Swallows Holding, Ltd. v. Comm'r

Holmes, J., dissenting: The issue in this case is easy to understand. Section 882(c)(2) denies foreign corporations that have U.S. income the benefit of the deductions and tax credits they would otherwise get if they fail to file returns “in the manner prescribed by subtitle F.” Section 6072 — which is part of the Code’s subtitle F — imposes a time limit for filing foreign corporate returns. Before 1990, courts had construed the phrase in section 882(c)(2) — “in the manner prescribed by subtitle F” — as meaning neither “foreign corporations must file their returns by the deadline set in section 6072” nor “foreign corporations have till the end of time to file,” but rather that “foreign corporations have only until the Secretary, after a reasonable time, prepares a substitute return.” The regulation that we invalidate today replaced the old “reasonable time standard” with an 18-month grace period 1 beyond section 6072’s deadline, and replaced the preparation of a substitute return with a written notice. The 18-month grace period might be shorter or longer than the old judicially constructed one. It is undeniably more definite.

Upholding this regulation should be almost trivially easy. “So long as the Commissioner issues regulations that ‘implement the congressional mandate in some reasonable manner,’ • * * we must defer to the Commissioner’s interpretation. Only if the code has a meaning that is clear, unambiguous, and in conflict with a regulation does a court have the authority to reject the Commissioner’s reasoned interpretation and invalidate the regulation.” Redlark v. Commissioner, 141 F.3d 936, 939 (9th Cir. 1998), revg. 106 T.C. 31 (1996). For the Secretary to issue a regulation giving a clear 18-month grace period doesn’t contradict anything in the Code, at least anything clearly and unambiguously in the Code. 2

I respectfully dissent, because today’s Opinion lays down new and misleading trails through three different parts of the jungle of administrative law:

• It misapplies the plain meaning rule;

• It greatly extends the doctrine of legislative reenactment to overturn a regulation; and

• It rejects the recent teaching of the Supreme Court in Brand X 3 on the necessity of deferring to an administrative agency’s decision to issue a regulation overturning caselaw.

I also write separately to highlight what I think is a serious confusion in the appropriate way we should review regulations that have gone through notice-and-comment rule-making, especially those that change existing law. Much of the majority’s exhaustive recitation of the history of section 882 and its regulation arises from the different factors that we use in applying National Muffler 4 compared to Chevron. 5 This case may therefore be a good vehicle for appellate guidance on whether National Muffler continues to be in good working order after Chevron, Mead, 6 and Brand X.

I.

The majority begins its analysis, as I agree we should, with the question of whether section 882’s phrase “in the manner prescribed by subtitle F” has an unambiguous meaning. Whether National Muffler or Chevron applies, there is no doubt that if Congress has spoken on the issue, no regulation in conflict can survive. “If the intent of Congress is clear, that is the end of the matter; for the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress.” Chevron, 467 U.S. at 842-843; see also National Muffler, 440 U.S. at 476.

But what materials should a court look at to decide whether a statutory phrase is unambiguous? The answer is in Natl. R.R. Passenger Corp. v. Boston & Maine Corp., 503 U.S. 407, 417 (1992) (citations omitted): “a court must look to the structure and language of the statute as a whole. If the text is ambiguous and so open to interpretation in some respects, a degree of deference is granted to the agency.” 7

The majority crane their necks away from the actual words of section 882 and its place in the Code to look at whether the regulation “adopts respondent’s unsuccessful litigating position, with total disregard to * * * judicial precedent,” majority op. p. 135, and at the legislative reenactment doctrine, majority op. p. 135 note 18. As I discuss later on, these factors are only relevant, if at all, in reviewing a regulation based on a text that we’ve already found to be ambiguous. The majority’s strongest point, though, is their cataloging of the various times in the Code where a phrase like “at the time and in the manner prescribed” appears. The absence of the first part of the phrase, they reason, means that the second part — “in the manner prescribed” has no “time element” because Congress must have known what it was doing when it included “manner” and left out “time”. Majority op. pp. 132-134. They conclude:

We understand that use [i.e., of the word “manner”] to refer to items of information and not to refer to the time for the filing of a return or the furnishing of any other document. We conclude that Congress, by using only the word “manner” in section 882(c)(2), did not intend to include in that provision any element of time. * * * [Majority op. p. 134; fn. ref. omitted. 8 ]

This was also more or less the reasoning of our predecessor, the Board of Tax Appeals, in Anglo-Am. Direct Tea Trading Co. v. Commissioner, 38 B.T.A. 711 (1938). But there are at least two problems with this reasoning. The first is that, as is usually the case with a statute as old and overgrown as the Code, there are counterexamples of the use of the word “manner.” Consider, for example, section 179(c). This section gives small businesses the option of expensing capital purchases. Such an election “shall be made in such manner as the Secretary may by regulations prescribe.” He prescribed such a regulation, sec. 1.179-5(a), Income Tax Regs., and it restricts the time in which a taxpayer can make this election, given the practical needs of a tax system based on periodic returns. The same is true of elections by a reciprocal insurer under section 835(c)(2), which requires a consent “in such manner as the Secretary shall prescribe.” The Secretary prescribed the manner in a regulation, which again requires filing of such consents by a particular time. See sec. 1.826-1(c), Income Tax Regs.

