Carpenter Family Investments, LLC, Carpenter Capital Management, LLC, Tax Matters Partner v. Commissioner

CARPENTER FAMILY INVESTMENTS, LLC, CARPENTER CAPITAL

MANAGEMENT, LLC, TAX MATTERS PARTNER, PETITIONER

v. COMMISSIONER OF INTERNAL REVENUE,

RESPONDENT

Docket No. 30833–08. Filed April 25, 2011.

P moved for summary judgment on the ground that R’s

partnership item adjustments were made after the general 3-

year period of limitations for assessing tax had expired. R

argues that an extended 6-year period of limitations applies.

Held: The 3-year period of limitations is applicable. Thus P’s

motion for summary judgment will be granted.

Kevin T. Pearson and Eric J. Kodesch, for petitioner.

Gary J. Merken, for respondent.

OPINION

WHERRY, Judge: This case is before the Court on peti-

tioner’s motion for summary judgment filed September 28,

2009. Respondent filed an objection to petitioner’s motion on

November 20, 2009. Petitioner filed a memorandum in sup-

port of its motion on July 27, 2010. The issue is whether the

notice of final partnership administrative adjustment (FPAA)

challenged in the petition was issued before the applicable

period of limitations for assessing tax had expired. Our deci-

sion turns on whether the general 3-year period of limita-

tions under section 6501(a) or the extended 6-year period of

limitations under section 6229(c)(2) or section 6501(e)(1)(A)

373

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374 136 UNITED STATES TAX COURT REPORTS (373)

applies. 1 This is an issue of law and may be disposed of by

summary judgment pursuant to Rule 121, Tax Court Rules

of Practice and Procedure. See also Sundstrand Corp. v.

Commissioner, 98 T.C. 518, 520 (1992) (‘‘Summary judgment

is appropriate if the pleadings and other materials show that

there is no genuine issue as to any material fact and a deci-

sion may be rendered as a matter of law.’’), affd. 17 F.3d 965

(7th Cir. 1994); Fla. Peach Corp. v. Commissioner, 90 T.C.

678, 681 (1988) (‘‘Summary judgment is intended to expedite

litigation and avoid unnecessary and expensive trials.’’).

Background

I. Undisputed Facts

The following facts are not in dispute. Petitioner, Car-

penter Capital Management, LLC, is a Nevada limited

liability company classified as a partnership for Federal

income tax purposes. Petitioner is the tax matters partner of

Carpenter Family Investments, LLC, an Oregon limited

liability company classified as a partnership for Federal

income tax purposes with its principal place of business in

Salem, Oregon (the partnership).

At the end of its 2000 taxable year the partnership was

owned as follows: Tommie Carpenter, 0.5 percent; Virginia

Carpenter, 0.5 percent; petitioner, 99 percent. During the

taxable year ending December 31, 2000, petitioner was

owned as follows: Tommie Carpenter, 75.25 percent and Vir-

ginia Carpenter, 24.75 percent. Accordingly, Tommie and

Virginia Carpenter (the partners) ultimately were allocated

all items of income, gain, loss, deduction, and credit of the

partnership.

During its 2000 taxable year the partnership sold shares

of stock of American Tower Corp. (ATC), a publicly traded cor-

poration listed on the New York Stock Exchange, for total

proceeds of $29,608,861 (the stock sale). On or before October

15, 2001, the partnership timely filed Form 1065, U.S.

Return of Partnership Income, for its taxable year ending

December 31, 2000. On this information return the partner-

ship reported gross proceeds of $29,608,861, an adjusted tax

1 Section references are to the Internal Revenue Code of 1986, as amended and in effect for

the tax year at issue.

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(373) CARPENTER FAMILY INVS., LLC v. COMMISSIONER 375

basis of $23,285,745, and gain of $6,323,116 from the stock

sale. On or before October 15, 2001, the partners timely filed

a joint income tax return on Form 1040, U.S. Individual

Income Tax Return, for calendar year 2000. On this tax

return the partners reported all of the $6,323,116 gain from

the stock sale.

On April 10, 2007, petitioner sent to respondent a Form

872–P, Consent to Extend the Time to Assess Tax Attrib-

utable to Partnership Items, executed on behalf of the part-

nership. Also on April 10, 2007, the partners sent to

respondent an executed Form 872–I, Consent to Extend the

Time to Assess Tax As Well As Tax Attributable to Items of

a Partnership. On October 2, 2008, respondent issued an

FPAA to petitioner, as tax matters partner of the partnership,

for the partnership’s taxable year ending December 31, 2000.

II. The Theory of the FPAA

Respondent alleges that ‘‘the partnership exploited a com-

plex series of basis-inflating tax avoidance transactions (a

variant of the Son-of-BOSS shelter described in Notice 2000–

44) beginning in December 1999.’’ See Notice 2000–44, 2000–

2 C.B. 255, which describes so-called Son-of-BOSS trans-

actions. See also Kligfeld Holdings v. Commissioner, 128 T.C.

192, 194 (2007), discussing the prototypical Son-of-BOSS

transaction:

Son-of-BOSS is a variation of a slightly older alleged tax shelter known as

BOSS, an acronym for ‘‘bond and options sales strategy.’’ There are a

number of different types of Son-of-BOSS transactions, but what they all

have in common is the transfer of assets encumbered by significant liabil-

ities to a partnership, with the goal of increasing basis in that partnership.

The liabilities are usually obligations to buy securities, and typically are

not completely fixed at the time of transfer. This may let the partnership

treat the liabilities as uncertain, which may let the partnership ignore

them in computing basis. If so, the result is that the partners will have

a basis in the partnership so great as to provide for large—but not out-

of-pocket—losses on their individual tax returns. * * *

Respondent claims a Son-of-BOSS shelter is at work on

account of a transfer to the partnership ‘‘of short sale pro-

ceeds of Treasury Notes and the obligation to close the open

short sale position’’. Respondent contends that this transfer

‘‘artificially stepped-up inside basis’’. According to

respondent: ‘‘As a result of the artificial step-up in basis in

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376 136 UNITED STATES TAX COURT REPORTS (373)

the American Tower Corporation stock, the partnership’s

total net long-term gains derived from dealings in property

on its 2000 return was [significantly] understated’’.

III. Motion for Summary Judgment

Petitioner moved for summary judgment, arguing that the

FPAA was not timely because it was issued after ‘‘The period

of limitations imposed by I.R.C. § 6501 on assessment and

collection of tax * * * [of] three years from the date the

return to which the tax relates was filed.’’ Both the partner-

ship’s information tax return and the partners’ joint income

tax return were filed on or before October 15, 2001. The 3-

year limitations period, if applicable, would have expired on

or before October 15, 2004. Petitioner contends that ‘‘Because

the FPAA was issued after October 15, 2004, respondent is

precluded from assessing any tax attributable to items

reported on the Partnership Tax Return.’’

Petitioner further argues that the untimeliness of the FPAA

invalidates petitioner’s and the partners’ consents to extend

the limitations period. ‘‘Neither of the Forms 872 signed by

petitioner or the Partners was executed before the expiration

of the three-year period of limitations imposed by I.R.C. §

6501(a) or 6229(a).’’ As a result, according to petitioner, these

consents cannot be used ‘‘to reopen the three-year period of

limitations on assessment and collection of tax.’’ See sec.

6501(c)(4) (‘‘Where, before the expiration of the time pre-

scribed in this section for the assessment of any tax imposed

by this title, * * * both the Secretary and the taxpayer have

consented in writing to its assessment after such time, the

tax may be assessed at any time prior to the expiration of

the period agreed upon.’’ (Emphasis supplied.)); see also

Romine v. Commissioner, 25 T.C. 859, 871 (1956) (holding

that if a taxpayer executes a consent after the expiration of

the 3-year limitations period, the Commissioner bears the

burden of proving that a longer limitations period applies

and that the consent was obtained within such longer

period); Seltzer v. Commissioner, 21 T.C. 398 (1953) (same).

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(373) CARPENTER FAMILY INVS., LLC v. COMMISSIONER 377

IV. Timeliness of the FPAA

Respondent claims that the applicable period of limitations

is not 3 years but 6 years, as provided in sections 6229(c)(2)

and 6501(e)(1)(A).

On September 24, 2009, the Treasury Department and the Internal Rev-

enue Service issued temporary Treasury regulations under Sections

6229(c)(2) and 6501(e)(1)(A) that clarify that an overstatement of basis

relating to the disposition of property, other than the sale of goods or serv-

ices in a trade or business, constitutes an omission from gross income for

purposes of Sections 6229(c)(2) and 6501(e)(1)(A).

Respondent argues that these temporary regulations, sec-

tions 301.6229(c)(2)–1T and 301.6501(e)–1T, Temporary

Proced. & Admin. Regs., 74 Fed. Reg. 49322–49323 (Sept. 28,

2009), extend the limitations period for the partnership’s

2000 taxable year to 6 years because they ‘‘apply to taxable

years with respect to which the applicable period for

assessing tax, as interpreted in the temporary regulations,

did not expire before September 24, 2009.’’

Because ‘‘The FPAA * * * issued within the six-year period

of limitations provided in Sections 6229(c)(2) and

6501(e)(1)(A), as further extended by consent,’’ respondent

contends that the FPAA was timely.

Discussion

I. Introduction

We have previously held invalid the temporary regulations

respondent cites. See Intermountain Ins. Serv. of Vail, LLC

v. Commissioner, 134 T.C. 211, 224 (2010). 2 Since we issued

our Opinion in Intermountain, the Commissioner has issued

these regulations in final form. See secs. 301.6229(c)(2)–1,

301.6501(e)–1, Proced. & Admin. Regs. Also, the Supreme

Court has issued its opinion in Mayo Found. v. United States,

562 U.S. ll, 131 S. Ct. 704 (2011), which clarifies that the

Commissioner’s regulatory efforts are generally entitled to

the same Chevron standard as those of any other agency. See

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

2 See infra note 15, discussing the current procedural posture of Intermountain Ins. Serv. of

Vail, LLC v. Commissioner, 134 T.C. 211 (2010), and related cases, in which the Commissioner

has hitherto succeeded twice on appeal, and failed an equal number of times, as he seeks to

invoke sec. 6501(e)(1)(A) and apply a 6-year limitations period to Son-of-BOSS transactions.

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378 136 UNITED STATES TAX COURT REPORTS (373)

837 (1984) (establishing a two-step framework for testing the

validity of an agency’s interpretation of ambiguous statutes).

We take this opportunity to consider whether anything in the

final regulations or their preamble or Mayo warrants a revi-

sion of our Intermountain holding. 3

II. Effective/Applicability Date Provisions: Placing the Horse

Firmly in the Cart

The preamble to these final regulations asserts that ‘‘The

Tax Court’s majority in Intermountain erroneously inter-

preted the applicability provisions of the temporary and pro-

posed regulations’’. T.D. 9511, 2011–6 I.R.B. 455, 456. We are

not infallible and have reviewed our interpretation of the

regulations’ applicability provisions in the light of respond-

ent’s criticism, but as discussed below we still do not agree

with respondent.

The temporary regulations provided that ‘‘The rules of this

section apply to taxable years with respect to which the

applicable period for assessing tax did not expire before Sep-

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

1T(b), Temporary Proced. & Admin. Regs., supra (emphasis

supplied). In Intermountain Ins. Serv. of Vail, LLC v.

Commissioner, supra at 218–219, we had commented on the

‘‘notably convoluted interpretation of the effective/applica-

bility date provisions’’ required to cause the temporary regu-

lations to apply to a case where the 3-year limitations period

has already expired. We had remarked that the Commis-

sioner’s attempt to apply the temporary regulations in that

case ‘‘begs the question’’. Id.

