UNITED STATES TAX COURT

CLC

136 T.C. No.

17

UNITED STATES TAX COURT

CARPENTER FAMILY INVESTMENTS, LLC, CARPENTER CAPITAL MANAGEMENT,

LLC, TAX MATTERS PARTNER, Petitioner v.

COMMISSIONER OF INTERNAL REVIINUE, 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,

Gary J. Merken,

for respondent.

SERVEDApr252011

for petitioner.

- 2 OPINION

WHERRY, Judge:

This case is before the Court on

petitioner'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 support 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 decision turns on

whether the general 3-year period of limitations under section

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

section 6229(c) (2) or section 6501(e) (1) (A) 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.

Sundstrand Corp. v. Commissioner,

98 T.C.

518,

520

See also

(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 decision may be rendered as a matter of law."), affd.

17 F.3d 965

(7th Cir.

T.C. 678, 681 (1988)

1994); Fla. Peach Corp. v. Commissioner,

("Summary judgment is intended to expedite

litigation and avoid unnecessary and expensive trials.").

Section references are to the Internal Revenue Code of

1986, as amended and in effect for the tax year at issue.

90

- 3 Background

I.

Undisputed Facts

The following facts are not in dispute.

Carpenter Capi-tal Management, LLC,

Petitioner,

is it Nevada limited liability

company classified as a partnership fo:: Federal income tax

purposes.

Petitioner is the tax matte::s 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 Virginia

Carpenter, 24.75 percent.

Accordingly, Tommie and

Virginia Carpenter (the partners) ultinately 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

corporation 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

- 4

-

Partnership Income, for its taxable year ending December 31,

2000.

On this information return the partnership reported gross

proceeds of $29,608,861, an adjusted tax 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 Attributable to

Partnership Items, executed on behalf of the partnership.

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,

II.

2000.

The Theory of the FPAA

Respondent alleges that "the partnership exploited a complex

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 transactions.

See

-

5

-

also Kligfeld 'Holdings v. Commissioner,

128 T.C.

192,

discussing the prototypical Son-of-BOS

transaction:

194

(2007),

Son-of-BOSS is a variation of a slightly-older alleged

tax shelter known as BOSS, an acrðnym for "bond and

options sales strategy." There ace 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 liabilizies 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 lat the partnership

treat the liabilities as uncertaia, which may let the

partnership ignore them in computing basis.

If so, the

result is that the partners will aave a basis in the

partnership so great as to provida for large--but not

out-of-pocket--losses on their individual tax returns.

* * *

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

account of a transfer to the partnership "of short sale proceeds

of Treasury Notes and the obligation t3 close the open short sale

position".

Respondent contends that tais transfer "artificially

stepped-up inside basis".

According to respondent:

"As a result

of the artificial step-up in basis in the American Tower

Corporation stock, the partnership's tptal net long-term gains

derived from dealings in property on its 2000 return was

I

[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

- 6 the tax relates was filed."

Both the partnership'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."

6501(c) (4)

See sec.

("Where, before the expiration of the time prescribed

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

-

7

-

limitations period applies and that the consent was obtained

within such longer period); Seltzer v. Commissioner, 21 T.C. 398

(1953)

IV.

(same).

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 Treasucy Department and the

Internal Revenue Service issued tamporary Treasury

regulations under Sections 6229(c) (2) and 6501(e) (1) (A)

that clarify that an overstatemen: of basis relating to

the disposition of property, other than the sale of

goods or services in a trade or basiness, constitutes

an omission from gross income for purposes of Sections

6229(c) (2)

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

Respondent argues that these temporary regulations, sections

301.6229(c) (2)-1T and 301.6501(e)-1T,

Temporary Proced.

Regs.,

28,

74 Fed. Reg. 49322-49323

(Sept.

2009),

& Admin.

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 oefore September 24, 2009."

Because "The FPAA * * * issued within the six-year period of

limitations provided in Sections 6229(2) (2) and 6501(e) (1) (A), as

further extended by consent," respondent contends that the FPAA

was timely.

- 8 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.

301.6501(e)-1,

See secs. 301.6229(c) (2)-1,

Proced. & Admin. Regs.

Also, the Supreme Court

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

,

131 S. Ct.

704

562 U.S.

(2011), which clarifies that the

Commissioner's regulatory efforts are generally entitled to the

same Chevron standard as those of any other agency.

U.S.A.

Inc. v. Natural Res. Def. Council,

467 U.S.

See Chevron

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 revision of our

Intermountain holding.3

2See infra note 15, discussin'g 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.

3By 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.

(continued...)

II.