This is hardly surprising. While I agree that we should always construe the words of a statute to have their original public meaning, it is also true that we can — indeed, we should — recognize that even tax statutes are written against a background of common law legal usage. And it is generally the case that when a legal instrument omits explicit time limits to do something permitted or required, it does not ordinarily mean that there are no time limits at all. See 1 Restatement, Contracts 2d, sec. 41 (1981); 1 Corbin, Corbin on Contracts, sec. 2.16 at 203 (1993) (“[i]f the offeror has not communicated a specific time limit with sufficient definiteness, the power of acceptance by the offeree continues for a reasonable time * * * [w]hat is a reasonable time, in any case, is a question of fact to be determined by a consideration of all the circumstances existing when the offer [is made]”); e.g., Staples v. Pan-Am. Wall Paper & Paint Co., 63 F.2d 701, 702 (3d Cir. 1933) (as offer “contained no time limitation for acceptance, it was incumbent upon the plaintiff to accept within a reasonable time”); Minneapolis & St. Louis R.R. Co. v. Columbus Rolling-Mill Co., 119 U.S. 149, 151 (1886) (“[i]f the offer does not limit the time for its acceptance, it must be accepted within a reasonable time”).

I’m not saying that we need to canvass contract law to construe the Code, only suggesting that the observation that Congress used the word “manner” without specifying “time” is not the end of the argument. The context in which the word occurs suggests that imputation of a reasonable time limit is not a departure from the ordinary legal meaning of the word — any more than imputation of a reasonable delivery time in a contract for delivery of specified goods, 1 Restatement, Contracts 2d sec. 33 (1981), or imputation of a reasonable time for closing a conveyance of property, 1 Restatement, Property (Mortgages) 3d, sec. 7.2 (1997) would be. And before today, I knew of no place in the Code where a Court has held that “manner” without “time” means “anytime at all.”

The reason for imputing some time limits on filing returns or making elections is one of practical necessity. And this is where the majority’s invocation of Anglo-American is so unintentionally radical, because the second problem with its discussion of the plain meaning of “manner” is that it misunderstands the import of the many opinions from the 1930s and 1940s that in effect did set a filing deadline for foreign corporations if they wanted to qualify for deductions and other credits. The BTA’s opinion in Taylor Securities Inc. v. Commissioner, 40 B.T.A. 696 (1939), and the opinions of the Fourth Circuit in Ardbern Co. v. Commissioner, 120 F.2d 424 (4th Cir. 1941), modifying and remanding 41 B.T.A. 910 (1940); Blenheim Co. v. Commissioner, 125 F.2d 906 (4th Cir. 1942), affg. 42 B.T.A. 1248 (1940); and Georday Enterprises v. Commissioner, 126 F.2d 384 (4th Cir. 1942), all disagreed with a reading of Anglo-American as disallowing any limits on late filing.

As the Board of Tax Appeals explained in Taylor Securities:

In view of such a specific prerequisite [that foreign corporate taxpayers file tax returns] it is inconceivable that Congress contemplated by that section that taxpayers could wait indefinitely to file returns and eventually when the respondent determined deficiencies against them they could then by filing returns obtain all the benefits to which they would have been entitled if their returns had been timely filed. Such a construction would put a premium on evasion, since a taxpayer would have nothing to lose by not filing a return as required by statute. [ 40 B.T.A. at 703-704 .]

The Fourth Circuit recognized long ago that Taylor Securities was an innovation. Blenheim, 125 F.2d at 910 . It is therefore Taylor Securities, not Anglo-American that was— until today, at least — the controlling preregulation case. And Taylor Securities accommodated the Commissioner’s need for some point at which he could assess delinquent taxes owed by a foreign corporation that had failed to file its own return. Taylor Securities and its progeny were precisely the sort of case-by-case development of reasonableness that one would expect in response to the absence of a specific mention of time in section 882.

Where our Opinion leaves the Commissioner after today’s ruling is very unclear. 9 Current IRS practice, even when the Commissioner prepares a substitute return under section 6020(b), is to encourage nonfilers to prepare and file a return, if for no other reason than to stop the addition to tax for failure to timely file. See sec. 6651(g)(1), (a)(1); In re Rank, 161 Bankr. 406 (N.D. Ohio 1993) (noting number of exceptions to recognition of substitute return, giving taxpayer continuing incentive to file); Saltzman, IRS Practice & Procedure, par. 4.02 (citing examples in Code where taxpayer may file a return after substitute return prepared to challenge Commissioner’s determinations). If the majority’s hesitance to explicitly overrule Taylor Securities is an endorsement of what was, over 60 years ago, “the generally accepted rule concerning the number of returns which may be filed,” majority op. p. 142 note 28, quoting Blenheim, 125 F.2d at 910 , it will just cause more confusion given the intervening evolution in the effect of substitute returns.

II.

Having concluded that the plain language of section 882 invalidates the regulation, the majority could have stopped. Instead, as an alternative holding, it goes on to analyze the reasonableness of the regulation under National Muffler— asking whether the regulation “(harmonizes with the plain language of the statute, its origin, and its purpose.)” Majority op. p. 130 (quoting National Muffler, 440 U.S. at 477).

Applying National Muffler, the majority concludes that the regulation is out of tune with the statute not just because it fails to harmonize with section 882’s plain language but because the regulation:

• is “not a ‘substantially contemporaneous construction of the statute,”’

• “merely adopted respondent’s unsuccessful litigating position,”

• “conflicts with the agency’s previous interpretation of the same statute,”

• had been in effect for only a short time before being challenged,

• was not issued after a revision to section 882, and

• was not relied on by petitioner to his detriment.

See majority op. pp. 136-137.

Each of these statements is at least arguably true — though it seems a stretch to say that a bright-line 18-month grace period is so substantially different from the old reasonable-time-before-letting-the-lRS-bring-the-curtain-down-by-filing-a-substitute-return test as to be in “conflict”. And each of the factors the majority cites is concededly relevant in a National Muffler analysis. These counts, though, don’t add up to a successful indictment of the regulation’s reasonableness. For what really seems to trouble the majority is that this regulation was promulgated years after section 882 or its predecessor was enacted, and that it disregarded the caselaw that had built up in the meantime. These related issues are the “legislative reenactment” and “Brand X’ problems.