3 By their terms, the final regulations purport to apply to this case. Other than minor stylistic

changes in the effective/applicability provisions, which we discuss infra Pt. II, and largely con-

forming changes in the accompanying preambles, which we discuss infra Pt. IV, the final and

temporary regulations are identical. Therefore, we have decided not to delay these proceedings

for supplemental briefing on the final regulations before ruling on their (in)validity. We note

that to date neither party has asked for leave to file such briefs. By comparison, the Commis-

sioner promptly filed notices of supplemental authority calling attention to the Supreme Court’s

opinion in Mayo Found. v. United States, 562 U.S. ll, 131 S. Ct. 704 (2011), in the various

Intermountain-related cases on appeal discussed infra note 15, including Grapevine Imps., Ltd.

v. United States, 636 F.3d 1368 (Fed. Cir. 2011), in which oral argument was conducted the day

after Mayo was issued. Moreover, the Commissioner has asked these various Courts of Appeals

to apply the final regulations. Consequently, respondent can reasonably be expected to cite and

rely on the final regulations as relevant and applicable authority in any appeal of our decision.

We thus feel we would be derelict in our duty to the court hearing such an appeal if we were

to simply grant petitioner’s motion for summary judgment based on the temporary regulations

without discussing the final regulations.

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(373) CARPENTER FAMILY INVS., LLC v. COMMISSIONER 379

By comparison with the effective/applicability date provi-

sions of the temporary regulations, the final regulations pro-

vide that ‘‘This section applies to taxable years with respect

to which the period for assessing tax was open on or after

September 24, 2009.’’ Sec. 301.6229(c)(2)–1(b), Proced. &

Admin. Regs. (emphasis supplied); see also sec. 301.6501(e)–

1(e), Proced. & Admin. Regs. Respondent and the Treasury

Department contend that ‘‘The final regulations * * * clarify

the effective/applicability date provisions in the section

6229(c)(2) and section 6501(e) regulations to eliminate a per-

ceived ambiguity in the temporary regulations, that was

brought to light by the Tax Court in Intermountain Insur-

ance Service of Vail v. Commissioner, 134 T.C. No. 11 (2010),

appeal docketed, No. 10–1204 (D.C. Cir.).’’ T.D. 9511, 2011–

6 I.R.B. at 455.

We fail to see how this semantic distinction in the effec-

tive/applicability date provisions between the final regula-

tions and the temporary regulations, the verbal equivalent of

the other side of the same coin, begets a response to the

begged question.

Unlike the terse text of the final regulations’ effective/

applicability date provisions, the accompanying preamble

contends at length that

The Internal Revenue Service will continue to adhere to the position that

‘‘the applicable period’’ of limitations is not the ‘‘general’’ three-year limita-

tions period. * * * The expiration of the three-year period does not ‘‘close’’

a taxable year if a longer period applies. * * * [T.D. 9511, 2011–6 I.R.B.

at 456; emphasis supplied.]

However, whether or not a longer period should, in fact,

apply is the very subject matter, the sum and substance of

the regulations. 4 Clearly, then, as with the temporary regu-

4 The final regulations’ preamble goes on to assert that ‘‘Consistent with that position [which

assumes their substantive validity], the final regulations apply to taxable years with respect to

which the six-year period for assessing tax under section 6229(c)(2) or 6501(e)(1) was open on

or after September 24, 2009.’’ T.D. 9511, 2011–6 I.R.B. 455, 456. On the basis of this conclusory

assertion, the Court of Appeals for the Federal Circuit held in Grapevine Imps., Ltd. v. United

States, supra at 1383, that ‘‘by their plain terms the new Treasury regulations apply to’’ the

taxpayer’s tax year for which the 3-year limitations period had expired. We do not believe that

the actual text of the regulations says as much. As mentioned above, pursuant to their effective/

applicability date provisions, the substance of the final regulations ‘‘[applies] to taxable years

with respect to which the period for assessing tax was open on or after September 24, 2009’’.

T.D. 9511, 2011–6 I.R.B. at 455. In ‘‘an interpretation of an administrative regulation a court

must necessarily look to the administrative construction of the regulation if the meaning of the

words used is in doubt.’’ Bowles v. Seminole Rock & Sand Co., 325 U.S. 410, 413–414 (1945);

Continued

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380 136 UNITED STATES TAX COURT REPORTS (373)

lations, in order to apply the final regulations to a taxable

year after the expiration of the ‘‘general’’ 3-year limitations

period, one must presuppose that the regulations are other-

wise valid and that they apply retroactively. 5 In other words,

the applicability of the regulations assumes their substantive

validity. We held this assumption untenable in Inter-

mountain Ins. Serv. of Vail, LLC v. Commissioner, supra at

224. After reviewing the final regulations and their preamble

and considering any effect that Mayo may have, we reaffirm

our prior conclusion for the reasons set forth below.

III. Substantive Validity: Divining Congressional Intent

As we did previously when reviewing the temporary regu-

lations, and as we now do in testing the final regulations, we

‘‘must judge the propriety of * * * [respondent’s] action

solely by the grounds invoked by’’ him. SEC v. Chenery

Corp., 332 U.S. 194, 196 (1947). 6 From the preambles to the

see also Wyo. Outdoor Council v. U.S. Forest Serv., 165 F.3d 43, 53 (D.C. Cir. 1999) (‘‘Although

the preamble does not ‘control’ the meaning of the regulation, it may serve as a source of evi-

dence concerning contemporaneous agency intent.’’). However, whether a tax year in question

is ‘‘open’’ is the very essence of these proceedings. Deferring to respondent’s interpretation of

‘‘open’’ tax years for purposes of the effective/applicability date provisions would inevitably re-

solve the question of legitimacy of the regulations’ substance. More generally, if we were to allow

the Secretary to replicate in his regulations the core of the Code provision at issue and then

defer to the Commissioner’s interpretation of this regulatory text, it would inappropriately

imbue this text with the solidity of Seminole Rock, instead of subjecting it to the two steps of

Chevron. Cf. Stinson v. United States, 508 U.S. 36, 45 (1993) (declining to apply Chevron and

relying on Seminole Rock for the proposition that ‘‘provided an agency’s interpretation of its own

regulations does not violate the Constitution or a federal statute, it must be given controlling

weight unless it is plainly erroneous or inconsistent with the regulation’’ (quotation marks omit-

ted)).

5 Respondent insists ‘‘these regulations are not retroactive’’. T.D. 9511, 2011–6 I.R.B. at 456.

The Commissioner’s previous regulatory foray in his ongoing quest to bring to justice past abu-

sive Son-of-BOSS transactions was lost, as Eurydice was lost to Orpheus, when the Commis-

sioner chose to turn around and look directly backwards by giving his regulations full-blown ret-

roactive effect. See generally Murfam Farms, LLC v. United States, 88 Fed. Cl. 516 (2009) (hold-

ing as impermissibly retroactive sec. 1.752–6, Income Tax Regs., which requires reduction in a

partner’s outside basis in the partnership upon the partnership’s assuming the partner’s contin-

gent liability, and discussing other similar holdings).

Perhaps mindful of that experience, respondent now argues that he is no longer looking back.

Instead, he claims that he is, in effect, glancing sideways, and appears to wield the circular logic

of the effective/applicability date provisions as the round and polished shield of Perseus in which

he can safely view the Gorgon’s reflection.

Sec. 7805(b) and its caption of ‘‘Retroactivity of Regulations’’ notwithstanding, in the conven-

tional linear temporal mode, changes in legal rules have only prospective impact. ‘‘At least until

we devise time machines, a change can have its effects only in the future.’’ Bergerco Can. v.

U.S. Treasury Dept., 129 F.3d 189, 192 (D.C. Cir. 1997). Putting such abstruse arguments to

one side, these regulations, if valid, would cause a limitations period that would have otherwise

expired as of September 23, 2009, to remain open beyond that date. They thus ‘‘relate back’’

and in that respect are ‘‘retroactive’’ in the mundane sense of the word.

6 Chenery sweeps wider than the Administrative Procedure Act’s ‘‘basis and purpose’’ require-

ment, 5 U.S.C. sec. 553(c) (2006). Requiring an agency to give reasons for its rulemaking will

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(373) CARPENTER FAMILY INVS., LLC v. COMMISSIONER 381

temporary and final regulations, we isolate two discrete

grounds that respondent can possibly adduce as bases upon

which his regulatory project ‘‘purports to rest’’, id.: (1) The

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

357 U.S. 28 (1958), which excluded overstatement of basis

from the phrase ‘‘omits from gross income’’ in the identically

worded predecessor of current section 6501(e)(1)(A), was con-

fined by section 6501(e)(1)(A)(i) to a trade or business con-

text; 7 and (2) Colony represents the Supreme Court’s own

construction of this phrase as it now appears in section

6501(e)(1)(A), rather than an explication of unambiguous

congressional intent.

These two grounds are mutually exclusive. If the Colony

holding has been statutorily confined to a trade or business

context, it cannot any longer constitute the Supreme Court’s

interpretation of current section 6501(e)(1)(A). Conversely, if

Colony represents the Supreme Court’s own construction of

this text, the holding must necessarily extend beyond just

trade or business.

Respondent leads with the former contention, which he

vociferously espouses, not just in the preambles to the tem-

porary and final regulations, but also in his submissions on

brief in this and other similar cases. 8 The latter claim, on

the other hand, is presented with great circumspection. After

being absent in the preamble to the temporary regulations,

this claim appears stealthily in the final regulations’ pre-

not itself ensure that review of the rule will be limited to those reasons. Legislation or trial

court decisions can both be subsequently sustained on other grounds. See, e.g., U.S. R.R. Ret.

Bd. v. Fritz, 449 U.S. 166, 179 (1980) (‘‘Where, as here, there are plausible reasons for Congress’

action, our inquiry is at an end. It is, of course, constitutionally irrelevant whether this rea-

soning in fact underlay the legislative decision’’ (internal quotation marks omitted)); Helvering

v. Gowran, 302 U.S. 238, 245 (1937) (‘‘In the review of judicial proceedings the rule is settled

that if the decision below is correct, it must be affirmed, although the lower court relied upon

a wrong ground or gave a wrong reason.’’). However, agency action can be upheld only on the

ground previously advanced by the agency. See, e.g., Burlington Truck Lines, Inc. v. United

States, 371 U.S. 156, 169 (1962) (holding that under Chenery ‘‘For the courts to substitute their

or counsel’s discretion for that of the * * * [agency] is incompatible with the orderly functioning

of the process of judicial review.’’).

7 This provision, without changes in text, has since been redesignated sec. 6501(e)(1)(B)(i) by

the Hiring Incentives to Restore Employment Act of 2010, Pub. L. 111–147, sec. 513(a)(1), 124

Stat. 111. The provision states that ‘‘In the case of a trade or business, the term ‘gross income’

means the total of the amounts received or accrued from the sale of goods or services (if such

amounts are required to be shown on the return) prior to diminution by the cost of such sales

or services’’. Since bases of goods or services sold by a trade or business do not affect its gross

income, an overstatement of any such basis will not constitute omission from gross income.

8 See infra note 10.

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382 136 UNITED STATES TAX COURT REPORTS (373)

amble, and even there is shrouded in caveats and qualifica-

tions. 9

A. Trade or Business With Colony

The final regulations’ preamble reiterates respondent’s

position, ‘‘set forth in the preamble to the temporary regula-

tions’’, that ‘‘the Supreme Court’s opinion in Colony v.