Effective/Applicability Date Provlsions:

Firmly in the Cart

Placing the Horse

The preamble to these final regul tions asserts that "The

Tax Court's majority in Intermountain arroneously interpreted the

applicability provisions of the temporary and proposed

regulations".

T.D.

9511,

2011-6 I.R.B. 455,

456.

We are not

infallible and have reviewed our interaretation of the

regulations' applicability provisions 'n the light of

respondent's criticism, but as discuss d 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

3(...continued)

II, and largely conforming 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 Commissioner promptly filed notices of

supplemental authority calling attention to the Supreme Court's

opinion in Mayo Found. v. United States, 562 U.S.

, 131 S. Ct.

704 (2011), in the various Intermountalin-related cases on appeal

discussed infra note 15, including Graþevine Imps., Ltd.. v.

United States,

F.3d

(Fed. Cir., War. 11, 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.

- 10 September 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/applicability date

provisions" required to cause the temporary regulations to apply

to a case where the 3-year limitations period has already

expired.

We had remarked that the Commissioner's attempt to

apply the temporary regulations in that case "begs the question".

Id.

By comparison with the effective/applicability date

provisions of the temporary regulations, the final regulations

provide that "This section applies to taxable years with respect

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

September 24,

Regs.

2009."

Sec. 301.6229(c) (2)-1(b),

Próced.

& Admin.

(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 perceived

ambiguity in the temporary regulations, that was brought to light

by the Tax Court in Intermountain Insurance 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.

- 11 -

We fail to see how this semantic distinction in the

I

effective/applicability date provisions between the final

regulations 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 limitations

period. * * * The expiration of the three-year period

does not "close" a taxable year il 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

4The 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. at 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 __ (slip op. at 28), that "by their plain terms the new

Treasury regulations apply to" the taxpayer's tax year for which

the 3-year limitations period had expi:ced. We do no believe that

the actual text of the regulations says as much. As mentioned

above, pursuant to their effective/appl.icability 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".

455.

T.D.

9511,

2011-6 I.R.B. at

In "an interpretation of an administrative regulation a

(continued...)

- 12 -

Clearly, then, as with the temporary regulations,

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 otherwise valid and that they

apply retroactively."

In other words, the applicability of the

4(...continued)

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);

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

evidence 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 resolve 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 omitted)).

sRespondent 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

abusive Son-of-BOSS transactions was lost, as Eurydice was lost

to Orpheus, when the Commissioner chose to turn around and look

directly backwards by giving his regulations full-blown

retroactive effect.

See generally Murfam Farms, LLC v. United

States, 88 Fed. Cl. 516 (2009) (holding 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 contingent liability,

(continued...)

- 13 -

regulations assumes their substantive validity.

We held this

assumption untenable in Intermountain Ins. Serv. of Vail, LLC v.

Commissioner at 224.

After reviewing :he 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

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

we "must judge the propriety of * * *

solely by the grounds invoked by" him.

U.S. 194, 196

(1947).'

[respondent's]

action

SEC v. Chenery Corp., 332

From the preambles to the temporary and

s(...continued)

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 conventional 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.

'Chenery sweeps wider than the Administrative Procedure

Act's "basis and purpose" requirement, 5 U.S.C. sec, 553(c)

(2006).

Requiring an agency to give reasons for its rulemaking

will not itself ensure that review of the rule will be limited to

(continued...)

- 14 -

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 confined by section 6501(e) (1) (A) (i)

to a

trade or business context;? and (2) Colony represents the Supreme

6(...continued)

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 reasoning 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,

(1962)

Inc. v. United States,

371 U.S.

156,

169

(holding that under Chenery "For the courts to substitute

their or counsel's discretion for that of the * * * [agency]

incompatible with the orderly functioning of the process of

judicial review.").

is

?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.

- 15 -

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 temporary

and final regulations, but also in his submissions on brief in

this and other similar cases."

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' p¶eamble, and even there is

shrouded in caveats and qualifications."

"See infra note 10.

"See infra pt. IV.

-

A.

16

-

Trade or Business With Colony

The final regulations' preamble reiterates respondent's

position,

"set forth in the preamble to the temporary

regulations", 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 business

under the predecessor of section 6501(e)."

I.R.B. at 455; see also T.D.

9466,

T.D.

9511,

2011-6

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 limited 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 Commissioner has made on brief in

related litigation across the country."

"See, e.g., Burks v. United States,

633 F.3d 347,

350

(5th

Cir. 2011) (slip op. at 5) ("The government contends 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)

(slip op. at 9)

("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. Commissioner, 568 F.3d 767,

775 (9th Cir. 2009) ("the IRS argues that Colony, read correctly,

interpreted § 275(c) as having the same meaning as §

6501(e) (1) (A) (i) and applying only to taxpayers in a trade or

(continued...)