A.

According to the majority, the legislative reenactment doctrine means that “Congress is presumed to have known of the administrative and judicial interpretations of a statutory term reenacted without significant change and to have ratified and included that interpretation in the reenacted term.” Majority op. pp. 138-139. The majority then marches through the history of the reenactments of section 882 — both the great codifications of 1939, 1954, and 1986, and a minor amendment (having nothing to do with the filing requirement) in 1966 — before reaching its conclusion that Congress “was mindful of the relevant judicial interpretations and included within the reenacted text the judiciary’s interpretation.” Majority op. p. 139.

I don’t agree that this is right formulation of the legislative reenactment doctrine, at least when it is used to invalidate, rather than uphold, a regulation. In a lengthy discussion of the doctrine, the D.C. Circuit held:

The district court mistakenly relied on the familiar notion that Congress is presumed to be aware of administrative interpretations of a statute or regulation when it adopts such language in a statute. Though courts have stated this general proposition, usually as a defense to a later attack against the same interpretation, no case has rested on this presumption alone as a basis for holding that the statute required that interpretation. * * * [AFL-CIO v. Brock, 835 F.2d 912 , 916 n.6 (D.C. Cir. 1987).]

Even if we wanted to be pioneers, I am quite leery of the majority’s formulation. Elsewhere in Brock, the D.C. Circuit summarized its understanding of the doctrine to require “express congressional approval of an administrative interpretation if it is to be viewed as statutorily mandated.” Id. at 915. Other appellate courts have likewise been careful in limiting the doctrine:

• “Mere reenactment is insufficient. It must also appear that Congress expressed approval of the agency interpretation. That is to say, the doctrine applies when Congress indicates not only an awareness of the administrative view, but also takes an affirmative step to ratify it.” Isaacs v. Bowen, 865 F.2d 468, 473 (2d Cir. 1989);

• “When the congressional discussion preceding reenactment makes no reference to the * * * regulation, and there is no other evidence to suggest that Congress was even aware of the * * * interpretive position[,] ‘we consider the * * * reenactment to be without significance.’” * * * Am. Bankers Ins. Grp. v. United States, 408 F.3d 1328, 1335-36 (11th Cir. 2005) (quoting Am. Online v. United States, 64 Fed. Cl. 571, 580-581 (2005)).

See also Peoples Fed. Sav. & Loan Association of Sidney v. Commissioner, 948 F.2d 289, 302 (9th Cir. 1991) (doctrine is “most useful in situations where there is some indication that Congress noted or considered the regulations in effect at the time of its action”).

The majority’s reliance on legislative reenactment should have ended when it could find no affirmative evidence that Congress knew of any of the Fourth Circuit or BTA cases that it describes. The legislative history that the majority quotes and summarizes features only vague references to “existing law.” Majority op. p. 141.

Of course, the majority also describes at great length the absence of even a mention of a timely filing requirement in any of the various legislative histories that it pores through. They reason that the absence of any disagreement with the existing BTA and Fourth Circuit precedents shows that Congress intended to ratify those precedents. See majority op. pp. 139-140. This is an innovation. If taken seriously, it would freeze existing judicial constructions and IRS regulations in place whenever Congress reenacted a portion of the Code, forcing us to treat them as if they were part of the statutory language and blocking the Secretary from changing regulations without persuading Congress to change the Code.

This cannot be right.

B.

The majority is, I think, also wrong about the amount of deference the Secretary owes to caselaw when he writes a regulation.

This is the Brand X problem. In that case, the FCC had issued a declaratory rule interpreting the term “telecommunications service” under its general authority to enforce the Telecommunications Act of 1934. Brand X, 545 U.S. at _, 125 S. Ct. 2695 . According to this new regulation, broadband cable modems were not a “telecommunication service.” This was a change in the law, at least in the Ninth Circuit, because in AT&T Corp. v. Portland, 216 F.3d 871 , 880 (9th Cir. 2000), that court had specifically ruled that broadband cable modems were a “telecommunications service.”

The Supreme Court began its analysis by citing the Fee’s broad grant of regulation-writing power — very similar to the Secretary’s in section 7805(a) — of prescribing “such rules and regulations as may be necessary in the public interest.” Brand X, 545 U.S. at _, 125 S. Ct. at 2699. The Court recognized that the regulation did change existing caselaw but reasoned:

A court’s prior judicial construction of a statute trumps an agency-construction otherwise entitled to Chevron deference only if the prior court decision holds that its construction follows from the unambiguous terms of the statute and thus leaves no room for agency discretion. * * * [Id. at _, 125 S. Ct. at 2700.]

The majority distinguishes Brand X in several ways:

• the FCC gave a more careful consideration of developments in the field than the Secretary did here;

• Brand X did not involve a change in the agency’s own interpretation;

• the FCC was not a party in the court case whose holding it was reversing; and

• the FCC’s new regulation was promulgated only five years after the contrary caselaw.

Majority op. pp. 143-145.

These distinctions should not make a difference — the Supreme Court did not balance carefulness of consideration, prior litigation history, or the amount of time that had passed between the caselaw and the new regulation. It simply looked to see if the agency had been delegated broad regulatory authority and whether its construction of an ambiguous statutory phrase was reasonable. Brand X, 545 U.S. at _, 125 S. Ct. at 2700-2702. Conflicting precedent would have mattered only if that precedent had held the phrase “telecommunications service” to have an unambiguous meaning contrary to the regulation. Id. at _, 125 S. Ct. at 2700. And in this case, the majority can point to no precedent that holds the absence of a time restriction in section 882 unambiguously means that there is no time restriction.