Commissioner, 357 U.S. 28 (1958), * * * [is limited to] an

omission from gross income in the context of a trade or busi-

ness under the predecessor of section 6501(e).’’ T.D. 9511,

2011–6 I.R.B. at 455; see also T.D. 9466, 2009–43 I.R.B. 551,

552 (‘‘Therefore, by amending the Internal Revenue Code,

including the addition of a special definition of ‘gross income’

with respect to a trade or business, Congress effectively lim-

ited what ultimately became the holding in Colony, to cases

subject to section 275(c) of the 1939 Internal Revenue

Code.’’). This echoes similar arguments that the Commis-

sioner has made on brief in related litigation across the

country. 10

This case would, absent stipulation to the contrary, be

appealable to the U.S. Court of Appeals for the Ninth Cir-

cuit. That court has rejected the argument that the Colony

holding is properly construed as limited to the sale of goods

and services in a trade or business. ‘‘There is no ground for

suggesting that the Court intended the same language in §

275(c) to apply differently to taxpayers in a trade or business

than to other taxpayers.’’ Bakersfield Energy Partners, LP v.

Commissioner, 568 F.3d 767, 778 (9th Cir. 2009), affg. 128

T.C. 207 (2007).

9 See

infra Pt. IV.

10 See,

e.g., Burks v. United States, 633 F.3d 347, 350 (5th Cir. 2011) (‘‘The government con-

tends that Colony applies only in the context of a trade or business engaged in the sale of goods

or services.’’); Home Concrete & Supply, LLC v. United States, 634 F.3d 249, 254 (4th Cir. 2011)

(‘‘In this case, the district court distinguished Colony on the ground that its holding is limited

to cases in which the taxpayer is a trade or business selling goods or services.’’); Salman Ranch

Ltd. v. United States, 573 F.3d 1362, 1371 (Fed. Cir. 2009) (‘‘In the government’s view, * * *

Colony’s holding [is properly construed] narrowly by defining ‘gross income’ as gross receipts of

a trade or business from sales of goods or services’’); Bakersfield Energy Partners, LP v. Commis-

sioner, 568 F.3d 767, 775 (9th Cir. 2009) (‘‘the IRS argues that Colony, read correctly, inter-

preted § 275(c) as having the same meaning as § 6501(e)(1)(A)(i) and applying only to taxpayers

in a trade or business’’), affg. 128 T.C. 207 (2007); accord Beard v. Commissioner, 633 F.3d 616,

620 (7th Cir. 2011) (accepting the Commissioner’s argument and finding that ‘‘the situation

faced by the Court in Colony [is one] where there is an omission of an actual receipt or accrual

in a trade or business situation’’), revg. T.C. Memo. 2009–184.

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(373) CARPENTER FAMILY INVS., LLC v. COMMISSIONER 383

In Bakersfield, the Court of Appeals for the Ninth Circuit

held that the current section 6501(e)(1)(A), which was

enacted as part of the Internal Revenue Code of 1954, did not

constitute a ‘‘new statutory setting’’ for the phrase ‘‘omits

from gross income’’.

Congress did not change the language in the body of § 6501(e)(1)(A), which

is identical to the language in § 275(c) that the Supreme Court construed

in Colony. As a general rule, we construe words in a new statute that are

identical to words in a prior statute as having the same meaning. * * *

[Id. at 775.]

Finding ‘‘that applying Colony to the 1954 Code would [not]

render * * * superfluous’’ any provision of section

6501(e)(1)(A), id. at 776, the court went on to conclude that

the Colony

holding controls our interpretation of the same language in § 275(c)’s suc-

cessor provision, § 6501(e)(1)(A) of the 1954 Code. However sensible the

IRS’s argument may be that a taxpayer can ‘‘omit . . . an amount’’ of gain

by overstating its basis, this argument is foreclosed by Colony. * * * [Id.

at 778.]

The Court of Appeals for the Ninth Circuit’s opinion in

Bakersfield was quickly followed by an opinion of the Court

of Appeals for the Federal Circuit that also failed to ‘‘discern

any basis for limiting Colony’s holding concerning the ‘omits

from gross income’ language of I.R.C. § 275(c) to sales of

goods or services by a trade or business.’’ Salman Ranch Ltd.

v. United States, 573 F.3d 1362, 1372 (Fed. Cir. 2009). 11

These two Courts of Appeals have now been joined by the

Courts of Appeals for the Fourth and Fifth Circuits, which

have similarly declined to limit the Colony holding to a trade

11 The Court of Appeals for the Federal Circuit has since decided to accord the regulations

at issue here Chevron deference. See Grapevine Imps., Ltd. v. United States, 636 F.3d at 1376.

The court distinguished this decision from its holding in Salman Ranch that Colony was not

limited to a trade or business context, declaring that

Salman Ranch [does not] mandate any different conclusion. This court there closely analyzed

both the updated statute and its legislative history to determine whether divergence from Col-

ony was warranted. It made no separate holding that the statute was unambiguous for purposes

of Chevron step one * * *. [Id. at 1378; citation omitted.]

Grapevine does not reject the court’s prior reading of Colony in Salman Ranch. Since ‘‘Salman

Ranch preceded the issuance of Treasury regulations interpreting this statute’’, Grapevine char-

acterized the court’s task in Salman Ranch ‘‘different from ours.’’ Id. at 1377. Finding Colony

‘‘no bar’’ to granting the regulations Chevron deference, Grapevine concludes that ‘‘Salman

Ranch notwithstanding, we will defer to the Treasury Department’s interpretation in applying

§ 6501(e)(1)(A).’’ Id. at 1381. As we explain infra note 28, we have concluded to the contrary

that Colony is a ‘‘bar’’ to Chevron deference.

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384 136 UNITED STATES TAX COURT REPORTS (373)

or business. See Home Concrete & Supply, LLC v. United

States, 634 F.3d 249, 255 (4th Cir. 2011)) (‘‘Like the Ninth

and Federal Circuits, we hold that the Supreme Court in

Colony straightforwardly construed the phrase ‘omits from

gross income,’ unhinged from any dependency on the tax-

payer’s identity as a trade or business selling goods or serv-

ices.’’); Burks v. United States, 633 F.3d 347, 355 (5th Cir.

2011) (‘‘We join the Fourth, Ninth, and Federal Circuits by

finding that Colony’s holding with respect to the definition of

‘omits from gross income’ [is not limited to trade or business

and] remains applicable in light of the revisions to the

Code.’’).

The Court of Appeals for the Seventh Circuit, on the other

hand, has sided with the Commissioner and limited the

applicability of Colony to an omission from income of a trade

or business. See Beard v. Commissioner, 633 F.3d 616, 620

(7th Cir. 2011) (concluding that ‘‘Colony’s holding is inher-

ently qualified by the facts of the case * * *, where the

* * * omission was * * * in the course of trade or busi-

ness.’’), revg. T.C. Memo. 2009–184.

Following the Commissioner’s judicial setbacks in Bakers-

field and Salman Ranch, the Secretary issued the temporary

regulations, seeking, as it were, to lay a regulatory founda-

tion for respondent’s position that an overstatement of basis

does constitute an omission from gross income under section

6501(e)(1)(A). Respondent claims that this regulatory project

‘‘is entitled to deference even if the agency’s interpretation

may run contrary to the opinions in Bakersfield and Salman

Ranch.’’ See T.D. 9466, 2009–43 I.R.B. at 552. However, nei-

ther of those opinions was based on the court’s interpretation

of section 6501(e)(1)(A). Instead, each court had held Colony

to control this interpretation, which it, in turn, merely fol-

lowed. In effect, then, respondent is asking us to defer to his

determination of whether that Supreme Court decision is on

point.

Amidst conflicting signals of legislative intent, Chevron

and its progeny certainly require deference to the admin-

istering agency’s interpretation of the resulting statutory lan-

guage. However, we know of no authority, and respondent

cites none, that requires us to defer to the Commissioner’s

determination of the applicability of Supreme Court prece-

dent.

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When Congress speaks in muffled tones, the Commissioner

presumably enjoys an advantage in deciphering the message.

And though we are respectful of the Commissioner’s experi-

ence in reviewing court opinions, we decline to surrender our

prerogative of interpreting judicial pronouncements—ambig-

uous or otherwise.

Respondent does not purport, at least not explicitly and

unequivocally, 12 to elevate his interpretation of the text in

current section 6501(e)(1)(A) above that of the Court in

Colony. Rather, he seeks to persuade us, as he has succeeded

in persuading the Court of Appeals for the Seventh Circuit

in Beard, 13 that the Colony holding is not relevant to our

inquiry. Respondent may arguably have the authority to

attempt to reach the former outcome, at least in the Tenth

Circuit. 14 But we, the U.S. Court of Federal Claims, and the

U.S. District Courts, subject to review by the respective

Courts of Appeals and the Supreme Court, retain ultimate

authority over the latter, in all circuits. 15

12 Cf. infra Discussion, Pt. IV, discussing respondent’s ‘‘vague and indecisive’’ attempt to sup-

plant the Colony holding with a contrary interpretation of the statutory text in current sec.

6501(e)(1)(A).

13 See Beard v. Commissioner, 633 F.3d at 623. Beard lists a number of cases that ‘‘have found

that Colony does not apply and an overstatement of basis can be an omission from gross in-

come.’’ Id. at 619–620. Included in this list is Phinney v. Chambers, 392 F.2d 680 (5th Cir. 1968),

a case that was decided decades before the Son-of-BOSS transaction could have constituted the

proverbial gleam in its promoters’ eyes. As we pointed out in UTAM, Ltd. v. Commissioner, T.C.

Memo. 2009–253, we believe that ‘‘Phinney is not directly on point and does not persuade this

Court to overrule Bakersfield.’’ Phinney did not involve applying an extended period of limita-

tions to a transaction in which the taxpayer had overstated basis. Instead, in Phinney,

The Fifth Circuit Court of Appeals * * * found that the 6-year period of limitations applied to

a fiduciary income tax return on which the nature of an item of income was misstated. The

Commissioner was at a disadvantage identifying the error in the reporting of the transaction

in issue in Phinney because the fiduciary tax return listed the item of income without disclosing

its receipt in an installment sale. * * * [UTAM, Ltd. v. Commissioner, supra.]

The Court of Appeals for the Fifth Circuit in Burks appears to validate our reading of Phinney

and faults Beard’s interpretation of the case. See Burks v. United States, 633 F.3d at 352 n.5

(‘‘The Seventh Circuit in Beard incorrectly read our decision in Phinney as limiting Colony’s

holding.’’). The taxpayers in Beard have since filed a motion for a rehearing en banc based on,

amongst other grounds, the claim that Beard ‘‘relied heavily on the Commissioner’s interpreta-

tion of Phinney, purportedly ‘distinguishing Colony as the Phinney court did.’ This reliance was

misplaced. The Fifth Circuit [in Burks] stated that ‘they do not read Phinney as limiting Col-

ony’s holding.’ ’’ See also infra note 16, discussing why the Court of Appeals for the Ninth Cir-

cuit’s decision in Bakersfield Energy Partners, LP v. Commissioner, 568 F.3d 767 (9th Cir. 2009),

affords us the luxury of staying on the firm and dry ground of concluding that Colony controls

the interpretation of sec. 6501(e)(1)(A).

14 The Court of Appeals for the Tenth Circuit in Hernandez-Carrera v. Carlson, 547 F.3d 1237

(10th Cir. 2008), applied Natl. Cable & Telecomms. Association v. Brand X Internet Servs., 545

U.S. 967 (2005), to uphold regulations reversing a Supreme Court decision.