- 17 This case would, absent stipulation to the contrary, be

appealable to the U.S. Court of Appeals for the Ninth Circuit,

I

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 ii

§ 275(c) to apply

differently to taxpayers in a trade or business than to other

taxpayers."

F.3d 767,

778

Bakersfield Energy Partners, LP v. Commissioner, 568

(9th Cir.

2009),

affg.

128 T.C.

207

(2007).

In Bakersfield, the Court of Appeals for the Ninth Circuit

held that the current section 6501(e) (:.) (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.

[not]

Finding "that applying Colony to the 1954 Code would

render * * * superfluous" any provision of section

°(...continued)

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.

- 18 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 successor 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)

services by a trade or business."

States,

573 F.3d 1362,

1372

to sales of goods or

Salman Ranch Ltd. v. United

(Fed. Cir. 2009)."

"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, __ F.3d

at __ (slip op. at 23). 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 Colony was warranted.

It made no separate holding that the statute was

unambiguous for purposes of Chevron step one * * *.

Id. at __ (slip op. at 18) (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 characterized the court's

task in Salman Ranch "different from ours."

Id. at __ (slip op.

(continued...)

- 19 -

These two Courts of Appeals have now been joined by the

Courts of Appeals for the Fourth and FLfth Circuits, which have

similarly declined to limit the Colony holding to a trade or

business.

See Home Concrete & Supply, LLC v. United States, 634

F.3d 249,

255

(4th Cir.

2011))

("Like

-he 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 taxpayer's identity as a

trade or business selling goods or services."); Burks v. United

States,

633 F.3d 347,

355

(5th Cir.

20:-1)

("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] rema:.ns 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.

2011)

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

(7th Cir.

(concluding that "Colony's holding is inherently qualified

by the facts of the case * * *, where t,he * * * omission was

"(...continued)

at 16).

Finding Colony "no bar" to gri.nting 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

(slip op.

at 23). As we explain infra note 28, we have concluded to the

contrary that Colony is a "bar" to Chevron deference.

- 20 * * * in the course of trade or business."), revg. T.C. Memo.

2009-184.

Following the Commissioner's judicial setbacks in

Bakersfield and Salman Ranch, the Secretary issued the temporary

regulations, seeking, as it were, to lay a regulatory foundation

for respondent's position that an overstatement of basis does

constitute an omission from gross income under section

6501(e) (l) (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, neither of those

opinions was based on the court's interpretation of section

6501(e) (1) (A)i.

Instead, each court had held Colony to control

this interpretation, which it, in turn, merely followed.

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 administering

agency's interpretation of the resulting statutory.language.

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 precedent.

When Congress speaks in muffled tones, the Commissioner

presumably enjoys an advantage in deciphering the message.

And

- 21 -

though we are respectful of the Commissioner's experience in

reviewing court opinions, we decline to surrender our prerogative

of interpreting judicial pronouncements--ambiguous or otherwise.

Respondent does not purport, at least not explicitly and

unequivocally," 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," that the Colony holding is not relevant to our inquiry.

"Cf. infra Discussion, pt. IV, discussing respondent's

"vague and indecisive" attempt to supp ant the Colony holding

with a contrary interpretation of the statutory text in current

sec.

6501(e) (1) (A).

"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 om:.ssion from gross income."

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 limitations to a transaction in which the

taxpayer had overstated basis.

Instead, in Phinney,

The Fifth Circuit Court of Appealt * * * found that the

6-year period of limitations appljed 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 Phinncy because the

fiduciary tax return listed the item of income without

disclosing its receipt in an instëllment sale. * * *

[UTAM, Ltd. v. Commissioner, supri.]

(continued...)

-

22

-

Respondent may arguably have the authority to attempt to reach

the former outcome, at least in the Tenth Circuit."

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."

(...continued)

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 interpretation 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 Colony's holding.'"

See also infra note 16, discussing why the Court of Appeals for

the Ninth Circuit'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).

"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.

"The Commissioner has appealed to the appropriate Courts of

Appeals Intermountain Ins. 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,

F.3d

(Fed. Cir., Mar. 11, 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

(continued...)

- 23 Following Bakersfield, we conclude that Colony is not

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

interpretation of section 6501(e) (1) (Al."

(...continued)

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 pencling 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.,

ntermountain Ins. Serv. of

Vail, LLC v. Commissioner, supra,s on appeal (D.C. Cir., July 27;

2010); UTAM, Ltd. v.

(D.C. Cir., Aug. 17,

Commissioner, T.C. Memo. 2009-253,

2010); Reynolds Props., L.P. v.

on appeal

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).