III.

Finding the regulation unreasonable under National Muffler, even if section 882 is ambiguous, raises some very difficult issues at the intersection of administrative and tax law. I think the majority has erred, both in relying so heavily on the disputed regulation’s change to existing law and in being so skeptical about whether Brand X even applies to tax regulations, majority op. p. 144. I also think those errors are examples of how difficult some of these issues have proven to be for trial courts conscientiously trying to follow their reviewing courts’ precedents. In the spirit of Eberhart v. United States, 545 U.S. _ , _, 126 S. Ct. 403 (2005), I think it important not to hide these troublesome issues and hope that their effects in this case will help those likely to review our decision.

A.

The first issue is whether it is still correct to say, as we did 10 years ago, that

“we are inclined to the view that the impact of the traditional, i.e., National Muffler standard, has not been changed by Chevron, but has merely been restated in a practical two-part test * * * ” [Central Pa. Sav. Association & Subs. v. Commissioner, 104 T.C. 384, 392 (1995) (quoted at majority op. p. 131).]

Both National Muffler and Chevron do tell courts to review regulations for their reasonableness. But the factors that each test tells us to consider can be quite different.

National Muffler — at least as our Court has applied it— requires a top-to-bottom review of the regulation to see if it is in harmony with the “plain language of the statute, its origin, and its purpose.” National Muffler, 440 U.S. at 477. It requires us to consider whether a regulation:

is a substantially contemporaneous construction of the statute by those presumed to have been aware of congressional intent. If the regulation dates from a later period, the manner in which it evolved merits inquiry. Other relevant considerations are the length of time the regulation has been in effect, the reliance placed on it, the consistency of the Commissioner’s interpretation, and the degree of scrutiny Congress has devoted to the regulation during subsequent re-enactments of the statute. * * * [Id.]

National Muffler gives great weight to the consistency of an agency’s position over time, consistency with judicial precedent, 10 and any reliance interest the public might have developed. This makes a regulation that changes existing law more likely to be invalidated. And this is logical — if a court has to consider factors focusing on the Secretary’s justification for changing his position, there will be some cases where they will be decisive. See, e.g., Pac. First Fed. Sav. Bank v. Commissioner, 94 T.C. 101 (1990) (discussed supra note 2).

Chevron review places substantially less emphasis on justification for regulatory change. It expressly recognizes that there can be a range of permissible alternatives, and directs a court to decide only if the agency’s regulation is “a permissible construction of the statute.” Chevron, 467 U.S. at 843. After Chevron, “there is a range of permissible interpretations * * * [and] the agency is free to move from one to another, so long as the most recent interpretation is reasonable its antiquity should make no difference.” Barnhart v. Walton, 535 U.S. 212, 226 (2002) (Scalia, J., concurring in part and concurring in judgment).

It’s important to recognize that, in most cases, applying either National Muffler or Chevron will end up producing the same result — when a statute is ambiguous, agencies do have considerable leeway in devising regulations that clarify the law. But the most important class of cases in which results under the two tests diverge is the one into which this case falls — when an agency writes a regulation that changes existing law, either in the form of a previous regulation or judicial construction. The Supreme Court has consistently held that Chevron allows such reversals. 11 Chevron is such an important case because it was so explicit in recognizing that resolution of ambiguities in a statute is more “a question of policy than of law. * * * When Congress, through express delegation or the introduction of an interpretive gap in the statutory structure, has delegated policy-making authority to an administrative agency, the extent of judicial review of the agency’s policy determinations is limited.” Pauley v. BethEnergy Mines, Inc., 501 U.S. 680, 696 (1991).

We have, in some cases at least, viewed the decision to analyze a regulation under National Muffler as a mandate to undertake a review of the Secretary’s legal analysis, construing “reasonableness” under National Muffler almost as meaning “the most reasonable construction.” Compare the majority’s analysis in today’s Opinion to the minimal deference given regulations under Skidmore v. Swift & Co., 323 U.S. 134, 140 (1944): “The weight * * * in a particular case will depend upon the thoroughness evident in its consideration, the validity of its reasoning, its consistency with earlier and later pronouncements, and all those factors which give it the power to persuade, if lacking power to control.”

This “hard look” deference simply doesn’t reflect the contemporary understanding of administrative law that regulations are a way to make policy choices, not just a way to interpret ambiguous statutory phrases. I agree with the majority that the judicial interpretations of section 882(c)(2) in the years before the regulation was issued are more in keeping with the actual words of the Code than are the words of the regulation. But this is due to the different competencies of judges and regulation writers. Regulation writers are doing their jobs when they make up safe harbors and lay down deadlines; for judges to do so — instead of setting up fact-bound tests of “reasonableness” — looks like an exercise of legislative or administrative, rather than judicial, power.

My disagreement with the majority is not just a disagreement about how to apply National Muffler. Instead, I think the problem lies in a very subtle distinction between National Muffler and Chevron — “reasonableness” using the National Muffler factors is taken to mean “is the Secretary construing the statute reasonably?,” while under Chevron it means “is the Secretary behaving unreasonably by violating the statute in the course of exercising his delegated authority to set policy?” Both cases look to reasonableness, 12 but in different ways. The majority’s condemnation of the Secretary’s 18-month grace period, majority op. p. 134 note 17, illustrates this. It rhetorically asks: <fWhere that * * * rule came from, we do not know.” Majority op. p. 134 note 17. The fact is that the Secretary routinely makes tax law more certain by using his regulatory authority under section 7805(a) to dredge safe harbors and stake well-defined boundaries. See, e.g., sec. 1.401(a)(4)-2(b) Income Tax Regs. There are undoubtedly hundreds more such instances scattered throughout the five thick volumes of title 26 of the Code of Federal Regulations. They (or at least most of them) survive Chevron review because they are “permissible constructions” in the sense that they don’t violate the Code, not in the sense that they interpret the Code in the same way a judge using normal canons of statutory interpretation would. If each of these detailed regulations had to survive scrutiny by matching it up against general statutory language and asking “where did this come from?,” instead of “does the Code prohibit it?” today’s Opinion would ignite a thoroughgoing revolution in tax law.