15 The Commissioner has appealed to the appropriate Courts of Appeals Intermountain Ins.

Continued

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386 136 UNITED STATES TAX COURT REPORTS (373)

Following Bakersfield, we conclude that Colony is not lim-

ited to a trade or business, and that it controls our

interpretation of section 6501(e)(1)(A). 16

Such a conclusion, by itself, does not rule out Chevron def-

erence to the regulations. 17 It does mean, however, that

instead of applying the original version of the Chevron anal-

ysis, we apply its Brand X variant. 18 Compare Chevron

Serv. of Vail, LLC v. Commissioner, 134 T.C. 211 (2010), and several companion cases in which

he had sought to invoke sec. 6501(e)(1)(A) and apply a 6-year limitations period to Son-of-BOSS

transactions. The Commissioner thus far has been successful in Grapevine Imps., Ltd. v. United

States, 636 F.3d 1368 (Fed. Cir. 2011), and Beard v. Commissioner, 633 F.3d 616 (7th Cir. 2011),

discussed supra notes 11 and 13, respectively, and unsuccessful in Home Concrete & Supply,

LLC v. United States, 634 F.3d 249 (4th Cir. 2011), and Burks v. United States, 633 F.3d 347

(5th Cir. 2011), discussed infra note 27. The Commissioner’s petition for rehearing en banc was

denied in Home Concrete and is pending in Burks. The Commissioner is urging the respective

Courts of Appeals in Burks and other cases still on appeal to apply the final regulations in

reaching their decisions. See, e.g., Intermountain Ins. Serv. of Vail, LLC v. Commissioner, supra,

on appeal (D.C. Cir., July 27, 2010); UTAM, Ltd. v. Commissioner, T.C. Memo. 2009–253, on

appeal (D.C. Cir., Aug. 17, 2010); Reynolds Props., L.P. v. Commissioner, docket No. 22437–07

(order and decision entered May 11, 2010), on appeal (9th Cir., Aug. 3, 2010); Salman Ranch,

Ltd. v. Commissioner, docket No. 13677–08 (order and decision entered Aug. 7, 2009), on appeal

(10th Cir., Oct. 27, 2009).

16 As pointed out supra note 13 and the accompanying text, the Court of Appeals for the Sev-

enth Circuit has recently rejected the conclusion reached in Bakersfield and Salman Ranch Ltd.

v. United States, 573 F.3d 1362 (Fed. Cir. 2009), that Colony controls the interpretation of sec.

6501(e)(1)(A). Beard v. Commissioner, supra. Beard described the Bakersfield reasoning as wad-

ing ‘‘through a convoluted discussion of numerators and denominators’’. Id. at 623. Beard also

dismissed the Federal Circuit’s Salman Ranch holding, characterizing it as ‘‘a deep-dive into leg-

islative history’’. Id. Preferring to toe ‘‘the clear, dry line from the language to the plain meaning

of Section 6501(e)(1)(A)’’, the Court of Appeals for the Seventh Circuit finds ‘‘that Colony is not

controlling’’. Id. Since this case would, absent stipulation to the contrary, be appealable to the

Court of Appeals for the Ninth Circuit, we are content to follow Bakersfield, which holds that

Colony controls the interpretation of sec. 6501(e)(1)(A). Cf. Golsen v. Commissioner, 54 T.C. 742,

757 (1970) (requiring us to follow Beard and hold that Colony does not control the interpretation

of sec. 6501(e)(1)(A) in a case appealable to the Court of Appeals for the Seventh Circuit), affd.

445 F.2d 985 (10th Cir. 1971).

17 See Grapevine Imps., Ltd. v. United States, supra at 1376 (discussed supra note 11, holding

that in the absence of the regulations, Colony controls the interpretation of sec. 6501(e)(1)(A),

but since ‘‘Chevron review of the new Treasury regulations * * * [compels that] the Treasury

regulations are entitled to Chevron deference * * * [, they constitute] new intervening authority

* * * [that] require us to depart from * * * [Colony]’’); cf. Beard v. Commissioner, supra at 623

(highlighting the volume of ink that ‘‘has been spilled in the briefs over whether temporary

Treasury Regulation Section 301.6501(e)–1T(a)(1)(iii) would be entitled to Chevron deference if

Colony were found to be controlling’’, the court declined to reach that issue ‘‘Because we find

that Colony is not controlling’’).

18 We note, without judging, the Commissioner’s asserted ability to command Chevron def-

erence to, and establish Brand X primacy for, regulations that rearrange the tax outcome of a

transaction well after that transaction’s economic consequences have been realized. See Natl.

Cable & Telecomms. Association v. Brand X Internet Servs., supra at 982 (‘‘Chevron’s premise

is that it is for agencies, not courts, to fill statutory gaps.’’). This ace-in-the-hole can trump the

best laid plans of honest and cynical taxpayers and deter both from asserting their ‘‘Code-given’’

rights. For an example of how after-the-fact changes in tax law can render Pyrrhic hard-fought,

time-consuming, and expensive litigation victories, see Hellerstein, ‘‘Is ‘Internal Consistency’

Foolish?: Reflections on an Emerging Commerce Clause Restraint on State Taxation’’, 87 Mich.

L. Rev. 138, 144–145 n.33 (1988) (discussing the eventual futility of an initially successful Com-

merce Clause challenge in Tyler Pipe Indus., Inc. v. Wash. Dept. of Revenue, 483 U.S. 232 (1987),

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(373) CARPENTER FAMILY INVS., LLC v. COMMISSIONER 387

U.S.A. Inc. v. Natural Res. Def. Council, 467 U.S. at 843

(upholding an agency’s reasonable interpretation of a statute

only if ‘‘Congress has not directly addressed the precise ques-

tion at issue’’), with Natl. Cable & Telecomms. Association v.

Brand X Internet Servs., supra at 984 (allowing ‘‘a court’s

prior interpretation of a statute to override an agency’s [con-

trary] interpretation only if the relevant court decision held

the statute unambiguous’’).

B. Colony’s Chevron Classification

In Intermountain Ins. Serv. of Vail, LLC v. Commissioner,

134 T.C. at 224 (internal quotation marks omitted), we held

that Colony ‘‘forecloses the agency’s interpretation of sections

6229(c)(2) and 6501(e)(1)(A) and displaces respondent’s tem-

porary regulations.’’ Nothing in the final regulations or their

preamble, or Mayo, gives us cause to revise that conclusion.

1. Invitation to Regulation

The Court of Appeals for the Ninth Circuit in Bakersfield

Energy Partners, LP v. Commissioner, 568 F.3d at 778, con-

ceded that in its Colony opinion, the Supreme Court had

‘‘acknowledged that the statutory language was ambiguous,

but nonetheless rejected the same interpretation the IRS is

proposing in this case.’’ (Citations omitted.) Respondent

claims that this concession by the Court of Appeals con-

stitutes an invitation to issue regulations to reverse the

Bakersfield outcome. See T.D. 9466, 2009–43 I.R.B. at 552.

The Court of Appeals had indeed stated that ‘‘The IRS may

have the authority to promulgate a reasonable reinterpreta-

tion 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 778 (quoting Natl.

Cable & Telecomms. Association v. Brand X Internet Servs.,

supra at 983).

However, ‘‘The Court of Appeals did not indicate defini-

tively whether any such * * * regulations would actually

trump the Supreme Court’s prior judicial construction.’’ Inter-

to the State of Washington’s discriminatory business and occupations tax). For further discus-

sion of a ‘‘meaningful post-deprivation remedy’’ in this context, see Fulton Corp. v. Faulkner,

516 U.S. 325 (1996); Reich v. Collins, 513 U.S. 106 (1994); Harper v. Va. Dept. of Taxation, 509

U.S. 86 (1993); McKesson Corp. v. Div. of Alcoholic Beverages & Tobacco, 496 U.S. 18 (1990).

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388 136 UNITED STATES TAX COURT REPORTS (373)

mountain Ins. Serv. of Vail, LLC v. Commissioner, supra at

224 n.24. Assuming regulations that are not ‘‘arbitrary,

capricious, an abuse of discretion, or otherwise not in accord-

ance with law’’, and are issued in ‘‘observance of procedure

required by law’’, 5 U.S.C. sec. 706(2)(A), (D) (2006), assump-

tions not necessarily satisfied here, there remain two unre-

solved issues that would potentially affect the analysis: (1)

Whether legislative history should be considered at step one

of the two-step Chevron analysis; and (2) whether a construc-

tion of statutory language by the Supreme Court automati-

cally renders the statute unambiguous.

With respect to the applicability of legislative history at

Chevron step one, compare Natural Res. Def. Council v. U.S.

EPA, 526 F.3d 591, 603 (9th Cir. 2008) (‘‘An examination of

the statutory language and its legislative history assists us

in this [Chevron step one] inquiry.’’), 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.’’). 19

Regarding whether an agency’s interpretation can trump a

prior Supreme Court construction of the same statutory lan-

guage, compare Natl. Cable & Telecomms. Association v.

Brand X Internet Servs., 545 U.S. at 1003 (Stevens, J.,

concurring) (‘‘I add this caveat concerning * * * [that part of

19 On the inadvisability of a blanket prohibition against consulting legislative history, see Har-

rison v. N. Trust Co., 317 U.S. 476, 479 (1943) (‘‘But words are inexact tools at best and for

that reason there is wisely no rule of law forbidding resort to explanatory legislative history no

matter how clear the words may appear on superficial examination.’’ (Internal quotation marks

omitted.)). If words are inherently ambiguous, then judicial interpretation of an agency-adminis-

tered statute that eschews legislative history and grants the agency’s interpretation Chevron

deference would apparently cede to the agency power reserved for the legislative branch. Chev-

ron deference would thus seem to violate the same structural constraint that textualists fault

the use of legislative history for transgressing; i.e., implicit constitutional prohibitions against

legislative self-delegation, such as the bicameralism and presentment requirements. For an ex-

position of the nondelegation argument in favor of textualism, see Bank One Chi., N.A. v. Mid-

west Bank & Trust Co., 516 U.S. 264, 280 (1996) (Scalia, J., concurring in part and in the judg-

ment) (‘‘It has always been assumed that * * * [congressional legislative] powers are nondele-

gable * * * No one would think that the House of Representatives could operate in such fashion

that only the broad outlines of bills would be adopted by vote of the full House, leaving minor

details to be written, adopted, and voted upon only by the cognizant committees.’’). By compari-

son, Chevron deference would enable ‘‘minor details’’ to be written and adopted by the agency,

without allowing for any congressional vote, not even that of ‘‘a small band of its number’’. Id.

A defense of legislative history against a nondelegation charge may be found in Breyer, ‘‘On the

Uses of Legislative History in Interpreting Statutes’’, 65 S. Cal. L. Rev. 845, 863 (1992) (‘‘No

one claims that legislative history is a statute, or even that, in any strong sense, it is ‘law.’

Rather, legislative history is helpful in trying to understand the meaning of the words that do

make up the statute or the ‘law.’ ’’).

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the Court’s opinion], which correctly explains why a court of

appeals’ interpretation of an ambiguous provision in a regu-

latory statute does not foreclose a contrary reading by the

agency. That explanation would not necessarily be applicable

to a decision by this Court that would presumably remove

any pre-existing ambiguity.’’), with Hernandez-Carrera v.

Carlson, 547 F.3d 1237, 1248 (10th Cir. 2008) (‘‘we conclude

that the holding of Brand X applies whether the judicial

precedent at issue is that of a lower court or the Supreme

Court.’’).

2. The Mayo Effect

We pause here to observe that the Supreme Court recently

rejected a taxpayer challenge to section 31.3121(b)(10)–2,

Employment Tax Regs., promulgated by the Treasury

Department to define the word ‘‘student’’ in section

3121(b)(10). Mayo Found. v. United States, 562 U.S. ll,

131 S. Ct. 704 (2011). In doing so, the Supreme Court clari-

fied that the Chevron standard of deference applies to

Treasury regulations. The Court pointed out that the tax-

payer in Mayo had ‘‘not advanced any justification for

applying a less deferential standard of review to Treasury

Department regulations than we apply to the rules of any

other agency.’’ Id. at ll, 131 S. Ct. at 713. The Court held

that ‘‘In the absence of such justification, we are not inclined

to carve out an approach to administrative review good for

tax law only.’’ Id.

