis-

trative law. Berg, ‘‘Judicial Deference to Tax Regulations: A

Reconsideration in Light of National Cable, Swallows

Holding, and Other Developments’’, 61 Tax Law. 481, 486–

487 (2008) (‘‘the Administrative Procedure Act (APA) draws

the line between legislative and other regulations differently

[than tax law].’’ (fn. ref. omitted)). In administrative law,

‘‘interpretive’’ is a label reserved for regulations that ‘‘advise

the public of the agency’s construction of the statutes and

rules which it administers.’’ Clark, U.S. Dept. of Justice,

8 The Treasury Decision does say that the regulations contain a ‘‘reasonable interpretation’’

of the statutory provisions. T.D. 9466, 74 Fed. Reg. 49321, 49322 (Sept. 28, 2009). Perhaps this

was the Secretary’s attempt to claim the interpretive exception, but it makes little difference

as the APA doesn’t require an explicit assertion of the interpretive-rule exception.

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, section 6229 gov-

erns partnerships, meaning that the regulation applicable here is section 301.6229(c)(2)–1T,

Temporary Proced. & Admin. Regs. See majority op. note 2. This regulation was issued under

two sources of authority—section 7805 and 6230(k). The tax-law definition of interpretive has

largely been limited to regulations issued solely under section 7805. See Asimow, ‘‘Public Partici-

pation in the Adoption of Temporary Tax Regulations’’, 44 Tax Law. 343, 358 (1991); see also

Berg, ‘‘Judicial Deference to Tax Regulations: A Reconsideration in Light of National Cable,

Swallows Holding, and Other Developments’’, 61 Tax Law. 481, 485–486 (2008).

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(211) INTERMOUNTAIN INS. SERV. v. COMMISSIONER 241

Attorney General’s Manual on the Administrative Procedure

Act 39 (1947), available at http://www.law.fsu.edu/library/

admin/1947cover.html (providing working definitions). 10 Sub-

stantive or legislative rules, on the other hand, are ‘‘rules,

other than organizational or procedural * * * issued by an

agency pursuant to statutory authority and which implement

the statute * * *. Such rules have the force and effect of

law.’’ Id.; see also Batterton v. Francis, 432 U.S. 416, 425 n.9

(1977) (and cases cited). In other words, legislative rules are

those that are binding. Chrysler Corp. v. Brown, 441 U.S.

281, 301–302 & n.31 (1979); Hickman, ‘‘Coloring Outside the

Lines: Examining Treasury’s (Lack of) Compliance With

Administrative Procedure Act Rulemaking Requirements’’, 82

Notre Dame L. Rev. 1727, 1762–1763 (2007) (Hickman,

‘‘Coloring Outside the Lines’’); Merrill & Watts, ‘‘Agency

Rules With the Force of Law: The Original Convention’’, 116

Harv. L. Rev. 467, 476–477 (2002).

Courts have applied various tests to distinguish between

legislative and interpretive rules, but the D.C. Circuit’s test

in Am. Mining Cong. v. Mine Safety & Health Admin., 995

F.2d 1106 (D.C. Cir. 1993), has become the ‘‘dominant

standard’’. Hickman, ‘‘Coloring Outside the Lines’’, supra at

1766; see also 1 Pierce, Administrative Law Treatise, sec.

6.4, at 454 (5th ed. 2010) (citing adoption of the test in six

circuits including the Tenth and D.C. Circuits). 11 Am.

Mining Cong. v. Mine Safety & Health Admin., 995 F.2d at

1109, relying on both caselaw and the Attorney General’s

Manual, held that a rule is legislative if Congress has given

the agency authority to issue rules with the force of law and

the agency intended to use that authority. The court listed

four ways an agency could show it intended to issue legisla-

tive rules:

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 Bowen v. Georgetown Univ.

Hosp., 488 U.S. 204, 218 (1988) (Scalia, J., concurring) (referring to the Attorney General’s Man-

ual as ‘‘the Government’s own most authoritative interpretation of the APA * * * which we

have repeatedly given great weight’’, citing examples).

11 See Warder v. Shalala, 149 F.3d 73 (1st Cir. 1998); Mission Group Kan., Inc. v. Riley, 146

F.3d 775 (10th Cir. 1998); Truckers United for Safety v. Fed. Highway Admin., 139 F.3d 934

(D.C. Cir. 1998); Aulenback, Inc. v. Fed. Highway Admin., 103 F.3d 156 (D.C. Cir. 1997); Appa-

lachian States Low-Level Radioactive Waste Commn. v. O’Leary, 93 F.3d 103 (3d Cir. 1996);

Hoctor v. USDA, 82 F.3d 165 (7th Cir. 1996); Chen Zhou Chai v. Carroll, 48 F.3d 1331 (4th

Cir. 1995); N.Y. City Employees’ Ret. Sys. v. SEC, 45 F.3d 7 (2d Cir. 1995).