"As pointed out supra note 13 and the accompanying text,

the Court of Appeals for the Seventh Circuit has recently

rejected the conclusion reached in Bak€rsfield 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 describéd the Bakersfield

reasoning as wading "through a convoluted discussion of

numerators and denominators".

Id. at €23. Beard also dismissed

the Federal Circuit's Salman Ranch holding, characterizing it as

"a deep-dive into legislative 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 Cclony 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 cortrol 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).

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

deference to the regulations."

It does mean, however, that

instead of applying the original version of the Chevron analysis,

we apply its Brand X variant."

Compare Chevron U.S.A. Inc. v.

"See Grapevine Imps., Ltd. v. United States, supra at __

(slip op. at 13) (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").

"We note, without judging, the Commissioner's asserted

ability to command Chevron deference 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 Commerce Clause challenge in Tyler Pipe

Indus., Inc. v. Wash. Dept. of Revenue, 483 U.S. 232 (1987), to

the State of Washington's discriminatory business and occupations

tax). For further discussion 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).

-

25

-

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 question 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

[contrary] interpretation only if the

relevant court decision held the statute unambiguous").

B.

Colony's Chevron Classification

In Intermountain Ins. Serv. of Va l, 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 displa.ces respondent's temporary

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 Ninti. Circuit in Bakersfield

Energy Partners, LP v. Commissioner, 5€8 F.3d at 778, conceded

that in its Colony opinion, the Supreme Court had "acknowledged

that the statutory language was ambiguc.us, but nonetheless

rejected the same interpretation the IRS is proposing in this

case."

(Citations omitted.)

Responder.t claims that this

concession by the Court of Appeals constitutes an invitation to

issue regulations to reverse the Bakersfield outcome.

9466,

2009-43 I.R.B. at 552.

See T.D.

The Court of Appeals had indeed

- 26 -

stated that "The IRS may have the authority to promulgate a

reasonable reinterpretation of an ambiguous provision of the tax

code, even if its interpretation runs contrary to the Supreme

Court's 'opinion as to the best reading' of the provision."

Bakersfield Enerqv 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 definitively

whether any such * * * regulations would actually trump the

Supreme Court's prior judicial construction."

Intermountain 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 accordance with law", and are

issued in "observance of procedure required by law", 5 U.S.C.

sec.

706(2) (A),

(D)

(2006),

assumptions not necessarily satisfied

here, there remain two unresolved 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 construction of statutory language by the Supreme Court

automatically 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

- 27 [Chevron step one]

inquiry."), with Schneider v. Chertoff, 450

F.3d 944, 955 n.15 (9th Cir. 2006)

("A though 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.")."

"On the inadvisability of a blanket prohibition against

consulting legislative history, see Harrison 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 am iguous, then judicial

interpretation of an agency-administer d statute that eschews

legislative history and grants the age cy's interpretation

Chevron deference would apparently cede to the agency power

reserved for the legislative branch.

Chevron deference would

thus seem to violate the same structural constraint that

textualists fault the use of legislative history for

transgressing; i.e., implicit constitut-ional prohibitions against

legislative self-delegation, such as the bicameralism and

presentment requirements.

For an exposition of the nondelegation

argument in favor of textualism, see Bank One Chi., N.A. v.

Midwest Bank & Trust Co., 516 U.S. 264, 280 (1996) (Scalia, J.,

concurring in part and in the judgment) ("It has always been

assumed that * * * [congressional legislative] powers are

nondelegable * * * 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 conparison, Chevron deference

would enable "minor details" to be writ ten 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 nondeleg tion 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.'").

- 28 -

Regarding whether an agency's interpretation can trump a

prior Supreme Court construction of the same statutory language,

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

Servs., 545 U.S. at 1003 (Stevens, J., concurring)

caveat concerning * * *

("I add this

[that part of the Court's opinion], which

correctly explains why a court of appeals' interpretation of an

ambiguous provision in a regulatory 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,

2008)

547 F.3d 1237,

1248

(10th Cir.

("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).

United States,

562 U.S.

,

131 S. Ct.

704

(2011).

Mayo Found. v.

In doing so,

the Supreme Court clarified that the Chevron standard of

deference applies to Treasury regulations.

The Court pointed out

that the taxpayer in Mayo had "not advanced any justification for

applying a less deferential standard of review to Treasury

- 29 Department regulations than we apply to the rules of any other

agency."

Id. at

_,

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 Mavo implies,- by omission

rather than affirmative statement, that a trial court's

investigation of congressional intent at Chevron step one be

limited to the plain text of the statute.

See id..at

, 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 residents

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 ho]ding applies to its own

precedent.

Mayo's silence on this score is not surprising since

the Supreme Court had no occasion to ir.terpret the word "student"

in section 3121(b) (10) before the Treasury Department's issuing

of the challenged regulation.