B.

This observation brings me to the next two issues today’s decision raises — should regulations issued under section 7805(a) receive Chevron deference? And what would such deference look like?

The key text here is the famous passage from Chevron where the Supreme Court said:

If Congress has explicitly left a gap for the agency to fill, there is an express delegation of authority to the agency to elucidate a specific provision of the statute by regulation. Such legislative regulations are given controlling weight unless they are arbitrary, capricious, or manifestly contrary to the statute. Sometimes the legislative delegation to an agency on a particular question is implicit rather than explicit. In such a case, a court may not substitute its own construction of a statutory provision for a reasonable interpretation made by the administrator of an agency. [467 U.S. at 843-844; fn. refs, omitted.]

What is an “express delegation of authority to the agency to elucidate a specific provision of the statute by regulation?” And what is the difference between reviewing a regulation to decide whether it is “arbitrary, capricious, or manifestly contrary to the statute” in contrast to a “reasonable interpretation?”

I’ll discuss each in turn.

1.

The majority accurately states our Court’s general rule— if the Secretary issues a regulation under section 7805(a), we call it “interpretive” and analyze its validity under National Muffler, but if the Secretary issues a regulation under a more specific grant of authority, we call it “legislative” and analyze its validity under Chevron. Walton v. Commissioner, 115 T.C. 589, 597 (2002).

Understanding the problem this causes requires a brief introduction into the ambiguity of the terms “interpretive” and “legislative” when used to describe regulations. In tax law, “legislative” regulations are those issued by the Secretary under a specific grant of authority in a particular Code section. “Interpretive” regulations, on the other hand, are all those regulations issued under the Secretary’s general authority to prescribe all “needful rules and regulations.” See sec. 7805(a). “Interpretive” regulations issued under sec. 7805(a) are, however, almost always sent through notice-and-comment rulemaking. 13

In administrative law, these same terms mean something different. Under the Administrative Procedure Act, “legislative regulations” are those that create new legal duties binding on the parties and the courts. Merrill & Watts, Agency Rules With the Force of Law: The Original Convention, 116 Harv. L. Rev. 467 , 477 (2002). They must generally be subjected to notice-and-comment rulemaking. 5 U.S.C. sec. 553 (b) (2000). “Interpretative” regulations, in contrast, only clarify existing duties; and they do not bind the public, and do not go through notice-and-comment rulemaking. 14

There can be little doubt that, in this classification, both general and specific authority tax regulations are intended to bind the public and have the force of law. The IRS and Treasury use the same regulation-writing process for both general and specific authority regulations, subjecting both to the same painstaking review under the IRS’s “Regulation Drafting Handbook,” I.R.M. 32.1.5. Both types are issued as Treasury decisions, and both are signed by an Assistant Treasury Secretary and the IRS Commissioner. And when the Code penalizes taxpayers for “disregard of rules and regulations,” sec. 6662, it penalizes them for disregard of either type of regulation. See sec. 1.6662-3(b)(2), Income Tax Regs.

Chevron’s distinction between explicit and implicit congressional delegations of authority certainly doesn’t reflect any difference between general and specific authority regulations. The Court there cited to four cases as examples of “express delegations.” Chevron, 467 U.S. at 844 n.12. But look at the statutes involved:

• 42 U.S.C. § 607 (a): whether a child “has been deprived of parental support or care by reason of the unemployment (as determined in accordance with standards prescribed by the Secretary),” Batterton v. Francis, 432 U.S. 416, 419 (1977);

• 42 U.S.C. § 1396a(a)(17)(B): “taking into account only such income and resources as are, as determined in accordance with standards prescribed by the Secretary, available to the applicant,” Schweiker v. Gray Panthers, 453 U.S. 34, 43-44 (1981);

• Communications Act of 1934, § 200: “The Commission may, in its discretion, prescribe the forms of any and all accounts, records, and memoranda,” AT&T v. United States, 299 U.S. 232, 235 (1936); and

• 25 U.S.C. § 9 : “The President may prescribe such regulations as he may think fit for carrying into effect the various provisions of any act relating to Indian affairs, and for the settlement of the accounts of Indian affairs,” Morton v. Ruiz, 415 U.S. 199 , 231 n.25 (1974).

The first two delegations are the kind that tax lawyers would say lead to “legislative” regulations — they are delegations of authority to fill in a gap in one particular section of a statute. But the second two delegations are entirely as broad as section 7805(a)’s power to make “all needful rules and regulations under this title.”

To make the contrast sharper, consider the two cases cited by the Court in Chevron as examples of a “legislative delegation to an agency on a particular question [that] is implicit rather than explicit”

• INS v. Jong Ha Wang, 450 U.S. 139, 140 (1981), analyzing reviewability of the Attorney General’s decision to suspend deportation of an illegal alien under 8 U.S.C. § 1254 (a)(1) if it would “result in extreme hardship * * *,” and

• Train v. NRDC, 421 U.S. 60, 67 (1975) analyzing reviewability of the EPA Administrator’s approval of a state’s Clean Air Act plan under 42 U.S.C. § 1857c(5)(a)(2) requiring him to approve a plan “if he determines that it was adopted after reasonable notice and hearing.”