The Supreme Court’s opinion in Mayo implies, by omission

rather than affirmative statement, that a trial court’s inves-

tigation of congressional intent at Chevron step one be lim-

ited to the plain text of the statute. See id. at ll, 131 S.

Ct. at 711 (‘‘In any event, the statutory text still would offer

no insight into how Congress intended predominance to be

determined or whether Congress thought that medical resi-

dents would satisfy the requirement. * * * In the typical

case, such an ambiguity would lead us inexorably to Chevron

step two’’ (emphasis supplied)).

Though Mayo tangentially addresses the first issue and

appears to frown upon the use of legislative history at step

one of a Chevron analysis, it is silent on the second issue of

whether the Supreme Court’s Brand X holding applies to its

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390 136 UNITED STATES TAX COURT REPORTS (373)

own precedent. Mayo’s silence on this score is not surprising

since the Supreme Court had no occasion to interpret the

word ‘‘student’’ in section 3121(b)(10) before the Treasury

Department’s issuing of the challenged regulation.

By comparison, the Supreme Court’s Colony holding pre-

dates the regulations at issue here by over half a century.

Fortunately, and as we explain infra Part IV, respondent’s

indecision has spared us the ordeal of walking the plank and

plumbing the depths of Brand X. 20

3. Filling the Gap

Gaps in congressional enunciation, whether intentional or

inadvertent, can be filled by the Commissioner to dictate the

underlying meaning. So long as the Commissioner is reason-

able, Chevron implies, and Mayo confirms, that we permit

him to complete Congress’ sentences, unless he contradicts

the ‘‘unambiguously expressed intent of Congress.’’ Chevron

U.S.A. Inc. v. Natural Res. Def. Council, 467 U.S. at 843.

Where a court whose precedent is binding on us has pre-

viously interpreted the statutory language at issue, ‘‘if the

prior court decision holds that its construction follows from

the unambiguous terms of the statute’’, Natl. Cable &

Telecomms. Association v. Brand X Internet Servs., supra at

982, then ‘‘that is the end of the matter’’, Chevron U.S.A. Inc.

v. Natural Res. Def. Council, supra at 842. We, in turn,

merely follow the precedent, which automatically ‘‘displaces

a conflicting agency construction.’’ Natl. Cable & Telecomms.

Association v. Brand X Internet Servs., supra at 983. For any

court opinion of pre-Chevron vintage, we must confront and

overcome the Chevron classification challenge on our own,

without deference to annotations or commentary that the

Commissioner may provide. 21

20 As we explain infra Pt. IV, we do not have to engage in an analysis of predicting whether

the impact of the Brand X holding stops at the doors of the Supreme Court since respondent’s

‘‘vague and indecisive’’ appeal to Brand X fails to meet the ‘‘clear and understandable basis’’

test of SEC v. Chenery Corp., 332 U.S. 194, 196 (1947).

21 Making this determination with respect to court opinions that were handed down well be-

fore the Supreme Court had announced and developed the Chevron framework poses a unique

challenge. Specifically, ‘‘it is sometimes difficult to determine whether pre-Chevron decisions are

based upon ‘Chevron step one’ (the plain command of the statute) or upon ‘Chevron step two’

(a permissible construction of the statute).’’ Home Concrete & Supply, LLC v. United States, 634

F.3d at 258 (Wilkinson, J., concurring). In Intermountain Ins. Serv. of Vail, LLC v. Commis-

sioner, 134 T.C. at 224 n.22, we noted ‘‘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

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After maintaining silence on Colony’s proper Chevron

classification in the preamble to the temporary regulations,

respondent apparently attempts to categorize Colony as a

Chevron step two decision in the final regulations’ preamble.

Respondent contends that ‘‘The Supreme Court stated in

Colony that the statutory phrase ‘omits from gross income’ is

ambiguous, meaning that it is susceptible to more than one

reasonable interpretation.’’ T.D. 9511, 2011–6 I.R.B. at 455.

In Intermountain, we rejected this contention and firmly

placed Colony in the Chevron step one category.

Since then, the Supreme Court has issued its Mayo

opinion, which focuses exclusively on the statutory text at

Chevron step one and suggests (by negative implication) a

disfavor of using legislative history at that stage. We are not

persuaded, however, that after Mayo, any judicial construc-

tion that examines legislative history is automatically rel-

egated to a Chevron step two holding by that fact alone.

Mayo’s directive to move ‘‘inexorably’’ from an ambiguity to

Chevron step two is reserved for the ‘‘typical case’’. More

importantly, the ambiguity Mayo talks about is not any tex-

tual ambiguity per se, but an ambiguity in congressional

intent that remains after searching the ‘‘statutory text * * *

[for] insight into how Congress intended’’ the language at

issue to apply. Mayo Found. v. United States, 562 U.S. at

ll, 131 S. Ct. at 711. 22

have been aware of the standards against which its opinion would be tested.’’ Judge Wilkinson’s

concurrence in Home Concrete & Supply, LLC v. United States, supra at 258, phrased it much

more elegantly in pointing out that ‘‘Justice Harlan in Colony, Inc. v. Commissioner, 357 U.S.

28 (1958), had no occasion to ponder the permutations of the Chevron test, which came down

in 1984.’’ In this connection, we are struck by the prophetic nature of Justice Scalia’s warning

regarding the ‘‘chaotic undermining of all prior judicial decisions that do not explicitly renounce

ambiguity’’, which he delivered when he asked rhetorically: ‘‘And what of the many cases de-

cided in the past, before this * * * requirement was established?’’ Natl. Cable & Telecomms.

Association v. Brand X Internet Servs., 545 U.S. at 1018 & n.13 (Scalia, J., dissenting).

22 Chevron, the ultimate source of the eponymous doctrine, does not confine to the statutory

text a search for ‘‘the unambiguously expressed intent of Congress.’’ Chevron U.S.A. Inc. v. Nat-

ural Res. Def. Council, 467 U.S. 837, 843 (1984). In fact, in Chevron, the Supreme Court ap-

peared to place on an equal footing both statutory text and legislative history as ‘‘traditional

tools of statutory construction’’. Id. at 843 n.9; see, e.g., id. at 845 (quoting with approval United

States v. Shimer, 367 U.S. 374, 382–383 (1961) (if an agency ‘‘choice represents a reasonable

accommodation of conflicting policies that were committed to the agency’s care by the statute,

we should not disturb it unless it appears from the statute or its legislative history that the

accommodation is not one that Congress would have sanctioned’’ (emphasis supplied))). In dis-

cussing the regulations at issue in Chevron, the opinion gives as much importance, and devotes

almost an equal amount of space, to legislative history as statutory language. The section titled

‘‘Legislative History’’ spans 21⁄2 pages compared with the 3 pages of the section titled ‘‘Statutory

Language’’. It would seem, then, that any apparent reluctance to resort to legislative history

Continued

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392 136 UNITED STATES TAX COURT REPORTS (373)

Brand X requires only that the prior judicial construction

‘‘follows from the unambiguous terms of the statute’’. Natl.

Cable & Telecomms. Association v. Brand X Internet Servs.,

545 U.S. at 982. 23 It is entirely possible for a court’s opinion

to discover, acknowledge and comment upon textual ambigu-

ities in the statute and yet rest its construction on the

remaining ‘‘unambiguous terms of the statute’’. Having done

so, the court may very well analyze legislative history for

additional evidence of congressional intent supporting its

construction. 24

Whatever Mayo may or may not prescribe (or proscribe)

with respect to legislative history at Chevron step one, surely

that prescription (and proscription) comes too late for the

‘‘many hundreds of past statutory decisions’’, Natl. Cable &

Telecomms. Association v. Brand X Internet Servs., supra at

1018 (Scalia, J., dissenting), that have in fact looked at legis-

lative history, including Colony. 25

Chevron restrains ‘‘Judges, [who] are not experts in the

field, and are not part of either political branch of the

Government * * * [from reconciling] competing political

interests * * * on the basis of * * * [their] personal policy

preferences.’’ Chevron U.S.A. Inc. v. Natural Res. Def.

represents current jurisprudential thinking on the use of legislative history in statutory con-

struction generally. It should not be seen as an inherent limitation built into the Chevron two-

step framework. See infra note 26 and accompanying text, discussing the anachronism of apply-

ing present-day sentiments on acceptable tools of statutory construction to prior Supreme Court

decisions.

23 Brand X leaves unspecified the term ‘‘unambiguous terms of the statute’’. At least as far

as tax law is concerned, determining the true meaning of many statutory terms, and

ascertaining whether or not they are ambiguous, entails consulting legislative history. See, e.g.,

Livingston, ‘‘Congress, the Courts, and the Code: Legislative History and the Interpretation of

Tax Statutes’’, 69 Tex. L. Rev. 819, 832 (1991) (‘‘The tax legislative process differs in several

important respects from the model assumed in most interpretative theories. These differences

include * * * the reliance on an extraordinary volume of legislative history (committee reports,

floor colloquies, and so on) to explain and supplement the statutory language.’’).

24 In Grapevine Imps., Ltd. v. United States, 636 F.3d 1368 (Fed. Cir. 2011), a case decided

after Mayo, the Court of Appeals for the Federal Circuit did not deem complete step one of a

Chevron inquiry without considering legislative history. See id. at 1379 (‘‘Having concluded that

the text, standing alone, does not resolve Congress’s intended treatment of basis overstatement,

we next must look to see if there are any other indications of Congressional intent so clear that

we perceive no room for an agency to add anything.’’ (Emphasis supplied.)).

25 Brand X’s premise may very well be that ‘‘Article III courts * * * sit to render decisions

that can be reversed or ignored by executive officers.’’ Natl. Cable & Telecomms. Association v.

Brand X Internet Servs., supra at 1017 (Scalia, J., dissenting). We do not, however, presume

that Brand X bestows upon us, a statutory court, the power to sit in judgment on decisions ren-

dered by the highest constitutional court in ‘‘statutory-construction cases involving agency-ad-

ministered statutes’’ and designate these decisions ‘‘agency-reversible’’, solely on the basis of an

absence of dicta disclaiming the centrality of legislative history to the Court’s conclusions. Id.

at 1018–1019.

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Council, 467 U.S. at 865. On the other hand, Brand X’s con-

cern is ‘‘ ‘the ossification of large portions of our statutory

law,’ * * * [which would be caused] by precluding agencies

from revising unwise judicial constructions of ambiguous

statutes.’’ Natl. Cable & Telecomms. Association v. Brand X

Internet Servs., supra at 983 (quoting United States v. Mead

Corp., 533 U.S. 218, 247 (2001) (Scalia, J., dissenting)).

Brand X’s principle for deciding whether or not ‘‘A court’s

prior judicial construction of a statute trumps an agency

construction otherwise entitled to Chevron deference * * *

follows from Chevron itself.’’ Id. at 982. Thus, Brand X does

not introduce any substantive constraints on judicial statu-

tory construction independent of, and in addition to,

Chevron’s warning to ‘‘federal judges—who have no constitu-

ency—* * * to respect legitimate policy choices made by

those who do.’’ 467 U.S. at 866. It stands to reason, therefore,

that only if an ‘‘unwise judicial construction’’ represents a

policy choice, must it yield to ‘‘the wisdom of the agency’s

policy’’. Id.