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242 134 UNITED STATES TAX COURT REPORTS (211)

(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 is affirmative, we have a legislative, not an

interpretive rule. [Id. at 1112.]

These four ways of finding agency intent have developed over

time. A subsequent case in the D.C. Circuit rejected the

second way, calling publication in the CFR merely a ‘‘snippet

of evidence of agency intent’’, and rejecting a claim that rules

were legislative based on publication alone. 12 Health Ins.

Association of Am., Inc. v. Shalala, 23 F.3d 412, 423 (D.C.

Cir. 1994). The Ninth Circuit added a look into whether a

rule binds ‘‘tribunals outside the agency.’’ Erringer v. Thomp-

son, 371 F.3d 625, 631 (9th Cir. 2004) (citing Hemp Indus.

Association v. Drug Enforcement Admin., 333 F.3d 1082,

1088 (9th Cir. 2003)). Other cases have relied upon a cri-

terion discussed but not applied in American Mining—that if

an agency issues a rule interpreting a legislative rule, the

underlying legislative rule cannot be too vague or open-ended

to support the interpretation. See, e.g., Gonzales v. Oregon,

546 U.S. 243 (2006).

Though American Mining’s test is not universally accepted,

the case reconciles the precedents well and is accepted by at

least two of the three potential appellate courts here. See,

e.g., U.S. Telecomm. Association v. FCC, 400 F.3d 29, 34–35

(D.C. Cir. 2005); Mission Group Kan., Inc. v. Riley, 146 F.3d

775, 784 (10th Cir. 1998). 13

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

Drake v. Honeywell, Inc., 797 F.2d 603 (8th Cir. 1986). In a brief discussion, it appeared to adopt

a similar approach of looking to the agency’s intent and whether the agency had a delegation

of law-making authority. Id. at 607–608. Similarly, in Nw. Natl. Bank v. U.S. Dept. of the Treas-

ury, 917 F.2d 1111, 1116–1117 (8th Cir. 1990), the Eighth Circuit relied on the familiar distinc-

tion that an interpretive rule merely reminds parties of existing duties while a legislative rule

‘‘ ‘has the force of law, and creates new law or imposes new rights or duties.’ ’’

But in Howard E. Clendenen, Inc. v. Commissioner, 207 F.3d 1071, 1074 (8th Cir. 2000), affg.

T.C. Memo. 1998–318, the Eighth Circuit may have held that regulations that the Secretary

issued without specific authority do not have the force of law, though it did refer to them as

law, see id. (‘‘Congress considered then-existing law—namely, Section 402(e)(3), together with

its regulations’’), and appeared to give them legal effect, id. at 1075 (citing the regulations for

its conclusions without further sources).

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(211) INTERMOUNTAIN INS. SERV. v. COMMISSIONER 243

1. Does the Secretary Have Authority To Issue Rules With

the Force of Law?

American Mining asks first whether a particular agency

has the authority to issue rules having the force of law. The

Secretary does—Congress delegated authority to him in var-

ious Code sections to create rules and regulations. Sec-

tion 7805(a) contains the broadest of these delegations,

allowing promulgation of ‘‘all needful rules and regulations

for the enforcement of this title’’. (‘‘[T]his title’’ in section

7805(a) refers the entire Internal Revenue Code.) Such regu-

lations carry the force of law, because the Code imposes pen-

alties for failing to follow them. Sec. 6662(b); see also Merrill

& Watts, supra at 477.

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 Schaefer v.

Commissioner, 105 T.C. 227, 229 (1995). Both temporary and

final regulations give rise to penalties. Sec. 6662(b); sec.

1.6662–3(b)(2), Income Tax Regs.; Hickman, ‘‘Coloring Out-

side the Lines’’, supra at 1738–1739. And both general- and

specific-authority regulations also give rise to penalties, so

the Secretary’s issuance of these regulations under section

7805 makes no difference. Hickman, ‘‘Coloring Outside the

Lines’’, supra at 1762–1763 (‘‘Regulations that bind both the

government and regulated parties are legislative, whether

promulgated pursuant to specific or general statutory

authority.’’ (citing Shalala v. Guernsey Meml. Hosp., 514 U.S.

87, 99 (1995), and several other sources)).

We would therefore conclude that both section 7805(a) and

the various more specific Code sections delegate legislative

authority to the Secretary.

2. Did the Secretary Intend To Issue Regulations With the

Force of Law?

The second part of the American Mining test asks whether

the agency intended the regulations to have the force of law.