Neither of these two cases involved direct review of regulations at all, but instead as a review of individual decisions by agencies in the course of which they had to construe disputed statutory terms.

In short, I think that the contrast that Chevron made was between review of regulations put through notice-and-comment rulemaking, and construction of statutory terms in the course of administrative adjudication. 15 Reading Chevron this way makes sense when one considers the Administrative Procedure Act itself, which tells courts to use one standard in reviewing formal regulations — are they “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law?,” 5 U.S.C. § 706 (2)(A), see Motor Vehicle Manufacturers Association of United States, Inc. v. State Farm, 463 U.S. 29, 41-45 (1983); and another standard in reviewing administrative adjudications — are they “unsupported by substantial evidence?,” 5 U.S.C. § 706 (2)(E) (which has been interpreted as going to “the reasonableness of what the agency did,” United States v. Carlo Bianchi & Co., 373 U.S. 709, 715 (1963) (emphasis added)).

Mead makes this clearer — it says that the Court has “recognized a very good indicator of delegation meriting Chevron treatment in express congressional authorizations to engage in the process of rulemaking or adjudication that produces regulations.” 533 U.S. at 229. It then lists, among other cases to prove that point, Atlantic Mut. Ins. Co. v. Commissioner, 523 U.S. 382 (1998), a case in which we were reversed after invalidating a regulation issued under section 7805(a). 16

After Mead, I don’t think it possible to draw distinctions between the deference owed tax regulations issued under section 7805(a) and those issued under more specific authority. 17 See Boeing Co. v. United States, 537 U.S. 437, 448 (2003) (dismissing dispute over distinctions between general and specific authority regulations because both must be treated with deference).

If applying Chevron instead of National Muffler would lead to a different result, this discussion might still not matter— National Muffler (and the pre-Chevron cases that relied on it, United States v. Vogel Fertilizer Co., 455 U.S. 16 (1982); Rowan Cos. v. United States, 452 U.S. 247 (1981)) were all tax cases, and the rule is that we are bound to follow the cases that more directly control until and unless they are expressly overruled. Agostini v. Felton, 521 U.S. 203 (1997), quoted by Eberhart, 388 F.3d at 1049.

But our Court has a special problem in trying to find the precedents it should follow — appeals from our decisions go to twelve different Courts of Appeals, and the question of what review a general authority regulation issued under section 7805 should get has already led to divergent results. Some of our reviewing courts have concluded that general authority regulations don’t qualify for Chevron deference, and some have concluded that they qualify only as an implicit delegation on a particular question and read Chevron as silently incorporating National Muffler and its factors as a test of “reasonableness.” And some read Chevron as requiring review of general authority regulations under an arbitrary- and-capricious standard.

The resulting circuit split was noted as long ago as 1998. See Bankers Life & Casualty Co. v. United States, 142 F.3d 973, 982 (7th Cir. 1998). And it seems only to have become more pronounced:

• Second Circuit — Gen. Elec. Co. v. Commissioner, 245 F.3d 149 , 154 n.8 (2001) (noting conflict but not taking sides);

• Third Circuit — E.I. du Pont de Nemours & Co. v. Commissioner, 41 F.3d 130 , 135-36 and n.23 (1994) (less deference to general authority regulations, but leaving open possibility of considering the question); see also the nontax cases Cleary v. Waldman, 167 F.3d 801, 807 (1999) (Chevron deference applies to notice-and-comment rules); Elizabeth Blackwell Health Center for Women v. Knoll, 61 F.3d 170, 190 (1995) (interpretive rules get only Skidmore deference);

• Fourth Circuit — Snowa v. Commissioner, 123 F.3d 190, 197 (1997) (general authority regulations get National Muffler review under Chevron);

• Fifth Circuit—Nalle v. Commissioner, 997 F.2d 1134, 1138 (1993) (National Muffler review rather than Chevron);

• Sixth Circuit—Peoples Fed. Sav. & Loan Association of Sidney v. Commissioner, 948 F.2d 289, 300 (1991) (Chevron review for “reasonableness”); Hospital Corp. of Am. & Subs. v. Commissioner, 348 F.3d 136, 141 (2004);

• Seventh Circuit—Bankers Life & Cas. Co. v. United States, 142 F.3d 973, 983 (1998) (Chevron review for “reasonableness”);

• Eighth Circuit—United States v. Tucker, 217 F.3d 960, 965 (2000) (National Muffler review);

• Ninth Circuit—Redlark v. Commissioner, 141 F.3d 936, 940 (1998) (Chevron arbitrary-and-capricious review);

• Tenth Circuit—In re Craddock, 149 F.3d 1249 , 1258 (1998) (National Muffler review);

• Eleventh Circuit—Beard v. United States, 992 F.2d 1516, 1520-21 (1993) (Chevron arbitrary-and-capricious review);

• D.C. Circuit—Tax Analysts v. Commissioner, 350 F.3d 100, 102-03 (2003) (Chevron review); and

• Fed. Circuit—Schuler Indus. Inc. v. United States, 109 F.3d 753, 755 (1997) (National Muffler deference).

2.

How would review of this regulation look under Chevron? Here again, I think that Mead has clarified the law, by conflating the standard of “reasonableness” with the standard of “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.” See Mead, 533 U.S. at 229. 18

On what “reasonableness” means in the post-Mead world, I generally agree with Judges Swift and Halpern. 19 The question is one of line-drawing, and substituting an 18-month rule for an indeterminate and'case-by-case consideration of the facts certainly seems reasonable. It does nothing more than substitute more definite deadlines for less definite ones and allows the Commissioner to trigger them by sending a notice rather than filing a substitute return.