- 30 -

By comparison, the Supreme Court',s Colony holding predates

the regulations at issue here by over half a century.

Fortunately, and as we explain in Part IV, infra, respondent's

indecision has spared us the ordeal of walking the plank and

plumbing the depths of Brand X."

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 reasonable,

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

previously 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

"As we explain infra in 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).

- 31 construction."

Natl. 'Cable & Telecommy. 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 Comnissioner may provide."

After maintaining silence on Coloiy'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 regulat:.ons' preamble.

Respondent

"Making this determination with respect to court opinions

that were handed down well before the Supreme Court had announced

and developed the Chevron framework poses a unique challenge.

Specifically, "it is sometimes difficu t 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. Se¾v. of Vail, LLC v.

Commissioner, 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 Inte½net Servs., supra., so that

the Supreme Court could not have been aware of the standards

against which i'ts opinion would be tesLed." 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 thjs 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

decided in the past, before this * * * requirement was

established?" Natl. Cable & Telecomms. Associátion v. Brand X

Internet Servs., 545 U.S. at 1018 & n.33 (Scalia, J.,

dissenting).

- 32 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 construction that examines

legislative history is automatically relegated 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 textual

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.

Found. v. United States, 562 U.S. at

,

Mayo

131 S. Ct. at 711."

"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. Natural Res. Def. Council,

467 U.S.

837,

843

(1984).

In fact,

in Chevron, the Supreme Court appeared to place on an equal

footing both statutory text and legislative history as

"traditional tools of statutory construction".

Id. at 843 n.9.

(continued...)

- 33 -

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."

It is entirely possible for a court's opinion to

discover, acknowledge and comment upon textual ambiguities in the

statute and yet rest its construction on the remaining

(...continued)

See, e.g., id. at 845 (quoting with approval United States v.

Shimer, 367 U.S. 374, 382-383 (1961), :hat 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

discussing 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 2½ 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

represents current jurisprudential thinking on the use of

'legislative history in statutory construction 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 applying present-day

sentiments on acceptable tools of statutory construction to prior

Supreme Court decisions.

"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 s:atutory terms, and

ascertaining whether or not they are aubiguous, entails

consulting legislative history.

See, e.g., Livingston,

"Congress, the Courts, and the Code:

Interpretation of Tax Statutes",

Legislative History and the

69 Ten. 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 re iance on an extraordinary

volume of legislative history (committee reports, floor.

colloquies, and so on) to explain and supplement the statutory

language.").

- 34 -

"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."

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 legislative history,

including Colony."

Chevron restrains "Judges,

[who] are not experts in the

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

"In Grapevine Imps., Ltd. v. United States,

(Fed.. Cir., Mar.

11,

2011),

F.3d

a case decided after Mayo,

the Court

of Appeals for othe Federal Circuit did not deem complete step one

of a Chevron inquiry without considering legislative history.

See id. at _ (slip op. at 19) ("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)).

"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 rendered by the highest constitutional court in

"statutory-construction cases involving agency-administered

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.

- 35 -

Government * * * [from reconciling] còmpeting political interests

* * * on the basis of * * * [their] personal policy preferences."

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

865.

On the other hand, Brand X's concern is "'the ossification

of large portions of our statutory law ' * * *

[which would be

caused] by precluding agencies from re rising unwise judicial

constructions of ambiguous statutes."

Natl. Cable & Telecomms.

Association v. Brand X Internet Servs.

supra at 983

United States v. Mead Corp.,

533 U.S.

218,

247

(2001)

(quoting

(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

statutory construction independent of, and in addition to,

Chevron's warning to "federal judges--who have no constituency--

* * * to respect legitimate policy cho:.ces 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

- 36 -

had employed in constructing the statute," but the

considerations it weighed during that process.

Agencies should,

thus, be free to revisit and reject a past judicial statutory

construction 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.

The Supreme Court in Colony did allude to a policy concern

when it mentioned that a contrary result would "create a patent

incongruity in the tax law."

Colony, Inc. v. Commissioner, 357

"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

construction 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 construction, ascertains that Congress had an intention

on the precise question at issue, that intention 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 construction, evolve over

time.

Applying current, rather than then-prevalent mores, to

define traditionality in tools of statutory construction for

categorizing that construction's Chevron status 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

determining 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.,

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);

Farber, "The Inevitability of Practical Reason:

Statutes,

Formalism, and the Rule of Law", 45 Vand. L. Rev. 533, 536

(1992).

- 37 -

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".

Emphasis supplied.

Id. at 36.

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."