For ‘‘deossification’’ of judiciary’s historical ‘‘un-wisdom’’ to

proceed, what would matter, then, are not the tools a court

had employed in constructing the statute, 26 but the consider-

ations it weighed during that process. Agencies should, thus,

be free to revisit and reject a past judicial statutory construc-

tion but only if the construction arose from ‘‘assessing the

wisdom of * * * policy choices and resolving the struggle

between competing views of the public interest’’. Id.

26 Brand X would, in fact, ‘‘hold judicial interpretations contained in precedents to the same

demanding Chevron step one standard that applies if the court is reviewing the agency’s con-

struction on a blank slate’’, Natl. Cable & Telecomms. Association v. Brand X Internet Servs.,

545 U.S. at 982. Under that standard, ‘‘If a court, employing traditional tools of statutory con-

struction, ascertains that Congress had an intention on the precise question at issue, that inten-

tion is the law and must be given effect.’’ Chevron U.S.A. Inc. v. Natural Res. Def. Council,

supra at 843 n.9 (emphasis supplied). Traditions, even with respect to tools of statutory con-

struction, evolve over time. Applying current, rather than then-prevalent mores, to define

traditionality in tools of statutory construction for categorizing that construction’s Chevron sta-

tus would seem anachronistic. More troubling, it could leave this Chevron categorization in flux,

sliding up and down a two-step staircase, as the bag of permissible tools shrinks and expands.

We, therefore, are reluctant to characterize legislative history, whose use may have fallen out

of favor more recently, as nontraditional and, therefore, beyond the pale, for purposes of deter-

mining the Chevron classification of Colony, a case decided in 1958, when the Supreme Court

readily resorted to legislative history in interpreting agency-administered statutes. See, e.g.,

Farber, ‘‘The Inevitability of Practical Reason: Statutes, Formalism, and the Rule of Law’’, 45

Vand. L. Rev. 533, 536 (1992); Molot, ‘‘Reexamining Marbury in the Administrative State: A

Structural and Institutional Defense of Judicial Power Over Statutory Interpretation’’, 96 Nw.

U. L. Rev. 1239, 1297 (2002).

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394 136 UNITED STATES TAX COURT REPORTS (373)

The Supreme Court in Colony did allude to a policy con-

cern when it mentioned that a contrary result would ‘‘create

a patent incongruity in the tax law.’’ Colony, Inc. v. Commis-

sioner, 357 U.S. at 36–37. However, this statement was

offered merely to buttress the Court’s central conclusion that

‘‘We think that in enacting § 275(c) Congress manifested no

broader purpose’’ than the one the Court was attributing to

it and that to attribute a different purpose ‘‘would be to read

§ 275(c) more broadly than is justified by the evident reason

for its enactment’’. Id. at 36 (emphasis supplied). We find

these statements sufficient to conclude that Colony reveals

unambiguous congressional intent rather than a policy choice

the Court was making in the absence of agency guidance.

Consequently, as we did in Intermountain, even after Mayo,

we classify Colony as a Chevron step one holding. 27

We do not consider the Court of Appeals for the Ninth Cir-

cuit’s observation that the Supreme Court in Colony had

‘‘acknowledged that the statutory language was ambiguous,’’

Bakersfield Energy Partners, LP v. Commissioner, 568 F.3d

at 778, fatal to Colony’s Chevron step one status in that cir-

cuit. Even if we were to assume that the Court of Appeals

for the Ninth Circuit would treat Colony as a Chevron step

two holding, 28 respondent’s regulatory appeal to Brand X to

27 We find validation for this classification in the recent opinions in Home Concrete & Supply,

LLC v. United States, 634 F.3d 249 (4th Cir. 2011), and Burks v. United States, 633 F.3d 347

(5th Cir. 2011), decided by the Courts of Appeals for the Fourth and Fifth Circuits, respectively,

after Mayo. Each discusses the Mayo opinion and neither finds anything in it that would require

a downgrade in Colony’s Chevron standing. See, e.g., Burks v. United States, supra at 360 (‘‘Be-

cause we hold that § 6501(e)(1)(A) is unambiguous and its meaning is controlled by the Supreme

Court’s decision in Colony, we need not determine the level of deference owed to the Regula-

tions.’’); id. n.9 (‘‘Although we hold that § 6501(e)(1)(A) is unambiguous and its meaning is con-

trolled by the Supreme Court’s decision in Colony, we note that even if the statute was ambig-

uous and Colony was inapplicable, it is unclear whether the Regulations would be entitled to

Chevron deference under Mayo’’.); Home Concrete & Supply, LLC v. United States, supra at 257

(citing Mayo for the proposition that ‘‘Chevron deference is warranted only when a treasury reg-

ulation interprets an ambiguous statute’’ and concluding that ‘‘Because the regulation here in-

terprets ‘omits from gross income’ under § 6501(e)(1)(A), and the Supreme Court declared that

statute unambiguous, we do not believe that the regulation is entitled to controlling deference.’’);

id. at 257 (Wilkinson, J., concurring) (‘‘I am persuaded that the Supreme Court rested its judg-

ment in Colony on the plain language of the statute * * * [and] believe that Colony was decided

under Chevron step one * * * [even though] there is some language in Colony suggesting that

the Court looked at legislative history or thought that § 275(c) was ambiguous.’’).

28 As discussed supra notes 11 and 17, the Court of Appeals for the Federal Circuit has in

Grapevine Imps., Ltd. v. United States, 636 F.3d 1368 (Fed. Cir. 2011), characterized Colony as

a Chevron step two holding, which permits contrary regulations entitled to deference. The Court

of Appeals for the Seventh Circuit in Beard v. Commissioner, 633 F.3d at 623, also indicated

in dicta that it ‘‘would have been inclined to grant the * * * regulation Chevron deference,’’

though it did not in fact reach that issue since it found Colony not to control the interpretation

of sec. 6501(e)(1)(A), a conclusion foreclosed here by Bakersfield Energy Partners, LP v. Commis-

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supplant the Colony holding fails to meet the Chenery test.

See SEC v. Chenery Corp., 332 U.S. at 196–197 (holding,

with respect to ‘‘the basis upon which * * * [administrative

action] purports to rest,’’ that ‘‘a court [cannot] be expected

to chisel that which must be precise from what the agency

has left vague and indecisive.’’).

IV. Respondent’s Difficulty Does by His Own Indecision Grow

Respondent persists in drawing a sheathed sword to attack

a statute of limitations defense to an alleged abusive Son-of-

BOSS sheltering transaction. 29

Respondent may desire to repeal Colony in the name of

Brand X. If so, he should decisively say as much. SEC v.

Chenery Corp., supra at 196 (‘‘If the administrative action is

to be tested by the basis upon which it purports to rest, that

basis must be set forth with such clarity as to be understand-

able.’’).

Respondent declares in the final regulations’ preamble that

‘‘The interpretation adopted by the Supreme Court in Colony

represented that court’s interpretation of the phrase [‘omits

from gross income’] but not the only permissible interpreta-

tion of it.’’ T.D. 9511, 2011–6 I.R.B. at 455. Appealing to

Brand X and asserting his privilege ‘‘to adopt another

sioner, 568 F.3d 767 (9th Cir. 2009). See supra note 16.

Grapevine is therefore the only case thus far that both accepts Colony as controlling the inter-

pretation of sec. 6501(e)(1)(A) and allows the Commissioner to reach a contrary result by regula-

tion. ‘‘That the Supreme Court * * * [has] strongly reasoned for a certain interpretation of these

statutes does not mean their inherent ambiguity has been wiped away.’’ Grapevine Imps., Ltd.

v. United States, supra at 1379. The contrast with the Brand X ‘‘caveat’’ of Justice Stevens, who

had authored Chevron for a unanimous Supreme Court, that ‘‘a decision by this Court * * *

would presumably remove any pre-existing ambiguity’’, Natl. Cable & Telecomms. Association

v. Brand X Internet Servs., supra at 1003 (Stevens, J., concurring), could not be starker. Regard-

less, we respectfully disagree with the Court of Appeals for the Federal Circuit, which declined

to classify Colony as a Chevron step one holding because ‘‘The Court did not find that there

was no other reasonable interpretation’’ of the statutory language contained in current sec.

6501(e)(1)(A). Grapevine Imps., Ltd. v. United States, supra at 1379. For the reasons set forth

supra notes 26 and 27 and the accompanying text, we believe Colony represents an explication

of unambiguous congressional intent rather than a policy choice ‘‘resolving the competing inter-

ests which Congress itself either inadvertently did not resolve, or intentionally left to be re-

solved by the agency charged with the administration of the statute in light of everyday reali-

ties.’’ Chevron U.S.A. Inc. v. Natural Res. Def. Council, 467 U.S. at 865–866. We decline to char-

acterize Colony’s ascertainment of congressional intent ambiguous merely because the Supreme

Court did not explicitly note that ‘‘it has reached, not only the right (‘best’) result, but ‘the only

permissible’ result’’, Natl. Cable & Telecomms. Association v. Brand X Internet Servs., 545 U.S.

at 1018 (Scalia, J., dissenting), in an opinion handed down over a quarter of a century before

Chevron was decided.

29 See also supra note 5 discussing respondent’s denial of the retroactive character of the regu-

lations.

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396 136 UNITED STATES TAX COURT REPORTS (373)

reasonable interpretation of ’’ that phrase, respondent equivo-

cates in the next breath, by adding the proviso ‘‘particularly

as * * * [that phrase] is used in a new statutory setting.’’ Id.

As discussed above, the Court of Appeals for the Ninth Cir-

cuit has rejected the proposition that section 6501(e)(1)(A)

constitutes ‘‘a new statutory setting’’ for the phrase ‘‘omits

from gross income’’.

The appeal to Brand X in the final regulations’ preamble

is further attenuated by a preceding statement that reiter-

ates respondent’s position that Colony ‘‘dealt with an omis-

sion from gross income in the context of a trade or business

under the predecessor of section 6501(e)’’ and no longer

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

‘‘It will not do for a court to be compelled to guess at the

theory underlying the agency’s action’’. SEC v. Chenery

Corp., supra at 196–197. Even if we read the Supreme

Court’s recent Mayo opinion as a license to categorize most

judicial constructions that discuss legislative history as

Chevron step two decisions, respondent has yet to unabash-

edly accept the Court of Appeals for the Ninth Circuit’s

invitation and issue regulations that unequivocally repudiate

the Colony holding. Unless and until he does so, his hands

must remain tied. 30 Consequently, his discretion in inter-

preting section 6501(e)(1)(A), howsoever noble and worthy of

deference, must remain circumscribed.

V. Conclusion

When enacting section 6501(e)(1)(A) in 1954, Congress

could not possibly have foreseen the development of the tax

shelter industry and the use of complex devices, such as Son-

of-BOSS transactions, which seek to artificially inflate bases

of partnership assets to achieve tax alchemy. Much as we

30 Chenery may demand less than crystal clarity of purpose, but at least when applied at

Chevron step two it should require more than muddled thinking. Chevron deference appears in-

compatible with an agency asking a court to choose between two or more alternative validating

grounds. See Interstate Commerce Commn. v. Bhd. of Locomotive Engrs., 482 U.S. 270, 283

(1987) (holding that a court ‘‘may not affirm on a basis containing any element of discretion—

including discretion to find facts and interpret statutory ambiguities—that is not the basis the

agency used, since that would remove the discretionary judgment from the agency to the court’’

(emphasis supplied)). The agency, having invoked its discretion to fill statutory gaps by issuing

regulations, cannot then surrender it by seeking validation of the regulations on any one of a

number of competing grounds. See Holland v. Natl. Mining Association, 309 F.3d 808, 818 (D.C.