I will only add a cite to Motor Vehicle Mfrs. Assn, of the United States, Inc. v. State Farm, 463 U.S. 29 (1983). In that case, the Supreme Court wrote that a regulation was arbitrary and capricious if:

the agency has relied on factors which Congress has not intended it to consider, entirely failed to consider an important aspect of the problem, offered an explanation for its decision that runs counter to the evidence before the agency, or is so implausible that it could not be ascribed to a difference in view or the product of agency expertise. * * * [Id. at 43; see also Sunstein, 90 Colum. L. Rev. at 2104-2105.]

That is of course far from what happened here. The Secretary faced an ambiguous phrase in a Code section, unambiguously aimed at giving foreign corporations a major incentive to file their returns. He also learned by experience that some taxpayers would wait to file until a notice of deficiency was issued, Anglo-American, 38 B.T.A. 711 , or would file only after starting a case in this Court, Blenheim, 125 F.2d 906 , or would refuse to file even after a revenue agent came calling, Ardbern, 120 F.2d 424 . To issue a regulation with a fixed grace period and provision for exceptions reflected experience, failed to consider no aspect of the problem, and ran counter to no reasonable evidence before him. The regulation did change existing law, but under Chevron and Brand X, the Secretary should be allowed to “change the law” — even if the law is our caselaw — by regulation, vetted by notice-and-comment, and tested against only a very liberal notion of reasonableness.

I respectfully dissent.

Swift, J., agrees with this dissenting opinion. As Judge Swift carefully explains, see dissent supra pp. 151-153, the disputed regulation is fairly complex and establishes a number of exceptions to the general 18-month rule; for simplicity’s sake, I refer to the regulation as creating an 18-month grace period.

Our Court has met with limited success in finding regulations unreasonable after the extensive review of the sort we do today. See Pac. First Fed. Sav. Bank v. Commissioner, 94 T.C. 101 (1990) (invalidating sec. 1.593-6(b)(1)(iv), Income Tax Regs., after plenary review of statute and legislative history), revd. 961 F.2d 800, 805 (9th Cir. 1992) (“we cannot usurp the Treasury’s authority and invalidate the regulation unless it is an unreasonable construction”), disagreed with by Peoples Fed. S&L v. Commissioner, 948 F.2d 289, 300 (6th Cir. 1991) (“a court may not substitute its own construction for the reasonable interpretation of an agency”), disagreed with again by Bell Fed. Sav. & Loan Association v. Commissioner, 40 F.3d 224, 227 (7th Cir. 1994), revg. T.C. Memo. 1991-368 (“choice among reasonable interpretations is for the Commissioner, not the courts”), and finally abrogated, Cent. Pa. Sav. Association & Subs. v. Commissioner, 104 T.C. 384 (1995); see also Redlark v. Commissioner, 106 T.C. 31 (1996) (invalidating sec. 1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs., 52 Fed. Reg. 48409 (Dec. 22, 1987), after plenary review of statute and legislative history), revd. 141 F.3d 936 (9th Cir. 1998) (using language quoted in text above), disagreed with by Allen v. United States, 173 F.3d 533 (4th Cir. 1999) (regulation need not be “best possible means of implementing the statute” if it’s reasonable), and disagreed again with Kikalos v. Commissioner, 190 F.3d 791, 796-797 (7th Cir. 1999), revg. T.C. Memo. 1998-92 (“[i]t is not our role to determine the most appropriate interpretation of the statute, but simply to assess whether the regulation reflects a reasonable construction”), and finally abrogated, Robinson v. Commissioner, 119 T.C. 44 (2002).

Natl. Cable & Telecomm. Assn. v. Brand X Internet Servs., 545 U.S. _ , 125 S. Ct. 2688 (2005).

National Muffler Dealers Assn., Inc., v. United States, 440 U.S. 472 (1979).

Chevron U.S.A., Inc., v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984).

United States v. Mead Corp., 533 U.S. 218 (2001).

Whether a court should look to the text alone in deciding if a statute is ambiguous, as in Natl. R.R. Passenger, or to the text plus legislative history, as Chevron implies, see Chevron, 467 U.S. at 842 , is a matter of some controversy. See Coke v. Long Island Care at Home, Ltd., 376 F.3d 118 , 127 n.2 (2d Cir. 2004) (collecting cases); see also Tax Analysts v. Commissioner, 350 F.3d 100, 103-104 (D.C. Cir. 2003); Hosp. Corp. of America & Subs. v. Commissioner, 348 F.3d 136, 144 (6th Cir. 2003) affg. 107 T.C. 73 (1996). It doesn’t matter in this case because the legislative history of section 882 shows no congressional intent one way or the other about when a foreign corporation must file its return to avoid loss of deductions. See infra p. 170.

The Code governs the “place” of filing returns as well as their “time” and “manner.” Part VII of subtitle F has detailed rules, which the IRS has supplemented with extensive regulations. Treas. Regs. 1.6091-1, 20.6091-1, 25.6091-1, 31.6091-1, 40.6091-1, 41.6091-1, 44.6091-1, 53.6091-1, 55.6091-1, 156.6091-1, 157.6091-1T, 301.6091-1, 1.6091-2, 1.6091-3, 1.6091-4. Given today’s narrow reading of “manner prescribed under subtitle F,” we may someday have to decide whether a return that a foreign corporation intentionally sends astray could trigger a loss of deductions.

The majority seems to soften its analysis by suggesting at a couple of points that the Commissioner can still enforce section 882 by again preparing substitute returns. See majority op. pp. 137 note 22, 142. But the Opinion also states that this cannot be an “absolute and rigid rule.” Majority op. p. 142 note 28.