"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 ("Because 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 Regulat:.ons."); id. n.9 ("Although

we hold that § 6501(e) (1) (A) is unambiguous and its meaning is

controlled by the Supreme Court's decision in Colony, we note

that even if the statute was ambiguous 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 regulation interprets an ambiguous statute" and

concluding that "Because the regulation here interprets '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

(continued...)

- 38 -

We do not.consider the Court of Appeals for the Ninth

Circuit'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 circuit.

Even

if we were to assume that the Court of Appeals for the Ninth

Circuit would treat Colony as a Chevron step two holding,"

"(...continued)

(Wilkinson, J. concurring) ("I am persuaded that the Supreme

Court rested its judgment 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.").

"As discussed supra notes 11 and 17, the Court of Appeals

for the Federal Circuit has in Grapevine Imps., Ltd. v. United

States,

F.3d

(Fed. Cir., Mar. 11 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,

note 16.

568 F.3d 767

(9th Cir.

2009).

See supra

Grapevine is therefore the only case thus far that both

accepts Colony as controlling the interpretation of sec.

6501(e) (1) (A) and allows the Commissioner to reach a contrary

result by regulation.

"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

(slip op. at

20). 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.

Regardless, we respectfully disagree with

(continued...)

- 39 respondent's regulatory appeal to Bran

X to supplant the Colony

holding fails to meet the Chenery test.

See SEC v. Chenery

Corp., 332 U.S. at 196-197 (holding, wlth respect to "the basis

upon which * * *

"a court

[administrative action] purports to rest," that

[cannot] be expected to chiset that which must be

precise from what the agency has left vague and indecisive.").

IV.

Respondent's Difficulty Does by H s 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."

Respondent may desire to repeal Colony in the name of Brand

X.

If so, he should decisively say as much:

SEC v. Chenery

"(...continued)

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

__ (slip op. at 20).

For the reasons set forth supra in notes 26

and 27 and the accompanying text, we believe Colony represents an

explication of unambiguous congression,al intent rather than a

policy choice "resolving the competing interests which Congress

itself either inadvertently did not resolve, or intentionally

left to be resolved by the agency charged with the administration

of the statute in light of everyday realities." Chevron U.S.A.

Inc. v. Natural Res. Def. Coúncil,

467 U.S. at 865-866.

We

decline to characterize 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.

"See also supra note 5 discussinc respondent's denial of

the retroactive character of the regulations.

- 40 -

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 understandable.").

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 interpretation

of it."

T.D.

9511,

2011-6 I.R.B. at 455.

Appealing to Brand X

and asserting his privilege "to adopt another reasonable

interpretation of" that phrase, respondent equivocates in the

next breath, by adding the proviso "particularly as * * *

phrase]

is used in a new statutory setting."

Id.

[that

As discussed

above, the Court of Appeals for the Ninth Circuit 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 reiterates

respondent's position that Colony "dealt with an omission 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".

supra at 196-197.

SEC v. Chenery Corp.,

Even if we read the Supreme Court's recent

- 41 Mayo opinion as a license to categorize most judicial

constructions that discuss legislative history as Chevron step

two decisions, respondent has yet to unabashedly 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."

Consequently, his discretion in interpreting section

6501(e) (1) (A), howsoever noble and worzhy 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

"Chenery may demand less than crystal clarity of purpose,

but at least when applied at Chevron s:ep two it should require

more than muddled thinking.

Chevron deference appears

incompatible with an agency asking a court to choose between two

or more alternative validating grounds.

See Interstate Commerce

Commn. v. Bhd. of Locomotive Engrs.,

432 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 disccetionary judgment from the

agency to the court."

(emphasis supplied)).

The agency, having

invoked its discretion to fill statutocy gaps by issuing

regulations, cannot then surrender it my seeking validation of

the regulations on any one of a number of competing grounds. See

Holland v. Natl. Mining Association, 339 F.3d 808, 818 (]D.C. Cir.

2002) (refusing to choose among several potential validating

grounds because "Chevron deference is only appropriate where the

agency's action represents its reasonel judgment about the

meaning of the statute.").

- 42 partnership assets to achieve tax alchemy.

Much as we 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.

Theory of Legal Interpretation",

Cf. Holmes,

"The

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).

Bakersfield

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

- 43 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.,

consideration of this opinion.

did not participate in the

- 44 HALPERN and HOLMES, JJ., concurring:

I.

Introduction

We have joined Judge Thornton's concurring opinion, which

would grant petitioner's motion for summary judgment 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 sufficient ground

to dispose of this case and should end the matter.

prevailing opinion2 does not stop there.

But the

Without benefit of

argument from the parties, Judge Wherry has addressed the final

regulations, sections 301.6229(c) (2)-1,

Admin. Regs.

301.6501(e)-1,

Proced.