If we go through American Mining’s list of the specific ways

an agency can show it intends a rule to have the force of law,

we find that two are present here. The first is the Secretary’s

invocation of his general authority to issue regulations,

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244 134 UNITED STATES TAX COURT REPORTS (211)

plainly noted in the Treasury Decision containing the regula-

tions themselves. Respondent claims that the regulations are

interpretive under the APA, but the Secretary’s cited source

of authority doesn’t quite match that sentiment—he promul-

gated one of these regulations explicitly under section 7805

alone and the other under both section 7805 and section

6230(k), knowing that regulations issued under these sec-

tions carry the force of law.

The second is that these regulations effectively changed (or

at least tried to change) existing law. American Mining

phrased this factor as amending ‘‘a prior legislative rule.’’

This leads to another question left unanswered and

unaddressed by the majority: Does Brand X require an

agency’s interpretation to be embodied in a legislative rather

than an interpretive rule to trump an existing judicial

interpretation? Even assuming an agency interpretation can

displace the Supreme Court’s, see Hernandez-Carrera v.

Carlson, 547 F.3d 1237 (10th Cir. 2008), we think the answer

must be yes, in part because when there is otherwise binding

judicial precedent, an agency interpretation asserting a con-

trary interpretation amounts to a change in the law. 14 Cer-

tainly, as the Ninth Circuit recognized in Bakersfield, 568

F.3d at 768, 778, a Supreme Court decision such as Colony

binds lower courts at least until something changes.

Respondent wants us to vacate our otherwise final decision,

which he could not logically ask us to do without implying

that the Secretary intended that these new rules have the

force of law.

But we don’t need to puzzle this out. American Mining

tells us: ‘‘If the answer to any of these questions is affirma-

tive, we have a legislative, not an interpretive rule.’’ Am.

Mining, 995 F.2d at 1112. So even if our reasoning on this

second way of finding agency intent is wrong, it remains true

that the Secretary explicitly invoked his legislative authority

in promulgating these regulations and Congress entrusted

him with that power. That makes them legislative.

14 The Brand X framework also suggests this result. In Brand X, the Court weighed a prior

judicial interpretation against ‘‘an agency construction otherwise entitled to Chevron deference’’.

Natl. Cable & Telecomms. Association v. Brand X Internet Servs., 545 U.S. 967, 982 (2005). Just

5 years earlier, the Court said interpretive rules—those lacking the force of law—aren’t entitled

to Chevron deference. Christensen v. Harris County, 529 U.S. 576, 587 (2000). It seems to follow

that if an agency wants to trump judicial precedent, it has to issue legislative rules.

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(211) INTERMOUNTAIN INS. SERV. v. COMMISSIONER 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 section 7805 alone, they

are not ‘‘interpretive’’ under the APA’s exception to the notice-

and-comment requirements because they are meant to bind

the public, which the Secretary has the power to do. 15

B. Section 7805(e) and the APA

Though the Secretary did not subject the regulations to

notice and comment, he did issue identical proposed regula-

tions and a Notice of Proposed Rulemaking (NPRM) at the

same time as the temporary regulations, as required by sec-

tion 7805(e)(1). This section directs the Secretary, when

issuing temporary regulations, to issue a simultaneous NPRM

and sets a 3-year expiration date for all temporary regula-

tions. The legislative history of that section, respondent says,

shows that Congress was aware of the Secretary’s procedures

of issuing temporary regulations that were effective imme-

diately but without notice and comment. 16 He says that Con-

gress implicitly okayed that process by limiting the tem-

porary regulations to 3 years and ensuring that the Sec-

retary issued an NPRM at the same time. Even though this

violates the APA, he justifies it by arguing that section

7805(e) conflicts with the APA, and in the battle of the stat-

utes, a specific statute trumps a general one. See Bulova

Watch Co. v. United States, 365 U.S. 753, 758 (1961).

We do not agree. First we note that nothing in the text of

the statute suggests that the notice-and-comment require-

ment has been waived, nor does the legislative history state

that it has. The legislative history does note that the Sec-

15 Nearly 30 years ago, in Wing v. Commissioner, 81 T.C. 17, 28 (1983), we mentioned that

Treasury regulations, though deemed to have the force of law, still qualify as ‘‘interpretative’’

rules and are exempt from the APA’s requirements. In context, this was dictum, and the over-

whelming weight of precedent from later years counsels us not to follow it.

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 regu-

lations without ever finalizing or repealing them. See, e.g., Fleming v. Commissioner, T.C.

Memo. 2010–60 (relying on 25-year-old temporary regulations for substantiation standards).

Several commentators suggest that Congress was actually aiming to restrict the Treasury’s reg-

ulation writers by curtailing this practice. See Hickman, ‘‘A Problem of Remedy,’’ supra at 1209;

ABA, Section of Taxation, ‘‘Report of the Task Force on Judicial Deference’’, 57 Tax Law. 717,

735 (2004); Asimow, supra at 363–364.

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246 134 UNITED STATES TAX COURT REPORTS (211)

retary commonly issued temporary regulation

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