This seems to be a special concern for our Court. See, e.g., Ga. Fed. Bank v. Commissioner, 98 T.C. 105, 114 (1992) (later vacated and remanded) (regulations contrary to judicial precedents “created a greater inconsistency than they resolved”); Redlark, 106 T.C. at 57 (“The nuts and bolts of this case is that the Commissioner continues to disagree with the pre-TRA judicial view”); see also majority op. p. 135 (deference unwarranted where Secretary has “total disregard to firmly established judicial precedent”).

See, e.g., Brand X, 545 U.S. at _ , 125 S. Ct. at 2699 (agency reversal permissible as it is charged with interpreting ambiguous statutes); Smiley v. Citibank (South Dakota), N.A., 517 U.S. 735, 742 (1996) (prior contradictory agency position is not fatal); Rust v. Sullivan, 500 U.S. 173, 186-187 (1991) (changing circumstances require that an agency’s position not be “carved in stone”). Of course, such changes are permissible under National Muffler too. (Indeed, National Muffler involved a regulation that changed existing law. 440 U.S. at 481-483 .) But they would seem to be less probable because of the National Muffler factors that concentrate on consistency in the law over time.

The Supreme Court’s continuing citations to National Muffler after Chevron all stand for this general proposition. See Boeing Co. v. United States, 537 U.S. 437, 451 (2003); United States v. Cleveland Indians Baseball Co., 532 U.S. 200, 219 (2001); Atl. Mut. Ins. Co. v. Commissioner, 523 U.S. 382, 389 (1998); Commissioner v. Estate of Hubert, 520 U.S. 93, 127 (1997); Newark Morning Ledger Co. v. United States, 507 U.S. 546, 576 (1993); Cottage Sav. Assn. v. Commissioner, 499 U.S. 554, 560-561 (1991).

Saltzman, IRS Practice & Procedure, 2d ed., par. 3.02[2]; sec. 601.601, Statement of Procedural Rules.

The confusing nomenclature prompted one academic to propose calling Treasury regulations issued under section 7805 “general authority” regulations, and Treasury regulations issued under other sections “specific authority” regulations. Coverdale, “Court Review of Tax Regulations and Revenue Rulings in the Chevron Era,” 64 Geo. Wash. L. Rev. 35 , 55 (1995). I adopt this convention for the remainder of this dissent.

This is the consensus view in nontax fields. See Cunningham & Repetti, “Textualism and Tax Shelters,” 24 Va. Tax Rev. 1 , 43-45 (2004).

Mead, 533 U.S. at 230 n.12. Many, perhaps most, of the cases cited in that footnote involve general authority regulations. E.g., Shalala v. Ill. Council on Long Term Care, Inc., 529 U.S. 1 (2000) (issued under 42 U.S.C. sec. 1395cc(b)(2) ((“Secretary may [act] * * * as may be specified in regulations”)); United States v. Haggar Apparel Co., 526 U.S. 380 (1999) (issued under 19 U.S.C. sec. 1502 (a) ((Secretary may “establish and promulgate such rules and regulations not inconsistent with the law”)); AT&T Corp. v. Ia. Util. Bd., 525 U.S. 366 (1999) (issued under 47 U.S.C. sec. 201 (b) (“Commissioner may prescribe such rules and regulations as may be necessary”)); United States v. O’Hagan, 521 U.S. 642 (1997) (issued under 15 U.S.C. sec. 78j(b) ((authorizing “rules and regulations as the [SEC] Commissioner may prescribe as necessary or appropriate”)); Am. Hospital Assn. v. NLRB, 499 U.S. 606 (1991) (issued under 29 U.S.C. sec. 156 ((“authority from time to time to make, amend, and rescind * * * such rules and regulations as may be necessary”)); Sullivan v. Everhart, 494 U.S. 83 (1990) (issued under 42 U.S.C. secs. 401 et seq. ((Secretary authorized to “make rules and regulations and to establish procedures not inconsistent with this subchapter, which are necessary’)); Massachusetts v. Morash, 490 U.S. 107 (1989) (issued under 29 U.S.C. sec. 1135 ((“the Secretary may prescribe such regulations as he finds necessary or appropriate”)); K Mart Corp. v. Cartier, Inc., 486 U.S. 281 (1988) (issued under 19 U.S.C. sec. 1526 (d)(4) ((“Secretary may prescribe such rules and regulations as may be necessary”)).

See also Vermuele, “Mead in the Trenches”, 71 Geo. Wash. L. Rev. 347 , 350 (2003) (notice- and-comment rulemaking a safe-harbor category). But see Coke v. Long Island Care at Home, Ltd., 376 F.3d 118 , 132 n.5 (2d Cir. 2004); Merrill, “The Mead Doctrine: Rules and Standards, Meta-Rules, and Meta-Standards”, 54 Admin. L. Rev. 807 , 814-815 (2002) (notice-and-comment rulemaking begets Chevron deference only if regulation intended to have force of law). (That distinction wouldn’t matter here, because general authority tax regulations are intended to have the force of law.)

See also Sunstein, “Law and Administration After Chevron”, 90 Colum. L. Rev. 2071 , 2093 (1990) (“Chevron might be taken to suggest that whenever an agency is entrusted with implementing power — whether to be exercised through rulemaking or adjudication — agency interpretations in the course of exercising that power are entitled to respect so long as they are reasonable”); CBW West Bay v. Thompson, 246 F.3d 1218, 1223 (9th Cir. 2001) (summarizing caselaw on Chevron step two as requiring reasonableness in substantive interpretation and in the process of making the decision).

There is an extensive commentary on Chevron step-two standards. See Polsky, “Can Treasury Overrule the Supreme Court?”, 84 B.U.L. Rev. 185, 192 (2004); Cunningham & Repetti, supra at 49 n.15.