&

(the final regulations), and found one reason to

E.g., Intermountain Ins. Serv. of Vail, LLC v.

Commissioner, 134 T.C. 211, 224 (2010) (invalidating 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)".).

2Judge 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 Thornton that, to grant the motion, we

should go no further than to reiterate our historical position

that the statute unambiguously precludes respondent's

interpretation.

45 -

question them and two reasons 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 'observance of procedura required by law'".

Majority op. p. 26.

Commissioner,

Second, he classifies Colony, Inc. v.

357 U.S.

28

(1958)

(Coloay), 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

rend'ers invalid, the final regulations (as we held in

Intermountain Ins. Serv. of.Vail, LLC v. Commissioner, 134 T.C.

211, 224

(2010)

regulations).

(Intermountain) with r spect to the temporary

See majority op. pp. 25, 32.

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. 38-39.

3While 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 ïnvalid.

There are different standards for reviewing

the procedural validity of temporary 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.

- 46 -

We file this concurring opinion because of the prominence of

the prevailing opinion.

296, 311 (1967)

See Bushnell v. Commissioner, 49 T.C.

(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

decision principally on the basis of our analysis in

Intermountain.

Majority op. p. 32.

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:

4Judge 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 History 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

(continued...)

- 47 -

In so holding, the Supreme Court found that the

statute's legislative history clacified its otherwise

ambiguous text and, as a result, explicated Congress'

intent and the meaning of the sta:utory provision.

Thus,.the Supreme Court's opinion in Colony, Inc..v.

Commissioner, supra, "unambiguously forecloses the

agency's interpretation" of sections 6229(c) (2) and

6501(e) (1) (A) and displaces respondent's temporary

regulations.

See Natl. Cable & Talecomms. 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 specific

instruction that "A court's prior judicial construction * * *

trumps an agency construction * * * only if the prior court

decision holds that its construction follows from the unambiguous

terms of the statute".

added).

Brand X,

545 U.S. at 982

(emphasis

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".

p. 35.

Majority op.

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

4(...continued)

good for tax law only. To the contrary, we have- expressly

'[r]ecogniz[ed] the importance of mairtaining a uniform approach

to judicial review of administrative action.'" Mayo Found. v.

United States, 562 U.S. ___, ___, 131 S. Ct. 704, 713 (2011)

(quoting Dickinson v. Zurko, 527 U.S. 150, 154 (1999)).

- 48 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 construing 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]

terms of the statute".5

from the unambiguous

That, in turn, raises two questions:

(1) what exactly did the earlier court assert? and (2) does its

assertion carry authority?

asks:

"The first inquiry seeks meaning and

did this court assert that its interpretation was the only

reasonable one?

The second seeks authority and asks:

assertion part of the case's holding?"'

was this

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

sThis point is made in Note, "Implementing Brand X: What

Counts as a Step One Holding?", 119 Harv. L. Rev. 1532, 1536

(2006).

'Id.

- 49 legislative history in the Chevron franework and the situation in

the Courts of Appeals is muddled.

232-236

See Intermountain,

134 T.C. at

(Halpern and Holmes, JJ., concarring 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? was unambiguous or a holding dependent on such

unambiguity," before declining to give deference to the

Secretary's contrary regulations.'

We do not find either in

Colony and, thus, if called upon to do so, would not find it a

Chevron step one holding."

7Sec.

275(c),

I.R.C.

1939.

"See supra note 5.

'ha explicit-statement approach is suggested by the author

in Case Comment, "Administrative 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).

"We recognize that the Courts of Appeals have addressed

this issue and have reached varying rEsults. Grapevine Imps.,

Ltd. v. United States, ___ F.3d ___, ___ (Fed. Cir., Mar. 11,

2011) (slip op. at 18) (ambiguous 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 ( th Cir. 2011) (unambiguous

at Chevron step one; Home Concrete & upply, LLC v. United

States, 634 F.3d 249, 257 (4th Cir. 2C'11) (accord).

- 50 -

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 decision in Chenery would

still invalidate the final regulations.

Majority op. pp. 38-39.

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) (l) (E),

(2).

Understandably,

Judge Wherry may wish to be heard on that question.

Unfortunately, his contribution--his conclusion that Chenery

requires the Secretary to "unequivocally" repudiate Colony in his

regulations, majority op. p. 41--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 statement of

- 51 * * * [the regulations'] basis and puraose."

553(c)

5 U.S.C. sec.

(emphasis added)."

The Secretary did explain his basis for the final

regulations.

He recognized authority for his substantive view of

a broad, general definition of gross income.