Cir. 2002) (refusing to choose among several potential validating grounds because ‘‘Chevron def-

erence is only appropriate where the agency’s action represents its reasoned judgment about the

meaning of the statute.’’).

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may be tempted, we cannot speculate on how the Congress

that enacted section 6501(e)(1)(A) would have meant it to

apply in the present-day context. To paraphrase Justice

Holmes, we do not inquire what the legislature would have

meant. Cf. Holmes, ‘‘The Theory of Legal Interpretation’’, 12

Harv. L. Rev. 417, 419 (1899), reprinted in Collected Legal

Papers 207 (1920) (‘‘We do not inquire what the legislature

meant; we ask only what the statute means.’’). In this case,

we do not even ask what the statute means; we merely ask

what the Court of Appeals for the Ninth Circuit and the

Supreme Court have told us the statute means.

The Court of Appeals for the Ninth Circuit tells us that

Colony controls the meaning of the phrase ‘‘omits from gross

income’’ as it now appears in section 6501(e)(1)(A). Bakers-

field Energy Partners, LP v. Commissioner, 568 F.3d at 778.

And the Supreme Court has told us, in Colony, that this

phrase does not include an overstatement of basis. We thus

hold that only a 3-year limitations period under section

6501(a) applies here. Consequently, we hold the FPAA issued

after the expiration of this 3-year period to be untimely. We

further hold petitioner’s and the partners’ consents executed

after the FPAA was issued to be invalid. We will therefore

grant petitioner’s motion for summary judgment. The Court

has considered all of respondent’s contentions, arguments,

requests, and statements. To the extent not discussed herein,

we conclude that they are meritless, moot, or irrelevant.

To reflect the foregoing,

An appropriate order and decision will be entered.

Reviewed by the Court.

COLVIN, GOEKE, and KROUPA, JJ., agree with this opinion.

MARVEL, J., concurs in the result only.

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

consideration of this opinion.

HALPERN and HOLMES, JJ., concurring:

I. Introduction

We have joined Judge Thornton’s concurring opinion,

which would grant petitioner’s motion for summary judgment

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398 136 UNITED STATES TAX COURT REPORTS (373)

on the ground of this Court’s prior decisions consistently

holding that our construction of section 6501(e)(1)(A) follows

from the unambiguous terms of the statute. 1 That is a suffi-

cient ground to dispose of this case and should end the

matter. But the prevailing opinion 2 does not stop there.

Without benefit of argument from the parties, Judge Wherry

has addressed the final regulations, sections 301.6229(c)(2)–

1 and 301.6501(e)–1, Proced. & Admin. Regs. (the final regu-

lations), and found one reason to question them and two rea-

sons to reject them. 3 First, he suggests (‘‘assumptions not

necessarily * * * [contradicted] here’’) that they are

‘‘ ‘arbitrary, capricious, an abuse of discretion, or otherwise

not in accordance with law’, * * * [or not] issued in ‘observ-

ance of procedure required by law’ ’’. Majority op. p. 388.

Second, he classifies Colony, Inc. v. Commissioner, 357 U.S.

28 (1958) (Colony), as a Chevron U.S.A. Inc. v. Natural Res.

Def. Council, Inc., 467 U.S. 837 (1984) (Chevron), step one

holding, which is contradicted by, and thus renders invalid,

the final regulations (as we held in Intermountain Ins. Serv.

of Vail, LLC v. Commissioner, 134 T.C. 211, 224 (2010)

(Intermountain) with respect to the temporary regulations).

See majority op. pp. 387, 391. Finally, assuming arguendo

that Colony is a Chevron step two holding, he disqualifies the

final regulations as violating the Chenery doctrine, SEC v.

Chenery Corp., 332 U.S. 194 (1947) (Chenery). Majority op.

pp. 394–395.

1 E.g., Intermountain Ins. Serv. of Vail, LLC v. Commissioner, 134 T.C. 211, 224 (2010) (invali-

dating the temporary regulations, secs. 301.6229(c)(2)–1T, 301.6501(e)–1T, Temporary Proced. &

Admin. Regs., 74 Fed. Reg. 49322–49323 (Sept. 28, 2009), on the ground that Colony, Inc. v.

Commissioner, 357 U.S. 28 (1958), is a Chevron U.S.A. Inc. v. Natural Res. Def. Council, 467

U.S. 837 (1984) (Chevron), step one holding, which ‘‘ ‘forecloses the agency’s interpretation’ of

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

2 Judge Wherry’s report in this case was referred to the Court Conference by the Chief Judge

pursuant to the authority of sec. 7460(b). It was reviewed by the Court Conference, and Judge

Wherry’s disposition of petitioner’s motion for summary judgment prevailed because all of the

Judges voting at the Court Conference either were for the report or concurred in the result. A

majority of the voting Judges authoring or joining an opinion, however, agree with Judge Thorn-

ton that, to grant the motion, we should go no further than to reiterate our historical position

that the statute unambiguously precludes respondent’s interpretation.

3 While we agree with Judge Thornton that there is no need to address the final regulations,

it is because, as Judge Wherry notes, see majority op. note 3, ‘‘respondent can reasonably be

expected to cite and rely on the final regulations * * * in any appeal’’ that we think it would

be better to ask the parties their views on the validity of the final regulations before trying to

hold them invalid. There are different standards for reviewing the procedural validity of tem-

porary and permanent regulations, and there is some risk to both parties that we are making

arguments neither would choose to make on his or its own.

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(373) CARPENTER FAMILY INVS., LLC v. COMMISSIONER 399

We file this concurring opinion because of the prominence

of the prevailing opinion. See Bushnell v. Commissioner, 49

T.C. 296, 311 (1967) (Raum, J., concurring) (concurring

opinion filed to rebut theory relied on in prevailing opinion).

We address the second two of Judge Wherry’s three reasons,

the first (unless one and the same with the Chenery reason)

giving us nothing to grasp.

II. Chevron Step One

Judge Wherry classifies Colony as a Chevron step one deci-

sion principally on the basis of our analysis in Inter-

mountain. Majority op. p. 391. In Intermountain, 134 T.C. at

223–224, we stated that, on the basis of its review of the

legislative history of the predecessor to section 6501(e)(1)(A),

the Supreme Court in Colony ‘‘concluded that Congress’

intent was clear and that the statutory provision was

unambiguous.’’ The Supreme Court, we added, found in that

section’s legislative history the narrow purpose of extending

the 3-year period of limitations only when a taxpayer had

omitted an item of gross income. Id. at 224. 4 We concluded:

In so holding, the Supreme Court found that the statute’s legislative his-

tory clarified its otherwise ambiguous text and, as a result, explicated Con-

gress’ intent and the meaning of the statutory provision. Thus, the

Supreme Court’s opinion in Colony, Inc. v. Commissioner, supra, ‘‘unambig-

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

6501(e)(1)(A) and displaces respondent’s temporary regulations. See Natl.

Cable & Telecomms. Association v. Brand X Internet Servs., * * * [545

U.S. 967, 983 (2005) (Brand X)]. Consequently, the temporary regulations

are invalid and are not entitled to deferential treatment. [Id.; fn. refs.

omitted.]

While the majority in Intermountain dutifully cited Brand

X, it paid insufficient attention to the Supreme Court’s spe-

cific instruction that ‘‘A court’s prior judicial construction

* * * trumps an agency construction * * * only if the prior

4 Judge Wherry hints, majority op. note 23, that there might be different rules for resorting

to legislative history in tax cases, citing with approval Prof. Livingston’s 20-year-old observation

that ‘‘The tax legislative process differs in several important respects from the model assumed

in most interpretive theories.’’ Livingston, ‘‘Congress, the Courts, and the Code: Legislative His-

tory and the Interpretation of Tax Statutes’’, 69 Tex. L. Rev. 819, 832 (1991). This may be true,

but the Supreme Court unanimously warned us just earlier this year that ‘‘we are not inclined

to carve out an approach to administrative review good for tax law only. To the contrary, we

have expressly ‘[r]ecogniz[ed] the importance of maintaining a uniform approach to judicial re-

view of administrative action.’ ’’ Mayo Found. v. United States, 562 U.S. ll, ll, 131 S. Ct.

704, 713 (2011) (quoting Dickinson v. Zurko, 527 U.S. 150, 154 (1999)).

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400 136 UNITED STATES TAX COURT REPORTS (373)

court decision holds that its construction follows from the

unambiguous terms of the statute’’. Brand X, 545 U.S. at 982

(emphasis added). Judge Wherry reads Brand X to allow a

subsequent regulation to trump the holding of a case ‘‘only

if an ‘unwise judicial construction’ represents a policy choice’’.

Majority op. p. 393. This seems to be a unique reading of

Brand X, which distinguishes between statutes that the

courts have found ambiguous and those they have found

unambiguous, see Brand X, 545 U.S. at 982, not between

cases where judges self-consciously make policy choices and

cases where they engage in the more pedestrian work of con-

struing a statute’s terms.

The appropriate focus of any application of Brand X is the

prior opinion’s holding, specifically whether it held that its

interpretation of a provision ‘‘[followed] from the unambig-

uous terms of the statute’’. 5 That, in turn, raises two ques-

tions: (1) what exactly did the earlier court assert? and (2)

does its assertion carry authority? ‘‘The first inquiry seeks

meaning and asks: did this court assert that its interpreta-

tion was the only reasonable one? The second seeks authority

and asks: was this assertion part of the case’s holding?’’ 6

Both inquiries must yield positive answers in order for a

court applying Brand X to find a step one holding.

Colony is a pre-Chevron case, and the Supreme Court did

not have to decide whether its interpretation of the statute

was the only reasonable one (i.e., that the statute was

unambiguous, or clear) or merely the best one. The first

inquiry, seeking meaning, is, for that reason, problematic

when applied to Colony. It is even more so for us, a national,

trial-level Court, because the Supreme Court has not spoken

clearly on the issue of legislative history in the Chevron

framework and the situation in the Courts of Appeals is

muddled. See Intermountain, 134 T.C. at 232–236 (Halpern

and Holmes, JJ., concurring in the result). Brand X signals

an agency-deferential approach to statutory interpretation.

Given the difficulties in trying to reclassify Colony within the

Chevron framework, we too would be inclined to require

either an explicit statement that the predecessor statute 7

5 This point is made in Note, ‘‘Implementing Brand X: What Counts as a Step One Holding?’’,

119 Harv. L. Rev. 1532, 1536 (2006).

6 Id.

7 Sec. 275(c), I.R.C. 1939.

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was unambiguous or a holding dependent on such

unambiguity, 8 before declining to give deference to the Sec-

retary’s contrary regulations. 9 We do not find either in

Colony and, thus, if called upon to do so, would not find it

a Chevron step one holding. 10

III. Chenery

Supplementing our analysis in Intermountain, Judge

Wherry addresses the contingency that we may have been

wrong there in deciding that Colony is a Chevron step one

holding. Even if it is not, he says, the Supreme Court’s deci-

sion in Chenery would still invalidate the final regulations.

Majority op. pp. 394–395. In Bakersfield Energy Partners, LP

v. Commissioner, 568 F.3d 767, 778 (9th Cir. 2009), affg. 128

T.C. 207 (2007), the Court of Appeals for the Ninth Circuit

implicitly brought into question Colony’s standing as a

Chevron step one holding by suggesting that the Secretary

may have authority to reinterpret the phrase ‘‘omits from

gross income’’. Barring written stipulation to the contrary,

this case is appealable to the Court of Appeals for the Ninth

Circuit. See sec. 7482(b)(1)(E), (2). Understandably, Judge

Wherry may wish to be heard on that question. Unfortu-

nately, his contribution—his conclusion that Chenery

requires the Secretary to ‘‘unequivocally’’ repudiate Colony in

his regulations, majority op. p. 396—will, if mistaken for the

position of the Court, likely only cause us more trouble in our

already nettlesome relationship with the Administrative

Procedure Act (APA), 5 U.S.C. secs. 551–559, 701–706 (2006).

The problem is that the APA itself requires no

‘‘unequivocal’’ statement; it requires only ‘‘a concise general

8 See

supra note 5.

9 An

explicit-statement approach is suggested by the author in Case Comment, ‘‘Administra-

tive Law—Chevron Deference—Federal Tax Court Holds Pre-Chevron Judicial Construction of

Statute Precludes Subsequent Agency Interpretation if Prior Construction Was Premised on

Legislative History.—Intermountain Insurance Service of Vail, LLC v. Commissioner, No. 25868–

06, 2010 WL 1838297 (T.C. May 6, 2010)’’, 124 Harv. L. Rev. 1066, 1071 (2011).

10 We recognize that the Courts of Appeals have addressed this issue and have reached vary-

ing results. Grapevine Imps., Ltd. v. United States, 636 F.3d 1368, 1378 (Fed. Cir. 2011) (ambig-

uous at Chevron step one); Beard v. Commissioner, 633 F.3d 616 (7th Cir. 2011) (inclined to

give regulations Chevron deference), revg. T.C. Memo. 2009–184; Burks v. United States, 633

F.3d 347, 360 (5th Cir. 2011) (unambiguous at Chevron step one; Home Concrete & Supply, LLC

v. United States, 634 F.3d 249, 257 (4th Cir. 2011) (accord).

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402 136 UNITED STATES TAX COURT REPORTS (373)

statement of * * * [the regulations’] basis and purpose.’’ Id.

sec. 553(c) (emphasis added). 11

The Secretary did explain his basis for the final regula-

tions. He recognized authority for his substantive view of a

broad, general definition of gross income. T.D. 9511, 2011–6

I.R.B. 455, 456 (‘‘outside of the trade-or-business context

* * * the section 61 definition of gross income applies’’). He

referenced sections 7805 and 6230(k) as his authority for

issuing the final regulations. Id. He disagreed with our

holding in Intermountain that the Supreme Court’s

interpretation of the statutory phrase in question (‘‘omits

from gross income’’) in Colony was the only permissible

interpretation, and, on the basis of that disagreement, he

relied on Brand X as his authority for superseding that

interpretation. Id., 2011–6 I.R.B. at 455.

The Secretary also made his purposes clear: To supersede

the, in his view, erroneous view of the Courts of Appeals for

the Ninth and Federal Circuits that Colony is not limited to

the trade or business context under the predecessor of sec-

tion 6501(e)(1), id., and to address Intermountain’s holding

that the Supreme Court’s interpretation in Colony is the only

permissible interpretation of the statutory language (‘‘omits

from gross income’’) in sections 6229(c)(2) and 6501(e)(1)(A),

id.

While Judge Wherry recognizes the Secretary’s dual pur-

poses of (1) limiting Colony to a trade or business cir-

cumstance and (2) failing that, establishing his authority

under Brand X to supersede the Supreme Court’s interpreta-

tion of the phrase ‘‘omits from gross income’’, he finds neither

adequate. Majority op. p. 381. The first, he believes, attempts

to usurp the courts’ function of interpreting the Supreme

Court’s opinions. We agree. See Bakersfield Energy Partners,

LP v. Commissioner, supra. The second, he believes, is fatally

equivocal, principally because of the preamble’s reference to

‘‘a new statutory setting.’’ Majority op. p. 396. For him, that

is an unacceptable ambiguity: does the Secretary really mean

he can trump the Supreme Court’s interpretation in Colony

11 Judge Wherry is right, of course, that ‘‘Chenery sweeps wider than the Administrative Pro-

cedure Act’s ‘basis and purpose’ requirement, * * * agency action can be upheld only on the

ground previously advanced by the agency.’’ Majority op. note 6. But there cannot be any other

grounds in this case—never having asked respondent his views on the matter, he cannot pos-

sibly advance justifications in favor of the regulations different from those in the preamble to

the regulations.

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(373) CARPENTER FAMILY INVS., LLC v. COMMISSIONER 403

or is he reiterating his view that Colony is confined to the

1939 Code? Until the Secretary unequivocally takes the

former position, Chenery, according to Judge Wherry, ties the

Secretary’s hands. Majority op. p. 396. We do not agree.

First, it must be kept in mind that the Secretary’s ref-

erence to a new statutory setting arises only in the context

of his rebuttal of our holding in Intermountain that the

Supreme Court’s opinion in Colony was the only permissible

interpretation of the statute. Following the Secretary’s recital

of the Supreme Court’s statement in Colony that the term

‘‘omits from gross income’’ is ambiguous, which he states

‘‘meaning * * * susceptible to more than one reasonable

interpretation’’, he references Brand X and states that the

Secretary and the IRS are permitted to adopt another reason-

able interpretation of the term, ‘‘particularly as it is used in

a new statutory setting.’’ T.D. 9511, 2011–6 I.R.B. at 455.

The Secretary does not say, e.g., ‘‘because of ’’ or ‘‘in light of ’’

that new setting. It seems to us that he was merely

addressing what he saw as a flaw in our Intermountain anal-

ysis; viz, that the meaning the Supreme Court attached to

the phrase ‘‘omission from income’’ in the 1939 Code nec-

essarily attached to the same phrase in the 1954 Code.

Tellingly, after stating his disagreement with Intermountain,

the Secretary drives home his right to challenge it by cita-

tion: ‘‘See Hernandez-Carrera v. Carlson, 547 F.3d 1237 (10th

Cir. 2008) (agencies are free to promulgate a reasonable

construction of an ambiguous statute that contradicts any

court’s interpretation, even the Supreme Court’s).’’ Id., 2011–

6 C.B. at 455–456. Why cite language of the, at the time, 12

only Federal appellate-level decision applying Brand X to a

Supreme Court interpretation other than to try to overturn

a Supreme Court interpretation?

Moreover, neither Chenery nor the APA requires crystal

clarity of purpose. We think that it is reasonably clear from

the preamble to the final regulations that the Secretary

believes that, relying on Brand X, he can come to a different

conclusion as to the meaning of section 6501 than the

Supreme Court did in Colony. And despite Judge Wherry’s

assertions to the contrary, Chenery asks no more. He is right

12 More recently, in validating the final regulations, the Court of Appeals for the Federal Cir-

cuit found the Supreme Court’s opinion in Colony, Inc. v. Commissioner, 357 U.S. 28 (1958), to

be ambiguous. Grapevine Imps., Ltd. v. United States, supra.

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404 136 UNITED STATES TAX COURT REPORTS (373)

that under APA section 706(2)(A) the Secretary’s findings

cannot be arbitrary and capricious, majority op. p. 388, and

we recognize that under that standard ‘‘the agency must

examine the relevant data and articulate a satisfactory expla-

nation for its action’’, Motor Vehicle Manufacturers Associa-

tion of the U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463

U.S. 29, 43 (1983) (emphasis added). And although a court

cannot provide a reasoned basis for the Secretary’s decision

if he did not, see id. (citing Chenery), a court must ‘‘uphold

a decision of less than ideal clarity if the agency’s path may

reasonably be discerned’’, id. (quotation marks omitted); see

also Providence Yakima Med. Ctr. v. Sebelius, 611 F.3d 1181,

1190 (9th Cir. 2010). The Secretary’s Brand X rationale

meets that standard, and that is enough. See, e.g., Nw. Eco-

system Alliance v. U.S. Fish & Wildlife Serv., 475 F.3d 1136,

1146 (9th Cir. 2007) (though not ‘‘a paragon of clarity * * *,

the Service’s reasoning can be discerned with careful

reading.’’); Dominion Res., Inc. v. United States, 97 Fed. Cl.

239, 259 (Feb. 25, 2011) (the Secretary’s path could ‘‘be ‘dis-

cerned,’ albeit somewhat murkily’’). We have no call to

require more than that, with reasonable effort, the Sec-

retary’s intent can be discerned. See Vt. Yankee Nuclear

Power Corp. v. Natural Res. Def. Council, Inc., 435 U.S. 519,

543–544, 548 (1978) (absent extremely compelling cir-

cumstances, courts should not overturn agency decisions

when the statutory minimums have been met).

Finally, we recognize that, having accepted Judge Wherry’s

criticism of the Secretary’s first rationale (limiting Colony)

and rejected his criticism of the second (reliance on Brand X),

we are left with a mixed basket of correct and incorrect

rationales for an agency’s decision, which might provide suffi-

cient reason for a court to invalidate the agency’s action.

E.g., Intl. Union, UMW v. U.S. Dept. of Labor, 358 F.3d 40,

44–45 (D.C. Cir. 2004). But ‘‘[w]hen an agency relies on mul-

tiple grounds for its decision, some of which are invalid,

* * * [we] may nonetheless sustain the decision as long as

one is valid and the agency would clearly have acted on that

ground even if the other were unavailable.’’ Casino Airlines,

Inc. v. NTSB, 439 F.3d 715, 717 (D.C. Cir. 2006) (internal

quotation marks omitted); see also Fed. Express Corp. v.

Mineta, 373 F.3d 112, 118 (D.C. Cir. 2004) (‘‘No principle of

administrative law or common sense requires us to remand

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(373) CARPENTER FAMILY INVS., LLC v. COMMISSIONER 405

a case in quest of a perfect opinion unless there is reason to

believe that the remand might lead to a different result.’’

(internal quotation marks omitted)). 13 Because we believe

that the Secretary’s second rationale is independent of his

first, we believe that he would stand behind his regulations

on that ground alone.

IV. Conclusion

We have made clear that we would not characterize Colony

as a Chevron step one holding. If called upon to do so, we

would also find Chenery inapplicable. Nonetheless, since the

temporary regulations are invalid per Intermountain, we

have to concur with the Court’s disposition of petitioner’s

motion for summary judgment.

THORNTON, J., concurring: This Court’s prior decisions,

beginning with Bakersfield Energy Partners, LP v. Commis-

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

2009), have consistently held, relying on Colony, Inc. v.

Commissioner, 357 U.S. 28 (1958), that its construction of

section 6501(e)(1)(A) follows from the unambiguous terms of

the statute. Moreover, our decision in Intermountain Ins.

Serv. of Vail, LLC v. Commissioner, 134 T.C. 211 (2010),

accords with decisions of the Courts of Appeals for the

Fourth and Fifth Circuits rendered after Mayo Found. v.

United States, 562 U.S. ll, 131 S. Ct. 704 (2011). See

Burks v. United States, 633 F.3d 347 (5th Cir. 2011); Home

Concrete & Supply, LLC v. United States, 634 F.3d 249 (4th

Cir. 2011). The Courts of Appeals for the Federal and Sev-

enth Circuits have rendered decisions to contrary effect. See

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

Cir. 2011); Beard v. Commissioner, 633 F.3d 616 (7th Cir.

2011), revg. T.C. Memo. 2009–184. Nevertheless, there is no

13 Judge Wherry disagrees, believing we cannot choose between alternative grounds. See ma-

jority op. note 30. In support of this view, he cites Holland v. Natl. Mining Association, 309 F.3d

808 (D.C. Cir. 2002). But in Holland, the court was not weighing multiple rationales given by

the agency. Instead, it remanded because it did not know whether the agency came to a decision

on its own or left the reasoning to the Court of Appeals for the Eleventh Circuit, which had

previously found against the agency. The court could not affirm if the basis for the decision was

not the agency’s. See Interstate Commerce Commn. v. Bhd. of Locomotive Engrs., 482 U.S. 270,

283 (1987). But in this case, the Secretary, rather than this or any other court, supplied the

reasons.

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