I.R.B. 455, 456

T.D. 9511, 2011-6

("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 section

6501(e) (1), id., and to address Interrountain's holding that the

"Judge Wherry is right, of course , that "Chenery sweeps

wider than the Administrative Procedure Act's 'basis and purpose'

requirement, * * * agency action can te upheld only on the ground

previously advanced by the agency." Najority op. note 6. But

there cannot be any other grounds in this case--never having

asked respondent his views on the matter, he cannot possibly

advance justifications in favor of thE regulatiOnS different frOm

those in the preamble to the regulaticns.

- 52 -

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 purposes

of (1) limiting Colony to a trade or business circumstance and

(2) failing that, establishing his authority under Brand X to

supersede the Supreme Court's interpretation of the phrase "omits

from gross income", he finds neither adequate.

14-15.

Majority op. pp.

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. 40.

does the

For him, that is an unacceptable ambiguity:

Secretary really mean he can trump the Supreme Court's

interpretation in Colony 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. 41.

We do not agree.

First, it must be kept in mind that the Secretary's

reference 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

- ,53 -

of the statute.

Following the Secretacy'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 interpretazion", he references Brand

X and states that the Secretary and the IRS are permitted to

+

adopt another reasonable interpretation of the term,

"particularly as it is used in a new s:atutory-setting.".

9511, 2011-6 I.R.B. at 455.

T.D.

The Secre:ary 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 analysis; viz, that the neaning the Supreme Court

attached to the phrase "omission from income" in the 1939 Code

necessarily 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 citation:

"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," orly.Federal appellate-level

"More recently, in validating the final regulations, the

Court of Appeals for the Federal Circuit 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,

__ F.3d ___ (Fed. Cir., Mar. 11, 2011).

- 54 -

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 that under APA section

706(2) (A) the Secretary's findings cannot be arbitrary and

capricious, majority op. p. 26, and we recognize that under that

standard "the agency must examine the relevant data and

articulate a satisfactory explanation for its action", Motor

Vehicle Manufacturers Association of the U.S.,

Mut. Auto.

Ins.

Co.,

463 U.S.

29,

43

(1983)

Inc. v. State Farm

(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. Ecosystem Alliance v. U.S. Fish & Wildlife Serv., 475 F.3d

1136,

1146

(9th Cir. 2007)

(though not "a paragon of clarity

55 -

* * *, the Service's reasoning can be discerned with careful

reading."); Dominion Res., Inc. v. United States,

(Feb. 25, 2011)

(slip op. at

:6)

Fed. Cl.

(the Secretary's path

could "be 'discerned,' albeit somewhat murkily").

We have no

call to require more than that, with rnasonable effort, the

Secretary'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 circumstances,

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 rat:.onale (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, w:iich might provide

sufficient reason for a court to invalldate the agency's action.

E.g.,

Intl. Union, UMW v. U.S. Dept. oE Labor,

(D.C. Cir. 2004).

358 F.3d 40, 44-45

But "[w]hen an agenzy relies on multiple

grounds for its decision, some of whica 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 qu tation marks omitted); see

also Fed. Express Corp. v. Mineta,

373 F.3d 112,

118

(D.C. Cir.

- 56 -

2004)

("No principle of administrative law or common sense

requires us to remand 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))."

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.

"Judge Wherry disagrees, believing we cannot choose between

alternative grounds.

See majority 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.

-

THORNTON,3 _J. , concurring :

57

-

This Court ' s prior decis ions ,

beginning with Bakersfield Energy Partners, LP v. Commissioner,

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. oif 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. __,

(2011) .

633 F.3d 347

See Burks v. United States,

2011); Home Concrete & Supply, LLC v.

(4th Cir. 2011) .

131 S. Ct. 704

(5th Cir.

United States,

634 F.3d 249

The Courts of Appeals for the Federal and

Seventh Circuits have rendered decisions to contrary effect.

Grapevine Imps., Ltd. v. United States,

Mar.

11,

2011),

2011) ; Beard v. Commissioner,

revg. T.C. Memo.

2009-184.

F.3d

(Fed. Cir.,

633 F.3d 616

(7th Cir.

Nevertheless,

See

there is no

compelling reason for this Court to abandon its precedents in

this case, which is appealable to the Court of Appeals for the

Ninth Circuit.

That court has affirmed Bakersfield, although

without addressing the final regulaticns, which had not then been

issued.

Presumably that Court of Appeals and perhaps the Supreme

Court will have future occasion to do so.

But at least for now

- 58 -

the prevailing opinion appropriately holds in this case that the

regulations do not trump this Court's prior decisions.

See Natl.

Cable & Telecomms. Association v. Brand X Internet Servs., 545

U.S.

967,

984

COHEN,

(2005).

HALPERN,

concurring opinion.

HOLMES,

and PARIS,

JJ. ,

agree with this